If your response to the title of this article was “Huh?” and you run a business, then you may not be complying with state unclaimed property laws and a more appropriate response might have been “Uh-oh.” For example, if your business holds deposits for individuals that it cannot locate, is obligated to pay refunds that customers have not claimed, has issued payroll or vendor checks that have not been cashed or gift certificates/cards that have not been redeemed, then at some point in time, the rights of the owners to claim these items will become “unclaimed property.” And even if the owner never makes a claim for this property, it never belongs to your business. It belongs first to the owner and if that owner cannot be found, then it belongs to a state that is entitled to it under its unclaimed property laws. In addition, the states that have jurisdiction over your unclaimed property require you to report and eventually turn over (or pay an amount equal to the value of) the unclaimed property to the state. Failure to comply with these requirements can be costly.
All U.S. states have unclaimed property programs that require businesses to report and turn over unclaimed property so that the state can then try to match owners with their unclaimed assets. Unclaimed property laws have been around for a long time, but in the last couple of decades more and more states have begun to enforce them aggressively. And as you will see, under certain circumstances, a New Hampshire business may have unclaimed property responsibilities with respect to many states, not just New Hampshire.
Unclaimed (also called abandoned) property includes savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler’s checks, trust distributions, unredeemed money orders or gift certificates/cards (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes. And that is not the whole list. While some of these assets are peculiar to certain industries (banking or insurance, for example) many of them are more generic and could arise in any business, big or small. All states subject intangible property to their unclaimed property laws, and special laws may exist for certain types of tangible personal property too. Real property generally is not subject to unclaimed property laws.
Each state has statutes that protect unclaimed property from reverting back to the company that is holding it. These laws generally require companies to report and turn over unclaimed property to a state official who is required to make diligent efforts to find the true owners. If the owners are not found, the property eventually devolves to the state. In New Hampshire, the state official charged with these responsibilities is the Director of the Abandoned Property Division of the New Hampshire Treasury (the “Abandoned Property Division”).
Fifteen states and the U.S. Virgin Islands have adopted the Uniform Law Commission’s Unclaimed Property Act (the “Uniform Act”). All other states, New Hampshire among them, have their own statutes (for New Hampshire, see RSA 471-C). Generally, however, the purposes and methods adopted by the drafters of the Uniform Act and the other states’ laws are similar. But the differences that do exist can be problematic, including causing businesses to have overlapping obligations to various states.
The U.S. Supreme Court has established jurisdictional limitations that help to avoid disputes over which state has the right to unclaimed property. There are two priority rules. In describing these rules below, an “owner” means the person who has rights to the unclaimed property and a “holder” means the business that is in possession of the unclaimed property.
- Under the first-priority rule, the state or jurisdiction of the owner’s last-known address, as shown on the holder’s books and records, is entitled to custody of the unclaimed property.
- Under the second-priority rule, when the owner’s address is unknown or the state of the owner’s last-known address does not provide for claiming the owner’s property, the state in which the holder is incorporated becomes the custodian of the property. Also, widely accepted as part of the second-priority rule and included in the Uniform Act and New Hampshire law, when the holder is not a corporation, the state of the holder’s principal place of business is determinative. A state claiming property under this second-priority rule may retain the property for itself only until some other jurisdiction comes forward with proof that it has a superior claim under the first-priority rule.
The distinction made in the second-priority rule between corporations and entities other than corporations can be very important. For example, Delaware, which is generally viewed as the “playground bully” in the world of unclaimed property, does not recognize the distinction. If a business is formed or organized under Delaware law, whether corporation, limited liability company, partnership, etc., Delaware treats itself as the state that is the custodian of the property. So, for example, if an LLC formed in Delaware has its principal place of business in New Hampshire, New Hampshire would claim jurisdiction over the property under its place-of-business rule and Delaware would claim jurisdiction under its place-of-formation rule, putting the holder in an uncomfortable position.
Under New Hampshire law, intangible property is presumed abandoned if it is held, issued, or owing in the ordinary course of a holder’s business and has remained unclaimed by the owner for more than five years after it became payable or distributable. However, the New Hampshire unclaimed property statute includes special provisions that establish shorter or longer periods and exclude, or provide special treatment for, many particular forms of property. For example: (i) gift certificates of $100 or less, and store credits that were issued for store merchandise credit, regardless of when issued, are not unclaimed property, (ii) travelers checks and money orders are generally not deemed abandoned for 15 and 7 years, respectively, (iii) stocks may be deemed abandoned after 3 years from certain specified events (e.g., the payment of a dividend that has not been claimed) and (iv) unpaid wages, including wages represented by un-presented payroll checks that remain unclaimed by the owner for more than one year after becoming payable are presumed abandoned.
