ABC Amega Unclaimed Property Presentation Presenters: Michael Kenehan Nick Boegel April 21, 2016
Agenda
Agenda 1. Unclaimed Property Overview 2. Extrapolation 3. Audit Process Retail/Service Industry 4. Top 10 UCP Issues with A/R 5. Mitigation Strategies 6. Updates in Industry 7. Questions 8. Bios Page 3
Unclaimed Property Overview
Unclaimed Property Overview All 50 states and the District of Columbia have enacted unclaimed property laws. The purpose of unclaimed property laws is to ensure the protection of abandoned property until the rightful owner is located. Moreover, states use any derivative funds earned on such property for the public good. States actively pursue unclaimed property as an additional source of revenue, which avoids raising taxes States unclaimed property laws apply to all entity types, including: Corporations S Corporations Partnerships Limited Liability Companies Page 5
Unclaimed Property Overview Generally intangible personal property for which there has been no owner activity for a specified period of time ( dormancy period ). Examples of unclaimed property: Uncashed payroll or commission checks Uncashed payable/vendor checks Gift certificates/gift cards Customer merchandise credits, layaways, deposits, refunds or rebates Overpayments/unidentified remittances Unused/outstanding benefits (non-erisa) Miscellaneous income/bad debt expense accounts Page 6
Unclaimed Property Overview The Supreme Court of the United States in Texas v. New Jersey, established the following unclaimed property sourcing rule: First, to the state of the rightful owner s last known address, if known, or Second, to the state of the holder s incorporation (commercial domicile for unincorporated entities). Priority rules in Texas v. New Jersey were upheld in the subsequent cases Pennsylvania v. New York (escheat of money orders) and Delaware v. New York (unclaimed dividends and interest). Although not sanctioned by the Court, some states have adopted a transactional or throwback rule, which provides that if both the state of the owner s last known address and the state of the holder s incorporation decline or fail to exercise jurisdiction over the unclaimed property, then the state in which the transactions giving rise to such property occurred has the right to claim the property. Page 7
Unclaimed Property Overview Dormancy Periods Dormancy Period : A statutorily prescribed period that begins from the date of creation of the property type (e.g., check issuance date) and ends after the passage of a certain number of years (typically 1-5 years). Property becomes presumed abandoned when it has remained unclaimed during the statutory dormancy period. State Wages (years) A/R Credit Balances (years) Third Party Dividends (years) Gift Cards (years) A/P Checks (years) All other property (years) DE 5 5 5 5 5 5 No NY 3 3 3 5 3 3 No CA 1 3 3 3 3 3 No IL 1 5 5 5 5 5 Yes FL 1 5 3 5 5 1-5 No TX 1 3 3 3 3 3 Yes (deferral) B2B Page 8
Unclaimed Property Extrapolation
Extrapolation Many states, including Delaware, use extrapolation techniques to establish a historic liability, at times dating back to 1991, in the event all records requested are not available and/or complete. The determination of whether or not to extrapolate may depend of factors such as: Historical unclaimed property reporting practices Filing history Materiality of errors found for periods where records were reviewed Record availability and reliability by property type Page 10
Exposure Quantification: PAYROLL EXTRAPOLATION Unremediated Payroll O/S Checks 12/31/2004 Federal 1120 Payroll 12/31/2004 = % x Federal 1120 Payroll (prior years) Page 11
Exposure Quantification: ACCOUNTS PAYABLE EXTRAPOLATION Accounts Payable O/S Checks - 12/31/2004 Federal 1120 Sales 12/31/2004 = % x Federal 1120 Sales (prior years) Page 12
Exposure Quantification: ACCOUNTS RECEIVABLE EXTRAPOLATION If all sales are on account, the following extrapolation can be used: Unremediated Net Credits 1 12/31/2004 Sales - 12/31/2004 = % x Sales (prior years) 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. Page 13
Exposure Quantification Total Unclaimed Property Liability (ALL STATES) for Base Period (a) Base Period = Total Sales (1120) for Base Period (b) Escheat Percentage (c) (Unclaimed Property Liability(a)/Total Sales (b)) Escheat Percentage(c) * Total Sales in Non-Base Period(d) = Total Projected Liability(e) Projection Years Total Projected Liability(e) + Address Property(f) = Total Liability Owed (Projection and Address) Page 14
