Unclaimed property historic litigation and legislation May 8, 2017

Unclaimed property: historic litigation and legislation and their impact on annual complianceMay 3, 2017

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Page 2 Unclaimed property: historic litigation and legislation

Aurianne LopatkaErnst & Young LLP Indirect Tax Boston, MA

Today’s moderator


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Today’s presenters

Bob BazataErnst & Young LLP

Indirect TaxNew York, NY

Dave BourgoinErnst & Young LLP

Indirect Tax Dallas, TX

Jim KutzErnst & Young LLP

Indirect Tax Houston, TX

Sarah ToiErnst & Young LLP

Indirect TaxStamford, CT


Today’s agenda

► Background

► Landscape updates

► Compliance process

► Hot topics – organizational challenges

Polling question


How does your organization perform unclaimedproperty annual compliance reporting?

A. Track records using spreadsheets and generate reports manually

B. Utilize a third-party software to track records and generate reports

C. Outsource the reporting function

D. Not currently reporting

E. Does not apply (EY, faculty, other)

Today’s agenda

► Background► Fundamentals► Unclaimed property (UP)

reporting requirements




What is unclaimed property?


► Tangible or intangible property that is unclaimed by its rightful owner after a significant period of time (called the dormancy period).

► UP is not a tax; often referred to as a “hidden liability” and is remitted dollar for dollar (generally) to the reporting jurisdictions with no nexus type considerations.

► UP laws serve to protect property rights of owners in perpetuity, provide economic benefit to “all” citizens, reunite owners with property, empower states to act as custodian.

► Currently, 54 US jurisdictions have UP laws, which can vary significantly from one jurisdiction to another with respect to reporting due dates, pre-filing due diligence requirements and dormancy periods.

► No organization is exempt from reporting — it applies to all organizations, regardless of industry, even including nonprofits.

► The property to be reported varies, ranging from payroll and accounts payable checks to the most complicated transactions within a client’s business model, like customer billing discrepancies, accounts receivable credits and equity.

Where and why should you report


► Due to the established sourcing rules and the requirement of some states for negative reporting, organizations typically face a 50-state reporting obligation, regardless of physical presence. As a result of the varying sourcing rules, there can be additional implications related to the organization’s state of incorporation or formation.► Where to report the property is based upon priority rules, as established by

the Supreme Court’s decision in Texas v. New Jersey 379 U.S. 674 (1965):► First Priority Rule: state of owner’s last known address, as shown on holder’s

books and records► Second Priority Rule: state of holder’s incorporation/formation, if the holder

does not have an owner’s last-known address, or if the last known address is a foreign address (generally)

► States are enforcing compliance through increased audit activity, often led bythird-party auditors working on a contingent fee basis, with look-back periodsup to 15 years.

► Failure to report UP liabilities could result in additional interest and penalties, with little relief in limiting the look-back.

What are the statutory responsibilities of a holder of unclaimed property?


► If the rightful owner cannot be located, the “holder” of the property has an obligation, after the statutorily defined dormancy period, to:► Perform statutory due diligence mailings (owner contact)

► File reports annually, in the fall and spring, with alljurisdictions where property is due and owing, as well as in states that require “negative” reports

► Holders must remit payment to the jurisdictions for all property being reported

► Must maintain books and records and copies of supportingdocumentation and reports for future audit inquiries

Common unclaimed property types(Varies by industry and business model)


► Unused deposits► Dormant bank accounts► Insurance proceeds► Matured certificates of

deposit► Consumer or customer

rebates► Securities related property:

stocks, mutual funds► Benefit-related property

► Uncashed checks:payroll, vendor, refund, interest, dividends,royalties

► Accounts receivablecredit balances

► Unredeemed gift cards► Merchandise credits► Customer overpayments► Unapplied cash or

unidentified remittances

Today’s agenda

► Background

► Landscape updates► Significant litigation► Legislation


► Hot topics – organizationalchallenges

Current environment – significant litigation


Temple-Inland, Inc.: Delaware’s actions “shock the conscience”► Background

► Delaware corporation principally located in Texas and Indiana► 2008 audit initiated by Delaware through third-party contract audit firm► 22-year look back period (1986)► Records produced back to 2003/2004 in addition to prior reports filed back to 1998► Assessed a $2.1m exposure for estimation due Delaware based on an estimation

methodology that relied heavily on property escheatable only to other states► Findings

► June 28, 2016, the US District Court for the District of Delaware (the Court) foundDelaware’s executive action of auditing and assessing a multistate corporation’sunclaimed property violated substantive due process

► Court held that the state’s use of the existence of unclaimed property in the baseyears to infer the existence of unclaimed property in the reach-back years, without replicating the characteristics and qualities of the property within the sample, creates significantly misleading results

► On August 5, 2016, Delaware and Temple-Inland, Inc. reached a settlement agreement

Current environment – significant litigation(continued)


