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MarketSphere received correspondence on April 3, 2020 from the office of Delaware’s Secretary of State (SOS), regarding the latest round of VDA invitations mailed to companies in February 2020.  As a consequence of the COVID 19 pandemic, the SOS is extending the regular 60-day response deadline by 30 days.  Invited companies will now have until May 22, 2020 to respond to the SOS.  The correspondence also provides details regarding how best to communicate with the SOS during the current state of emergency.  

The correspondence states: 

Important update on the February 2020 invitations: The Secretary of State (“SOS”) ​is encouraging companies who know they want to enroll in the VDA Program to send in a completed VDA-1 within the prescribed 60-day timeframe.  Due to the current state of emergency declared by Governor John Carney as well as many other declarations made across the country and the world, the SOS, in consultation with the Department of Finance and the State Escheator, realizes that many companies have not had full access to their mail or the proper time to route the invitation to the appropriate individual(s).  As a result, holders who received an invitation from the SOS to join the VDA Program during February 2020 will be allowed to join the SOS VDA Program through May 22, 2020. After May 22, 2020, all companies that do not enroll in the SOS VDA will be referred to the State Escheator for examination.  Holders should be mindful that, under Delaware law, they may not join the VDA Program after a Notice of Examination has been mailed by the State Escheator.

In any given year, it is not uncommon for a holder to have no unclaimed property to report to one or more states.  Does this mean you have no reporting obligation?  Not necessarily.  Some states still require that you file a “negative” report.  This negative report indicates to the state that the holder has no property to report for the given report year, while demonstrating ongoing compliance with the state’s unclaimed property requirements.

The states are split on the matter of negative reports, so it is important to check with the state(s) in question before filing.  Approximately half the states require negative reports to be submitted.  In these states, failing to submit even a negative report will cause the holder to be considered out of compliance.  Other states do not require negative reports but will accept them if they are filed., and a handful of states do not accept negative reports at all. 

A few examples can illustrate the variation in negative reporting requirements across the states:

• Nevada requires negative reporting for three years after the submission of a positive report. After that, negative reports are not accepted.
• In California, if a notice report is negative, a negative remittance report should not be filed. However, if the notice report is positive, a negative remittance report should be filed.
• Connecticut requires a negative report only if the holder is domiciled in Connecticut.

As a holder advocate, one of the most frequent questions we receive is whether a company with multiple subsidiaries and entities under its corporate umbrella can file consolidated unclaimed property reports.  The unclaimed property compliance environment is complex, frustrating, and demanding for corporate America, and complex organizational structures don’t make it any easier to navigate.  Conducting unclaimed property filings on a consolidated basis can create efficiencies for many holders.  However, a number of factors should be considered when determining the right approach for your particular organization. 

Consolidated unclaimed property filings are similar to other consolidated financial filings such as income tax filings and financial statements.  Consolidated unclaimed property filings consist of one report sent to each state or filing jurisdiction, usually by a parent company, on behalf of multiple subsidiaries.  This single report contains all property that would have been reported if separate reports had been prepared for each individual entity.

Consolidated reporting simplifies and streamlines the reporting process and tends to be more cost effective regardless of whether the filing process is managed internally or outsourced.   It is particularly beneficial for companies with a substantial number of subsidiaries that would otherwise consistently file zero or negative reports due to limited or no unclaimed property activity.  It may also be the simplest approach for companies who already consolidate financials or are running a common paymaster across its various entities. 

While there are  benefits of a simplified process, there are several factors to consider before deciding to file consolidated unclaimed property reports.

This blog was originally created at the request of the Association for Financial Professionals (AFP) organization and posted to their website in August 2019 in a series dedicated to the education of its’ members and attendees of the 2019 AFP Annual Conference in Boston, Oct, 20-23.

The likelihood of an unclaimed property audit has increased in recent years due to several factors, including the proliferation of third-party auditors, realization by states that significant amounts are involved, and the escalation of unclaimed property litigation. Escheat compliance is no longer optional and being audited is not a matter of if, but when.

Situations and events that may bring an auditor to your door include:

• Failure to file or filing late
• Filing negative reports year after year
• Filing incomplete reports or reports that don’t match remittance
• Not filing in the state’s required format
• Not reporting property types that are standard for your industry
• Reporting much less than similar organizations
• Filing to the incorrect state
• Mergers and acquisitions
• Claiming property without being compliant

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.

