On February 4, Governor Corbett proposed his 2014-2015 budget, keeping his promise not to increase taxes, despite a nearly $1 billion proposed increase in spending. However, the budget includes a $150 million increase to state revenue that is to be funded by Pennsylvania entities and their vendors. Under the governor’s proposal, this $150 million increase in revenue will be obtained through a change to the commonwealth’s unclaimed property law.¹

Under Pennsylvania’s unclaimed property law, Pennsylvania-incorporated entities that hold certain property for the actual owners, including uncashed checks and outstanding credits, must remit that property to Pennsylvania after a period of inactivity, referred to as the dormancy period. For example, Pennsylvania-incorporated entities must pay unidentifiable credits over to Pennsylvania after the dormancy period. Further, any vendors holding credits to Pennsylvania-based businesses must pay those credits over to Pennsylvania after the dormancy period.² Once the property has been remitted, the commonwealth is supposed to hold the property in trust for owners to claim. However, in reality, the value of the unclaimed property remitted to the commonwealth goes directly to the General Fund as revenue. The state returns only an estimated 5 percent of the almost $2 billion of unclaimed property it holds each year.³

Currently, the dormancy period for most property is five years.⁴ So, for example, a credit issued to a Pennsylvania customer in 2011 becomes dormant in 2016—absent any customer-initiated activity—and is remitted to Pennsylvania with the unclaimed property report due in April 2017. This is true even where the holder and the Pennsylvania customer still do business together. The governor’s proposal is to reduce the dormancy period from five to three years—in order to accelerate state revenue.⁵ The governor views the change as merely a “timing issue,”⁶ but it can have real implications for Pennsylvania businesses.

First, any late reporting of unclaimed property by a holder as a result of slow adaptation to the change in the dormancy period would result in an interest accruing at a rate of 12 percent per year on any property reported late.⁷ So, for example, if a Pennsylvania-incorporated company remits a credit after year five as opposed to year three, the company will be subject to interest.

Second, Pennsylvania businesses will be forced to use any credits they have on account with their vendors more quickly. Otherwise, they may only be able to recover those amounts from the state through the claims process.⁸ Given the low percentage of unclaimed property returned to owners by Pennsylvania, many of those credits likely will never be recovered.

Finally, there is some ambiguity as to which transactions will be subject to the new dormancy period. For example, will credits issued in 2011 and still unclaimed as of the law change be reportable as unclaimed property after three years of dormancy (in 2014) or five years of dormancy (in 2016)? To the extent that the new dormancy period is considered to apply retroactively—that is, to transactions outstanding as of the date new legislation goes into effect—it could have serious constitutional flaws.⁹

As we keep an eye out for any specific legislation that would change the dormancy period in Pennsylvania, it’s important for companies to ensure their unclaimed property policies are up to date in all states—both for reporting and for recovering property. If your company still does not have an unclaimed property compliance process in place, now might be the time to implement one.

If you are interested in more details on the proposed changes to Pennsylvania’s unclaimed property law, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work.

1. Governor’s Budget in Brief at 8, available at PA Budget in Brief.
2. Texas v. New Jersey, 379 U.S. 674 (1965).
3. See http://www.patreasury.gov/Unclaimed/search.html (publicizing approximately $2BB of unclaimed property held by state and reporting a return of $100MM in 2012).
4. 72 P.S. §§ 1301.1–1301.10.
5. The reduction contemplated appears to be in addition to the reduction the House has proposed for inactive share accounts held by credit unions. See H.B. 2009 (proposed Feb. 4, 2014).
6. See Secretary of Revenue Daniel Meuser’s answers to questions from the Senate Appropriations Committee on February 18, 2014.
7. 72 P.S. § 1301.24. Note that penalty provisions may apply if the omission is deemed to be “without reasonable cause.” 72 P.S. § 1301.
8. 72 P.S. § 1301.19.
9. See, e.g., American Exp. Travel Related Services Co., Inc. v. Hollenbach, 630 F.Supp.2d 757 (E.D. Ky., 2009), judgment vacated by, judgment vacated, 641 F.3d 685 (6th Cir. 2011); New Jersey Retail Merchants Ass'n v. Sidamon-Eristoff, 669 F.3d 374 (3rd Cir. 2012) (addressing constitutional problems inherent in retroactive application of unclaimed property laws)

Client Alert 14-082