Overreaching State Authority in Unclaimed Property Audits

Photo provided courtesy of Freerange PhotosLet's welcome the State of New Jersey back to the unclaimed property stage, as it attempts to overreach its authority in claiming abandoned property during an audit. You might remember the summer of 2010, when the state attempted to change the priority rules for gift card reporting to claim unused card balances for cards sold in the state, regardless of where the owner might reside. Now, the state has assessed a holder for addressable property in other states, property preempted by federal law, and for periods beyond the statute of limitations, all the while ignoring the holder's books and records.

National Freight, Inc., a New Jersey corporation, was the subject of a New Jersey unclaimed property audit that began in 2010. The audit was to cover report years 1996-2010. New Jersey bifurcated the audit into two parts - one for disbursements, which included payroll and accounts payable, and a second part for accounts receivable or customer credits. The original disbursement assessment was for $328,983.12 plus $145,305.59 in interest. A partial payment of $187,543.78 was made to New Jersey.

After written objections to the original disbursement assessment were filed, New Jersey issued a revised assessment for $242,031.58. This disbursement assessment included: (a) $93,150.00 in estimation penalty; (b) $127,461.73 for unclaimed property in New Jersey, no address, or foreign property; (c) $21,225.56 for unclaimed property with addresses in states that exempted the property; and (d) $194.29 for property in other states where the property was not yet exempt due to the continuing business relationship. New Jersey then assessed $258,515.70 in interest on the disbursement assessment, an increase from the original interest assessment.

On April 30, 2015, New Jersey issued an assessment of $1,954,506.31 for customer credits. The assessment letter also said that interest would be assessed against National Freight if the credit assessment was not paid by June 1, 2015.

On May 27, 2015, National Freight filed a lawsuit seeking an injunction to protect the company from egregious unclaimed property assessments.

Hands Off My Exemptions!

With both the disbursements and credit assessments, New Jersey is once again attempting to claim property properly reportable to states that exempt the property. The disbursement assessment includes more than $21,000 in property with addresses in states that specifically exempt the property from escheat or the dormancy period tolls (continuous relationship). The credit assessment included more than $18,000 of exempt property. Further, the estimation and extrapolations in the credit assessment were calculated using property from other states, including states with exemptions and deferrals.

Remember, New Jersey already lost one battle on state exemptions. In the litigation resulting from the 2010 gift card amendments, the Third Circuit Court of Appeals said "The ability to escheat necessarily entails the ability not to escheat. To say otherwise could force a state to escheat against its will, leading to a result inconsistent with the basic principle of sovereignty. Various considerations might motivate states not to exercise custodial escheat. For example, because companies might find the absence of state custodial escheat attractive, states may want to incentivize companies to incorporate in their jurisdiction by choosing not to escheat abandoned property."

Don't Touch the Preempt Property Either!

While the state attempted to grab exempt property under the assessments, it issued a second assessment for customer credits that are preempted by federal transportation law. National Freight is a motor carrier, as defined by the Interstate Commerce Commission Termination Act of 1995 ("ICCA"). The ICCA provides that no state may make a law relating to the price, route, or service of a motor carrier in respects to the transportation of property. National Freight contends that the ICCA bars New Jersey from claiming customer credits by escheat. New Jersey Deputy Attorney General Marc Krefetz rejected National Freight's preemption position in 2014. In 2015, the state assessed $1,954,506.31 for customer credits even though all customer credits arise entirely from the transportation of property by a motor carrier and relate to the price, route, or service of a motor carrier.

New Jersey did not consider overcharges, designated with "UR" codes in the company's records, as escheatable property. However, credits that were not able to be matched with an open invoice, designated with "P" code in the records, were considered escheatable property. Generally speaking, P credits arose because "customers pay based on their record of contracted tariff rates, bill of lading, and other shipping-related documentation even before [National Freight] mails an invoice. In addition P transactions arise because loads are not entered into [National Freight]'s system but the customer pays based on delivery, or incorrect reference numbers are entered into [National Freight]'s system and the customer pays by their reference number rather than [National Freight]'s invoice number."

Why Are You Ignoring Our Records?

National Freight said that the auditors ignored its entire years worth records if they did not identify whether the credits were UR or P credits. Specifically at issue are records from 1999-2005 which included customer's addresses. By disregarding the records, New Jersey used its penalty provisions to assess $794,862.00 for those years. National Freight argues that although no penalty should have been assessed because of preemption, the estimation penalty was still not reasonable because the P credits could have been allocated in the same proportion as the known P and UR credits from 2006-2010 periods.

And Ignoring Your Own Law?

New Jersey law permits estimations and extrapolations that are reasonable and based on property that "should have been but was not reported." When the state attempts to assess liability using property exempt in other states, it is basing its assessment on property that should not have been reported. This improperly inflates an assessment, to the detriment of the holder and to the benefit of the state. The state benefits by receiving "property" that it has no chance of returning to an owner and then depositing into the state's general fund as revenue.

To cap everything else off, New Jersey also assessed for time periods that are beyond its statute of limitations. National Freight argues that the 1991 transactions were beyond the applicable statute of limitations.

New Jersey's Response

New Jersey responded to the allegations in National Freight's complaint with a motion to dismiss for lack of subject matter jurisdiction and failure to state a claim. New Jersey said that National Freight failed to show a significant impact on the price, route, or service of goods required to trigger preemption under the ICCA. Further, the state argues that it is "permitted to collect and retain custody of unclaimed property from a New Jersey corporation where another state's law does not provide for remittance of that property." (emphasis added by Barganier) New Jersey also says that the public is harmed by not being permitted to claim unclaimed property from the state if it remains with the holder. Finally, it argues that a bond is required if a preliminary injunction is granted.

New Jersey distinguishes the current grab for property exempted by other states' unclaimed property laws from the gift card debate by saying that in the gift card case by saying that they are taking under the second priority since the state with the first priority did not take the property. In the gift card debate, the place of purchase presumption (now repealed) would have created a conflict between the state of incorporation and New Jersey, possibly requiring multiple reporting of the unused gift cards. New Jersey argues that there is no conflict here because the first state has already waived its rights.

Barganier will continue to monitor this and other litigation that may be of interest to motor carriers and other holders.

See Also:
Google Sued for California Gift Card Practices
Investors Sue Delaware for Wrongful Seizure of Stock
Plains All America Pipeline Sues Delaware, Challenges Audit Process