Unclaime d Property. TeleStrategies Communications Taxation 2016 Wires or Wireless, Don t Get Tangled by Unclaimed Property.

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1 Unclaime d Property TeleStrategies Communications Taxation 2016 Wires or Wireless, Don t Get Tangled by Unclaimed Property May 17, 2016

2 Disclaimer The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2

3 Agenda Overview of unclaimed property Holder responsibilities Audit trends Rebate programs Gift certificate and gift card programs Loyalty programs Voluntary disclosure programs Q&A 3

4 Overview Wires or Wireless, Don t Get Tangled by Unclaimed Property

5 Overview The concept of unclaimed property Abandoned Property is not a tax - But can be a source of revenue to the states Traditional tax nexus principles do not apply If efforts by holders to reunite rightful owners with their property are unsuccessful - After a period of time, the property must be reported and remitted to the state Custodial laws - Derivative Rights Doctrine Not a true escheat Most states act as a custodian to step into the shoes of the owner in perpetuity 5

6 Overview Tax similarities Key source of revenue to states Annual reporting obligation to each state Interest and/or penalties for noncompliance Periodic audits to enforce compliance Tax differences Not a % of some base - Actual value of the property Nexus does not apply - Priority Rules apply No statute of limitations for property not reported Audits can span over 20 years (or existence of a company) Longer record retention Minimal case law and court precedent for unclaimed property 6

7 Overview What is unclaimed property? Fixed and certain obligation owed by the holder to the owner Tangible or intangible - Intangible property property that does not have value in itself, but that represents value (e.g., checks, suspense account balances, etc.) Majority of unclaimed property is intangible property - Tangible property physical property (e.g., land, machinery, etc.) Owner-generated activity ceases to occur with respect to the property Property remains unclaimed by the owner for a period of time (i.e., the dormancy period or abandonment period ) - Also commonly referred to as abandoned property 7

8 Overview Commonly reported: Often overlooked: Stale dated checks Trade payables Wages/payroll/salary Employee expense reimbursements Commissions Bonuses Royalties Suspense accounts Voided checks Un-refunded deposits Unapplied cash Unclaimed Property Can be created by nearly every department within a company Rebates Merchandise credits/vouchers Stock and dividends Worker s comp benefits Flexible spending accounts Retirement accounts Employee garnishments Health savings accounts 8

9 Overview Unclaimed property could be owed to: Employees (past and current) Vendors / suppliers Customers Creditors Land / property owners (leased property) Heirs / beneficiaries Any owner of the property or having an ownership interest in the property 9

10 Overview Supreme Court established priority rules Texas v. New Jersey 379 U.S. 674 (1965) Reaffirmed by Pennsylvania v. New York (1972) and Delaware v. New York (1993) 1 Property should be remitted to the state of the owner s last known address based on the holder s books and records 2 Property with no last known address is reportable to the state of the holder s domicile If the state of last known address does not provide by law for the escheat of the property, the state of the holder s domicile has the power to escheat 10

11 Overview U.S. Reporting Jurisdictions = 55 The 50 U.S. States + District of Columbia, Puerto Rico, Guam, U.S. Virgin Islands, and Northern Mariana Islands 11

12 Holder responsib ilities Wires or Wireless, Don t Get Tangled by Unclaimed Property

13 Holder responsibilities Holder obligations To identify, track, and safeguard abandoned property To perform due diligence To file an annual report To remit property to the state after the dormancy period is reached 13

14 Holder responsibilities Annual compliance requirements Reporting requirements vary by state and property type - Dormancy periods and cut-off dates vary to determine when property becomes reportable - Report due dates vary by state and industry - Limited to banks and financial institutions in some jurisdictions - Preliminary reports required by some states - Negative reports required by some states - Due diligence not required by all states 14

15 Holder responsibilities Adjust financial records for unclaimed property remitted to states Collect financial data to support future unclaimed property compliance Prepare and submit annual reports per state requirements Annual Unclaimed Property Compliance Cycle Analyze unclaimed property items held for for dormancy and reportability Prepare due diligence correspondence to property owners per state requirements 15

16 Holder responsibilities Due diligence Most states specify certain dates and dollar thresholds that the due diligence letters must be sent to owners - For many states, the mailing requirement is days before the report is due - Threshold amount varies by state Some states require certain language and font size - Example: CA requires certain language at the top of due diligence letters Some states require certified mail - Example: NY requires an additional letter, sent certified mail, return receipt requested, for items over $1,000 if you did not receive a response to the first letter Good business practice to conduct due diligence in all states, regardless of the state s statutory requirement 16

