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Supreme Court Case Threatens Delaware’s ‘Tax-Free Shopping’

Pennsylvania and other states argue that Delaware has been wrongly pulling money through unclaimed property seizures, which, in recent years, have funded 10 percent of the state’s budget. The case could cost Delaware $400 million.

(TNS) — A new U.S. Supreme Court session opened last week, and one of the first cases poses a threat to Delaware's status as a "Home of Tax-Free Shopping."

The case, Delaware v. Pennsylvania, is a fight over what happens to "unclaimed property" — all those billions that Americans and those who work or do business around the country are constantly leaving in unattended bank and business accounts, such as gift cards to closed restaurants or expired SEPTA tokens.

For most states, unclaimed property ranks with hunting licenses and other fees as a minor funding source, far below income or sales taxes.

For Delaware, "unclaimed property" seizures in recent years have funded a whopping 10% of the state budget.

But now that revenue-driver is in danger — and a legal attack against Delaware's windfall seizures of other people's property by 30 states could cost Delaware $400 million, including $19 million to Pennsylvania, according to Pennsylvania State Treasurer Stacy Garrity.

A court-imposed change in how seized funds are split among states could even force Delaware to find new revenues, such as a retail sales tax, a subject of long debate in the First State. This would crimp the state's status as a center for bargain shoppers and leave just New Hampshire, Montana and Wyoming (and parts of Alaska) without that particular means of squeezing the people. ( Delaware does charge a gross-receipts tax, a sales tax that shoppers don't see. Philadelphia charges both retail and gross-receipts taxes.)

In the case now at the Supreme Court, Pennsylvania and the other states say Delaware has been wrongly vacuuming money left idle at MoneyGram, a big cash-transfer company favored by immigrant workers trying to support their families back home.

Why do states get to grab unclaimed funds at all?

Under the hairy old English legal theory of escheat, buried treasure or shipwrecked doubloons belong to the king; in the U.S., abandoned funds are supposed to go (after a few years) to the state, which can use the money for public purposes until an owner or heir reclaims it.

But which state? You'd think the money would go to the states where its owners last lived. But many companies keep surprisingly poor records about that.

So a big share of that money has been going to Delaware, America's corporate capital and the legal home of most of the companies listed on the New York Stock Exchange and a million others — more companies than the state's human population, and growing faster. (Though Delaware still has far more chickens than businesses, or people).

'We tried to resolve this'

Delaware's main attraction to corporate America is its business-friendly Chancery courts, with their appointed judges who decide business disputes quickly using powerfully clear precedents.

The threat of a suit in Chancery sometimes settles the matter. Twitter, for example, is a Delaware-registered corporation. When moody spaceship- and electric-car-builder Elon Musk offered to buy the social-media company, then tried to bluff his way out of the deal, Twitter filed its complaint, not in federal court, but in Chancery.

After reviewing the facts, and the law as applied in Chancery, just the threat of spending October in a Wilmington Chancery courtroom getting beaten up by a gang of Delaware corporate-law bruisers was enough to convince the world's richest man that he'd better go ahead and buy Twitter, after all.

The corporate-franchise fees paid by Twitter and the million other Delaware-registered companies brought Delaware $1.3 billion last year, nearly a quarter of the state's revenues — with escheat from those companies' customer accounts adding that additional 10%.

Grabbing these funds is a state enterprise, but also highly capitalist: States hire private contractors to find and take these funds, and they get to keep a fat cut. Delaware's official escheator, Brenda Mayrack, used to work for one of those contractors; now she oversees them.

A Philadelphia federal judge already rapped Delaware's "grabby approach to unclaimed property," as Christopher Craig, chief counsel to Treasurer Garrity, put it.

"It's not a big secret that much of Delaware's activity is driven by budgetary needs," Craig said. "With so many companies in Delaware, it becomes a windfall for the state."

Craig said that windfall should have been trimmed by a 1970s federal law that assigns unclaimed money orders to the state where they were purchased. Delaware in its defense noted that MoneyGram payments aren't called money orders. Pennsylvania and the other states say they're close enough. Judge Pierre Leval, appointed by a lower federal court to examine the matter, agreed in a lengthy report.

"We tried to resolve this," but Delaware wasn't willing to follow the law, Craig said.

U.S. escheat laws date to the Civil War, when they protected funds transferred between soldiers and their families. The law still says that if lost money, whether from infantrymen or migrant workers, can't go to the person who sent it or was supposed to receive it, it can be used "by their community," Craig said.

"Instead, it's been going to subsidize Delaware's low-tax environment," he added. "Why should a guy who purchased a MoneyGram in Fayetteville, Pa., be subsidizing roads and teachers in Delaware?"

What's next?

Delaware could still collect significant escheat even if it loses the MoneyGram case. But after a string of federal court losses that brought the case to the Supremes on appeal, collections are already trending down.

Last year, Delaware collected $554 million in "unclaimed property" but gave up about $105 million worth to people who proved it was their money, leaving a net $449 million. That's less, compared with the budget, than in past years.

And this year, the state's DEFAC ( Delaware Economic and Financial Advisory Council) finance board estimated in June, it is likely to collect only $334 million from unclaimed property, a 23% drop from last year.

Mayrack said the state should get some credit for that apparent shortfall: She told me it was "due to an increase in the amount Delaware has been able to return to owners."

If these collections don't recover — if the trend continues down — how will Delaware plug the hole in its budget?

The escheator and other state officials didn't want to talk about new taxes. In an email, Mayrack replied: "We look forward to the court's decision."

(c)2022 The Philadelphia Inquirer Distributed by Tribune Content Agency, LLC.
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