September 19, 2022
California allows implementation of new voluntary compliance program for unclaimed property
On September 13, 2022, California Governor Gavin Newsom signed into law AB 2280, which allows the Controller to establish a VCP for certain Holders. The Controller will waive the 12% interest for Holders that report past-due unclaimed property and meet the requirements of the VCP.
The new law also expands to Section 1532 (property that may not be subject to escheat) the $10,000 limit on interest that applies when a Holder timely reports and pays or delivers unclaimed property, but the report does not substantially comply with the statutory requirements of Cal. Code of Civ. Pro. Section 1530.1 The Controller may waive interest if the failure is due to reasonable cause. Reasonable cause, however, depends somewhat on each situation's facts so Holders with significant past-due property may not be able to readily determine whether they have reasonable cause.
The new law allows the Controller to waive interest for Holders that complete all VCP requirements. To be eligible to participate in the VCP, the Holder must:
The Controller may reinstate interest if these conditions are not met.
The VCP is not available to all Holders. While AB 2280 precludes a Holder from participating in the VCP for the typical reasons (e.g., an ongoing or impending state audit or being the subject of civil or criminal prosecution for unclaimed property compliance), AB 2280 also prohibits a Holder from participating in the VCP if it received an interest assessment from the Controller within the past five years that was waived or remains unpaid. A Holder, however, may file or refile a request to enroll in the program after resolving (paying) the outstanding interest assessment. If an interest waiver is received from the Controller, AB 2280 also permits a Holder that acquired or merged with another entity within the five-year period preceding the interest waiver to submit a VCP enrollment request to resolve past-due unclaimed property resulting from the acquisition or merger.
Recovery claims contract change
In addition to the VCP, AB 2280 amends provisions of California's unclaimed property law on third-party assistance in recovering unclaimed property. The amendments will invalidate an agreement with a third party to locate and recover unclaimed property, if the agreement requires the owner to pay the third party a fee before the claim is approved and the owner is paid.
Disclosure of records not required
AB 2280 does not require the disclosure of records obtained by the Controller and a third-party auditor as a result of an examination of records, other than unclaimed property that should have been reported, in the event of a public record request. The law lists various information (e.g., social security number, date of birth, personal financial data) provided to the Controller's office that is not required to be disclosed.
The VCP is welcome news for Holders that wish to comply with California unclaimed property laws but have been dissuaded by the 12% statutory interest imposed on past-due property. In addition to imposing interest on audit assessments (including audits conducted by state-hired third-party audit firms), California, unlike other states, routinely issues interest assessments to Holders that discover past-due property when filing their annual compliance reports.
AB 2280 follows on the heels of a law enacted last year that requires, as of January 1, 2022, all California taxpayers to respond to unclaimed property compliance questions on their 2021 state business tax reports filed with the California Franchise Tax Board (CA FTB). Under that law, the CA FTB may share compliance responses with the Controller, which could aid in more swiftly identifying non-compliant Holders, possibly resulting in increased state audits of unclaimed property compliance (see Tax Alert 2022-0244).
While the establishment of a VCP appears to provide incentives for many Holders to comply fully with California's unclaimed property laws, the eligibility requirements appear restrictive. For example, Holders that have reported past-due unclaimed property within the last five years could be ineligible for the VCP. Likewise, an eligible Holder that successfully completes the VCP would be precluded from participating in the VCP for another five years, which is unusual and generally more restrictive than the programs sponsored in other states.
Further, the six-month time frame, with the possibility of the Controller providing up to an 18-month extension, to review 10 years of books and records (with limited procedural guidance) may not be enough. Thus, Holders that anticipate participating in the VCP should consider beginning the record review process before submitting the VCP application.
Holders also should consider reviewing their unclaimed property reporting compliance, as well as the following:
1 The $10,000 limit on payable interest already applies when the Holder timely pays or delivers unclaimed property but does not substantially comply with statutory reporting requirements. The Controller may waive interest for reasonable cause.
2 Specifically, Cal. Code of Civil Proc. Section 1530(b), (c) and (e).
3 Cal. Code of Civil Proc. Section 1532.