Since the demise of the Build America Bonds program on December 31, 2010, US states facing budget shortfalls (at least 42 according to an April 2012 post in Forbes CIO Network blog) have not been receiving much help from Washington. This, together with the generally poor economy and the resulting decrease in income from state taxes, has left many states desperate for additional revenue. In response, state governments are looking at their unclaimed property laws as a possible solution to budgetary woes.
In aggressive pursuit of untapped revenue, states are increasing the number of unclaimed property audits, scrutinizing annual reports, enacting new statutes, or re-interpreting existing provisions for potential under-reporting and aggressively pursuing companies they consider in violation of their statutes.
These intensified enforcement efforts are costing businesses billions of dollars in liability and non-compliance penalties. Every company needs to be aware of the unpaid property laws in the state where they are incorporated, as well as the laws in every state in which they do business. And they need to make sure they are in absolute compliance with all (old and new) requirements.
Items Receiving Special Attention by State Governments
Shortening the dormancy period has become a popular means for states to increase revenue. For instance, dormancy periods for most unclaimed property in many states was five years. Recently, a number of states (Missouri, Michigan, New Jersey, South Dakota, New York, to name a few) have reduced the 5-year dormancy period for certain property types to 1, 2 or 3 years.
Property Types subject to unclaimed property laws
Traditionally, items falling under unclaimed property laws included unclaimed wages, bank account deposits, credit balances, dividends, uncashed vendor payments, and unpaid life insurance policies. Some states have recently expanded the property types covered in their Unclaimed Property statutes by either changing the statute or reinterpreting current provisions. Items that may now be considered unclaimed property if not acted on during the dormancy period:
- Stored Value Cards, ranging from gift cards to prepaid calling cards, incentive cards and even HSA (Health Savings Account) and transit system fare cards
- Consumer Rebate Checks
- Class Action Settlements where a party has not cashed their proceeds.
- Digital Property, such as online accounts with social media websites, promotional codes redeemable for digital content or merchandise, point award systems.
- Unused coupons or magazine subscriptions
Many states have increased the number of audits by utilizing third-party auditors. These are typically paid on a contingent percentage basis (about 12%) for unclaimed property they discover. This practice, obviously, can lead to over zealous enforcement of the statutes by auditors looking to maximize their commission. To make matters worse, some states using third party auditors do not have procedures or safeguards to curb the incentive to inflate liability assessments, nor do they provide protection for the companies against which the assessments are made.
“Look back” periods and Estimated Liability
Most states have no statute of limitations for companies that have not previously filed an unclaimed property report. Even companies that have previously filed can be asked to prove that their filings were complete and accurate. In many states, the “look back” period can be 20 years or more — much longer than most companies retain their records.
Additionally, when no documentation is available, some states use a limited sample of data from select years to extrapolate a company’s liability. And, the burden of proof that the statutes were adhered to is on the unpaid property holder.
Imposing Excessive Penalties and Interest
In order to get the most benefit from their unpaid property statutes, many states charge exorbitant penalties and interest for non-adherence. For instance, Delaware penalties can be 50% of the value of the unclaimed property, or 75% if they believe fraud was intended. Add to that an interest rate of 12% from the time the property was due until it was paid.
How to Ensure Compliance with Unpaid Property Statutes
Probably the best way to ensure risk-proof compliance is to retain a company or an attorney that specializes in Unclaimed Property Law. Remember, if your company sells in any states outside the state where you are incorporated, you are responsible for filing reports according to those states’ requirements.
Some Sources of Further Information on Unpaid Property Laws
Unclaimed Property: The Solution to State Budget Woes? – Ethan D. Miller and Kendall L. Houghton, Alston & Bird LLP (September 12, 2011)
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