SALT To Taste:Unclaimed Property: Getting Your Priorities Straight

Kellie Lanford; Marshal Kline

All fifty states in addition to the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have unclaimed property laws. These laws require holders of unclaimed property to report and remit such property to the state (after a prescribed period of time has elapsed) until the owner of such property can be located. Unclaimed property is generally remitted to a state based upon the “first” and “second” priority rules that were established under Texas v. New Jersey. Pursuant to these rules, the state of the last known address of the owner, as shown by the holder’s books and records, has a first priority right to the unclaimed property. If the holder has no record of the owner’s last known address, or if the last known address is in a state that does not provide for the escheatment of the abandoned property, then the holder’s state of incorporation has a second priority right to that unclaimed property.

If these rules are as simple and straightforward as they seem, why is there always controversy in this area? Do states have the authority to escheat unclaimed property under other priority schemes? If so, should holders be concerned?

Find out these answers and more by reading the full newsletter here.

U.S. Court of Appeals for the Third Circuit Affirms District Court of New Jersey's Orders

Regarding 2010 N.J. Amendments to its Unclaimed Property Law

by Kellie Lanford

On January 5, 2012, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) affirmed the District Court of New Jersey’s (“District Court”) grant of preliminary injunction with respect to the retroactive enforcement of Chapter 25 ¹ (as it relates to stored value cards) and the prospective enforcement of the place-of-purchase presumption and the accompanying Treasury Guidance. The Third Circuit also affirmed the District Court’s denial of preliminary injunction as to the data collection provision and the two-year abandonment period.

Keep in mind that this decision was issued in response to a preliminary injunction motion and that further litigation is likely.

Retroactive Enforcement of Chapter 25

Prior to the enactment of Chapter 25, New Jersey unclaimed property law did not provide for the escheatment of gift certificates. Chapter 25 now provides for the escheatment of stored value cards (“SVCs”) which include gift certificates, gift cards, rebate cards, and other similar instruments.

The Third Circuit held that SVC issuers “showed a reasonable likelihood of success on the merits of their Contract Clause claim with respect to SVCs that are redeemable for merchandise and services” for the following reasons:

(1) The change in New Jersey law substantially impaired the contractual relationship by requiring SVC issuers to submit the value of the SVC in cash at the end of the dormancy period (even though the SVCs are not redeemable for cash) as this expected profit was vital to the issuer’s contractual relationship. The retroactive obligations imposed by Chapter 25 also impaired the contractual relationship as this was an unexpected obligation since New Jersey had never before provided for the escheatment of SVCs.

(2) Although it was determined that the law change had a “legitimate and important public purpose” because its goal was to reunite abandoned property with its owners, the “adjustment of the rights of the parties to the contractual relationship was [not] reasonable and appropriate in light of that purpose,” given that it failed to allow SVC issuers to collect their expected profits.

Place-of-Purchase Presumption

Chapter 25 §5(c) provides that “[i]f the issuer of a stored value card does not have the name and address of the purchaser or owner of the stored value card, the address of the owner or purchaser of the stored value card shall assume the address of the place where the stored value card was purchased or issued and shall be reported to New Jersey if the place of business where the stored value card was sold or issued is located in New Jersey.”

The Third Circuit held that “SVC Issuers demonstrated a reasonable likelihood of success on their claim that Chapter 25’s place-of-purchase presumption as well as the Treasury Guidance are preempted under federal common law.” The Court stated that the place-of-purchase presumption language directly contradicts the second priority rule as provided in Texas v. New Jersey,² and the presumption, if executed in accordance with the Treasury Guidance, allows New Jersey to infringe on the sovereign authority of other states.

Watch for our upcoming SALT To Taste for further information about this New Jersey development and discussion of “third” priority rules.

Data Collection Provision

Chapter 25 §5(c) further provides that SVC issuers “shall obtain the name and address of the purchaser or owner of each stored value card issued or sold and shall, at a minimum, maintain a record of the zip code of the owner or purchaser.”

The Third Circuit held that “the District Court did not abuse its discretion in denying a preliminary injunction of the data collection provision.” The Court stated that the data collection provision furthers the purpose of reuniting customers with their property by making it more likely that the State will be able to reunite the owner with the abandoned SVC funds. Additionally, the Court stated that the “State Legislature’s intent suggests that Chapter 25’s data collection provision is severable from the place-of-purchase presumption.”

Two-Year Abandonment Period

Chapter 25 presumes SVCs to be abandoned after two years of inactivity and requires issuer to transfer to the State the remaining value of the SVCs at the end of the two-year abandonment period.

