State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Delaware Enacts Historic Overhaul of Unclaimed Property Law On February 2, 2017, Delaware Governor John C. Carney Jr. signed legislation making major changes to Delaware s unclaimed property law. 1 The legislation amends three subchapters (Title 12, Chapter 11, subchapters II, III and IV) 2 by deleting them in their entirety and combining them into new subchapter II. The new legislation is generally understood to have been enacted partially in response to the U.S. District Court ruling in Temple-Inland Inc. v. Cook, 3 which found certain Delaware unclaimed property procedures to be unconstitutional, in addition to other litigation. The new legislation also adopts many concepts and provisions of the 2016 Revised Uniform Unclaimed Property Act (RUUPA). Certain Holders Can Convert Audit into VDA Must Act by July 1, 2017 If Delaware began an audit of a holder on or before July 22, 2015 (other than securities examinations in which estimation is not required), the holder can convert the audit into a review under the Secretary of State s voluntary disclosure program. 4 There is some uncertainty as to when such notice must be made, as there appears to be an internal conflict in the language of the relevant statutes. The statute governing rules and procedures for conducting an examination requires holders to notify the State Escheator and Secretary of State of their intent to convert the audit into a voluntary disclosure review in writing by July 1, However, the statute governing the failure of persons examined to retain records requires that a holder s written notice must be received within 60 days of the adoption of regulations that must be promulgated by July 1, The look-back period for the voluntary disclosure program is now consistent with the new statute of limitations, which is 10 years prior to when the property is presumed abandoned from the calendar year in which the original notice of examination was provided. 7 This codifies the Secretary of State s August 2016 administrative reduction of Release date March 8, 2017 States Delaware Issue/Topic Unclaimed Property Contact details Kevin Herzberg Tampa T E kevin.herzberg@us.gt.com David M. Glad Philadelphia T E david.glad@us.gt.com Gary Rosen Metro DC - Arlington T E gary.rosen@us.gt.com Matt O Brien Philadelphia T E matt.o brien@us.gt.com Guinevere Seaward Metro DC - Arlington T E guinevere.seaward@us.gt.com Luke Lucas Cleveland T E luke.lucas@us.gt.com 1 S.B. 13, Laws DEL. CODE ANN. tit. 12, F. Supp. 3d 527 (D. Del. 2016). For a discussion of this case, see GT SALT Alert: U.S. District Court Finds Delaware Unclaimed Property Audit Procedures Unconstitutional. 4 DEL. CODE ANN. tit. 12, 1172(b). 5 Id. 6 Id.; DEL. CODE ANN. tit. 12, 1176(b). 7 Id..

2 Grant Thornton LLP - 2 the voluntary disclosure look-back period to 10 years plus the dormancy period, which was made in response to the decision in Temple-Inland. 8 The legislation retains the prior law that the state may not initiate any new audit unless the holder has first been notified in writing that the holder may enter into an unclaimed property voluntary disclosure agreement. 9 Conversion of Audit into Expedited Examination Waiver of Penalty and Interest Any holder under examination by the State Escheator prior to February 2, 2017 may notify the State Escheator of its intent to expedite the completion of the pending examination by providing written notification on a form to be provided by the State Escheator. 10 The written notification must be received by the State Escheator within 60 days of the adoption of regulations to be promulgated by July 1, If holders comply with the expedited examination in a satisfactory manner, the state will waive all penalties and interest. 12 Holders that elect to an expedited examination must respond to all State Escheator requests for records, testimony and information within the time and manner established by the State Escheator. 13 Whether a holder has responded timely will be completely at the discretion of the State Escheator and subject to review only by the Secretary of Finance. 14 All requests made by the person conducting the examination must be sent within 18 months after the written notification has been received. 15 If the holder responds timely to requests, the State Escheator must complete the examination within two years from the date of the written notification. 16 All examinations completed as a result of the expedited examination must be treated the same as any other report after the conclusion of an examination. 17 Verified Report Requirement and Creation of Compliance Review If a holder has not filed a required report, or if the State Escheator believes that a property holder has filed an inaccurate, incomplete, or false report, the State Escheator may require the holder to file a verified report, which must: (1) state whether the person is holding reportable property; (2) describe property not previously reported or about which the state 8 Statement from Delaware Secretary of State Jeffrey W. Bullock regarding the Delaware VDA program sent via by VDA administrators to individuals who had been identified as representing a holder in the Delaware VDA program and to all then enrolled holders in the VDA program, Aug DEL. CODE ANN. tit. 12, 1172(a). 10 DEL. CODE ANN. tit. 12, 1172(c)(1). 11 Id.; DEL. CODE ANN. tit. 12, 1176(b). 12 DEL. CODE ANN. tit. 12, 1172(c)(2). 13 Id. 14 DEL. CODE ANN. tit. 12, 1172(c)(4). 15 DEL. CODE ANN. tit. 12, 1172(c)(3). 16 DEL. CODE ANN. tit. 12, 1172(c)(2). 17 DEL. CODE ANN. tit. 12, 1172(c)(5).

