Michigan Enacts Significant Unclaimed Property Legislation

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1 Journal of Multistate Taxation and Incentives (Thomson Reuters/Tax & Accounting) Volume 26, Number 3, June 2016 PROCEDURE Michigan Enacts Significant Unclaimed Property Legislation Michigan has enacted several amendments to its Uniform Unclaimed Property Act which generally provide welcome changes for businesses and other entities required to file Michigan unclaimed property reports. By ELAINE CUSANELLI AND SAMUEL SCHAUNAMAN ELAINE CUSANELLI is a Director and SAMUEL SCHAUNAMAN is a Senior Manager with the Abandoned and Unclaimed Property Practice at Ryan LLC. Ms. Cusanelli can be reached at and elaine.cusanelli@ryan.com. Mr. Schaunaman can be reached at and sam.schaunaman@ryan.com. (Note: Ryan LLC is neither a CPA firm nor a law firm.) Over the course of the past few years, Michigan has enacted several amendments to its Uniform Unclaimed Property Act (the "Act"), 1 which generally provide welcome changes for businesses and other types of entities, such as non-profit organizations, required to file Michigan unclaimed property reports (collectively referred to as "holders"). Specifically, Michigan has enacted major amendments to the Act, providing for a Business-to-Business ("B2B") exemption, audit reform, a formal appeals process, a de minimis exemption of $25 and under for most property types, and a more favorable statute of limitations. This article provides a summary of these key provisions and discusses the impact of the amendments to the holder community. Business-to-Business Exemption Michigan enacted a form of B2B exemption to the Act in As amended, the Act exempts from its application "any credit balances, overpayments, deposits, refunds, discounts, rebates, credit memos or unidentified remittances created on or after April 1, 2009 and issued, held, due or owing in any transactions between two or more associations." 3 The Act, as amended, further states that the term "association" is defined to mean "a business association, a public corporation, or any other commercial entity, including a sole proprietorship." 4

2 There are three property types delineated in the law that the B2B exemption does not cover. First, it does not apply to "outstanding checks, drafts or similar instruments." 5 Second, it does not apply to certain property held by banking or financial organizations under Section 7 of the Act, which generally includes "demand, savings, or matured time deposits with a banking or financial organization or any other interest in a banking or financial organization." 6 Finally, it does not apply to certain property held in safe deposit boxes under Section 17 of the Act, such as "property in safe deposit boxes or any other safekeeping repository in this state," as well as "proceeds resulting from the sale of the property." 7 Although the B2B exemption in Michigan is not as broad as the B2B exemptions in some other states (e.g., Illinois and Ohio also cover outstanding checks in their B2B exemptions), it is a helpful provision for the holder community. As stated by authors of a leading treatise in this area, the public policy behind B2B exemptions is that business entities generally are sophisticated parties, engaged in repeated and complex transactions that rarely give rise to reportable unclaimed property and produce disputes that are best resolved by the parties themselves. 8 Michigan's B2B exemption is a holder-friendly provision that is consistent with that policy. Audit Reform Michigan enacted legislation in 2013, H.B (the "Bill"), which provides enhancements and clarifications with regard to how unclaimed property audits are conducted. 9 Highlights of the Bill are as follows. First, any unclaimed property audit performed by the administrator or his or her agents must be performed "in accordance with generally accepted auditing standards to the extent applicable to unclaimed property examinations." 10 Second, a holder who has been the subject of an unclaimed property audit must be provided "a complete copy in printed or electronic format of the audit report, which shall identify in detail the work performed, the property types reviewed, any estimation techniques employed, calculations showing the potential amount of property due, and a statement of findings as well as all other correspondence and documentation which formed a basis for the findings." 11 The detail to be given to holders under the Bill who have undergone an audit should be helpful in analyzing what steps were taken by the auditor and in challenging any assumptions the holder believes were mistakenly made. Third, the Bill provides guidance on how to deal with troublesome audits where the vast majority of the purported liability is derived from the use of estimation techniques, usually by contract auditors for the

