An often overlooked due date on the calendar of many professionals and businesses is November 1, the due date for “unclaimed property” reporting. Many people simply do not understand what constitutes “unclaimed property” or how to deal with it. The purpose of this article is to give you a high level understanding of Nebraska’s unclaimed property laws.
Common examples of unclaimed property include un-cashed payroll and vendor checks, credit memos, unreturned deposits, unredeemed money orders and travelers checks and unused gift certificates. In Nebraska, to handle unclaimed property, the Unicameral has enacted the Revised Uniform Disposition of Unclaimed Property Act (the “Act”). Shane Osborn, Nebraska’s State Treasurer, administers and enforces Nebraska’s unclaimed property laws.
A full understanding of you and your client’s obligations with respect to unclaimed property begins with the concept of “holders” and “dormancy periods”. In short, the obligations imposed by the Act apply to anyone holding unclaimed property beyond the dormancy periods set forth in the Act. The general dormancy period for unclaimed property in Nebraska is five (5) years. The Act specifies different dormancy periods for the following (among others) types of property:
Payroll One (1) year after becoming payable. Intangible property distributable in the course of the dissolution of a business association Two (2) years following the date of final distribution. Gift certificates Three (3) years following issuance. Utility deposits, fees and refunds Three (3) years after termination of services. Credit memos Three (3) years after issuance. Funds from money orders Seven (7) years after issuance. Travelers’ checks Fifteen (15) years after issuance.
Anyone holding unclaimed property beyond the dormancy period is required to prepare and submit a reporting form on or before November 1 for the 12-month period ending the previous June 30. Reports for life insurance companies are due on or before May 1 for the calendar year ending the previous December 31. The State Treasurer has the authority to issue an extension of these due dates upon the written request of the holder.
Holder reporting forms are available through the State Treasurer’s website located at http://www.treasurer.state.ne.us. Holders reporting twenty (20) or more items of unclaimed property are asked to submit their report on diskette using the National Association of Unclaimed Property Administrators’ format, which can be found at http://www.wagers.net. In addition to submitting the form, (unless excused by the State Treasurer for good cause), all reported unclaimed property must be turned over to the State Treasurer’s Office at the time the report is filed.
It should also be pointed out that the running of the applicable statute of limitations period (e.g. via a contract forfeiture provision), prior to the time such property is required to be reported does not prevent the property from being required to be reported and turned over to the State Treasurer.
Prior to reporting unclaimed property and turning it over to the State Treasurer, there is an element of due diligence that the holder must perform. All holders of unclaimed property who know the whereabouts of the owner must communicate with the owner and take “necessary steps” to prevent abandonment of such property prior to filing the unclaimed property report. In short, the Act requires the holder to exercise “due diligence” in ascertaining the whereabouts of the rightful owner and attempting to return the property to them.
Once property is turned over to the State Treasurer, the holder is relieved from all liability (to the extent of the value of the property turned over to the State Treasurer), for claims then existing or which arise thereafter with respect to such property. In turn, any holder who subsequently makes payment to the rightful owner of the unclaimed property is entitled to be reimbursed by the State Treasurer’s Office. Alternatively (and as a less risky approach to the holder), the rightful owner should be advised to file a claim directly with the State Treasurer’s Office in order to have the property returned to them. The rightful owner of unclaimed property is not entitled to income earned on property following the turnover by the holder of the property.
As referenced above, the State Treasurer has responsibility for administering and enforcing Nebraska’s unclaimed property laws. Normally enforcement action by the State Treasurer’s Office begins with a demand to file a verified report within thirty (30) days. In order to enforce such demand, the State Treasurer must have “reason to believe” that the person has failed to report unclaimed property in accordance with the terms of the Act. The State Treasurer may also examine the records of a person believed to be in violation of the Act. If an examination by the State Treasurer discloses property which is reportable under the Act, the State Treasurer may assess the costs of the examination against the holder (subject to a maximum of the value of the property found to be reportable).
An action by the State Treasurer relating to unclaimed property must be commenced within seven (7) years after the holder files a report. Although “zero reporting” is not required by the Act, the 7-year statute of limitations does not commence until a report is filed. Each holder of unclaimed property required to file a report under the Act must also maintain a record of the last-known address of the owner for seven (7) years after the property first becomes reportable. Any holder that sells travelers checks, money orders or other similar instruments on which the holder is directly liable must maintain a record of those instruments while they remain outstanding, indicating the state and date of issue, for three (3) years after the date the property is reportable.
A person who fails to pay or deliver unclaimed property within the time prescribed by the Act is obligated to pay interest to the State Treasurer on the value of such property beginning from the date the property should have been turned over. A person who willfully fails to render an unclaimed property report or perform other duties required under the Act is liable for a civil penalty of $100 per day, subject to a maximum of $5,000. A person who willfully fails to pay or deliver property to the State Treasurer is liable for a civil penalty equal to 25% of the value of the property that should have been turned over. Interest and penalties may be waived for “good cause” shown. A willful refusal to pay or deliver abandoned property also constitutes a Class II misdemeanor.
Special rules apply to property owed to out-of-state owners. If unclaimed property otherwise subject to the provisions of the Act is owed to an owner whose last known address is in another state by a holder who is subject to the jurisdiction of that state, such property is not presumed abandoned in Nebraska so long as: (a) it may be claimed as abandoned under the laws of such other state; and (b) the laws of such other state make reciprocal provisions that similar property is not presumed abandoned by such other state when held for or owed or distributable to an owner whose last known address is within Nebraska by a holder who is subject to the jurisdiction of Nebraska.
In order to take advantage of the above provision (and thus not report unclaimed property in Nebraska for owner’s whose last known address is outside Nebraska), the Nebraska statute requires that the holder must be subject to the jurisdiction of such other state. This raises a dilemma for a holder of such property. Does the holder take the chance and not report such out-of-state owners’ property to Nebraska, thus arguably conceding the jurisdiction issue? Or does the holder report such property in Nebraska and take the chance that another state will not try to assert jurisdiction over them for such property?
Although unclaimed property laws operate much like state taxes (i.e. from a reporting, audit and enforcement standpoint), in reality they are not taxes, but rather regulatory laws governing the custody and control of property held by one party but belonging to another. This fundamental difference between taxes and unclaimed property laws could have a significant impact on a state’s ability to assert jurisdiction over an out-of-state holder of unclaimed property. Although for tax purposes, “substantial nexus” is required to be present before a state has the authority to impose a tax on an out-of-state taxpayer, for unclaimed property purposes, it is likely that a state attempting to assert jurisdiction over an out-of-state holder of unclaimed property would only need to show: (i) that the state’s regulation of unclaimed property is “rationally related” to a legitimate state interest (e.g. locating the rightful owners of property, some of which may be residents of such state); and (ii) that the burden imposed on interstate commerce (and any discrimination against it), are outweighed by the state’s interest in enforcing such laws. Thus it may well be that holders could owe unclaimed property responsibilities to states in which the holder has no substantial nexus of the type normally required to support a state’s jurisdiction to impose a tax on such person.
Unclaimed Property – Best Practices/Actions to Take Now.
1. Conduct a diligent search to determine what unclaimed property you have in your possession which is beyond the applicable dormancy period.
2. Report and remit such property to the State Treasurer’s Office.
3. Develop policies and procedures to track your reporting obligations.
4. Report new unclaimed property on an annual basis.
5. Maintain documentation to support your reports for seven (7) years.