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EPISODE 67: Businesses and individuals alike could potentially have unclaimed property sitting with the states. But how does your money end up with the state in the first place? Tommy Varnell of DHG's State and Local Tax practice joins this week's Growthcast to discuss what qualifies as unclaimed property, how your money gets to the state, and how you can claim your unclaimed property.



[00:00:09] JL: Welcome to today's edition of DHG's GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.


[00:00:58] JL: Today's guest on GrowthCast is Tommy Varnell, a Director in DHG's State and Local Tax practice to discuss our topic, unclaimed property. Welcome to GrowthCast, Tommy.

[00:01:09] TV: Thank you, John. It's so good to be here.

[00:01:12] JL: Well, I hear that you spend quite a bit of time helping people understand the challenges and opportunities associated with unclaimed property. So let's just start at the beginning, shall we? Give me a brief description of unclaimed property.

[00:01:28] TV: Sure. I'm sure a lot of people are familiar with unclaimed property. For most of us as individuals, you probably think of it from the side of, "Hey, does the state have money that's owed to me? Can I go to a state's website or website like and look for the funds that should have been paid to me but that weren't?" So part of that process that you probably don't spend a whole lot of time thinking of is, "Well, how did that money even get to the state?" So that's where we come in to help, and what a lot of companies deal with in this space is how does the process work to get the money from the company that may have owed you money to the state where you go to claim those dollars?

[00:02:11] JL: Great. When you think about this, obviously, we see the ads on TV and we get the mailers, but what types of properties are typically considered unclaimed property?

[00:02:23] TV: That's a great question, John. The most common that you see are outstanding checks. So a company writes you a check. For some reason, it's lost in the mail or never is cashed, and so that outstanding balance is still there. It's owed to you. Another very common area that may not be as apparent to us as individuals, but on the business-to-business side it comes up a lot is outstanding accounts receivable credits. If a vendor is owed a credit from a company because of an overpayment or return or something like that that occurred but that was never settled, that's another area where there could be unclaimed property due for that area.

[00:03:14] JL: How does this unclaimed property reporting typically work?

[00:03:19] TV: With unclaimed property reporting, there are several terms that I'll go over here because there's certain things that you need to know of from a high level in order to understand how the process works. Some of the things I'll go over in further detail are sourcing, dormancy periods, due diligence process, and then the actual reporting process. All of that kind of goes together in order to get the funds from a company to the state.

The first is sourcing. When you think about unclaimed property, the first thing to think about is, "Well, where is it even due? Which state is it reported to?" There are two sourcing rules that typically come into play. The first is the funds or the outstanding unclaimed property. We go to the state of the last known addresses of payee. So if you owed someone a check or have an outstanding AR credit balance, that would go to the state of the customer or vendor where they're located. If they were located in Georgia but never cashed that check, then ultimately that will get reported to the State of Georgia.

Now, in some instances, there's not a last known address. For some reason, maybe as part of the business process, you didn't record an address for that customer vendor. Sometimes, things like gift cards where there's just not a process to collect that information at all. For times like that where there's not a last on a dress, then those dollars would go to the state of incorporation or formation for the company that's reporting. So many companies are formed or incorporated in Delaware. That's why I see Delaware is such a popular state, which we'll cover in more detail as we discuss here. But that's why you see the state of incorporation is so important in this space is because for those unknown addresses, that's where the funds get reported.

Something else I do want to point out here is typically dealing with tax, and I've dealt with a lot of state tax, you have this concept of nexus. When you think of nexus, you think, "Well, I don't have to report in the state unless I have nexus in that state, unless I have some form of presence," which historically speaking from a sales tax perspective, which has been a lot of times sales tax, is I have a physical presence or more recently have some level of economic presence in a state that requires me to register and fall tax in that state.

Well, with unclaimed property, there is no concept of nexus, so it doesn't matter how minimum the balance is due to the state. If you do owe property to the state, then you're still required to file the unclaimed property for that state if your vendor or customer has an address in that state. That's something that is missed a lot in this area because many companies are thinking more through nexus, which really just doesn't apply to unclaimed property.

