Ohio Tax. Workshop K. Tuesday, January 24, :00 p.m. to 4:00 p.m. Tuesday & Wednesday, January 24 25, 2017 Hya Regency Columbus, Columbus, Ohio

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1 26th Annual Tuesday & Wednesday, January 24 25, 2017 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop K Unclaimed Property Key Developments Including the Temple Island Case, Navigating through an Audit and Practical Tips & Best Practices to Streamline Compliance Process Tuesday, January 24, :00 p.m. to 4:00 p.m.

2 Biographical Information Diann L. Smith, Counsel, McDermott Will & Emery 500 N. Capitol St. NW Washington, DC Fax Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm s Washington, D.C., office. Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity. Diann has experience representing clients in nexus, tax base, business and nonbusiness income classification, apportionment and FIN 48 compliance issues. She has also counseled clients on multi-state unclaimed property compliance and voluntary disclosure opportunities. Diann has represented clients from a broad range of industries, including retail, insurance and communications services. Diann has significant experience representing clients before the Multistate Tax Commission (MTC). Prior to joining McDermott, Diann was counsel at another international law firm, where she also focused on state and local taxation. She also previously served as general counsel for the Council On State Taxation (COST). While at COST, Diann worked on nearly every major state and local tax issue confronting multi-state businesses. From 1998 to 2005, Diann was an adjunct professor at Georgetown University Law Center for the LL.M. in taxation program. Diann received her J.D. from the Georgetown University Law Center, where she was an editor of the Georgetown Law Journal. She received her B.A. from Miami University. Diann served as a law clerk to the Honorable Alan E. Norris of the U.S. Court of Appeals for the Sixth Circuit in 1991 and Diann is admitted to practice in the District of Columbia, Ohio and New York. Patty Jo Sheets, Director, PricewaterhouseCoopers LLP 1 North Wacker, Chicago, IL patty.jo.sheets@pwc.com Patty Jo is a Director with PricewaterhouseCoopers LLP ( PwC ) and the Midwest Region leader of the Abandoned and Unclaimed Property (AUP) practice. She has over 10 years of experience serving clients with unclaimed property issues in various industries. Patty Jo specializes in AUP and spends her time exclusively serving clients in this area. Patty Jo joined PwC s AUP practice in February At PwC, she assists clients in a broad range of abandoned and unclaimed property services and directives aimed at minimizing exposure, reducing liability and managing compliance strategies. She has structured unclaimed property reporting and compliance programs for new and established businesses and managed third party and state directed unclaimed property audit defense engagements. Patty Jo has also led numerous engagements focused on assisting companies in coming into compliance with state unclaimed property laws. Prior to joining the firm in 2011, she was with another accounting firm where she spent time working in all areas of state and local tax, including sales and use tax consulting and property tax consulting and compliance, as well as unclaimed property consulting and compliance. Patty Jo has made several presentations on Abandoned and Unclaimed Property at local conferences and seminars. Patty Jo has specific experience in the retail, utility, hospitality, and manufacturing industries. Patty Jo is a certified member of the Institute of Professionals in Taxation (IPT) and is a member of the Unclaimed Property Professionals Organization (UPPO). She has a Bachelor of Business Administration and a Masters of Taxation both from Texas A&M University.

3 Biographical Information Geoffrey A. Sawyer, III, Partner, Drinker Biddle & Reath LLP 222 Delaware Ave., Ste. 1410, Wilmington, DE (302) FAX: (302) Geoff concentrates his practice advising both States and large corporations regarding compliance with state unclaimed property laws. Currently, Geoff leads the Firm s representation administering the State of Delaware s Voluntary Disclosure Agreement ( VDA ) program for unclaimed property compliance, which currently has over 800 enrolled companies. In addition, Geoff represents clients in connection with multi-state unclaimed property audits, has filed Section 1577 Interest Assessment Appeals in the State of California, and counsels clients regarding the effect of state unclaimed property laws in Mergers & Acquisitions, contract negotiation and internal compliance reviews. In addition to his unclaimed property practice, Geoff also represents clients in transactional and corporate litigation work before Delaware regulatory authorities. From , Geoff served as Delaware Governor Jack Markell s Deputy Chief of Staff and directed the Governor s economic development efforts, as well as oversaw the state s collective bargaining. Geoff is a graduate of Hamilton College, and received his JD from Penn State University Dickinson School of Law. Geoff is a Delaware native who lives in Wilmington with his wife, Cara, and their three children, Allie, Jude and Lucy.

