Major overhaul to Delaware unclaimed property laws enacted
SB 13 addresses current challenges by adopting provisions from RUUPA
TAX ALERT |
UPDATE (2/6/2017): On Feb. 2, 2017, Delaware Gov. John Carney, Jr. signed Senate Bill 13, enacting significant changes to the state’s unclaimed property laws. The bill, which was introduced on Jan. 12, 2017, quickly made its way through the Delaware General Assembly, receiving no votes against passage and only slight modification through an amendment added in the state senate. The senate amendment made several revisions to the introduced bill including the removal of provisions related to virtual currency and net card value, clarification of the time for escheat related to individual retirement accounts, and changes to the deadline to convert an unclaimed property audit into either the voluntary disclosure program or expedited audit from July 1, 2017, to within 60 days of the adoption of certain regulations.
While Senate Bill 13 makes a number of holder-friendly changes to the state’s unclaimed property law, some have argued that the legislation does not provide sufficient reform. The estimation methodology, which ‘shocked the conscience’ in Temple-Inland, is not addressed by the legislation, neither is the use of contingent fee audits—a frequent criticism of the state’s audit procedures. Pending any subsequent reform, holders should thoroughly review the changes in Senate Bill 13 and speak to their unclaimed property advisors with questions.
ORIGINAL (1/19/2017): On Jan. 12, 2017, State Senator Bryan Townsend introduced Senate Bill 13, which, if enacted, would overhaul Delaware’s current unclaimed property law. Proposed changes include revisions to the voluntary disclosure and audit look-back periods, an alignment of record retention policies with a new statute of limitations, the option to convert an audit into a voluntary disclosure agreement (VDA) or an expedited audit, new compliance requirements and implementation of many provisions of the 2016 Revised Uniform Unclaimed Property Act (RUUPA).
Reduced look-back period and alignment of statute of limitations with record retention requirements
Senate Bill 13 proposes to reduce the look-back period for all audits and VDAs to 10 report years, place a 10-year statute of limitations for Delaware to seek payment of unclaimed property due to the state, and align Delaware’s record retention policy to match the 10-year statute of limitations and look-back periods. Note, however, that a holder may be subject to examination for any period more than 10 years prior to when property is presumed abandoned if the State Escheator ‘reasonably concludes that the holder has filed a report containing a fraudulent or willful misrepresentation.’
If the holder does not retain the records as promulgated, the State Escheator may determine the amount of property due using a reasonable method of estimation including extrapolation and the use of statistical sampling when appropriate. On or before July 1, 2017, regulations regarding the method of estimation to create consistency in any examination or voluntary disclosure will be issued by the Secretary of Finance. These regulations will include permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks and the definition of what constitutes complete and researchable records. However, if a holder does retain all the required records, an examination may not be based upon an estimate unless the holder expressly consents in a record to the use of an estimate.
It appears that with these changes, the state is seeking to address many of the constitutional challenges raised in the Delaware District Court’s decision in Temple-Inland, Inc. v. Cook, No. 14-654-GMS (D. Del. 2016) (Temple-Inland) (for more information, please read our alert, Temple-Inland’s Delaware unclaimed property audit challenge dismissed).
Convert audit to VDA or expedited audit
Senate Bill 13 provides the authority for certain groups of holders to either convert their audit into a VDA or enroll in an expedited audit. Those holders under audit as of July 22, 2015, will have the option to convert their audit into a VDA administered by the Delaware Secretary of State. The expedited audit option is available to all holders under audit as of the effective date of this proposed legislation. The expedited audit imposes a timeline of no more than two years to complete the audit, of which only an 18-month window can be used by the person conducting the audit to request records, testimony and other information. Holders who choose to convert their audits to either option will have penalties and interest waived. Either option requires the holder to notify the State Escheator of their election by July 1, 2017.
Those holders who choose not to convert their audits will be subject to the new mandatory interest assessment of 0.5 percent per month, not to exceed 50 percent of the total amount of late-filed unclaimed property. However, 50 percent of the assessed interest may be waived at the discretion of the State Escheator.
