How your Best Buy gift card ends up in New York’s bank account

(DINO VOURNAS/REUTERS) Over at the Wall Street Journal, Phil Izzo reports that some $41 billion worth of gift cards have gone unused since 2005. So what, exactly, happens to that money? After all, retailers aren’t allowed to report the cash used to buy gift cards as income until the cards are actually redeemed. So there’s a murky area that arises when a gift card just gathers dust in a drawer for years, lost and forgotten:

The Securities and Exchange Commission allows companies to take unused gift-card money as income once they can reasonably say the card won’t be redeemed, but there’s no set time limit. Best Buy, for example, sets that level at about two years. In fiscal 2011, the electronics company recorded $53 million in income from gift-card “breakage,” or cards that are unlikely ever to be redeemed, up from $43 million a year earlier.

But some states don’t allow companies to keep unused gift-card cash. They demand that companies give the money to the state after a certain period of time to add to unclaimed-funds accounts. States claim this is a way to reunite consumers with their unspent money, but practically it’s a way for cash-strapped governments to give themselves more liquid funds.

Here’s a piece from 2009 looking at how various states treat unclaimed gift-card credit. Roughly half of all states collect unused gift cards after a set period, usually two to five years. And some states do, in fact, try to return the money to their original owners, though locating those owners isn’t always easy. New York, for instance, collected $9.6 million from unused gift cards in 2008 and returned just $2,150 of that to the original card buyers. The rest went into the state’s “abandoned property” fund, which includes everything from uncashed payroll checks to long-forgotten bank accounts. And, in the end, most of that money ($691 million in all) was eventually transferred to the state.

So what happens to unused gift cards? The answer seems to be that they become government revenue, eventually.