KeepUP™ Blog

Unclaimed property reporting is a complex task with varying state requirements and protocols. 

One of the biggest fears and concerns for holders is running afoul of this complexity and creating the potential for a penalty and interest (P&I) assessment. States have the statutory authority to assess these fees and may impose them for:

• Reporting late property
• Filing late reports
• Filing inaccurate reports
• Submitting improper funding
• Reports filed in an improper or incorrect format.

Most jurisdictions have some mechanism to assess penalties or interest.  Below are a few examples of several high-profile states.

In a recent communication from Drinker Biddle & Reath (“DBR”), one of the state agents for the Delaware Secretary of State’s Unclaimed Property Voluntary Disclosure Agreement Program, we were informed that the states of Missouri and North Dakota have now engaged DBR to serve in a similar capacity as they currently serve for Delaware.

Agreements for the Missouri Voluntary Examination and North Dakota Contractor Assisted Self-Audit were provided by DBR for holder consideration. Similar to the Delaware Voluntary Disclosure Program, these agreements include the following holder requirements:

• File a final report within two years of agreement execution
• Disclose the entities reviewed
• Perform due diligence prior to reporting
• Assert as to the completeness of records
• Report past due property for the last 10 report years
• File annual reports prospectively

Over the last several years the use of block-chain technologies and their associated cryptocurrencies have grown tremendously. As with many new areas of commerce, growth is usually followed by an onslaught of challenges brought on as governments and regulatory agencies try to decide how to adapt to or fit this new square peg into the round hole of already established laws and regulations.

In the world of unclaimed property, cryptocurrency is just now being recognized in various new statutes and proposed legislation.  Many states, including IL, KY, NV, TN and UT, have adopted some form of the 2016 Revised Uniform Unclaimed Property Act, which includes “virtual currency” in the legislative definition of “property”.  In addition, NY has recently introduced legislation calling for unclaimed cryptocurrency to be escheated to the state upon abandonment.

Whether you are a company that has emerged as a part of the support system to the cryptocurrency world (e.g., coin exchanges) or simply a company that has begun to accept Bitcoin or other similar cryptocurrencies as payment, it will be important that you are prepared for these challenges and are proactively addressing potential issues that can emerge. One often overlooked area for consideration, is the impact of the various states’ unclaimed property laws and regulations.

Delaware has been busy filling the mailboxes of companies recently with Voluntary Disclosure Agreement (VDA) program invitations.  If you are a recipient of any letter from Delaware, pay particular attention to the letter content. 

Pursuant to 12 Del. C. § 1172(a), the State of Delaware cannot initiate a new abandoned or unclaimed property examination unless the company has first been notified in writing by the Secretary of State that it may enter the Delaware VDA program.  The VDA program allows a company to come into compliance by utilizing the Delaware VDA guidelines to conduct a self-audit of their books and records. 

This is an excerpt which will help in identifying the Delaware VDA program invitation:

On May 14^th, the Supreme Court legalized sports betting, overturning a 1992 federal law which barred most states from permitting sports gambling. As a consequence of the decision, each state will be allowed to introduce and pass legislation for sports betting within its jurisdiction. Almost twenty states, as shown in the map below, have already enacted legislation or introduced bills to legalize sports wagering [1].

Note - Oregon, Delaware and Rhode Island appear to be readying for sports betting through their lotteries [1]. 

Considering the success of online companies who specialize in fantasy sports contests, we anticipate the legalization of sports betting to only spur the industry as a whole, while also generating a new source of revenue for states.

In late 2016, the Uniform Law Commission (“ULC”), with the input from state unclaimed property administrators, holders, and holder advocates, completed an update to the Uniform Unclaimed Property Act, entitled the Revised Uniform Unclaimed Property Act (“RUUPA”). Since the release of the RUUPA, four states, Delaware, Illinois, Tennessee, and Utah have adopted some form of the act. The acts adopted by Delaware and Illinois made significant changes to prior legislation and MarketSphere has covered those in previous blogs, Delaware Governor Signs Legislation to Overhaul their Unclaimed Property Laws and Illinois’ New Unclaimed Property Act – Impact on Business to Business Transactions. 

