State and Local Tax Baker & McKenzie Global Services LLC 300 East Randolph Drive Suite 5000 Chicago, Illinois 60601, USA Tel: +1 312 861 8000 Fax: +1 312 861 2899 Client Alert July 17, 2015 Big Changes, New Opportunities for Delaware Holders of Unclaimed Property On July 1, 2015, Delaware Senate Bill 141 (“S.B. 141”) was unanimously approved by the Delaware House of Representatives. The bill amends Delaware’s Abandoned and Unclaimed Property Law (“AUP Law”) to provide some favorable (and other not-so-favorable) changes. These changes have outsized significance because, under rules established by the US Supreme Court, the state of incorporation of a “Holder” (a person in possession of the property of another person) has the right to escheat unclaimed property if the address of the owner of the property is unknown. This rule has become a windfall for Delaware, and a source of frustration, and worse, for business entities formed under Delaware law. S.B. 141 was previously unanimously passed by the Delaware Senate and is widely expected to be signed into law by Governor Jack Markell in the immediate future. Businesses formed under Delaware law, especially those that have not yet been subjected to a Delaware unclaimed property audit or participated in a Delaware unclaimed property voluntary disclosure agreement, should carefully consider the implications of this legislation. Reduced Look-back Period for Unclaimed Property Audits From the perspective of a Holder formed under Delaware law, one of the more favorable reforms is a shortened look-back period applied in unclaimed property audits. The Delaware State Escheator is now precluded from seeking payment for any amounts owed prior to January 1, 1986, with respect to Holders currently under audit, and 1991, with respect to audits initiated after S.B. 141 becomes effective and through December 31, 2016. Beginning on January 1, 2017, the State Escheator is prohibited from initiating an audit for any amounts presumed abandoned related to transactions that occurred 22 years prior to the year in which the Holder receives the audit notice. This is a welcome change compared to Delaware’s historical look-back period, which permitted the State Escheator to estimate a liability for transaction years dating back to 1981. Interest Unfortunately for Holders, Delaware appears to have offset the projected revenue shortfalls related to the reduced look-back period by reinstating interest on outstanding unpaid amounts. Just last year, with the enactment of Senate Bill 228 (“S.B. 228”) in June 2014, Delaware completely eliminated interest from accruing on unpaid amounts. In an apparent about-face, interest is now reinstated at .5% per month and is capped at 25% of the amount due. The new interest provision is marginally better than Delaware’s previous interest provision (i.e. in effect prior to S.B. 228), which also imposed interest at .5% but capped the amount of interest that could accrue at 50% of the unpaid amount. The S.B. 141 interest provision applies to any late-filed unclaimed property that is reported and remitted on or after March 1, 2016. The State Escheator is empowered with the discretion to waive interest if it finds that the underpayment is due to reasonable cause and not willful neglect. Baker & McKenzie 2 Tax News and Developments – Client Alert July 17, 2015 Statutory Notice Requirement Effective July 1, 2015, the Delaware State Escheator is prohibited from initiating an audit of any Holder unless such Holder has first been notified in writing by the Secretary of State that it may enter into an unclaimed property voluntary disclosure agreement, which is discussed in further detail below. A Holder will have 60 days to respond to the Secretary of State’s voluntary disclosure request, after which the Holder will be referred to the State Escheator for audit. Permanent Voluntary Disclosure Program Established In addition to the above reforms, S.B. 141 establishes a permanent unclaimed property voluntary disclosure program. In the past, Holders who wished to pursue an unclaimed property voluntary disclosure agreement were required to wait until one was offered by the Secretary of State. S.B. 141 provides for a 19 year lookback period with respect to any Holder whose intent to enter into the program is accepted by the Secretary of State on or after January 1, 2017. The new program requires Holders to either make payment in full or enter into a payment plan within two years from the date the Holder was accepted into the program. The Secretary of state is also empowered with the discretion to amend the due date and payment provisions discussed above. Unclaimed Property Reporting Requirements S.B. 141 also amends the provisions governing unclaimed property reporting and compliance in two respects. First, the AUP Law now requires the State Escheator to notify Holders that have filed reports with Delaware in the past five years of their obligation to file a report. In addition, a Holder’s unclaimed property report must now include the name, mailing address, telephone number, email address, and title of a designated employee to serve as the contact person for all correspondence with Delaware regarding unclaimed property reporting and compliance. The Holder is further required to notify Delaware if such contact person has been replaced. The legislation does take several steps to improve the protection of Delaware Holders. In particular, the reduced look-back period and mandatory notice requirement that gives Holders the opportunity to pursue a voluntary disclosure agreement before being selected for audit are two reforms that make Delaware’s unclaimed property regime more equitable than it previously was. There are drawbacks to the bill, the most notable of which is the provision that reinstates interests on underpayments. Notwithstanding S.B. 141’s shortcomings, the legislation does provide new opportunities for business entities formed under Delaware law, and we encourage any such businesses to contact us should they have any questions about how this legislation may affect them. By Matthew S. Mock (Chicago) and Michael C. Tedesco (New York) www.bakermckenzie.com For additional information please contact the authors of this Client Alert or any member of Baker & McKenzie’s North American Tax Practice Group. Robert H. Albaral (214) 978-3044 email@example.com Theodore R. Bots (312) 861-8845 firstname.lastname@example.org Scott L. Brandman (212) 891-3747 email@example.com Matthew S. Mock (312) 861-4215 firstname.lastname@example.org John Paek (212) 626-4232 email@example.com J. Pat Powers (650) 856-5526 firstname.lastname@example.org David Andrew Hemmings (312) 861-3711 email@example.com Stephen W. Long (214) 978-3086 firstname.lastname@example.org Trevor R. Mauck (212) 626-4247 email@example.com Roman Patzner (312) 861-8945 firstname.lastname@example.org David Pope (212) 626-4289 email@example.com Michael C. Tedesco (212) 626-4284 firstname.lastname@example.org This Alert has been prepared for clients and professional associates of Baker & McKenzie. It is intended to provide only a summary of selected recent legal developments. For this reason, the information contained herein should not be relied upon as legal advice or formal opinion or regarded as a substitute for detailed advice in individual cases. 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