«By: JAMSHID EBADI AND SAMUEL SCHAUNAMAN JAMSHID EBADI is a Director with the Abandoned and Unclaimed Property Practice at Ryan LLC, in Greenwood ...»
Journal of Multistate Taxation and Incentives
Volume 23, Number 10, February 2014
Colorado Amends Unclaimed Property Law Regarding
Gift Cards; Will Other States Follow?
States are reviewing their processes and looking for the means to enhance revenue, a
course that includes increasing enforcement efforts and accelerating dormancy periods and
By: JAMSHID EBADI AND SAMUEL SCHAUNAMAN
JAMSHID EBADI is a Director with the Abandoned and Unclaimed Property Practice at Ryan LLC, in Greenwood Villa, Colorado. SAMUEL SCHAUNAMAN, J.D., is a Senior Manager with the same practice group, in Tulsa, Oklahoma, and he has previously written for The Journal. This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 23, No. 10, February 2014. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2014 Thomson Reuters/Tax & Accounting. All rights reserved.
All states, as well as an increasing number of foreign countries, have laws regulating the reporting and remitting of unclaimed property to the respective jurisdictions. Colorado has recently amended its Unclaimed Property Act ("Colorado Act" or "the Act") and the following discussion provides a synopsis of the Act and highlights the recent legislative developments in Colorado affecting the Act. First, however, we provide an overview of what typically constitutes unclaimed property.
While not a "tax," unclaimed property nevertheless has become a significant source of funds for many states. The field of unclaimed property (also referred to as "abandoned property" or "escheat") concerns the requirement that businesses holding such property (the "holders") report the property to state governments. Unclaimed property can include various intangible property, including stocks, bonds, and other securities, and funds represented by uncashed checks; and also tangible personal property such as the contents of safe deposit boxes. Generally, after a period of time established by statute (the "dormancy period"), a state will have the right to acquire an interest in the unclaimed property, subject to the actual owner's right to reclaim the property in the future.
As indicated above, the search for unclaimed property has become an increasingly significant activity for the states. A recent report noted that, currently, "state coffers include over $40 billion in unclaimed property," which is "nearly double the $22.8 billion states held just a decade ago." 1 Colorado's Act, according to a leading treatise in this area, is based upon provisions of the 1981 Uniform Unclaimed Property Act. 2 By developing a general understanding of the Act, as well as the attendant reporting requirements upon businesses and nonprofit organizations, holders will be better equipped to understand their responsibilities under the Act, as well as achieving a better understanding of the unclaimed property compliance process.
Overview Although the precise definition of unclaimed property can vary from state to state,
unclaimed property, as indicated above, generally has four basic characteristics:
The property is intangible personal property (e.g., uncashed checks, outstanding customer credit balances, unclaimed stock certificates), and certain tangible personal property such as the contents of safe deposit boxes.
The property has been abandoned by the owner, or owner-generated activity with respect to the property has ceased.
The property must remain unclaimed or inactive by the owner for the statutorily specified dormancy or abandonment period.
There must be a "fixed and certain legal obligation" of the holder to the owner.
Once a determination has been made that an entity or organization is in fact holding unclaimed property, the next question becomes which jurisdiction is entitled to receive the unclaimed funds. Under the rules of jurisdiction or federal priority rules, which were promulgated by the U.S. Supreme Court in the seminal case of Texas v. New Jersey, 3 the state with the first right to claim the property is the state of the owner's last known address, as shown on the holder's books and records. In Colorado, a "holder"—which is generally the entity responsible for reporting and remitting unclaimed property to the state—is defined by the Act to mean "(a) A person, wherever organized or domiciled, which is: (I) In possession of property belonging to another; (II) A trustee; or (III) Indebted to a person on an obligation; [or] (b) The public employees' retirement association." 4 If the holder of the funds does not have the last known mailing address of the owner on its books and records, the state of the holder's domicile can claim the property. "Domicile" is defined under the Colorado Act as "the state of incorporation of a corporation and the state of the principal place of business of an unincorporated person." 5 Among those jurisdictions that have adopted a formal definition of "domicile," however, those definitions may vary.
Therefore, the holder should review the unclaimed property statutes of the appropriate jurisdictions before reporting and remitting any unclaimed property.
Audit activity for unclaimed property among the states generally has increased significantly in recent years, due in part to low compliance levels with state unclaimed property laws, state budget shortfalls, and a proliferation of contract audit firms. State unclaimed property audits can be triggered by diverse factors, including recent merger and acquisition activity, increased publicity about a company, the revenue of a company, a company's being in a specific targeted industry or having certain property types, filing reports without the requisite industry property types, or even the filing of negative reports. In Colorado, the Act is administered by the State Treasurer's Office, Unclaimed Property Division.
One key fact separating unclaimed property compliance from other compliance obligations (e.g., tax compliance) is that, generally, there is no statute of limitations for potentially reportable unclaimed property not reported to the state. Therefore, unlike a tax audit, state unclaimed property audits in some states can reach back more than ten reporting years. 6 One reason why statutes of limitations in the unclaimed property area are generally not enforceable against the state is because most states, including Colorado, have adopted what are referred to as "anti-limitation" provisions. 7 The Colorado Act does state, however, that the unclaimed property administrator may not bring an action "with respect to any duty of a holder under this article more than five years after the duty arose." 8 The Colorado Act Our broader discussion of the Colorado Act focuses on three areas: a brief overview of some of its key provisions; reporting details pertinent to most holders; and property types that are exempt from application of the law.
