property to the State of last known address, the State may reasonably assume that a company may have employees, customers, vendors, and/or landowners addressed in their jurisdiction. To expand further, in the absence of an address, the custodial right is passed to the State of Incorporation. “Our company only operates in the Marcellus and Utica shale plays. Why would Delaware, California and Texas select us for audit? We have no operations in those States? Do they even have the right to examine us?” Using the logic expressed in the statement above would appear reasonable to most other situations, but the lack of physical presence, economic nexus, or other taxation concepts do not disqualify or prohibit the State from conducting an examination to confirm compliance with unclaimed property provisions. It is also important to note that as States continue their pursuit to both educate on and enforce their statute, there are a number of industries that have been flagged as prime candidates for review. Each industry has its own unique area of exposure that can create unclaimed property risks. Unfortunately for businesses operating in the oil and gas sector, material exposure to mineral proceeds and royalty properties have placed a huge bullseye on their backs! Others may be operating under the impression that past unclaimed property compliance efforts would provide a level of protection from audit. We’ve heard the following statement many times: “Oh, but my company reports mineral proceeds and royalties to the States timely. We use UP software, are aware of and apply the current pay provisions by State, and work our royalty owner accounts aggressively to resolve suspense issues! We are 100% in compliance without question!” While past filing history may influence a State’s decision of whether or not to participate in an examination, it does not preclude the State’s examination rights. Most States have the statutory authority to ensure compliance with their respective unclaimed property law at any reasonable time. Common Radar Triggers There are a number of structural profiles or activities that may put a company on a State’s radar for unclaimed property examination: • Presence in State or in a Contiguous State • Incorporated or Chartered in State • Events of high profile covered by media – such as
mass layoffs or reorganization • Mergers, Acquisitions, Divestitures, and/or spinoffs • Primary Business Activity – industry wide noncompliance (business type) • Reporting history (not reporting any unclaimed property, not reporting expected property types, or inconsistent filing history) • Consumer Complaints Related to Unclaimed Property Recommendations and Best Practice Even if your company does not have any of the above listed risks, companies operating in the oil and gas sector have a high probability that they will eventually be subjected to a State unclaimed property audit. Given the high likelihood of audit, it is imperative that management’s position on unclaimed property exposure shifts from a thought of “If my company gets audited, will I be prepared?” to “When my company gets audited, I’ll be prepared.” Experience supports that companies best prepared to address an audit share a similar profile: • The companies perform internal risk assessments focused on unclaimed property with support from management and legal counsel. • Mineral proceed and royalty title resolution are regularly worked by subject matter experts familiar with exposure to unclaimed property risks. • Merger and acquisition accounts are reviewed as part of the due diligence process before the deal closes, and aggressively worked upon consolidation. • Internal Unclaimed Property process owners and Conclusion We do not foresee the targeting of companies operating in this sector slowing down any time soon. The high rate of M&A and other restructuring activity supports the notion that there will be an increase in companies receiving audit notices for years to come. It is important that companies in this sector recognize unclaimed property as a material risk warranting allocation of resources for mitigation purposes. In doing so, companies ensure their preparedness for WHEN it receives the State UP audit notice(s). management regularly partake in continuing education courses and conferences with courses on unclaimed property – such as NADOA and UPPO.
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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