Delaware has long enjoyed its reputation as a business friendly state in which most businesses choose to incorporate. In fact, nearly half of all corporations are incorporated there, according to a 2012 New York Times article. Among the key attractions are a well-established business court, friendly tax laws, and a secretary of state’s office that stays open until midnight.
But lurking beneath this attractive exterior is one trait that receives far less attention: a growing appetite for unclaimed property. Under rules established by the U.S. Supreme Court, holders of unclaimed property who lack the owner’s address must turn over the property to the state of incorporation. In many cases, this is Delaware.
Nationwide, $41.7 billion of unclaimed property is held by states waiting to be returned to its rightful owner, says the National Association of Unclaimed Property Administrators (NAUPA), which explains that common forms of unclaimed property include bank accounts, stocks, uncashed payroll checks, trust distributions, unredeemed gift certificates, and life insurance policies. Between 1994 and 2009, the portion of Delaware’s revenue derived from unclaimed property increased nearly five-fold, from 2.4 percent to 11.1 percent, noted a 2009 report by the Council on State Taxation (COST). In 2012 alone, Delaware seized $319.5 million in unclaimed property, now the state’s third-largest revenue source, according to COST’s executive director Douglas Lindholm, who added that for 2013, the state expects collections to increase to over $500 million.
With those figures in mind, perhaps it is not surprising that Delaware was the only state to receive a grade of “F” in COST’s “Scorecard on State Unclaimed Property Statutes,” although a handful of states, including New York, Oregon, Georgia, and Mississippi, were not far behind, each receiving a grade of D-minus. Some of COST’s criteria for its scoring were whether the state’s limitations period for unclaimed reporting corresponded with state tax laws and normal business practices, whether the state treats unused gift certificates as unclaimed property, and whether the state’s auditors operate on a contingency fee basis.
Like NAUPA, which recognizes that although unclaimed property laws have existed since the 1930s, they have become “much broader and more enforced in the last 25 years,” Lindholm argues that Delaware “has engaged in increasingly unfair and onerous audit techniques, looking all the way back to 1981” to collect unclaimed property. The result, Lindholm concludes, is that a state that has been the leading location for companies to incorporate in is now becoming a “bully” based on its unclaimed property collection methods.
Even though Lindholm criticizes Delaware for looking back to 1981, states often have no statute of limitations on a company’s obligation to report unclaimed property, meaning that they could look back even farther. Additionally, states often disregard contractual limitations on owners’ rights to claim property, meaning that the state can take unclaimed property even where the property owner can no longer do so, notes Ethan Millar, of Alston and Bird LLP.
In light of the criticism, Delaware recently enacted an unclaimed property voluntary disclosure agreement program (2012 Del. S.B. 258), which the American Institute of CPAs refers to as “business friendly.” The website for the Delaware Voluntary Disclosure Program itself notes that its unclaimed property audits “are rigorous and perceived by some Holders [of unclaimed property] to be burdensome.” The program essentially provides amnesty for companies that failed to comply with their statutory reporting requirements by bringing the look-back date from 1981 up to 1993 or 1996, depending on when participating companies enter into agreements with the Secretary of State.
On the other end of the spectrum, COST gave Kansas the only “A,” while Arizona and Wisconsin scored A-minuses, and several states followed close behind in the “B” range. COST indicated several model positions states should take when collecting unclaimed property, which includes providing clear and reasonable definitions of what types of property are considered unclaimed property; excluding from the definition of unclaimed property credit balances arising from business-to-business transactions, as well as unused gift cards and gift certificates; and providing a reasonable limitations period.
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