Illinois SB 9 Enacts Sweeping Reforms to the State’s Unclaimed Property Program
Changes to Illinois Statutes
On July 6, 2017, Illinois Senate Bill 9 (SB 9) was enacted, rewriting the state’s unclaimed property statutes. Originally SB 9 was focused on funding the state’s 2017-2018 Fiscal Year Budget. However, several days before it was up for a vote, Illinois House Amendment No. 3 expanded the bill by adding Illinois’ Revised Uniform Unclaimed Property Act (RUUPA) and repealing Illinois’ existing Uniform Disposition of Unclaimed Property Act. The language in RUUPA that was included in SB 9 is similar to an earlier bill, HB 2603, which never gained traction in the House and failed to pass.
The timeline for these events is also worth noting. House Amendment No. 3, which added RUUPA to SB 9, was filed and passed by the Illinois House on July 2, passed by the Illinois Senate on July 4 and vetoed by the Governor on the same day. However, on July 6, both houses overrode the Governor’s veto and the bill became Public Act 100-0022. This timeline did not allow for detailed hearings on RUUPA nor allow for industry input. While parts of SB 9 took effect upon becoming law, RUUPA becomes effective on January 1, 2018.
However, the enactment of SB 9 may not be the final word on the matter. On July 3, Illinois House Bill 4078 (HB 4078) was introduced by opponents of SB 9 to overturn it. As HB 4078 was introduced before the enactment of SB 9, and HB 4078 provides that SB 9 will be repealed “if and only if Senate Bill 9 of the 100th General Assembly becomes law in the form in which it was amended by House Amendment No. 3,” HB 4078 will need to be considered by the House after it returns from its recess. In addition, on July 21, 2017, Illinois Senate Bill 2224 (SB 2224) was introduced with the intent of repealing SB 9.
It appears that many of the provisions in SB 9, including the addition of RUUPA, were attempts to address Illinois’ budget shortfalls. Illinois has been plagued by fiscal problems for years, and the enactment of SB 9 has apparently ended a two-year budget stalemate that had gone on so long that the state had fallen behind on its bills and risked further damage to its credit rating. Given its budget shortfalls and mounting debts, the state has apparently begun looking to any area that it can to increase its revenues, including unclaimed property.
Among some of the most significant changes in Illinois’ RUUPA are the following:
- Business-to-Business Exemption. The key impact of RUUPA for most companies is its lack of an Illinois business-to-business (B2B) reporting exemption. By being silent on the matter, Illinois has effectively repealed their earlier B2B exemption and property due or owed between business associations in the ordinary course of business is subject to the state’s unclaimed property due diligence, reporting, and remittance requirements.
- Transitional Provision (Section 15-1503). RUUPA has a “Transitional Provision” providing for a 5 year retroactive “look-back” for earlier periods where any exemptions were taken, requiring that any “initial report filed under this Act for property that was not required to be reported before the effective date of this Act, but that is required to be reported under this Act, must include all items of property that would have been presumed abandoned during the 5-year period preceding the effective date of this Act as if this Act had been in effect during that period.” The greatest impact of this provision will likely be felt by companies that have historically taken advantage of Illinois’ B2B exemption. As a result, companies filing Illinois unclaimed property reports due by May 1, 2018, will have to include B2B amounts that would have been reported on its 2013-2017 reports in addition to amounts due under RUUPA for the 2018 report period.
- Gift Cards (Section 15-102(11) and Loyalty Cards (Section 15-102(14)). The new law specifically exempts stored value cards that are gift cards (GCs) or loyalty cards. RUUPA defines GCs as pre-paid stored value cards that do not expire, are not subject to dormancy, inactivity or service fees, may be decreased in value only by redemption for merchandise, goods or services at a single merchant or group of merchants, and that may not be redeemed for or converted into money unless required by law. Loyalty cards are defined as a “record given without monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program which may be used or redeemed only to obtain goods or services or a discount on goods or services.”
- Stored Value Cards (Section 15-102(30)). Stored value cards (SVCs) are not exempt under RUUPA and would now be subject to the transitional provision. It is interesting to note that there appears to be some inconsistency in RUUPA regarding SVCs and GCs. Section 15-102(24)(B)(ii) defines property to include SVCs, and Section 15-102(24)(C)(iii) specifically provides that property does not include GCs. However, another part of RUUPA, Section 15-102(30)(A)(ii), specifically states that SVCs include GCs. The likely reason for this inconsistency is that the earlier version of Illinois’ new unclaimed property act, Illinois House Bill 2603, excluded “gift cards” in the definition of “property” subject to escheat, and the necessary modification was not made to this section when the earlier version was revised and inserted into IL SB 9. Nonetheless, this provision will need to be monitored by all affected companies.
- Reduced Dormancy Periods (Section 15-201). Not all dormancy periods are reduced in RUUPA; however, many dormancy periods that had been five years, including property that is owed by a business and the states “catch–all” provision, were reduced to three years. As a result, companies’ initial filings under RUUPA will now include amounts for items that would have otherwise been reported in 2019 and 2020.