Another thing that I wanted to cover here is dormancy periods. Basically, the dormancy period is the amount of time that you hold unclaimed property until it becomes due to a state. Every state is a little bit different with how they define dormancy periods. What you typically see at a high level is a three to five-year dormancy period for most property types. So AP checks, for example, if you write a check to someone and they don't cash it, three or five years later, then you would report that to the state. So you do have plenty of time to still try to reunite those funds with the rightful owner well before it's due to the state.

With as far as dormancy periods go, another common item that's reported is payroll checks or funds due. With payroll, those dormancy periods are typically a lot shorter. So companies or states like to make sure that employees are united with any wages due to them. Those dormancy periods are typically only one year for most states, so they really want to make sure that employees are united with their wages a lot sooner than that three to five-year period.

Another thing that occurs in unclaimed property is almost every state has a due diligence process. So the due diligence process is basically the process by which every company that has unclaimed property that's about to be reported will go through a process of trying to reunite those funds with the rightful owner one last time before it's reported to the state. Almost every state requires this, so you don't just go from having these outstanding balances to sending them to the state. The states do require an outreach to your customers and vendors where you have outstanding balances. Just make sure that you've made every effort to get those funds to them. Then in the end, if you still can't reach them, then it becomes reportable to the state.

Kind of the last step of all of that is the actual reporting. Reporting for most states occurs in the fall, so most states have – You think of it as kind of what the year is reporting. Most states have a July to June reporting period, and then those reports are due November 1st. That's what you see for most states. So anything that becomes dormant during that July to June period, you go through the due diligence process at some point after the June cut off, before the November filing is due. So you do your due diligence. Then whatever is still remaining outstanding at that point, that will get reported on your November unclaimed property report.

There are also a number of states that follow a more traditional calendar year reporting period. So we do see that a lot as well to have a December 31st cut off, with those filings being due sometime in the spring for those states. They also follow a similar due diligence process, as well as the other type of states.

[00:10:01] JL: If I understand what you're saying, it would be important for the individual to know what the state dormancy period is or where the vendor has the property, right? I mean, that you need to know whether it's three to five years to be able to inquire, I guess, regarding a claim to start with.

[00:10:24] TV: That's exactly right. Yeah. It's very important to know the state. The big thing there is, just so you know, what dormancy period am I even applying to this property. Because they do vary in dormancy periods, you want to make sure you have the right state in mind, so you don't want to assume something's a five-year property. If it's really a three-year property, then all sudden you're two years late reporting something which can introduce penalties into the scenario. Yeah. Very important to know from a sourcing standpoint which state the property should be assigned to, so you can best track both the sourcing and the due diligence process.

Even in some states, what can come into play is there are certain exemptions that states have, so you want to make sure that you're capturing any potential exemptions that may take place. One of the most common exemptions is a business-to-business exemption, so there are – The list is becoming shorter, but there are some states that will say if your outstanding balance is due to another business association, we don't consider that to be unclaimed property. We're really here for the individual that has unclaimed funds. We want to try to help them. If it's a B2B transaction, we think that can be settled between the business entities, and the state doesn't necessarily need to get involved in that process. So understanding that, so you know if an exemption applies, that's also another reason to do always make sure you're capturing the right state.

[00:12:06] JL: That's great. Let's say I've researched my records for the past three years and I have minimal unclaimed property. Should I be worried?

[00:12:16] TV: Well, potentially. Beyond not having nexus, another thing with unclaimed property is the look back period is going to be extremely long. As I have my tax hat on, I'm thinking nexus. Typically, if I'm going into the state and looking at what I'm trying to address, a situation to report, historical taxes due, I'm usually looking at a three to four-year period with that state and how far I have to look back. With unclaimed property, again, you already don't have nexus. Beyond that, the look back periods are extremely long, in most cases. So many states will follow this 10-year rule where either statutorily or just kind of by their general guidance, if you're going to report to that state, they'll say you have to go back 10 report years.

As we talked before about dormancy periods, just because you're going back 10 report years, it doesn't mean you stop looking at records that are 10 years old. Then you have to letter in the dormancy period. So if you're looking at a report that was, say, in 2021, if you're looking at the 2011 report, if there's a five-year dormancy period, then you're looking at property all the way back to 2006. You're having to go way back and look at records that are very old. So even though things look good maybe in the short term, you really do need to understand maybe what has happened historically with your company to see if there were any potential obligations beyond that period.

