Stop! Have You Checked For Exemptions?
A lot of companies are in the process of preparing their states’ unclaimed property reports, which are due on October 31st or November 1st depending on the state. Common examples of accounting transactions that have remained outstanding on a company’s books and records for a statutorily defined period of time and should be reported to the states as unclaimed property are uncashed checks, aged credit balances, unredeemed gift certificates, etc. Some of these outstanding transactions could be due to employees, customers, vendors or shareholders (for publicly traded companies). Based on the “Priority Rules” defined by the United States Supreme Court in 1965, companies with these outstanding transactions should report them to the state of last known address of the employees, customers, vendors or shareholders. In the absence of the owners’ last known address, these transactions should then be reported to the company’s state of incorporation. However, before these transactions are reported, most of the states require a level of due diligence to be performed in order to reunite the amounts due with their rightful owners (i.e. employees, customers, vendors or shareholders).
Regardless of the states’ reporting requirements, some states have exemptions that are applicable to certain transactions. These exemptions vary by state and can be grouped into 4 categories:
1) Business to business (B2B) exemptions: About 14 states have some form of B2B exemptions applicable to transactions generated between two businesses. For example, Ohio has a broad B2B exemption that applies to any payment or credit due or payable between two business associations in the ordinary course of business [Sec. 169.01 (B)(2)(b) &(c)]. Wisconsin’s B2B exemption applies to only credit balances issued to a commercial customer account by a business association in the ordinary course of business [177.01(10)(b)]. On the other hand, Tennessee’s B2B exemption applies to such transactions like checks, credit balances, customer overpayments or unidentified remittances issued as part of a commercial transaction in the ordinary course of business, provided that both businesses have an ongoing relationship within the dormancy period [66-29-104(3)(C)].
2) Industry specific exemptions: Some states have exemptions that are industry specific. For example, Florida has an exemption for companies in the transportation industry that are registered with the Surface Transportation Board (STB) formerly known as the Interstate Commerce Commission (ICC). This exemption eliminated the obligation to report, pay or deliver such intangible property held, issued, or owing to another business association [717.117 (7)(b)]. In addition, Florida’s industry specific exemption also applies to credit balances, overpayments, refunds, or outstanding checks due and owing by a health care provider to a managed care pay or under a managed care contract [717.117 (7)(c)]. Florida also exempts unclaimed patronage refunds of entities organized under Florida’s Rural Electric Cooperative Law [717.117 (7)(a)]. Kentucky exempts from their annual unclaimed property reporting requirements, those nonprofit organization registered as tax-exempt entities under the Internal Revenue Code Section 501(c)(3) [393.010(2)(a)].
3) Gift certificate or card exemptions: A few states exempt gift certificates and cards from the application of their unclaimed property laws. North Carolina exempts gift certificate or electronic gift cards provided that it’s conspicuously stated that the certificate or card does not expire. In addition, Tennessee also exempts gift certificates provided that no dormancy charges are imposed, it’s conspicuously state that the gift certificate does not expire, the gift certificate bears no expiration date or states that the printed expiration date on the certificate is not applicable in Tennessee [66-29-135 (c)].
4) De Minimis exemptions: The last group of state exemptions is the de minimis exemptions. Florida exempts credit balances, customer overpayments, security deposits, and refunds having a value of less than $10 [717.117 (1)(h)]. In addition, Kentucky exempts wages or salaries of $50 or less that are not claimed with a year [393.010(2)(a)]. Arizona exempts account balances of $50 or less payable between two business associations [44-301(3)].
Based on the aforementioned Priority Rules, the state exemptions will only apply when the owner’s last known address is located in the state providing for the exemption. For example, Ohio’s B2B exemption will only apply if the outstanding transaction is due to a business customer or vendor with a last known address in Ohio. However, there is a potential risk that other states, such as the company’s state of incorporation (especially Delaware) could also attempt to claim these exempt property based on the Priority Rules.
Companies planning to take advantage of the exemptions in order to minimize the amount of unclaimed property they plan to report to the states should first consult with their legal counsel to determine the applicability of such exemption and the necessary supporting documentation that should be maintained. Although not an exemption per se, it should also be noted that states’ unclaimed property laws do not apply to property held, due and owing in a foreign country and arising out of a foreign transaction.