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Facing slow economic recovery and the loss of federal stimulus funds used to fill budget gaps, Delaware officials are fighting to defend a key source of revenue: abandoned property.
Other cash-strapped states also are taking a more aggressive stance toward recovering abandoned property, which can include stocks and bonds, uncashed checks, unclaimed dividends, wages, refunds, and utility deposits. Such property typically is declared abandoned when an owner forgets about it, moves without a forwarding address, or dies without informing heirs of the property.
If businesses holding the property can't find the owners after a certain period of time, states are allowed to take possession of it in a process known as escheat.
Because of Delaware's status as corporate headquarters for thousands of companies, abandoned property has become a pillar of the state's budget. It is the third-largest source of revenue, behind only personal income taxes and corporate franchise taxes, totaling half a billion dollars last year.
While states are supposed to try to return abandoned property to its rightful owners, much of it remains unclaimed and stays in state coffers.
Delaware, for example, has taken in more than $1.7 billion in abandoned property since 2007 but returned only $46 million, or less than 3 percent.
"States need money, but this is not supposed to be a revenue generator," said Diane Green-Kelly, an attorney representing office supplier Staples Inc. in an escheat lawsuit against Delaware. "States are supposed to be reuniting property with its owners."
Other states depend on abandoned property to a far lesser degree than Delaware but nonetheless find it useful.
Nevada lawmakers facing a budget shortfall earlier this year proposed borrowing against the state's unclaimed property funds, which have been used for college scholarships. Officials in North Carolina, which also uses escheat funds to help college students, are concerned that the money could soon run out if withdrawals continue at the current level.
Meanwhile, many states have reduced the dormancy period after which property is declared to be abandoned, or created new types of property that can be escheated, such as gift cards.
Not surprisingly, Delaware is vigilant about going after unclaimed property, but some property holders are fighting back.
Staples filed a lawsuit earlier this year challenging Delaware's method of calculating liability and accusing the state of trying to obtain property to which it is not entitled. The lawsuit was filed almost a decade after Staples said in a voluntary disclosure agreement that it owed about $137,000 in past due escheat payments.
Under an amnesty program, holders of unclaimed property who have not complied with Delaware's annual filing requirements can voluntarily report past due obligations while avoiding penalties or interest. But in entering voluntary disclosure agreements, or VDA's, property holders are subject to audits that allow the state to estimate liability for previous years if records can't be found.
Rather than accepting Staples' VDA offer, Delaware commissioned an audit and presented the company with a bill earlier this year for $3.9 million, due in 30 days.
The Staples lawsuit is the third in the past two years involving Delaware's escheat system.
CA Inc., formerly known as Computer Associates, sued in 2008 after being told it owed $7.6 million, not the $684,000 it reported in 2005 in a voluntary disclosure agreement. After a court battle in which the state won access to previously undisclosed records, the company settled the case this year for $17.6 million.
McKesson Corp., a health care company, last year challenged Delaware's claim to inventory the company had received but for which it had not been billed. Facing business concerns about disrupting supplier relationships, the General Assembly passed a bill exempting such "uninvoiced payables" from the definition of property. The lawsuit was dismissed and McKesson was off the hook for $4.6 million.
"As a state, we're very fortunate to have this revenue source; it keeps taxes down for our citizens," said Delaware finance secretary Tom Cook. "But it's a fine line to walk. We certainly don't want to be seen or portrayed as being negative to business."
In addition to exempting inventory, the bill established an administrative appeals process allowing property holders to challenge assessments without having to sue.
"We think it's a great start," said Joseph Crosby, senior policy director for the Council on State Taxation, a trade association that represents major corporations.
But property holders still chafe that Delaware can reach back as far as 1981 in estimating abandoned property liability. They also complain that Delaware uses contract auditors who work on contingency.
"The more they find, the more money they make," explained Michael Houghton, a Wilmington attorney who specializes in abandoned property.
But Cook notes that the return for contract auditors is capped at 12 percent, and said that if a voluntary disclosure appears reasonable, there is no audit.
The state has closed 348 voluntary disclosure agreements since 2001, and only 23, or 7 percent, have been audited, Cook said. In the cases that were audited, however, the initial amounts claimed by the companies totaled about $7.2 million, while the amount eventually collected was $75 million, a difference of more than tenfold.
Cook also noted that only about 3,000 companies file annual abandoned property reports as required, a fraction of the companies incorporated in Delaware. Last year, for the first time, the amount collected from enforcement actions exceeded the amount taken in from regular collections.
"It's hard to believe that companies would not have some kind of a liability," he said, noting that some Fortune 500 companies are among those not filing the annual reports. "... You would expect there would be higher compliance."