In 2017, Nebraska, Maine, Minnesota and Vermont have proposed bills to adopt RUUPA. And, kicking off  2018, the District of Columbia and state of Washington have proposed legislation to adopt the 2016 RUUPA. 

The recently proposed bills for both the District of Columbia and Washington include changes to definitions, including additions of property types, changes to what constitutes contact with an owner, and various other updates consistent with the 2016 RUUPA. 

Record retention refers to how long important information must remain accessible for future use or reference. Most financial and accounting processes have standards that need to be met because agencies such as the Internal Revenue Service, the Federal Deposit and Insurance Corporation, and the Public Company Accounting Oversight Board all have requirements. You may be familiar with the obligations for these well-known agencies. Do you know what is required for escheat compliance? 

Companies generally maintain a schedule or policy for their escheat records that help define what will need to be kept and for how long. This is a worthwhile practice to meet requirements and have supporting documents available if requested or needed in the event of an audit. 

Creating and maintaining a schedule for unclaimed property record retention isn’t always easy. Unclaimed property retention requirements vary by state and jurisdiction and cause holders confusion about what and how long they need to archive records. Some holders might decide not to retain unclaimed property records and take their chances during an unclaimed property audit. We don’t want you to fall into this danger zone and have some practical advice that can simplify your escheat record retention policy. 

A Few Facts:

• Most States’ unclaimed property laws require record retention periods longer than standard tax statutes
• The 1981, 1995 & 2016 Uniform Acts require a record retention period of 10 years plus the dormancy period of the type of property
• Statutes are often silent on which records to keep

While mergers and acquisitions occur on a regular basis, the unclaimed property consequences of these transactions tend to be an afterthought. Even when unclaimed property compliance is identified as a potential issue, it is most often only reviewed at a very high level, which may result in future problems.  

Types of Mergers and Acquisitions

There are generally two types of takeover activity – (i) an asset sale, and (ii) a stock sale.  In general for an asset sale, the acquiring company tends not to acquire any historical unclaimed property obligation as it is only acquiring assets.  However, in a stock sale, the acquiring company generally become responsible for any historical obligation.  To avoid uncertainty regarding historical amounts due, the sale document should include language that specifically addresses this issue.

While the above approach has been the general position taken for merger and acquisition activity, it should be noted that Delaware has recently codified its position that the holder’s successor who has acquired “all or substantially all of the holder’s capital stock or assets, shall be responsible for fulfilling the holder’s obligation to hold for or pay or deliver property.”

Pre-Merger Due-Diligence

The optimal way to avoid unclaimed property issues during a merger or acquisition is to conduct a thorough assessment of the current and historical unclaimed property processes, liabilities, and potential exposure of the company being acquired. 

It can be difficult for holders to understand the intricacies of reporting stored value cards, payroll cards, reloadable cards and gift certificates. It’s not surprising when you take into consideration variations in card types, regulations and technology advances.  With the rapid growth in the card industry, this property category is getting more attention. In fact, the 2016 RUUPA includes several new card specific definitions that holders with a card program should be aware. As stated in our RUUPA blog post many states have adopted or are in the process of adopting the new act. Key definitions included in the act are gift card, loyalty card, net card value, payroll card, and stored-value card.

Legislative activity specific to cards and certificates is off to a fast start in 2017. For example:

• Oregon SB 113 provides that person identified in a gift card as providing goods or services shall transfer to the Department of State Lands any remaining balance of a gift card that a cardholder has not used within five years after the date of the last transaction using the gift card.

• New Hampshire House Bill 473 increases the threshold from $100 to $250 above which merchants can sell gift cards with expiration dates. The bill further provides that gift certificates of $250 or less shall not be considered abandoned property.

Accurate escheatment of card balances relies upon a variety of functions. Here are some of the crucial functional areas.

In late 2016, the Uniform Law Commission (“ULC”), with the input from state unclaimed property administrators, holders, and holder advocates, completed an update to the Uniform Unclaimed Property Act, entitled the Revised Uniform Unclaimed Property Act (“RUUPA”). The first uniform unclaimed property act was drafted in 1954 as a guideline that each of the states could use to help draft their own state unclaimed property laws.  The uniform act was subsequently revised in 1981 and again in 1995. Currently 39 jurisdictions have adopted either the 1981 or 1995 act uniformly, while 14 others have a non-uniform act in place.