Delaware Corporations and Other Business Entities Should Consider Enrolling in Delaware’s VDA Program By June 30, 2013
Delaware corporations and other business entities have a limited opportunity to minimize and liquidate exposure to Delaware unclaimed property liability by enrolling in Delaware's Voluntary Disclosure Agreement Program. The VDA program permits companies not under audit to voluntarily disclose and pay the amount of unclaimed property without interest or penalties. To obtain the maximum benefit of the VDA program—a waiver of all interest and penalties on reported property from transactions in 1996 and later, and an exclusion of property arising from transactions that took place prior to 1996—a company must enroll by June 30, 2013. An audit could otherwise subject a company to liability for transactions that took place as far back as 1981, plus interest and penalties which could double the amount due.
All that need be done by June 30 is to make the decision to enroll, and to fill out a simple form. Completing the enrollment form is not an acknowledgement of liability, but is a commitment to conduct an internal review to determine whether or not there is liability, and to make payment if liability is found. There is then a two-year period, until June 30, 2015, to file the report and pay any unclaimed funds due to Delaware from transactions in 1996 and later.
Most companies have some exposure under unclaimed property laws, which require that property such as uncashed payroll checks, uncashed vendor checks, uncashed dividend checks, unredeemed gift certificates (in some states), unredeemed cash rebates (in some instances) and other intangible property be paid to a state. The state of the owner's address has the first priority right to take the property. If that state is not known, or if the owner's address is in a foreign country, the state of incorporation (or formation) of the "holder" of the property has the right to take the property.
Companies likely to have the greatest unclaimed property exposure to Delaware include:
- Delaware companies whose business is likely to produce a significant volume of unclaimed property owed to persons or companies whose address is not known, or whose address is in a foreign country.
- Businesses which have significant dealings with employees, vendors, and customers in Delaware—especially if the nature of the transactions, such as seasonal employment, vendors used for a short time, and a liberal policy on accepting returns resulting in credit balances, is likely to result in unclaimed property.
The Delaware Legislature enacted the VDA program in recognition of the fact that many companies "have not historically" filed unclaimed property reports and paid unclaimed property to the State of Delaware. While regular responsibility for unclaimed property in Delaware is vested in the State Escheator in the Division of Revenue, the statute gave responsibility for the VDA program to the Secretary of State, noting that "the Department of State is uniquely situated to conduct an outreach program to Delaware entities … given its expertise in marketing to Delaware entities." In other words, the Legislature decided that companies would expect the Secretary of State—whose job includes persuading businesses to incorporate in Delaware—to conduct a fair VDA program.
The VDA program offers these financial incentives:
- Waiver of interest and penalties. All liability for interest and penalties is waived on reported property. Otherwise a holder with unclaimed property liability can face interest and penalties aggregating as much as 100% of the unreported unclaimed funds.
- Waiver of State's right to audit. If the Secretary of State approves the report filed by the holder, the State of Delaware waives its right to audit for any time period prior to the end of the time period covered by the report.
- A shorter "look-back" period than in an audit. If a holder enrolls by June 30, 2013 (and later timely files a report and makes payment approved by the Secretary of State), the holder need only report property which arose from transactions in 1996 and later; all liability for transactions prior thereto is waived. If a holder enrolls after June 30, 2013 but before June 30, 2014 (and later timely files a report and makes payment approved by the Secretary of State), the holder need only report property which arose from transactions in 1993 and later; all liability for transactions prior thereto is waived. Outside of the VDA program, in an audit, a holder is liable for principal, interest, and penalties for property which arose from transactions going back to 1981.
After enrolling, a holder must prepare a VDA Work Plan, in communication with the VDA Administrator acting on behalf of the Secretary of State, which will include plans for the holder's internal review of its records, provision of data to the Secretary of State, and preparation of a report, leading to final filing of a report by June 30, 2015 and payment of the amount due.
There are, of course, risks to participation in the VDA program, including these: Most companies will not know, before undertaking a self-review, the amount of their exposure. If a dispute arises between a company and the VDA Administrator as to whether particular property is subject to payment to Delaware, the VDA Administrator, on behalf of the Secretary of State, can refuse to accept the company's report—and thus deny the company the benefit of the VDA program—unless the company accepts the VDA Administrator's position. The VDA program will only resolve unclaimed property liability to Delaware, not to other States.
The risk of not participating is clear: It is expected that Delaware's Division of Revenue will ramp up enforcement of the State's unclaimed property laws through audit.