Breakage

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Breakage is a term used in accounting to indicate gift cards that have been sold but never redeemed. Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards.

Breakage is a term used in sales, distribution, and multi-level marketing organizations to indicate commissions that are lost for the failure to meet certain conditions or requirements. Revenue from breakage is almost entirely profit as commissions lost for failure to meet those conditions or requirements can never be recovered.

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[edit] Regulations and controversy

US States have varying regulations about the accounting practices of unused gift cards. Some states consider unredeemed gift cards to be abandoned property, and as such lay claim to the value of unredeemed cards. Retailers oppose such laws, because it pays for the expense of issuing and accounting for the card, only to have the value on the card confiscated by the government.

Some retailers have also imposed conditions on gift cards, such as expiration dates or monthly service fees that periodically reduce the value of the gift card. However, some jurisdictions, such as California, Connecticut, Massachusetts, and Ontario have deemed such regulations illegal.

Some companies have been criticized [1] for using estimated breakage to improve their revenue numbers.

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