Salt Strategies

Unclaimed Property and Escheat Responsibilities Should Prompt Multistate Tax Spring Clean Up

Joseph Pizzimenti, Esq. reviews unclaimed property and escheat responsibilities.What is a business’ responsibility regarding unclaimed property reporting?

With tax busy season over, now is an excellent time to prepare and prioritize your multistate tax 2016 Spring Clean Up. If you let this slide, you may be opening yourself up to harsh penalties from the states where you do business.

While not technically a tax, over the past several months we have noticed an increasing number of State Unclaimed Property inquiries, correspondence and exam notices being sent to our clients. Below are some Unclaimed Property concepts that should help you assess your unclaimed property reporting responsibilities.

Unclaimed Property FYIs

Did You Know?

For 2011, the latest year with complete information publicly available, the 50 states and the District of Columbia took in more than $5.7 billion and paid out $1.9 billion in unclaimed property. That is a surplus of proceeds to the states in excess of $3.7 billion.

There were 2.5 million claims totaling $2.25 billion returned to rightful owners in FY2011 as a result of state unclaimed property program efforts. The amount of the average claim was $892.

More than $41.7 billion collected in unclaimed property funds is sitting in states’ treasuries, waiting to be returned by states to their proper owners.

Unclaimed Property – The BIG Picture

In addition, as a potential “holder,” to be discussed later, we thought you may find the following interesting:

  • All 50 states and the District of Columbia have adopted unclaimed property laws that require the reporting and remittance (“escheatment”) of various types of intangible property (generally, any obligation to pay money to another person).
  • After such property has remained unclaimed by the owner for a specified period of time – generally three to five years after the property becomes due and payable to the owner- it is deemed to become dormant.
  • Most States’ Unclaimed Property laws do not contain a formal “business to business” exception for potentially dormant property arising from a company’s day-to-day regular operations with its customers and/or vendors that are also businesses.
  • If a state’s unclaimed property laws apply to the property, then once the property is deemed dormant, the “holder” of that property has certain obligations that generally include:
    • The holder’s documented attempt to return the property to the rightful owner (this is typically called “due diligence”); and
    • if the holder is unable to locate the owner, the holder reporting and remitting the property to the state.

The “Big Picture” highlights of Unclaimed Property are just the tip of the iceberg of how expansive Unclaimed Property’s compliance and reporting may be for any multistate business.

Key Terms and Concepts

What is Unclaimed Property?

Unclaimed property (sometimes referred to as abandoned property) generally refers to a property right to pay the owner that has become abandoned or dormant because it has not been paid to or taken by the owner within a specified time established by the state specific unclaimed property law. The owner’s right to the property may arise from or be based on a contract or documented understanding, i.e., a purchase order/invoice, formal or informal agreement between a company and owner that created the obligation to pay to the owner by the holder.

No Nexus Requirement

Unlike state income, franchise and sales and use tax constitutional limitations on states’ ability to assert jurisdiction over out of state companies, a state’s ability to constitutionally require out of state companies to comply with their Unclaimed Property Laws is not limited by the concept or principles of state tax nexus.

Generally, if a company is a holder of property owed to a property owner that is located in State A, then State A may subject the company/holder to its Unclaimed Property Law despite the fact that the company/holder does not have any contact or connection with State A other than the fact that it is the holder of property owned by a company or person located in State A.

*Please note that some states have entered into “reciprocity” provisions or agreements that may mitigate the onerous results of this broad jurisdictional authority. New York has a very limited “reciprocity” provision.

Common Forms or Property Types of Unclaimed Property

A company may create unclaimed property from virtually any transaction that creates an obligation for the company to pay someone – i.e. an employee, vendor, customer or shareholder. Common forms of unclaimed property include:

  • Savings or checking accounts
  • Stocks
  • Uncashed dividends
  • Uncashed payroll checks
  • Refund checks
  • Unused traveler’s checks
  • Uncashed trust distributions
  • Unredeemed money orders or gift certificates
  • Client overpayments indicated in the form of credits to their accounts
  • Uncashed checks to vendors
  • Deposits on account, i.e. tenant, container or lease deposits
  • Utility security deposits

If a company has outstanding checks, deposits, credits or other amounts owed to its customers, employees, vendors or shareholders as the result of the company’s day-to-day operations that have become dormant, that company will have reporting and remittance, i.e. escheatment, responsibilities for Unclaimed Property to one or more states.

Business to Business Issues and Exceptions

Most states’ unclaimed property laws do not contain a formal “business to business” exception for potentially dormant property arising from a company’s day-to-day regular operations with its customers and/or vendors. For example, neither New York nor New Jersey have adopted “business to business” exceptions for unclaimed property.

 When Does Property Become “Unclaimed”?  

Once it is established that a company has an obligation to pay an owner (that the company is a holder), the company must assess the dormancy of each property based on the type of property and by reference to the appropriate state’s statutory dormancy standards and prescribed triggers that start the dormancy clock running with respect to that property. Depending upon the applicable state’s rules and laws, dormancy may be predicated upon something that has happened with respect to the property (e.g., receipt of an undeliverable mail or “RPO” notice), or something that has not happened (e.g., no owner contact or activity with respect to the property item).

If the dormancy period passes without reestablishing contact with the owner, then a presumption of abandonment arises.   Generally, this presumption may, however, be rebutted if the holder successfully contacts the owner prior to being required to report the “unclaimed” property to the claimant state.

Who Is A Holder?

State statutes have defined the term “holder” in various ways, and the U.S. Supreme Court has also addressed this definition.

1995 Uniform Unclaimed Property Act Definition

The 1995 Uniform Unclaimed Property Act defines “holder” to be the “person obligated to hold for the account of, or deliver or pay to, the owner” the unclaimed property. Not all states have adopted the 1995 Act.

State Specific Definitions

A state’s Unclaimed Property provisions may not statutorily define who is “holder.” Instead, a state may refer to one or more seminal U.S. Supreme Court decisions in its reference or attempt to define who is a holder. One such decision, Delaware v. New York. may be referred to in a State’s attempt to define who is a holder.

Alternatively, other states may provide a highly specific statutory definition of who is a holder. For example, Delaware defines “holder” as “any person having possession, custody or control of the property of another person and includes … every other legal entity incorporated or created under the laws of this State or doing business in this State.”

Should Your Multistate Tax Spring Clean Up Include a Discussion About Unclaimed Property? Absolutely

Again, although Unclaimed Property is not a tax, it may often be administered by a state’s Department of Revenue or Controller’s Office. Given the increasing frequency of state Unclaimed Property notices, as you prepare your 2016 Multistate Tax Spring Clean Up list , every business should have unclaimed on its Multistate Tax Spring Clean Up list of things “To Do.”

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