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Ready for a Change? Updates Impacting Unclaimed Property (UP)

By: Cathleen A. Bucholtz Michelle Moloian |

This article originally appeared in the Fall 2019 issue of the Journal of State Taxation. Download a PDF of this article.

Changes: I Don’t Like the Sound of That…

Let’s admit it, nobody likes change.  However, companies should be aware that in the past few years the UP arena has been inundated with new state legislative and administrative actions that have significantly changed the overall UP landscape.  While many of the basic UP reporting requirements have not changed, such as which state has the right to claim property or how to report past-due property, the risk factors and complexity of reporting have increased.

One of the major events that contributed to the recent changes is the well-known case Temple-Inland v Cook, where the court rebuked the State of Delaware’s “shocking” audit methodologies.  The court’s findings ended up having a domino effect impacting many holders given the number of companies incorporated in the State of Delaware.

There have been other forces at work as well contributing to the overall changes, many of which are still actively evolving and forcing the holder community to play a constant game of catch-up.  This article summarizes some of the significant shifts of the UP terrain and explains how the changes may affect your organization.

Changes: Challenges to Audit Practices

One of the key issues raised by Temple-Inland in Temple-Inland v Cook was that the estimation practices used by Delaware and its third-party auditors during UP examinations was inherently unfair.  On June 28, 2016, the District Court for Delaware agreed, and granted Temple-Inland’s motion for summary judgment on its substantive due process claim challenging Delaware’s UP audit estimation methods.  The District Court concluded that Delaware violated the Plaintiff’s substantive due process rights, exploited loopholes in the statute of limitation, employed estimation methods that favored a greater liability, ignored facts that could reduce liability, and in short engaged in a game of “gotcha” with holders.

After such a stiff rebuke, many observers were hopeful that a more reasonable UP audit environment would emerge in the state.  Nevertheless, once Delaware patched the larger potholes in their audit super highway, it began to initiate an unprecedented amount of new UP audits, often joined by the large number of states that generally work with the third-party audit firms that facilitate Delaware UP audits.  However, Delaware is finding that the road is still riddled with hazards as they prepare to address the latest lawsuit filed on December 3, 2018, Univar, Inc. v. Geisenberger.  In its lawsuit, Univar is challenging Delaware’s audit methodology on a number of issues, including: violations of federal common law, the Fourth Amendment, Delaware’s own Escheat Law, the Due Process, Equal Protection and Takings Clauses of the Constitution, and a number of other issues.  The results of the new case will no doubt further change the UP landscape.

Changes: UP Statutes

Around the same time the Temple-Inland case was being decided, the Uniform Law Commission (ULC) was working to revise the outdated 1995 Uniform Unclaimed Property Act.  During their annual meeting on July 13, 2016, the ULC, comprised of lawyers and lawmakers appointed by state governments, voted favorably on their 2016 Revised Uniform Unclaimed Property Act, and “RUPPA” emerged.  While the holder community benefits from the proposed shortened look-back period under audits and the creation of a much-needed statute of limitation provision, many feel that RUUPA is ultimately biased towards the states.  Shortened dormancy periods, provision for contingent fee auditors, no restrictions on estimates under audit, prohibitions on consolidated reporting, and not providing for ERISA preemptions or business-to-business (B2B) exemptions appear to advance state interests to the detriment of holders.

In response to RUUPA, the American Bar Association (ABA) drafted their own unclaimed property “Model Act”, which included many more holder-friendly provisions, including reporting exemptions, longer dormancy periods, restrictions on estimations and the use of contingent fee audit firms, allowing consolidated reporting, and the recognition of ERISA preemptions.  While the ABA Model UP Act has not received much attention from the states, RUUPA has been proposed, and in some cases enacted, by a number of states in the past few years.  Here are a few examples:

  • Delaware SB13 (effective 2/2/2017)

Soon after the rollout of RUUPA, Delaware moved to enact SB13, which included a number of RUUPA provisions.  Among the more prominent provisions of SB13 were: mandatory interest for non-compliance up to a maximum of 50% of the exposure (with a provision for mitigating ½ of the interest), a codified estimation process, and a shortened audit look-back period (10 years plus dormancy).  While the shortened look-back period can be a major benefit for companies with no filing history, the codified estimation process and increased interest may offset any benefits of the shortened look-back period.

  • IL SB9 (effective 1/1/2018)

On July 6, 2017, Illinois Senate Bill 9 (SB9) was enacted.  Originally, SB9 was focused on funding the state’s 2017-2018 Fiscal Year Budget.  However, several days before it went to vote, Illinois House Amendment No. 3 expanded the bill by adding RUUPA provisions and repealing Illinois’ existing Uniform Disposition of Unclaimed Property Act.