17 Holder responsibilities Reporting exemptions and deductions Statutory and administrative Careful interpretation and application necessary Reporting exemptions Business-to-business ( B2B ) De minimis - Example: KY, MI and OH exempt payroll of $50 or less Industry specific - Example: Florida Surface Transportation Board Reporting deductions For administrative costs of reporting - Example: CO allows deduction of 2% or $25 per owner (whichever is more) 17

18 Holder responsibilities California Interest is statutory in California at 12% per annum - Abatement of interest is difficult Dual reporting process - Diligence notice be sent to the owner s last known address not less than 6 months nor more than 12 months before the property becomes reportable (i.e., by April 30) - Notice Report due before November 1 of each year - Final Remit Report due between June 1 and June 15 Payment via ACH for remittances totaling $20,000 or more - Payment must be made by electronic funds transfer (EFT) instead of a check - Failure to do so may result in a 2% penalty pursuant to Civil Code of Procedure section 1532(e) 18

19 Holder responsibilities Delaware SB141 annual reporting implications - State Escheator required to send annual notices to holders, reminding the holder of their obligation to file unclaimed property reports prior to March 1 - Holders must designate an individual employee to serve as the contact for all correspondence with the State 19

20 Audit trends Wires or Wireless, Don t Get Tangled by Unclaimed Property

21 Audit trends Overview of typical unclaimed property audit Most states either use their own audit staff or hire third party audit firms to conduct unclaimed property audits Audits can be challenging and time consuming Audit look-back periods can be extensive, covering many years No statute of limitations for unclaimed property not reported Assessments, including penalties and interest, can be substantial Important to secure end-of-audit Closing Agreements 21

22 Audit trends Some states seek to collect unclaimed property as a source of revenue Contingent Fee Audit State Audit Self-Audit Compensation dependent on outcome of audit Other states solicited to participate Can be contentious and lead to litigation State-employed auditors may not be as knowledgeable Audits often take more time Self-determined assessment with state guidance Can obtain end of audit closing agreement Some states seek to return unclaimed property as a way to stimulate local economies 22

23 Audit trends States right to estimate Most states provide for estimations for years where detailed records are not available or deemed incomplete No formal guidance from states related to estimation techniques - Base periods to be used for testing - Definition of complete and researchable records - Error rate calculation - Statistical sampling Some states require Record Availability Attestation letter to justify estimations 23

24 Audit trends Common audit triggers Holder s state of incorporation Company size/revenue (Larger = Riskier) Late reporting Failing to report all property types common for the company s industry Reporting errors and improper formatting Merger and acquisition activity Media coverage/company publicity (layoffs, bankruptcy, stocksplits, etc.) 24

25 Audit trends Contingent-fee audit Use of existing contracted third-party auditors Emergence of new contracted third-party auditors Compensation is contingent upon outcome of the audit Other states are solicited to participate State of incorporation serves as mandate state Burden of proof is on the company to remediate exposure 25

26 Audit trends Typical audit consists of the following: State issues audit notice and authorization letter Company is contacted by state or third party audit firm representing the state Opening conference meeting between auditor and the company Information Document Requests ( IDRs ) issued in phases IDR response due within auditor established timeline - Typically 30 days Task Management Report ( TMR ) and periodic status meetings Preliminary audit assessment provided Company finalizes remediation efforts Final audit assessment issued Settlement process / appeals process Closing agreement and payment 26

27 Audit trends Common audit-related issues include: Lack of records and supporting documentation Insufficient human resources to complete audit requests Difficulty ascertaining proper audit scope and estimation approach Dispute over sampling and testing methodologies Potential inconsistency in application of state reporting requirements: - Legal suspense - Current pay rules - Forced pooling provisions - Dates for determining dormancy 27

28 Audit trends Arizona HB2323 Pending legislation released May 7, Requires the AZ DOR to establish measurements of contingency fee auditor performance - Requires holders be notified of rights that a minimum include: A statement that DOR makes all final decisions regarding recommendations by a contingent fee auditor Information on corrections and appeals procedures Where to file complaints of auditor behavior Contact of DOR designated employees - Requires DOR to issue a request for information no later than 1/1/17 to explore the feasibility of contracting unclaimed property audits out that are not done on a contingency fee basis 28

