From Rewards to Regulations: Navigating the Legal Landscape of Loyalty Experiences
The legal requirements for running rewards and loyalty experiences are pretty simple and straightforward. In fact, you’re probably complying with many of them already. The golden rules are: 1. post clear rules, 2. don’t deceive your customers, 3. make sure your privacy policy is accurate, and 4. pay your taxes.
Keep reading to learn from Co:Create’s General Counsel, Josh Rosenblatt, about the legal basics of running your own rewards experience. 👀
📚 The Fine Print You Can’t Afford to Ignore….
The most important thing a rewards initiative should do is post terms and conditions. These terms should be clearly stated and easily accessible to your customers, including any limitations or restrictions on rewards, expiration dates, and other important details. Moreover, it’s essential to ensure that the terms are fair and reasonable, and that they do not mislead or deceive your customers.
While many customers work with their counsel to create Terms and Conditions that are suitable for them, we have created a template for your educational purposes, which you may access here. 🏆
🫡 Protecting Your Customers — Why Clear Policies Matter
It’s important to consider the consumer protection issues that may arise in the course of operating the program. Avoid deceptive practices such as using misleading advertising or unclear terms and conditions to entice consumers to sign up. Customers should not be confused about what they are getting when signing up for a program.
That clarity should also extend to the redemption of rewards. For example, if the rewards are offered in the form of points, it’s essential to have a clear process in place for customers to redeem those rewards. You should also have policies in place to address any disputes or issues related to reward redemption.
✍️ The Fine Print Your Accountant Doesn’t Want You to Miss
This brings us to everyone’s favorite topic — taxes. Are the rewards you get from signing up for a loyalty program going to be taxed? In general, rewards earned through a loyalty program are not taxable if they are considered to be discounts on purchases. However, if the rewards are considered income or a form of compensation, they may be taxable.
For example, if a program offers a reward for referring a friend to a company, that reward may be considered income and therefore taxable. Similarly, if the reward is in the form of cash, gift cards, or other easily transferable assets, it may be considered income and taxable.
Businesses should consult with their tax professionals to ensure that their rewards experience complies with all applicable tax laws and regulations. Additionally, those members in the rewards program should be informed of any tax implications of the rewards they earn through the program.
🤝 Building Trust with Your Customers, One Data Point at a Time
It’s important that your privacy policy provides an overview of how you collect, use, and share data from your rewards program. Your customers should have a clear understanding of what kind of data you’re gathering and how it’ll be used to make their rewards experience even better.
Make sure your privacy policy is easy to find and that it’s written in plain language that anyone can understand. It should lay out the types of data you’re collecting (like personal info and purchase history) and how that data will be used to create customized rewards and make your customers’ experiences top-notch.
Also, if you plan on sharing data with third-party vendors or partners, make sure to mention that in your policy. When your privacy policy is straightforward, you’ll build up trust with your customers — an essential element of any loyalty program.
⚠️ BSA — Rewards and/or Money Laundering?
It’s essential to ensure that the rewards initiative does not fall under the purview of the Bank Secrecy Act (BSA). The BSA is a federal law that mandates financial institutions to report certain types of transactions to the U.S. Department of the Treasury to prevent money laundering and other financial crimes. While loyalty programs typically don’t fall under the BSA, certain factors can trigger the law’s requirements.
If your program is merely providing rewards or other non-monetary benefits, it’s unlikely that it will fall under the BSA. However, if your program offers cashback rewards, prepaid cards, or other monetary incentives, it may inadvertently trigger these laws.
We believe the Co:Create model has been designed specifically to allow the user to ensure that our tokenized rewards and loyalty solution would not trigger the requirements for the BSA. However, it is still best practice to have risk appropriate anti-money laundering (AML) and know-your-customer (KYC) in place for your experience.
🔔 Disclaimer
The information provided in this blog post is intended for general informational purposes only and should not be construed as legal advice. Co:Create is not your lawyer and has not provided legal advice tailored to your specific situation. If you have any legal questions or concerns related to your loyalty program or any other aspect of your business, you should seek the advice of your own legal counsel. The use of this blog post or any information contained herein does not create an attorney-client relationship between you and Co:Create.
