Minimizing unclaimed property risk in the credit department.
What Is Unclaimed Property?
Unclaimed property is tangible property, such as safe deposit box contents, or intangible property, like unused credit balances that have been left dormant or untouched by the rightful owner for a statutorily defined amount of time. To classify property as unclaimed, the following three requirements must be met:
1. It is held or issued in the ordinary course of the holders business;
2. It constitutes a debt/obligation of the holder to a creditor/owner, and;
3. It remains unclaimed for more than the statutory dormancy period, which is determined by property type and by each state.
Unclaimed property laws originated from English common law. When a landowner died, the feudal lord would assume ownership of the property. Though the philosophy of unclaimed property dates to before America's conception, modern unclaimed property laws were produced by the Uniform Law Commissions (ULC) 1954 Uniform Unclaimed Property Act (UUPA). The UUPA is a recommended set of laws and regulations that states can adopt to establish uniformity nationwide.
The 1954 UUPA has been updated twice with the most current being the 1995 version. Currently, the ULC is deep into revising the 1995 UUPA, in favor of an act that acknowledges new property types and modernization. The anticipated release date of the new UUPA is late 2016 to early 2017. Despite the availability of a uniform act, states have the authority to adopt the 1995 UUPA in full, partially, or not at all, leaving the state to set its own due diligence and reporting requirements, dormancy periods, reportable property types and enforcement environment. This only complicates unclaimed property compliance.
Unclaimed Property in the Credit Department
Arguably, the most important responsibility of credit managers is to mitigate their company's potential bad debt risk. It's done by knowing the trade, using smart tools and having a good sense of the characteristics of creditworthiness. Unclaimed property risk is not considered when making decisions to extend credit, but it should be considered when reviewing aging accounts. Curtis Litchfield, senior credit manager of Land O'Lakes, said, "When managing accounts receivables you are managing one of the company's largest assets. If you aren't managing your unclaimed property properly, you are adding risk to the company. The risk is more than just the credit balances left on the account."
As credit balances sit untouched by the owner (your customer) and age, they become potential unclaimed property. The dormancy period is dependent upon the jurisdiction. In the United States, states typically dictate the dormancy period of accounts receivable credit balances as either three or five years. When the property becomes classified as dormant, the holder is obligated to conduct due diligence as a last ditch effort to reunite the property with the rightful owner/customer. After due diligence yields no response from the owner, the holder is legally obligated to report and remit the property to the jurisdiction of the owner's last known address.
Here's an example of the unclaimed property process. A lumber supplier located in Minnesota is approached by a Wisconsin-based contractor for lumber to construct a new development of homes. An overpayment by the contractor left a $500 credit balance on his account. It has been five years, and the $500 credit is still on the contractor's account. Wisconsin's dormancy period for credit balances is five years, so the property is now classified as unclaimed, and the lumber supplier is obligated to conduct due diligence as a final effort to reunite the credit balance with the contractor. If the lumber supplier is not able reunite the property with the contractor, it must report and remit the property to Wisconsin.
A number of states offer a reporting exemption to companies holding property of another company--simply known as the B2B exemption. The exemption is either identified in the jurisdictions statute or administrative regulations. The states known to have a B2B exemption are Arizona, Illinois, Indiana, Iowa, Maryland, Michigan, Missouri, North Carolina, Ohio, Tennessee, Virginia and Wisconsin. Colorado institutes a small business provision that relieves businesses of reporting obligations that have annual gross receipts less than $500,000, less than $3,500 in aggregated unclaimed property, and that don't hold a single item of $250 or more. Florida, Massachusetts and Wyoming exempt the reporting of property valued under a certain threshold, or have provisions limiting the scope of the exemption. Unclaimed property regulations and laws change frequently, so it's advisable to reference the state statute and administrative regulations, or contact a state administrator before assuming you don't have compliance requirements.
The intention of unclaimed property laws and regulations is to serve as consumer protection. It's assumed consumers don't have the resources that businesses do to track financial assets and property, making them rely on consumer protection laws. Businesses on the other hand, have robust accounting systems, accounting staff and the capability to collect money owed to them. They don't need the protection of the states to regulate transactions with other business associations--both from a holder and owner perspective. Including a B2B exemption in the revised UUPA is an inclusion being pushed for by the holder community. Notably, the Unclaimed Property Professionals Organization and the National Association of Credit Management jointly support the inclusion of a blanket B2B exemption in the new UUPA.
Negligence to satisfy unclaimed property requirements increases a company's liability and risk for an unclaimed property audit. Unclaimed property audits are notoriously lengthy and arduous--typically lasting 18 months to five years. By staying in compliance, companies reduce the risk of receiving an unclaimed property audit notice. Credit managers can be integral in their company's compliance program by simply integrating procedures within their departmental policies to stop aging credits from becoming deemed unclaimed property.
Where to Begin?
Unclaimed property compliance is not likely to fall into the day-to-day responsibilities of the credit manager, nor does it need to. But the level of exposure credit managers have to accounts receivable credit balances situates them in an effective position to stop aging credit balances from becoming unclaimed property. Achieving unclaimed property compliance should be an interdepartmental effort that is coordinated by one or two key individuals. Litchfield agrees saying, "Unclaimed property should be the responsibility of anyone who touches unclaimed property."
Disciplined policies and procedures that mitigate unclaimed property risk in the credit department can be incorporated into instituted departmental practices. Mike Thelen, director, customer financial services at Land O'Lakes, said, "The key is to not let your credit receivables age, so they don't become a problem later on." Not only will this strategy keep credit balances from becoming unclaimed property, but it can also sustain positive customer relationships.
If your company doesn't already have a policy, consider instituting one which requires staff to notify customers with aging credit balances after a certain period of time (60, 90 or 180 days). This planned future follow-up gives the credit manager an opportunity to make the customer aware of available credit, which could result in a prompt sale or a refund. Instituting a policy like this and diligently following it is a strategy that effectively mitigates unclaimed property risk, while producing good customer service.
A starting point for credit departments that are just introducing unclaimed property into the department's vocabulary is to conduct a comprehensive review of customer accounts. During the review, identify all aging credits and how long they have sat dormant, then share the results with the individuals responsible for unclaimed property compliance in the company to craft appropriate policies and procedures to manage unclaimed property. These individuals typically work in the general accounting, treasury, tax or compliance departments. Credit managers are in a critical position to assist their companies achieve unclaimed property compliance. By understanding the compliance basics, what to look for, and how to get compliance incorporated into departmental policies, credit managers will become more valuable assets to the department and company.
For more information about unclaimed property compliance, visit www.uppo.org.
The Unclaimed Property Professionals Organization is the association providing premier education, information, networking, and advocacy for U.S. and Canadian unclaimed property professionals.
Toni Nuernberg, CAE, CBA, CGA is president and COO at Forius NACM North Central and executive director at the Unclaimed Property Professionals Organization (UPPO), where she is responsible for leading the strategic vision of both associations. Forius NACM North Central is an affiliate of NACM, serving Minnesota, western Wisconsin and North and South Dakota. UPPO is the national association providing premier unclaimed property education, information, networking, and advocacy to U.S. and Canadian unclaimed property professionals. Nuernberg can be contacted at firstname.lastname@example.org or 763-253-4344.
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