Colorado Amends Unclaimed Property Law Regarding Gift Cards; Will Other States Follow?

Journal of Multistate Taxation and Incentives Volume 23, Number 10, February 2014 Department: PROCEDURE

States are reviewing their processes and looking for the means to enhance revenue, a course that includes increasing enforcement efforts and accelerating dormancy periods and reporting deadlines.

By: JAMSHID EBADI AND SAMUEL SCHAUNAMAN

JAMSHID EBADI is a Director with the Abandoned and Unclaimed Property Practice at Ryan LLC, in Greenwood Villa, Colorado. SAMUEL SCHAUNAMAN, J.D., is a Senior Manager with the same practice group, in Tulsa, Oklahoma, and he has previously written for The Journal. This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 23, No. 10, February 2014. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2014 Thomson Reuters/Tax & Accounting. All rights reserved.

All states, as well as an increasing number of foreign countries, have laws regulating the reporting and remitting of unclaimed property to the respective jurisdictions. Colorado has recently amended its Unclaimed Property Act ("Colorado Act" or "the Act") and the following discussion provides a synopsis of the Act and highlights the recent legislative developments in Colorado affecting the Act. First, however, we provide an overview of what typically constitutes unclaimed property.

While not a "tax," unclaimed property nevertheless has become a significant source of funds for many states. The field of unclaimed property (also referred to as "abandoned property" or "escheat") concerns the requirement that businesses holding such property (the "holders") report the property to state governments. Unclaimed property can include various intangible property, including stocks, bonds, and other securities, and funds represented by uncashed checks; and also tangible personal property such as the contents of safe deposit boxes. Generally, after a period of time established by statute (the "dormancy period"), a state will have the right to acquire an interest in the unclaimed property, subject to the actual owner's right to reclaim the property in the future.

As indicated above, the search for unclaimed property has become an increasingly significant activity for the states. A recent report noted that, currently, "state coffers include over $40 billion in unclaimed property," which is "nearly double the $22.8 billion states held just a decade ago." 1 Colorado's Act, according to a leading treatise in this area, is based upon provisions of the 1981 Uniform Unclaimed Property Act. 2 By developing a general understanding of the Act, as well as the attendant reporting requirements upon businesses and nonprofit organizations, holders will be better equipped to understand their responsibilities under the Act, as well as achieving a better understanding of the unclaimed property compliance process.

Overview

Although the precise definition of unclaimed property can vary from state to state, unclaimed property, as indicated above, generally has four basic characteristics:

 The property is intangible personal property (e.g., uncashed checks, outstanding customer credit balances, unclaimed stock certificates), and certain tangible personal property such as the contents of safe deposit boxes.

 The property has been abandoned by the owner, or owner-generated activity with respect to the property has ceased.

 The property must remain unclaimed or inactive by the owner for the statutorily specified dormancy or abandonment period.

 There must be a "fixed and certain legal obligation" of the holder to the owner.

Once a determination has been made that an entity or organization is in fact holding unclaimed property, the next question becomes which jurisdiction is entitled to receive the unclaimed funds. Under the rules of jurisdiction or federal priority rules, which were promulgated by the U.S. Supreme Court in the seminal case of Texas v. New Jersey, 3 the state with the first right to claim the property is the state of the owner's last known address, as shown on the holder's books and records. In Colorado, a "holder"—which is generally the entity responsible for reporting and remitting unclaimed property to the state—is defined by the Act to mean "(a) A person, wherever organized or domiciled, which is: (I) In possession of property belonging to another; (II) A trustee; or (III) Indebted to a person on an obligation; [or] (b) The public employees' retirement association." 4 If the holder of the funds does not have the last known mailing address of the owner on its books and records, the state of the holder's domicile can claim the property. "Domicile" is defined under the Colorado Act as "the state of incorporation of a corporation and the state of the principal place of business of an unincorporated person." 5 Among those jurisdictions that have adopted a formal definition of "domicile," however, those definitions may vary. Therefore, the holder should review the unclaimed property statutes of the appropriate jurisdictions before reporting and remitting any unclaimed property.

