Senate Bill (SB) 13, signed into law by Delaware Gov. John Carney on Feb. 2, 2017, significantly overhauls Delaware’s unclaimed property statutes. The Delaware legislature, which convened its current session on Jan. 10, 2017, fast-tracked the legislation in response to the June 28, 2016, Temple-Inland Inc. v. Cook et al. decision in which a federal district court ruled that the state’s approach to unclaimed property audits and its method of estimating liabilities violated the substantive due process requirements of the U.S. Constitution. The legislation apparently is intended to keep unclaimed property “revenue” flowing to the state as long as possible.
Certain provisions in the new law apply to companies currently under audit: some favorable, some unfavorable, and some that at first blush appear favorable but might not be. Audit-specific provisions include:
- A shortened lookback period for both audits and voluntary disclosure agreements (VDA) to 10 years plus the dormancy period (five years for most property types). Historically, audits often covered periods going as far back as 1981.
- Amplified interest and penalties, with mandatory interest on audit assessments.
- Options to “convert” an audit that began prior to July 22, 2015, into a VDA, or elect an expedited examination process.
By July 1, 2017, or within 60 days of the adoption of unclaimed property regulations mandated by SB 13, a holder under audit must notify the state escheator and secretary of state in writing of the holder’s intent to convert the audit to a VDA. The legislation is unclear as to whether it’s the earlier or the later of either.
Similarly, a holder’s intention to proceed with an expedited audit must be made in writing within 60 days of the adoption of the new regulations. It is uncertain how an examination will be expedited; Delaware unclaimed property audits typically take at least three to five years to complete (notwithstanding current regulations that indicate “a typical examination should not exceed twelve (12) months”).
Ironically, the legislature failed to address the most contentious unclaimed property audit issue: how estimated liabilities should be computed. Instead, SB 13 requires the secretary of finance to promulgate regulations for estimation on or before July 1, 2017, “to create consistency in any examination or voluntary disclosure.” Under the current secretary of state VDA program – and so presumably under audit – a holder is expected to estimate Delaware liabilities using the gross method and not necessarily take into consideration the “characteristic of [the] property” (that is, the property owner’s address) “to be extrapolated into the reach back years,” as stipulated by Temple-Inland.
Other enacted changes include:
- A statute of limitations of 10 years after the duty to report property arose
- A 10-year record retention policy for reports required to be filed
- Articulation of jurisdictional priority rules
- Definitions for previously undefined terms such as “domicile,” “gift card,” and “stored-value card”
- Claim to property with a foreign address held by a corporation or other entity domiciled in Delaware
- Pre-reporting due diligence
- Recordkeeping requirements
The legislation also mandates that reports be filed electronically. Conspicuously absent, however, is a requirement for a holder to file a report if no unclaimed property is due to the state.
In addition to directly affecting Delaware unclaimed property audits and VDAs, the enacted legislation will have an impact on other holders, especially Delaware corporations and noncorporate entities formed in Delaware, that are – or could be – holders of unclaimed property subject to claim by the state. Holders should continue to monitor Delaware’s rapidly changing unclaimed property laws.