29 Audit trends Delaware Delaware SB141 places limitations on Delaware audits - Reduces audit look-back period from January 1, 1981 (or 34 years) to 22 years on phased basis as follows: - Ongoing audits (at time SB141 passed) = January 1, Commenced before December 31, 2016 = January 1, Commenced January 1, 2017 or after = 22 years from when the audit commences - Interest Imposed on late-reported property Section 1159, relating to penalties and interest, amended to once again allow interest Applies to all late property reported after March 1, 2016 Rate of 0.5% per month, not to exceed 25% of late reported amount 29

30 Audit Trends Delaware Delaware Escheat Examination Manual - Proposed draft recently released to satisfy the statutory requirement of 80 Del Laws. c. 2 passed in early Intended to provide procedural guidelines for the conduct of Delaware unclaimed property examinations - Adoption of these positions as regulations would negatively affect holders under examination because of the judicial deference normally afforded to agency regulations - Would allow the Department of Finance the authority to issue Statement of Findings and Requests for Payment with regard to segments of an audit rather than only at the end of an entire audit 30

31 Rebate programs Wires or Wireless, Don t Get Tangled by Unclaimed Property

32 Rebate programs Common terms Rebate: Widely known as refunds, are a popular tool used by businesses to promote their products and services Lift: The increase in sales from a rebate program Breakage: The percentage of customers who don't seek to redeem their rebate, usually because they don't meet the rebate requirements - Fail to submit within the specified time frame - Don't provide the required documentation, etc. Slippage: The percentage of customers who redeem the rebate but never actually cash the check, use the gift card, etc. 32

33 Rebate programs Fitzgerald v. Young America Corporation In 2003, 45 states initiated an audit of Young America, a Minnesota rebate fulfillment company The retailers would pay to Young America the full value of all valid rebate submissions, but Young America would retain any uncsahed rebate checks - The "slippage" was later taken into income by Young America, to the tune of about $43 million from States wanted the slippage as unclaimed property and authorized Affiliated Computer Services (ACS) to begin an audit - The Young America audit spawned lawsuits in CA, IA, NH and MA, among others 33

34 Rebate programs Fitzgerald v. Young America Corporation The audit and subsequent litigation went on until 2010, when various retailers eventually settled with the various states - April 2009, Walgreens settled and was dismissed from the lawsuit - May 2009, T-Mobile settled with Iowa for $6,900, inclusive of interest - February 2010, Sprint settled with 36 states for $22 million 34

35 Rebate programs Costco Wholesale Corp. v. Washington, et al. March 2011, Washington demanded approximately $3.3M in uncashed rebate checks issued Costco used Continental Promotions Group (CPG) to manage its rebate fulfillment program CPG declared bankruptcy in 2008 and State demanded payment from Costco Costco paid the requested amount under protest and filed suit against the State Case dismissed in November Court granted the State a partial summary judgment motion as a matter of law on the issue of Costco s liability to report and deliver the unpaid rebate obligations into the State s protective custody in an amount to be determined at trial 35

36 Rebate programs Staples, Inc. v. Cook, et al. Delaware case decided February 2012 Staples agreed to give the customers a reduction in price, or a rebate for purchases of a minimum volume of merchandise from Staples during a one-year period The rebates were issued in the form of a check or as a credit to use against future purchases Delaware through its third-party contract auditors asserted that the rebates, once they remained unclaimed for the prescribed dormancy period (5 years), were subject to escheatment 36

37 Rebate programs Staples, Inc. v. Cook, et al. Staples argued that the rebates did not constitute unclaimed property The rebates had run against the rightful owners, and that the Delaware statute does not allow the State to escheat property where a claim by the rightful owner is time-barred under Delaware s Uniform Commercial Code The judge ruled in favor of the State admonishing Staples counsel for not clearly setting forth its arguments why the rebates (either in the form of credits or checks) did not constitute unclaimed property 37

38 Rebate programs Staples, Inc. v. Cook, et al. The court further ruled that once it was determined the rebates in either form (check or credits) did constitute property under Delaware s unclaimed property law, that the running of the statute of limitations (under UCC provisions) against the owner is irrelevant when the property at issue is one of the specifically enumerated types set forth in 1198(11) 38

39 Rebate programs Illinois v. Sprint Spectrum LP et al. March 2016, the State of Illinois sues Sprint for $2.7M in unclaimed rebates issued between Sprint rejected settlement offers with Illinois Young America is no longer authorized to do business in Illinois, according to the lawsuit RadioShack surrenders rebates to Illinois April 2016, RadioShack settlement for $140,000 in uncashed rebates owed to more than 5,000 Illinois residents Global Fulfillment Services retained the value of unclaimed rebates 39