Audit activity for unclaimed property among the states generally has increased significantly in recent years, due in part to low compliance levels with state unclaimed property laws, state budget shortfalls, and a proliferation of contract audit firms. State unclaimed property audits can be triggered by diverse factors, including recent merger and acquisition activity, increased publicity about a company, the revenue of a company, a company's being in a specific targeted industry or having certain property types, filing reports without the requisite industry property types, or even the filing of negative reports. In Colorado, the Act is administered by the State Treasurer's Office, Unclaimed Property Division.

One key fact separating unclaimed property compliance from other compliance obligations (e.g., tax compliance) is that, generally, there is no statute of limitations for potentially reportable unclaimed property not reported to the state. Therefore, unlike a tax audit, state unclaimed property audits in some states can reach back more than ten reporting years. 6 One reason why statutes of limitations in the unclaimed property area are generally not enforceable against the state is because most states, including Colorado, have adopted what are referred to as "anti-limitation" provisions. 7 The Colorado Act does state, however, that the unclaimed property administrator may not bring an action "with respect to any duty of a holder under this article more than five years after the duty arose." 8

The Colorado Act

Our broader discussion of the Colorado Act focuses on three areas: a brief overview of some of its key provisions; reporting details pertinent to most holders; and property types that are exempt from application of the law.

Key provisions. The Colorado Act has a broad scope. For example, the Act states generally: "Except as otherwise provided by this article, all intangible property, including any income or increment derived therefrom, less any lawful charges, that is held, issued, or owing in the ordinary course of a holder's business and has remained unclaimed by the owner for more than five years after it became payable or distributable is presumed abandoned." 9 The term "intangible property" is defined by the Act broadly to include a wide variety of property types, including, but not limited to, checks, deposits, interest, dividends, credit balances, gift certificates, refunds, credit memos, unpaid wages, securities, etc. 10 In order to appreciate the myriad of categories of unclaimed property covered by the Act, one should review the document available on the Colorado Treasurer's website, "Property Code/Property Description & Dormancy Period," which lists approximately 100 categories of property that, if unclaimed, are reportable as abandoned property. 11

Unclaimed property reporting and remittance. A wide variety of holders are covered under the umbrella of the Act's reporting requirements. The general reporting information for holders, available on the Colorado Treasurer's website, states that "[a]ll types of companies, including banks, financial institutions and business entities; ... [p]ublic institutions including courts, municipalities, governmental subdivisions/agencies, public corporations or authorities; [and] [n]on-profit entities, hospitals, utilities, estates, trusts, or any other legal or commercial entity" should file an unclaimed property report with the State Treasurer's Office. 12 The annual reporting and remittance due date is November 1, except for life insurance companies, which are to report and remit by May 1. The reporting period ends on each June 30, except for life insurance companies, for which the reporting period ends on December 31 of the prior year.

Each holder should also be aware of several significant details pertinent to the reporting process. First, the general reporting information states: "If you have NO unclaimed property to report ... no report is required." 13 Second, generally all unclaimed property must be reported, with the exception of a small business provision 14 and an "allowable deduction" provision (discussed below). The general reporting information further states, however, that "[f]or ease in reporting, unclaimed accounts or property valued at fewer than $25.00 may be reported by property type in the aggregate. Combine accounts fewer than $25.00 by property type and enter a single total. You may not take a deduction when reporting in the aggregate." 15 Unclaimed property reporting and remittance exemptions and deduction. Unclaimed property practitioners should be aware that there are significant categories of unclaimed property exempt from the application of the Colorado Act, as well as a unique deduction provision referred to above. The following discussion explores the deduction as well as some of these exemptions.

First, a limited exemption exists for certain gift certificates issued by a business that are redeemable only for "food, products, goods, or services" 16 (gift certificates and gift cards generally will be discussed in more detail in the text below, under "Recent Colorado Legislative Developments").

