California no longer dreams: California’s voluntary compliance program could finally become a reality | Alston and bird

Although the key word here is may, it looks like California may soon be adopting a voluntary unclaimed property compliance program. Our unclaimed property team is investigating how the provisions of AB 2280 might affect holders who have long dreamed of a VCP in California.

  • Which holders are and are not eligible for VCP and interest relief
  • To qualify for the interest waiver, holders would be required to participate in an educational training program and meet other requirements
  • How VCP impacts holders with pending interest assessments
  • VCP could save incumbents from threat of state litigation

On August 17, 2022, the California Legislature passed Assembly Bill 2280 (AB 2280) which, if signed into law by Governor Gavin Newsom as planned, would establish the California Voluntary Compliance Program (VCP) for unclaimed owners. Notably (or infamously), California is one of the only states where there is no voluntary compliance or similar program for holders to report overdue unclaimed property. Under AB 2280, the current California Code of Civil Procedure Section 1577.5 would be repealed and the provisions creating the VCP would be added as a new Section 1577.5 with the significant benefit that the Monitor would be obligatory to waive interest if the holder complies with the provisions of the program.

Under current California Unclaimed Property (UPL) law, holders are subject to 12% interest on property declared and delivered late, unless failure to report and timely delivery is due to “reasonable cause”. The Office of the State Comptroller (SCO) automatically generates interest assessments on overdue assets, and holders must plead their case for a waiver, citing “reasonable cause” grounds for removal by the SCO an assessment of interests (for example, the failure to declare was due to circumstances beyond the holder’s control). An interest cap of $10,000 is provided if a holder timely delivers the unclaimed property but the report is not substantially in compliance (this would not apply to most reports containing overdue goods).

Under the VCP, a Holder would not be eligible to participate in the Program if the Holder (1) is undergoing a records review (or has received notice of an impending review); (2) is the subject of a civil or criminal proceeding involving compliance with the UPA; (3) was notified of an assessment of interest under Section 1577 within the past five years that remained unpaid; or (4) has been the subject of an interest waiver by the SCO within the previous five years through its participation in the VCP (AB 2280 was amended by the Assembly to clarify that only waivers related to the VCP during five years would render a holder ineligible). AB 2280 allows a holder who currently has an unpaid interest assessment to file or re-enroll in the VCP after resolving the interest assessment.

AB 2280 also provides that if a holder has acquired or merged with another entity within five years, the holder may apply to register with the VCP to resolve unclaimed property issues relating to the acquired entity, even if the licensee (or such acquired entity) has been waived interest by the SCO within the previous five years.

As we noted in our original notice reviewing AB 2280 when it was introduced, the bill is overly restrictive in that it prohibits participation in the VCP by holders who have an outstanding assessment of interests. , including an ongoing assessment by the SCO of the licensee’s reduction request. The Assembly amendment did not address this particular concern. AB 2280 would appear to prevent a licensee from resolving ongoing interest assessment issues with the SCO through the VCP program, which is an unfortunate restriction. That said, new section 1577.5 allows SCO’s “discretion” to enroll “eligible cardholders in the program” and AB 2280 allows SCO to adopt guidelines that establish specific VCP procedures. It is possible that such guidelines address the ability of holders with pending interest reduction requests to enter the VCP.

In order for an Eligible Holder to participate in the VCP and qualify for Interest Relief, a Holder must:

  • Enroll in and participate in an “educational training program” provided by the SCO within three months of the SCO notifying the holder of their VCP enrollment. Note that AB 2280 does not specify whether this requirement applies only to first filers of unclaimed property or to all holders.
  • Undertake a review of its books and records for “at least” the last 10 reporting years (usually 13 transaction years).
  • “Make reasonable efforts” to notify owners by mail or electronically in accordance with procedures established by the UPL.
  • Report overdue goods within six months of your VCP enrollment (unless extended by the SCO; the SCO has the authority to extend the reporting date by up to 18 months after the enrollment date).
  • Hand over the property in accordance with the legal handover period (ie between seven months and seven months and 15 days after receipt of the report by the SCO). Note that the bill allows the SCO to reinstate interest if a holder fails to pay or deliver the property identified in the unclaimed property report.

The alleged adoption of the VCP marks another step in California’s recent focus on unclaimed property compliance that began with Assembly Bill 466 (AB 466), which went into effect on January 1, 2022. AB 466 amended California Revenue and Taxation Code Section 19554 to require businesses that file California franchise tax returns to disclose information about previous unclaimed property reports to the Franchise Tax Board ( FTB). Specifically, businesses must now disclose the date their last unclaimed property report was filed and the amount paid on that report.

Section 19554 also authorizes the FTB to share such disclosed information with the SCO. With the enactment of AB 466, California made it much more difficult for businesses to avoid unclaimed property reporting obligations through information sharing between the FTB and SCO. With the presumptive promulgation of the VCP, the VCP becomes the carrot of UPL compliance, which the state is betting is more palatable to businesses than the stick of increased scrutiny and possible litigation.

Companies should also be aware that the VCP can protect them from the threat of litigation for non-compliance with the UPL. Recently, the California Department of Justice has focused on corporate unclaimed property compliance (or non-compliance) efforts. In March 2022, the California Attorney General intervened in a California False Claims Act (CFCA) lawsuit alleging non-compliance of unclaimed property, People of the State of California, ex rel. Andrew Nguyen v US Healthworks, Inc., No. BC 698811 (Cal. Super. Ct. Cty. of Los Angeles). Using bold language such as “corporate evasion is corporate fraud,” the California Attorney General’s press release alleges that a company “violated the CFCA when it chose not to report its unclaimed property, knowingly concealing millions of dollars owed to the State of California”. .” With the state’s recent focus on unclaimed property compliance, the VCP offers eligible holders the opportunity to comply with the UPL using the VCP and avoid litigation costs.

Even with the good news of AB 2280 establishing a VCP, uncertainties remain. The bill does not provide an implementation date for the VCP, so in the short term, holders cannot rely on the VCP for interest reduction. Similarly, the new Section 1577.5 does not require the SCO to adopt the VCP, stating that “the controller may establish a cardholder voluntary compliance program for the purpose of resolving unclaimed property” (emphasis added). Although we expect the SCO to establish the VCP, it may not be on the SCO’s list of top priorities, so full implementation of the program may take longer than expected. holders would like.

Nonetheless, AB 2280 is a welcome development, as the VCP would provide unclaimed property holders in California (perhaps 1.3 million of them) the ability to clean up overdue unclaimed property without being subject to taxes. of onerous interest, examinations and litigation. For the holder community, which has long dreamed of a PCV in California, AB 2280 is about to make holders’ dreams come true, albeit perhaps delayed.

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