Among the most significant changes in Illinois was the repeal of their earlier Illinois’ B2B exemption and the adoption of a “Transitional Provision”.  This provision required that the first report filed under the new law include all property that would have been presumed abandoned during the preceding 5-year period as if new law had been in effect, even if it had been exempt under the old statute!

As a result, companies that filed Illinois UP reports in May 1, 2018, were also required to report B2B amounts that were previously exempted on their 2013-2017 reports.  For some holders, these amounts were significant.  Illinois’ RUPPA also reduced its former five-year dormancy periods to three years, so that companies’ 2018 filings under RUUPA would also advance the amounts for items that would have not have been reportable until 2019 and 2020.

  • Other States Adopting RUUPA

In addition to Delaware and Illinois, the states of Kentucky, Tennessee and Utah have recently adopted some form of RUUPA based legislation.  During 2017 and 2018, RUUPA style legislation was introduced in a number of jurisdictions, and currently, RUPPA style legislation is being proposed in Colorado, the District of Columbia, Nevada and Washington.

Changes: Audit Firms

If your company is incorporated in the State of Delaware and has significant revenue, it is likely that it has been or will be the subject of a comprehensive UP audit from the Delaware.  In addition, if your organization has customers, vendors or employees in other states you are likely to be audited by other states independently or as participating states joining a Delaware initiated audit.  Most if not all of these audits are being conducted by third-party contingent-fee audit firms (TPAFs).  There are currently as many as a dozen key TPAFs performing UP audits on behalf of multiple jurisdictions.  General ledger audits still predominately focus on unapplied accounts receivable, and uncashed vendor and payroll checks.  However, many TPAFs are specializing in auditing specific industries such as banking and finance, securities, life insurance, healthcare and oil & gas.

For many years, most jurisdictions almost exclusively used the UP audit firm Kelmar and Associates (Kelmar), one of the oldest TPAFs.  Most of the Delaware audits had lookback periods that exceeded 20 years.  However, in the wake of Temple-Inland v Cook and other cases, Delaware changed their UP laws to limit the lookback period to a maximum of 10 years plus the dormancy period, and to limit their utilization of any one TPAF to no more than 50% of their audits.  While this may have been a big boon to holders that had yet to be audited, it was likely a big bust to Kelmar’s revenue stream.

So began the evolution of Kelmar from a TPAF to a compliance resource for the states. Kelmar now offers the states specialized services and solutions to help them administer their UP compliance programs.  With the introduction of their KAPS system, Kelmar now offers the states assistance with managing their UP databases by providing a utility for converting data to the required NAUPA format and uploading it directly into the state web-portals.  While this streamlines the reporting process by allowing holders to upload reports to state that formerly did not offer uploads, holders may never be sure whether Kelmar will have access to company’s reporting records or to what degree, if any, they can review holder reporting data.  This has holders and their advocates wondering how to adequately prepare for what could become a more comprehensive, less holder-friendly reporting and audit environment.  In response, corporations will need to review and fortify their annual reporting process to ensure they are efficiently and effectively capturing and reporting UP.

Changes:  New Questions – And a Solution

Kelmar’s new role in assisting states with their UP management is raising a lot of questions for holders.  Is Kelmar also under contract with states to sift through their databases to determine which companies are compliant?  What level of transparency is there in the relationship between Kelmar and the states?  Does this expanded relationship create additional risks for first time reporting?  For example, if a company files a first-time report, will they then identified by Kelmar and targeted by the states for an audit?

Of course, the best defense is to make sure your organization is in compliance.  The good news is that help is available.  Just as states have turned to TPAFs to supplement their lack of resources and knowledge, holders can access UP advocacy firms, software programs, training opportunities, law firms specializing in UP, as well as on-line content and holder organizations, such as the Unclaimed Property Professional Organization (UPPO).

If your organization does not already have a process in place, before spending hundreds of hours to educate staff only to have them leave, building a UP department only have to spend more time each year to monitor and update the department, or purchasing software only to have to pay annual license fees and training costs – learn a lesson from the frugal state administrators.  Rather than doing it internally, it may cost considerably less for your company to outsource its UP processes to knowledgeable third parties that provide efficient and effective compliance services designed to proactively remedy the impact of a potentially overreaching audit administered by a TPAF.

There no time like the present to ensure your organization is in compliance and “audit ready”.  This can best be accomplished by having clear and complete UP policies and procedures coupled with a robust compliance process.  You can develop these on your own or bring in a company who can fill that void.  Moreover, if your company has never been audited, it would be a good idea to bring in subject matter experts to do a thorough diagnostic that can identify and help you fix any UP issues your company may have.  It can save a tremendous amount of time, energy and money down the road when the auditor comes knocking.