Unclaimed Property (UP): What Companies Need to Know
If you aren’t familiar with unclaimed property (UP) laws, you’re not alone. UP is generally intangible property (including everything from stocks and uncashed payroll/dividend/vendor checks to credits owed to customers or patients) that has not been resolved with its rightful owner for an extended period. As a result, it must be remitted to the state to be held until the owner makes a claim.
UP-focused laws have been a part of most states’ statutes for decades but went largely unrecognized until post-COVID budget shortfalls prompted states to look for ways to quickly close revenue gaps.
Generally, states estimate that anywhere from 65%-90% of companies that should be filing UP returns fail to do so. This lack of compliance has created a major source of revenue for state authorities who view UP collections as a way to fund state budgets and programs. To collect, states often hire third-party auditors who execute in-depth audits of businesses.
States are currently holding $50-$60 billion in unclaimed property. New York tops the list with $17 billion in possession, and California is second with over $7 billion.
Among states seeking out UP, Delaware — which counts UP as its third-largest revenue generator — continues to lead the charge. While few companies have significant activity in Delaware, more than one million companies, including 66% of the Fortune 500, are incorporated in Delaware. This matters because in 1965 in the case of Texas v. New Jersey (379 U.S. 674), the Supreme Court determined that any unknown or foreign-addressed property should be turned over to the company’s state of incorporation or domicile. Most states estimate an unclaimed property liability when records are not available for the full lookback, which saddles many companies with a significant unclaimed property assessment even when they had very few, if any, transactions with an actual Delaware address.
Delaware Senate Bill 281 (SB 281) further demonstrated that Delaware will continue to be the trendsetter for all states. SB 281 takes its 10-report year (15-transaction year) lookback one step further to require 10 years plus applicable dormancy until the audit or VDA is completed. That 10-year period starts running when:
- The notice of examination is delivered;
- The SOS VDA notice is delivered; or
- The holder elects to enter the VDA program.
Given that most unclaimed property audits take between three and seven years to complete, this Senate Bill could require a company to do a legal hold on document retention for 18-25 years. Delaware also continues to put the burden of proof on the company to prove it does not have any unclaimed property. SB 281 requires a company to maintain records of items that were NOT reported as unclaimed to “allow review to determine whether the holder has complied with this chapter [of the Delaware Escheats law].”
Given the Delaware lookback of 15 years, most companies have likely not retained the appropriate records to guard against an estimation assessment, which will be a hit to the income statement.
In further proof that COVID-19 pushed states to look for other revenue sources, California passed two bills to strengthen its position to find non-filers or under-reporters. California Assembly Bill 466 (AB 466) added the following questions to all California income tax returns filed in 2022 and later:
- Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller’s Office?
- If “yes,” when was the last report filed?
- Amount last remitted?
The information from these three questions will be used for holder reach out and other enforcement efforts, including audits.
California also just passed Assembly Bill 2280 (AB 2280), which established the Voluntary Compliance Program (VCP) and encourages entities to begin filing annual compliance reports and disclose any historic unclaimed properties due. AB 2280 was created following research that showed approximately 1.3 million California businesses file taxes but failed to submit an unclaimed property report. The state estimates that businesses that are out of compliance could be holding more than $17.6 billion in unclaimed property.
The VCP waives the 12% per annum interest penalty and allows the business to do a self-review, which is usually much more business-friendly than an audit. The one downside of the VCP is that it only gives six months after VCP enrollment to file the necessary reports. With this timeframe, most businesses should start a review now so that when California rolls out the VCP, the business has all property identified and can begin the due diligence letter process.
Other states, such as Illinois, Washington, New York, Florida, etc., have jumped on the unclaimed property enforcement bandwagon by sending out self-audit notices that tend to have very short turnaround times. Depending on the state and which notice a company receives, the self-audit could apply to not only the addressed company but also its subsidiaries, affiliates, and related parties. Completing the state’s expected thorough review of all applicable general ledger accounts in a short amount of time could be a significant undertaking.
When it comes to dealing with states, unclaimed property is the one area in which most companies believe they have zero or insignificant exposure. However, with the states’ increased hunger for revenue after COVID-19 and resulting aggressive audit methods, businesses should do some digging to ensure that historic policies and procedures have not put them at risk of a significant assessment. The key is to understand that most audit assessments for unclaimed property are not due to actual unclaimed property but rather what the business could not prove was not unclaimed property.
