Tax Analysts Blog

Are States Addicted to Revenue from Unclaimed Property?

Posted on Oct 16, 2013

The Council On State Taxation, recently issued a scorecard on the best and worst of state unclaimed property laws. Unclaimed property is an interesting area of the law. Although taxation is not involved, unclaimed property statutes operate, in many ways, like tax statutes. As a result, it is typically the responsibility of corporate tax departments to ensure compliance with unclaimed property laws and deal with unclaimed property audits.

The idea of unclaimed property stems from the common law concepts for real property. Unclaimed or abandoned real property must be dealt with because it will quickly become blighted and therefore an issue of public concern. The same logic applies to many forms of tangible personal property. If a car is abandoned, it becomes a litter issue and must be dealt with. But the main focus of unclaimed property laws is not real or tangible personal property; it is intangible personal property. Common forms include savings or checking accounts that have had no recent activity, stocks and dividends that have not been cashed, and unredeemed money orders or gift certificates.

The U.S. Supreme Court has held that holders of unclaimed property must turn the property over to the state of incorporation if the holder does not have the rightful owner’s address. The state will then try to find the rightful owner. State officials say they are acting in the best interest of consumers to ensure that funds are returned to their rightful owner and don't revert back to the company that held the funds.

But unclaimed property has become a revenue source for states because if the state can’t find the rightful owner of the property, it keeps the property. This has made states aggressive in their audit practices. Several states use contingent-fee third-party auditors, a practice that has long been frowned on. States also use long lookback periods, which create headaches for corporations. In at least one case, Delaware demanded records back to 1981. Going back 30 years requires extensive time and money on the part of the corporation to produce the required documents. And then there is the likelihood that the corporation no longer has many of the documents. But under Delaware law, if the corporation’s records are insufficient to permit the preparation of an audit report, the state may require the corporation to pay an amount to the state that reasonably estimates the amount “to be due and owing on the basis of any available records of the holder or by any other reasonable method of estimation.”

Delaware, often touted as a “business friendly” state, has come under fire for its unclaimed property practices. But Delaware is arguably addicted to unclaimed property. According to the COST score card, revenue from unclaimed property is the state’s third largest revenue source, generating 16 percent of the general revenue fund in fiscal 2013. And Delaware is not alone in its aggressive use of unclaimed property laws. Nationwide, COST says, “state coffers include over $40 billion in unclaimed property.”

The COST score card brings light to this issue. Unclaimed property is something that can easily fall under the radar, but it shouldn’t. COST should be praised for its efforts. Just as in the world of taxation, unclaimed property laws should mandate procedures that are predictable and fair to all parties.

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