Boot Camp All You Need to Know About Unclaimed Property.

• Author: Bucholtz, Cathleen
• Position: Californiabusiness

many people have heard about unclaimed properly, but there's often confusion on what it is and how the rules work. What follows are some questions most people ask about unclaimed property and how it may impact their company--including" the risks of non-compliance, assessing a company's unclaimed property exposure, and things to consider before reporting past-due property to a state and the best way to do so.

California also may be reflecting on its unclaimed property program. The Legislative Analyst's Office (LAO), a nonpartisan government agency providing fiscal and policy advice to the California Legislature, released a report in March on the state of unclaimed property in California. Among the report's findings:

* An estimated 2 percent of roughly 900.000 California businesses comply with the state's unclaimed property laws;

* The California Controller's Office estimates that billions of unclaimed property has not been reported;

* There is a need to increase compliance among companies holding unclaimed property; and

* Suggested unclaimed property questions be added to businesses' tax forms and provide a one-time amnesty program to waive interest for unclaimed property holders that voluntarily report past-due unclaimed properly.

While these ideas may increase holder awareness and temporarily increase compliance rates, respectively, there is a third option for the slate to consider: A California unclaimed property voluntary disclosure program (VDA).

Why Worry About Unclaimed Property?

Every company generates unclaimed property, which is generally defined as any intangible property owed by a company to an unrelated party that's unclaimed for a specific period of time by the rightful owner. Once a business has held the property for a statutorily mandated period (the dormancy period) without receiving communication from the owner, it becomes subject to escheat, and the holder has a responsibility to report the property to the appropriate state.

Which State Has the Right to Claim Unclaimed Property?

Over time, the U.S. Supreme Court has established a set of priority rules to determine the state to which a business is required to report unclaimed properly in its possession.

The first-priority rule provides that unclaimed property escheats to the state ol the apparent owner's last known address as shown on the holder's records. The second-priority rule provides that if the apparent owner's address is unknown, unclaimed property escheats to the holder's state of incorporation (or state of legal domicile).

Is Unclaimed Property a Tax?

Despite some similarities, including annual reporting requirements and potential slate audits, unclaimed property is not a tax. The state is not collecting revenue driven by a percentage of an underlying transaction. Instead, the state is acting as a custodian, requiring that the holder remit property in its possession for the safekeeping of the rightful owner. Therefore, tax concepts such as nexus, most statutes of limitation and tax-based...