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Unclaimed property historic litigation and legislation May 8, 2017

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Here's the presentation handout and replay link to the Ernst & Young LLP webcast on May 8 about the current legislative and litigation environment affecting unclaimed property.

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Unclaimed property historic litigation and legislation May 8, 2017

  1. 1. Unclaimed property: historic litigation and legislation and their impact on annual compliance May 3, 2017 Watch the webcast replay here ►
  2. 2. ► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances. ► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. ► The views expressed by the presenters are not necessarily those of Ernst & Young LLP. ► This presentation is © 2017 Ernst & Young LLP. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. Disclaimer Page 2 Unclaimed property: historic litigation and legislation
  3. 3. Aurianne Lopatka Ernst & Young LLP Indirect Tax Boston, MA Today’s moderator Page 3 Unclaimed property: historic litigation and legislation
  4. 4. How to get RCH credits For those with CPP or FPC designations Page 4 Unclaimed property: historic litigation and legislation ► RCH credit certificates will be emailed to qualified participants within two weeks of this event ► Be sure you provided the correct email address when you registered for this event ► You must respond “yes” to the RCH polling question that will appear toward the end of this presentation ► You must also respond to all other polling questions during this webcast
  5. 5. Today’s presenters Bob Bazata Ernst & Young LLP Indirect Tax New York, NY Dave Bourgoin Ernst & Young LLP Indirect Tax Dallas, TX Jim Kutz Ernst & Young LLP Indirect Tax Houston, TX Sarah Toi Ernst & Young LLP Indirect Tax Stamford, CT Page 5 Unclaimed property: historic litigation and legislation
  6. 6. Today’s agenda ► Background ► Landscape updates ► Compliance process ► Hot topics – organizational challenges
  7. 7. Polling question Page 7 Unclaimed property: historic litigation and legislation How does your organization perform unclaimed property annual compliance reporting? A. Track records using spreadsheets and generate reports manually B. Utilize a third-party software to track records and generate reports C. Outsource the reporting function D. Not currently reporting E. Does not apply (EY, faculty, other)
  8. 8. Today’s agenda ► Background ► Fundamentals ► Unclaimed property (UP) reporting requirements ► Landscape updates ► Compliance process ► Hot topics – organizational challenges
  9. 9. What is unclaimed property? Page 9 Unclaimed property: historic litigation and legislation ► Tangible or intangible property that is unclaimed by its rightful owner after a significant period of time (called the dormancy period). ► UP is not a tax; often referred to as a “hidden liability” and is remitted dollar for dollar (generally) to the reporting jurisdictions with no nexus type considerations. ► UP laws serve to protect property rights of owners in perpetuity, provide economic benefit to “all” citizens, reunite owners with property, empower states to act as custodian. ► Currently, 54 US jurisdictions have UP laws, which can vary significantly from one jurisdiction to another with respect to reporting due dates, pre-filing due diligence requirements and dormancy periods. ► No organization is exempt from reporting — it applies to all organizations, regardless of industry, even including nonprofits. ► The property to be reported varies, ranging from payroll and accounts payable checks to the most complicated transactions within a client’s business model, like customer billing discrepancies, accounts receivable credits and equity.
  10. 10. Where and why should you report Page 10 Unclaimed property: historic litigation and legislation ► Due to the established sourcing rules and the requirement of some states for negative reporting, organizations typically face a 50-state reporting obligation, regardless of physical presence. As a result of the varying sourcing rules, there can be additional implications related to the organization’s state of incorporation or formation. ► Where to report the property is based upon priority rules, as established by the Supreme Court’s decision in Texas v. New Jersey 379 U.S. 674 (1965): ► First Priority Rule: state of owner’s last known address, as shown on holder’s books and records ► Second Priority Rule: state of holder’s incorporation/formation, if the holder does not have an owner’s last-known address, or if the last known address is a foreign address (generally) ► States are enforcing compliance through increased audit activity, often led by third-party auditors working on a contingent fee basis, with look-back periods up to 15 years. ► Failure to report UP liabilities could result in additional interest and penalties, with little relief in limiting the look-back.
