Beware of the Escheat Law Traps

11 Jun

If you are holding customer funds, beware of the abandoned property, or “escheat,” laws.  Those laws typically require that customer overpayments and dormant accounts that have been inactive for a period of time (usually 3 years) must be remitted to the state.  You may be holding customer funds as a result of your loyalty card business, or even due to reserve account requirements.  Each state has its own escheat law.  The theory behind these laws is that the overpayments and dormant accounts belong to the customer, and not the company, and thus the business should not be able to profit from this unclaimed property.

Although the process of returning unclaimed property to the state seems relatively simple, there are some traps for the unwary business owner that can result in serious financial and legal consequences.  Some laws prescribe a penalty of $100 for each day of non-compliance while others allow the state to charge the person entrusted with accounting for the company’s unclaimed property with a misdemeanor.  Below are a few more of these traps.

Failure to Comply with Every Applicable State Law

It might be logical to think that you need to comply with the escheat laws only for states in which you are located or conduct business.  This is usually incorrect.  Businesses must comply with each state law in which each customer that has unclaimed property resides.  Therefore, businesses that conduct large national operations may have to comply with fifty different sets of escheat laws.

Failure to Remit All of the Abandoned Property to the State

Most states require that notices be sent via first class mail to alert customers whose accounts are valued at over a certain threshold amount (say, $50) and are on the verge of becoming dormant.  This may lead you to believe that you do not have to remit the property that is less than the threshold amount to the state.  Not true.  All unclaimed property, whether a mailing is required to be sent to the customer or not, must be remitted to the state.  At no time should you keep abandoned property or treat it as a profit.

Although the primary goal of escheat laws is to reunite individuals with their unclaimed property, state governments benefit because they have access to the unclaimed funds, as well as the interest that the funds generate, before the rightful owners are located.  It can be anticipated that states will be even more vigilant in enforcing their escheat laws during this period of time where state governments are strapped for cash.  Therefore, it is even more imperative that businesses avoid the traps and comply with the applicable escheat laws.


Holli Targan

Attorney & Partner

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