4 26th Annual Ohio Tax Conference January 2017

5 Overview of Abandoned and Unclaimed Property ( AUP ) Recent Litigation/Legislation Temple Inland and Estimation Delaware Revised Uniform Unclaimed Property Act Compliance Best Practices Q&A

Geoffrey A. Sawyer III Partner, Drinker Biddle & ReathLLP 222 Delaware Ave, Suite 1410 Wilmington, DE 19801 Direct: (302) 467-4230 geoffrey.sawyer@dbr.com Patty Jo Sheets Director, PwC 1 N.

6 Geoffrey A. Sawyer III Partner, Drinker Biddle & ReathLLP 222 Delaware Ave, Suite 1410 Wilmington, DE Direct: (302) Patty Jo Sheets Director, PwC 1 N. Wacker, Suite 900 Chicago, IL Direct: (312) Patty.Jo.Sheets@pwc.com Diann Smith Counsel, McDermott Will & Emery 500 North Capitol St NW Washington, DC Direct: (202) dlsmith@mwe.com

8 Unclaimed property is fixed and certain interest in tangible or intangible property held, issued or owed, in the course of a company s business that has been abandoned or unclaimed for a specific period of time (i.e., the dormancy period) by the rightful owner. Examples: Uncashed AP/Vendor Checks Securities/Dividends & Distributions AR Credit Balances Uncashed Payroll Commissions/Bonuses Rebates Gift Cards Employee Benefits Etc. Some states provide exemptions: gift cards, B2B transactions

9 Once deemed abandoned/unclaimed, it triggers the obligation to report and remit the value of the UP to the appropriate jurisdiction. All 50 states, US Virgin Islands, Puerto Rico and Guam have unclaimed property statutes that requires once property deemed abandoned/unclaimed, there is an obligation to report and remit the value of the UP to the appropriate jurisdiction. U.S. Supreme Court has established and a two-prong approach for determining priority among states: Texas v. New Jersey, 379 U.S. 674 (1965) First Priority: State of Owner s last known address. Second Priority: If no last known address for the Owner is available in the Holder s records, or if last known address is in a foreign country, then report and remit the UP to the company s state of incorporation.

11 If all sales are on account, the following extrapolation can be used: Holder should review credits written off (e.g., to miscellaneous income/expense account) to any amounts of bad debt as this is a viable position to offset net credits that is often overlooked. 1 In many cases the net credits were written off to miscellaneous income, allowance for doubtful accounts, or bad debt expense and documentation to prove it is not escheatable is unavailable.

Year Sales Total Unremdiated Unclaimed Property Unremediated Unclaimed Property w/ Delaware Address Extrapolated Liability Sourced to Delaware Total Delaware Assessment 2011 750,000,000 250,000

12 Year Sales Total Unremdiated Unclaimed Property Unremediated Unclaimed Property w/ Delaware Address Extrapolated Liability Sourced to Delaware Total Delaware Assessment ,000, ,000 12,500 12, ,000, ,000 5,500 Use 5, ,000, ,000 11,200 Actual 11, ,000,000 90,000 8,300 Data 8, ,000, ,000 4,500 4, ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000, , , ,000,000 98,213 98, ,000,000 92,075 92, ,000,000 75,706 75,706 Actuals 3,470,000,000 1,420,000 42,000 3,449,741 3,491,741 Error Rate % Application of Penalties and Interest 4,364,676 Total Delaware Assessment 7,856,416 Documents Unavailable Documents Unavailable