40 Rebate programs Key takaways Thus far, the Courts are clear in holding rebates are includible in the definition of property subject to escheat regardless of the manner or intent for issuing When using third-parties for rebate fulfillment functions, the contracts should be specific as to the filing of unclaimed property liability, as well as accounting and file retention policies - If your vendor is not reporting the properties, the vendor should be returning the value of uncashed checks to your company for reporting 40

41 Gift card programs Wires or Wireless, Don t Get Tangled by Unclaimed Property

42 Gift card programs Sale and administration vary widely by program Point of sale of physical cards Online sale and distribution of physical cards Electronic gift cards (digital card, code download, etc.) Universal cards Co-branded cards Third-party card production and fulfillment companies Create physical and digital cards Track issuances and redemptions Typically not the holder nor responsible for unclaimed property reporting 42

43 Gift card programs Gift card issuing entity Arguably the holder of unclaimed property Commonly domiciled in state that offers gift card and promotional exemptions and deductions Many gift card programs also have customer loyalty programs that can be added or integrated into a gift card system 43

44 Gift card programs Prepaid or stored value card? While the terms prepaid cards and stored-value cards are frequently used interchangeably, differences exist between the two products Characteristics may determine how card is regulated and whether federal or state law applies 44

45 Gift card programs Prepaid cards Generally issued to persons who deposit funds into an account of the issuer During the funds deposit process, most issuers establish an account and obtain identifying data from the account owner (e.g., name, phone number, and etc.) Example(s): phone cards, public transit fare card, payroll cards, etc. Stored value cards Do not typically involve a deposit of funds into an account as the value is stored directly on the cards or within the issuer s database which is accessed via a magnetic strip or barcode on the card - Closed-Loop System : Typically retailer/issuer specific for purchase of goods and/or services - Open-Loop System : Typically processed using the same systems as the branded network cards MasterCard, Visa, American Express, and Discover, etc., and offer the same functionality 45

46 Gift card programs Mobile and digital gift cards Mobile and digital gift cards are becoming more common Mobile gift cards are delivered to mobile phones via SMS messages using smart phone apps Virtual gift cards are typically delivered via or text to the recipient, who can print the card or access the card on a mobile device via a code Owner may register gift cards with name and address Some allow transfer of gift card balances to mobile payment apps 46

47 Gift card programs Virtual currencies Virtual currency systems generate revenue, provide low cost alternatives to credit cards for micropayments, offer prepaid solutions appealing to youth and other users without credit cards, and help companies build attractive loyalty programs Broadly speaking, state and federal gift certificate laws can apply when consideration is paid for a record that reflects a promise to provide goods or services of a certain value to the bearer of the record Virtual currency issuers often maintain online user accounts with information about the identity and location of the user - The state or states to which the issuer might have to remit the breakage is determined according to established jurisdictional rules that take into account the location of the owner of the property (i.e., the user) 47

48 Gift card programs Federal legislation Credit Card Accountability Responsibility and Disclosure (CARD) Act - Public Law Federal law passed by Congress in Set consumer protections for gift cards based on many state laws Expiration dates: card may not expire earlier than 5 years after the date on which it was issued, and expiration date must be clearly and conspicuously stated Fees prohibited unless: there has been no activity on the certificate or card for 12 months; required disclosures have been made; only one fee is charged per month; and additional requirements determined by the Board of Federal Reserve System (the Board ) are met 48

49 Gift card programs Federal legislation The federal law creates a floor, rather than a ceiling, for regulation and leaves room for state regulation on redeeming gift cards for cash and unclaimed property provision - Applies broadly to gift cards, stored value cards, and general use prepaid cards - Does not preempt state gift card laws, except if state laws are inconsistent with the Act 49

50 Gift card programs Federal legislation CARD Act exclusions - Loyalty, award, or promotional gift cards; - Gift cards used solely for telephone services; - Gift cards that are reloadable, not marketed or labeled as a gift certificate; - Gift cards that are not marketed to the general public; - Gift certificates issued only in paper; or - Gift cards redeemable only for admission to events or venues at particular locations 50

51 Gift card programs State legislation Much recent state legislative activity relating to gift cards has focused on the permissibility of imposing expiration dates and fees States have taken a variety of approaches to the imposition of expiration dates: - Prohibit expiration dates altogether - Permit expiration dates, but require clear disclosure and/or that gift card must be valid for a minimum number of years - Require clear and conspicuous disclosure of expiration date on gift card, or permit issuer to provide a phone number or web address where information can be obtained - Provide that gift cards will be subject to state escheat laws only if the gift card has an expiration date 51