  11. 11. What are the statutory responsibilities of a holder of unclaimed property? Page 11 Unclaimed property: historic litigation and legislation ► If the rightful owner cannot be located, the “holder” of the property has an obligation, after the statutorily defined dormancy period, to: ► Perform statutory due diligence mailings (owner contact) ► File reports annually, in the fall and spring, with all jurisdictions where property is due and owing, as well as in states that require “negative” reports ► Holders must remit payment to the jurisdictions for all property being reported ► Must maintain books and records and copies of supporting documentation and reports for future audit inquiries
  12. 12. Common unclaimed property types (Varies by industry and business model) Page 12 Unclaimed property: historic litigation and legislation ► Unused deposits ► Dormant bank accounts ► Insurance proceeds ► Matured certificates of deposit ► Consumer or customer rebates ► Securities related property: stocks, mutual funds ► Benefit-related property ► Uncashed checks: payroll, vendor, refund, interest, dividends, royalties ► Accounts receivable credit balances ► Unredeemed gift cards ► Merchandise credits ► Customer overpayments ► Unapplied cash or unidentified remittances
  13. 13. Today’s agenda ► Background ► Landscape updates ► Significant litigation ► Legislation ► Compliance process ► Hot topics – organizational challenges
  14. 14. Current environment – significant litigation Page 14 Unclaimed property: historic litigation and legislation Temple-Inland, Inc.: Delaware’s actions “shock the conscience” ► Background ► Delaware corporation principally located in Texas and Indiana ► 2008 audit initiated by Delaware through third-party contract audit firm ► 22-year look back period (1986) ► Records produced back to 2003/2004 in addition to prior reports filed back to 1998 ► Assessed a $2.1m exposure for estimation due Delaware based on an estimation methodology that relied heavily on property escheatable only to other states ► Findings ► June 28, 2016, the US District Court for the District of Delaware (the Court) found Delaware’s executive action of auditing and assessing a multistate corporation’s unclaimed property violated substantive due process ► Court held that the state’s use of the existence of unclaimed property in the base years to infer the existence of unclaimed property in the reach-back years, without replicating the characteristics and qualities of the property within the sample, creates significantly misleading results ► On August 5, 2016, Delaware and Temple-Inland, Inc. reached a settlement agreement
  15. 15. Current environment – significant litigation (continued) Page 15 Unclaimed property: historic litigation and legislation Temple-Inland, Inc. ► Delaware-centric ruling – what does that mean for my organization? ► Resulting legislation ► Impact on other states ► General awareness and appetite for change with the introduction of revised model act ► Other litigation ► MoneyGram – United States Supreme Court examining priority rules ► Office Depot / Marathon Oil – third-party audit firms attempting to review documentation around gift card entities
  16. 16. Legislation – RUUPA Page 16 Unclaimed property: historic litigation and legislation Revised Uniform Unclaimed PropertyAct (RUUPA) – Uniform Law Commission ► 1954, 1981, 1995 and now 2016 (finalized in November) ► 16 states adopted 1995 Act and approximately 40 states have adopted some version in whole or part ► States introducing/enacting 2016 Act ► Enacted: Delaware (SB 13), Utah (SB 175) ► Introducing: Illinois, Minnesota, Nebraska, Tennessee ► American Bar Association version currently being drafted to address more holder-focused issues
  17. 17. RUUPA (continued) Page 17 Unclaimed property: historic litigation and legislation Clarifies property subject to the Act ► Express exemptions for game-related digital content, loyalty cards, 529A plans ► Optional exemptions for gift cards and merchandise credits ► No business-to-business broadly proposed (i.e. IL SB 2603) Guidance on when property is presumed abandoned ► Impact financial services sector and dormancy “triggers” When can states escheat ► Jurisdiction – what is addressable property? ► Foreign property treatment (state of incorporation/second priority when the foreign country does not specifically exempt the property)
  18. 18. RUUPA (continued) Page 18 Unclaimed property: historic litigation and legislation Annual reporting ► 10-year record retention for information required to be included in the report and circumstances giving rise to the property right ► Aggregate reporting suggested at $50 (optional) ► Notice to owners (due diligence) 60-180 days before escheatment by First Class U.S. Mail Statute of limitations ► (1) Five years after the holder filed a non-fraudulent report or (2) 10 years after the holder was required to file a report (if no report filed or a fraudulent report was filed) Audits ► Contingent fee auditors permitted with restriction on fee and state must promulgate rules for method of exam including a reasonable method of estimation allowed
  19. 19. Legislation – Delaware’s SB 13 and regulations Page 19 Unclaimed property: historic litigation and legislation As a result of the Temple-Inland decision…. SB 13 signed into law February 2, 2017 Main considerations from the legislation: ► Establish a 10-year record retention requirement and statute of limitations, coupled with a 10-year plus dormancy look-back period, while under examination or voluntary disclosure agreement (VDA) program ► Allow holders currently undergoing an audit to convert an older examination (prior to July 22, 2015) to a VDA ► Establish a due diligence mailing requirement for general ledger type property, making Delaware the last state to enact such a provision ► Revise the definition of “last-known address” to only require that the state be identified in a holder’s books and records ► Mandate the assessment of interest and provide Delaware the right to waive interest only by 50% ► Delay resolution of Delaware’s unclaimed property estimation and sampling techniques (until July 1, 2017), which the court found lacking in Temple-Inland