13 Delaware Federal District Court decided that a combination of executive actions taken by the State Escheator in the unclaimed property audit of Temple Inland, shocked the conscience and therefore violated the company s due process rights. Those executive actions were: (i) applying a 22 year look back period, (ii) failing to apply the six-year statute of limitations, (iii) no UP record retention requirement in DE law, (iv) failing to follow fundamental principles of estimation, thus putting Temple Inland at greater risk for double liability, and (vi) subjecting Temple Inland to multiple liability from different states In spite of its ruling, the Court deferred ruling on a remedy, suggesting the State of Delaware was better positioned to find an appropriate remedy.

14 The Court expressly held that a reasonable estimation of a holders' unclaimed property liability is not an unconstitutional taking. Whether or not estimation techniques employed in Temple Inland were reasonable was deemed a dispute of material fact that could not be resolved on summary judgment. However, in the decision, Court criticized Delaware s use of gross or second priority estimation stating that employing estimation in this way, created significantly misleading results and therefore was improper.

16 On January 12, 2017, Senate Bill 13 was introduced in Delaware, presumably to address some of the concerns raised in the Temple Inland decision The legislation: Adopts in substance many provisions of the 2016 Revised Uniform Unclaimed Property Act. Reduces the look-back period for both audits and VDAs to 10 report years. Creates a statute of limitations of 10 years that begins to run once the duty to report unclaimed property arose.

17 Establishes a 10-yr record retention requirement that is aligned with the look-back period and statute of limitations. Offers any company under audit prior to July 22, 2015, the opportunity to convert their audit into a VDA Alternatively any company currently under audit can enter into an expedited audit process. Continues to require an invitation into the VDA prior to being audit eligible while waiving interest and penalties for VDA participants Mandates interest (capped at 50%) be assessed on any latefiled unclaimed property, be it through annual filing or in an audit, as a means to incent voluntary compliance.

18 Legislation establishes several choices (July 1, 2017 is decision date): Convert your audit into a VDA? VDA will not make holder start from scratch 400+ VDAs closed in last 3 years Convert your audit into a fast track audit? Two year statutory time frame to complete No interest/penalties if complete Auditor must request records, etc. within 18 months Do nothing 6% interest compounded annually on late filed property capped at 50%

19 On one hand through SB13 Delaware significantly reduced look back period, established a clear statute of limitations provision, and implemented a record retention requirement consistent with those provisions Delaware is shifting its focus away from audits as a means of getting companies into compliance, and promoting voluntary compliance first On the other hand Estimation methodology has not changed

20 Unremediated Unclaimed Year Sales Total Unremdiated Unclaimed Property Property w/ Delaware Address Extrapolate d Liability Sourced to Total Delaware Delaware Assessment ,000, ,000 12,500 12, ,000, ,000 5,500 Use 5, ,000, ,000 11,200 Actual 11, ,000,000 90,000 8,300 Data 8, ,000, ,000 4,500 4, ,000, , ,000 Documents Unavailable ,000, , , ,000, , , ,000, , , ,000, , ,800 Actuals 6,335,000,000 1,420,000 42, , ,300 Documents Unavailable Error Rate 0.02% Total Delaware Assessment 672,300

addresses technological advances and concerns from various stakeholders, including,

22 Original version created in 1954, with revisions enacted in 1966, 1981 and 1995 Portions of various version enacted by varying degree of states Latest version addresses technological advances and concerns from various stakeholders, including, but not limited to: State administrators, Consumer advocacy groups, and American Bar Association.

