Are California Vehicle Dealers Being Targeted for Their Failure to Remit Unclaimed Property to the State? The State is Auditing, so Dealer Beware!

What is unclaimed property and do you have any to turn over?  Unclaimed property is any financial asset that the true owner has not claimed for a period of time specified by the law. Typical examples of unclaimed property include uncashed checks and refunds owed to customers. Under the California Unclaimed Property Law (UPL), Code of Civil Procedure Section 1500 et. seq., holders of unclaimed property are required to report and remit that property to the State Controller’s Office (“SCO”).  To ensure compliance with the UPL, the SCO has authority to conduct audits. If your dealership is the subject of an unclaimed property audit, it’s likely the  dealership was not randomly selected.  Rather, the audit may be part of a plan to target vehicle dealers.

Over the years unclaimed property audits have not been prevalent, so why are these audits happening more frequently now?  In a 2017 Budget Request Proposal, the State Controller’s Office (SCO) requested an increase in its budget to fund unclaimed property audits “to ensure compliance with the California Unclaimed Property Law (UPL), reunite unclaimed property with its rightful owners or heirs, and provide administrative support.”  According to the proposal, the SCO identified the automobile dealership industry as an industry that under-reports the following types of unclaimed property: accessories due to customers, customer deposits, and Department of Motor Vehicles fees.  The SCO’s request for a budget increase was granted, allowing the SCO to increase its staff, perform more audits and potentially collect more unclaimed property, plus interest. 

Basic Requirements of Unclaimed Property Law

Businesses that have control over property of others must return it to the owners. If a business is unable to locate the owners, after a certain period of time (generally three years), it must transfer the property to the State. The UPL requires businesses to keep track of all unclaimed property and report and remit this property to the SCO annually. 

SCO Audit

After a dealership is notified that it has been selected for an audit by the SCO, the dealership will be required to complete a detailed questionnaire form.  Then, the SCO will require the dealership to provide 10 years’ worth of records.  These records include charts of accounts, general trial balances, bank reconciliations, accounts receivables aging reports, accounts payables aging reports, a copy of the business’ unclaimed property policy and procedures, the business’ records retention schedule and more.  An unclaimed property audit is not only potentially expensive, but is also a major distraction for dealership employees, as it requires a significant time commitment to provide all of the materials that the SCO requests.

Penalties

Businesses that violate the unclaimed property laws are subject to costly penalties. They must turn over 10 years’ worth of unclaimed property to the State and pay a 12% interest charge.  [Code of Civil Procedures § 1577]. In California, according to the California Legislative Analysis’s Office, there is a very low compliance rate with unclaimed property laws—approximately 2%.  That means there are plenty of potential business for the SCO to target. 

Best Practice

Businesses that don’t already have an unclaimed property program should implement one now. In order to fully comply with the UPL, businesses should have a written policy in place that outlines the requirements for monthly monitoring, notification to employees, vendors or customers to whom property is owed, and timely reporting and remitting of unclaimed property.  To learn more about UPL compliance, review the SCO’s website and/or seek the advice of competent counsel.