California Bill Would Require Retailers, Restaurants to Cash Out Gift Cards

The measure applies to amounts of $25 or less that can get ’stranded' on cards, lawmakers say. Restaurants don’t like the idea of becoming ATMs.

Gift cards are displayed at a Target store in New York on Dec. 21, 2023. Richard Drew/AP

Critics of California’s notoriously high tax burden like to quip that state government views businesses as an ATM.

Now, state officials want to actually require California retailers to function as ATMs for customers.

Senate Bill 1272 would effectively convert gift cards into generic cash cards, causing businesses to provide cash for any request of $25 or less.

Because restaurants would be on the hook with the new requirements, the California Restaurant Association (CRA) testified against SB 1272 last week in the Senate Judiciary Committee. The legislation goes before the full Senate next.

“Don’t we have bigger fish to fry than this?” asked Bill Higgins, chef-owner of the Whippersnapper restaurant in San Rafael. “I would think trying to help small business would be a bigger issue, trying to stop businesses from closing.”

The law bucks trends on cash availability that took root during the COVID pandemic, a time when the rate of bank branch closures doubled, according to the Center for Public Integrity, and a time when major venues like the Chase Center in San Francisco and its peers prohibited the use of cash on the premise that it was not “contactless” and could thus help spread the disease.

“Restaurant gift cards are unique, as the giver of that gift card is often intending to give an experience, as opposed to merchandise, products or services,” Sacramento public relations professional Sabrina Washington said in a video prepared for CRA. “If someone wanted to just give an individual cash for a gift, they would do that, or provide the equivalent on a cash gift card from one of the major banks.”

The legislation would require businesses to keep more cash on hand, Ms. Washington added. “And keeping extra cash on hand these days is certainly a security risk.”

The new proposal comes at a time when many California restaurants, retailers and small businesses are reeling from what seems like an endless onslaught of new requirements that add costs and administrative layers, John Kabateck, president of the National Federation of Independent Businesses (NFIB), told California Insider in March.

“We talk to our NFIB members all of the time, many of them restaurateurs, many of them small businesses, and they’re just facing a wall of problems, said Mr. Kabateck, who previously worked with CRA. “When is too much too much? ... It’s just what we call death by a thousand cuts.”

The new proposal is tied to inflation. That means the cash-out amount required will increase above $25 “and remain on autopilot for continued increases,” Ms. Washington said.

The intent of the legislation is to help consumers access lower amounts that become “stranded” in gift card balances, lawmakers say. But in the case of restaurants, Mr. Higgins said, any balances should just carry over to future meals.

“We’re trying to provide an experience, not to become like an ATM—that’s ridiculous,” Mr. Higgins said. “You sell people gift cards for them to use the full amount at the restaurant.”

In addition, many franchisees do not get paid for original gift card purchases for up to three months, until the franchisor accountants do their quarterly reconciliation. This could lead to depletion of those restaurants’ cash accounts.

“It’s almost like, as in many of the regulations we keep seeing, the policymakers never engaged with the stakeholders who are actually affected by it,” Mr. Higgins said.

Critics also point to potential unintended consequences, such as exploitation by scam artists, and in the case of electronic gift cards, exploitation by hackers.

Related legislation, passed by the Senate in September 2023, would have outlawed plastic gift cards in California by 2027, authorized various state agencies to enforce the new law, and imposed civil penalties on restaurants and other businesses who violated it, while exempting plastic cards used to pay public transit fares.

Gov. Gavin Newsom vetoed Senate Bill 728 in October, however.