3 states. Specifically, the Bill provides that if the person being examined has "filed all the required reports" and has maintained "substantially complete records," as such term is defined below, then "the examination shall not be based on an estimate." 12 In that event, the administrator or his or her agents "shall consider all evidence presented by the holder to remediate the findings." However, if "substantially complete records" are not maintained, then a reasonable method of estimation may be used. The term substantially complete records ("SCR") is defined in the Bill to mean "at least 90% of the records necessary for unclaimed property examination purposes as defined under the principles of internal controls. The determination of SCR shall not be made solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records. The lack of greater than 10% of records in one particular property class to be examined does not result in the extrapolation of error in those areas in which a person has filed all the required reports and has maintained at least 90% of the overall records for that particular property class." 13 The Bill does state that SCR are not meant to be an absolute measurement of all available records. Finally, the Bill provides that the state is to promulgate regulations governing the audit process. Formal Appeal Process One of the main concerns of holders in the unclaimed property arena is that so few states provide for a formal appeal mechanism to contest an adverse assessment issued by the state administrator. 14 Michigan enacted helpful legislation addressing this issue on December 27, In general, the Act, as amended now, provides that if the unclaimed property administrator determines that a holder has failed to report unclaimed property as required by Michigan law, the administrator is to mail to the holder a Notice of Examination Determination via registered or certified mail. 16 As amended, the Act now provides several alternative remedies a holder may utilize to challenge or appeal such determination, as follows. First, within 90 days after such notice has been mailed, a holder may elect to either file a Request for Reconsideration with the administrator or bring an action in circuit court. If a Request is made, it must be in writing, identify the contested property, and state the reason that the holder believes the decision is in error. 17 Any property not contested must be delivered to the administrator. While such request is pending, interest continues to accrue on all undelivered property. 18

4 Once the request is filed, the holder then has an additional 60 days to submit additional documentation in support of the request. The administrator may elect to have a formal meeting with the holder or handle via informal communications. The administrator shall mail the holder a written decision via certified or registered mail within 60 days of the receipt of the holder's Request for Reconsideration or within 60 days after the receipt of additional documentation. The administrator may extend the time period in which it is required to render a decision for good cause, provided such extended period does not exceed 183 days from the date the administrator initially received the Request for Reconsideration. 19 After the holder receives the decision from the administrator with respect to the Request for Reconsideration, the holder has a 90-day period to either (i) file an appeal with the administrator, or (ii) file an action in circuit court. 20 If an appeal is made, the administrator must appoint a delegate to conduct the appeal. The delegate may not be employed by the Department of Treasury ("Department") or have contracted with the Department to provide auditing or administrative services for the enforcement of the unclaimed property Act, other than as a delegate for an appeal. The delegate must have the "knowledge, skill and ability to qualify as an administrative law examiner under the Michigan Civil Service Commission's job specifications." However, even if a holder elects an appeal at this juncture, it may later file an action in circuit court. The appeal essentially may be withdrawn at any time by the holder, who then has 90 days after the Notice of Withdrawal of the appeal is mailed to the administrator to file an action in circuit court. 21 The Notice of Appeal must delineate the reason the holder believes the reconsidered decision of the administrator was in error, as well as certain other information specified in the Bill. The delegate selected by the administrator then sets the time and place for the hearing on the appeal and must give the holder written notice at least 21 days before the appeal is heard. The appeal is not subject to the Michigan Administrative Procedures Act. The hearing must generally be conducted within 90 days after the filing of the appeal, unless otherwise agreed to by the parties. The delegate must then issue a written recommendation to the administrator within 90 days after the hearing or submission of any post-hearing documentation, whichever is later. Such recommendation must include the reasons and the authority that support the recommendation. 22 Within 60 days after the date of the delegate's recommendation, the administrator shall affirm, modify, or reject all, or portions of, the delegate's recommendation. If the holder prevails as to any portion of the contested property, the "administrator shall return any contested property that had been remitted to the holder, including any related amount of interest or penalty paid." Within 90 days after such administrator's

