California AB 466 was enacted on July 16, 2021, and becomes effective on January 1, 2022. The bill allows the Franchise Tax Board (FTB) to share information from business entities’ tax filings, on an annual basis, with the State Controller’s Office (SCO), specifically:
♦The taxpayer's entity status and the date FTB last updated the status.
♦ The taxpayer’s revenue range.
♦ Whether the entity previously filed an unclaimed property report with the Controller, and if applicable, both of the following:
• The filing date of the taxpayer’s last report.
• The amount remitted on the taxpayer’s last report.
According to the FTB’s Bill Analysis dated June 24, 2021, the FTB already provides the SCO with a list of business entity taxpayers that are incorporated or began conducting business in the last three years and have filed a tax return. With the passage of AB 466, the FTB will be permitted to share business entities’ responses to these questions with the SCO, who can use the information to identify and provide outreach, in the form of education and/or audits, to companies that the SCO believes is not in compliance with the unclaimed property law.As holders may recall, prior legislative activity in California sheds additional light on the state’s latest efforts to increase holder compliance. SB 109, also known as the Budget Act of 2019, was introduced on January 10, 2019, and enacted on September 27, 2019. As holder compliance rates were declining - the SCO estimated a 2% compliance rate among holders, the SCO was tasked with reporting to the Joint Legislative Budget Committee on plans to provide either a one-time amnesty or other options to increase holder compliance, as well as options to increase the return of property to rightful owners. The FTB was required to report on plans to include a question related to unclaimed property on business tax forms.
The FTB and the SCO worked together to create a series of questions to be included on business entity tax forms in order to increase holder awareness of, and compliance with, the unclaimed property reporting requirements:
♦ Has this business entity previously filed an unclaimed property Holder Remit Report with the SCO? (yes/no)
♦ If “Yes,” when was the last report filed?
♦ What was the amount last remitted?
On March 15, 2019, before SB 109 was enacted, the California Legislative Analyst’s Office (LAO) issued a report on ways to increase holder compliance and recommended either a one-time amnesty, which would waive the 12% interest per year assessment, for holders who voluntarily reported late property or amending the tax law to require businesses to respond to an unclaimed property-related question as part of their tax filings. The LAO report indicated that implementing both options could be more effective than either option alone.
California’s sole amnesty program ran for two years (January 1, 2001-December 31, 2002) and was available to holders that were not under audit. Holder reports during this time accounted for over 25% of the $780 million escheated during the amnesty period and 31.8% of the reports were from first-time filers. Even though the amnesty program had a history of success, the SCO determined that an amnesty program would not adequately address holder compliance.
AB 466 was supported by State Controller Betty T. Yee, who also referenced the low compliance rate among holders. Per the Assembly Committee on Revenue and Taxation’s Bill Analysis dated March 22, 2021, the data compiled by the FTB would be used by the SCO “to identify the most viable candidates for outreach and education as well as compliance and audit efforts. Reaching out to businesses that are likely to have property to report or are likely to be responsive to the State Controller’s efforts would promote the efficient use of state resources for increasing compliance.”
Unlike many states, California does not have a voluntary disclosure program. The 12% interest assessment is mandatory, absent a showing of “reasonable cause” for the failure to timely report, pay or deliver property. “Reasonable cause” is defined as “the exercise of ordinary business care and prudence”, but as this is a subjective standard, waivers are not guaranteed, and if denied, could subject the holder not only to interest and penalties but also to an unclaimed property audit.
By the state’s own admission, the sharing of additional information related to a business entities’ unclaimed property filing history will enable them to conduct outreach efforts, including audit efforts, focused on those that they believe have unclaimed property to report. We recommend a proactive approach when it comes to unclaimed property compliance, not only with California law, but in all states, as they are actively enforcing their unclaimed property laws.
There is never a wrong time to ask questions or learn how you can improve your escheat compliance processes. At MarketSphere, our 100% focus is helping our clients improve efficiency, effectiveness, and reducing the risk of non-compliance. Contact Us to collaborate about issues you would like to address.
*Content contained in this article is considered accurate as of the publish date.