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By PAUL CARRIER
MaineToday Media, Inc. 12/06/2007

If you don't use it within two years, the card will become dormant. Once that happens, you'll inadvertently do your small part to fuel a face-off between the state and dozens of out-of-state retailers over who should get that $25, $50 or $100 that you misplaced or tossed aside.

It's a high-stakes game involving dueling claims of ownership and unresolved legal issues. And for state government, it represents more - a multimillion-dollar hole in the budget.

Experts say state revenue is likely to be $95 million less than initially expected for the rest of the two-year budget cycle that ends June 30, 2009. More than a quarter of that comes from retail chains' refusal to follow a new state law that requires them to turn over the money when their gift cards go unused.

Now, the state treasurer is asking the attorney general to look into what Maine can do to enforce the law, which took effect May 1. And state budget writers are trying to figure out how to compensate if the money isn't collected.

Gov. John Baldacci will tell the Legislature next month how he thinks the state should deal with the $95 million shortfall, amid predictions of cuts in as-yet unspecified programs.

David Farmer, Baldacci's spokesman, said recently that "real and significant cuts in programs and services" are likely, as well as additional efforts to make government more efficient.

State officials hoped to collect a total of $28.6 million this fiscal year and next from out-of-state retailers that have either ignored the state's demands for the money or challenged the law's legality.

"I can tell you nobody responded with money," said state Treasurer David Lemoine.

Gift cards are big business across the country, and getting bigger. Consumer Reports, citing research by a Massachusetts company, says gift card sales are expected to top $100 billion in 2008. Many of those cards are never used, or are used for only a portion of their value. Recipients often lose cards, forget about them, have no time to redeem them, or can't find anything they want to buy, according to the magazine.

The issue in Maine involves the state's definition of unclaimed property, a term that's commonly associated with bank accounts whose owners cannot be found.

Maine law treats gift cards as dormant if they are not used within two years. Once cards become dormant, the state claims a portion of their value.

Maine is one of 34 states whose unclaimed-property laws cover gift cards sold by in-state retailers, according to Lemoine. He said he believes that Maine and Connecticut are the only states that have tried to recoup money from out-of-state card issuers, and Connecticut has abandoned the practice.

Maine-based retailers have recognized the state's claims for years, Lemoine said, by giving the state 60 percent of the value of unused cards sold to unidentified buyers. A card holder can still use a card after it becomes dormant, because Maine law prohibits expiration dates on gift cards. If a dormant card is used after a Maine retailer has paid the state its share, the state returns the money to the retailer.

The current problem arose when the state tried to apply the 60/40 split to dozens of out-of-state retailers that sell gift cards to Mainers, such as Radio Shack, Home Depot and Best Buy.

By buying gift cards that go unused, Lemoine said, "Maine consumers are spending money for retail goods which are not being redeemed."

"There are going to be windfalls" when there is no record of who bought an unused card, Lemoine said, and "they should benefit the public, not the company" that issued the card.

Lawyers for some out-of-state retailers counter that Maine has no valid claim on their unsold cards because those companies are governed by the laws of their home states.

If other states had laws like Maine's, retailers would be "placed in the position of facing claims from several states for the same property," wrote Patrick Reynolds, a lawyer for J.C. Penney, in a June 1 letter to Lemoine.

"The state of Maine was never a party in the transaction between retailers and customers in the first place and it has no legitimate claim" to any of the money from the sale of gift cards, said Craig Shearman, spokesman for the National Retail Federation in Washington, D.C.

It may have been "a far reach" for the state to go after gift-card revenue, said Jim McGregor of the Maine Merchants Association, because the retailers, not the state, sell the cards.

"I don't know why the state is necessarily the first in line" to get a share of the unused cards' value, McGregor said.

The state's experience underscores the fact that forecasting state revenue combines a close look at economic data with a dose of crystal-ball gazing.

Predicting how existing taxes will perform is reasonably safe when it is based on a sound analysis of reliable data, said state Rep. H. Sawin Millett, R-Waterford, a former state finance commissioner.

But when the state counts on a new and untested source of revenue, such as gift-card money from out-of-state firms, "then you're getting more into the speculative arena" where forecasts require "a leap of faith," Millett said.

The state law, passed in 2004, took effect on May 1 of this year, so this is the first two-year state budget that includes revenue projections for unused gift cards from out-of-state retailers.

Lemoine said the state has no idea how much money individual retail chains pocket from unused gift cards that are sold in Maine, but officials know that Maine represents about 0.5 percent of the nation's retail sales. The state assumes that its share of gift-card sales is comparable.

Using national data on gift card trends, the state calculated that out-of state companies would owe Maine $13.1 million this year and $15.5 million next year from unused cards.

The state then drew up a list of more than 40 out-of-state retailers that do business in Maine, including CVS, Burger King and Agway, and sent them letters on May 11 demanding that they calculate what they owe and pay up.

Lemoine said none of the companies has complied, so he has referred the matter to the Attorney General's Office. That office is evaluating its options, which may include litigation, according to spokesman David Loughran.

Whatever the merits of the law, Maine is now out millions of dollars that lawmakers counted on in writing the state budget. Even if the state goes to court and wins, the state is unlikely to see any proceeds in the current two-year budget cycle.

This year, for example, the state expected to collect $22.9 million from unclaimed property, including gift cards, bank accounts and other assets. The resistance from out-of-state retailers has cut that to less than $9.8 million.

The state also projected gradual increases in gift-card revenue from out-of-state companies in the years ahead. So the shortfall will grow over time, from $13.1 million this year to $15.5 million next year, $16.7 million the year after that and $18.1 million in the following year, according to state estimates.

The gift-card fight is one of several factors that created the $95 million hole in the state budget.

Others are federal reimbursements to the Department of Health and Human Services that failed to meet projections, and lower-than-expected receipts from the sales tax, the corporate income tax and cigarette and tobacco taxes.

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