The Third Circuit held that “SVC Issuers failed to show a reasonable likelihood of success on the merits of their claim that Chapter 25’s two-year abandonment period is expressly preempted by the federal Credit CARD Act of 2009.” In reaching this conclusion, the Court stated that “the CARD Act only requires the funds to be available for five years whereas Chapter 25 protects the funds in perpetuity. Second, even with respect to non-expiring gift cards, Chapter 25 still provides greater protection because the consumer is able to reclaim the full cash value of the SVC under Chapter 25 after two years, whereas he would have been able to redeem only merchandise or services using the SVC.”

1. 2010 N.J. Laws Chapter 25 which amended New Jersey's unclaimed property statute.
2.Texas v. New Jersey, 379 U.S. 674 (1965).

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• Media continues to misinterpret the Amazon.com saga by depicting the issue as a "loophole" as if abiding by the U.S. Constitution and U.S. Supreme Court decisions is now an aggregious tax strategy.
• SALT To Taste - Well Done New Jersey! - from DLP
• Wal-Mart and Amazon.com - Strange Bedfellows?? - from DLP blog at statetaxalerts.com
• Social Media for Tax Professionals: Is It Time for Firms to Kick the Tires? - DLP article in BNA Tax Management Weekly State Tax Report
• Blog post from TEI summarizing the release of the Congressional Budget Office's cost estimate to the states of the Business Activity Tax Simplification Act of 2011 ("BATSA"). Approximately $2 billion in the first year - read more here
• Council on State Taxation files amicus brief in the Washington Supreme Court arguing that a 24-year retroactive period is unconstitutional - pdf copy of the brief here
• One state's Chamber of Commerce's take on corporate tax rates - “Illinois should never have a higher corporate tax rate than our neighboring states”

Reminder - Dow Lohnes Price recently launched its new website design at www.dlptax.com.  Check it out when you have a minute.

SALT To Taste: Well Done New Jersey!

Marshal Kline; Russell Padgett
In a well-founded application of unitary principles and constitutional restraints, the New Jersey Superior Court concluded that BIS LP, Inc. was not unitary with its ninety-nine percent owned limited partnership interest.  After reaching the non-unitary conclusion, the Superior Court determined that BIS LP, Inc. was not subject to New Jersey's corporation business tax.

Read entire newsletter here.

The New Jersey Supreme Court Determined That “You Can’t Throw Out The Baby With The Bath Water”

Jimmy Helms; Marshal Kline
In Whirlpool, a unanimous decision by the New Jersey Supreme Court ("Court"), it was determined that a state's throw-out rule could simultaneously operate constitutionally and unconstitutionally.  This article looks at some of the constitutional standards addressed by the Court and provides some thoughts as to when they may apply in the current state tax environment.

View the full newsletter here.

Amnesty Alert: MEDIA COMPANIES Voluntary Disclosure Initiative in NEW JERSEY

New Jersey’s Division of Taxation recently announced a voluntary disclosure initiative directed to media and media content companies beginning on August 15, 2011 and ending on November 15, 2011.

Several of the program details include:

• A look back period will be limited to four years. This includes the current period and the previous three years.
• All late filing penalties will be waived. A five percent amnesty penalty will be assessed for amnesty eligible periods; i.e., returns due on or after January 1, 2002 and prior to February 1, 2009.
• The amount of receipts earned by licensing intangible property cannot exceed ten percent of total gross receipts.
• Discretionary apportionment relief from “throwout” allocation may be granted on a case-by-case review.
• Within 90 days of execution of its VDA, the taxpayer should file its New Jersey Corporation Business Tax Returns for the disclosure period and remit the taxes due.
• Interest will be paid within 30 days of assessment.

For instructions and all of the specific principles of the program, please click here.

If you have any questions or require assistance regarding this voluntary disclosure offering, please feel free to contact Geoff Christian at 864-241-2009, gchristian@dlptax.com or Marshal Kline at 864-241-2005, mkline@dlptax.com.

SALT To Taste: New Jersey Provides Additional Guidance Regarding Addbacks

The New Jersey Division of Taxation recently issued Technical Advisory Memorandum, Add Back of Related Member Interest Expense (TAM-13) to apply the New Jersey Tax Court's decision in Beneficial New Jersey, Inc. v. Director, Division of Taxation, Docket No. 009886-2007(N.J. Tax Ct., Aug. 31, 2010).  According to this court decision and TAM-13, related party interest payments can qualify for New Jersey's "unreasonable" exception to the addback rules. This newsletter looks at how the Court determined when the "unreasonable" exception may be utilized to deduct related party payments.

Read this SALT To Taste newsletter here.