At this year's meeting of the Unclaimed Property Professionals Organization (UPPO) in Orlando, one of the hottest topics was gift cards. The advancement of technology and a natural broadening of the scope of unclaimed property over time has brought this type of property into the limelight. States have begun to review the impact of unclaimed property laws on gifts cards, and there has been a recent flurry of related legislative actions with the aim of clarifying specific gift card rules and tightening statutory controls. This property category also encompasses any type of stored value card, such as payroll cards and reloadable cards, as well as gift certificates.
The escheatment of gift card breakage will be a new focus for many holders, and it can be difficult to know where to start. There are still a lot of grey areas as the legislative dust settles and some aspects of gift card breakage are settled in court.
Several important issues legislation and court cases have addressed include:
- The capture of customer information upon the sale of a gift card. A New Jersey rule was struck down because the requirement would have been too cumbersome for large issuers of cards, and some were planning to shut down operations in the state. (See last quarter's KeepUP™ Newsletter for more information about this development.)
- Due diligence idiosyncrasies. Because most cards don't have owner information attached to them, it can be next to impossible to find missing owners. How does this affect dormancy and due diligence requirements, if at all?
- Ownership of a card's remaining balance. Who has a right to benefit from gift card breakage? Does an agreement between issuer and card purchaser supersede the state's right to require escheatment of the balance?
- Responsibilities of third-party issuers. The contract between an issuer and a third-party processor of gift cards often shifts responsibility for reporting to the processor if they are assuming the liability. But it doesn't always, and silent contracts can cause confusion about who should escheat breakage. Some companies are setting up their own third-party processing affiliates specifically to remove escheatment responsibility from the parent company. Is it legal?
We will continue to monitor this important segment of unclaimed property for our clients and keep you informed. If you are facing the issue now, it might be helpful to read a recent MarketSphere blog on the subject: Much Ado About Gift Cards: 3 Steps to Get You Started.
MarketSphere has advisors on staff who specialize in this area.
Some holders are conservative and don’t want to risk noncompliance. They decide to simply report every iota of unclaimed property they find, which can result in over-complying. In large companies with lots of unclaimed property, this can be very costly.
Other companies do the opposite. They shrink from their duty to escheat, and they report as little as possible—some even ignoring the responsibility altogether. This results in under-escheating and exposing the company to the risks and costs of audits, penalties and interest. For a holder with many unclaimed property records and a great deal of missing information, the costs can be devastating.
There is a happy medium between the two extremes, but finding that balance can be complicated. To make matters worse, the sweet spot is different for every holder, depending on the industry and the company.
Find the right balance through assessment, systems and exemptions
By following the few steps in this article, you can find that happy medium and settle on an unclaimed property process that brings as little cost and stress to your company as possible.
- Order a professional assessment. This will help you determine exactly where your unclaimed property is located and what your situation is. Use assessment results to get your data in order, so it's easy to mine.
- Know your past reporting record. If you haven't reported in the past, the risks associated with an audit could be much more devastating than if you've reported regularly.
- Establish clear written policies and processes. This will help you manage unclaimed property data. This makes data more easily accessible, which reduces the costs of management. It also shows you are making an effort to report correctly, which can minimize post-audit costs.
- Work with an expert to mine your data. Look for legal exemptions, duplications, accounting mistakes and other issues that legally reduce your final escheatment amount. Many companies don't take the time or expend the resources to do this, which can end up costing more in the long run.
- Use whatever method necessary to know for sure you are following state laws. They can be complex and they change frequently. If you defer to the expertise of an advisor, the need for internal monitoring reduces to nearly zero. It's like trusting your tax preparer. You need to understand the law overall, but you can leave the details to your advocate.
- Seek specific advantages. Ask your professional advisors about actions you might be able to take in certain circumstances in your specific industry to positively affect costs. Each industry and type of property is different.
An interesting situation that impacts any holder's chosen level of compliance is the fact that unclaimed property negotiations with states and auditors are often more about documentation, policies, relationships and the spirit of the law than strict interpretations of statutory language (even with recent tightening of statutory audit controls). This provides opportunities to work in cooperation with state administrators and auditors to settle on lower escheatment amounts, penalties, fees, interest charges and past reporting liabilities.
Learn more about balancing the risks and costs of unclaimed property here.
Today's best unclaimed property strategies are supported by a variety of technology solutions to create a seamless, streamlined unclaimed property management system. Technology often provides agility, centralization and comprehensive reporting that benefits the entire enterprise. However, technology is just a tool to help you manage unclaimed property, as in any discipline. You still need strategic guidance for this critical business function, just as you need a tax or legal advisor. Even if you do set up your own technology, it can often be expensive for the software, personnel to run it, and training time.
One solution (we think it's the best one) is to work with a professional advisory company that not only provides the expertise you need for strategy, but also offers premier technology already in place. It can be extremely cost effective to engage the services of an advisor with existing system software and use their services in tandem with your own records systems.
With the guidance of professional strategic advisors, technology can help you:
- Monitor laws and reporting parameters. This is what "the original" unclaimed property software does. You or your advisors can use the software to continually update laws and prepare reports to meet meticulous statutory standards. If you do this in-house, work with an advocate to create strategies and timelines, set up systems to maximize reporting processes, and ensure you aren't reporting too much.
- Consolidate, move and store information. Certain common types of software can be used as tools within your unclaimed property processes to identify dormant properties and assist in separating them from active records for more efficient management. This might include your in-house ERP packages for accounts payable, payroll, and others. Technology also assists in the secure and accurate moving of information from your databases to that of your advisory company. You can also centralize dormant records for use by personnel in different locations and provide clear documentation to support the audit process.
