Unclaimed Property Laws Face
Increased Scrutiny By States

     PAY CHECKS, GIFT CERTIFICATES, LAY-A-WAY - Somehow, or in some way, most retailers and other businesses have been faced with the concept of unclaimed property. And you may not have known it. In the recesses of your company’s accounting and treasury functions, unclaimed property is likely lurking, accompanied by the related compliance obligations associated with these uncashed checks, unclaimed stock and dividends, and unredeemed gift certificates. All 50 states, the District of Columbia and other U.S. Territories including Puerto Rico, Guam and the U.S. Virgin Islands have unclaimed property laws, which require an annual filing of certain types of intangible obligations being held by businesses.
     Over the past several years, states have greatly increased their enforcement efforts of these laws, because of the potential windfall of revenue associated with compliance enforcement. It is no secret that of late, many states are facing severe deficits due to lower tax revenue and other diminished fee collections. These shortfalls have resulted in the increased enforcement of laws that have been in existence for decades. For confirmation of this fact, one needed only to pick up a recent copy of The News Journal, a Delaware newspaper, and read the headline that blared: “$51.5 Million Windfall Cuts Delaware Deficit.” $47.1 million of this reported “windfall” came from a single company settling a case with the Delaware State Escheator.
     Delaware has much to gain from unclaimed property laws, because of the existing priority system for compliance. Based on a 1965 U.S. Supreme Court case, the state that has initial claim to unclaimed items is the state of the owner’s last known address. If last known address information is not available, then the state with the next claim to the property is the state of the holder’s corporate domicile, or more commonly – the state of incorporation. In unclaimed property parlance an “owner” is considered the original rightful owner of the item that went unclaimed (e.g. an employee who did not cash their final payroll check). The term “holder” means the business or organization that is holding the property until it is presumed abandoned – a period that varies by state and by the type of property being considered. The states are then entitled to keep and utilize the funds remitted to them by holders as custodians, until the rightful owner comes forth to make a claim. Unclaimed property being held by states is presently estimated to be more than $20 billion.
     For the retail industry, often the most intolerable notion associated with unclaimed property is the remittance of unredeemed gift certificates to the states. Based on the compliance priorities mentioned above, the state of Delaware collected over $162 million in unclaimed property from holders in the year 2001, including a substantial amount of unredeemed gift certificates. As a result of lobbying efforts, retailers and other industries that rely on gift certificates sales as a key component of their operations have successfully persuaded some states to exempt gift certificates from their unclaimed property laws. Georgia is not one of those states. However in the southeast, Alabama, Florida, North Carolina and South Carolina have each changed their unclaimed property laws to exempt gift certificates.
     The nearly universal evolution from paper gift certificates to gift cards have also put into application so-called dormant account or service fees. While these may seem a viable alternative to ultimately complying with state unclaimed property laws (after all, if there’s nothing left to turn over – then why should the law apply?), many holders often fail to take into account several facets of governing state laws that may lead to audit risks. Without a lengthy discussion of all parameters of these requirements, it should be noted that many states have specific statutory, regulatory and administrative rules and positions that make the application of these fees more complex than simply deciding how much per month to deduct from each dormant account.
     In conclusion, businesses and organizations today are faced with the stark reality that these laws are very far-reaching, and that they as holders are likely to face increased scrutiny by the states. It is important that holders, especially those who have not been in compliance with state unclaimed property laws in the past, begin to review internal processes to determine where exposure and compliance gaps may lie. Voluntary compliance programs such as those offered by the state of Georgia are a good way to get started in complying with these laws – and a good way
to avoid the assessment of interest and/or penalties for non-compliance. There is no better time to
act than now.

This article is provided by GRA member James O. Santivañez, Senior Manager, Ryan & Company, Inc., Atlanta, GA (404) 365-0922.