Second, Colorado has a very unique "deduction provision," described by the state's Treasurer as follows: "Except for aggregated amounts, you may by law, voluntarily deduct and retain from each item remitted 2% of the value of the property you are remitting, or $25, whichever is less (L). For some types of property, you may deduct and retain 2% or $25, whichever is more (M)." 17 Accordingly, each category of property on the reporting form is coded as either "L" or "M" to let the holder know if the lesser or greater amount can be deducted. Most types of checks for goods and services and accounts payable appear to permit the greater amount to be deducted. Authority for this provision is found in the Colorado Unclaimed Property Act as follows: "A holder may voluntarily, prior to payment or delivery of said unclaimed property, deduct and retain two percent of the value of the property or twenty-five dollars whichever is more per item." 18 A related statutory provision dealing with holders that are banking or financial organizations then provides that for certain specified types of property, the "two percent ... or twenty-five dollars, whichever is less" rule applies. 19 Nevertheless, as explained on the Treasurer's website, in all cases "[t]he amount deducted from each item cannot exceed the amount due the owner. For instance, if the amount due the owner is $10, you cannot retain $25; the amount you would retain is $10." Further, "[h]olders may not retain the allowable deduction for properties associated with states other than Colorado." Also, "[s]afe-deposit/safekeeping items are not eligible for the deductions under this provision." 20

Third, the law provides that the Colorado Act "shall not apply to gaming award points and gaming chips or tokens issued or sold by a licensed gaming establishment before, on, or after the effective date of this section [8/4/04], except to the extent the state has taken custody of any gaming award points or gaming chips or tokens on or before January 1, 2004." 21

Fourth, certain unclaimed property held by agricultural marketing and supply cooperatives, as well as by cooperative electric associations and telephone cooperatives, are also exempted from application of the Act. 22

Fifth, the Colorado Act does not require reporting of unclaimed property held by dog and horse racetracks. 23

Sixth, organizations that are exempt from taxation under IRC Section 501)(3) should review a possible exemption from reporting and remitting delineated in the Colorado Act. 24 Nevertheless, for such organizations that receive "contributions totaling one million dollars or more annually," reporting may be required if certain specified thresholds of unclaimed property are reached. 25

Recent Colorado Legislative Developments

In March 2013, Colorado enacted legislation (H.B. 13-1102, 3/15/13; Laws 2013, ch. 44) to amend the state's Unclaimed Property Act. The legislation includes several key provisions affecting gift card issuers and holders. First, it adds a statutory definition of gift cards to the Colorado Act; previously, gift cards had not been defined in the Act. Second, as described in more detail below, it creates an express statutory exemption under the Act for smaller issuers of gift cards. Finally, it purports to address unresolved claims by the Colorado Treasurer against any business association for payments related to unclaimed gift cards.

Prior treatment of gift cards. Before examining the new legislation in detail, a quick history of Colorado's treatment of gift cards for unclaimed property purposes will be helpful to put the current changes in context. By way of background, until 2005, the Act specifically addressed "gift certificates" but not gift cards. Thus, Colorado law, as in effect on 4/13/05, essentially provided that gift certificates that remained unclaimed by the owner for more than five years after becoming payable or distributable were presumed abandoned, except as otherwise provided in that section of law. 26 That section further provided that it "shall apply to any gift certificate issued by a business that is redeemable in cash and not to any gift certificate issued for food, products, goods, or services." 27

In a 2005 opinion, however, the Colorado Attorney General's Office ruled that while gift certificates issued for merchandise or services were exempt under the Act, gift cards were a different property type altogether, and, as the Colorado Legislature had not seen fit to exempt gift cards, they were, therefore, escheatable under the "catch-all" provision of the Act. 28 Although in 2010, the Colorado Legislature amended another area of the law— consumer protection/deceptive trade practices—to provide a definition of "gift cards," 29 no such definition existed in the Unclaimed Property Act until H.B. 13-1102 was enacted into law.

