Washington Unclaimed Property Law: Considerations for CPAs

By Susan Han, Senior Manager, and Sam Schaunaman, Senior Manager, Unclaimed Property Group, Thomson Reuters

Why should Washington State CPAs and accounting firms care about the various state unclaimed property laws?  Quite simple:  “It’s the Law!”

All states have laws regulating the reporting and remittance requirements relating to unclaimed property compliance.  However, there are still many companies that fail to properly report and remit these items to the appropriate state jurisdiction.  Thus, it is critical for the CPA to have a strong command and understanding of these laws in order to properly counsel their clients.

 

Turning to a discussion of the Washington Uniform Unclaimed Property Act (Act), as stated in the Washington Department of Revenue’s (DOR) “General Information Guide”, abandoned property is defined as “tangible or intangible property unpaid or undelivered to the rightful owner for the time period specified by law.”  These property types can include, but are not limited to, such items as uncashed payroll or account payable checks, insurance proceeds, dormant bank accounts, and accounts receivable credit balances.

 

This article will provide a high level overview of what typically constitutes ’unclaimed property’, and will discuss why companies should keep informed of current developments in this area.  It will then provide an overview of the Act, and will conclude by discussing how companies may proactively address their own compliance programs.  

 

Unclaimed property generally has four basic characteristics:

 

    1.    The property is intangible personal property, subject to certain narrow exceptions, (e.g., contents of safe deposit boxes);

    2.     The whereabouts of the apparent owner is not known;

    3.    The property must remain unclaimed by the owner for a specified period of time (sometimes referred to as the ‘dormancy period’); and

    4.    There must be a ‘fixed and certain obligation’ of the holder to the owner.

Once a determination has been made that the unclaimed property is reportable, the next question becomes: which state is entitled to receive the unclaimed funds?  Under the  ‘priority rules’ promulgated by the U.S. Supreme Court in the seminal case of Texas v. New Jersey, the state of the owner’s last known address (LKA), as reflected on the holder’s books and records, is considered as the state with the first right to the property.   If there is no such LKA, the secondary right to the property belongs to the holder’s state of legal domicile (which, for an incorporated entity, is the state of incorporation.)  Please note that the holder is generally the person, business, organization, or other entity that is the legal obligor on the property or otherwise is in possession of the property that has not been claimed by the owner within the dormancy period.    

 

State unclaimed property audit activity has increased significantly in recent years, due in part to low compliance levels with state unclaimed property laws, state government budget shortfalls, and the proliferation of third-party contract auditors, many of whom are paid a percentage of what they recover.  State audits can be triggered by diverse factors, such as recent merger and acquisition activity, publicity about a company, size of a company, having certain property types, being incorporated in a state that is aggressive in enforcing unclaimed property laws , or even the filing of zero (i.e., negative) reports.  Washington is generally considered a holder-friendly state and tries to find reasonable solutions to help holders come into compliance, as well as reunite unclaimed property with its rightful owners.  However, like the majority of states, the DOR does conduct compliance audits as well as outsourcing examinations through the use of third-party auditors (who are often compensated on a contingency basis).  Depending on the state, unclaimed property audits can reach back over 20 years, so amounts that may not be deemed material in a given year can become material, given the cumulative effect of combining liabilities, interest, and penalties over a fifteen to twenty year period.  

 

In order to appreciate the myriad of property types covered by the Act, one should review the over one hundred property categories delineated in the page  captioned “Property Category Code Table ” found in a document captioned “Reporting Booklet”, which is available on the website of the DOR Unclaimed Property Section.  The website can be accessed via www.unclaimed.org, which is the website for the National Association of Unclaimed Property Administrators, or via the state’s website, which is www.ucp.dor.wa.gov. 

 

With rare exception, a broad range of holders are covered under the umbrella of the reporting requirements. The first page of the Reporting Booklet essentially states that all types of holders, “whether or not for profit”, must file an annual report with the DOR.  Common holders of reportable property include, but are not limited to, financial institutions, insurance companies, hospitals, business corporations, utilities, state and local government agencies, and retailers.  Subject to certain exceptions, most states, including Washington, generally do not exempt non-profit organizations from the duty to report and remit unclaimed property.  