- Speed processing of data. For example, if a holder has large volumes of unclaimed items requiring thousands or tens of thousands of mailings, technology can be used to automate handling, which saves time and money—not to mention ensuring accuracy. Barcoding technology can be used to expedite inbound handling of due diligence mailings, quickly record undeliverable mail when it's returned, or speedily access customer records when they respond.
- Search and identify. Parameters in some software can be set to automatically identify exemptions, duplicate records and accounting mistakes. This process is time consuming when it's done manually or in-house, and there is too much room for human error. Dedicated software and database functions provided by a trained professional advisory team get it done quickly and accurately, as a part of your overall unclaimed property strategy, so you are not reporting more unclaimed property than you need to.
- Report and project for the future. Properly processed unclaimed property data can be crunched to provide reports for upper management on the amount of unclaimed property, cost analyses, and other useful data. Past data can be used in repeatable formulas to project future unclaimed property volume and costs.
- Connect systems. Advanced technology provides seamless, automatic connections between various software programs to reduce IT services, improve user experience, and aid in training.
- Improve security and backup. Built-in security features and backup protocols preserve data for the long term.
- Communicate. Technology helps streamline communication with customers and between personnel for reliability and efficiency.
You might be surprised what other functions technology can serve to help holders streamline and maximize unclaimed property reporting. As our technological abilities continue to advance, it will be interesting to learn new ways to save time and money while ensuring accurate unclaimed property reporting.
Unclaimed property processes require expenditures. There's no getting around it. However, with a little thought and manipulation of resources, you can save more time and money than you might think. The ultimate goal is get your unclaimed property "machine" running like a top, so it doesn't take away from other more important competencies of your department and business. We've worked with hundreds of companies over more than a decade to formulate the best cost-saving tactics, and we use them for all of our clients. Successful reduction of the costs of unclaimed property involves two basic focuses.
First, prevent unclaimed property from occurring in the first place. Not all unclaimed property can be prevented, of course, but you and your staff can take measures to keep some stale-dated liabilities from becoming dormant. Here are a couple of ways unclaimed property volume can be minimized simply by addressing "upstream" processes:
- Follow up with customers promptly after stale-dated accounts are identified. To do this most effectively, determine how long it takes for 95% of your uncashed checks to clear the bank. Then set your follow-up procedure to perform outreach just after that mark. By reaching out sooner rather than later, you are more likely to locate the payee. That person is also likely to remember the item, which makes it much easier to resolve.
- Collect alternative contact data. When on-boarding new customers and vendors, the more contact information you can record in your systems, the less likely you will be to permanently lose the payee. Ask for secondary phone numbers, email addresses, and physical addresses to give you more options for follow-up.
Second, establish policies and procedures to streamline the unclaimed property process. To prevent unclaimed property data and processes from becoming a burden—and to maximize any cost advantages—it's critical to get your data in order and establish consistent ways of handling it among all departments in your organization. (Technology can help. See article in this newsletter.) We've identified the following actions as some of the most impactful ways to save money through proper management of data and processes.
- Organize data in proper formats to quickly and easily prepare reports, transfer information, and search for data to defend reporting during an audit.
- Name a point person for unclaimed property to keep things clear, organized and moving along. This person can serve as a project leader to hold the rest of the unclaimed property team accountable.
- Review credit balances quarterly and move items to a centralized repository for more efficient handling.
- Work with an expert to review exemptions, especially if specific to an industry. Holders often overlook legal exemptions, which results in over-reporting.
- Take advantage of cost efficiencies available through your advisory company, such as streamlined due diligence services, deductions for mailing costs (where allowable) and efficient "no address" property research protocols.
Once your unclaimed property systems are set up properly, whether in-house, outsourced or a combination, the amount of time you and your staff will be required to spend on unclaimed property will shrink significantly. Do a little strategizing and organizing now for ongoing time and money savings.
For more ways to make your unclaimed property processes more efficient and cost effective, download the MarketSphere e-book, The Invisible Plan: Navigating and Negotiating Unclaimed Property for Least Impact.
Updates of unclaimed property laws in some states are beginning to include statutory permission for audits and the hiring of third-party contingent fee auditors. Some of the laws now include guidelines and parameters to keep audits fair. This might seem strange to holders and providers who have spent quite a few years looking at auditors with dread and suspicion and even questioning the states' right to use outside auditors.
On the other hand, the horror stories we've heard about audits and aggressive auditors really are not the norm. Most unclaimed property auditors, like auditors in any financial area, are professionals with reputable business training, knowledge and experience. It's only the occasional auditor who has unreasonable expectations. Those few aggressive auditors have unfortunately set the tone for audits and raised fears. They have been able to do this in part because there have not been laws to set boundaries.
New state audit laws act as guidelines for other states to follow
With the addition of new laws governing audits and the state/auditor relationship, maybe it's time to stop focusing on those few who have taken advantage. We can now more comfortably acknowledge the many respectful, professional auditors out there working with integrity to protect consumer property. California has had audit-related laws for more than a decade, but other states are now catching up. Delaware is currently creating standards third-party auditors must use during audits. Other states are expected to refer to Delaware's standards to create their own laws.
Once published, the standards will not only guide the actions of state and third-party auditors, but holders will have a better idea where they stand. They will better understand the audit process, as well as their rights and obligations associated with audits.
Ultimately, unclaimed property laws are like any other financial laws. It's a cost of doing business. It's just one type of compliance required of companies.
It is important to remember, in spite of new statutory controls, an audit still is a serious event and it can become adversarial. Just as you would not go to court without proper counsel or face a tax audit without an accountant, you shouldn't tackle an unclaimed property audit without proper advocacy. It's also advisable early in the game to get expert help setting up records and systems to support your company's best interests in the event you are audited.
A recent MarketSphere blog explores this topic further.