Article

Breaking down the property puzzle: Essential insights between unclaimed property and property tax

Oct. 3, 2024 · Authored by Matthew Chenowth, Jim Weigand

Our Baker Tilly team recently hosted a webinar to address the question: What exactly are the differences between unclaimed property and property tax? Baker Tilly unclaimed property professionals were joined by property tax specialists from Cantrell McCulloch, Inc. (CMI) to take on this question and were able to provide attendees with an overview of the similarities and differences, as well as useful information to help companies make sure that they are compliant with both.

While both are subject to annual reporting requirements and audits, for most companies, that is where the similarities end.

Unclaimed property

Unclaimed property (UP) is any intangible property that is held, issued or owed in the ordinary course of business and has remained unclaimed by the apparent owner for a specified period after it becomes payable or distributable is presumed abandoned. All industries and companies have the potential to generate transactions that can become UP if unresolved.

UP is NOT a tax – so nexus rules do not apply. Unlike property taxes, which are payable to the jurisdiction in which the property is located, determining which state gets UP is more complex. In general, the state with the primary claim to UP is the state in which the owner’s (or payee’s) last known address is located. If the owner is unknown or the address is unknown, the state of formation or incorporation of the company that has the liability to the owner can claim the UP. UP laws are custodial in nature whereby the jurisdiction “holds” the property in custody for the owner until it can be claimed.

When specific types of property are due also varies by property type and state, and there are also some state reporting exemptions. In addition, before reporting UP, a company must perform state specific “due diligence” to notify the owner that their property may be reported to the state if it remains unclaimed.

All U.S. states and certain territories require annual UP reporting, resulting in 54 jurisdictions with annual reporting requirements. Most states require companies to report and remit property in the Fall, with Oct. 31 or Nov. 1 deadlines. Other require companies to file in the Spring, between Mar. 1 and May 15, with a few requiring reports to be filed in July. In addition, certain Canadian provinces have established reporting requirements as well.

Property tax

Property tax is an annual or semiannual charge levied by a local government and paid by the owners of real estate or business personal property within its jurisdiction. It’s worth remembering that property tax receipts are the main source of revenue for most local governments in the U.S. They are used to fund schools, police and fire departments, road construction and repair, libraries, water and sewer departments and other local services that benefit the community.

How much property tax a property owner pays is determined based on two factors. The relevant Appraisal District or Assessor's Office determines the value of the property, while locally elected officials set the Property Tax Rate based upon funding for annual budgets. In addition, property tax falls into two main categories: real property tax and business personal property tax.

Real property tax is a tax on structures and land and is usually based their value as determined by individual county appraisal districts using fair market data. In contrast, business personal property is a tax on the fixed assets and sometimes inventory of a company. The value of personal property is also determined by county appraisal districts, and each county uses its own depreciation schedules to determine the tax due. While all states have real property tax, only 37 states currently assess business personal property taxes, with 11 also taxing a business’ inventories as well. While there are some exemptions for businesses personal property tax, these can be difficult and confusing for the taxpayer to apply.

The similarities…

• Annual compliance: Both require yearly payments to jurisdictional authority
• Increased enforcement: As state revenues decrease, UP audits and property tax reassessments have increased
• Interest and penalties: jurisdictions will assess interest and penalties for delinquent reporting and non-compliance.
• Appeals processes available: Both have processes in place to challenge liability assessments
• Planning opportunities available if certain elements are in place

….And differences

• One is NOT a tax: No nexus or location standards for UP
• State vs. local enforcement: UP is enforced at state level - often by third-party auditors, while property tax is enforced at the local or municipal level
• Calculation of liability: Property tax is based on assessed value if real property while UP is based on liabilities reflected in a company’s records
• Impact to your company

UP trends

• Audits: Enforcement activity on the rise, especially as states using third-party auditor firms to perform audits
• State self-audits: Certain states have begun contracting with these firms to “administer” state self-audit programs – e.g., District of Columbia, Illinois, Indiana, Massachusetts
• Voluntary Disclosure Agreements (VDAs): Delaware continues to send “invitation” letters for holders participate in state’s VDA program – even to companies that have a long-standing reporting history, not formed in Delaware and/or with prior DE VDA history
• Acquired liabilities: Merger and acquisition transactions are now scrutinized under audit as many may result in the unintentional assumption of obligations in both stock and asset transactions
• Legislative trends: Recent trends focus on increased due diligence and record retention requirements, “transitional provisions” retroactively applying new statutes and the increased use of estimation and third-party auditors
• Canada on the move: Another Canadian province, New Brunswick, has adopted an UP statutes

Property tax trends

• Property tax values: Will continue to increase as operating budgets for municipalities climb on an annual basis
• Property tax assessments: Tend to increase in both rising and declining markets. Market value and uniform and equal continue to present challenges to assessors and taxpayers
• Legislative trends: The whiplash effect of election year legislation (Senate Bill 2)
• Audits: Enforcement activity is on the rise as states continue using third-party auditor firms to perform audits of companies believed to be out of compliance.

How can you fix these problems?

• Be proactive: Understand your company’s potential UP and property tax liabilities, and how to resolve any open items before you get an enforcement notice. There are often self-reporting procedures in place that can benefit companies IF they know how to proceed
• Liability assessments can be challenged: Whether based on “opinions of value,” estimations, or even penalty and interest calculations, assessments from the state or local governments can be successfully challenged
• Utilize an expert: Property tax and UP are specialized areas, and it is often best to get help with compliance requirements, audit, or “outreach” notices, contesting assessments or entering a voluntary compliance initiative

Companies interested in learning more about UP, including specific concerns or issues, or if you have questions about the content from our webinar, can reach out to a Baker Tilly UP specialist.

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.