United States

California: Merchandise Credits Not Subject to Unclaimed Property Law

Mar 21, 2016
From KPMG TaxWatch

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A California Superior Court recently held that merchandise credits offered by a retailer were not subject to California’s unclaimed property law. The taxpayer, a home goods retailer, operated numerous retail stores in California. When customers attempted to return merchandise without an original receipt, it was the taxpayer’s policy to accept the return and issue the customer a merchandise return certificate, or MRC. These MRCs could be redeemed for store merchandise. Per store policy, customers were not given cash refunds if they did not possess an original receipt. Between 2004 and 2012, the taxpayer reported and remitted as unclaimed property those MRCs that had not been redeemed by customers. The value of the unredeemed MRCs escheated to the state was $1,834,477.62.

In 2013, the taxpayer filed a claim requesting a refund of the amount remitted as unclaimed property for the unredeemed MRCs. After its refund request was denied, the taxpayer filed suit in San Diego superior court.  In the taxpayer’s view, the MRCs were akin to gift certificates and were not escheatable property. The state, on the other hand, argued that the MRCs were intangible property that was required to be remitted under California’s unclaimed property law.  The court noted that only intangible property that is actually “owing” to an owner is escheatable. Store credits, the court noted, could not be redeemed for cash and were therefore not intangible property owed to an owner. Furthermore, the court noted that it would be contradictory to require MRCs to be escheated as cash when the taxpayer’s return policy specifically stated that absent a receipt a customer was not entitled to cash.  Finally, the court determined that the MRCs were akin to gift certificates that are not subject to the state’s unclaimed property laws. It remains to be seen whether this case will be appealed. For more information on Bed Bath & Beyond v. Chiang, please contact Samantha Petersen at 303-382-7220. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.