10-Year Statute of Limitation (Section 15-610) and Record Retention Policy (Section 15-404). RUUPA creates a 10-year statute of limitations, providing that the administrator may not attempt to enforce the provisions of the act more than 10 years after property was specifically identified and reported, which doubles the time period under the old law. RUUPA also requires holders to retain records for 10 years after the later of the date the report was filed or the last date a timely report was due to be filed, unless a shorter period is provided by rule of the administrator.
- Verified Report and Examination of Records (Article 10). RUUPA has created a number of updates related to how Illinois may perform an examination of a holder’s books and records, including:
- Section 15 101 now authorizes the state to require a holder to file a “verified report” in a form prescribed by the administrator if a report was not filed, or if the administrator believes that the report submitted was inaccurate, incomplete or false;
- Section 15 1009 allows Illinois to contract with contingent fee auditors to conduct examinations; however, the administrator must adopt rules governing the examination process that must be followed in all examinations; and,
- Section 15-1006 allows for the use of estimations if a holder fails to retain the records required by RUUPA and further states that “A payment made based on estimation under this Section is a penalty for failure to maintain the records required by Section 15-404 and does not relieve a person from an obligation to report and deliver property to a State in which the holder is domiciled.”
- Address to Establish Priority (Section 15-301). The provisions adopted by RUUPA now expressly provide that for Illinois to establish priority, it considers the last-known address of an apparent owner to be “any description, code, or other indication of the location of the apparent owner which identifies the state, even if the description, code, or indication of location is not sufficient to direct the delivery of first-class United States mail to the apparent owner.”
- Due Diligence (Section 15-501). Illinois’ earlier due diligence requirements provided that if a holder had not communicated with an owner within 120 days before a report is due, it must send notice at least 60 days before the report is due if the value of the property was $10 or more. Under RUUPA, a holder must send notice not more than one year or less than 60 days before the report is due if the value of the property is $50 or more. RUUPA also brings due diligence into the 21st century by allowing holders to send electronic due diligence, in addition to a first class mailing, to those owners who have consented to receive electronic-mail delivery. Finally, a holder must send due diligence by certified mail for securities valued at $1,000 or more.
Many Unanswered Questions
In addition to some of the unwelcome changes that it makes, RUUPA also leaves unanswered many questions that should be of concern to every holder, such as:
- Unclaimed Property Audits. Now that RUUPA allows for the use of contingency fee auditors, companies facing enforcement activity from Illinois may be subject to more aggressive and contentious audit tactics. In addition, for companies currently under audit by Illinois, will the new statute of limitations impact the audit if the audit is not completed in 2017? If so, how can a holder feel certain that the auditors are not delaying the audit to take advantage of the new rules in 2018? Finally, can completed audits be re-opened to go after property that would now be covered under RUPPA’s transitional provision but that was not part of the original audit scope?
- Voluntary Disclosure Agreements. Will Illinois accept new companies into its VDA program under its existing rules were a company to complete its report under the old guidelines before January 1, 2018? For completed VDAs, would any negotiated settlement and release terms be honored, or will Illinois try to go after property now reportable under RUPPA’s transitional provision?
- Estimations. With RUUPA allowing for the use of estimations as a penalty against a holder, will Illinois try to take second priority property (e.g., property with no name and address) for entities not incorporated in Illinois, subjecting holders to double estimation?
Because of all of these, and many more, unanswered questions, many organizations have already been discussing the need for a repeal of RUUPA, or at the very least amending several key areas of RUPPA to include additional guidance to holders. True Partners is actively involved, and we will be providing periodic updates as developments occur.
What This Means to Holders
The new Illinois unclaimed property laws will require every holder with a reporting obligation in the state to carefully review the impact of RUUPA on its unclaimed property compliance process. The reduced dormancy periods means that for many property types, holders will be including three years of property on their initial report under RUUPA. Fortunately, for these items it is “just” a matter of remitting early.
More difficult, and more troubling to holders, is the application of the RUUPA’s transitional provision. The repeal of a reporting exemption is never good news for a company. However, RUUPA’s requirement that holders report property that would have been presumed abandoned during the five year period preceding the effective date of the act as if the act had been in effect during that earlier period seems particularly harsh to many holders.
However, RUUPA does not become effective until January 1, 2018, and there seems to be opposition to it as evidenced by HB 4078 and SB 2224calling for its repeal. While it is unclear if the call for the repeal will gain traction, many in the business and holder community will be closely watching the Illinois legislature for additional developments. On the other hand, if the legislation remains unchanged and all the extra years of reporting in the first year of enactment as described above occurs, it is clear that most companies will have a much larger compliance burden than they ordinarily experienced. Planning for this should be considered.
True Partners will continue to monitor this and other legislation impacting your company as it arises, and will release relevant updates as additional information is available.