On August 17, 2022, the California legislature passed Assembly Bill 2280 (AB 2280) that, if signed into law by Governor Gavin Newsom as expected, would establish the California Voluntary Compliance Program (VCP) for unclaimed property holders. Notably (or infamously), California is one of the only states where there is no voluntary compliance or similar program for holders to report past-due unclaimed property. Under AB 2280, current Section 1577.5 of the California Code of Civil Procedure would be repealed, and provisions creating the VCP would be added as a new Section 1577.5 with the significant benefit that the controller would be required to waive interest if the holder complies with the program’s provisions.
Under the current California Unclaimed Property Law (UPL), holders are subject to 12% interest on late reported and delivered property, unless the failure to timely report and deliver is due to “reasonable cause.” The State Controller’s Office (SCO) automatically generates interest assessments on past-due property, and holders must plead their cases for a waiver, citing “reasonable cause” grounds for the SCO’s withdrawal of an interest assessment (e.g., the failure to report was due to circumstances beyond the holder’s control). A $10,000 interest cap is provided if a holder timely delivers the unclaimed property but the report is not in substantial compliance (this would not apply to most reports containing past-due property).
Under the VCP, a holder would be ineligible to participate in the program if the holder (1) is the subject of an examination of records (or has received notification of an impending examination); (2) is the subject of a civil or criminal prosecution involving compliance with the UPL; (3) has been notified of an interest assessment under Section 1577 in the past five years that has remained unpaid; or (4) has had interest waived by the SCO within the previous five years via participation in the VCP (AB 2280 was amended by the Assembly to clarify that only VCP-related waivers within the last five years would render a holder ineligible). AB 2280 does allow a holder that currently has an unpaid interest assessment to either refile or reenroll in the VCP after resolving the interest assessment.
AB 2280 also provides that if a holder acquired or merged with another entity within a five-year period, the holder may request to enroll in the VCP to resolve unclaimed property issues relating to the acquired entity, even if the holder (or such acquired entity) had interest waived by the SCO within the previous five years.
As we indicated in our original advisory reviewing AB 2280 when it was introduced, the bill is overly restrictive in that it prohibits participation in the VCP by holders that have an outstanding interest assessment, including one subject to ongoing SCO review of the holder’s abatement request. The Assembly’s amendment did not address this particular concern. AB 2280 would appear to preclude a holder from resolving ongoing interest assessment issues with the SCO via the VCP program, which is an unfortunate restriction. That said, the new Section 1577.5 allows the SCO “discretion” to enroll “eligible holders in the program,” and AB 2280 authorizes the SCO to adopt guidelines that establish specific procedures of the VCP. It is possible that such guidelines could address the ability of holders with pending interest abatement requests to enter the VCP.
In order for an eligible holder to enter into the VCP and qualify for the interest waiver, a holder must:
- Enroll and participate in an “educational training program” provided by the SCO within three months of the SCO notifying the holder of the holder’s enrollment in the VCP. Note that AB 2280 does not specify whether this requirement only applies to first-time filers of unclaimed property or to all holders.
- Undertake a review of its books and records for “at least” the past 10 report years (typically, 13 transaction years).
- “Make reasonable efforts” to notify owners by mail or electronically in accordance with the procedures established by the UPL.
- Report past-due property within six months of being enrolled in the VCP (unless extended by the SCO; the SCO has the authority to extend the reporting date for no more than 18 months after the enrollment date).
- Remit the property in accordance with the statutory remittance timeline (i.e., between seven months and seven months and 15 days after the report is received by the SCO). Note that the bill allows the SCO to reinstate interest if a holder fails to pay or deliver the property identified in the unclaimed property report.
The presumptive enactment of the VCP signals another step in California’s recent focus on unclaimed property compliance that began with Assembly Bill 466 (AB 466), which became effective January 1, 2022. AB 466 amended Section 19554 of the California Revenue and Taxation Code to require companies filing California franchise tax returns to disclose information about previous unclaimed property report filings to the Franchise Tax Board (FTB). Specifically, companies must now disclose the date their last unclaimed property report was filed and the amount remitted on that report.
Section 19554 also authorizes the FTB to share this disclosed information with the SCO. With the enactment of AB 466, California has made avoiding unclaimed property reporting obligations much more difficult for companies through the information sharing between the FTB and SCO. With the presumptive enactment of the VCP, the VCP becomes the carrot to UPL compliance, which the state is betting is more palatable for companies than the stick of increased examinations and possible litigation.
Companies should also be aware that the VCP may save them from the threat of litigation for failing to comply with the UPL. Recently, the California Department of Justice has focused on companies’ unclaimed property compliance (or lack of compliance) efforts. In March 2022, the California attorney general intervened in a California False Claims Act (CFCA) lawsuit alleging unclaimed property noncompliance, People of the State of California, ex rel. Andrew Nguyen v. U.S. Healthworks, Inc., No. BC 698811 (Cal. Super. Ct. Cty. of Los Angeles). Using bold language such as “corporate evasion is corporate fraud,” the California attorney general’s press release alleges that a company “violated the CFCA when it chose not to report its unclaimed property holdings, thereby knowingly concealing millions of dollars due to the State of California.” With the state’s recent focus on unclaimed property compliance, the VCP offers qualifying holders an opportunity to become compliant with the UPL using the VCP and to avoid the cost of litigation.
Even with the welcome news of AB 2280 establishing a VCP, uncertainties remain. The bill does not provide an implementation date for the VCP, so in the short term, holders cannot rely on the VCP for interest abatement. Relatedly, new Section 1577.5 does not require the SCO to adopt the VCP, stating “the Controller may establish a program for the voluntary compliance of holders for the purpose of resolving unclaimed property” (emphasis added). While we expect the SCO to establish the VCP, it may not be on the SCO’s list of top priorities, so the program’s full implementation may take longer than holders would prefer.
Nonetheless, AB 2280 is a welcome development, as the VCP would provide holders of unclaimed property in California (possibly 1.3 million of them) the opportunity to clean up past-due unclaimed property without being subject to onerous interest impositions, examinations, and litigation. For the holder community, which has long dreamed of a VCP in California, AB 2280 is poised to make holders’ dreams a reality, albeit possibly delayed.