Legal Concerns for Catalogers ’07: Lawyers Outline Key Use-tax, Gift Card Issues

During a session at the recent NEMOA conference in Cambridge, Mass., George Isaacson and Martin Eisenstein, both attorneys from the Lewiston, Maine-based law firm Brann & Isaacson LLP, pointed out that such recent changes as the shift of power in the House and Senate to Democratic control could revive the use-tax debate. They also touched on some key legal issues involving the rapidly growing gift card market.

During his presentation, Isaacson said that there are several dynamics in play this year that make the federal use-tax issue less predictable than it’s been in the past. “Every year since Quill Corp. v. North Dakota,” he said referring to the landmark 1992 that ruled that direct marketers need only collect sales tax on purchases placed by consumers residing in states where the marketers have a physical presence, such as a store or warehouse, “there’s been legislation introduced to collect tax.”

Although none of them has posed a threat on the federal side, with Democrats controlling both arms of Congress this year for the first time since the mid-’90s, committee chairs have changed, “so control features are new.”

He highlighted other tax issues of note to catalogers. For one, the Internet Tax Nondiscrimination Act (formerly known as the Internet Tax Freedom Act) expires Nov. 21. “That could put into play some kind of deal,” he cautioned, that may affect catalogers marketing online.

Regarding the Streamlined Sales and Use Tax Agreement, whose original goal was to simplify and make more uniform state and local sales and use taxes easier for retailers to collect, the group now has 15 member states. “Early on,” Isaacson said, “state delegates ran into disagreements among one another. Instead, the [coalition] lowered its sights and settled for a few very limited reform measures, such as some uniform definitions. The strategy of the National Governors Association will increase leverage in Congress to reward those states involved. Even with very modest reforms that the Agreement calls for, they’ve already started cheating on it, passing new taxes, not calling them sales or use-taxes. A number of states have used this as a way to increase taxes, including rounding up taxes on shipping and handling.”

Another tax issue catalogers should watch out for is that some states are attempting to impose direct taxes, such as corporate income taxes, on out of state retailers, arguing that the physical presence standard from Quill applies only to sales and use-tax collection obligations and doesn’t apply to other forms of taxes, Isaacson said.

Key Gift Card Legal Issues

Eisenstein discussed some of the legal challenges facing the growing gift card market. And it is a growing market: He cited a National Retail Federation report that during the holiday 2006 season, gift card spending jumped 50 percent to $27.8 billion over holiday ’05. The whole gift card market is about $40 billion, 20 percent of which is purchased online.

The benefits of issuing gift cards (or “virtual” gift cards issued by catalogers either online or in their print books) are the chance to spread sales out over the course of a year. Another key benefit is known as “breakage,” the 5 percent to 10 percent of gift cards that are purchased but never redeemed by the recipients.

On the legal front, three areas of law impact direct marketers regarding gift cards:

1. FTC and state consumer protection laws require adequate and conspicuous disclosure of terms, although nexus doesn’t apply to gift cards.

2. Various state statutes prohibit expiration dates on gift cards or the charging of fees for them.

3. Laws on breakage prevent marketers from gaining the benefit of breakage, also known as escheat laws.

Among the recent legal developments involving gift cards, Eisenstein pointed to the following:

*The FTC recently sued Kmart for inadequate and false descriptions of terms and conditions. What’s more, Kmart charged $2 a month to consumers who didn’t use gift cards (in other words, a $50 gift card’s value would diminish monthly to $48, then $46 and so on).

*He pointed to recent class action suits regarding gift cards in California and other jurisdictions, as well as a recent suit against shopping mall developer Simon Property Group, which issues its own gift cards.

*The SEC has issued comment letters on companies that don’t properly account for gift card breakage.

With all recent developments in mind, Eisenstein offered the following pointers to issuers of gift cards.

1. Disclose all terms and conditions for use.

2. Disclosure should satisfy the New York Statutory Standard and the Kmart Standard.

3. Be wary of the 13 states (including California, Connecticut, George, Illinois and Massachusetts) that have statutes prohibiting expiration dates on gift cards or charging dormancy fees.

4. Regarding escheat/abandoned property (unused gift cards), every state, as well as Washington, D.C., has such laws, although they vary. “There are certain common features,” he noted, “such as identifying what constitutes escheatable property and obligations on the part of the retailer with regard to the customer.