Many companies doing business in Pennsylvania are incorporated in Delaware.1 This is important when reporting unclaimed property. If property cannot be refunded directly to the owner, a holder must first remit it to the state of the last known address of the owner. If the owner’s address is unknown (or is in a jurisdiction without an applicable unclaimed property law), the property is sourced to the holder’s state of domicile.2 This can lead to significant liabilities for companies that have not accounted for past unclaimed property and no longer have complete accounting records.
On Feb. 2, 2017, Delaware made fundamental changes to its unclaimed property law. In recent years, Pennsylvania has also made numerous changes. For companies doing business in Pennsylvania but incorporated in Delaware, it is important to compare these changes.
Recent Delaware Changes
There are many changes to the Delaware law, so this column focuses on the more notable provisions.
Conversion of certain audits into VDAs or expedited examinations – If Delaware began an audit of a holder on or before July 22, 2015 (other than securities examinations in which estimation is not required), the holder can convert the audit into a review under the secretary of state’s voluntary disclosure agreement (VDA) program. A holder must give written notification of its intent to enter into the VDA within 60 days of the adoption of regulations to be promulgated by July 1, 2017. The look-back period for a “converted” VDA is 10 years prior to when the property is presumed abandoned from the calendar year in which the original notice of examination was provided. The legislation retains the existing law that the state may not initiate any new audit unless the holder has first been notified in writing that the holder may enter into an unclaimed property VDA.3
Alternatively, any holder under audit prior to Feb. 2, 2017, may notify the state of its intent to expedite the audit. If holders who elect into an expedited examination respond to all state requests (within the time and manner established by the state), the state must complete the audit within two years from the date of the written notification. If holders comply with the expedited examination, the state will waive penalties and interest.4
Verified report and compliance review – If a holder has not filed a required report, or if the state believes that a holder has filed an inaccurate, incomplete, or false report, the state may require the holder to file a verified report. In addition, if the state believes that a holder has filed an inaccurate, incomplete, or false report, the state may initiate a compliance review of the report. If a compliance review identifies a deficiency, the state must notify the holder within one year from the date that the compliance review was authorized. If the holder fails to pay the amount due within 90 days of notification, the state may audit the holder or provide an opportunity to enter the VDA program.5
Ten-year statute of limitations – Under the new law, the state may not commence action with respect to reporting, payment, or delivery more than 10 years after the duty to report arose.6
Indication of owner interest to restart dormancy period – The new law provides that property is not abandoned if the owner “indicates an interest in the property” before the dormancy period ends. Among other things, an owner can indicate an interest through a record communicated to the holder, an oral communication to the holder, cashing a check, or accessing an account.7
Estimation of liability tied to document retention requirement – One of the deficiencies found by the U.S. District Court in Temple-Inland v. Cook was that in Delaware’s audit procedures the state estimated a liability for years when the holder did not have accounting records, yet did not require a holder to maintain records.8 The new law requires holders who must file an annual unclaimed property report to retain records for 10 years after the date the report was filed. The state must also retain the holder’s annual unclaimed property report for at least 10 years after the report is filed.9
If a holder under audit does not retain records, the state may use reasonable estimation, including extrapolation and the use of statistical sampling, to determine the amount of property due. Regulations that must be promulgated by July 1, 2017, will detail the rules regarding estimation.10
Recent Pennsylvania Changes
In 2016, Pennsylvania became the second-to-last state (Delaware was the last) to require a holder to provide notice to the owner, which gives the owner a final opportunity to claim the property.11
In 2014, Pennsylvania reduced its dormancy period for numerous property types (including payables and receivables) from five to three years.12
