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Diving deeper into the world of exemptions

Posted By Administration, Thursday, May 11, 2017

Exemptions provide holders with the ability to significantly reduce their unclaimed property liability. Unfortunately, identifying, understanding and applying available exemptions are not simple.


“There’s no uniformity in terms of their application or meaning,” says Freda Pepper, counsel for Reed Smith LLP. “For example, the business-to-business exemption isn’t addressed by every state or offered by every state. Among states that do offer it, the B2B exemption comes in a variety of shapes and colors. Some are full exemptions, some are partial exemptions and some have qualifications that others don’t.”


B2B exemptions are based on the idea that businesses don’t require the same protection as consumers because they have the resources and knowledge necessary to protect and recover their property from another business. While many states agree on this premise, they differ in their execution of the exemption.


Some, including Illinois, Kansas, Ohio, Maryland, and Virginia, offer broad B2B exemptions with few conditions. Others, including Indiana, Iowa, Massachusetts, Michigan and North Carolina, offer limited B2B exemptions that are still holder-friendly but may include exclusions. Others offer what appears to be a B2B exemption, but it is really a deferral, requiring an ongoing business relationship.


“Holders may not understand whether an exemption is outright or more of a deferral,” says Chris Jensen, director of abandoned and unclaimed property compliance for Ryan. “Sometimes the liability is delayed or deferred from reporting until the relationship you have with another business no longer exists. The definition of an ‘ongoing business relationship’ differs by jurisdiction, so it is important to review the state’s requirements before applying the deferral.”


Some states may not include a B2B exemption or deferral in their unclaimed property statutes, but do so administratively. These present greater risk and diligence, as they may change when a new administration is installed.


The B2B exemption is one of the more common exemptions, but many others are available. Gift cards represent another opportunity in many jurisdictions. More than 30 states offer some form of gift card exemption, depending on card variables including expiration date, fee inclusion and type of merchant (retailer or other). Other retail exemptions include merchandise return credits, loyalty cards, layaway deposits and rebates—each with their own restrictions, rules and application standards, depending on the state and other factors.


While holders are generally accustomed to reporting property regardless of its value, a few states offer de minimis exemptions. Michigan, for example, does not require escheatment of property valued at $25 or less. Similarly, Florida and Arizona exempt select property types below $10 and $50, respectively.


Because exemptions vary so widely, it takes some effort to identify and understand them. Even locating exemption language in state statutes can prove challenging.


“Locating where exemptions actually appear in the statute varies by state,” Pepper says. “Sometimes there’s an outright exemption addressed in the area covering the presumptions of abandonment. Often, the exemption can be found in the definitions section of the statute. For example, when defining ‘property,’ there may be a passage listing that is not considered reportable property. So, finding the exemptions can be a hunt.”


In addition, taking an exemption doesn’t relieve a holder from all responsibilities for that property.


“If the holder determines an asset is exempt from reporting, it doesn’t necessarily extinguish the liability on their books and records,” Jensen says. “There remains an expectation that you adjudicate the asset with the owner and resolve it on your books and records. Don’t automatically take it as income. Having conversations internally about how property is managed after its determined to be exempt cannot be understated.”


With so many variables and sometimes murky definitions at play, applying exemptions presents some challenges. Holders may need to examine how their reporting software accounts for available exemptions and consider their level of risk. When an exemption is offered administratively but not statutorily, a holder applying the exemption takes on some risk. Likewise, when definitions related to exemptions are vague and open to holder interpretation, risk increases. Holders should document their interpretation, apply it consistently and keep track of when it is applied. Doing so may prove useful if faced with an audit.


Holders seeking to minimize their unclaimed property liability have the ability to do so via exemptions. The lack of uniformity from state to state presents numerous challenges. Identifying, understanding and correctly applying available exemptions may not be easy, but can be worthwhile.


To help holders dive deeper into the world of unclaimed property exemptions, Jensen and Pepper will lead UPPO’s An Advanced View of Exemptions webinar on Wednesday, May 17. This informative webinar will focus on various exemptions offered by the states and will help holders determine when and how to apply them. Unclaimed property professionals with customers or vendors located in states that offer exemptions should not miss this in-depth educational session. Register now.



Tags:  audits  compliance  exemptions  unclaimed property 

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