The new provisions. With that background in mind, let us turn to an analysis of how H.B. 13-1102 affects the application of the Act. First, as indicated above, the legislation, for the first time, adds a definition of "gift cards" to the Act. Specifically, H.B. 13-1102, §1, amended the Act to define "gift card" as "a prefunded tangible or electronic record of a specific monetary value evidencing a business association's agreement to provide goods, services, credit, money, or anything of value." 30 In addition, a gift card "includes, but is not limited to, a tangible card; electronic card; stored-value card; or certificate or similar instrument, card, or tangible record, all of which contain a microprocessor chip, magnetic chip, or other means for the storage of information and for which the value is decremented upon each use." 31

The legislation also delineated a number of diverse property types that are specifically excluded from the definition of "gift card." These exclusions comprise the following: "a prefunded tangible or electronic record issued by, or on behalf of, any government agency; a gift certificate that is issued only on paper; a prepaid telecommunications or technology card; a card or certificate issued to a consumer pursuant to an awards, loyalty, or promotional program for which no money or other item of monetary value was exchanged; a card issued for wages or other payroll purposes; a card used for rebates or refunds; or a card that is donated or sold below face value at a volume discount to an employer or charitable organization for fundraising purposes." 32 Section 2 of the new legislation adds an express exemption from the Act for "unclaimed gift cards where the holder or issuer is a business association with annual gross receipts from the sales or issuance of all gift cards totaling two hundred thousand dollars or less." 33

As indicated above, the legislation was signed by the Colorado governor on 3/15/13 and took effect immediately. 34 Also, the legislation states that it applies "to any unresolved claims by the state treasurer against any business association for payment related to unclaimed gift cards as of the effective date of this act." 35

For holders of gift cards potentially subject to the Act, the legislation does provide some needed clarity to Colorado unclaimed property law by defining the types of gift cards that are covered property under the Act. What this means, therefore, is that the gift certificates described above (e.g, gift certificates issued for merchandise or services, generally in a one- time transaction) continue to be an exempted property type, while gift cards and stored value cards (the types to which most retailers and other issuers have transitioned) are clearly not exempt under Colorado unclaimed property law. Still, the Act can benefit smaller businesses with its provision of a de minimis exemption for holders or issuers of gift cards with annual gross receipts of $200,000 or less from the issuance of such cards. 36

Conclusion

Unclaimed property is an increasingly important are of the law for the states, holders, and the missing actual owners. States are reviewing their processes and looking for the means to enhance revenue, a course that includes increasing enforcement efforts and accelerating dormancy periods and reporting deadlines. Holders should ensure that they have suitable procedures in place to identify, track, and properly report and remit unclaimed property. By taking into the consideration the information set forth above (much of which may be applied to other states' unclaimed property regimes), companies may be able to improve relations with customers and vendors, reduce regulatory risk, and help actual owners reunite with their unclaimed property. []

Practice Note: Read More About Escheat

We again remind readers that The Journal has published several articles dealing generally with the area of unclaimed property, as well as with various specific aspects of this increasingly important—albeit not strictly "tax"—topic. See, for example:

 McTaggart and Frazer, "Escheat: Are Significant Legal Changes—and Potential Liability—Ahead?," 13 J. Multistate Tax’n 14 (Mar/Apr 2003).

 Sangiuliano, "Unclaimed Property: An Overlooked Area of Responsibility for Tax Practitioners," 16 J. Multistate Tax’n 20 (October 2006).

 Peters and Beintum, "Going Fishing: State Budget Deficits Drive an Expanding Net of Unclaimed Property Collections," 19 J. Multistate Tax’n 26 (July 2009).

 Green-Kelly, "Complying With Unclaimed Property Laws: Two Decisions Add Burdens, Create Uncertainties," 19 J. Multistate Tax’n 34 (July 2009).

 Shop Talk, "Enforcement Trends in Unclaimed Property: What Companies Need to Know," 19 J. Multistate Tax’n 34 (February 2010).

 Hall, Ryan, Turner, Browdy, and Elzholz, "Delaware's Authority to Claim Abandoned Property Owed to a Non-U.S. Last-Known Address," 20 J. Multistate Tax’n 24 (January 2011).