Example of the Impact of Extrapolation Year Sales Total Unremdiated Unclaimed Property Unremediated Unclaimed Property w/ Delaware Address Extrapolated Liability Sourced to Delaware Total Delaware Assessment 2005 750,000,000 250,000 12,500 12,500 2004 700,000,000 650,000 5,500 Use 5,500 2003 680,000,000 320,000 11,200 Actual 11,200 2002 675,000,000 90,000 8,300 Data 8,300 2001 665,000,000 110,000 4,500 4,500 2000 550,000,000 225,072 225,072 1999 625,000,000 255,764 255,764 1998 600,000,000 245,533 245,533 1997 550,000,000 225,072 225,072 1996 540,000,000 220,980 220,980 1995 525,000,000 214,841 214,841 1994 510,000,000 208,703 208,703 1993 495,000,000 202,565 202,565 1992 475,000,000 194,380 194,380 1991 460,000,000 188,242 188,242 1990 425,000,000 173,919 173,919 1989 400,000,000 163,689 163,689 1988 390,000,000 159,597 159,597 1987 365,000,000 149,366 149,366 Documents Unavailable 1986 345,000,000 141,182 141,182 Actuals 10, 725,000,000 1,420,000 42,000 2,968,905 3,010,905 Error Rate 0.04092% Application of Penalties and Interest 3,763,631 Total Delaware Assessment 6,774,536 Documents Unavailable Page 15
Audit Process
Audit Process 3-7 years Multi-state Decreased decision making, increased company resources Third party contingency fee auditors In-depth review of books and records Potential estimation back to date of incorporation (DE 1991) Page 17
Top 3 rd Party Audit Firms # Firm Comments 1 Kelmar Associates LLC Leading audit firm for DE and certain other states 2 UPCH Owned by Xerox; maintain contracts with over 25 states 3 Audit Services US Maintain contracts with 46 states 4 Verus Financial LLC Leader in Life Insurance audits 5 Treasury Services Group LLC Bought Bankrupt APEX; newer firm 2012-2013 6 Discovery Audit Services LLC Newer Firm outside LA; Performing audits for LA since 2003 7 Hertz & Herson Newer Firm, started in 2012-2013 8 Innovative Advocates Group, Inc. Newer Firm, started in 2013 Page 18
Audit Concerns Retail and Service Industry Common Property Types/Concerns Property Type Gift Cards Concern Millions of gift cards go unredeemed every year and could be escheatable to the state of last known address or state of incorporation. Accounts Receivable Accounts Payable Service industries typically have a significant customer listing including both larger and smaller customers from different states Many suppliers from different states Payroll Multiple employees throughout many states hourly TPA Third Party Admin Self Insured Benefits Workers comp, etc. Rebates High number of customers; low redemption rates Page 19
Top 10 UCP Issues with Accounts Receivable
Top 10 UCP Issues with Accounts Receivable # Issue Risk 1 Complex Analysis Analysis of AR TB s and write off accounts Potential for errors throughout identification of population, remediation, etc. Could cause inflated populations, increased liability, etc. 2 Inclusion of Non AR transactions Sales Accounts (large data sets/populations) Increased efforts throughout remediation process Potential for increased liability and sample risk 3 Difficult to remediate Historic information is not accessible Harder to conceptualize Current customer not acceptable argument 4 Lack of AR prior filings Potential for increased UCP liability Non-compliance=greater audit risk 5 Transactions removed from Balance Sheet Multiple accounts Understand the business reason Inclusion of non write off related accounts Increased efforts throughout remediation process Page 21
Top 10 UCP Issues with Accounts Receivable # Issue Risk 6 Identification of population Netting of write off accounts Potential for inflated net credit population if related customers are not netted together Address information/no address information 7 Records available vs. researchable Potential for increased error rate and higher UCP exposure 8 Inconsistent treatment across entities Potential for mistreatment of population and remediation, possibly increasing UCP liability 9 De-Minimis accounts Automatic write off of small balances Potentially still owed as UCP 10 Burden of proof Typically burden is put on the customer to research if credit is owed. The audit process states that the burden or proof cannot be put on customer. Potentially results in customer saying a credit amount is owed, when it is not Page 22
Mitigation Strategies
Mitigation Strategies BDO offers a variety of services that can be utilized to help reduce exposure: Voluntary Disclosure Agreements (VDA) Agreement between the company and the state whereby the company comes forward with all unreported unclaimed property in exchange for the following: Reduced look back period Abatement of interest and penalties Removal of audit risk Control of workpapers Page 24
Mitigation Strategies BDO offers a variety of services that can be utilized to help reduce exposure: Feasibility Study Calculate the current exposure and potential for future exposure, as it relates to specified property type largely used for decision making. General Compliance Prospective filings for all property types; avoid interest and penalties, audit risk, etc. General Consulting Consulting on all unclaimed property related matters. Policies & Procedures Gift Card Management/Restructuring Page 25
UCP Industry Updates
