AmEx Stops Gift Card Sales in New Jersey As Merchants Battle Zip-Code Law

A controversial New Jersey law that claims unused gift card balances as state property after two years and requires gift card sellers to obtain buyers’ ZIP codes is taking heavy fire. If it survives a repeal effort and court challenges, however, opponents fear gift card issuers will leave the state and that other cash-strapped states might copy the idea of having merchants collect ZIP codes from gift card buyers in order to enhance revenues under unclaimed-property laws.

In fact, American Express Co. didn’t wait for all the dust to settle and stopped selling gift cards in New Jersey on April 1. “It’s just the tip of the iceberg,” John Holub, president of the New Jersey Retail Merchants Association (NJRMA), tells Digital Transactions News. “Our fear is that many retailers are likely to follow American Express’s lead. It will come as no surprise.”

The New Jersey Legislature in 2010 passed a law governing unclaimed property, a law that for the first time provided for the escheat of gift cards to the state. The NJRMA, AmEx, and the New Jersey Food Council challenged the statute in court, leading a federal district court to throw out some aspects of it, including a provision for retroactive revenue collection, according to reports from retailer groups. The state appealed, but the Third U.S. Circuit Court of Appeals in Philadelphia led stand the ZIP-code provision, and a 2-year-old injunction preventing its enforcement recently expired, the Washington, D.C.-based National Retail Federation said.

While the law requires gift card sellers to obtain customers’ ZIP codes on all purchases, out-of-state customers who buy the cards in New Jersey would not be subject to the escheatment provisions. Sellers or issuers of gift cards are required to track the balances of New Jersey residents and turn them over to the state after two years of inactivity. But merchants and their allies say they’ve received little guidance from the state Treasurer’s office on exactly who is responsible for tracking the balances or about related compliance issues such as what to do if a customer refuses to divulge his ZIP code.

“Collecting the data could require expensive modifications to cash registers and other point-of-sale equipment, and retraining of sales clerks. In addition, retailers would be required to keep the data on the gift cards secure so that the funds could not be stolen by computer hackers,” a recent news report by the NRF to its membership said.

The NJRMA is seeking a one-year waiting period before the law is enforced, but it is unclear whether state officials will grant that request, according to the NRF. Merchants found not to be in compliance could face fines of $200 a day up to $100,000.

In passing the law, the New Jersey Legislature took advantage of a provision in the federal CARD Act of 2009 that, in regulating aspects of prepaid card pricing, left state statutes with more stringent provisions stand as the applicable law, according to Ben Jackson, a senior analyst who researches the prepaid card industry at Maynard, Mass.-based Mercator Advisory Group Inc. Jackson calls New Jersey’s claim on unused balances after two years “pretty fast” compared to other states.

The ZIP-code provision, meanwhile, “is kind of a naked play” by New Jersey to enhance revenues, Jackson says, adding that he’s not aware of any other state that has tried something similar. He notes that the law doesn’t require retailers to collect customers’ full addressees, which would aid in the return of unclaimed property to rightful owners. “It’s a shakedown,” he says.

“It’s a pretty safe assumption the sole intention was to raise revenue,” adds Holub of the 3,500-member NJRMA. When it was introduced, the gift card provision was a component of new Gov. Chris Christie’s attack on the state government’s chronic budget deficits, he says. The NRF said that unclaimed balances on instruments covered by the law, including gift cards, money orders, and travelers checks, could amount to $80 million a year.

But the law has made enough enemies that a repeal measure passed the Assembly, the lower house of the state Legislature, by a 48-27 vote with four abstentions on March 15. Holub expects the state Senate to consider the repeal bill when it reconvenes in May. Meanwhile, the federal appellate court returned the NJRMA’s lawsuit to the U.S. District Court in Trenton for more proceedings, according to Holub.

With all the opposition, the prospect of more states forcing retailers to collect ZIP codes of gift card buyers would seem to be highly problematic. But an NRF spokesperson tells Digital Transactions News that the idea could gain traction elsewhere if it survives in New Jersey.

“The concern is that if this requirement manages to hold up in the courts in New Jersey, and it has so far, and they are successful in collecting money this way, it could serve as an example to other states,” the spokesperson says.