Unclaimed Property 101

A Primer for Corporate Finance Leaders
The goal of unclaimed property (UP) law is to protect property rights. When an item of property that belongs to one person is held for an extended period by another, the property must be turned over to the state. The state then serves as custodian until the property can be returned to its rightful owner.

The legal tradition surrounding unclaimed property is rooted in English feudal law. Following the American Revolution, UP concepts passed into U.S. law through the states’ adoption of English common and statutory law. Originally, unclaimed property legislation pertained only to real property. In the late nineteenth century, the states began to apply UP law to tangible personal property as well. Unclaimed property now applies to a wide range of both tangible and intangible property types.

Currently, all 50 states, plus the District of Columbia, Puerto Rico and the U.S. Virgin Islands, have enacted unclaimed property legislation. In addition, several other countries, most notably Canada, have adopted unclaimed property laws that may impact your company.

Definitions and details
For the purposes of corporate compliance, unclaimed property is tangible or intangible property that a company has in its possession because the owner of the property cannot be located. An “owner” is any person having legal or equitable claim to a property. Owners can include employees (current or former), customers, vendors, stockholders, bondholders and many other individuals and organizations.

Items subject to UP law can include uncashed payroll checks, uncashed vendor payments, voided payments, duplicate remittances, unreconciled overpayments, accounts payable balances, gift certificates, stored-value gift cards, rebates and many other property types. Unclaimed property can encompass both actual owed amounts and items of “property” that amount to little more than accounting errors.

A multi-state issue
When an item of property has remained unclaimed for a designated period, it must be reported and “escheated” to the state. But which state?

Unclaimed property is rarely a single-state issue. Due to priority rules outlined in Texas v. New Jersey, 379 U.S. 674 (1965), an unclaimed property reporting obligation could exist in a state where a company does not have operations. The state of first priority is based on the owner’s last known address. If the address is unknown, then the state of second priority is the company’s state of incorporation.

More recently, the Supreme Court upheld these rules in Delaware v. New York, 507 U.S. 490 (1993). Currently, there is no sign that the court will reverse these decisions or that Congress will enact legislation to change state jurisdictional priorities.

A source of revenue for the states
In principal, the states hold items of unclaimed property in order to reunite them with their rightful owners. In practice, unclaimed property collections are a significant source of revenue for states.

With the economic boom an ever more distant memory, states are finding their coffers dwindling due to lower tax revenues. As a result, many jurisdictions have reverted to precipitous enforcement of UP laws as a quick (and sometimes consistent) source of revenue. In addition, states have become more coordinated and increasingly aggressive in collecting unclaimed property. Audit activity continues to rise, and many states are now contracting with contingent-fee (“bounty hunter”) auditors.

A significant cost for companies
For corporations, the cost of non-compliance can be significant. Interest on late, inaccurate or non-reported amounts ranges from 6 percent to 18 percent per annum. Penalties can range from $100 a day (maximum levels vary) to 25 percent of the value of the property subject to reporting. Further, criminal penalties may be imposed by jurisdictions for willful failure to report unclaimed property. Beyond these monetary penalties, companies found to be holding a large amount of unclaimed property can suffer negative publicity.

A controllable risk
While the costs of UP non-compliance can be significant, companies can take steps to control their liability and manage their risk. SeaChange can help you by providing the tools your company needs to manage its unclaimed property function knowledgeably, efficiently and cost-effectively.

To understand more about unclaimed property and discuss your specific situation, contact SeaChange today.


" Unclaimed property is tangible or intangible property that your company has in its possession because the owner of the property cannot be located. Examples of an “owner” are: employees (current or former), customers, patients, insurance companies, other companies/vendors, stockholders, and bondholders, etc." 

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