 Hopkins and Hedstrom, "Unclaimed Property Laws: Custodial Safekeeping or Disguised Tax?," 21 J. Multistate Tax’n 22 (January 2012).

 Shop Talk, "Minnesota Launches Voluntary Disclosure Program for Holders of Unclaimed Property," 22 J. Multistate Tax’n 39 (October 2012).

 Shop Talk, "New Jersey's New Unclaimed Property Rules Regarding Gift and Other Stored Value Cards," 23 J. Multistate Tax’n 40 (Mar/Apr 2013).

 Schaunaman, Matchett, and Millar, "Unclaimed Property and Employee Benefits: What Businesses Need to Know," 23 J. Multistate Tax’n 30 (May 2013).

 Schaunaman, Han, and Finkelson, "A Tale of Two Cases: The Impact of Federal Common Law on State Unclaimed Property Law," 23 J. Multistate Tax’n 26 (July 2013).

 Paolillo and Schaunaman, "Foreign Property and U.S. States' Unclaimed Property Laws," 23 J. Multistate Tax’n 18 (October 2013).

______END NOTES

1 See Lindholm and Hogroian, "The Best and Worst of State Unclaimed Property Laws: COST Scorecard on State Unclaimed Property Statutes" (Council On State Taxation, October 2013). As described on its website (www.cost.org.), COST is a nonprofit trade association consisting of more than 600 multistate corporations engaged in interstate and international business. COST's objective is to preserve and promote equitable and nondiscriminatory state and local taxation of multijurisdictional business entities. This COST Scorecard report is available also via State Tax Notes at www.taxanalysts.com (electronic cite: 2013 STT 192-2).

2 See Houghton, et al., 74-2d T.M. (BNA, Corporate Practice Series, Rev. 2009), Unclaimed Property, page A-14. The Colorado Act may be found at Colo. Rev. Stat. §§38-13-101 through 38-13-134.

3 379 US 674, 13 L Ed 2d 596 (1965).

4 Colo. Rev. Stat. §38-13-102(6).

5 Colo. Rev. Stat. §38-13-102(4).

6 See Houghton, et al., supra note 2, page A-45 ("audits and the related liability do date back 10 to 15 reporting years and, in some states, for even longer periods").

7 See Colo. Rev. Stat. §38-13-122(1), which states: "The expiration, before or after July 1, 1987, of any period of time specified by contract, statute, or court order, during which a claim for money or property can be made or during which an action or proceeding may be commenced or enforced to obtain payment of a claim for money or to recover property, does not prevent the money or property from being presumed abandoned or affect any duty to file a report or to pay or deliver abandoned property to the administrator as required by this article."

8 Colo. Rev. Stat. §38-13-122(2).

9 Colo. Rev. Stat. §38-13-103(1).

10 Colo. Rev. Stat. §38-13-102(7)(a).

11 See the website of the Colorado Department of the Treasury, at www.colorado.gov/treasury/gcp/images/Propdescripcode.pdf.

12 See "General Reporting Information: Who Is Required to Report Unclaimed Property?," available via the Colorado Treasurer's website at www.colorado.gov/treasury/gcp (select "Holder Information" and click on "Detailed Holder Instructions"); also available via the website of the National Association of Unclaimed Property Administrators (NAUPA) at www.unclaimed.org. As described on its website (click on "About NAUPA"), the Association is a nonprofit organization affiliated with the National Association of State Treasurers and the Council of State Governments. Members represent all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and various international governmental entities. NAUPA's mission is to promote and strengthen unclaimed property administration and interstate cooperation in order to enhance states' return of unclaimed property to the rightful owners and provide a forum for the open exchange of information and ideas.

13 See "General Reporting Information: What Reporting Forms Need to Be Filed?," available via the Colorado Treasurer's website, as described in note 12, supra.

14 See Colo. Rev. Stat §38-13-110(4)(e)(I) (a business with fewer than $500,000 in annual gross receipts is not required to file a report annually until the aggregate value of the unclaimed property it is holding exceeds $3,500, or a single property of at least $250 becomes reportable).