  20. 20. Proposed regulations Page 20 Unclaimed property: historic litigation and legislation ► As a result, proposed regulations were promulgated on April 1, 2017 with commentary open until today (May 3, 2017). ► Regulations do not alter the long-standing administrative procedures utilized in the estimation calculation. ► Proposes that Delaware continue to include several factors in the calculation such as property due to any of the 54 other US jurisdictions, even if that jurisdiction chooses to exempt the property from its UP laws. ► For now, avoidance of a notion similar to apportionment within UP for those periods where the second priority rule applies, and an open door for future litigation. ► Additional guidelines are provided in detail in the regulations, with the intent of providing a clear and consistent understanding of the state’s administration of UP program. ► Time sensitive considerations (60 days after these regulations are finalized) ► Decide whether to convert an audit existing before July 22, 2015, into a VDA or ► Agree to an expedited audit process for those audits in process as of February 2, 2017 ► Anticipate an increase in audit activity, VDA invitations, and settlements
  21. 21. Polling question Page 21 Unclaimed property: historic litigation and legislation Has your organization experienced any audit activity? A. Previously went through an unclaimed property audit B. Currently under an unclaimed property audit C. Recently received an unclaimed property audit notice D. Never been audited E. Does not apply (EY, faculty, other)
  22. 22. Today’s agenda ► Background ► Landscape updates ► Compliance process ► Current accounting procedures ► Data collection and analysis ► Exemption and deduction analysis ► Due diligence letter mailings and processing ► Report preparation and filings ► General ledger account reconciliation ► Hot topics – organizational challenges
  23. 23. Annual compliance process Accounting procedures Data collection Exemption and deduction analysis Due diligence mailings and processing Report preparation and filings Reconciliation to general ledger Page 23 Unclaimed property: historic litigation and legislation
  24. 24. Accounting procedures and data collection Page 24 Unclaimed property: historic litigation and legislation Accounting procedures ► Importance of accounting policies at the business unit or functional level – what is performed in the pre-dormancy phase? ► Accounting policies and research timeline can significantly impact reportable property (and asset retention for financial services organizations) ► Documenting and governing what the business unit ownership is responsible for prior to property reaching the escheatment process ► Assess inclusion of all property types and legal entities or business units Data collection ► Streamline an effective data gathering process from the various business units, enterprise resource planning (ERP) systems and functional areas within the organization through assessing use of an escheat holding account and an unclaimed property administrator ► Cross-validate with prior year’s data collection ► Confirm records received is the entire population to process ► Can you standardize the data received from the individual business units in order to reduce manual manipulation and errors?
  25. 25. Exemptions, deductions and deferrals Are you over-reporting? Page 25 Unclaimed property: historic litigation and legislation ► You could be over-reporting your unclaimed property liability if you are not taking advantage of statutory exemptions and deductions. ► Common exemptions and deductions include: ► Business-to-business (B2B), payroll, de minimis and gift cards/merchandise credits ► 36 states effectively exempt gift certificates/gift cards in part or in full. ► 4 states have de minimis exemptions – (AZ $50, FL $10, ID $50, MI $25). ► 3 states have wage/payroll exemptions – properties less than $50 (KY, MI, OH). ► 16 states have some form of business-to-business exemption, which can vary from a near complete exemption from reporting any property held in the ordinary course of business, to deferral of reporting until the ongoing business relationship ceases to exist.
  26. 26. Due diligence Page 26 Unclaimed property: historic litigation and legislation Considerations Statutory requirement ► Prior to reporting unclaimed property to the states, all jurisdictions now require companies to reach out to owners of the property via a due diligence letter as an effort to reunite the owner with their property. ► Varying dormancy periods: most property types 1, 3 or 5 years ► Varying due diligence letter threshold requirements ► CT – all property regardless of amount ► Most greater than $50 ► Varying timeframe windows for mailing out due diligence letters ► No fewer than 60 days, but no more than 120 before the report is due ► No fewer than 90 days prior to the report due date ► State specific language requirements on the actual due diligence letter (CA, NC) Other considerations ► Complete address for due diligence purposes? ► What are the mailing requirements? Typically first-class mail with some states requiring certified mail for amounts over a certain dollar threshold like Ohio and New York ► How do you intend to track responses? Will owners be able to call or email with questions?