Another thing that can happen in this area is if you don't have records going back that far, which in most cases companies don't keep records going back 15 years or at least not very good records, it's just difficult to manage a process for that long. What most states will require you to do if they're either looking at you from an audit standpoint or if you're doing a voluntary disclosure in that state to try to come and clean reporting prior unclaimed property due, they'll actually have you estimate what you think your liability was. Then you extrapolate that back over the reporting period.

So even if you have a minimal amount due, say, for a three-year period, if you're having to extrapolate that over 10 report years, that can really grow a lot. So thinking of things like that, you really have to keep in mind that most states will require you to go back much further than a traditional tax audit or tax voluntary disclosure.

[00:15:12] JL: It sounds like you need to really be knowledgeable about your state requirements here, which leads me to my next question. How do states enforce compliance?

[00:15:24] TV: As we've kind of talked before, unclaimed property is different in tax in many ways. Beyond the nexus concept that doesn't exist within playing property, the extremely long look back periods. Well, another area that really kind of leads to non-compliance often is with unclaimed property, unless you have unclaimed property due, there's typically not a filing requirement or annual filing requirement to file every year for a given state. Because it's not maybe on a company's radar that, "Hey, we know that every November we had to file in this state, that state, that state," a lot of times that can be missed because it's not just part of their owner compliance calendar.

Now, many states will say, once you start reporting in a state, then you have to report there prospectively, even if you don't have unclaimed property dues. You may be filing zero returns, but at least you're getting on as part of your routine now, so that helps a little bit. Hopefully, most companies, once they do start filing, they're kind of keeping up with those states that do have – What they do, they call it negative reporting requirements. So even if you don't have any unclaimed property to file, you're still filing your zero reports prospectively. There are some states that do that, but a lot of them don't. Kind of keeping up with that can introduce additional complexities.

Now, as far as how states enforce that compliance, the fact that it may not be on company's radars, you have this this concept of these extremely long look back periods, there's a lot of non-compliance. In most cases, it's not intentional. It's just an area that's just a little bit different than any other tax or fee the companies pay. But the way that most states enforce it is with the use of third-party audit firms. In many cases, you'll have one third-party audit firm who's typically a law firm or an accounting firm that performs these audits on the state's behalf. But in many cases, those firms will represent multiple states in a single audit.

As we said earlier, one company may be paying or remitting unclaimed property to multiple states. It's all depending on where your vendor or customer is located or where you're incorporated. The amount of unclaimed property that you're sending can really vary year to year, and the states where you're sending it can be different year to year. It's not necessarily driven by this is where I have the revenue by state every year, so we know we're filing in these states every year. Unclaimed property is just a little bit of a different animal.

In many cases, these auditors will come in. They represent multiple states, so they're just coming in and looking at your outstanding accounts payable without a specific state in mind. So they'll be looking at it and doing that on behalf of several states. Then they're going in and working with those states to basically issue audit reports on behalf of those states and making sure that you're coming into compliance for those states that they're representing.

[00:19:05] JL: Now, you mentioned – Didn't you mentioned earlier Delaware, obviously a big state for incorporation? So what kind of specialty elements does Delaware offer to this discussion?

[00:19:19] TV: That's a great question, John. So, yeah, Delaware is definitely the biggest player state-wise with unclaimed properties. They definitely leverage to third parties to do their audits. With so many companies being incorporated there, there's a lot of companies that kind of come into the mix with Delaware. Now, one thing that Delaware does that's a little unique is they will actually – If you are coming on your audit in Delaware, they will send you an audit notice but still allow you to opt in to their voluntary disclosure program. So they'll basically send you a letter saying you've been selected for audit. But within 60 days, if you'd like to opt out of the audit and go into our voluntary disclosure program, you can do that.

With that program, it's a little more manageable from the company's perspective. Typically, those cases that the company will either handle it themselves or hire an advocate firm to help administer the voluntary disclosure program. By doing that, Delaware will waive all penalties and interest, which is a great thing. They still have the longer look back period, like we discussed before. They still do have the 10-year reporting period, plus five-year dormancy period. So you're having to go back pretty far, but it does allow a lot of the process to be more in the company's control, versus a typical audit where the third party is coming in and auditing you.

