Illinois Removes B2B Exemptions: What Happened & What’s Next?
Paul MacCready, Director of Liability Reduction & Remediation Services
December 13, 2017
December 13, 2017
Illinois’ decision to adopt a majority of the provisions recommended in the 2016 Revised Uniform Unclaimed Property Act (RUUPA) presents a dilemma for companies that have historically elected to take advantage of the Illinois business-to-business (B2B) exemptions for unclaimed property. While the practice was permitted previously by Illinois, the B2B exemption was specifically not included with RUUPA.
This change creates many questions for holders regarding what is currently deemed reportable and the procedures to capture those transactions. It should also raise flags regarding how B2B exemptions are documented and supported where permitted. We will look first at the most immediate concern, how to report for 2018 given the retrospective element of the change; then we will address other potential ramifications.
In a nutshell, the Illinois House added RUUPA as an amendment to a budget bill which was passed by the IL Senate, then vetoed by the Governor but with that veto overridden by the House and Senate. The B2B exemption was not so much repealed as simply not included as part of the new rules.
2018 Illinois Escheat Reporting Process – Retrospective Impact
Section 15-1503 – Transitional provision, states in part:
(a) An initial report filed under this Act for property that was not required to be reported before the effective date of this Act, but that is required to be reported under this Act, must include all items of property that would have been presumed abandoned during the 5-year period preceding the effective date of this Act as if this Act had been in effect during that period.
While this clause appears to be confusing, Keane interprets this to include properties reportable as of December 31, 2014 plus a five-year look-back period, or January 1, 2010. Any outstanding obligations resulting from credits memos, credit balances and vendor checks owed to businesses that have not previously been satisfied, issued between January 1, 2010 and December 31, 2014, should be remitted to the state with the May 2018 report.
Keane expects further direction from the State of Illinois to help clarify the revised act and will provide updates as they become available.
The Importance of Documentation
Good documentation of what potentially reportable property is deemed not remittable, and the justification for that position, has always been a recommended component of a comprehensive unclaimed property policy. Since audits are a real possibility for any holder, a solid defense begins with effective documentation. Without proper documentation, the logic of a position may not be immediately apparent given that staff turnover happens, memories fail, and out-of-the-ordinary situations may defy explanation years later. Documentation is also necessary to provide proof in the event of an audit. With the precedent set by Illinois of a retrospective approach to the withdrawal of the B2B exemption, holders with historical documentation are going to find compliance much easier.
It is no secret that Illinois had/has a budget crisis. In addition to not maintaining the B2B exemption, the new law also reduces dormancy for property types like AP and AR items from five years to three. Those changes combined with the retrospective nature of the transition will generate an immediate influx of funds. We note these details simply to put the Illinois decision to not renew the B2B exemption in context as we look at implications for other states.
Is this a precedent to be concerned about with the other sixteen states that have some form of special allowance for Business to Business items? It is certainly possible especially if a state experiences similar financial challenges or by virtue of the process of adopting RUUPA. At this moment in time, no other states have advertised the elimination of their B2B exemptions, but a precedent indeed now exists.
Companies electing to take advantage of the unclaimed property exemptions should implement procedures to fully document both the item, as well as the rationale for exercising the exemption. This effort would help protect holders both in the event that a state changes its B2B position or in the case of an audit.
For example, a limited number of states include wording in their provisions that require an ongoing (or current) business relationship (OBR/CBR) while others allowed the exemptions without the need to demonstrate this relationship. Documentation of the evidence of those relationships should be included in the history to avoid the need for time consuming research later.
Change is possible and, regardless of whether other states follow Illinois’ path, good documentation is always a necessary component of a comprehensive Unclaimed Property process, and should be especially emphasized by holders taking advantage of B2B exemptions.
The following was added after the above article was completed
On Nov. 14, 2017, Allen Mayer, deputy general counsel for the Illinois Treasurer’s Office, spoke to the Illinois Chamber of Commerce about the Illinois Revised Uniform Unclaimed Property Act. The following are comments made by Mr. Mayer as reported by UPPO (Unclaimed Property Professional Organization) members Sara Lima, Freda Pepper and Tim Dressen. Mayer described the prior law as “an antiquated mess” and was exceedingly positive about the new law. Below are comments to selected questions.
Has the legislature considered the constitutionality issues raised by the transitional provision? Requiring Holders to look back 10 years (five-year requirement plus five-year dormancy period) to report otherwise exempted property raises due process issues.
Mayer said that, although he cannot speak for the Illinois General Assembly, he considers the lookback period to be eight years (five-year requirement plus three-year dormancy period under the new Illinois unclaimed property statues). He noted that he personally researched the constitutionality issue and believes the exemption can be retroactively revoked, citing Riggs Nat. Bank v. District of Columbia (581 A.2d 1229) in particular.
In attempting to comply with the transitional provision, records dating back to that period of time will most likely not exist, particularly because there has been no record retention requirement contained in Illinois’ unclaimed property law. What will be the consequences of not being able to “catch up” report when these records are no longer available?
Mayer responded that there has always has been a record-retention provision, although it was hard to find before the new Illinois unclaimed property legislation. He cited Section 11(h)(ii), which proscribes a five-year retention from when property is reportable. According to Mayer, holders who report “catch up” property on the 2018 report will not be subject to interest and penalties. He also invited feedback and suggestions on how the state should otherwise deal with the issue.
What specifically will the administrative rules be addressing?
Mayer did not provide any specific topics, but noted Illinois will be considering pay cards (possibly in new legislation) and is open to informal discussion about this topic.
Could you please provide clarification of when reports are expected to be filed by investment companies? Are they considered “business associations” that are required to file by May 1?
Mayer specified that investment companies are business associations, required to file by May 1. He said he would be open to including clarification in future legislation.