Authors: Andrew Garcia and Gary Wallace, CPA
Because of the recent poor economic climate, states have been in search of additional sources of revenue. One potential source that has received an increasing amount of attention is unclaimed property (“escheat”). Unclaimed property is defined as any tangible or intangible property that has been unclaimed by its owner for an extended period of time. Although the types of property reportable to and claimed by the states continues to expand, major categories include:
- Unclaimed wages and accounts payable
- Uncashed dividend checks
- Credit balances of accounts receivable
- Unredeemed rebates and unused gift cards
- Amounts distributable from employee benefit plans
- Unredeemed vendor credits
- Interest and dividend payments
- Stock and other securities
- Retained asset accounts
There are currently estimated tens of billions of dollars in unclaimed property throughout the U.S.
All 50 states have laws that require businesses (known as holders) who have unclaimed property to remit any money or property owed to the rightful owner to the proper state after a certain period of time, or “dormancy period,” has passed. This period typically ranges from one to five years, depending on the type of property.
Most states have now begun to use unclaimed property as a way to potentially reduce or eliminate their budget deficits while not technically raising taxes. This had led to a noticeable increase in unclaimed property audits. These audits can last for years, with look back periods that usually range from five to twenty years. In addition, penalties and interest that have to be paid by companies as a result of noncompliance can be considerable. If a business has not filed unclaimed property filings, the look back period may be unlimited.
Manufacturers, distributors and retailers need to be aware, as states are becoming more aggressive on their “definitions” of unclaimed property. For example, some states have begun to include inventory, vendor samples, coupons, unused magazine subscriptions, and other items that some companies argue should not be considered unclaimed property. For example, in McKesson Corp. v. Cook, the auditor hired by the State of Delaware began requesting information on inventory mismatches, including vendor samples, five years into its audit of McKesson Corp., even though Delaware had not changed its statutes or regulations to put companies on notice for this category of property. In an apparent response to the outcry over the lawsuit and other pressures, Delaware passed legislation that provides a limited exclusion for inventory mismatches and vendor samples. This exclusion does not apply to other states.
Rebates and gift cards have also been especially problematic. For example, in Fitzgerald v. Young America Corp., the treasurer of the State of Iowa filed a lawsuit against Young America Corp. and other companies to compel them to disclose their records to determine whether their rebate programs were in compliance with the state’s unclaimed property laws. The Iowa District Court denied the defendants motion for summary judgment, indicating that just because the defendants may no longer be in possession of the property did not mean that the defendants were not holders under the statute and therefore obligated to satisfy the state’s unclaimed property reporting an remittance requirements.
Some states have been very aggressive in taking advantage of this high noncompliance rate, and in many states, unclaimed property audits can result in a major source of revenue for the government. Delaware, for example, is estimated to take in as much as $484 million in unclaimed property in 2013. Even though unclaimed property is not even considered a tax, it is still the state’s third largest source of revenue.
Delaware has been advantaged in the search for revenue because of the unique sourcing law concerning unclaimed property. The Supreme Court established a rule that if the address of the owner of the property is unknown, then the property remits to the holder’s state of corporate domicile. This law, in combination with the absence of any address records for a large portion of Delaware’s long look- back period and the fact that many businesses are incorporated in the state of Delaware, created the potential for Delaware to reap enormous gains.
Delaware recently opened a Voluntary Disclosure program (VDA), in order to provide relief to holders of Unclaimed Property. The VDA program limits the look- back period for non filers to 1996, rather than 1981.It also shortens the review time considerably and waives interest and penalties on past-due unclaimed property. In order to qualify for participation in the Delaware VDA program, holders must not be currently under audit or have received a notice of audit, and must enroll in the program by June 30, 2013 and enter a settlement and remit all past-due unclaimed property by June 30, 2014.
Manufacturing, Distribution and Retail businesses should be aware of the unclaimed property laws of the various states and take action to be in compliance. VDA programs, such as Delaware’s, may provide an opportunity to become compliant, while limiting the period of review, as well as exposure to substantial penalties.
Contact Gary Wallace at firstname.lastname@example.org or your Tax Team for additional information on how your business may be impacted by unclaimed property.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.