By Susan Han
Michigan is continuing its recent trend of enacting holder-friendly unclaimed property legislation. Senate Bill 538 (“S.B. 538”) was enacted on December 22, 2015 as Public Act 242 of 2015 (the “Act”). The legislation introduces several novel items, including a streamlined audit process and exemption for de minimis property, thereby providing significant changes to the Michigan Uniform Unclaimed Property Act. Subsequent to Ryan’s earlier Alert in November, 2015 on this matter, several significant changes were made in the final version of the legislation enacted into law. Highlights of the Act are as follows.
- De Minimis Exemption for Property $25 or Less - The Act provides, subject to two exceptions, for an expansive de minimis exemption for all property valued at $25 or less. The two exceptions delineated in the Act are that the foregoing exemption does not apply to (i) equity-related property such as stock or other intangible ownership interest in a business association, or (ii) dividends. Thus, the exemption in the Act applies to general ledger property, such as accounts payable, accounts receivable, and payroll, but does not apply to stock or dividends property. An earlier version of the draft legislation provided for a $50 de minimis exemption.
- Streamlined Audit Process - General - The Act provides that “eligible holders” being examined by the Administrator (State Treasurer) may elect to follow a new, streamlined audit process. To elect the streamlined audit process, the Act states that the eligible holder must execute a nondisclosure agreement acceptable to the Administrator within 30 days from the receipt of the audit notice. The key goal of this new audit process is to complete the audit within 18 months from the receipt of the audit notice, within a timeframe jointly developed by the eligible holder and Administrator, according to rules and regulations to be promulgated.
- Eligible Holder Defined - An “eligible holder” is defined for purposes of the streamlined audit process to mean a holder that meets one or more of the following: (i) a business whose principal place of business is in Michigan as evidenced by 20% or more of its payroll or 20% or more of its real and tangible personal property, except inventory, owned or rented in this state during the period subject to examination or the majority of officers that direct, control, and coordinate the activities of the business are employed in Michigan, (ii) a corporation that wholly owns a corporation that has incorporated in Michigan, and the corporation incorporated in Michigan meets the criteria for a business described above, or (iii) a corporation that is wholly owned by a corporation that is incorporated in Michigan, and the corporation that is incorporated in Michigan meets the criteria for a business described above. The definition of “eligible holder” contained in the final version of the Act is different from that in an earlier version of the legislation.
- Streamlined Audit Process-Voided Checks - The Act states that for an eligible holder that has elected a streamlined audit, examinations shall not include checks voided within 180 days from the date of issuance of the check.
- Significance of Streamlined Audit - Holders eligible for the streamlined audit process must act quickly once a Michigan audit notice is received. If they fail to affirmatively elect to be covered by the streamlined audit process, Michigan officials could assign the audit to a third-party contingent fee auditor to manage the audit, thus resulting in a longer, and presumably more expensive, audit.
- Statute of Limitations - The Act provides that for eligible holders that elect to participate in the streamlined audit process, an action or proceeding shall not be commenced by the Administrator with respect to any duty of a holder more than four years after the duty arose. For holders not covered by the new streamlined audit process, an action or proceeding shall not be commenced by the administrator more than ten years after the duty arose or, for the holder of records of transactions between two or more associations, more than five years after the duty arose.
- Effective Date - The Act provides that it takes immediate effect. It also provides that the legislation is retroactive and applies to audits in progress as of August 15, 2015, but does not retroactively apply to contested determinations in litigation before the date of enactment of S.B. 538.
This Act is ancillary to other holder-friendly legislation Michigan has passed in recent years. For example, in 2012 Michigan House Bill 4563 added a Business-to-Business exemption to its law, impacting reporting for 2013. In addition, a new, holder-friendly appeals process was enacted in December 2014, with an effective date of March 31, 2015. In contrast, many states have not codified an appeals process applicable to unclaimed property. Also, Michigan added new auditing standards with the enactment of House Bill 4289 in October 2013. H.B. 4289 included several key holder protections. For example, auditors are required to use generally accepted auditing standards for unclaimed property examinations. It also directed the administrator to initiate rules on auditing standards. H.B. 4289 provided extrapolation would not occur if a holder has “substantially complete records.”
In summary, the new legislation provides for several key holder-friendly provisions. Thus, the provisions of a streamlined audit process, shortened audit look-back periods, expansive de minimis exemption, and voided check provisions described above are all beneficial to the holder community. Holders seeking additional clarification on how these matters impact their specific factual situations may contact their designated Abandoned and Unclaimed Property (AUP) representative or one of the Ryan contacts below.
TECHNICAL INFORMATION CONTACTS:
Mark A. Paolillo