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By Richard Ruszat |
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Using your customer's dormant account as a source of revenue
This may come as a surprise if your customer's dormant accounts are used as a source of revenue - it is likely, and in fact inevitable, that those funds must be remitted to the state or federal government. This procedure is known as "escheatment," which has amassed billions of dollars of unclaimed property to state coffers.
Unclaimed Property
The theory of escheatment provides that until the rightful owner is located, all citizens of the state, rather than an individual holder, derive benefits from the unclaimed property. Unclaimed property law finds its genesis in early English common law where unclaimed property would escheat, or revert, to the king upon abandonment. In modern times, a custodial theory has replaced confiscation. In the United States, the laws of the individual states govern abandoned property and escheatment. The meaning of escheatment has broadened to include property of every kind and description that remits to the state for want of individual ownership. Accordingly, the definition of unclaimed property involves hundreds of categories of property. As a rule of thumb, if a person or entity has a legal or equitable right to the property, then a state's unclaimed property law governs it.
The Uniform Laws and Purpose of Escheatment
Congress enacted several uniform laws to control the disposition of unclaimed property among the various states. The most recent legislation is the Uniform Unclaimed Property Act of 1995 (the "1995 Act"). The Uniform Unclaimed Property Act of 1981 and the Uniform Disposition of Unclaimed Property Act of 1954 preceded the 1995 Act. Portions of the uniform laws have been enacted by every state, the District of Columbia, and Puerto Rico. The purpose of the unclaimed property laws have remained constant-to reunite owners with their property, limit the liability of the holder of unclaimed property, and to provide states with a stream of income.
Reporting Requirements
If
property
remains
unclaimed
for
a
certain
period
of
time,
known
as
the "dormancy
period," then
a
state
gains
derivative
rights
to
the
unclaimed
property.
The
dormancy
period
is
defined
by
state
law
and
is
measured
by
the
date
that
the
holder
comes
into
possession
of
the
unclaimed
property
and
the
date
that
the
property
must
be
reported
to
the
state.
A
majority
of
states
follow
the
1995
Act
and
mandate
that
any
money
or
credits
owed
to
a
customer
has
a
dormancy
period
of
three
years.
However,
the
dormancy
period
may
range
between
one
year
and
five
years.
As a general rule, the owner's domicile governs a state's rights to succession
of unclaimed property. The primary rule requires reporting the last known
address of the owner as documented by the holder's books and records. If
the identity and address of the owner is not known, then the secondary rule
awards the right to escheat to the holder's state of corporate domicile.
It is important to note that the holder's corporate domicile governs which
property is required for reporting purposes, not the owner's domicile.
Under limited circumstances, a holder may deduct charges to maintain the
unclaimed property during the dormancy period. In order to deduct charges,
the holder must have a valid written contract with the owner, regularly impose
the charge, and the amount of the deduction may not be unconscionable.
Annual Reporting
The
holder
of
unclaimed
property
must
submit
an
annual
report
to
the
state
in
which
the
property
escheats.
Some
states
require "negative
filing," which
is
a
report
demonstrating
that
the
holder
is
not
in
possession
of
unclaimed
property.
The
holder
should
file
an
annual
report
using
forms
that
are
provided
by
the
individual
states.
Generally, the annual report requires the following information. First, the
report should provide a brief description of the unclaimed property, including
dates that the property became payable and the last transaction with the
owner. Second, the report should provide the owner's name, address, and social
security number or tax identification number. Third, if permitted by state
law, a report should aggregate all claims with minimal value. A holder should
consult state law to assure compliance with state-specific procedures.
In addition, a majority of states require a final notice period. Generally,
the holder of unclaimed property is required to provide notice to the owner
that the property is subject to escheatment. This notice is required 60 days
to 120 days prior to escheatment if the unclaimed property meets minimum
value threshold requirements.
Challenging Abandoned Property Laws
In
an
effort
to
avoid
turning
over
property
to
the
state,
some
businesses
include
contractual
provisions
that
cause
the
loss
of
the
owner's
property
rights
prior
to
the
time
the
property
would
escheat.
For
example,
a
business
may
include
a
statement
on
a
written
instrument
declaring
that
the
owner's
failure
to
negotiate
an
instrument
within
a
certain
period
of
time
constitutes
private
escheat
(i.e.,
the
property
reverts
back
to
the
holder).
A
majority
of
courts
conclude
that
this
practice
circumvents
public
policy
and
constitutes
an
attempt
to
avoid
compliance
with
unclaimed
property
laws.
In addition, some businesses argue that credit balances and credit memos
resulting from business to business transactions should not be subject to
escheatment for the following reasons. First, business transactions are not
similar to consumer transactions since businesses have the capability to
audit accounts and an incentive to collect outstanding balances. Second,
unclaimed property arising from business transactions is usually the result
of administrative errors or a credit issued against future purchases to preserve
goodwill. Third, compliance results in an administrative burden that exceeds
any benefits to society. Although certain states have excluded this property
from reporting requirements, the majority of states require reporting business
to business transactions.
Compliance
Generally, compliance with a state's unclaimed property law is mandatory. There are significant civil penalties for the failure to comply with reporting requirements. Penalties range from simple interest to the full value of the unclaimed property. In addition, some states impose daily penalties. Moreover, if a business willfully or fraudulently files a report, then the penalties may exceed $1,000 per day. However, criminal penalties are rare.
Conclusion
Compliance is an ongoing process that requires conscious efforts to implement procedures to comply with state law. The states have several methods to enforce unclaimed property laws. These methods include auditing the business for compliance and voluntary amnesty programs to entice businesses to comply without incurring penalties. It is necessary for businesses to comply with state escheatment laws and file annual reports to avoid the consequences of time consuming audits, monetary fines, and the surprise associated with remitting thousands, even millions of dollars, in unclaimed property that has accumulated over the years.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 02
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