Unclaimed property, also known as escheatment, is a compliance issue that many companies overlook. This discussion covers what qualifies as unclaimed property, how it affects accounts receivable and payable, and the specific obligations businesses must meet to remain compliant. Key topics include dormancy periods, due diligence, reporting requirements, and how state laws impact reporting responsibilities.
First in a series of posts discussing unclaimed property for credit and finance pros, this article is based on a BuildingBlocks Community Webinar hosted by Lori J Drake, CBA featuring Troy Wangen, Principal – Unclaimed Property at Baker Tilly.
In this session, Troy breaks down the complexities of unclaimed property and escheatment, explaining how companies in construction, heavy equipment, and related industries can navigate compliance challenges.
Speaker Profile: Troy Wangen
Troy Wangen is the Principal for Unclaimed Property at Baker Tilly, where he has been for over two years. With 18 years of experience in unclaimed property compliance, Troy has worked with businesses of all sizes—from Fortune 10 companies to small dental clinics and construction firms—helping them navigate escheatment regulations.
He is also the Bylaws and Ethics Co-Chair and a past president of the Unclaimed Property Professionals Member Group, where he has been actively involved for over a decade. Troy earned his Bachelor’s degree from the University of Mary and is a published author in Laurman and the SU News.
Unclaimed property laws impact accounts receivable, accounts payable, payroll, and more, often catching companies off guard during audits. Understanding how to track and report unclaimed property correctly can help businesses avoid costly penalties while staying compliant with state regulations.
Understanding Unclaimed Property and Escheatment
What is Unclaimed Property?
Unclaimed property, or escheatment, refers to assets a company holds that remain unresolved with the rightful owner for a specified period. This typically includes intangible property such as uncashed checks, credit balances, and unapplied cash. The only form of tangible unclaimed property is safe deposit box contents, which are less relevant to most businesses.
For a company, this means it holds a fixed and certain obligation to a specific owner—whether a customer, vendor, or employee. If the property remains unclaimed past a dormancy period, the business must report and remit it to the appropriate state.
Example: A construction supply company issues a refund check to a subcontractor for an overpayment. The subcontractor never cashes the check, and after three years (the typical dormancy period for accounts payable items), the company is required to report and remit those funds to the state as unclaimed property.
How Unclaimed Property Affects Credit and Finance
Unclaimed property issues often arise in accounts receivable (AR) and accounts payable (AP) processes. Many companies struggle with identifying when a credit balance or overpayment should be classified as unclaimed property.
Accounts Receivable (AR) – Unapplied cash, credit memos, and overpayments that remain unresolved.
Scenario: A heavy equipment dealer applies a customer’s payment to the wrong invoice, creating a credit balance. The customer doesn’t request a refund, and the credit remains on the books for several years. If it isn’t properly resolved, it may become unclaimed property.
Accounts Payable (AP) & Payroll – Outstanding checks, including voided ones that were never reissued.
Scenario: A general contractor writes a check to a vendor for services rendered, but the vendor never deposits it. If the check remains outstanding for three years, it must be reported as unclaimed property.
Other Potential Unclaimed Property – Rebates, warranties, gift cards, employee benefits, and insurance claims.
Example: A manufacturer offers a rebate on bulk equipment purchases. A contractor qualifies but never redeems the rebate. After a few years, the manufacturer may be required to report the rebate funds to the state as unclaimed property.
Simply voiding an old check doesn’t erase the obligation—if funds were owed, they may still be considered unclaimed property. Companies must ensure they aren’t unintentionally bypassing compliance by writing off balances without following due process.
Company Responsibilities for Compliance
Unclaimed property laws exist in all 50 states, Washington DC, Guam, Puerto Rico, and the US Virgin Islands. While unclaimed property is not a tax, it is still a legal reporting obligation, much like tax compliance.
Companies must:
1. Identify and track unclaimed property on an annual basis.
2. Implement internal controls to prevent unauthorized write-offs.
3. Perform due diligence by attempting to contact property owners before reporting.
4. File and remit unclaimed funds to the appropriate jurisdiction.
5. Retain records for compliance, even if the business believes an item was resolved.
Dormancy periods vary by state and property type, but most accounts payable and accounts receivable credits must remain unclaimed for three years before being reported. Payroll checks typically have a shorter dormancy period of one year since they directly affect employees.
How States Determine Reporting Obligations
A key legal precedent in unclaimed property is the 1965 Texas v. New Jersey Supreme Court ruling, which established a two-priority rule for reporting:
1. First Priority Rule – Report unclaimed property to the state of the owner’s last known address.
2. Second Priority Rule – If no owner address is available, report it to the company’s state of incorporation.
This rule is why Delaware, where many companies are incorporated, collects a disproportionate amount of unclaimed property—up to $500 million annually, compared to North Dakota’s $5 million every two years. If an owner’s address is unknown, the state of incorporation benefits from those unclaimed funds.
Example: A subcontractor in Texas has an unclaimed credit balance with a supplier. If the supplier has the subcontractor’s last known address in Texas, they report the unclaimed property to Texas. If the address is missing, the supplier reports it to their state of incorporation, which may be Delaware.
State laws differ on what constitutes a valid address for reporting. Some states require a complete mailing address, while others allow reporting as long as a state indicator is present. Companies must ensure address accuracy to avoid reporting property incorrectly.
Avoiding Common Compliance Mistakes
Ignoring small balances – Even minor overpayments or unused gift card balances can be classified as unclaimed property. (E.g. A contractor receives a $50 supplier credit but never uses it. The supplier must eventually report it as unclaimed property.)
Automatically voiding checks – Voiding without reissuing or resolving the balance could create unclaimed property liability. (E.g. A rental company voids a $1,000 deposit refund check instead of reissuing it, creating a compliance issue.)
Failing to conduct due diligence – Companies must attempt to notify owners before reporting property to the state. (E.g. A payroll department fails to send reminder notices to former employees with unclaimed paychecks before the dormancy period ends.)
• Misclassifying write-offs – Moving unclaimed credits to revenue without proper reporting violates compliance rules. (E.g. An equipment dealer automatically moves old customer deposits to revenue after 12 months instead of following unclaimed property laws.)
Poor Unclaimed Property Management is Costly
Unclaimed property laws are complex and vary by state, but noncompliance can lead to audits and financial penalties. Companies must proactively track outstanding balances, follow due diligence procedures, and report property correctly based on jurisdictional rules.
For credit and finance teams in construction and heavy equipment industries, this means keeping a close watch on accounts receivable, accounts payable, and payroll to prevent unintentional escheatment violations. By implementing proper tracking, internal controls, and compliance processes, businesses can avoid costly penalties and ensure they meet legal obligations for unclaimed property reporting.
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