Magazine article Business Credit

Escheatment in the Post-September 11 Environment: A Problem for the Credit Executive? (Legal Corner)

Magazine article Business Credit

Escheatment in the Post-September 11 Environment: A Problem for the Credit Executive? (Legal Corner)

Article excerpt

The recent anniversary of September 11 reminds us that states are still struggling to meet the new financial burdens that the terrorist acts created. States are incurring enormous financial costs for homeland security. In light of this, states are looking for untapped revenue sources. The Chicago Tribune recently reported that New York state's annual budget now includes $408 million line items for escheatment or abandoned property. Other states are looking at abandoned property as a source of substantial revenue to offset rising costs post-September 11.

Given this environment, how does a state's focus on abandoned property as revenue source affect the credit professional? A credit professional often manages a portfolio of hundreds of commercial accounts, with credit extensions that can be in the millions of dollars. With an active trade relationship, it is not uncommon for the credit professional to have accounts with a surplus or credit balance. On occasion, the corporate customer may never claim the credit balance.

Are escheatment laws, commonly referred to as unclaimed property, a problem for the credit executive, especially post-September 11 where states are seeking untapped revenue sources to help offset the expense of homeland security? What is considered unclaimed property that may fall under the escheat laws? Does a credit balance qualify? What may be the consequence if the vendor declares the unclaimed property as income and applies it to the bottom line, as the vendor views it as a windfall to offset losses from unrelated delinquent accounts?

Post-September 11 and the States' Efforts to Find Untapped Revenue

The post-September 11 costs to state governments are estimated in the billions. For example, New York property claims associated with the 11th attacks are expected to reach up to $16 billion. Local governments and cities report that municipal revenues have been affected by the September 11 attacks, and many are finding it difficult to meet budgets, in part, because of a decrease in tax collection and an increase in expenses to cover security. In this setting, states are looking for sources of revenue, and abandoned property, as the press reports, may be that untapped source for states. Escheatment revenue is an appealing revenue source from the states' view, as it does not require raising taxes. States are more aggressive in their escheat efforts. Several private firms are working on behalf of states on a contingency fee basis to locate abandoned property that should have been turned over to the state.

Escheatment Defined

Businesses and residents abandon over a billion dollars of tangible and intangible property annually. Every state has legislation that requires companies to escheat to the state after some period. California, for example, requires escheatment to the state after three years of abandonment. Escheatment includes all forms of property, both tangible and intangible. For the credit professional, an account's credit balance may qualify as an abandonment of property. Escheatment laws provide that the state becomes the legal owner of abandoned property, based on the concept of state sovereignty. In looking at escheatment as a revenue source, states are considering those businesses that have failed to escheat.

Development of Escheatment Law

The origin of escheatment law dates back to British law. Abandoned land was returned to the king. The states within the United States have followed this principle.

Uniform Disposition of Unclaimed Property Act

With the growing popularity of state unclaimed property statutes as a new source of state revenue in the 1950s, uniformity of such laws became a necessity, as controversies between states over conflicting claims to property developed. For example, if a corporation abandons credits it has based on a trade relationship with a vendor, several states might attempt to claim custody. …

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