One set of legal obligations that are often overlooked by Internet sellers arise under states’ “unclaimed property” laws, sometimes referred to under the arcane label of “escheat.” Black’s Law Dictionary defines escheat as “the preferable right of the state to an estate left vacant, and without there being any one in existence able to make a claim thereto.” Although dense, the definition, once parsed, describes a relatively simple concept: under the laws of nearly every state, a business that is holding property on behalf of a third-party (called the “owner”) is obligated to report and turn over the unclaimed property to the state, after passage of a prescribed “dormancy” period.
Unclaimed property includes customers’ unredeemed gift certificates and gift cards, merchandise credits, and uncashed refund checks. It also includes accounts payable, payroll and benefits, shareholder dividends, and even workers’ compensation funds, among other things. Indeed, any third-party obligation that goes unredeemed may be subject to escheat. For Internet retailers, unredeemed gift obligations can be substantial (although fortunately some state laws include exemptions for gift certificates). Retailers should be aware that expiration dates on gift certificates and gift cards do not apply to states’ right of escheat and that there is no statute of limitations on escheat obligations under most states’ laws.
Essentially, as such property becomes “abandoned” under the applicable dormancy period, the holder of the property (i.e., the retailer) must pay such amounts to the state. As a general rule, the holder is obligated to remit the funds to the state of the last known address of the owner; if the retailer does not have address information for the holder, then the retailer typically must remit the funds to the retailer’s state of domicile (typically, where the retailer is incorporated).
Many states aggressively enforce their unclaimed property laws as a source of revenue. (Among the most active states for unclaimed property audits are Arizona, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, Nevada, Rhode Island, and Tennessee.) Indeed, a number of states are increasing the number of unclaimed property audits they conduct on the belief that there are billions of dollars of unreported unclaimed property. State laws typically impose interest and penalties for failure to report, as well.
Note that there is no nexus rule that limits a state’s constitutional authority to seek to collect unclaimed property from a remote seller. Multi-state audits are common. In addition, many states are now using outside auditors, paid on a commission basis, to pursue collection. Not surprisingly, such “hired-gun” auditors have an incentive to think creatively and to conduct wide-ranging, time-consuming audits that examine records going back decades.
There are strategies for managing unclaimed property obligations and reporting. If you believe your company faces unclaimed property reporting requirements which have not yet been addressed, consult legal counsel for advice on the various solutions available.