“Can I keep the Money?” Tips for Navigating Escheats Laws

Just about every business, regardless of size or non-profit/for-profit status, must pay different entities for supplies, assets or services rendered. Quite often this payment is done by check. But what happens if the entity being paid, such as a vendor, customer or even an employee, doesn’t cash that check within a year? Does the organization just write it off and keep the money?

The answer is a resounding “NO” — doing so would be illegal. All states have what they call an “Escheats Law” for unclaimed property which states that property (including money) that meets all of the following criteria must be sent to the state:

  • The property is due to another company, person or entity
  • The property has had no recent activity
  • The property is at least one year old (or more, depending on type of property)

While not all-inclusive, below are some common examples of properties that often meet this criteria, along with their holding period or age:

  • Unpaid wages (1 year)
  • Outstanding checks (3 years)
  • Accounts Receivable credits (3 years)
  • Checking and savings accounts (3 years)

There are many more categories that we haven’t listed, so research is crucial. Also of note is that physical property is excluded from this consideration.

While the process of determining which unclaimed properties must be sent back to the state may be seemingly simple, your organization might ask several more clarifying questions:

  • Do we file and pay in Texas?
  • What is the filing and remitting process?
  • When are returns due?

Depending on your organization’s activity, unclaimed property can be a complex process which can vary by both jurisdiction and property type. To simplify this discussion, we will concentrate solely on Texas for a moment.

Texas is one of only two states that file an Escheats return during the summer, specifically on July 1. Most other states file in October or November. Schedule-wise, Texas uses a lookback period that begins on March 1 and goes back one calendar year.

So, let’s say we have a Texas vendor check that was issued on Feb. 2, 2017, and has not cleared. As of March 1, 2020, it is three years old and needs to be Escheated by July 1, 2020. Texas requires that by May 1, you go through a due diligence process of trying to contact the vendor and send them the money owed. If that works, the process is done. But if that fails, an Escheats return needs to be filed, and the check amount will be sent to the state.

But what if, in the above example, the vendor is in Florida and the business is incorporated in Illinois but does business in Texas? According to the U.S. Supreme Court, payment must be made to the state where the entity that is owed last resided. If an address is unknown, the payment is made to the state where the entity holding the money was incorporated.  So, in our example, we’d follow Florida law for compliance and file the forms and money there unless we have no address. With no address, the filing goes to Illinois. Texas is uninvolved.

These intricacies are why outside service companies and automated payors like Bill.com exist – to help businesses with this potentially complex process and improving efficiencies and accuracies by removing the need for physical checks.

Have you never filed an Escheats report? Do you have some old, outstanding checks on the books?

Give consideration to the Texas Voluntary Disclosure Program, under which penalties and interest may be waived if you voluntarily report/remit all past-due unclaimed property you hold. Typically, the lookback period here is 10 years. More information is available on the Texas unclaimed payment website.

Additionally, there is some possible good news on the flip side of this process. The experts at SST recommend that, once a year, organizations check the Texas Unclaimed Payments website to find out if someone has recently Escheated money that is owed to you.

If this process seems daunting, it doesn’t have to be. SST is happy to provide counsel to your organization – connect with us today.

Thanks to SST Virtual Controller Tony Lovio for providing the content of this post.