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By Altus Group | June 17, 2020

By Scott Regan, Unclaimed Property

During the best of times, unclaimed property collections represent an attractive and continually growing source of revenue for the states.  The so-called derivative rights doctrine is widely viewed by them as an opportunity to use unclaimed property collected from corporations (holders) to cover shortfalls in their budgets beyond traditional revenue streams like sales and use tax, income tax, licensing fees, lottery and gambling revenues.  Many states rely heavily on unclaimed property. In Delaware for instance, unclaimed property accounts for as much as 10% of the state’s annual budget.

During the Great Recession of 2007-2009, the states leaned more heavily than ever on unclaimed property collections to cover budget deficits.  Indeed the early 2010’s are remembered as active years by unclaimed property advisors as state unclaimed property coffers swelled from $32 Billion in 2010 to over $43 Billion in 2013.  In fact as a group, states last reported collections data in 2015, and had collected $7.8 Billion and returned $3.2 Billion.  The states could now be sitting on well over $60 Billion dollars.

Reacting to the pandemic

Due to the COVID-19 crisis, state finances are facing a time of unprecedented strain.  We believe the states will rely even more on unclaimed property collections in 2020 and beyond.  What actions might the states take and what will this mean for businesses?  Are there opportunities for organizations to benefit from unclaimed property during this crisis?

For starters, some spring reporting states have extended their reporting due dates by 30-60 days.  Some are considering extension requests and/or the abatement of penalties and interest.  Further, some states are faced with having to consider online reporting and electronic payment to omit receiving state reports in the mail.  Michigan and Texas have not yet extended their July 1st deadlines.  Altus Group is closely monitoring COVD-19 unclaimed property and state tax developments.

While short term deadline extensions are obviously critical during a lock down phase, it may be difficult for holders to address their fall unclaimed property obligations, which are by far more extensive, once the new normal begins. It may be doubtful that states with fall deadlines will offer filing extensions beyond their standard filing extension request offerings.  Outsourcing of unclaimed property due diligence mailing and report filing, thus allowing corporate professionals to focus on business-critical efforts, is advisable.

Audit activity

For those corporations who received an invitation to participate in the Delaware Secretary of State Voluntary Disclosure Program (“DE SOS VDA”) in February, the state has extended its deadline for enrollment by 30 days to May 22nd but will refer those that do not respond by that time for audit.  Full detail of Delaware’s VDA program are available here.   It is critical that companies respond before the May 22nd deadline.

The Altus Group Unclaimed Property Team is expecting states to significantly increase audit activity, most via referral to their third party contingent auditor vendors.  We’ve noticed a trend toward less flexibility on record request deadlines and toward early release of preliminary findings buy auditors.  Could premature or bifurcated demand letters be next?  We are expecting a proliferation of voluntary disclosure programs across the states, which would likely be viewed as a net positive occurrence.

In light of the inevitable increase of audit activity, corporations would be well served to conduct a rapid health test or mini-assessment of both their availability of records and of the risk that the company may unknowingly hold unreserved liabilities that could have a material P&L impact.  Our replay of Altus Group’s recent webinar on this topic may be viewed here.

What to expect and how to respond

What might corporations expect from state legislatures?  States frequently trend toward lowering dormancy periods to enable more rapid collection of unclaimed property.  In recent years we’ve seen states propose laws to permanently keep unclaimed property, as well as to eliminate long standing exemptions, often retroactively.  Oil producing states frequently impose “current to pay” provisions that require producers to immediately turn over unclaimed royalty payments.  Colorado adopted such a provision in 2019 with the implementation of Senate Bill 19-088.  We would expect all such measures to be attempted as states work to enhance collections.

Of course, corporations are facing extreme financial pressure as well.  Might there be some opportunities for holders to leverage unclaimed property?  One area to consider is remediation.  Acceptable procedures exist, but are not well known, allowing holders to ensure that they are not over reporting unclaimed property and to hold back and keep amounts they might otherwise report and remit.  Furthermore, a review of past filings often reveals a history of overreporting.  There are avenues for holders to request re-imbursement of amounts that were reported in error in the past.

Another area of revenue enhancement available to holders is unclaimed property asset recovery.  Just as businesses turn over unclaimed property to the states, they can recover cash held by the states in their name reported by other companies.  Considering that as much as $60 Billion dollars may be sitting with the states, the collection opportunities for some companies are often in the seven-figure range.  Companies with extensive acquisition history often find much success.  Bearing in mind the poor data quality in state systems, and the byzantine record production requirements, it may be best to partner with a firm that has the technology and expertise to efficiently assist with recovery.

The Altus Group unclaimed property team is deeply experienced in these matters and stands ready to help.

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