All 50 states and the District of Columbia have laws that require unclaimed property holders to annually report and remit the “dormant” portion of such property to the appropriate state. When property becomes dormant depends on the state and type of property. For instance, most states set their dormancy period for wages, compensation and commissions at one year, but use three to five years as the dormancy period for “other” property. There are many other categories of property, including securities, gift certificates and the contents of safe deposit boxes—each with their own dormancy period.
For most businesses, there are five big questions: who, what, when, where and why?
Who needs to report? Under the law, any business entity that has accounts reflecting property rights with others is subject to reporting. Even if none of the underlying property rights have gone dormant, some states require so-called negative reports, also known as nothing to report. While most states don’t require negative reporting, it’s a best practice in states where you have the most exposure to keep the statutes of limitation tolling.
What needs to be reported? Like so many details of unclaimed property law, that depends on the state. While the general rule is all dormant unclaimed property needs to be reported, there are a number of exceptions. Many states don’t require amounts owed to another business to be escheated to the state under the rationale that another business should be sophisticated enough to keep track of amounts it’s due.
When are reports and remittances due? At last count, 40 of the 50 states use November 1 as their deadline. The others generally are in the spring, although the due dates in New York vary depending on the property type.
Where’s the money sent? Although states battled over this question for a long time, 1965 U.S. Supreme Court case Texas v. New Jersey clearly set out the rules. First, you look to the state of the last known address of the apparent owner of the property, as shown in the holder’s books and records. If there’s no address of record, the money is escheated to the holder’s state of corporate domicile. Delaware—where many corporations are domiciled—is particularly active in the unclaimed property arena and recently enacted significant changes to its unclaimed property statutes.
Why do states require this? Ostensibly, to reunite their citizens with monies due to them. And while a report from the National Association of Unclaimed Property Administrators shows $3.235 billion of unclaimed property (out of $7.763 billion escheated) was returned to owners in fiscal year 2015, that leaves $4.528 billion in state coffers. Until they’re claimed (if ever), some state unclaimed property funds can be used for the benefit of all state citizens through activities such as making public improvements or reducing student loans.
As states continue to look for additional revenue sources, many have become more active and aggressive in conducting unclaimed property audits, either through their own personnel or through contract auditors. In either case, if a company has failed to file annual reports and/or cannot produce adequate records, the exposure can far outstrip the underlying liabilities.
Many states have a 10-year record-keeping requirement and allow projections to be used when adequate records aren’t maintained. Those facts, along with statutory interest and penalties for failure to file, can easily double the exposure.
Because states are becoming more active in this field, companies need to take steps to comply with state laws, either through the use of voluntary disclosure agreements or by reviewing their existing practices and making needed corrections.
Contact your trusted BKD advisor with questions or for more information.