Overview

New Mexico has joined the growing list of states that regulate gift certificates. HB0127 was signed into law by Governor Bill Richardson last month, and takes effect July 1st, 2007.

This law, like many of the others, has the best of intentions but really ends up hurting small businesses. It is my sincerest hope that eventually, our legislators will look past the mentality of "I have no sympathy, because businesses just use your money and hope you will lose the card!" (actual quote from an unnamed NM State Legislator). Without going into a diatribe, some of the high-level problems with this statute are:

• Five (5) year expiration date – For a product- or service-based GC, there is a significant chance the product or service will no longer be available or cost significantly more than what was originally paid for, at five years. Also, the five years is a long time for the small business to keep a liability on the balance sheet.
• No fees, including at time of sale – The language used is imprecise, and can suffer from many interpretations. A conservative – and reasonable – interpretation would be that no fees of any form can be charged against the GC, including but not limited to gross receipts tax, shipping and/or handling charges, surcharges or convenience fees.
• Modifies 7-8A-2 NMSA 1978, Presumption of Abandonment, to the Uniformed Unclaimed Property Act (UUPA) – GC’s are considered abandoned property, if "unclaimed 5 years after December 31st of the year in which the GC was sold." This means GC sellers must turn in the money obtained from GC sales to the Tax and Revenue Department of New Mexico, if not redeemed. This legislation assumes GC revenue is “free money,” and doesn’t appreciate the many costs that go into selling, maintaining and redeeming GC’s: CC transaction fees, handling fees from service providers, and staff time.

There are many ways to help protect consumers, while avoiding hurting small businesses. For example:

• Require the expiration date and key terms and conditions to be prominently displayed on the GC.
• Prohibit expiration dates of less than a year, unless charitable. Five years (or indefinite) is too long.
• Require a phone number and contact information on the GC, where a holder can call to inquire as to the status of the GC.
• Require businesses to honor their GC’s.

New Strategies to Maximize Revenues Given Gift Certificate Laws

I believe this applies to everyone, not just New Mexico spas and salons.

When you sell a GC, it cannot be counted as revenue, since it's actually a liability. The money goes on your balance sheet as a liability, where it stays until one of three things happens: The GC is redeemed, the GC expires or the GC is turned over to the state. The goal here, is to move the GC amount from the balance sheet to your income statement. You can only do this, if your GC is redeemed or you expire the GC.

Therefore, if you're in a state that does NOT regulate GC expiration dates, you benefit by having a reasonable expiration date because it helps you achieve your goal of recognizing that money as income. My recommendation in these jurisdictions: Use a one (1) year expiration date, but if someone walks into your spa or salon with an expired GC, take it! You have an opportunity to obtain a new customer, or at the very least, a happy recipient who may refer new customers to you.

If you're in New Mexico or one of the other states that regulate GC expiration dates, the strategy changes. You can ONLY recognize a GC sale as revenue if the GC is redeemed. You need to think about strategies that cause folks to redeem your GC's. In New Mexico, waiting the five years to expire a GC doesn't really help, since you're now required to send in the funds to the State of New Mexico, given the modification to the UUPA (more on this in an upcoming blog article).

No or long-term expiration dates also create potential issues for service-based GC's. Over time, products or services may no longer be available or increase in price. You are only required to honor the value paid for GC's. Do you need to put the value-paid for a GC on the GC? No. Should you create a policy with respect to long-term, service-based GC's? Yes.

Here are our recommendations:

• Expire your GC's if you can, within the parameters of the law, and always accept your GC's even if expired.
• Work hard to get customers to redeem their GC's:
• Consider promotions for GC holders.
• Use SpaBoom to send out newsletters and reminders to your GC customers.
• If customers lose their GC's, look it up and print a new one. SpaBoom makes this easy, if you use SpaBoom to manage your GC's.
• Over 60% of GC buyers prefer service-based GC's, and those buyers spend more, on average, than dollar-based GC buyers.
• Continue selling service-based GC's, and maintain the personal touch by NOT placing purchased amounts on the face of the GC's.
• Create a policy around service-based GC's, by offering the service for a year and converting the GC to cash-value after a year. In SpaBoom, you can add to the "GC fine print:" under Setup, Basics, with the following language: "Reverts to cash-value after one (1) year."
• To reiterate, I do not believe you should consider including the cash value on all GC's.
• Get ready to start filing reports to the State of New Mexico, and sending in the cash for unredeemed GC's. Many states have some form of UUPA on the books. SpaBoom will be publishing more information about this shortly. Stay tuned.
• When buying or selling a spa or salon, do NOT forget about the GC liability. Simply hanging a sign, "Under New Management," will not prevent customers from demanding redemption of their GC's, and can create serious legal consequences if not handled properly.

In Summary

If you're in New Mexico, you must change the expiration dates of GC's sold on or after July 1st, 2007, to five (5) years or more. Start changing your mindset, and your policies, regarding longer-term GC's. Start thinking about how to get folks to redeem their GC's.

Consult with your tax expert or attorney, to make sure you're doing things properly.

Finally, stay tuned. SpaBoom will be publishing more information about the GC laws in all states, as well as UUPA compliance. We are also thinking about better tools to help you with legal compliance, as well maximizing GC profitability. Do you have suggestions or ideas?

5 Responses to “New Mexico's new gift certificate law”

1. Debbie Hirsch Says:
   May 6th, 2007 at 5:51 am

   WOW!!! I had no idea laws like this existed. This is very anti-small business owners! I would be curious to know what the law is for the State of Georgia.

2. Skip Williams Says:
   May 7th, 2007 at 9:09 am

   Dear Larry,

   Glad to see that you are on top of this. Unfortunately many Spa Owners depend on broken GC sales to provide profit, but I, like your advice, advise that we do everything we can to get recipients of GCs in so that we can convert them to long term Clients. Spas stand to make much more from a loyal Client than a broken GC.

   Larry could you clarify how this new law in NM conflicts with IRS (Federal) law? I believe, and you would know better, that the IRS forces us to convert the liability to revenue after a specified amount of time doesn’t it? And if it does, then doesn’t the new NM law then conflict, and which one would supersede the other?

   Best Wishes & Healthy Profits
   Skip Williams

3. Angel Says:
   May 8th, 2007 at 8:59 am

   By your register receipts you are already paying taxes in some way on this money in some fashion. On top of that you pay out money to the credit card companies if that is the method of payment. The over head on a GC is not considered when New Mexico requires you to turn in all of the money. This is new law is absolutely ridiculous and unthought through.

4. Larry Donahue Says:
   May 9th, 2007 at 7:04 am

   Debbie, we're doing more research to update our knowledge of all the state laws, and will be publishing more articles to summarize all the states and what to do about it.

   Thanks, Skip, for the reminder about IRS requirements for GC reporting. I'm going to do more research, and post it on the blog in short order. If we have any CPA's or tax folks who know about this, we'd love to hear what you have to say!

   Larry.

5. Michelle Says:
   May 9th, 2007 at 12:17 pm

   Thank you for this post! Please keep us up to date on what happens with NM and other states.

Leave a Reply

Name (required)

Mail (will not be published) (required)

Website