0607_CalProd_Beautiful (MUST USE)

May 2008

multipage

Escheat.” The very word sounds sinister, and for good reason — direct marketers beware! But how do state escheat laws, which are often known as “abandoned property laws,” work? And what risk do they pose to multichannel merchants?

Defining ‘Unclaimed Property’

Unclaimed property is a liability that a company owes to an individual or other business that has remained outstanding beyond a specified period of time. Every year, billions of dollars of economic entitlements go unclaimed, including obligations of retailers to their customers and suppliers. Depending on the particular state, these include:

● unredeemed gift certificates and gift cards;

● uncashed refund and rebate checks;

● uncashed checks payable to vendors or employees;

● stored value cards with remaining balances; and

● buyer rewards programs.



With gift card sales becoming increasingly attractive to both multichannel merchants and consumers, the economic implications of escheat laws are growing. Moreover, with heightened financial scrutiny resulting from the Sarbanes-Oxley Act, many accounting firms now require their clients to account for unclaimed property liability on financial statements.

The theory behind state escheat laws is this: Companies that owe money to their customers or suppliers
don’t have the right to continue holding such funds, even if those sums go unclaimed by the parties that have a rightful claim to them. State governments maintain that they have two specific interests in such unclaimed property.

First, state abandoned property offices argue that they’re in the best position to reunite unclaimed property with its rightful owner; we’re all familiar with the long lists periodically published in newspapers identifying people whose names are associated with property being held by the state treasurer or similar government official.

Second, government officials argue that if property belonging to members of the public remains unclaimed, the state is an appropriate proxy for the individual. Therefore, the state should be the beneficiary of any property rights that have been abandoned by its citizens.

Why States Care

In reality, state governments view unclaimed property as a major source of new revenue, enabling states to raise revenue without raising taxes. Consequently, what was once a seldom-enforced area of the law has spawned aggressive audits of catalog companies and electronic merchants.

And as the nation’s economy slides into recession and state coffers run dry, strict enforcement of escheat laws will be an increasingly attractive way for states to deal with their burgeoning budget deficits.

Moreover, to haul in as much money as possible, states hire private audit firms on a commission basis to identify and audit