5 decision is mailed, the holder may appeal by filing an action in circuit court. In summary, the Michigan formal appeal process legislation gives holders meaningful alternatives to address a perceived inequitable outcome received from the administrator. De Minimis Exemption and Streamlined Audit Process The Michigan Legislature enacted further reforms to the Act in 2015 via S.B S.B. 538 states the "amendatory act is retroactive and applies to audits in progress as of August 15, 2015, but does not retroactively apply to contested determinations in litigation before the date of enactment of this amendatory act." Key changes to the Act emanating from S.B. 538 are as follows. First, the Bill provides that, subject to two exceptions, property is not subject to the custody of the state as unclaimed property if its value is $25 or less. 24 The foregoing exemption, the Bill states, does not apply to certain property described in Section 11a of the Act, e.g., (i) stock, shares, or other intangible ownership interest in a business association, or (ii) dividends. Thus, the de minimis exemption in the legislation applies to general ledger property, such as accounts payable, accounts receivable, and payroll but does not apply to stock or dividends property. This de minimis exemption is a "win-win" for the state and the holder community. Holders will not have to report small amounts, and the state will not have to keep records of small amounts. Second, "eligible holders" being examined by the administrator may elect to follow a new, streamlined audit process. To elect the streamlined audit process, the eligible holder must execute a nondisclosure agreement acceptable to the administrator within 30 days from the receipt of the audit notice. 25 The key goal of this new audit process is to complete the audit within 18 months from the receipt of the audit notice, within a time frame jointly developed by the eligible holder and administrator, according to rules and regulations to be promulgated. 26 An "eligible holder" is defined as a holder meeting one or more of the following: (i) a business whose principal place of business is in Michigan as evidenced by 20% or more of its payroll or 20% or more of its real and tangible personal property, except inventory, owned or rented in the state during the period subject to examination, or the majority of officers that direct, control, and coordinate the activities of the business are employed in Michigan, (ii) a corporation which wholly owns a corporation that has incorporated in Michigan, and the corporation incorporated in Michigan meets the criteria for a business described above,

6 or (iii) a corporation which is wholly owned by a corporation incorporated in Michigan and the corporation which is incorporated in Michigan meets the criteria for a business described above. 27 For an eligible holder electing a streamlined audit, examinations will not include checks voided within 180 days from the date of issuance of the check. Holders eligible for the streamlined audit process must act quickly once a Michigan audit notice is received. If they fail to affirmatively elect to be covered by the streamlined audit process, Michigan could assign the audit to a third-party contingent fee auditor to manage the audit, thus resulting in a longer, and presumably more expensive, audit. Third, S.B. 538 provides some relief to holders in the statute of limitations area. Thus, if an eligible holder elects to participate in the streamlined audit process, an action or proceeding shall not be commenced by the administrator with respect to any duty of a holder more than four years after the duty arose. 28 However, for holders not covered by the new streamlined audit process, an action or proceeding shall not be commenced by the administrator more than ten years after the duty arose, or, for the holder of records of transactions between two or more associations, more than five years after the duty arose. 29 In summary, the Michigan Legislature has enacted key pieces of unclaimed property legislation over the past few years amending the Michigan Uniform Unclaimed Property Act, which are each beneficial to the holder community in their own right. When taken together, they indicate that the Michigan Legislature has enacted well thought-out legislation that provides clarity and business-friendly legislation for the holder community. 1 The Act may be found at Chapter 567, Escheats, of the Michigan Compiled Laws Service (MCLS), commencing at Section and ending at Section See H.B (2012), Public Acts 2012, No The bill was signed by the Governor and filed with the Secretary of State on May 24, Language in the bill states: "This Act is ordered to take immediate effect." 3 See MCLS Section a(1). 4 See MCLS Section a(2). 5 See MCLS Section a(1). 6 See MCLS Section a(1).

7 7 See MCLS Section a(1). 8 See Michael Houghton, et al., Unclaimed Property, 74-3rd C.P.S. (Bloomberg/BNA Rev. 2/14), at p. A See Enrolled House Bill No. 4289, Act No. 148, Public Acts of 2013, effective, per LEXIS note, March 14, The Bill amends Section of the Act. 10 See MCLS Section (4). 11 See MCLS Section (4). 12 See MCLS Section (5). 13 See MCLS Section (9). 14 A leading treatise in this area noted in 2014 that only about a dozen states had formal appeals mechanisms. See Michael Houghton, et al., Unclaimed Property, 74-3rd C.P.S. (Bloomberg BNA Rev. 2/14) at p. A-15. Although a few additional states have enacted formal appeals mechanisms in the past two years, the majority of states still do not have a formal appeals mechanism allowing a formal appeal of an adverse decision from an unclaimed property administrator. 15 See Public Acts 2014, No. 423, effective March 31, See MCLS Section a(1). 17 See MCLS Section a(3). 18 See MCLS Section a(5). The holder apparently has an option to pay or deliver the contested property. If it is paid or delivered, the holder does not waive its right to a Request for Reconsideration. 19 See MCLS Section a(7). 20 See MCLS Section a(8). 21 See MCLS Section a(9). 22 See MCLS Section a(11). 23 See Public Acts 2015, No. 242, effective December 22, See MCLS Section a(1).

8 25 See MCLS Section b(1). 26 See MCLS Section b(2). 27 See MCLS Section (2)(g). 28 See MCLS Section (3). 29 See MCLS Section (2) Thomson Reuters/Tax & Accounting. All Rights Reserved.