Temple-Inland, Inc.► Delaware-centric ruling – what does that mean for my

organization?► Resulting legislation► Impact on other states► General awareness and appetite for change with the introduction

of revised model act

► Other litigation► MoneyGram – United States Supreme Court examining priority

rules► Office Depot / Marathon Oil – third-party audit firms attempting to

review documentation around gift card entities

Legislation – RUUPA


Revised Uniform Unclaimed Property Act (RUUPA) –Uniform Law Commission► 1954, 1981, 1995 and now 2016 (finalized in November)► 16 states adopted 1995 Act and approximately 40 states

have adopted some version in whole or part► States introducing/enacting 2016 Act

► Enacted: Delaware (SB 13), Utah (SB 175)► Introducing: Illinois, Minnesota, Nebraska, Tennessee

► American Bar Association version currently being drafted to address more holder-focused issues

RUUPA(continued)


Clarifies property subject to the Act► Express exemptions for game-related digital content, loyalty cards, 529A

plans► Optional exemptions for gift cards and merchandise credits► No business-to-business broadly proposed (i.e. IL SB 2603)

Guidance on when property is presumed abandoned► Impact financial services sector and dormancy “triggers”

When can states escheat► Jurisdiction – what is addressable property?► Foreign property treatment (state of incorporation/second priority when the

foreign country does not specifically exempt the property)

RUUPA(continued)


Annual reporting► 10-year record retention for information required to be included in the report

and circumstances giving rise to the property right► Aggregate reporting suggested at $50 (optional)► Notice to owners (due diligence) 60-180 days before escheatment by First

Class U.S. Mail

Statute of limitations► (1) Five years after the holder filed a non-fraudulent report or (2) 10 years

after the holder was required to file a report (if no report filed or a fraudulent report was filed)

Audits► Contingent fee auditors permitted with restriction on fee and state must

promulgate rules for method of exam including a reasonable method ofestimation allowed

Legislation – Delaware’s SB 13 and regulations


As a result of the Temple-Inland decision…. SB 13 signed into law February 2, 2017

Main considerations from the legislation:► Establish a 10-year record retention requirement and statute of limitations,

coupled with a 10-year plus dormancy look-back period, while under examination or voluntary disclosure agreement (VDA) program

► Allow holders currently undergoing an audit to convert an older examination(prior to July 22, 2015) to a VDA

► Establish a due diligence mailing requirement for general ledger type property, making Delaware the last state to enact such a provision

► Revise the definition of “last-known address” to only require that the state be identified in a holder’s books and records

► Mandate the assessment of interest and provide Delaware the right to waive interest only by 50%

► Delay resolution of Delaware’s unclaimed property estimation and sampling techniques (until July 1, 2017), which the court found lacking in Temple-Inland

Proposed regulations


► As a result, proposed regulations were promulgated on April 1, 2017 withcommentary open until today (May 3, 2017).

► Regulations do not alter the long-standing administrative procedures utilized in the estimation calculation.

► Proposes that Delaware continue to include several factors in the calculation such as property due to any of the 54 other US jurisdictions, even if that jurisdiction chooses to exempt the property from its UP laws.

► For now, avoidance of a notion similar to apportionment within UP for those periods where the second priority rule applies, and an open door for future litigation.

► Additional guidelines are provided in detail in the regulations, with the intent of providing a clear and consistent understanding of the state’s administration of UP program.

► Time sensitive considerations (60 days after these regulations are finalized)► Decide whether to convert an audit existing before July 22, 2015, into a VDA or► Agree to an expedited audit process for those audits in process as of February 2, 2017

► Anticipate an increase in audit activity, VDA invitations, and settlements

Polling question


Has your organization experienced any audit activity?A. Previously went through an unclaimed property audit

B. Currently under an unclaimed property audit

C. Recently received an unclaimed property audit notice

D. Never been audited

E. Does not apply (EY, faculty, other)

Today’s agenda

► Background


► Compliance process► Current accounting procedures► Data collection and analysis► Exemption and deduction analysis► Due diligence letter mailings and

processing► Report preparation and filings► General ledger account

reconciliation


Annual compliance process

Accounting procedures

Data collection

Exemption and

deduction analysis

Due diligence

mailings andprocessing

Report preparation and filings

Reconciliation to general

ledger


Accounting procedures and data collection


Accounting procedures► Importance of accounting policies at the business unit or functional level – what is

performed in the pre-dormancy phase?► Accounting policies and research timeline can significantly impact

reportable property (and asset retention for financial services organizations)► Documenting and governing what the business unit ownership is responsible

for prior to property reaching the escheatment process► Assess inclusion of all property types and legal entities or business unitsData collection► Streamline an effective data gathering process from the various business units,

enterprise resource planning (ERP) systems and functional areas within the organization through assessing use of an escheat holding account and an unclaimed property administrator

► Cross-validate with prior year’s data collection► Confirm records received is the entire population to process► Can you standardize the data received from the individual business units in order

to reduce manual manipulation and errors?

Exemptions, deductions and deferralsAre you over-reporting?


► You could be over-reporting your unclaimed property liability if you arenot taking advantage of statutory exemptions and deductions.

