The idea behind a lost-and-found is to reunite forgetful owners with their property. The very concept is a repudiation of the “finders-keepers” principle.
But when money-hungry states get into the lost-and-found business, finders-keepers is suddenly elevated from schoolyard taunt to public policy.
Unclaimed property laws exist in every state. These laws are designed to protect the contents of financial accounts that have had no activity or owner contact for a set amount of time (typically at least a year, but longer in many states).
Say you move and lose track of a small checking account with a local bank because its balance isn’t large enough you miss it. The account has no deposits or withdrawals for the next year, and the bank has no way to reach you at your new address. Rather than the balance reverting back to the bank itself, unclaimed property laws mean that the state steps in to take custody of the funds while, in theory, actively searching for you. These days, much of the searching occurs online, through social media and a variety of state-maintained websites where potential claimants can locate missing assets. If a state official tracks you down, or if you contact the state, you will get the contents of your checking account back.
So far, so good. But what happens if the state can’t find you? The second concept underpinning unclaimed property laws is that when an owner cannot be found, the windfall should benefit the public - that is, the state - rather than a private company.
The two purposes of unclaimed property laws pull the state in different directions. On the one hand, it has a responsibility to try to unite lost property with its owner. On the other, failing to do so means greater income for the state itself.
The revenue-raising potential of unclaimed property laws has led some states to act aggressively against businesses allegedly holding ownerless property. They do this, in large part, by assessing businesses for property that cannot be returned to its owners, because such owners do not actually exist.
Delaware, a state popular as a site for organizing businesses large and small, is one of the worst abusers. It derives a substantial part of the state budget from audits in which freelance examiners are paid a bounty - er, contingent fee - for discovering such property. Rather than paying third-party examiners a set fee, or using state employees paid an hourly wage, states encourage auditors to be aggressive by paying them with contingent fees. It works. In 2010, unclaimed property was Delaware’s third-largest source of revenue.
Many states also have overly long statutes of limitations, or no limitations at all. This extended or infinite period in which businesses are theoretically supposed to maintain clear records of ownership, when combined with ever-changing (read: expanding) definitions of what constitutes unclaimed property, makes voluntary compliance for businesses tricky or impossible. Nor does voluntary disclosure effectively protect businesses and other holders from audits.
Further, examiners often use sampling and estimates to determine the extent of a business’ alleged liability. Often, no particular asset is identified when such estimates are extrapolated, meaning the state will have no chance of finding a rightful owner. Nor does it really want one.
A frequent target for states is gift cards or certificates. From the consumer standpoint, the best gift certificate is one that never expires. Yet some states require retailers to turn over the full face value of gift certificates when assessors identify them as unclaimed. Other creative unclaimed property targets include unused cell phone minutes and inventory mismatches. Any property where an owner cannot be identified or does not exist is automatically attractive to states and, thus, to examiners.
The use of unclaimed property assessments as a de facto, informal tax is all the more obvious when states like Delaware deposit unclaimed property collections directly into the state’s general fund. In the cases where owners are found, they are paid out of the fund, effectively allowing the state to borrow the money interest-free. In the many cases where no owner can or will be found, the state is free to spend the money immediately and without restriction.
Though advocates of unclaimed property reform have pushed for greater oversight, the courts have so far done little to check those states engaging in aggressive enforcement. Worse, taxpayers seldom have access to any sort of administrative appeals process, as they would in a tax case. Instead, their only recourse is civil court, where the plaintiff bears the evidentiary burden, the costs are often prohibitive, and the law is stacked in favor of the state.
So holder beware. In particular, businesses that issue gift cards or certificates, take money for prepaid services, or keep forfeited funds without documenting that the funds are forfeited (for example, a deposit on a layaway item that the customer never returns to finish purchasing), need to be very careful, lest the unclaimed-property examiner come knocking. And if examiners do show up, holders should prepare for an aggressive audit that could last for years and leave few options if the final assessment is unsatisfactory.
If Delaware and other states are going to be unfair in the way they demand unclaimed property, business advisers should give some thought to setting up new enterprises elsewhere. Though all states have unclaimed property laws, not all states use them to regularly make up their own budget shortfalls. Apart from being reined in by the courts, the only way a place like Delaware is going to give up this “found” money is going to be when it finds pursuing it means a greater loss - such as a sharp drop in the number of businesses choosing to organize within the state’s borders.