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Effective Management of Unclaimed Property: Exploring Dormancy Periods, Due Diligence, and Escheatment


Pujun Bhatnagar · September 29, 2023 · 6 min read

Effective Management of Unclaimed Property: Exploring Dormancy Periods, Due Diligence, and Escheatment

Mastering Unclaimed Property and Sales Tax Compliance in a Shifting Legal Landscape

In the complex world of financial management, unclaimed property often falls under the radar for companies primarily focused on profit maximization. This can lead to insufficient attention to crucial regulatory and customer protection obligations, including compliance with sales tax regulations and unclaimed property laws.

Tax professionals, often with limited training in this specialized area, find themselves responsible for managing unclaimed property. This task entails identifying assets eligible for escheatment while ensuring compliance with various state sales tax laws and regulations. As property holders, companies must undertake due diligence to return the property to its rightful owners before resorting to escheatment – the process of transferring unclaimed property to the state's custody.

The intricacies of this obligation may intensify as the United States Supreme Court prepares to hear a pivotal unclaimed property case in its 2022 Fall term – the first in 30 years. This event, coupled with ongoing fluctuations in both unclaimed property and sales tax laws, signals potential significant changes by year's end.

Neglecting these regulatory demands poses serious risks for businesses. Non-compliance can lead to severe penalties, including substantial fines and legal repercussions. This underscores the importance for tax professionals to grasp core concepts such as escheatment, sales tax compliance, and the nature of escheatable property.

Understanding the Basics: Escheatment and Sales Tax Compliance

Escheatment, a process originating from medieval times, involves reverting property to the state when an owner passes away without legal heirs. Today, it applies when a property holder cannot locate the rightful owner. Notably, the procedures following escheatment differ significantly from those of sales tax collection and remittance. Once remitted, the state becomes the custodian of unclaimed property, with an ongoing obligation to the original owner.

Before this transfer of custody, companies must fulfill due diligence, which varies based on state laws and the type of property involved. This is particularly relevant for businesses dealing with sales tax automation software, sales tax calculations, and compliance with local, state, and possibly international sales tax regulations.

Imagine a retail company that sells consumer electronics both online and in physical stores across several states. Over the years, the company accumulates a variety of unclaimed assets, including customer refunds that were never cashed and payroll checks that employees did not deposit. According to escheatment laws, after a certain dormancy period, these unclaimed funds must be reported and handed over to the state's treasury department, which then holds these assets with the obligation to return them to the rightful owners upon claim.

Tracing the Path to 'Unclaimed'

Unclaimed property encompasses a range of assets, from dormant bank accounts and investment holdings to uncashed paychecks and overpayments in various sectors. Businesses must navigate the complexities of sales tax exemptions, online sales tax, and sales tax filing requirements alongside managing these unclaimed assets.

Consider an online bookstore that frequently encounters small credit balances due to customer overpayments or adjustments. Over time, these balances accumulate, and without proper management, they turn into unclaimed property. The bookstore must track these transactions, attempt to return the funds to the customers, and if unsuccessful due to inability to contact the rightful owners, prepare to escheat these funds to the state after the dormancy period expires.

Setting Dormancy Periods

Each unclaimed property has a designated dormancy period after which it becomes escheatable. This period varies, reflecting the diversity in types of assets – from payroll checks to long-inactive savings accounts. Businesses must stay informed about dormancy period changes, a challenge highlighted in recent reports, including a comprehensive December 2020 Sovos analysis. This is crucial for maintaining sales tax compliance and effectively managing sales tax liabilities.

A multinational corporation with diversified business operations holds various unclaimed properties, including uncashed dividend checks, unused customer loyalty rewards, and forgotten vendor credits. Each type of asset has a specific dormancy period; for example, dividend checks might have a three-year dormancy period, while loyalty rewards could have five years. The corporation must meticulously track these periods for each asset type and jurisdiction to ensure compliance with escheatment laws and avoid penalties. This complexity is compounded when the corporation must also navigate varying sales tax regulations across different states and countries.

Navigating Due Diligence

After determining the dormancy period, companies must conduct thorough due diligence, a vital step in both unclaimed property and sales tax compliance processes. This involves attempts to contact the property's owner before reporting and remitting to the state, paralleling the meticulousness required in sales tax reporting and remittance.

Legal Challenges and Jurisdiction in Unclaimed Property and Sales Tax

For nearly six decades, companies have navigated unclaimed property and sales tax compliance using established legal frameworks. However, recent legal disputes and upcoming Supreme Court cases, particularly involving states like Delaware, spotlight the evolving landscape of unclaimed property management and its intersections with sales tax regulations.

These developments emphasize the growing complexity and significance of compliance in areas such as e-commerce sales tax, multi-state sales tax, and international sales tax considerations. They underscore the need for robust sales tax management solutions, including automated sales tax calculation tools, comprehensive sales tax consulting, and in-depth understanding of sales tax nexus rules.

In conclusion, the impending court decisions and ongoing legal battles highlight the dynamic nature of unclaimed property management and its integral connection with sales tax compliance. Businesses must stay abreast of these changes to navigate the challenges of sales tax collection, sales tax audit preparedness, and the intricate intricacies of escheatment. Effective sales tax automation and management, alongside proactive unclaimed property handling, are key to ensuring regulatory compliance and safeguarding against potential financial and reputational risks.

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