On June 8, 2017, the Delaware Senate approved Senate Substitute 1 for SB 79 (SS1 for SB 79), which would modify some of the recently enacted changes to the state's unclaimed property laws. The proposed bill would move back the state's deadline to adopt unclaimed property estimation method regulations, and it would clarify holder-friendly indemnification and interest waiver provisions.

This past February, Delaware enacted significant unclaimed property reforms through SB 13. These changes were made in response to a federal court's 2016 ruling in Temple-Inland¹ and to conform in part to the Revised Uniform Unclaimed Property Act as drafted by the National Conference of Commissioners on Uniform State Laws and issued in final form in July 2016. A majority of these provisions would not be affected by SS1 for SB 79.

SS1 for SB 79 is currently in the House for consideration. If SS1 for SB 79 is enacted into law, it would take effect immediately.

For information about the full scope of unclaimed property changes previously enacted in SB 13, see Tax Alert 2017-0260 and Tax Alert 2017-0149. For information about related proposed regulations, see Tax Alert 2017-0675.

Proposed changes

If SS1 for SB 79 is enacted, the Secretary of Finance (consulting with the Secretary of State) would have until December 1, 2017, to adopt regulations regarding Delaware's estimation method. Currently, the deadline to promulgate these regulations is July 1, 2017. The estimation method is used to create consistency in any unclaimed property examination or voluntary disclosure, and requirements for what must be included in the regulations are unchanged from previous reform efforts. The legislation proscribes that the regulations must include permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records. For consistency purposes, an amendment in SS1 for SB 79 also would remove the July 1, 2017 notification deadline for holders that choose to convert pending State Escheator examinations authorized on or before July 22, 2015, into a review under the Delaware Secretary of State's voluntary disclosure program. As amended, the notice would have to be received within 60 days of the adoption of the estimation regulations for a holder to convert the examination into a review under the unclaimed property voluntary disclosure program.

SS1 for SB 79 also would amend the effective date for due diligence mailing requirements outlined in SB 13 to July 1, 2017. The stated intent of this amendment is to provide holders sufficient time to comply. SB 13, which took effect upon its February 2, 2017 enactment, requires holders to send due diligence letters by first-class US mail 60-120 days before filing an annual report for property valued at $50 or more, except for securities. There is no minimum threshold for due diligence mailings for securities. Delaware was the last state to adopt a statutory due diligence requirement through SB 13.

Additionally, SS1 for SB 79 would clarify that, when a holder pays or delivers property to Delaware's State Escheator in good faith, the state will indemnify and defend that holder against a foreign jurisdiction's claims to the property. This includes any foreign jurisdiction or subdivision of a foreign jurisdiction that is not a US state, the District of Columbia, Puerto Rico, the US Virgin Islands, or any territory or insular possession subject to US jurisdiction.

Finally, provisions of SS1 for SB 79 would permit the State Escheator to waive interest under certain circumstances. Interest would be waived for any holder that filed its intent to enter the Delaware Department of Finance's expedited estimation process within 60 days of the adoption of the required regulations, provided the holder acts in good faith to complete the examination. Additionally, for good cause shown, the State Escheator could offer the following relief: (1) the partial or full waiver of interest due for unclaimed property remitted with certain statutorily required reports; (2) before January 1, 2019, the partial or full waiver of interest for unclaimed property remitted to Delaware from securities examinations that do not require estimation; or (3) the waiver of up to 50% of other unclaimed property interest due by statute.

In the originally filed SB 79, Delaware considered repealing an anti-assignment provision enacted as part of the reforms in February. This change, however, is not in SS1 for SB 79. Accordingly, if SS1 for SB 79 is enacted as currently drafted, this anti-assignment provision will remain unchanged from SB 13 in that the holder may not assign or otherwise transfer its obligation to hold for or pay or deliver property or to comply with the duties of the unclaimed property laws, other than to a parent, subsidiary, or affiliate of the holder.

Implications

The delay of regulations related to Delaware's unclaimed property program and estimation method would push back one of the most anticipated aspects of Delaware's unclaimed property reporting reforms. As such, this delay may impact the state's audit activity and voluntary disclosure agreement settlements over the next six months before the proposed regulations are either adopted or modified. Of importance, the state promulgated estimation regulations in April that did not alter the long-standing administrative practices of the state or address some of the downfalls identified in the Temple-Inland ruling, but the delayed deadline could indicate that the regulations as drafted may change. Other provisions, such as those related to indemnification, provide holders with more certainty in administering their unclaimed property obligations. In addition, the interest waiver provisions would allow Delaware not to assess potentially material interest, consistent with past administrative practice. Application of such allowable changes remains to be seen. Holders should continue to monitor the legislative developments in Delaware and carefully weigh the options available for audit closure or voluntary disclosure and appropriate timing of such settlements.

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ENDNOTES

¹ Temple-Inland, Inc. v. Thomas Cook, Civ. No. 14-654-GMS (U.S. D. Del. June 28, 2016).