By the way, most of those third-party firms operate on a contingent fee basis, so they're very motivated to try to find whatever unclaimed property they can find because the more they find, the more fees they get. Certainly, if we do have clients or prospects out there that do get those notices from Delaware, definitely take those seriously, and we would we would highly recommend entering into the VDA program because it definitely offers a lot of positive aspects that you may not get with a traditional unclaimed property audit.

[00:21:43] JL: Great advice. I mean, don't ignore those letters, right?

[00:21:47] TV: Yeah. Yeah.

[00:21:47] JL: They probably need a response.

[00:21:50] TV: Okay. One other thing that I want to add regarding Delaware or any other state of incorporation is earlier, we talked about how many states don't have records going back the 10 to 15 years back that you had to look with unclaimed property, so you have to use some form of an estimation process. Well, the way the state's view that from a sizing standpoint is because you don't have a last known address for those periods where you're estimating those unclaimed property amounts, those would go to your state of incorporation or formation, which in many cases for a Delaware entity, that would go to Delaware.

Delaware certainly gets a lot more of an unclaimed provenance reported to them through that process to the estimation process than they do from actual vendors or customers that are located within the state. So it's important to – If you are able to have actual records going back as long as you can, that can become very invaluable in this area because that's less periods that you have to estimate here and less unclaimed property that you may be sending to a state that'll ultimately never get reunited because they're just based on estimations.

[00:23:18] JL: Great advice. As we wrap up here today, Tommy, can you just share with our audience some of the services that DHG offers in this area?

[00:23:26] TV: Sure. Glad to, John. We do a wide array of services with unclaimed property. From your more traditional services, we help clients with just the annual unclaimed property reporting process. So if a client is – We do as small as clients who are just reporting to one or two states to clients who are reporting across the country. So if you need help with that process, we can be there to help you file your annual reports. We provide assistance with the due diligence letters. So some clients prefer to do that process internally, but many decide to outsource that. They don't want to have to send out thousands of letters and track the responses and worry about how that ultimately gets reflected on unpaid property report. So we also provide those services where we're sending those letters out on behalf of our clients and in tracking those responses on their behalf.

We'll do unclaimed property diagnostic services where we're going in, and maybe it's the company that's never reported on unclaimed property or think they have an issue, or maybe they're going through a transaction where this has come up with the buyer or seller. We go in and help evaluate any potential unclaimed property obligations that a company may have. Look at the process, help them get a process in place for unclaimed property. We assist with audits. As I mentioned before, many times these third parties are coming in or sometimes it's the state. That is looking at one or multiple states, so we can help our clients with the audit process. Validate what the auditor is saying is due to see if that's reasonable or not, or push back on any areas where we think that the owner has been way too aggressive.

The last thing I want to mention, and we kind of spoke about before, is with Delaware, obviously, they're the kind of the big player in this space with unclaimed property. We talked about their voluntary disclosure program that they'll allow you to opt in, even after getting an audit notice. So we help a lot of clients out with that process. We are a listed advocate for the Delaware VDA program. So if you go to Delaware's website, they have certain firms that have been approved to represent companies that are going through the VDA process. We're one of the firms that are on that list, so we help clients out. We're their advocate for that. We help them just go through the whole process and work with Delaware and Delaware's representatives to make sure they're getting to a good place with their VDA.

[00:26:25] JL: Yeah. Especially if you're a first time jumping into that pool, I guess having somebody who's been in the water before would be helpful, right?

[00:26:32] TV: Absolutely.

[00:26:34] JL: Hey, Tommy, thanks so much for sharing your insights today. It's been great spending time with you.

[00:26:40] TV: Thank you so much, John. Have a great day.

[00:26:43] JL: And thank you for listening to today's episode of GrowthCast with DHG's Tommy Varnell. We hope that you feel more informed about the different opportunities and challenges surrounding unclaimed property reporting and the impact on your tax planning. I'm your host, John Locke, and I look forward to reconnecting with you soon on another episode of DHG GrowthCast. Until then, be sure to rate, review, and subscribe to DHG GrowthCast on Apple Podcasts, Spotify, or Podbean.

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