3 Grant Thornton LLP - 3 has inquired or about which there is a dispute as to whether it is reportable; and (3) state the value of the property. 18 If the State Escheator believes that a property holder has filed an inaccurate, incomplete or false report, including a verified report, the State Escheator may initiate a compliance review of the report. 19 The compliance review must be limited to the contents of the report(s) in question as well as the supporting documents related to such reports. If a compliance review determines that there is a deficiency, the State Escheator must notify the holder of the amount due in writing within one year from the date that the compliance review was authorized. If the holder fails to pay the amount due within 90 days of notification, the State Escheator may audit the holder or give it the opportunity to enter Delaware s unclaimed property voluntary disclosure program. 20 Estimation of Liability Tied to Document Retention Requirement One of the deficiencies that the U.S. District Court in Temple-Inland found in Delaware s unclaimed property audit procedures was that the state would estimate a liability for years when the holder did not have accounting records, yet the state did not require that a holder, or the state, maintain records. 21 In fact, prior to the new legislation, Delaware was one of only four states that had not adopted a formal document retention policy. 22 The new legislation requires holders who are required to file an annual unclaimed property report to retain records for 10 years after the date the report was filed, unless a shorter period is provided by the State Escheator by rule or regulation. 23 The 10-year retention policy enacted by Delaware is a lengthy retention requirement in comparison to other states that generally oblige holders to retain their records between five and 10 years. Holders must retain: (1) the verifiable information required to be included in the report; (2) the date, place and nature of the circumstances that gave rise to the property right; (3) the amount or value of the property; (4) the last address of the owner, if known; and (5) if the holder sells, issues or provides to others for sale or issue in Delaware traveller s checks or money orders, a record of the instruments while they remain outstanding indicating the state and date of issue. 24 The State Escheator must also retain the holder s annual unclaimed property report for at least 10 years after the report is filed. 25 If a holder under audit does not retain these records, the State Escheator may use reasonable estimation, including extrapolation and the use of statistical sampling, to determine the amount of property due. 26 By July 1, 2017, the Secretary of Finance, in consultation with the Secretary of State, must promulgate regulations with regard to the method of estimation to create consistency in any audit or voluntary disclosure. These 18 DEL. CODE ANN. tit. 12, 1170(a). 19 DEL. CODE ANN. tit. 12, 1170(b). 20 Id. This program is available under DEL. CODE ANN. tit. 12, Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016). 22 In Temple-Inland, the U.S. District Court provided an appendix listing the retention periods in each state. 23 DEL. CODE ANN. tit. 12, Id. 25 DEL. CODE ANN. tit. 12, DEL. CODE ANN. tit. 12, 1176(a).

4 Grant Thornton LLP - 4 regulations must include permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records Year Statute of Limitations; Interest Provisions Modified Under previous law (effective for reports filed or required to be filed on or after July 22, 2002 and prior to February 2, 2017), the State Escheator was required to audit a holder s report within three years from the date the report was filed, or within six years in case of an omission of more than 25 percent of the property disclosed. 28 Under the new legislation, the state may not commence action with respect to reporting, payment or delivery more than 10 years after the duty to report arose. 29 For any late-filed unclaimed property reported or remitted on or after July 1, 2017, the new legislation retains the imposition of interest at a rate of 0.5 percent per month on outstanding unpaid amounts from the date the property was originally due, but increases the maximum aggregate amount of interest from 25 percent to 50 percent of the amount required to be paid. 30 Penalties for failure to file remain at a rate of 5 percent per month up to 50 percent in the aggregate or $100 per day up to $5, Penalties for failure to pay remain at a rate of 0.5 percent per month up to 25 percent in the aggregate. 32 In a provision perhaps directed towards aggressive gift card arrangements, a holder that enters into a contract or other arrangement for the purpose of evading the unclaimed property law can be assessed a civil penalty of $1,000 for each day the obligation is evaded, up to $25,000, plus 25 percent of the property not reported, paid or delivered. 33 For good cause, the State Escheator may waive penalties in whole or in part and may waive up to 50 percent of interest. 34 Restriction on Transfers; Merger and Acquisition Successors As a means to limit what the state believes to be evasive third-party gift card company arrangements, 35 the new legislation provides that a holder may not assign or otherwise transfer its obligation to hold for, pay or deliver property or otherwise comply with the unclaimed property law, other than to a parent, subsidiary or affiliate of the holder. 36 Unless otherwise agreed in a transaction, a holder s successor by merger or consolidation or a person or entity that acquires all or substantially all of a holder s stock or assets will be responsible for that holder s unclaimed property obligations. 37 The new law does not prohibit a holder from contracting with a third party for the reporting of unclaimed 27 DEL. CODE ANN. tit. 12, 1176(b). 28 Former DEL. CODE ANN. tit. 12, 1158(a). 29 DEL. CODE ANN. tit. 12, 1156(b). 30 DEL. CODE ANN. tit. 12, 1183(a). 31 DEL. CODE ANN. tit. 12, 1183(b). 32 DEL. CODE ANN. tit. 12, 1183(c). 33 DEL. CODE ANN. tit. 12, 1184(a). 34 DEL. CODE ANN. tit. 12, See Delaware v. Card Compliant LLC, Delaware Superior Court, C.A. No. N13C FSS [CCLD], Nov. 23, DEL. CODE ANN. tit. 12, 1147(a). 37 DEL. CODE ANN. tit. 12, 1147(b).

