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Editorial 9 MIN READ

Delaware's 2021 unclaimed property revamp, read in plain English

Senate Bill 104 trims the audit lookback, puts a hard 1% on expedited exams, and closes the tolling loophole that made VDA enrollment a delay tactic

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 8 sections
  1. What Delaware was doing before SB 104
  2. The interest and penalty schedule, now on paper
  3. The VDA tolling fix
  4. Record retention, verification, and what examiners can now ask for
  5. The smaller fixes that do actual work
  6. Texas v. New Jersey is still the backdrop
  7. What remains unclear
  8. Sources

n June 30, 2021 Governor John Carney signed Delaware Senate Bill 104, the first substantive rewrite of the state's unclaimed property statute since the 2017 overhaul. The Delaware unclaimed property law, codified at 12 Del. C. Ch. 11, now runs on a shorter lookback, a clearer interest schedule, and a tolling rule that ends the game of enrolling in a voluntary disclosure program to stop the clock.

SB 104 is a mid-course correction, not a fresh draft. The spine is still the 2017 rewrite under SB 13. What changed in 2021 is the operational layer: how long an examination can reach back, what penalties look like when the state finishes one, and what a holder gets by opting into the Secretary of State's Voluntary Disclosure Agreement program instead of waiting for the State Escheator to show up.

What Delaware was doing before SB 104

Unclaimed property is the quiet revenue line that keeps Delaware general fund projections intact. Uncashed payroll checks, dormant customer credits, unredeemed gift cards, un-presented securities, vendor refunds that never reached a payee: each item is a liability on a holder's books, and the state of incorporation gets to collect it when the rightful owner cannot be located. The priority rule comes from Texas v. New Jersey, 379 U.S. 674 (1965), which held that abandoned intangible property escheats first to the state of the owner's last known address on the holder's books, and in the absence of a known address to the state of the holder's incorporation. Delaware is the state of incorporation for roughly two thirds of the Fortune 500, which is why its escheat statute is a national compliance problem and why its enforcement practices get written up in tax advisories.

For most of the last two decades, Delaware's audits were run by contingent-fee third parties and covered lookback periods of 20 to 25 report years. Estimation filled the gap when records were incomplete. The federal district court opinion in Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016), called that combination a due process problem and forced the state to concede that an indefinite lookback paired with estimation would not survive. SB 13, signed in February 2017, was the response: it cut the examination reach to 10 report years, imposed a matching 10-year record retention rule, built out the VDA program as a soft landing, and told holders that the state would no longer chase them into records they were not obligated to keep.

SB 104 is what the state learned while operating that regime for four years.

The interest and penalty schedule, now on paper

The clearest change in SB 104 is a two-track interest structure, visible in the bill synopsis and the amendments to 12 Del. C. Ch. 11. A holder that agrees to an expedited examination, with a two-year work plan and a cooperative record production, pays 1 percent interest on past-due liability. A holder that takes a conventional examination pays at least 20 percent interest on the assessed past-due liability. The State Escheator can waive anything above that 20 percent floor, but not below it, for examinations noticed after August 1, 2021. Penalties in the older statute were discretionary in a way that made cost forecasting hard; the new structure converts that into a spread that a CFO can put on a slide.

The practical effect is that an expedited examination is now priced at roughly a 20-to-1 discount to a conventional one on the interest line. That is not a small number on a seven-figure liability. A company with a $10 million assessed underpayment sits at $100,000 of interest on the expedited track and at least $2 million on the conventional one. The math, once you read it, is doing most of the persuasion the synopsis could not.

The expedited examination program had existed as a temporary pilot. SB 104 makes it permanent. Any holder already under examination as of the bill's effective date had a defined enrollment window to elect into the expedited work plan, and holders noticed after August 1, 2021 get the option up front.

The VDA tolling fix

Before SB 104, a holder that received a Secretary of State VDA invitation could enroll in the VDA program and, while enrolled, argue that the statute of limitations kept running. That made VDA enrollment attractive as a delay tactic, especially for holders who suspected they were about to be noticed for audit. The state could find itself watching years of potential liability evaporate while a holder nominally cooperated.

SB 104 closes that. The 10-year limitations period for the State Escheator's enforcement action is now tolled at the earlier of two events: delivery of an invitation to enroll in the Secretary of State VDA program, or the holder's enrollment in that program. Once either trigger fires, the limitations clock stops until the VDA resolves, the holder declines, or the state notices an examination.

This is a one-sentence change that reshapes the economics of receiving a VDA letter. Before the amendment, a holder that got an invitation could run out the clock on older report years while drafting a response. After the amendment, getting the letter is a limitations event. The advice from the unclaimed property bar has shifted accordingly: when the letter arrives, respond on the merits, do not treat the mailbox as leverage.