UCP- Industry Updates DE VDA Program On February 19, DE sent approximately 200 letters to companies informing them to participate in its VDA program based on record of non-compliance or they may face being audited. These letters are in addition to letters sent in September that were followed by audit notices in December. Targeted companies: middle market companies with annual revenues of $100M and above. Potential audit concerns are alleviated when entering into DE VDA program Waives interest/penalties Waives right to audit VDA is 2 years vs. 3-7 year audit VDA void criteria is more favorable Page 27
UCP- Industry Updates DE VDA Program VDA Guidelines Comments Review of books/records Internal VS. Aggressive 3 rd party auditors Timeline 2 years 1-5 years less than audit Reachback 1996 3 years reduction of prior SOS VDA program, 5 year reduction of audit reachback Voids Included 90+ days 60 day difference of audit criteria Interest? No, waived Audit up to 25% interest Right to audit Waived With certain conditions Page 28
UCP- Industry Updates DE Audit Program On December 15, Delaware sent audit notices to companies that failed to participate in the VDA program after receiving a letter 2 months prior. VDA letters sent September 15. Unlike VDA s, UCP audits are performed by third party auditing firms that work for a contingency fee and may include interest, penalties, and increased look-back. Companies at highest risk incorporated in DE and/or significant operations in DE. Page 29
UCP- Industry Updates DE Audit Program Audit Guidelines Comments Review of books/records Timeline Aggressive third party contingency fee auditing firms 3-7 years Kelmar Associates, LLC, UPCH, Audit Services US, Verus Financial, LLC, Treasury Services Group LLC, Discovery, Hertz & Herson, Innovative Advocates Group, Inc. Reachback 1991 Voids included 30+ days Interest? 25% Uncertainty of application: automatic or case by case Page 30
UCP- Industry Updates PA Audit Notice The Pennsylvania Department of Treasury has been sending out self-audit review audit notices to many public and private companies within the state and outside the state seeking compliance with its unclaimed property laws. Failure to comply with notice requirements will likely result in full unclaimed property examination. Moreover, certain responses to the questionnaire may also elicit direct examination by the state. Targeted companies now include middle market companies that maintain annual revenues of $50M and above. Page 31
UCP Industry Updates - TX Domiciled Companies at High Risk for Unclaimed Property Audit by Texas Companies at RISK $75M and above in annual revenues Incorporated in TX or DE Domiciled in TX No or little filing history of escheat reports with TX and other states High incidence of M&A activity Received any notices from TX BART Division in last 6 months Under audit by another state Texas Voluntary Disclosure Agreements Accepted into program TX Audit Manual Brings companies into compliance Abatement of interest and penalties 6 month with possibility of extension Limited scope of review Page 32
UCP Industry Updates Texas Audit vs. VDA CATEGORY TX VDA Audit Penalty & Interest Audit Waiver Look-back Waived Audit waived unless misrepresentation or fraud 10 report years Up to max of 20% of assessment N/A 10 report years (statutorily Inc. date) Who Conducts Review Self review Third party audit firm Venue Texas Comptroller of Public Accounts Texas Comptroller of Public Accounts Timeline Less than 2 years ~ 3 to 6 years Page 33
UCP Litigation Temple-Inland, Inc. v. Cook Temple-Inland, Inc., a Delaware incorporated entity, was audited by Kelmar Associates on behalf of the State of Delaware beginning in 2008, and subsequently filed an administrative appeal regarding Kelmar s Report of Examination. Temple-Inland alleges that its substantive due process rights were violated due to the use of estimation. If Temple-Inland is successful, may have significant impact on Delaware s ability to estimate and/or the methods used to estimate a liability for years where records do not exist. Summary Judgments 3/17/16 State of Delaware ex rel. French v. Card Compliant LLC, et. al. Delaware Defendants are multiple retailers, incorporated in Delaware, that sell gift cards. Delaware Defendants did not keep any records of who purchased the gift cards. Without name and address information, the unredeemed gift card balances would be reportable to the Company s state of incorporation or formation. Card Compliant Defendants set up shell corporations incorporated in Ohio and Florida to hold the value of the unredeemed gift cards, because these states do not define unclaimed property to include unredeemed gift cards, and therefore this property was no longer reportable. Delaware claims that the various retailers outsourced their gift-card programs to a non-delaware third party in order to circumvent Delaware Escheats Law. If Delaware s claims succeed, this type of outsourcing arrangement will be subject to scrutiny/challenge. The decision could have ramifications for internal gift card arrangements. Page 34
