United States: Unclaimed Property Reporting: Best Practices For Managing Unclaimed Property Reporting And Compliance With State Escheat Laws

Unclaimed Property Reporting – three words that have kept many state tax and compliance specialists at U.S. corporations awake at night. Though not a "tax" per se, most states consider dollars collected or "escheated" from companies as a major source of revenue. Increasingly, many states have significantly ramped up their audit and enforcement activities, which are designed to ensure companies remit unclaimed property that may arise from mundane business activities. Due to the myriad of unclaimed property laws and regulations in the U.S., even the most diligent and sophisticated company could be exposed to over or under reporting its unclaimed property liability.

It is ironic that while many states are focused on collecting unclaimed property, they have made few strides to adopt uniform compliance practices that would allow U.S. corporations to adhere to a reporting protocol without overburdening tax and finance personnel. Unclaimed property reporting laws are created by individual state legislatures, meaning no two sets of state unclaimed property laws and regulations are the same. In fact, the Uniform Law Commission ("ULC") first established a uniform state unclaimed property act in 1954, and promulgated revisions in 1981 and 1995. In July 2016, during its annual meeting, the ULC approved its "Revised Uniform Unclaimed Property Act" or "RUUPA". To date, only three states have enacted laws aligned with RUUPA and only six others have introduced legislation to adopt conforming statutes.

What is so confusing about unclaimed property reporting? At the outset, reporting deadlines can vary. Eleven jurisdictions require filing on October 31; 29 use November 1; three states have May 1; one each use March 1, 10 or 31; one jurisdiction's deadline is July 1; and one each are December 10, April 30, and April 15. Not to be outdone, California requires multiple dates with a preliminary report due on October 31, with final reports due between June 1 and June 15 depending on certain variables.

Most states require that holders, (companies who owe a liability and thus must to comply with unclaimed property law) send owners, (companies or individuals to whom the debt is owed) a last-ditch notification letter, known as a due diligence letter, before reporting and remitting unclaimed property. The minimum dollar threshold for mailing these letters vary by state, as do the requirements to use first class versus certified postage, the earliest and latest dates for mailing, the structure and formatting of the letter, the font, as well as options for the owner to respond

As a result, uniformity is lacking in the realm of property types and dormancy periods. For purposes of unclaimed property reporting, property type is a classification of the item to be reported.Accounts payable, accounts receivable credits and payroll are the three main property types, but there are more than 90 for corporations to consider. Dormancy periods refer to the length of time a property type must be open or uncashed on a holder's records before it should be treated as unclaimed property and subject to reporting. And of course, dormancy periods vary widely state-to-state by property type. Typical dormancy periods range from one to three to five years. It is not a surprise to hear that states continually propose and pass new legislation to reduce dormancy periods to address budget shortfalls.

What steps can be taken to ensure your corporation is compliant with unclaimed property reporting requirements?

  • The first step is to decide how your firm will report these requirements: manually, via reporting software or outsourcing the tasks to third-party specialists.
  • If reporting manually – your first task will be to build a matrix of all property types and dormancy periods by state. This can be a daunting task as you will need to locate, review and interpret each jurisdiction's statutes. Additionally, you will need to build a "rules engine" that can age each property type against each state's dormancy period.
  • As a next step, you will need to gather data regarding aged property types from the ERP systems. Start by building a template that you can push out to finance colleagues. An Excel or CSV file with unique fields for each data point is a good choice.
  • Run the data against the rules engine to calculate which items could be ripe for escheatment. Be sure to consider the "cutoff date" for each state – the date by which the item must be dormant "as of." Cutoff dates vary by state and property type.
  • Review each state's laws and regulations to determine if allowable exemptions may apply to any dormant items. Apply these rules to your population. Further test dormant items to ensure they represent actual obligations. Accounting errors commonly cause firms to unnecessarily remit funds to states.
  • Run items that you have determined are dormant and not exempt and do not represent an accounting error against your due diligence rules engine. Mail due diligence letters to all owners in the appropriate time frames, as required. Void and reissue checks to those owners who respond.
  • After the due diligence window closes, make a final determination on a population to be reported to a jurisdiction and prepare a filing for that jurisdiction. File the report with payment in accordance with each state's requirement. Some states require uploading a report and paying electronically, some require a paper report, while others still require an encrypted diskette.

Finally – begin this process again! As stated earlier, there is not much uniformity. States have reporting deadlines all year round.

Obviously, reporting manually is not a realistic option for most corporations. As a result, most companies consider unclaimed property reporting software or outsourcing unclaimed property reporting. While some firms may lean toward a software purchase, many find that unclaimed property legislation changes more frequently than do software vendor updates. And of course – you still must do all the work. Many companies find unclaimed property reporting outsourcing to be the best solution.

If considering an outsourced partner, it is generally a best practice to consider a firm that is experienced in negotiating with various jurisdictions. During this process, many firms realize that they may possess significant past due property. It is then prudent to select a firm that has the necessary experience to negotiate state unclaimed property voluntary disclosure agreements (VDA) and has successfully defended corporations against unclaimed property audits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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