New Texas Unclaimed Property Reporting Procedures
On June 10, 2019, Texas passed changes to how unclaimed property is reported in the state in HB 3598, as well as provisions relating to audits and owner claims.
The law is effective immediately.
New Texas Consolidated Reporting
The biggest change that will be noticed immediately for holders is the new consolidated reporting requirement.
Under the new law, all companies of an affiliated group must file one report for the entire affiliated group. This is commonly referred to as “consolidated reporting” within the industry.
An affiliated group is “one or more entities in which a controlling interest is owned by a common owner, either corporate or noncorporate, or by one or more of the member entities.”
For unclaimed property purposes, controlling interests means more than 50 percent interest – voting stock in a corporation, capital or profits in a partnership, membership interest in an LLC, and beneficial interest in any other entity.
Compare Nevada Reporting Requirements
While Texas is now requiring consolidated reporting, Nevada went the other way.
In the 2018 report year holders manual, Nevada wrote, in all caps and in red: “CONSOLIDATED REPORTS WILL BE RETURNED UNPROCESSED.”
Nevada went on to say “All holders, including business associations, banking and financial organizations, utilities and other legal entities, are responsible for filing individual reports on behalf of their branches, divisions, and other affiliated entities.”
Why Both Approaches to Consolidated Reporting Are Bad
My experience is that neither the Texas nor the Nevada approach to consolidated unclaimed property reporting is beneficial to the holder.
Today’s corporations are complex creatures, full of difficult organizational charts, decentralized accounting, and many mergers and acquisitions constantly changing the status of an entity.
Think about companies owned by private equity firms. For the most part, the separate organizational structures operate entirely independent of each other with little day-to-day involvement from the common ownership. They must now all operate together to file one return for Texas.
Meanwhile, a bank must file for each branch located in Nevada. Many of these will show “negative” reports since the accounting functions are consolidated at headquarters and not the branch level. For many companies, it will be burdensome to trace back the source for vendor checks, particularly if they are paid by a common paymaster for multiple related entities.
A better approach is to allow companies to find the balance that works for them. States should require companies to submit a list of entities that are included in a consolidated filing – legal name and FEIN – so that the state can verify that all companies are reporting as required.
What would require more processing power by the state – lining up all the related entities and sorting through hundreds of reports and matching remittances? Or answer questions relating to claims because the claimant never did business with the reporting entity? What’s the trade-off between convenience to the state in their reporting processes and encouraging the reporting and remittance of unclaimed property?
Negative Reporting Requirement
Texas also added a new negative reporting requirement. In the bill, it is referred to as a “continuing reporting requirement.”
In section (b), if a person does not have any abandoned property, then the person must certify that fact.
New Texas Audit Procedures
The next most noticeable change to the Texas unclaimed property law is the new administrative subpoena power that the Controller has as well as power to bring an action to compel cooperation with unclaimed property audit practices.
If a person fails to comply with the subpoena or to follow procedure to effectively challenge the subpoena, then the attorney general shall bring a lawsuit to enforce the subpoena in Travis County, Texas.
The new Texas law only applies to new audits or exams and not ongoing or previously conducted audits.
Record Retention Requirement
The state kept the 10 year record retention requirement, although it changed up the language.
Texas now requires records for 10 years from the later of the date the property became reportable or was filed.
It does not matter whether the property was reported in the aggregate or in full detail on the report.
Statute of Limitations
In addition to the 10 year record retention policy, Texas has a seven year statute of limitation for reports filed.
The statute of limitation does not apply if there are false or fraudulent reports, no report was filed, or a court must compel the person to submit to an audit.
A report is false or fraudulent if the property was under-reported by 25%.
Meanwhile, the provision that the statute of limitations does not apply to companies that must be compelled to comply with the unclaimed property audit should be a very serious consideration in any audit defense strategy.
Changes to Texas Owner Claims
HB 3598 also made changes to persons attempting to make claims on behalf of corporations, in particular corporations that were previously forfeited, dissolved, or terminated.
In particular, the Texas administrator may deny a claim from one who revives a corporation for the purpose of making a claim and that person was not an authorized representative at the time that the corporation was dissolved or terminated.
This change is to stop fraudulent heir finders from reviving old corporations to attempt to make a claim for previously escheated property.
Yes, that’s been a problem in the past.
General Administrative Changes
The new law also gives the Texas administrator greater flexibility in how to publicize the unclaimed property program. And how to sell tangible property that it receives.
The Texas administrator also received new powers to require fellow Texas agencies, commissioners, and officials to provide information or assistance in enforcing the unclaimed property laws.
Finally, there is a noticeable change in how the applicable sections are written – instead of the reporting requirements being made against a “holder” they are made applicable to the property. And the subpoena and suit to compel is against any “person” rather than holder.
And a change in the definition of the presumption of abandonment. The bill removed “existence and” from “personal property is presumed abandoned if, for longer than three years the existence and location of the owner of the property is unknown to the holder.”
Perhaps as a result of the ClubCorp audit and litigation?
Are you reporting unclaimed property in Texas and need to discuss these changes? Contact Kimberly DeCarrera to discuss how this law change affects your unclaimed property compliance program or audit defense.