  27. 27. Due diligence Leading practices Page 27 Unclaimed property: historic litigation and legislation ► Designate key contacts to lead research efforts within each applicable business unit (accounts payable, payroll, accounts receivable, etc.) ► Identify, research and resolve large dollar items prior to compliance requirements ► Track evidence of customer contact across the organization to avoid escheating active customer funds such as a dormant bank account (online account logins, ATM logins, email correspondence, etc.) ► Send correspondence to payees in advance of state mandated due diligence letters (phone, email, search letters) ► Third-party resources to assist locating owners ► Tracking and processing of responses: hotline, post escheatment notifications, customer relations
  28. 28. Reporting considerations Page 28 Unclaimed property: historic litigation and legislation What are my options and decision points? ► Two compliance seasons annually – fall and spring ► 43 jurisdictions plus California preliminary – fall reports due October 31 and November 1 ► 10 jurisdictions plus California final – spring report due dates vary from March to the end of June ► Filing in every state vs. one or few, and impact of negative reporting ► File reports online via state websites, third-party software or manually via paper forms and CDs ► Growing number of states require online filing via their website, such as IN, NY, OK, TN, TX ► Are you filing separate reports for every legal entity or filing consolidated? ► Consolidated is widely accepted; NV is the exception to the rule ► Reciprocity agreements ► Should your organization file records in the aggregate? ► Holder type – Are you considered a corporation for holder reporting purposes? ► Have you identified the person/persons who will represent your organization as the report contact, claim contact and signor of the reports? ► Signor – requirement varies by state – Officer or agent ► Some reports are also required to be notarized
  29. 29. General ledger reconciliation Page 29 Unclaimed property: historic litigation and legislation ► Audit trail!!! ► Forecasting – future due, exemptions, due diligence ► Timing – at what point do transactions move to the escheat holding account vs. when can they be removed and what is the corresponding level of documentation required? ► Maintenance of all business unit or legal entity data regardless of filing method ► Record retention
  30. 30. Where are you in the compliance lifecycle? Considerations Page 30 Unclaimed property: historic litigation and legislation ► Have never filed ► What types of unclaimed property exist in your organization? ► What is your organization’s history? Mergers, acquisitions? ► What is your state of incorporation? ► Assess your potential unclaimed property exposure prior to filing and develop a plan for remediation ► Partially in compliance ► Assessment of your current policy and procedures ► Consider possible voluntary disclosure agreements where applicable and enhance processes ► Fully compliant ► How are you keeping up with legislative changes? Dormancy changes? Due Diligence letter requirements? ► Further automation of the process
  31. 31. Polling question Page 31 Unclaimed property: historic litigation and legislation What is your current filing methodology? A. Filing consolidated under a single holder to a single state B. Filing under multiple holders to a single state C. Filing consolidated under a single holder to multiple states D. Filing under multiple holders to multiple states E. Currently not filing F. Does not apply (EY, faculty, other)
  32. 32. Today’s agenda ► Background ► Landscape updates ► Compliance process ► Hot topics – organizational challenges ► Database reviews ► Recovering property without being in compliance ► Third-party contracts / administrators ► Decentralized operations ► Acquisitions ► Sector specific
  33. 33. Hot topics – organizational challenges Page 33 Unclaimed property: historic litigation and legislation Commonly observed Database reviews ► Duplicate records in the database or escheated more than once ► Missing possible exemptions or deductions Asset recovery ► Consider a broad recovery strategy to examine potential escheated funds that belong to your organization available at various sources ► Recovering property without being in compliance Third-party contracts / administrators ► Who is contractually responsible for unclaimed property reporting – consideration of where the requisite data is maintained, what is occurring in practice, etc. Decentralized operations ► Establishing and adhering to sound UP policies and procedures across the organization ► Company-wide systems upgrades and conversions should always be evaluated with UP point of view to avoid loss of data and potential red flag areas Acquisitions ► Inheritance of predecessor UP liability or difficulty integrating new operations into centralized/consistent filing process
  34. 34. Hot topics – sector specific Page 34 Unclaimed property: historic litigation and legislation Financial services (insurance, banking, asset management) ► Policy and procedure reviews, including business unit ownership and centralized governance ► Asset retention strategies ► Maintaining the compliance function in-house or considering the cost benefits of outsource; in-depth analysis around business process outsourcing Health (payor, provider, non-profit) ► Response to third-party audit initiative focused on health insurers and providers with insurance operations ► Process review and related exposure analysis/quantification Retail / consumer products ► Response to gift card-specific litigation through examination of gift card programs