23 Presumption of abandonment Excludes unused rain or shine tickets, loyalty cards, and game-related digital content Includes virtual currency, payroll cards, stored-value cards, municipal bonds, health savings accounts, commissions, employee reimbursements, and custodial accounts for minors Owner generated activity updates Rules determining knowledge of death Holder requirements Notice to apparent owners, including electronic notices Reporting and retention requirements

24 State procedures Burden of proof on the state Examination procedures, including the use of third party and contingent fee auditors Statutes of limitations Administrative and judicial reviews

26 Due diligence Zero reports Do not have uncashed check write-off account Do not void a checks without documenting reason Verify business unit compliance if decentralized Maintain records Look whether you have property that has been reported to states.

27 RUUPA Watch for state introduction in 2017 and 2018 legislative sessions. Some states may only adopt sections of Act Litigation Merchandise credits and derivative rights doctrine ERISA pre-emption Use of gift card management companies Other qui tam actions

PJ joined PwC s AUP practice in February 2011.

29 PJ is a Director with PricewaterhouseCoopers LLP ( PwC ) and the Midwest Region leader of the Abandoned and Unclaimed Property (AUP) practice. She has over 10 years of experience serving clients with unclaimed property issues in various industries. PJ specializes in AUP and spends her time exclusively serving clients in this area. PJ joined PwC s AUP practice in February At PwC, PJ assists clients in a broad range of abandoned and unclaimed property services and directives aimed at minimizing exposure, reducing liability and managing compliance strategies. She has structured unclaimed property reporting and compliance programs for new and established businesses and managed third party and state directed unclaimed property audit defense engagements. PJ has also led numerous engagements focused on assisting companies in coming into compliance with state unclaimed property laws. Prior to joining the firm in 2011, she was with another accounting firm where she spent time working in all areas of state and local tax, including sales and use tax consulting and property tax consulting and compliance, as well as unclaimed property consulting and compliance. PJ has made several presentations on Abandoned and Unclaimed Property at local conferences and seminars. PJ has specific experience in the retail, utility, hospitality, and manufacturing industries.

30 Partner, Drinker Biddle & Reath LLP 222 Delaware Ave Suite 1410 Wilmington, DE Direct: (302) Geoffrey A. Sawyer III is a partner in the firm s Life Insurance & Annuities practice group. In addition to his transactional and corporate litigation work, which includes experience representing energy and utility clients before regulatory authorities, Geoff focuses his practice on escheat/unclaimed property administration, including representing clients in connection with multistate unclaimed property audits. Geoff recently served as Delaware Governor Jack Markell s Deputy Chief of Staff, and directed the Governor s efforts to bring PBF Energy and Bloom Energy to Delaware. That effort included negotiating and drafting economic development term sheets and grant agreements, drafting legislation, and leading regulatory efforts to secure necessary approvals. Geoff also oversaw the state s collective bargaining, from negotiations to directing outside counsel in binding interest arbitration, and, along with the governor s chief of staff, led a pension/health taskforce comprising state legislators, employee union representatives and administration officials to secure over $100 million in taxpayer savings over five years. Prior to joining the Governor s Office, Geoff worked for a highly regarded Wilmington-based law firm representing Fortune 500 companies in defense of multistate unclaimed property/escheat audits as well as voluntary compliance with the unclaimed property laws of Delaware and other jurisdictions.

Diann Smith Counsel, McDermott Will & Emery 500 North Capitol St NW Washington, DC 20001 Direct: (202) 756-9241 dlsmith@mwe.

31 Diann Smith Counsel, McDermott Will & Emery 500 North Capitol St NW Washington, DC Direct: (202) Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. She has counseled clients on multi-state unclaimed property compliance and voluntary disclosure opportunities, and has contributed as a co-author for a cert petition filed before the US Supreme Court. She serves as outside counsel on state tax and unclaimed property matters for the Entertainment Software Association and the National Retail Federation. Diann serves on Unclaimed Property Professionals Organization, Government Relations Advocacy Committee and is currently co-chair of a task force addressing the RUUPA.

Unclaimed Property: What You Need to Know ~ Part 1 ~ Heela Popal & Troy Wangen June 15, :00p 3:00p 25084

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