New compliance requirements
Senate Bill 13 proposes mandatory e-filing for all unclaimed property reports beginning on March 1, 2018. In addition, the legislation introduces a notice to owner requirement, otherwise known as a due diligence requirement. The notice to owners must be mailed by first-class United States mail, and cannot be mailed more than 120 days nor less than 60 days before the filing of the holder’s annual report. The notice threshold requirement will be set at $50 for all property, with the exception of securities, in which case the holder must send a notice to the owner regardless of the value.
Adoption of RUUPA provisions
As part of the overhaul and reworking of the entire subchapter, the legislation adopts many provisions of the newly finalized RUUPA.
Virtual currency, stored-value card and loyalty card
Though the definitional section of Senate Bill 13 has been widely expanded compared to that of the current law, of particular interest are the additions of the terms stored-value card, loyalty card and virtual currency. Historically, stored-value cards had been informally treated as gift cards from an escheatment perspective given their similar characteristics, however, the term stored-value card and its treatment for escheat purposes is now clearly defined with a dormancy period of five years after the later of the date of purchase, the addition of funds to the card, a verification of the balance by the owner, or the last indication of interest in the property.
A recently debated topic within unclaimed property has been how to treat loyalty cards from an escheatment perspective. The proposed legislation clearly defines the term loyalty card and specifically provides for the exclusion of this property type from escheatment—unless it can be converted to money.
In a further attempt to modernize the law for the digital age, Senate Bill 13 defines the term virtual currency and includes it within the definition of property subject to escheat. However, Delaware deviated from RUUPA by specifically omitting RUUPA’s exclusion of ‘game-related digital content’ from the definition of virtual currency.
For holders wishing to appeal the results of an unclaimed property examination, Senate Bill 13 now provides holders the option to appeal to a state court, the Court of Chancery, within 90 days of the State Escheator’s determination of liability. This newly created option allows the holder community to bypass the existing administrative appeals process.
Owners interest in property
The proposed bill adopts RUUPA’s provisions regarding the types of owner initiated activities which constitutes an interest in the property and, therefore, resets the dormancy period. Such activities include, but are not limited to: written communication by the owner; oral communication by the owner—given that the record of the communication is maintained; presentment of a check or other instrument of payment; and owner initiated activity in an account in which property is held, including accessing the account or information concerning account and/or increasing or decreasing the property in the account.
Verification reports and compliance reviews
Senate Bill 13 provides the State Escheator with the ability to require a holder to file a verification report if the holder does not file a report, or if the State Escheator believes the holder has filed an inaccurate, incomplete or false report. In addition, the proposed legislation provides the State Escheator the option to conduct a ‘compliance review’ of a holder’s report if the State Escheator believes that the holder may have filed an inaccurate, incomplete or false report. The compliance review is limited to the contents of the filed report, including any supporting documents related to the report.
Clarification of sourcing rules
Although Delaware has historically sourced property according to the priority rules established by the U.S. Supreme Court case Texas v. New Jersey, its current statute does not define when the State Escheator may take custody of property. Senate Bill 13 clarifies the sourcing rules by providing that the State Escheator may take custody of property that is presumed abandoned, whether located in Delaware or another state, or in a foreign country if the last-known address of the owner is in Delaware, or if the holder is domiciled in Delaware and (1) there is no last-known address, (2) the state of the last-known address does not provide for escheatment of the property, or (3) the last-known address is in a foreign country. However, Senate Bill 13 has further clarified that if the property is specifically exempt from custodial taking under the law of Delaware or the state of the last-known address of the owner, the property is not subject to the custody of the State Escheator.
Senate Bill 13 aims to address the many challenges currently facing the Delaware unclaimed property program. By striking out the previous subchapters and starting afresh, the proposed bill aims to retool all aspects of unclaimed property examinations, VDAs and compliance. Given Delaware’s changing unclaimed property landscape, companies need to stay abreast of these proposed changes so that they are prepared to act if and when Senate Bill 13 is enacted.