Tax Analysts Blog

States' Misuse of Unclaimed Property Laws

Posted on Jun 5, 2013

Delaware has long been the state in which many businesses choose to incorporate because of its favorable laws for the incorporation and taxation of businesses. Yet Delaware has been termed a “bully” when it comes to unclaimed property. That is quite a disconnect. But as it turns out, Delaware is taking in a lot of revenue from unclaimed property. In 2012, Delaware seized $319.5 million from liquidated property. But here’s the rub, it only returned $18.9 million of that unclaimed property to the rightful owners. Stated differently, Delaware retained $300.6 million or a whopping 94 percent of the revenue it collected.

Companies may hold unclaimed property in a variety of instances. For example, unclaimed property can be found in payroll, customer deposits or refunds, unredeemed gift cards, rebate checks, stocks, bonds, and dividends, or insurance claims. The idea behind unclaimed property audits is that a company may be holding property that is not rightfully the company’s and therefore should be returned to the rightful owner. States have gotten more aggressive in identifying unclaimed property and examining companies’ compliance with state unclaimed property (or escheat) laws. But the reason does not appear to be because of a desire to return property to its rightful owner. It’s because of revenue.

Here is how the typical scenario plays out in Delaware: A corporation receives a notice from Delaware announcing its intent to examine the books and records of the corporation to determined compliance with the state’s unclaimed property laws. Surprisingly, though, the notice indicates the examination period will be from 1981 though the present and that the state expects all records to have been retained (despite the ridiculousness of that expectation given normal corporate record retention requirements). Finally, the notice says the state won’t actually be conducting the examination, a third party consultant will be doing so (and the fine print is that the third party consultant is being paid on a contingent fee basis).

There are multiple problems here. First, the idea that a company will have 30 years of records is simply unrealistic. Corporations do not, nor are they required, to retain records for 30 years. But for purposes of an unclaimed property audit, if a company can’t produce the requested records, the auditor may “extrapolate” the amount of unclaimed property the company has had. What’s worse is that the auditors doing the estimating are paid on a contingent fee basis. This means they are (or at least can be) motivated by the fees they will be paid to inflate the amount of unclaimed property a company allegedly has. And because the company doesn’t have records to prove or disprove the auditors allegations, the company may feel as though it has no recourse.

While it seems like a dismal scenario for corporations, increased attention is being brought to the issue. In 2009, the Council on State Taxation (COST) issued a scorecard ranking state unclaimed property laws. Some states fared better than others. Delaware was slapped with an “F” rating for its unclaimed property laws. More recently, a lawsuit was filed in April 2013 in U.S. District Court for the District of Delaware by Select Medical Corporation. That lawsuit alleges the state has violated not only its Escheats Law, but also the Takings Clause, Commerce Clause, and Full Faith and Credit Clause of the U.S. Constitution.

The case bears watching. Delaware’s administration of its unclaimed property laws has gone far astray from the purpose of those laws: to reunite property owners with lost or forgotten property. Unclaimed property laws were never meant to be a major revenue raiser for states or a major headache for businesses.

Read Comments (2)

amt buffJun 5, 2013

California got in trouble several years ago over its abuse of escheat:

Cara Griffith's pictureCara GriffithJun 5, 2013

You are right. California did get into trouble over their abuse. Other states
are just as bad. Unclaimed property has turned into a revenue source and the
manner in which some states audit unclaimed property is really disturbing.

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