52 Gift card programs State legislation States have taken a variety of approaches to the imposition of fees: - Prohibit fees - Allow fees but require that they be clearly disclosed - Allow fees under very particular circumstances, or when a certain time period has elapsed Example: CA permits fees only when remaining value is $5 or less, fee is not more than $1 per month, gift card is inactive for 24 months, and gift card is reloadable 52

53 Gift card programs State legislation Other state considerations - Date of Issue: A few states require that the date of issuance must be printed on the card - Toll-Free Numbers: Some states require or allow gift card issuers to disclose a toll-free number that holders may call to find out balance, expiration date and other terms and conditions 53

54 Gift card programs State cash redemption requirements Less Than $10 - CA Less than $5 - CO, ME, MA, MT, OR and WA Less than $1 - RI and VT 54

55 Loyalty programs Wires or Wireless, Don t Get Tangled by Unclaimed Property

56 Loyalty programs Loyalty reward cards are structured marketing programs that reward and encourage loyal behavior on the part of customers Programs are variously described as discount cards, club cards, or rewards cards The owner of the card is typically entitled to either a discount on current or future purchases or an allotment of points that can be used toward making future purchases - An owner of a loyalty reward card has a right to demand products or services in exchange for his reward points, but not a cash equivalent value of points - The holder has no obligation to pay a cash equivalent value to the owner; rather, the holder s obligation is to exchange a product or service, but only when the owner uses or redeems points Promotional programs and rewards redeemable for cash are typically not exempted from reporting 56

57 Loyalty programs Promotional disclosures Promotional gift certificates and gift cards should disclose that the certificate or card is not redeemable for cash, because these states require the unredeemed balance or amount payable to be reported as unclaimed property if the certificate or card is redeemable for cash Examples: CT, CO, IN, MT, NM, NE, NH, NY, RI, WA 57

58 Loyalty programs Questions that arise when determining the unclaimed property implications with promotional instruments and programs: - Whether terms and conditions exist for the program, clarifying the customer s entitlement to the particular promotion Example: No cash refund, redeemable only for goods/services; any conditions that must be satisfied by the customer - Whether a state treats intangible property as escheatable only if rights are vested in such property Example: No unsatisfied conditions and only to the extent consideration was received for it - Whether the various exemptions contained in state laws pertain to the property under review; and - Whether other doctrines or legal principles support a position that the instrument is not subject to unclaimed property reporting 58

59 Loyalty programs Holders face the risk of states taking the position that promotional items are not truly promotional and instead: - Are akin to store or merchandise credits; - Should be treated as gift cards and therefore escheatable unless otherwise exempt; or - Constitute other miscellaneous intangible property subject to the state catch-all provision - Many states have adopted a catch-all provision in their unclaimed property statutes The strength of a holder s position with respect to promotional rewards/incentives can depend on: - the program s terms and conditions, - the holder s particular facts (e.g., are some rewards/ instruments purchased), and - the state unclaimed property law in question 59

60 Voluntary Disclosur e Programs Wires or Wireless, Don t Get Tangled by Unclaimed Property

61 Voluntary Disclosure Agreements State voluntary disclosure agreements ( VDA ) VDAs (formal or informal) are available in most states, although the process varies by state As the term indicates, it is a voluntary process through which a company may report past due unclaimed property - Promised future compliance - Self review of certain books and records for defined scope period - Requires evaluation of all potential areas of unclaimed property Estimations may be required 61

62 Voluntary Disclosure Agreements State voluntary disclosure agreements ( VDA ) Statutory programs (formal) - Signed contractual agreement - Established guidelines and expectations - May require a presentation of analysis performed Administrative programs (informal) - Cover letter submitted with voluntary report and remittance - First time filing (FTF) with cover letter 62

63 Voluntary Disclosure Agreements VDAs CT Interest is statutory Program Type: No Program Informal Program Case-By-Case Managed Self-Audit Formal VDA Agreement 63

64 Voluntary Disclosure Agreements VDAs can be a beneficial way to get into compliance, BUT do it right! Keep state apprised during the self-review process Avoid aggressive reporting positions Disclose where records are limited Negotiate and agree on assumptions Retain all records used to calculate liability - Executed agreement, any demand for payment or other documentation and records demonstrating payment was made Report on time and stay in compliance Develop ongoing compliance process and policies and procedures 64

65 Q&A 65

66 Thank you Samantha R. Petersen, Tax Managing Director State and Local Tax Denver, CO (303)

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