SB 104 also extends the holder's initial response window to the VDA invitation from 60 days to 90 days. The extra 30 days is a concession to the reality that a VDA response requires pulling records and running a scoping exercise that a tax department cannot stand up in two months. The tolling rule makes the window meaningful rather than a trap.

Record retention, verification, and what examiners can now ask for

Under SB 13, the State Escheator could examine records "for the purpose of determining compliance" with Chapter 11. Delaware holders and their auditors disagreed about how far that authority reached when a record did not, on its face, identify property owed to Delaware. SB 104 writes the state's position into the statute: the Escheator's examination authority expressly includes "verification of completeness and accuracy of records relating to unclaimed property." In operational terms, a holder under examination cannot decline to produce records solely because those records do not, themselves, tabulate Delaware liability. General ledger detail, check registers, vendor masters, and reconciliation worksheets are all now clearly in scope.

The record retention rule aligns with the examination lookback. Holders must retain records for 10 years after the report was due, which matches the limitations period and the VDA reach. In a Temple-Inland world, that alignment is the whole point: the state cannot ask for records older than it required the holder to keep, and estimation is only available when the holder failed to retain the records the statute required.

SB 104 also tightens confidentiality for third-party contract auditors and excludes certain fraud-detection procedures from public disclosure. That is not the marquee provision, but it closes a gap that holders had complained about since the contract-audit model took hold.

The smaller fixes that do actual work

Two smaller items in SB 104 are worth flagging because they come up in practice.

The first is bonds and securities dormancy. SB 104 clarifies that bonds carry a three-year dormancy period, aligning their treatment with securities rather than with general intangible property. For a corporate trustee processing a large bond population, a three-year clock is a material change from the previous ambiguous treatment. SB 104 also speaks to IRA escheatment in the wake of the federal SECURE Act, which accelerated required beginning dates and left states to reconcile their dormancy triggers against a moving federal standard.

The second is gift cards. Delaware continues to treat unused gift card balances as a reportable class, but SB 104 carves out de minimis exemptions: restaurants and similar establishments need not report gift cards under $5, and all holders are exempt from reporting aggregate gift card balances below $5,000. For a restaurant chain with millions of small-value cards, the carve-out eliminates a reporting line that was never a meaningful revenue source for the state.

The securities claim rule is the one that will show up in claimant complaints first. SB 104 replaces the old "18 months" with a precise 558-day processing window for securities claims, and it clarifies that a claimant entitled to the security is also entitled to accrued dividends during the processing period. Eighteen months was always a rough shorthand; the new number leaves less room for a claimant to argue that the state was dragging its feet inside an undefined window.

Texas v. New Jersey is still the backdrop

None of the SB 104 changes disturb the Texas v. New Jersey priority rules. The first-priority rule routes property to the owner's last-known-address state; the second-priority rule routes it to the holder's state of incorporation when no address is on the books. The entire reason Delaware's statute matters nationally is that the state collects under the second-priority rule for a disproportionate share of American corporate holders. Reform in Delaware is reform of the second-priority regime for most of the country's public companies, whether or not those companies have a single employee in the state.

Pending Supreme Court action on a narrower question, the rules that govern what the state can take and how long it can look back are the rules SB 104 writes. That is the relevant law for a Delaware holder planning the next four years of compliance.

What remains unclear

Two questions are not answered on the face of SB 104.

The first is how the State Escheator will exercise discretion on the conventional-audit interest floor. A 20 percent minimum is written into the statute; whether the state routinely assesses more, and what it takes to secure a waiver of the portion above 20 percent, is a practice question that will be answered through audit closings, not bill text. The expedited program's 1 percent rate is meant to move that volume, and it will; the open question is what the conventional rate looks like in the remaining cases.

The second is the relationship between the new tolling rule and a holder's constitutional defenses. Temple-Inland was a due process decision about estimation and lookback, not about tolling. A holder served with a VDA invitation while already in the later years of an audit-free window may argue that the invitation itself cannot restart or extend a limitations period the holder had reasonably relied on. That argument has not been adjudicated, and it is the kind of question that tends to surface two or three years after a statute of this type takes effect.

If you are the general counsel of a Delaware-incorporated company that has not yet been noticed for an unclaimed property examination, SB 104 is a reason to look at the VDA program with fresher eyes than you had under the 2017 regime. The response window is longer, the limitations rule is clearer, and the expedited audit is priced to be the alternative you want if a VDA is not available. For a general counsel who is already in an examination, the math in the first paragraph of this section is the one to take to the CFO.

Sources

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