New Secretary of State Voluntary Compliance Program
February 20, 2013
Over the last decade and a half, Delaware’s status as the preferred jurisdiction of incorporation and entity formation has yielded the state another significant source of annual revenue in the form of abandoned or unclaimed property. Currently, Delaware collects approximately $400 million annually in the form of unclaimed property, which accounts for nearly 15 percent of the state’s annual budget. It is estimated that only 3 percent of the amount of unclaimed property collected by Delaware is ever returned to the rightful owner.
Although the classic example of unclaimed property is the uncashed check, unclaimed property can take many forms. By way of example, the following could constitute unclaimed property: payroll and accounts payable, accounts receivable credit balances, unredeemed gift cards or gift certificates, unclaimed dividend checks, unclaimed merger consideration, dormant securities and unclaimed royalty payments. It is rare that an operating entity would have no unclaimed property in its possession, so any significant operating entity formed under Delaware law will likely be the target of an unclaimed property audit by Delaware at some point in time.
The majority of the amounts collected by Delaware are collected pursuant to audits conducted by third-party auditors contracted by the Delaware Department of Finance. Currently, the Department of Finance audits and potentially assesses unclaimed property liability for years back to 1986. In addition, it is common for an unclaimed property audit conducted by the Department of Finance to last several years before it is resolved.
In July 2012, Delaware enacted 78 Del. Laws, c. 317, which established a new unclaimed property voluntary compliance program to be administered through the Office of the Secretary of State of Delaware rather than the Department of Finance. In general, pursuant to the new Secretary of State Voluntary Compliance Program (the “New VDA Program”):
- A company that notices its intent to participate in the New VDA Program by June 30, 2013 will only be subject to potential unclaimed property liability back to 1996 (rather than 1986).
- A company must resolve its liability by full payment or by entering an installment plan by June 30, 2015.
- Interest and penalties will not be imposed.
- The Office of the Secretary of State anticipates that the review process may be completed in as little as nine months.
However, once a company receives an audit notice from the Department of Finance, such company (and likely its affiliates as well) becomes ineligible to participate in the New VDA Program with the Secretary of State. Upon the enactment of the Secretary of State New VDA Program, the Department of Finance ceased sending new unclaimed property audit notices for a period of approximately seven months. The Department of Finance is expected to resume sending new Delaware unclaimed property audit notices in February 2013. Thus, while the deadline to take advantage of the New VDA Program is by statute June 30, 2013, the actual effective deadline to take advantage of the program could be at any time before that date.
In the late fall of 2012, the Office of the Secretary of State identified certain significant Delaware-formed entities that had neither recently been through a Delaware unclaimed property audit (or VDA) with the Department of Finance nor had regularly been filing annual unclaimed property reports with the State of Delaware. The Office of the Secretary of State sent each of these entities a letter encouraging them to consider participating in the New VDA Program.
Please let us know if you would like to discuss the potential benefits of participating in the Delaware Secretary of State New VDA Program.