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Understanding the B2B Unclaimed Property Exemption.

Unclaimed property laws exist to protect property owners, ensuring the ability to claim what is rightfully theirs. State laws dictate the procedures property holders must take to notify property owners that property of value (uncashed checks, inactive financial accounts, general ledger credits, etc.) is considered dormant and subsequently transfer the property to the state. These laws are especially important for consumers, who may have no knowledge or record of property they legally own.

Because credit managers work closely with accounts receivable and current customer accounts, they have the ability to effectively minimize unclaimed property risk in the credit department or perhaps even company wide, depending on the scope of their position. One significant area of interest to help minimize unclaimed property risk is the business-to-business (B2B) exemption that may be available.

Several states have exempted businesses from these protections under the premise that they don't require the same protection as consumers because they have the resources and knowledge necessary to protect and recover their property from another business. While many states agree on this premise, they differ in their execution of the exemption.

Exemption Basics

As with other unclaimed property rules, not all businessto-business (B2B) exemptions were created equally. States offering the exemption can be grouped into one of four categories:

* Substantial exemption: Kansas, Maryland, Ohio and Virginia offer the most favorable rules, exempting most B2B transactions and property types.

* Partial exemption: Some states provide mostly favorable statutes but may apply some thresholds or property type limitations. These states include Indiana, Iowa, Massachusetts, Michigan, North Carolina and Wisconsin.

* Limited exemption: A few states appear to exempt B2B property but require an ongoing business relationship. In practice, this exemption is actually a deferral. When the relationship ends, the dormancy period begins. States with a limited exemption include Arizona, Missouri, Nevada and Tennessee. The definition of an "ongoing business relationship" differs by state, so it is important to review each states requirements before applying the deferral.

* Administrative exemption: Although they don't have a statutory B2B exemption, New York and Texas have taken the position through administrative advisories or actions that holders may be able to claim B2B exemptions.

Unclaimed property regulations and laws change frequently, so its advisable to consult the applicable state statutes and administrative regulations, or contact a state administrator before assuming a B2B exemption clears your company of some or all of its unclaimed property responsibilities.

Evaluating Risk

B2B exemptions can be extremely beneficial, substantially decreasing a property holder's liability. However, applying those exemptions comes with some inherent organizational risks. Among the questions holders need to consider when applying the B2B exemption are:

* Which property types are exempt?

* How does a state define a business?

* Is due diligence required for items that are flagged as exempt?

* Do exemptions apply for the holder's specific business type--telecommunications, financial, or health care, for example?

* How should documentation be handled and how long do records need to be maintained in case a state questions the exemption in the future?

When evaluating whether to apply the B2B exemption, evaluating the holder's risk profile is essential. One company might be more willing to take on risk for the benefit of the exemption. Others are more risk averse and would rather err on the side of reporting unclaimed items if they're not sure whether the exemption applies or how the state intends the statute to be read. So, it's helpful to build a risk profile to determine what positions the company wants to take and then be consistent with how the exemptions are applied each year.

Recent Developments

In July 2016, the Uniform Law Commission (ULC) concluded several years of work drafting the Revised Uniform Unclaimed Property Act (RUUPA). This model language, last updated in 1995, provides a template for state legislatures seeking to modernize their unclaimed property statutes.

Despite the availability of a uniform act, states have the authority to adopt the RUUPA in full, partially, or not at all. They are free to set their own due diligence and reporting requirements, dormancy periods, reportable property types and exemptions--including the B2B exemption. This only complicates unclaimed property compliance.

Early drafts of the RUUPA included two alternatives: an exemption contingent on the holder and owner companies maintaining an ongoing business relationship (alternative A); and a comprehensive, blanket B2B exemption (alternative B).

When evaluating whether to apply the B2B exemption, evaluating the holder's risk profile is essential.

The ULC had the difficult and unenviable responsibility of having to balance a lot of different stakeholder needs and requests. Some stakeholders advocated for an extremely inclusive B2B exemption and others pushed for no exemption at all.

The Unclaimed Property Professionals Organization (UPPO), the association providing premier education, information, networking, and advocacy for U.S. and Canadian unclaimed property professionals, represented property holders and their service provider partners during RUUPA drafting discussions. The association advocated for the alternative B, arguing that unclaimed property laws are intended to protect consumers. NACM provided a letter to the ULC supporting alternative B.

UPPO reasoned that businesses don't need the support of the state to monitor unclaimed property because they have sophisticated accounting resources (software and staff) to manage business relationships. Often, amounts reflected as debts to other businesses are merely accounting errors that are later reconciled in some manner (e.g., settlements). Even if amounts are owed, businesses may make affirmative decisions not to pursue debts because the amounts owed are immaterial or for other important business reasons.

Unfortunately, the finalized version of the RUUPA eliminated both exemption alternatives, so states are on their own to determine whether they will craft a B2B exemption and how it will be applied.

The B2B exemption's omission from the RUUPA has already resulted in a troubling change in one state. On July 6, 2017, Illinois budget bill S.B. 9 became law after the House voted to override the governor's veto. Among the provisions added to the bill shortly before passage was the Illinois Revised Uniform Unclaimed Property Act, which repeals the state's current unclaimed property statute and replaces it with new language, a modified version of the RUUPA containing several provisions unfavorable to property holders.

The previous Illinois unclaimed property statute, in effect until the Illinois RUUPA's effective date of Jan. 1, 2018, includes a substantial B2B exemption, exempting most business-to-business transactions and property types. However, the new statute excludes the B2B exemption entirely.

Property holders seeking to minimize their unclaimed property liability have the ability to do so via exemptions. The lack of uniformity from state to state presents some challenges, and the lack of inclusion in the RUUPA may lead to decreased availability of the B2B exemption. Identifying, understanding and correctly applying the exemption requires some extra work, but ultimately can result in less liability when filing the company's annual unclaimed property report in states exempting B2B transactions.

For more information about unclaimed property compliance, visit www.uppo.org.

Toni Nuernberg, CAE, CBF, CGA, is president and COO at NACM North Central and serves via management agreement as executive director at the Unclaimed Property Professionals Organization (UPPO), where she is responsible for leading the strategic vision of both associations. 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 tnuernberg@nacmnc.com or 763-253-4314.
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Title Annotation:SELECTED TOPIC
Author:Nuernberg, Toni
Publication:Business Credit
Date:Nov 1, 2017
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