5 Grant Thornton LLP - 5 property, but the holder will remain ultimately responsible for the complete, accurate and timely reporting of the property. 38 Gift Cards and Loyalty Cards Delaware retains its five-year dormancy period for gift cards and the deduction for a holder s profit margin (the reportable value is the amount representing the maximum cost to the issuer of the merchandise, goods or services represented by the card). 39 However, the new legislation also exempts holders from reporting if their unredeemed gift cards have an aggregate value of less than $5, Loyalty cards, which are given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program, are exempt. 41 Indication of Owner Interest to Restart Dormancy Period Following the 2016 RUUPA, the new Delaware law provides that property is not abandoned if the owner indicates an interest in the property before the dormancy period ends. 42 Among other things, an owner can indicate an interest through a record communicated to the holder, an oral communication to the holder, cashing a check, or accessing an account. 43 Other provisions provide for communications related to insurance and investment accounts. Electronic Filing Beginning March 1, 2018, all reports must be filed electronically. No other methods for submitting the report will be accepted. 44 Administrative Subpoenas In Delaware v. Blackhawk Engagement Solutions (DE), Inc., 45 a current matter being considered at the Delaware Court of Chancery, the Delaware Department of Finance is seeking to enforce an administrative subpoena against Blackhawk. In response, Blackhawk is arguing that the previous statute did not grant authority to enforce administrative subpoenas as related to unclaimed property audits. The recent legislation now explicitly grants the State Escheator the power to issue an administrative subpoena and to seek enforcement of an administrative subpoena in the Court of Chancery. 46 Knowledge of Death Dormancy Trigger for Life Insurance Following other states, the new Delaware law provides that an amount owed on a life insurance policy is dormant five years after knowledge of death. 47 Knowledge of death regarding an owner s interest in property may be identified through any source, including a 38 DEL. CODE ANN. tit. 12, 1147(c). 39 DEL. CODE ANN. tit. 12, 1133(14). 40 DEL. CODE ANN. tit. 12, 1143(d). The new legislation also retains the exemption for restaurants and other eating establishments, as defined under DEL. CODE ANN. tit. 30, 2906, with cards having a face value of $5 or less. 41 DEL. CODE ANN. tit. 12, 1130(11), (18).c DEL. CODE ANN. tit. 12, 1136(a). 43 DEL. CODE ANN. tit. 12, 1136(b). 44 DEL. CODE ANN. tit. 12, 1142(a). 45 Delaware Court of Chancery, No CB, filed Nov. 20, DEL. CODE ANN. tit. 12, DEL. CODE ANN. tit. 12, 1133(7)a.

6 Grant Thornton LLP - 6 declaration of death, death certificate, a comparison of the holder s records against the Social Security Death Master File or other equivalent resources. 48 Commentary As this may be the most significant change to Delaware s unclaimed property law in the past decade, any company incorporated in Delaware should review the legislation carefully. Most importantly, holders that are currently under audit may be able to either enter a voluntary disclosure program or expedite the audit. The legislation addresses many issues that Delaware was facing as a result of Temple-Inland. However, a number of issues were not addressed by the legislation, such as the state s ability to extrapolate a liability for years in which a holder no longer has accounting records but was not required to file a negative report. Holders should closely examine their unclaimed property reporting procedures to assure they are in compliance with the new legislation and to take advantage of these new opportunities. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed. Grant Thornton does not engage in the practice of law. Because unclaimed property is not a tax, Grant Thornton cannot give advice that involves the interpretation of unclaimed property laws. Accordingly, in most cases, Grant Thornton practitioners work with a client's legal counsel in providing unclaimed property services. Additional limitations apply to Grant Thornton attest clients subject to SEC reporting. 48 DEL. CODE ANN. tit. 12, 1137.