United States: Gift Card Alert - Delaware Rewrites Its Unclaimed Property Law

Last Updated: February 22 2017
Article by Gregory T. Parks and Anne Marie Estevez

Retail Did You Know?



After a federal court dealt a significant blow to Delaware's unclaimed property law in June 2016, Delaware responded by entirely rewriting its unclaimed property law. This edition of Morgan Lewis Retail Did You Know? describes the requirements of the new law and details some of the significant ways it may impact retailers, particularly with respect to gift card programs.

Background

Various state escheat laws require companies to annually report and pay unclaimed property to states in certain circumstances. This may include customer credits, uncashed payroll checks, and balances on gift certificates or gift cards. Although this money is supposed to be held in trust by the state and returned to its owners, most escheated funds are never returned and become an important source of revenue for states. Because the rules that dictate which state is entitled to the unclaimed property emphasize the company's place of incorporation, Delaware has come to depend heavily on unclaimed property as its third-largest source of revenue. The state has historically pursued aggressive enforcement through third-party audits that involve the use of "estimation" to calculate abandoned property liability going back decades.

Delaware's ability to collect unclaimed funds was dealt a significant blow last year, however, when a federal judge ruled in Temple-Inland, Inc. v. Cook that Delaware's application of its unclaimed property law to estimate companies' abandoned property liability where such records were absent violated due process. Among the problematic features of Delaware's law were

  • a lack of notice that companies needed to retain unclaimed property records,
  • application of the estimation provision of the statute retroactively,
  • a "look back" liability period that stretched over two decades, and
  • an estimation method that emphasized characteristics favoring liability.

The court concluded that Delaware "engaged in a game of 'gotcha' that shocks the conscience." With the Temple-Inland decision, Delaware's ability to obtain significant funds through audits and voluntary disclosure agreements (VDAs) was seriously jeopardized.

The New Delaware Bill

Against that backdrop, the Delaware legislature has now rewritten the Delaware unclaimed property law to try to address the problems identified in Temple-Inland and to bring Delaware more in line with the Uniform Unclaimed Property Audit Act used by other states. In addition, the legislature appears to have designed the new statute to help accelerate Delaware's collection of unclaimed property by providing incentives to companies who agree to resolve pending audits in the near term.

The new law includes a number of changes and new provisions that are notable for retailers' unclaimed property compliance and planning programs:

  • "Gift cards" are expressly included as abandoned property. Although sometimes interpreted more broadly, the previous version of the law only applied to "gift certificates." Helpfully, the law also clarifies that promotional gift cards—defined as "a record given without consideration under an award, reward, benefit, loyalty incentive, rebate, or promotional program"—are exempt.
  • The definition of abandoned property now includes any "customer's overpayment," security deposits, refunds, and unused tickets. However, layaway account deposits are excluded.
  • Significantly, the law also makes clear that liability for unclaimed property can be assigned to a "parent, subsidiary or affiliate" of the company, which appears to be an endorsement of subsidiaries used to issue gift cards in states that do not require their escheat, often called "GiftCos."
  • The new law adopts a record retention requirement running 10 years after a report is due, and specifies certain information that companies need to maintain.

Retailers under audit with the State of Delaware should also be aware that they may be impacted by some of the new law's significant changes. First, the law purports to correct a number of the problems identified by the Temple-Inland court such that the state may now be able to pursue estimation theories that increase the potential liability in audits. This includes a requirement that the state issue detailed rules on its estimation methods by July 1, 2017. Second, the new law decreases the look-back period for audits and VDAs to 10 years (previously, audits would look back to 1986). Third, the law increases and essentially makes interest mandatory on unclaimed property that has not been timely remitted to the state, which could significantly change the potential liability for companies under audit.

Recognizing the significance of the changes and encouraging collection of funds through pending audits, the new law also gives most companies under current audit the ability to elect to obtain a waiver of interest and penalties by (a) converting their audits to VDAs, which would require giving up the right to judicial review; or (b) requesting expedited reviews, which would require completion of the requests on Delaware's own schedule. Companies can also elect, within 60 days of the state's issuing its new estimation guidelines, to continue with their current audits.

These are just a few of the notable changes to the statute, which includes many revisions throughout and deserves careful review and consideration.

Practical Implications

The new Delaware law has many implications for retailers, with substantial near-term impact on those currently under audit with Delaware and changes that will also impact retailers' unclaimed property planning. The other significant changes regarding Delaware's treatment of unclaimed property, including the handling of gift cards and other forms of property common in the retail setting, also deserve attention. The changes to the law regarding imposition of interest also raise the potential costs of noncompliance.

How We Can Help

Morgan Lewis regularly advises retailers on unclaimed property law compliance and represents retailers in audits, VDA proceedings, and litigation regarding abandoned property. In addition to assisting with compliance obligations, we often work with our clients to structure their consumer and commercial relationships and internal business practices to limit or prevent unclaimed property liability from even occurring. We can apply our experience and knowledge to help efficiently analyze how a retailer's practices and policies might be impacted by unclaimed property laws across the country.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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