► Common exemptions and deductions include:► Business-to-business (B2B), payroll, de minimis and gift

cards/merchandise credits► 36 states effectively exempt gift certificates/gift cards in part or in full.► 4 states have de minimis exemptions – (AZ $50, FL $10, ID $50,

MI $25).► 3 states have wage/payroll exemptions – properties less than $50

(KY, MI, OH).► 16 states have some form of business-to-business exemption, which

can vary from a near complete exemption from reporting any property held in the ordinary course of business, to deferral of reporting until the ongoing business relationship ceases to exist.

Due diligence


ConsiderationsStatutory requirement► Prior to reporting unclaimed property to the states, all jurisdictions now require

companies to reach out to owners of the property via a due diligence letter as an effort to reunite the owner with their property.► Varying dormancy periods: most property types 1, 3 or 5 years► Varying due diligence letter threshold requirements

► CT – all property regardless of amount► Most greater than $50

► Varying timeframe windows for mailing out due diligence letters► No fewer than 60 days, but no more than 120 before the report is due► No fewer than 90 days prior to the report due date

► State specific language requirements on the actual due diligence letter (CA, NC)Other considerations► Complete address for due diligence purposes?► What are the mailing requirements? Typically first-class mail with some states requiring

certified mail for amounts over a certain dollar threshold like Ohio and New York► How do you intend to track responses? Will owners be able to call or email with

questions?

Due diligenceLeading practices


► Designate key contacts to lead research efforts within each applicable business unit (accounts payable, payroll, accounts receivable, etc.)

► Identify, research and resolve large dollar items prior to compliance requirements

► Track evidence of customer contact across the organization to avoid escheating active customer funds such as a dormant bank account (online account logins, ATM logins, email correspondence, etc.)

► Send correspondence to payees in advance of state mandated duediligence letters (phone, email, search letters)

► Third-party resources to assist locating owners

► Tracking and processing of responses: hotline, post escheatment notifications, customer relations

Reporting considerations


What are my options and decision points?► Two compliance seasons annually – fall and spring

► 43 jurisdictions plus California preliminary – fall reports due October 31 and November 1► 10 jurisdictions plus California final – spring report due dates vary from March to the end

of June► Filing in every state vs. one or few, and impact of negative reporting► File reports online via state websites, third-party software or manually via paper forms

and CDs► Growing number of states require online filing via their website, such as IN, NY, OK, TN,

TX► Are you filing separate reports for every legal entity or filing consolidated?

► Consolidated is widely accepted; NV is the exception to the rule► Reciprocity agreements► Should your organization file records in the aggregate?► Holder type – Are you considered a corporation for holder reporting purposes?► Have you identified the person/persons who will represent your organization as the

report contact, claim contact and signor of the reports?► Signor – requirement varies by state – Officer or agent► Some reports are also required to be notarized

General ledger reconciliation


► Audit trail!!!► Forecasting – future due, exemptions, due diligence► Timing – at what point do transactions move to the

escheat holding account vs. when can they be removed and what is the corresponding level of documentation required?

► Maintenance of all business unit or legal entity data regardless of filing method

► Record retention

Where are you in the compliance lifecycle?Considerations


► Have never filed► What types of unclaimed property exist in your organization?► What is your organization’s history? Mergers, acquisitions?► What is your state of incorporation?► Assess your potential unclaimed property exposure prior to filing and

develop a plan for remediation

► Partially in compliance► Assessment of your current policy and procedures► Consider possible voluntary disclosure agreements where applicable and

enhance processes

► Fully compliant► How are you keeping up with legislative changes? Dormancy changes?

Due Diligence letter requirements?► Further automation of the process

Polling question


What is your current filing methodology?

A. Filing consolidated under a single holder to a single state

B. Filing under multiple holders to a single state

C. Filing consolidated under a single holder to multiple states

D. Filing under multiple holders to multiple states

E. Currently not filing

F. Does not apply (EY, faculty, other)

Today’s agenda

► Background



► Hot topics – organizational challenges► Database reviews► Recovering property without being

in compliance► Third-party contracts /

administrators► Decentralized operations► Acquisitions► Sector specific

Hot topics – organizational challenges


Commonly observed

Database reviews► Duplicate records in the database or escheated more than once► Missing possible exemptions or deductionsAsset recovery► Consider a broad recovery strategy to examine potential escheated funds that belong

to your organization available at various sources► Recovering property without being in complianceThird-party contracts / administrators► Who is contractually responsible for unclaimed property reporting – consideration of

where the requisite data is maintained, what is occurring in practice, etc.Decentralized operations► Establishing and adhering to sound UP policies and procedures across the organization► Company-wide systems upgrades and conversions should always be evaluated with

UP point of view to avoid loss of data and potential red flag areasAcquisitions► Inheritance of predecessor UP liability or difficulty integrating new operations into

centralized/consistent filing process

Hot topics – sector specific


Financial services (insurance, banking, asset management)► Policy and procedure reviews, including business unit ownership and centralized

governance► Asset retention strategies► Maintaining the compliance function in-house or considering the cost benefits of

outsource; in-depth analysis around business process outsourcing

Health (payor, provider, non-profit)► Response to third-party audit initiative focused on health insurers and providers with

insurance operations► Process review and related exposure analysis/quantification

Retail / consumer products► Response to gift card-specific litigation through examination of gift card programs

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One-minute recap


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