What does unclaimed property have to do with taxes?
Ben Blair: Strictly speaking, unclaimed property liability isn’t a tax. It’s simply the state government-authorized method to reunite lost or abandoned property with its true owner or to pay the unclaimed property over to the state for safekeeping. In practice though, states treat unclaimed property like a tax. Something like 90 percent of unclaimed property that is escheated to a state is never reunited with its owner, and states are able to spend those funds like taxes – simply with the caveat that it may have to be repaid to an owner in the future. Functionally, states use unclaimed property like an interest-free loan that may not need to be paid back.
Also, unclaimed property liability doesn’t fit neatly within many companies’ departmental structure, so it often falls to in-house tax personnel to report unclaimed property or deal with auditors. Thus, it also often falls to tax lawyers to answer those questions.
I’ve heard Indiana isn’t especially aggressive in its approach to unclaimed property. Why should Indiana lawyers or Indiana companies care about the topic?
BB: Unclaimed property is a nationwide liability. Due to a decades-old Supreme Court precedent – which is being challenged by states who don’t think they’ve gotten a fair shake – there are rules of priority as to where unclaimed property must be reported. First, to the state of the last known address of the owner – which may or may not be the state where the transaction occurred or the company holding the property is located. Second, if there isn’t a record of a last known address, the property is reportable to the state of the holder’s incorporation. For that reason, Delaware – a common state of incorporation – is especially aggressive about unclaimed property enforcement. This year alone, I’ve represented clients in Delaware audits or voluntary disclosure matters – clients who have no ties to the state of Delaware other than being incorporated there. So being in a relatively non-aggressive state doesn’t mean a company shouldn’t think about unclaimed property.
Isn’t unclaimed property mostly relevant to banks and insurance companies?
BB: It’s true that unclaimed property laws were originally developed with banks and insurance companies in mind, and those companies do often have the greatest annual liability. But unclaimed property is a broad term, and any company (or government, for that matter) can have unclaimed property liability. For example, any company that issues gift cards or gift certificates could have significant exposure. Any company that issues dividends to shareholders could have exposure. Any company that employs people who might not cash their paychecks or collect benefits could have exposure. And any company that transacts in the marketplace could have unclaimed payables or receivable credit balances. In short, no business is free from potential unclaimed property exposure.
Is there a component of unclaimed property that’s relevant to transactional lawyers?
BB: Yes, and it’s of growing importance. Unclaimed property liability often transfers in corporate mergers and acquisitions, but because it’s not an area most companies think about, there often is little if any due diligence done by the acquiring company. Reps and warranties relating to unclaimed property are uncommon. But auditing states will certainly investigate all corporate transactions, and if unclaimed property wasn’t properly addressed during due diligence, the acquiring company could have a substantial liability that they didn’t plan for.
Why should lawyers attend your August 6 CLE hosted by the IndyBar?
BB: Unclaimed property is just so topical right now. States are becoming far more aggressive in audits, and the third-party audit firms are growing exponentially. At the same time, states are updating their unclaimed property laws to account for some of the ways businesses have historically planned around prior versions of the law. It’s a changing landscape, and we as lawyers should be able to advise our clients about these changes, their exposure and potential liability, and what they can do to plan for unclaimed property in the modern economy.
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