Delaware Opens Dramatic Voluntary Disclosure Program Aimed At Businesses Holding Unclaimed Property Payable To The State Of Delaware

In an effort to stem the backlash from Fortune 500 companies incorporated in Delaware that have long been the targets of the state's aggressive unclaimed property audits, the state has adopted a sweeping new Voluntary Disclosure program. This new program potentially differs substantially from the approach of the contingent fee contract auditors that Delaware has long relied on for audit enforcement of its unclaimed property laws. For Holders that meet the new Voluntary Disclosure requirements, Delaware will reduce the Holder's liability reachback period by 15 years, from 1981 to 1996, and waive all interest and penalties. This could reduce a typical Holder's potential liability dramatically.

What is Unclaimed Property and Why is it Important to my Business?

All 50 states have enacted unclaimed property laws requiring businesses and others (the Holders) to remit ("escheat") to the proper state any monies or other property owed by the Holder to the property's Owner once the property remains unpaid or otherwise unclaimed ("dormant") for periods ranging from typically one year to five years, depending on the type of property at issue.1 The states then hold the turned-over unclaimed property until claimed by the lost Owners. That seldom occurs in practice. States are currently holding more than $41 billion in unclaimed property but only a percentage of that is ever reunited with "lost" Owners. Hence, unclaimed property has become an increasingly important (and permanent) source of revenue for cash-strapped states with none of the political and due process constraints that typically restrict states in collecting taxes and fees.2

Why is Delaware Important to My Company's Potential Unclaimed Property Exposure?

Unlike state income tax or sales tax, where the tax is generally due to the state in which the seller or buyer operates or resides, unclaimed property has a unique ordering protocol to establish the state to which a Holder must report and remit unclaimed property. The U.S. Supreme Court in 1965 imposed the following rule that remains the law of the land today:

If an Owner's last known address is found in the Holder's books and records, the Owner's unclaimed property is remitted to the state of that last known address; But if that address is unknown, the property remits to the Holder's state of corporate domicile. As a practical matter, this ordering rule results in a substantial portion of unclaimed property remitted in the United States in...

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