Are you familiar with escheat laws and how they may affect your business? A little-known process in many states (including California), escheat laws transfer “unclaimed property” to the state for safe holding and potentially, if they remain unclaimed, permanently.
How Escheat Laws Work
The theory behind escheat laws is that there is certain property that goes unclaimed by the rightful recipient. The organization with control over this property needs to return it to the rightful owner and, if they aren’t successful, the state government steps in to take control of the property until it’s returned to the owner or enough time passes that it’s forfeited (you can check out this website to see if there’s any property out there that belongs to you). Typical examples of escheatable property include dormant bank accounts, un-cashed payroll (or other) checks from businesses to employees and vendors, certain unclaimed gift certificates without expiration dates, and other property.
Here is a typical example some businesses face: If you are an employee of the Widgets & More Corp. and they pay you a final payroll check for $52.86. It’s small, it gets lost in the pile of things in your car, and you never cash it. You have not received the ultimate benefit of that paycheck. Although conventional wisdom (and certainly MY thinking) might be, “Too bad, you should have cashed the check. Not my problem,” and then add the funds back into the company’s account since it was never cashed. WRONG! California wants to take care of you, so:
- Widgets & More must make several attempts to find you and give you the money, including making efforts to see if you’ve moved, etc.
- If they are ultimately unsuccessful, the business has to report to the state that there is a $52.86 check out there that should be claimed by you.
- Then the organization sends that money to the state for safekeeping.
- The rub (for me) is that if that money is never collected (i.e. it stays “unclaimed”), it reverts to the state. It has always seemed to me that it should go back to the business (it makes more sense for big items like property, etc., but even little checks get stuck in escheat laws).
- If a business doesn’t report unclaimed property, it can be liable for the amount in addition to various penalties and fees for decades. This amount can add up quickly!
As you can see, escheat laws can become an administrative headache, particularly for very small checks, or large volume transactions. Further, many small business (and even many large businesses) don’t even realize that escheat laws exist.
Want to learn more about escheat laws and how they can affect your business? Contact us for more information, and stay tuned for details about how another state is making changes to similar legislation!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit. To learn more, contact us today at www.MilesConsultingGroup.com.
