The Council on State Taxation (COST) released their report “The Best and Worst of State Unclaimed Property Laws,” an updated version of the popular unclaimed property “scorecard” initially released in January 2009. The updated scorecard offers objective comparisons and insights into the unclaimed property statutes of all 50 states and the District of Columbia.
U.S. Supreme Court cases have established priority rules for determining the state that has the superior right to compel a holder to report an item of presumed abandoned property. Under the first priority rule, the state with the superior claim to presumed abandoned property is the state of the last known address of the owner. Under the second priority rule, the state with the superior claim is the state where the holder is domiciled, which is generally the state of incorporation.
COST has evaluated the policies surrounding these requirements and has determined that business-to-business exemptions, a reasonable period of limitations, an independent appeals process, and a ban on contingent fee audits, among other factors, can contribute to a fair and effective unclaimed property system.
Under COST’s evaluation, Massachusetts and Virginia were the best states for businesses which hold unclaimed property. Delaware, Mississippi, and New York were the worst states for unclaimed property policy, each receiving a grade of D-.
As the main benefactor under second priority rule, Delaware’s unclaimed property system feature prominently in COST's report. Perhaps most egregiously, the report notes that state allows for contingent-fee audits, which encourages auditors to interpret the law to their advantage, to target specific holders for audit, and to ignore errors that would lead to lower assessments and thus a lower paycheck for them.
Also, no interest is paid by Delaware to the property owners, and holders of the property may be required to pay interest to the state if they do not timely comply with unclaimed property reporting requirements.
Delaware does not exempt gift certificates from its unclaimed property statute, which some argue amounts to an infringement on the private contract rights of the retailer and the consumer. Finally, while the state technically offers an independent appeals process, the Secretary of State is not required to accept the ruling, which essentially renders the independent appeals process irrelevant.
Responding to criticism of this aggressive enforcement of its unclaimed property laws, Delaware passed legislation last year which grants the Secretary of State a three-year limit to enter into voluntary disclosure agreements with holders of unclaimed property. As practitioner Kendall Houghton noted in a recent Bloomberg BNA Roundtable discussion, “the [audit] administrators and the Secretary of State have continued to articulate their commitment to making this a process whereby [unclaimed property] holders can fairly square up with the state if they have liabilities.”
Recognizing that all of the states could use some improvement, COST’s report outlines a plan for state legislators which wish to improve their unclaimed property laws. A change in the law can have a significant impact on a state’s business environment, so legislators should pay attention.
By Melissa Fernley
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