  35. 35. Polling question Page 35 Unclaimed property: historic litigation and legislation Will you require an RCH certificate for today’s webcast? Those with CPP or FPC professional designations check “yes” to this question. All others check “no.” A. Yes B. No
  36. 36. One-minute recap Page 36 Unclaimed property: historic litigation and legislation
  37. 37. Upcoming Thought Center webcasts Page 37 Unclaimed property: historic litigation and legislation www.ey.com/ustaxwebcasts ► Friday, May 5: US tax reform update – How President Trump’s tax reform principles could affect the prospects for US tax reform ► Tuesday, May 9: International tax talk quarterly series with the EY Global Tax Desk Network – What complying with the EU Anti-Tax Avoidance Directive means for multinational companies with European operations ► Wednesday, May 10: Update on Indian tax developments – Preparing for the Goods and Services Tax and examining the Advance Pricing Agreement programs ► Thursday, May 18: Navigating in a post-BEPS world: hybrid mismatches, interest deductibility and other coherence measures – Session 5 of 6 part series: “Navigating in a post-BEPS world” ► Wednesday, May 24: Domestic tax quarterly webcast series: a focus on state tax matters ► Thursday, May 25: BorderCrossings with EY’s transfer pricing and tax professionals – Navigating a transfer pricing adjustment
  38. 38. Thanks for participating. Page 38 Unclaimed property: historic litigation and legislation
  39. 39. Connectwithus Resources Online ey.com/Tax Mobile devices ey.com/TaxGuidesApp ey.com/EYInsights Twitter @EY_Tax Thoughtleadership T Magazine ey.com/TMagazine Indirect tax briefing ey.com/IndirectTax Global Tax Policy and Controversy Briefing ey.com/TPC Page 39 Unclaimed property: historic litigation and legislation
  40. 40. Technical difficulties ► If you can’t hear the audio through your computer, you may listen by phone. ► Click on the green telephone widget to get local numbers in your area. Dial-in Numbers Dial-in Numbers Page 40 Unclaimed property: historic litigation and legislation
  41. 41. How do I get my CPE certificate? ► At the end of the webcast, complete the feedback ► Click on the URL in the slide window or click on the red feedback icon ► Then, click on the purple CPE icon to download your certificate ► To download a certificate after this console has been closed ► Click on the link that will be provided in the post-webcast message. ► The on-demand version of this webcast will also contain your certificate. Visit ey.com/webcasts in about a week. Page 41 Unclaimed property: historic litigation and legislation
  42. 42. Watch on YouTube: Search on EY Webcast Connect with us Follow on Twitter: @EY_Webcasts Page 42 Unclaimed property: historic litigation and legislation
  43. 43. Viewing tips Slides Media player volume Help/tips Resources: Slide download and related links CPE/CE certificate: launch at end of webcast Feedback form Slide size: ► Click to make full screen ► Click to make larger ► Click again to reduce Disable your pop-up blockers now Panelists Slides Page 43 Unclaimed property: historic litigation and legislation
  44. 44. Viewing tips Help/tips CPE/CE certificate: launch at end of webcast Media player volume Resources: Slide download and related links Feedback form Slides Panelists Page 44 Unclaimed property: historic litigation and legislation
  45. 45. Receiving CPE/CE credit Page 45 Unclaimed property: historic litigation and legislation ► To be eligible for CPE/CE credit, you must meet all of the minimum eligibility criteria: ► Participate for a minimum of 50 minutes to start earning credit ► Respond to all polling questions ► Submit feedback ► Webcast technology automatically determines whether participants qualify for credit based on the eligibility requirements above. ► Certificates will be available for qualified non-EY participants to print at the conclusion of the webcast by clicking on the purple CPE icon at the bottom of this interface. ► EY participants’ awards will be posted in your CPE history within 10 business days.
  46. 46. Receiving RCH credit Page 46 Unclaimed property: historic litigation and legislation ► To be eligible for 1.0 RCH credit, you must meet all of the minimum eligibility criteria: ► Participate for a minimum of 50 minutes ► Respond to a minimum of 3 polling questions ► Respond “yes” to the last polling question regarding RCH credit ► Webcast technology automatically determines whether participants qualify for credit based on the eligibility requirements above. ► Certificates will be emailed within two weeks.
  47. 47. If you are participating in a group Page 47 Unclaimed property: historic litigation and legislation ► Each person who logged in to the webcast should: ► Register for and log in to the live webcast ► Respond to the required number of polling questions ► Complete the feedback form ► At the end of the webcast, the group leader can: ► Print certificates for all qualified participants by clicking on the purple CPE icon at the bottom of this interface ► Or, complete the CPE/CE attendance sheet available on the Thought Center webcast site and include all requested information ► Submit the attendance sheet within 72 hours of the completion of the webcast by email to tcw.efaxdocs@ey.com ► Certificates will then be emailed to participants

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