Delaware Proposes Escheat Reform Legislation
January 13, 2017
On January 12, 2017, Delaware SB 13 was introduced in the Delaware General Assembly, proposing comprehensive Delaware unclaimed property legislative reform. The administration-drafted bill addresses many aspects of Delaware’s unclaimed property audit program and compliance regime. Over the past decade, the receipt of unclaimed property has consistently been Delaware’s third-largest source of revenue, accounting for nearly 15% of the state’s annual operating revenue. While perhaps approximately 5% of such escheated property is ultimately returned to the rightful owner, most remains with the state.
Increasingly, the business community has complained about the aggressiveness in Delaware’s unclaimed property audit regime. In June 2016, in the case Temple-Inland, Inc. v. Cook et al, Federal District Judge Gregory Sleet found that Delaware’s unclaimed property regime “shocked the conscience” in that matter, and thus violated the procedural due process requirements of the Fourteenth Amendment of the United States Constitution. However, the case settled prior to a judicial determination of the appropriate remedy to ameliorate the noted Constitutional infirmity.
SB 13 is meant to address certain aspects of Delaware unclaimed property administration discussed in Judge Sleet’s decision. It should be noted, however, that as Delaware is addressing certain aspects of its unclaimed property program noted in the Temple-Inland case (audit lookback period, records retention requirements, etc.), presumably Delaware means to continue to estimate liability (for periods when estimation is appropriate) using the controversial “gross escheatable items” methodology rather than a “Delaware items only” methodology. In August 2016, the Delaware Secretary of State signaled that “gross” estimation would continue to be required for participants in the Secretary of State’s Unclaimed Property Voluntary Disclosure Program. Some significant provisions of the proposed comprehensive Delaware unclaimed property reform legislation are outlined below.
1. Shortened Audit Lookback Period. Effective upon enactment, the audit lookback period will not exceed ten years plus the period of dormancy (generally five years for most property types) from the date of the audit notification letter. This shortened lookback period is meant to apply to audits initiated but not resolved prior to the enactment of the legislation as well as audits initiated after the legislation is enacted.
2. Option for Entities Currently Under Audit to Elect into the Secretary of State VDA Program. After enactment, any holder currently under audit may make a one-time election to convert its existing audit into participation in the Delaware Secretary of State Unclaimed Property Voluntary Disclosure Program (the “VDA Program”). Such election must be made by July 1, 2017. Subsequent to such election, a holder would resolve its Delaware liability with that agency rather than through the Delaware Department of Finance and its contract auditors. However, it should be noted that many, if not most, unclaimed property audits are multi-state audits conducted by private contract auditors on behalf of multiple states. Thus, the election would only end the Delaware aspect of the audit, and any multistate audit would continue with respect to the other states represented by that contract auditor. A holder who elects to convert its Delaware audit to a Delaware VDA and resolves its liability within the prescribed time limits will avoid the imposition of the interest and penalties hereafter described.
3. Option to Expedite Existing Audit. As an alternative to electing into the Delaware Secretary of State VDA Program, SB 13 provides that upon enactment a holder currently under audit may at any time prior to July 1, 2017 elect to expedite the resolution of its audit. Under such expedited audit, so long as the holder resolves its Delaware liability within the prescribed times, the holder will avoid the imposition of late payment interest and penalties hereinafter prescribed.
4. Establishment of Compliance Reviews. The proposed legislation establishes a separate compliance review procedure meant to be less intrusive than a full holder examination/audit. While Delaware still has the authority to conduct a full holder examination, in the case of a filed report, the compliance review would be limited to the contents of the report and the supporting documents related to the report.
5. Due Diligence Requirements. Under current Delaware law, a holder’s only due diligence requirements to owners were related to securities-related property. The bill imposes a required due diligence outreach requirement on holders with respect to any type of dormant unclaimed property prior to the holder escheating such amount to Delaware.
6. Increased Interest and Penalties on Late Remitted Unclaimed Property. Currently, Delaware may impose interest on late remitted unclaimed property at the rate of 0.5% per month, capped at 25% of the underlying amount of unclaimed property liability. The proposed legislation will increase the cap to 50% of the underlying liability. The proposed legislation would also re-impose failure to pay penalties at the rate of 0.5% per month, up to a capped amount of 25% of the underlying liability. In addition, the bill proposes additional fraud penalties (75% of the underlying liability) and purposeful evasion/willfulness penalties of up to 25% of the underlying liability. While for certain periods in the past Delaware has had some form of interest and/or penalties in the Delaware Code for late remitted unclaimed property, they were very rarely imposed because most audits resulted in a negotiated settlement. However, there is an indication that, going forward, Delaware will automatically impose and attempt to collect applicable interest and penalties.
7. Electronic Filing of Annual Reports. Effective for annual unclaimed property reports due on or after March 1, 2018, all Delaware annual unclaimed property reports will be required to be filed electronically by means of a web-based system to be established.
As this proposed legislation was drafted by the current administration, it is expected to be enacted in the near future. If you would like to discuss the implications of SB 13 or any aspect of Delaware unclaimed property law, please feel free to contact a Richards, Layton & Finger attorney.