One Man's Loss is Not Your Gain: How Unclaimed Property Laws Impact Your Business
Automotive Dealership Law / Corporate & Business Law / Practice on December 15, 2011
Whether it is a mom-and-pop shop or a Fortune 500 company, your business almost certainly possesses some form of unclaimed property. Uncashed payroll checks or vendor payments, unreturned security deposits, unapplied customer credits, unpaid dividends and distributions, or any of the other myriad forms of unclaimed property are subject to state escheatment laws. If such property is not claimed by its owner within the relevant dormancy period, the business in possession of that property will be considered a “Holder” of unclaimed property and must comply with various reporting, due diligence and property remittance requirements. A Holder’s failure to timely report and remit all of its unclaimed property can result in the imposition of penalties, interest and fees and the Florida Department of Financial Services is authorized to conduct audits to ensure that businesses comply with the law. Moreover, because there is no statute of limitations related to unclaimed property, failing to comply can result in a significant accumulation of liability.
The Florida Disposition of Unclaimed Property Act and rules promulgated by the Florida Department of Financial Services govern how businesses must report and account for unclaimed property in Florida. Significantly, however, it is not the business’ location that is determinative of which state’s escheatment laws apply. Rather, it is the laws of the state where the unclaimed property’s owner was last known to reside that apply. Therefore it is the laws of the unclaimed property owner’s home state that determine the dormancy period for each type of property, what actions the Holder must take to find the unclaimed property owner, and where and when the property must ultimately be remitted if the unclaimed property owner cannot be located.
The State of Florida has reciprocity agreements in place with several (but not all) states. These reciprocity agreements allow Holders of unclaimed property belonging to owners residing in other states to report and remit that property directly to the State of Florida. While Florida’s reciprocity agreements may be convenient for reporting and remitting such property, it can also become a trap for the unwary.
First, while reports of Florida property owners’ unclaimed property must be filed before May 1st of each year, property subject to another state’s laws must be reported by that state’s reporting deadline – which in many cases is November 1st. A Holder’s failure to meet a reciprocating state’s reporting deadline (even if it meets the Florida reporting deadline) may subject the Holder to late fees or penalties in the reciprocating state. Likewise, the dormancy periods in other states may be shorter or longer than those in Florida. As such, property subject to a reciprocating state’s escheatment laws must be reported only after the property has become dormant in that particular state. Additionally, while Florida only imposes certain minimal due diligence requirements for property valued at $50 or more, other states may have more demanding requirements related to what actions a Holder must undertake to locate the owners of unclaimed property.
Notably, unclaimed property compliance is not only important with respect to operating a business as a going concern. In a mergers and acquisitions context, it is imperative that an acquiring entity review the target’s unclaimed property policy and perform sufficient due diligence with respect to the target’s history of compliance. An entity acquiring an interest in a target by way of a stock purchase or a merger (or in many instances even in the context of an asset purchase) may inadvertently acquire the target’s liability related to its previous failure to comply with unclaimed property laws.
Many Florida motor vehicle dealers maintain tag refunds, customer credits, and similar accounts in their “We Owe” account. Most, if not all, of the accounts and property held in a dealers’ We Owe account, along with many credit balances in their receivables, are considered to be unclaimed property and subject to state escheatment laws. It is important for Florida motor vehicle dealers to develop strong unclaimed property policies to ensure compliance with state escheatment laws so as to protect the dealership from the penalties, interest and other fees related to state compliance audits.
Complying with state unclaimed property law is vital to the health of your business. With respect to unclaimed property that a business has already failed to timely report, many states have developed amnesty programs that allow businesses to voluntarily become compliant while eliminating or reducing penalties and fees. Florida has two such programs – the Voluntary Compliance Self-Audit Program and the Voluntary Disclosure Program. Under both programs, penalties and interest assessable to the noncompliant business are waived by the state. Because there are several procedural and substantive differences between the two programs, determining which program is best suited for a particular business depends largely upon the facts of a specific situation. On a going forward basis, developing a strong unclaimed property policy is critical. Among other things, such a policy will establish how often receivables are reviewed for potential unclaimed property, it will provide a method of determining when an account item is properly classified as unclaimed property, and it will establish a procedure for notifying the owner of such property of its existence. Because there is no limit to how far back an audit can reach to determine your business’ liability for failing to properly report unclaimed property, taking the steps now to ensure compliance may save your business from a more significant liability later.
Michael Semanie is an associate with the firm and concentrates his practice in commercial litigation and corporate law matters.