0607_CalProd_Beautiful (MUST USE)

May 2008

multipage

target companies. Typically receiving 10 percent to 15 percent of the amounts they collect, these bounty hunters frequently conduct audits on behalf of several states at the same time. The bill to direct marketers can be enormous, especially when interest and penalties are piled on.

How to Comply

Compliance with escheat laws isn’t easy. State laws vary considerably regarding the types of property that must be reported and the time period before retailers must turn unclaimed property over to state treasuries. The period of time that must pass before property is considered abandoned (the so-called “dormancy period”) ranges from one year to 10 years, depending on the state and type of property.

Pay attention to how state laws deal with issues such as gift card expiration dates. Many marketers mistakenly believe they can retain the unredeemed value of gift cards, sometimes referred to as “slippage” or “breakage.”

While some states exempt gift cards from their unclaimed property laws, these exemptions often aren’t available if expiration dates or service charges are imposed by merchants. Careful planning is required to minimize your exposure to unclaimed property liability with these programs.

Compliance is further complicated because it’s sometimes difficult to determine which state is entitled to the unclaimed property. It’s not uncommon for states to compete with each other for these unclaimed funds.

The U.S. Supreme Court tried to referee the battle among competing — did someone say greedy? — states more than 40 years ago, establishing the basic principles controlling which jurisdiction has priority over unclaimed property. In the case of Texas v. New Jersey, the Supreme Court declared that first priority goes to the state of the rightful owner’s (e.g., customer’s) last known address as evidenced by the holder’s business records.

If a merchant issued a rebate check to a customer in California, for example, the value of the uncashed check would need to be reported to California.

If the rightful owner’s address is unknown, however, then the property belongs to the state where the company holding the property is incorporated. This may be Delaware, a state in which many companies choose to incorporate due to its liberal corporation laws.

How to Escape

If your company’s not in compliance with escheat laws, most states have voluntary disclosure programs allowing merchants that haven’t made abandoned property reports to fully disclose amounts owed with a waiver of interest and penalties. These can be very substantial.

Voluntary disclosure agreements, however, are only available to companies that haven’t been audited or received a notice of audit. So if your business has unreported abandoned property, you’re at risk of being targeted for a state unclaimed property audit, and you should get advice from a professional who can help quantify the risk. If the situation warrants action, that professional can help you negotiate voluntary disclosure agreements before states start sending you audit notices. «



George S. Isaacson is senior partner with Brann & Isaacson. He represents multichannel merchants on tax matters and is tax counsel to the Direct Marketing Association (DMA). Reach him at gisaacson@brannlaw.com.