In Response to Temple-Inland Delaware Reins in Controversial Unclaimed Property Program
On February 2, 2017, the State of Delaware overhauled its aggressive and controversial unclaimed property program by enacting Senate Bill 13 (SB 13). SB 13 significantly alters Delaware’s prior unclaimed property program, specifically in the areas of:
- Record retention and estimation methodology;
- Audit and Voluntary Disclosure Agreement (VDA) administration;
- Look-back period limitation (Audit and VDA);
- Statute of limitations for initiation of audits;
- Assessment of interest;
- Compliance reviews; and
- Treatment of gift cards and stored-value cards.
This sweeping reform to Delaware’s unclaimed property program follows last year’s decision in Temple-Inland Inc. v. Cook, in which the U.S. District Court held that Delaware’s unclaimed property practices violated the U.S. Constitution’s Due Process Clause and were a game of ‘gotcha’ that shocks the conscience. The following provides some details regarding the changes that offer a more reasonable approach to the administration and compliance related to unclaimed property reportable to Delaware.
Record Retention and Estimation Methodology
Many of the grievances levied against Delaware’s prior law stemmed from the fact that Delaware holders were unable to furnish complete records requested for the full 20 or 25-year period under review. This failure to furnish the requested records often left holders at the mercy of the estimation method employed to determine their liability. However, SB 13 requires holders subject to Delaware’s reporting requirements to retain all pertinent records for a period of 10 years.
While the period of time holders would need to retain documents has been more than halved in some instances, holders are not out of the woods yet. Where the holder has failed to retain the required documents, SB 13 specifically directs the State Escheator to promulgate regulations regarding a reasonable estimation methodology. These regulations must be issued by July 1, 2017 and address permissible base periods, items to be excluded, and the definition of researchable records.
Audit and Voluntary Disclosure Agreement Administration
Under SB 13, the State Escheator retains its historical authority to initiate audits in an effort to determine whether a person has complied with Delaware’s unclaimed property laws. However, SB 13 curtails this authority by providing that any person currently under an audit initiated prior to July 22, 2015 may choose to convert the audit to a VDA.
Choosing to enter into a VDA allows the qualified person to avoid the assessment of interest and penalties associated with the unclaimed property. However, it should be noted that persons entering into a VDA program do not have the ability to challenge the results of the review. Persons wishing to convert their ongoing audits into a VDA may do so up to 60 days after the adoption of the unclaimed property regulations meant to determine a consistent method of estimation to be used in any audit or VDA. Those regulations must be adopted no later than July 1, 2017. (Note: The enacted bill contains language requiring persons currently under audit to notify the state both before July 1, 2017 and within 60 days from the adoption of the regulations. This appears to be an error in drafting. Review of the legislative process indicates the Senate’s intention to use the 60th day following the adoption of regulations as the deadline for converting from an audit to a VDA).
SB 13 also provides that any person under examination prior to the law’s effective date, February 2, 2017, may elect to expedite the audit by notifying the State Escheator in writing up to 60 days after the adoption of the unclaimed property regulations. If the election is made, the State Escheator must complete the audit within two years of the election and waive all interest and penalties associated with the unclaimed property. This change will ensure the State does not drag on the audit with the intention of creating a huge interest liability on any potential exposure identified.
Review Period Limitation (Audit and VDA)
Perhaps the most significant change made by SB 13 is the reduction in the review periods for audits and VDAs. Historically, Delaware’s practice was to examine the prior 25 years during an audit and the prior 20 years under a VDA. However, pursuant to SB 13, the State Escheator may not, except in cases of fraud, conduct any examination of records or investigations for any period more than 10 years prior to when unclaimed property is presumed abandoned. Similarly, SB 13 establishes that the look-back period for VDAs is also 10 years prior to when unclaimed property is presumed abandoned.
While the review periods for audits and VDAs are both limited to 10 years, it is only under a VDA that a holder can avoid penalties and interest. A holder who is assessed a deficiency pursuant to an audit will benefit from the limited 10-year review period, but will remain subject to penalties and interest.
Statute of Limitation
While Delaware’s prior unclaimed property law technically contained a statute of limitations provision, the State Escheator found enough loopholes in the provision such that it did not bar the state from seeking payment of unclaimed property due to the state at almost any time. SB 13, however, establishes a firm 10-year statute of limitations which applies regardless of whether or not a return has been filed.
Assessment of Interest
While most of the changes to Delaware’s unclaimed property program benefit holders of unclaimed property by creating consistency and limiting the scope of an audit or VDA, SB 13 also allows for the increased assessment of interest going forward. Under the prior law, interest was assessed on outstanding unpaid amounts at a rate of 0.5% per month, with the interest capped at 25% of the amount due. Under SB 13, interest accrues at the same 0.5% per month, but the cap is increased to 50% of the amount due. This higher cap is designed to encourage holders of unclaimed property to come forward voluntarily and participate in the VDA program to avoid the substantial interest penalty.
SB 13 establishes a new method of review for the State Escheator. Pursuant to the new law, the State grants the State Escheator the authority to initiate compliance reviews of a holder’s unclaimed property reports in order to determine whether a person may have filed an inaccurate, incomplete, or false report. The scope of a compliance review is narrower than that of a complete audit. The reviews are limited only to the contents of the reports filed with the State Escheator and any supporting documents.
The State Escheator has one year from the authorization of a compliance review to notify the holder of any deficiencies identified through the review. This requirement should encourage regular reporting by holders by reducing the potential for excessive interest and additional assessment of liability once the one-year period has run on the filed report.
Treatment of Gift Cards, Stored-Value Cards, and Virtual Currency
The new law also significantly expands the provisions related to gift certificates to include gift cards and stored-value cards, which are given a broad definition. Modeled after the 2016 Revised Uniform Unclaimed Property Act, the new provisions also specifically exempt loyalty programs that are not redeemable in cash.
Additionally, the new law omits any specific reference to virtual currency. Delaware, by not specifically addressing the treatment of virtual currency, has offered little guidance to unclaimed property holders as to their obligations to remit such property, how such property, if required to be remitted, should be valued, and how such property should be classified.
SB 13 offers a comprehensive reform of Delaware’s unclaimed property program. The implementation of a reduced look-back period for the VDA program and establishment of a set period during which filed returns can be audited reflects a kinder, gentler Delaware as it relates to unclaimed property compliance. Also, SB 13 imposes strict record retention requirements, which potentially open up holders of unclaimed property who fail to comply with a liability determined by an estimation methodology that has yet to be outlined. Additionally, for those holders of unclaimed property currently under audit, the deadline for electing to enter either Delaware’s VDA program or an expedited audit program is fast approaching. It is important to act quickly to determine whether either option is in their best interest.