Beyond California’s recent unclaimed property decision

The State of California’s push for revenue from unclaimed property took a hit last month due to a state court decision holding in favor of Bed Bath & Beyond Inc. (BB&B).

Between 2004 and 2012, BB&B remitted unclaimed property to California in the form of cash equal to the full balances of merchandise return credits (MRCs) that went unredeemed during the three-year dormancy period, totaling $1,834,477.62. MRCs essentially represent store credit to a customer who returns merchandise at a BB&B store without a receipt. BB&B is not obligated to accept returns without a receipt. MRCs are redeemable only for merchandise at BB&B and its affiliates; MRCs are not redeemable for cash.

In 2013, BB&B filed a claim with the California State Controller’s Office seeking a refund of the amounts paid that were attributable to MRCs on the grounds that BB&B mistakenly remitted these monies to the state. After the state denied the claim, BB&B sued the state controller and asserted the MRCs were property that should not have escheated to the state.

In her order, Judge Joan Lewis held that MRCs were not “intangible personal property” that properly escheated under California Code of Civil Procedure section 1520 because the MRCs were not redeemable for cash and, thus, are not “owing” to the owner.

In addition, Judge Lewis held that the MRCs are a type of gift certificate, which is not subject to escheat under section 1520. Gift certificates, according to the judge, “include those that are distributed by the issuer to a consumer pursuant to an awards, loyalty or promotional program.” As MRCs are issued by BB&B, they fell within the gift certificate exemption.

It is unclear whether the state intends to appeal this decision. At the Unclaimed Property Professionals Organization’s recent annual conference, representatives from several states expressed the opinion that the decision was wrong. Whether other states will pursue cases on similar grounds remains to be seen. At the very least, companies issuing merchandise credit with and without cash value should maintain separate accountings for these items. Otherwise, a state could assume all store credit on a company’s books has a cash value and may be escheatable.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.


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