Pennsylvania’s 2014 legislation also expanded enforcement provisions. Unlike Delaware, Pennsylvania is allowed to assess the cost of the examination against the holder at a rate of $200 a day for each examiner, or a greater amount that is reasonable and was incurred, not to exceed the value of the property.13
Pennsylvania also defined when an owner has “indicated an interest in property.” Similar to Delaware, Pennsylvania allows a holder to restart dormancy if, among other things, there is written or verbal contact by the owner, so long as the holder creates a contemporaneous record.14
Pennsylvania’s 2014 law also expressly allows the state to estimate an unclaimed property liability if the owner fails to maintain “adequate records.”15 Interestingly, while the state provides for a 15-year statute of limitations period,16 Pennsylvania’s law does not specify the number of years that a holder must maintain “adequate records” to avoid estimation. Administratively, however, the Pennsylvania Treasurer “recommends that holders retain their records for at least 10 years after submitting their report.”17
Comparing the laws of Delaware and Pennsylvania highlights some important considerations for companies considering their unclaimed property exposure in both states. Noncompliant companies face strong enforcement provisions from both states (and scrutiny from financial statement auditors reviewing the ASC 450 disclosure). Companies can avoid the states’ enforcement procedures by reporting under VDAs. However, the states’ different dormancy periods can create planning issues. A company that completes a Delaware VDA will report property that is five years dormant. However, because Pennsylvania has a dormancy period of three years for payables and receivables and two years for wages, the company will need to review two to three more years of records to complete a Pennsylvania VDA. Both states will reset dormancy even with verbal contact, but companies must diligently create contemporaneous documentation of owner contact. Importantly, companies must compare their document retention policies (which is often seven years) with Delaware’s and Pennsylvania’s 10-year document retention requirement for unclaimed property.
1 More than half of public companies are incorporated in Delaware. Alana Semuels, “The Tiny State Whose Laws Affect Workers Everywhere,” The Atlantic, Oct. 3, 2016.
2 Texas v. New Jersey, 379 U.S. 674 (1965); Delaware v. New York, 507 U.S. 490 (1993). While “domicile” for a corporation is the state of incorporation, the state of domicile for an unincorporated entity can vary by state.
3 Del. Code Ann. tit. 12, Section 1172 (a) and (b); and Del. Code Ann. tit. 12, Section 1176(b).
4 Del. Code Ann. tit. 12, Section 1172(c)(1) and (c)(2).
5 Del. Code Ann. tit. 12, Section 1170(a) and (b). A verified report must state whether the person is holding reportable property; describe property not previously reported or about which the state has inquired or about which there is a dispute as to whether it is reportable; and state the value of the property. The voluntary disclosure program is available under Del. Code Ann. tit. 12, Section 1173.
6 Del. Code Ann. tit. 12, Section 1156(b). Under previous law, the state was required to audit a holder’s report within three years from the date the report was filed, or within six years in case of an omission of more than 25 percent of the property disclosed. Former Del. Code Ann. tit. 12, Section 1158(a).
7 Del. Code Ann. tit. 12, Section 1136(a) and (b).
8 Temple-Inland Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016).
9 Del. Code Ann. tit. 12, Section 1145. The statute of limitations may be reduced by the state escheator by rule or regulation. And Del. Code Ann. tit. 12, Section 1164.
10 Del. Code Ann. tit. 12, Section 1176(a) and (b).
11 Act of July 13, 2016 (Act 85), amending 72 P.S. 1301.10a.
12 Pennsylvania reduced the dormancy period for wages from three years to two years in 2003. Act of Dec. 23, 2003 (Act 2003-45), amending 72 P.S. 1301.10.2.
13 Act of July 10, 2014 (Act 126), amending 72 P.S. 1301.23(e).
14 Act of July 10, 2014 (Act 126), amending 72 P.S. 1301.1.
15 Act of July 10, 2014 (Act 126), amending 72 P.S. 1301.23(f). Pennsylvania’s power to estimate a liability, however, should be restricted to Pennsylvania-domiciled companies. See Texas v. New Jersey, 379 U.S. 674 (1965).
16 72 P.S. 1301.16.1.
17 Pennsylvania Treasury Unclaimed Property Frequently Asked Questions, www.patreasury.gov/bup/faqs.
David M. Glad, CPA, JD, is a director of state and local taxes at Grant Thornton LLP and is leader of the firm’s unclaimed property practice. He can be reached at email@example.com.