15 See "General Reporting Information: Do Small Amounts of Unclaimed Property Need to Be Reported?," available via the Colorado Treasurer's website, as described in note 12, supra.

16 Colo. Rev. Stat. §38-13-108.4(3).

17 See "General Reporting Information: Allowable Deduction," available via the Colorado Treasurer's website, as described in note 12, supra.

18 Colo. Rev. Stat. §38-13-112(1)(b)(I).

19 Colo. Rev. Stat. §38-13-112(1)(b)(II), which states that if the abandoned property held by a banking or financial organization is "a demand, savings, or matured time deposit or funds held or owing under an insurance policy or annuity contract, the holder may deduct and retain two percent of the value of the property or twenty-five dollars, whichever is less." By contrast, if the abandoned property is "dividends, royalties, or other items that are backed by an underlying share, interest, insurance policy or annuity contract," the holder may retain the greater of 2% or $25 per item. Id. The types of property for which the "lesser of" or "greater of" rule applies are also delineated in "Property Code/Property Description & Dormancy Period Guide," supra note 11.

20 Note 17, supra.

21 Colo. Rev. Stat. §38-13-108.7. The terms "gaming award points" and "gaming chip or token" are defined in Colo. Rev. Stat. §§38-13-102(5.3) and (5.5), respectively. See also §38-13-102(7)(b), which excludes from the definition of "intangible property" any "gaming chips or tokens, or gaming award points."

22 Colo. Rev. Stat. §§38-13-107.5(5)(b) and 38-13-102(7)(b), respectively.

23 See "General Reporting Information: Who Is Required to Report Unclaimed Property?," available via the Colorado Treasurer's website, as described in note 12, supra, citing Colo. Rev. Stat. §38-13-108.8, which references §12-60-102(26) for the definition of "racetrack."

24 Colo. Rev. Stat. §38-13-110(4)(e)(III), which applies to such exempt organizations "that receive contributions totaling less than one million dollar annually."

25 Colo. Rev. Stat. §38-13-110(4)(e)(II) (reporting and remittance may be required if the organization (1) holds property acquired during the immediately preceding five-year period with an aggregate value of at least $3,500, or (2) holds an item of property of any one apparent owner acquired during such period with an aggregate value of more than $250).

26 Colo. Rev. Stat. §38-13-108.4(1) (still in effect).

27 Colo. Rev. Stat. §38-13-108.4(3) (still in effect).

28 "Status of Stored Value Cards, Including Gift Cards," Colo. Attorney General Opinion No. 05-01, 4/13/05. Referring to gift cards and stored value cards collectively as "SVCs," the opinion noted that "a gift certificate generally represents a fixed value that can be exchanged for goods or services from only the merchant who issued it, and generally in a one-time transaction. On the other hand, SVCs ... are electronic payment products that operate much more like currency, or like an on-going account with value periodically removed or enhanced." The opinion concluded that "Colorado's Act covers all intangible property, unless otherwise excluded. SVCs are a type of intangible property not otherwise excluded from the Act's operation. Thus, SVCs are covered by the omnibus sections of the Act."

29 Colo. Rev. Stat. §6-1-722, enacted by S.B. 10-155, Laws 2010, ch. 180, §1, effective 8/11/10.

30 Colo. Rev. Stat. §38-13-102(5.7)(a), added by H.B. 13-1102, §1.

31 Colo. Rev. Stat. §38-13-102(5.7)(b), added by H.B. 13-1102, §1.

32 Colo. Rev. Stat. §38-13-102(5.7)), added by H.B. 13-1102, §1.

33 Colo. Rev. Stat. §38-13-108.9, added by H.B. 13-1102, §2. Section §3 of the legislation indicates, among other things, that this exemption applies "on or after the effective date [3/15/13] of this act."

34 H.B. 13-1102, §4.

35 H.B. 13-1102, §3.

36 For another state's treatment of gift cards, see Shop Talk, "New Jersey's New Unclaimed Property Rules Regarding Gift and Other Stored Value Cards," 23 J. Multistate Tax’n 40 (Mar/Apr 2013).