 

Under the Act, holders are required to make efforts to locate the owner prior to reporting the property to the state.  The Reporting Booklet further provides that “For items over $75, written notices must be sent to owners between May 1 and August 1.  The letters, often called ‘due diligence letters’, only need to be sent to owners who have valid addresses.  The letter is intended to inform owners that there is property being held for them which may be turned over to the…DOR’s Unclaimed Property Section due to inactivity.”  

 

CPAs and practitioners in this area should be aware of a category of property that is exempt from the application of the Act.  A document which appeared on the DOR website in 2004 captioned “Gift Certificates and Gift Cards” stated in part “Gift certificates sold after July 1, 2004 may be retained by the business and are no longer reportable as unclaimed property.  However, gift certificates issued after July 1, 2004 shall no longer contain an expiration date, a dormancy or inactivity charge, or include a service fee.”  See Wash. Rev. Code Sec. 19.240.005, and Sec. 63.29.020(6), which provide additional guidance on gift certificates.  Please note that the Act does not exempt merchandise credits that are exempted in some states or business to business transactions that are statutorily exempted in about a dozen states.  Similar to some states, Washington provides that if the remaining value on the gift certificate/card is less than $5.00, it is redeemable in cash ‘upon demand’.  Other exemptions are beyond the scope of this document.

 

Unclaimed property holders in Washington can take proactive steps to reduce their risk and increase their compliance with the Act.   Important elements of an unclaimed property program could include the following:

• Identification of Unclaimed Property Exposure.  Companies should conduct a thorough review of their books and records to identify, research, perform due diligence, and subsequently report and remit any outstanding unclaimed property to the property jurisdiction;  
• Understanding the State Filing Requirements.  Because the states have different dormancy periods depending on the property types, different due diligence thresholds, and different filing deadlines, it is difficult to keep track of every state’s filing requirements.  For example, Washington generally has a three-year dormancy period for most property types, with the most notable exception being payroll, which has a one-year dormancy period.  Washington’s filing deadline is similar to the majority of states, requiring reporting and remitting by November 1 annually all property that has been unclaimed for the required dormancy period as of the preceding June 30;
• Understanding of State Voluntary Compliance Initiatives. Companies should be familiar with state unclaimed property ‘voluntary disclosure programs’ or ‘amnesty initiatives’;
• Setting the ‘Tone at the Top’.  Companies should consider adopting a formalized corporate policy that addresses compliance with state unclaimed property laws.  Preferably, the policy should be rolled out by an appropriate representative of  management, such as the Chief Financial Officer, Controller, Tax Director, or Treasurer, and should be disseminated throughout the organization to any individuals or groups that may touch upon unclaimed property issues; 
• Development of Unclaimed Property Procedures.  Companies should develop and implement detailed formalized accounting procedures for identifying, tracking, reporting, and remitting unclaimed property and retention of related records in accordance with the provisions of applicable state unclaimed property laws; and 
• Formation of an Unclaimed Property Committee. Companies should consider forming an Unclaimed Property Committee.  There are a number of advantages to having such a committee, e.g., spreading the tracking and reporting responsibility burden among several departments, providing for continuity and retention of information within the organization, and creating a formal process to ensure compliance with state unclaimed property laws.      

In summary, due to increased audit attention states are giving to unclaimed property, Washington CPAs should continue to keep informed on the potential implications of the Act and other state unclaimed property laws as they relate to companies located in the state.  Proper review, research, due diligence, and unclaimed property policies and procedures will help Washington based companies become compliant or maintain compliance with the Act and other state unclaimed property laws.  A number of national organizations that include many CPAs as members are becoming active in the area of unclaimed property, including the Council on State Taxation (COST) and the Unclaimed Property Professionals Organization (UPPO),  because this area has emerged as one that will likely continue to grow in importance for the foreseeable future.   

 

Prior to their arrival at Thomson Reuters, Susan Han was a Senior Manager and Pacific Northwest Unclaimed Funds Leader for Ernst & Young, LLP, and G. Samuel Schaunaman, II, was in a similar position in the unclaimed property practice of Deloitte & Touche LLP.