Unclaimed Property Exemptions and Deductions: A Comprehensive Guide

Unclaimed property is a growing concern for holders, and understanding the available exemptions and deductions offered by states is an essential step in the ongoing compliance process.

This comprehensive guide covers state exemptions, priority rules and state of incorporation, and best practices – everything your business needs to navigate the complexities of exemptions and deductions.

State Exemptions

State exemptions tend to vary depending on the state but generally provide certain allowances for reporting select property types. These typically depend on factors like owner type, reported amount, etc.

To ensure compliance, it's crucial to consult your state's unclaimed property laws and identify the applicable exemptions. Specific state exemptions to note are B2B, payroll, de minimis, and gift card exemptions.

Business-to-Business (B2B) Exemptions

B2B exemptions relate to transactions between businesses. This includes full business-to-business exemptions, which are broader and typically apply to more property types. These exemptions apply to states including Kansas, Maryland, Ohio, and Virginia.

There are also partial business-to-business exemptions, which are a focused scope, typically on credit balances. These exemptions apply to states including Iowa, Massachusetts, North Carolina, and Wisconsin.

States provide these exemptions intending that businesses can resolve outstanding liabilities without State involvement.

Payroll Exemptions

Payroll exemptions relate to unclaimed wages, salaries, commissions, or other forms of employee compensation. These exemptions are limited in scope and typically only apply to amounts less than $50.

These exemptions apply in states including Kentucky, Ohio, and Michigan.

De Minimis Exemptions

De minimis exemptions concern unclaimed property with a value below a certain monetary threshold.

In states offering de minimis exemptions, like Michigan and Idaho, holders are not required to report or remit unclaimed property below the established limit. This threshold varies among states.

Priority Rules and State of Incorporation

Priority rules dictate to which state unclaimed property is escheated. In the Texas vs. New Jersey ruling of 1965, the U.S. Supreme Court established the following priority rules:

• First Priority: The state where the property owner last resided has the primary claim.
• Second Priority: If the owner’s address is foreign or unknown, the holder’s state of incorporation has the secondary claim.

Priority rules should be utilized to determine when and if exemptions can be utilized. Your company’s state of incorporation could claim exempt priority via the Second Priority Rule. It is important to understand this before utilizing exemptions offered by the states.

Best Practices

• Periodically check laws for changes.
• Keep detailed records in case a state changes its stance on exemptions.
• Perform due diligence, even if not required to escheat an item.
• Never write off non-dormant and potentially exempt items.
• The obligation to pay the owner does not go away because an item is exempt.
• Determine if your state of incorporation offers exemptions.
• Establish detailed Policies and Procedures that address company policy on exemptions.
• Know what constitutes a “business” before determining exemptions.
• Retain copies of all contracts used in any escheat deductions.

Unclaimed property exemptions and deductions are a complex topic, but businesses and individuals can successfully navigate the landscape with a thorough understanding of the various aspects involved.

‍Talk to our experts to reduce your business’s unclaimed property liability while maintaining compliance.