Unclaimed property: unraveling the business-to-business exemption

While the concept of a business-to-business (B2B) exemption to unclaimed property reporting seems simple on its face, the intricacies of state-specific laws greatly complicate the matter. B2B exemptions can vary from a near complete exemption from reporting any property held in the ordinary course of business to a mere deferral of reporting until an ongoing business relationship ceases to exist. It is important for unclaimed property professionals to understand these different B2B exemptions.

The policy behind B2B exemptions is derived from the policy of unclaimed property law in general. Unclaimed property laws exist to protect owners that are vulnerable to the loss of their property. For this very reason, many states have specific reporting requirements for life insurance companies, financial institutions, and other entities that act as fiduciaries. States feel that these entities should not benefit financially from the vulnerability of the individuals they serve. Some states take the position that businesses, unlike individuals, do not need the protections afforded by unclaimed property laws. States with B2B exemptions feel that businesses have the capability to ensure their property interests are secured and that taxpayer dollars should not be exhausted to protect these property interests. States with B2B exemptions choose not to interfere with business relationships and instead allow businesses to settle their contractual rights between each other.

However, not all B2B exemptions are the same. Arizona and Tennessee limit the B2B exemption to property held by a business in favor of another business in which an ongoing business relationship exists. Missouri has a similar “ongoing business B2B exemption,” but exempts credit balances regardless of whether is an ongoing business relationship. The ongoing business B2B exemption merely acts as a deferral of unclaimed property reporting until the business relationship ends, at which point the property's dormancy period begins to toll.

Other states have more holder-friendly B2B exemptions, under which property held in the ordinary course of business is exempt from reporting notwithstanding a lack of an ongoing business relationship with the owner. While holders are still required to attempt to return the property to the owners through due diligence procedures, any unreturnable property becomes the property of the holder. Not all of these "ordinary-course-of-business" states provide the same breadth of exempt property under their B2B exemption. States such as Indiana, Iowa, Massachusetts, Michigan, North Carolina, and Wisconsin, only exempt credit balances from unclaimed property reporting, but still require the escheatment of uncashed checks and other types of property acquired in the ordinary course of business. Illinois, Kansas, Maryland, Ohio, and Virginia, on the other hand, have broad exemptions that cover most property held in the ordinary course of business and owned by another business, including credit balances and uncashed checks. These states are seen as the most business friendly with reference to their unclaimed property laws.

Texas and New York, states without statutory B2B exemptions, have administrative B2B exemptions as a result of issued guidance. Because this guidance is not law, holders cannot cite to the guidance as precedent, but it can generally be relied upon for application to each state's unclaimed property reporting laws. Both of these administrative B2B exemptions generally only act as reporting deferrals, rather than full exemptions from reporting.

Finally, property that falls under a B2B exemption in the primary state does not escheat to the secondary state. B2B exemptions follow the primary and secondary rules established by Texas v. New Jersey. That is, the unclaimed property laws of the state of the owner as listed in the holder's books and records, i.e., the primary state, take priority. If the owner's state has a B2B exemption, then such exemption will apply to any transactions between the holder and the owner. If no address is listed in the holder's books and records, then the secondary state, i.e., the holder’s state of incorporation, dictates whether a B2B exemption will apply. This creates incentive for holders to incorporate in states with favorable B2B exemptions.

Action item: B2B exemptions can significantly reduce a holder’s unclaimed property liability. Unfortunately, many holders are either unaware of B2B exemptions or not familiar with the specifics of B2B exemptions. States will accept any property remitted to them and will not ensure that a B2B exemption is properly applied. Therefore, it is the holder's duty to fully understand and apply B2B exemptions to ensure the holder receives the full benefit from these exemptions.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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