Delaware Voluntary Disclosure: A Window of Opportunity?

July 16, 2012 Blog Post by Josiah Osibodu, Managing Partner – Consulting Services

July 1st was not just the beginning of the heat wave in some Northern states, but also can be viewed as the beginning of a “window of opportunity” in one of these states, notorious for the aggressive enforcement of its unclaimed property laws and regulations.  Those companies that have had a taste of these enforcement and collection actions may prefer the heat wave.

The Delaware House and Senate recently passed SB 258, establishing a new Voluntary Disclosure Agreement (VDA) program as an incentive for companies to report and remit their unclaimed property that is past due to Delaware.  This outreach program is an alternative opportunity for companies that have not historically reported unclaimed property to Delaware to begin regular reporting.  Unlike the infamous Delaware VDA program, which is an agreement between the company and the Delaware Department of Finance, State Escheator (“Escheator VDA”), the agreement for this new program will be between the company and the Delaware Secretary of State (“Secretary VDA”).  This new VDA is an additional incentive for companies to report their unclaimed property due to Delaware and it does not  replace the Escheator VDA or audit examination.   

Some companies will be wondering, what’s the big deal between this new Secretary VDA and the Escheator VDA, since both are programs authorized by the Delaware state government.  To appreciate and decide whether there is a window of opportunity, one needs to consider a few facts and realities.

The U.S. Supreme Court decided in 1965 the simple rules for the states to follow when exercising their authority to claim unclaimed property from companies.  First rule grants priority to the state of the (unclaimed property) owner’s last known address as reflected on the company’s records, while the second rule grants priority to the state of company’s incorporation when there is no owner’s address (or the address is in a foreign country). 

For reasons beyond the scope of this blog, many companies are incorporated or choose to incorporate in Delaware, and unlike in other states, this provides Delaware with a critical mass of companies over which to exercise the second priority rule.  In general, there is no statute of limitation to stop the states from claiming historical and past due unclaimed property.  States can “look-back” or “reach-back” to the last 10 or 15 years to claim past due unclaimed property from companies.  Delaware’s Escheator VDA can reach-back to 1991, while their audit examination can reach-back to 1981.  Time out…we’re now talking about a state reaching back 20 or 30 plus years and you’re beginning to ask yourselves how are you going to find all your historical accounting records, starting with the most recent years.  Good luck to you and your company as you embark on this treasure hunt, and keep in mind that lack of accounting records does not translate to a get-out-of-jail-free card. 

Now that I have your undivided attention and hopefully you’re now beginning to think of how to get a get-out-of-jail-free card, I want to inform you that the states have the authority to estimate past due unclaimed property when companies don’t have historical accounting records to determine the actual unclaimed property due to the states.  Said differently, in the absence of historical accounting books and records, Delaware can and will estimate a company’s past due unclaimed property to determine the unclaimed property due to the state….thereby exercising the second priority rule.

Let’s discuss your get-out-of-jail-free card; for a period starting July 1, 2012 and ending June 30, 2015, Delaware’s Secretary VDA is providing a reduced look-back period as an incentive for companies to enter into an agreement with the state and voluntarily report all past due unclaimed property to the state.  A look-back to 1996 (5 years less than the reach-back for Escheator VDA) is provided to companies that sign up for the Secretary VDA before June 30, 2013 and pay their past due unclaimed property to the state by June 30, 2014.  In addition, a look-back to 1993 (3 years less than the reach-back for Escheator VDA) is provided to companies that sign up for the Secretary VDA after June 30, 2013 but before June 30, 2014 and pay their past due unclaimed property to the state by June 30, 2015.  However, the Secretary VDA will not be available to companies that do not sign up before June 30, 2014 or pay their past due unclaimed property by June 30, 2015.

Ok, I bet you’re now asking yourself whether your get-out-of-jail-free card is for real or not.  Well, thanks to Delaware, this is the card you get.  For some companies, this card could be a bargain especially if they have multi-million dollars of (estimated) past due unclaimed property during each of the historical years and removing 3 to 5 years from the equation may add up.  Some realities for companies to consider include:

1. Depending on the size of the companies, it is almost impossible to complete a review of the company’s accounting records to adequately determine the past due unclaimed property within the specified timeframe without having to deal with multi-million dollars in potential past due unclaimed property.
2. Most companies will underestimate the level of commitment (especially from their management), associated cost involved and resource requirements to address their VDA program with Delaware.
3. Companies that are incorporated in Delaware, have never filed unclaimed property reports to the state, have no physical presence in the state and have been in business for some years will most likely have past due unclaimed property to report.
4. It is not uncommon to benchmark companies within the same industry to determine their categories of unclaimed property and potential amount of past due unclaimed property.  Companies should be aware of the common unclaimed property issues within their industries and should not wait to find these out directly from the state. 

The new Delaware VDA program (i.e. Secretary VDA), even though it provides an incentive for companies to come forward and comply with the state’s unclaimed property laws, still leaves a lot of doubt as to whether it is truly a “window of opportunity.”  The program could be the solution that some companies have been waiting for or could end up as a nightmare for others.  There is a lot of money at stake for both the state and companies, and it behooves the company’s management to be well informed before signing up for the new Delaware VDA program.