UCP Litigation Plains All American Pipeline, L.P. v. Cook Delaware and Kelmar Associates notified Plains that it was the subject of an unclaimed property audit and sent initial requests for information. Plains objected to those requests on constitutional grounds, which Delaware rejected. Plaintiff alleges that Delaware s audit practices (1) constitute unreasonable searches and seizures under the 4th Amendment; (2) violate Plains due process rights under the 14th Amendment; (3) constitute the taking of private property for public use without just compensation; and (4) violate Plains right to equal protection. Plaintiff also challenges Delaware s right to estimate, similar to what Temple-Inland argues. In addition to challenging the estimation methodology employed by Delaware, the Plains complaint is worth watching insofar as it raises new challenges related to Delaware audit selection methods. Page 35
BDO Unclaimed Property Questionnaire
BDO Unclaimed Property Questionnaire Unclaimed Property Questionnaire 1)Does your company have revenues in excess of $50M Yes No 2)Has your company ever been subject to an unclaimed property audit or participated in a formal Voluntary Disclosure Program Yes No 3)Identify the state of incorporation/formation for the main entities with operations (bank accounts, general ledgers, accounts receivable, etc.) State of Inc. - Current State of Inc. - Prior 4)Does your company have a history of filing unclaimed property to any reporting jurisdiction Yes No Does your company have established policies and procedures related to unclaimed property (voided 5) checks, overpayments, escrow balances, unapplied cash, etc.) Yes No 6)Does your company have operations/locations in multiple states? Yes No E-mail completed questionnaire to Michael Kenehan at Mkenehan@bdo.com. Follow-up will be scheduled based on response date. Page 37
Questions?
Biographies
Biography Nick Boegel, JD, CPA, MBA. Nick Boegel comes to BDO with seventeen years of tax consulting experience. He has reviewed, researched and documented solutions for complex state and local tax issues in income and franchise, sales and use, payroll and employment, and property taxes and unclaimed property. He has expertise in identifying and serving multi-state client needs and performing creative tax and unclaimed property reviews to quantify potential savings via process improvements and prospective corporate restructuring projects. As the firm s Midwest Unclaimed Property Practice Leader, Nick has established professional relationships with many of the state unclaimed property administrators in handling client matters, successfully negotiated voluntary disclosure agreements on behalf of clients and provided audit representation services. In addition, Nick has significant escheat planning experience. nboegel@bdo.com Direct: 414-615-6773 Mobile: 262-391-8091 Prior to joining the firm, Nick worked with PriceWaterhouseCoopers, Arthur Andersen, Deloitte, and Reinhart Consulting providing state and local tax compliance, consulting and planning services for public and private companies. 330 E. Kilbourn Ave., Suite 750 Two Plaza East Milwaukee, WI 53202 Tel: 414-272-5900 www.bdo.com Page 40
Biography Michael Kenehan, CPA, MBA. Michael has more than 11 years of combined experience in abandoned and unclaimed property (AUP) and internal audit related matters. He possesses vast experience in handling large unclaimed property audit engagements for the nation s largest contract AUP firm in a variety of industries including healthcare, retail, manufacturing, oil and gas, entertainment, food and beverage, automobile, and hospitality. Mike leverages his extensive knowledge of the audit process, property types, and the rules and regulations associated with AUP to assist clients in mitigating exposure and proactively addressing its escheat issues. Mkenehan@bdo.com Direct: 215-636-5563 Mobile: 570-357-1648 1801 Market Street, 17 th Floor Philadelphia, Pa 19103 Michael is based out of the Philadelphia office and specializes in audit defense, escheat planning, general consulting, and voluntary disclosure agreements (VDA), etc. He has established professional relationships with many state unclaimed property administrators and offers clients with a unique perspective in dealing with all unclaimed property related matters. Prior to joining BDO, Michael worked with Kelmar Associates, LLC as a Senior Audit Manager in charge of unclaimed property audits contracted on behalf of various states. Michael also worked as a Team Leader in internal audit for ABC Supply Company. Tel: 215-564-1900 www.bdo.com Page 41
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