Key provisions. The Colorado Act has a broad scope. For example, the Act states generally: "Except as otherwise provided by this article, all intangible property, including any income or increment derived therefrom, less any lawful charges, that is held, issued, or owing in the ordinary course of a holder's business and has remained unclaimed by the owner for more than five years after it became payable or distributable is presumed abandoned." 9 The term "intangible property" is defined by the Act broadly to include a wide variety of property types, including, but not limited to, checks, deposits, interest, dividends, credit balances, gift certificates, refunds, credit memos, unpaid wages, securities, etc. 10 In order to appreciate the myriad of categories of unclaimed property covered by the Act, one should review the document available on the Colorado Treasurer's website, "Property Code/Property Description & Dormancy Period," which lists approximately 100 categories of property that, if unclaimed, are reportable as abandoned property. 11 Unclaimed property reporting and remittance. A wide variety of holders are covered under the umbrella of the Act's reporting requirements. The general reporting information for holders, available on the Colorado Treasurer's website, states that "[a]ll types of companies, including banks, financial institutions and business entities;...
[p]ublic institutions including courts, municipalities, governmental subdivisions/agencies, public corporations or authorities; [and] [n]on-profit entities, hospitals, utilities, estates, trusts, or any other legal or commercial entity" should file an unclaimed property report with the State Treasurer's Office. 12 The annual reporting and remittance due date is November 1, except for life insurance companies, which are to report and remit by May 1.
The reporting period ends on each June 30, except for life insurance companies, for which the reporting period ends on December 31 of the prior year.
Each holder should also be aware of several significant details pertinent to the reporting process. First, the general reporting information states: "If you have NO unclaimed property to report... no report is required." 13 Second, generally all unclaimed property must be reported, with the exception of a small business provision 14 and an "allowable deduction" provision (discussed below). The general reporting information further states, however, that "[f]or ease in reporting, unclaimed accounts or property valued at fewer than $25.00 may be reported by property type in the aggregate. Combine accounts fewer than $25.00 by property type and enter a single total. You may not take a deduction when reporting in the aggregate." 15 Unclaimed property reporting and remittance exemptions and deduction. Unclaimed property practitioners should be aware that there are significant categories of unclaimed property exempt from the application of the Colorado Act, as well as a unique deduction provision referred to above. The following discussion explores the deduction as well as some of these exemptions.
First, a limited exemption exists for certain gift certificates issued by a business that are redeemable only for "food, products, goods, or services" 16 (gift certificates and gift cards generally will be discussed in more detail in the text below, under "Recent Colorado Legislative Developments").
Second, Colorado has a very unique "deduction provision," described by the state's Treasurer as follows: "Except for aggregated amounts, you may by law, voluntarily deduct and retain from each item remitted 2% of the value of the property you are remitting, or $25, whichever is less (L). For some types of property, you may deduct and retain 2% or $25, whichever is more (M)." 17 Accordingly, each category of property on the reporting form is coded as either "L" or "M" to let the holder know if the lesser or greater amount can be deducted. Most types of checks for goods and services and accounts payable appear to permit the greater amount to be deducted. Authority for this provision is found in the Colorado Unclaimed Property Act as follows: "A holder may voluntarily, prior to payment or delivery of said unclaimed property, deduct and retain two percent of the value of the property or twenty-five dollars whichever is more per item." 18 A related statutory provision dealing with holders that are banking or financial organizations then provides that for certain specified types of property, the "two percent... or twenty-five dollars, whichever is less" rule applies. 19 Nevertheless, as explained on the Treasurer's website, in all cases "[t]he amount deducted from each item cannot exceed the amount due the owner. For instance, if the amount due the owner is $10, you cannot retain $25; the amount you would retain is $10." Further, "[h]olders may not retain the allowable deduction for properties associated with states other than Colorado." Also, "[s]afe-deposit/safekeeping items are not eligible for the deductions under this provision." 20 Third, the law provides that the Colorado Act "shall not apply to gaming award points and gaming chips or tokens issued or sold by a licensed gaming establishment before, on, or after the effective date of this section [8/4/04], except to the extent the state has taken custody of any gaming award points or gaming chips or tokens on or before January 1, 2004." 21 Fourth, certain unclaimed property held by agricultural marketing and supply cooperatives, as well as by cooperative electric associations and telephone cooperatives, are also exempted from application of the Act. 22 Fifth, the Colorado Act does not require reporting of unclaimed property held by dog and horse racetracks. 23 Sixth, organizations that are exempt from taxation under IRC Section 501)(3) should review a possible exemption from reporting and remitting delineated in the Colorado Act. 24 Nevertheless, for such organizations that receive "contributions totaling one million dollars or more annually," reporting may be required if certain specified thresholds of unclaimed property are reached. 25
Recent Colorado Legislative Developments
In March 2013, Colorado enacted legislation (H.B. 13-1102, 3/15/13; Laws 2013, ch. 44) to amend the state's Unclaimed Property Act. The legislation includes several key provisions affecting gift card issuers and holders. First, it adds a statutory definition of gift cards to the Colorado Act; previously, gift cards had not been defined in the Act. Second, as described in more detail below, it creates an express statutory exemption under the Act for smaller issuers of gift cards. Finally, it purports to address unresolved claims by the Colorado Treasurer against any business association for payments related to unclaimed gift cards.