Delaware has long cultivated a reputation as a haven for corporations. Its relatively uncomplicated legal structure and low tax rates have enticed more than half of all publicly traded companies in the U.S. to incorporate there. But there is a dark side to this otherwise business friendly environment: Delaware has some of the most intrusive and baffling unclaimed property laws in the country.
Now in place in all 50 states, unclaimed property laws are ostensibly a consumer-protection mechanism, intended to reunite a person with his or her dormant bank account balances, uncashed paychecks and other unclaimed property. The state holds these assets until their rightful owner steps forward.
But in Delaware, the laws in theory and the laws in practice are two radically different things. Delaware law states that companies must turn over unclaimed securities and dividends to the state if they can’t locate the owner after three years. Other types of unclaimed property — such as gift certificates — become spoils for the state after five years.
Moreover, Delaware is turning a fabulous profit. Seizures of unclaimed property are now the state’s third largest source of revenue: Last year alone, Delaware absorbed $319.5 million from liquidated property, while returning only $18.9 million of unclaimed property to the owners. The state’s estimated General Fund revenue from unclaimed property in 2013 exceeds half a billion dollars. Clearly the stated purpose of these laws — to return lost or forgotten property to owners — has been replaced with the tacit goal of generating revenue.
If only this was the worst of the wrongdoing.
Over the last decade, Delaware has engaged in ruthless and arbitrary auditing practices, dating all the way back to 1981. If the company doesn’t have records going back that far — and very few businesses do — then Delaware simply “extrapolates” the amount the state feels it is owed from unclaimed property and heaps interest on to that amount. Effectively, the financial penalty for not keeping more than 30 years of detailed records is whatever the Delaware auditors deem fair. What could be more unfair?
Delaware’s Secretary of State has tried to soften the mistreatment by enacting a Voluntary Disclosure program, under which companies need only look back to 1996 for unclaimed property, instead of 1981. If they cooperate with state reporting mandates for the next three years, the businesses will be sheltered from future audits. But the many companies already under audit do not qualify for this program, and the reforms are too limited to truly solve the problem.
The auditing is a long, exasperating and resource-draining process. Companies based in Delaware repeatedly lament the unscrupulousness of the auditors. But the general lack of boundaries really ought not come as any surprise to these businesses, given that Delaware hires private firms to perform audits on a contingent fee basis. In other words, the bottom line for these auditing companies depends on their ability to wrest as much “unclaimed property” as they possibly can from Delaware corporations.
So far their efforts have been met with considerable success.
In 2010, CA Technologies Inc. paid Delaware $17.6 million in an out-of-court settlement made five years after the state began its audit. Staples yielded almost $9 million to escape from an audit that began in 2005. And these are just two of the fleeced companies.
It’s difficult to understand how the Delaware government could defend such practices. The state simply writes its own checks based on an imagined amount of unclaimed property that a business might have retained over the unrecorded years. The practice bears more than a little resemblance to a mafia-style extortion racquet —but clearly such compunctions have been set aside for the greater good of state revenue. Keeping these onerous unclaimed property laws in place could very well cost Delaware in the long run, as the state’s most valuable inhabitants — its corporations — may seek shelter elsewhere.