State enforcement of unclaimed property compliance continues to rise.  States are auditing more companies than ever in order to validate that unclaimed property is being reported accurately and completely.  To prevent an audit, many holders over-report property, escheating items that are not actually unclaimed property, or may not be reportable to the states. However, this practice could cause red flags.

The two most common transaction types that are not considered to be unclaimed property are accounting errors and exclusions/exemptions.

Accounting Errors

Accounting errors are not unclaimed property.  Unfortunately, errors in accounting systems do occur that cause items to appear to be outstanding or unresolved, when in fact they are not. This leads to the potential for over-reporting.  Examples of accounting errors include:

• duplicate payments
• voids that were never processed
• misapplied payments.

Prior to reporting, research should be performed to identify and correct accounting errors and avoid over-reporting.   

Exclusions/Exemptions

Many state statutes include provisions that exclude certain transactions from the definition of unclaimed property, or specifically exempt the property from reporting.  An example of a state exclusion appears in the Kansas unclaimed property law, whereby:

Even though it seems like a long way away, Fall unclaimed property reports will be due before you know it.  With Fall states reports generally having deadlines of November 1, now is the time to create a checklist to ensure you meet the deadlines.  The following, while not in-depth, contains the most important tasks for you to perform.

1. Understand State Requirements

Before starting the process, it is imperative that holders understand existing state statutes and regulations, and determine whether there have been any changes from the previous year that may impact the current year’s filings.  If you use software, you should ensure that you are using the most current update provided by the software vendor. Unclaimed property law is a dynamic environment. Over the last few years, some states have made minor changes to their unclaimed property laws and administrative rules while other states have significantly overhauled their unclaimed property laws.  With all of these changes and more changes likely on the horizon, it is more vital than ever to keep current with the statutory environment.

On April 16, 2019 Colorado joined the growing group of states that has adopted RUUPA, when the governor signed S.B. 19-088, the Revised Uniform Unclaimed Property Act (“Act”) into law.  The Act is effective July 1, 2020 and while it contains many of RUUPA’s provisions it also includes certain provisions that are not contained in RUUPA. 

The legislation makes many changes to the existing statute, the highlights of which include repealing the existing reporting deduction, stipulating record retention requirements, allowing use of estimation methods for the failure to retain records, imposing interest and penalties for failure to act in a timely manner and providing a transitional provision.

Reporting deduction eliminated

Colorado’s current unclaimed property statute provides that “A holder may voluntarily, prior to payment or delivery of said abandoned property, deduct and retain [2%] of the value of the property or [$25] whichever is more per item…”. The Act does not include a similar provision.

Retention of records

The Act provides that “a holder required to file a[n unclaimed property] report … shall retain records for ten years after the later of the date the report was filed or the last date a timely report was due to be filed, unless a shorter period is provided by rule of the administrator”.

Many people are aware that all states and jurisdictions have abandoned property statutes.  These statutes are the basis for how holders report, what they report and various related matters.  A knowledge of these statutes can make the often-complex filing process a little easier to understand.

However, many unclaimed property statutes also include language permitting the state to make complimentary regulations that further define and explain issues that may not be specifically addressed in the statute.  States regularly update their regulations and these updates may not receive significant exposure. This lack of exposure may create problems for holders because an understanding of both statute and regulations is necessary for a holder to be confident that they are in compliance with a state’s unclaimed property requirements.

One recent example of a regulation occurred in December 2018, when Tennessee proposed a regulation that clarifies the obligations of both the Unclaimed Property Division and holders of unclaimed property. It rewrites pre-existing unclaimed property rules with updated provisions.  The purpose of these proposed rules is to bring the Unclaimed Property Division's rules into compliance with new statutory changes to the Tennessee Code Annotated since the Uniform Unclaimed Property Act was passed in 2017.  The document detailing the proposed regulations states: 

MarketSphere Unclaimed Property Specialists has learned that the State of Delaware began sending out a significant number of unclaimed property audit notices in early January 2019.

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. 

As we advised in our December blog entitled “Delaware Unclaimed Property Notice Letter”, Delaware had been busy filling companies’ mailboxes with Voluntary Disclosure Agreement (“VDA”) program invitations. Companies had 60 days to respond to the invitation or be referred to the Department of Finance for audit.  Following up on these invitations, the State has now begun mailing unclaimed property audit notices to companies that did not respond timely to these invitations.