Unclaimed Property Audits. Under New Hampshire law, the Abandoned Property Division has the power to audit reports and to audit companies that fail to file reports. In addition, if a holder fails after January 1, 1987 to maintain required records and the records it has are insufficient to permit the preparation of a report, the administrator may require the holder to report and pay such amounts “as may reasonably be estimated from any available records.” RSA 471-C:34, V. Delaware has a similar law that can reach back to 1981. Some states have applied their power to use any reasonable estimation method quite liberally. But while state unclaimed property statutes are intended to protect the interests of unknown owners and temporarily benefit the custodial State, the holder also has interests entitled to protection (including possible constitutional protection), especially when faced with the use of audit estimation methods.
Mergers & Acqusitions. Unclaimed property issues need to be on the radar of any business engaged in the sale or acquisition of other businesses or assets. Sellers need to know what unclaimed property issues might arise during due diligence or what impact unclaimed-property representations may have. Buyers need to know what unclaimed property issues they may be assuming and take appropriate steps to insulate themselves from the consequences. Careful drafting and attention to due diligence are a must. And keep in mind that a state’s ability to reach back many years in the case of failures to report or in the course of an audit means that a buyer can have significant exposure with respect to unclaimed property. A long look-back period means that unclaimed-property exposures arising from an acquired company’s prior acquisitions need to be examined too.
It is important to remember that just because your company has complied with New Hampshire’s unclaimed property law does not mean that it has necessarily discharged all of its unclaimed property law obligations. For example, if the last-known address of an owner of unclaimed property is in another state, a New Hampshire business must report and pay or deliver property to that state in accordance with that state’s unclaimed property laws (see the discussion of New Hampshire’s limited single-state-filing option discussed in the Appendix to this article). In addition, other states may have different requirements regarding any aspect of unclaimed property law (e.g., timing for the presumption of abandonment, excluded property, filing dates, interest and penalty provisions and statutes of limitations).
In conclusion, depending on the “footprint” of your business, compliance with unclaimed property laws could be simple or complicated. The more property you have that is subject to other states’ laws, the more complicated your compliance requirements can be. One thing is certain, however, you are better off knowing ahead of time, rather than when you may be audited, what, if any, exposure you might have to liability for unclaimed property.
Appendix
An Overview of Selected New Hampshire Unclaimed Property Requirements
Annual Reporting
Under New Hampshire law, all holders are required to review their records annually to determine whether they are in possession of properties that are presumed to be abandoned. Holders are further required to report and remit such properties (or their value in the case of certain intangibles) to the Abandoned Property Division of the New Hampshire Treasury (the “Division”) on a T-1 Form. If a holder is required to report in one year but not another, a negative or “0” report is not required, however, the Division encourages such filings.
Electronic Reporting
Reports of twenty or more records are required to be filed electronically. The Division accepts Electronic Holder Reporting from the following free software programs: UPExchange, HRS Pro and UPExpress.
Reporting to Other States
As a convenience, if you are a holder of unclaimed property and are located in the state of New Hampshire, you may file one unclaimed property report with the Division even if you are reporting and remitting property for owners who live in other states. However, only “incidental property” may be included in such a report. The National Association of Unclaimed Property Administrators has defined incidental property as ten or fewer properties, totaling $1,000 or less, which belong to a state other than the state to which the properties were remitted. Once the property is reported to the Division, it will forward the names of out-of-state owners to the appropriate states. Whether you report the property to the Division or to the appropriate state directly, you must follow each state’s unclaimed property laws. Some states may require you to report to them directly even if the property is considered incidental (e.g., California). For property that does not fall under the definition of incidental you will need to report directly to the state of last-known address.
When to File
For all filers but insurance companies, the report of abandoned property must be filed annually by November 1 for all properties presumed abandoned as of the 30th day of June immediately preceding. For insurance companies, the report must be filed annually by May 1 for all properties presumed abandoned as of the 31st day of December immediately preceding. All holders are responsible for filing on behalf of their branches, subsidiaries and affiliated entities.
Due Diligence
Not more than 120 days prior to filing, all holders must send written notice to the last-known address of the owner of any unclaimed property having a value of $50 or more. This notice must inform the owner of the nature of the property and how to recover it and avoid the presumption of abandonment and possibility of escheatment to the state.
Failure to Comply
Any holder failing to comply with the provisions of RSA 471-C may be subject to penalty, interest and costs of audit/examination. Interest accrues at the annual rate of 18 percent on the property or its value from the date the property should have been paid or delivered to the state, or $25, whichever is greater. The penalty for willfully failing to render any report or perform other duties required under the unclaimed property law is $100 for each day the report is withheld or the duty is not performed, but not more than $5,000. The penalty for willfully failing to pay or deliver property to the administrator is equal to 25 percent of the value of the property that should have been paid or delivered. Willfully refusing after written demand to pay or deliver property to the state as required under the unclaimed property law is a misdemeanor.
