How to Find and Report Unclaimed Customer Credits

Why this matters

Every shop that takes payments ends up holding money that belongs to customers: a card payment and a check for the same invoice, a deposit on a job the customer cancelled, a refund check nobody cashed, a credit memo issued and never used. The tempting move after a couple of years is to write it off to income, because nobody has asked for it. In every state that is the wrong move. State unclaimed property laws treat that money as the customer's, require the business to try to return it, and then require it to be reported and turned over to the state after a dormancy period. A state audit that finds years of credits quietly moved to income can reach back far further than the shop's own memory of them. This is the procedure for finding what you hold and handling it before that happens.

The rule in brief

Unclaimed property, sometimes called escheat, is entirely a state layer. Every state has a statute, most modeled to some degree on the uniform acts, and they agree on the shape while differing on the details:

• Property that belongs to someone else and goes dormant (no owner-generated activity for a set period) must be reported and remitted to the state, which then holds it for the owner to claim.
• The dormancy period varies by state and by property type. Three years is a common period for many types, some states use five, and a few use shorter periods for specific types such as wages. Check your state's period for each type you hold.
• Before reporting, the holder must try to reach the owner, usually with a written due diligence letter sent to the last known address within a window before the report, for items above a small amount the state sets.
• Reports and remittances are due annually on the state's schedule, which in many states falls in the fall for a period ending mid-year. Several states use a different date.
• The holder keeps records for a period the state sets, and states audit holders, sometimes through contracted audit firms, with lookbacks that can run a decade or more.

This is not legal advice. The questions this procedure sends to an accountant or attorney are named where they arise.

The procedure

1. List every kind of customer money the shop can be holding

Go through the accounting system and the office's habits for each of these: overpayments and credit balances on customer accounts, unapplied payments (money received that never matched an invoice), deposits on cancelled jobs not yet refunded, refund checks issued but never cashed, credit memos issued and neither applied nor paid out, prepaid maintenance plans with unused visits after the plan ended, and gift certificates. Why: each lives in a different corner of the books, and an audit asks about all of them. What breaks if skipped: the shop handles credit balances carefully and forgets that a voided, uncashed refund check went back into the operating account as if it had never been written.

2. Age each item by the owner's last activity, not by the invoice date

Run a report of every item with the date the customer last did something: paid, called, emailed, booked, signed. Dormancy generally runs from the owner's last activity, and for a check from the date it was issued. Why: an overpayment on a three-year-old invoice from a customer who booked a tune-up last month is not dormant, and treating it as dormant sends a report the state does not want and leaves a customer you see every year wondering why their money went to the state.

3. Resolve everything you can before it ages, by refunding or applying

The best outcome is not a report; it is the money back with the customer. For each item still inside its dormancy period, refund it to the original payment method or apply it to an open invoice at the customer's direction, and record the customer's instruction. Why: the state process exists for money the business could not return, and every item resolved here is one with no due diligence letter, no report and no audit question. What breaks if skipped: the list grows every year, and the office stops looking at it because it is long.

The one move that is never in this step: writing it off to income. A credit balance moved to a revenue or miscellaneous income account has not gone away; it has been converted, and an auditor reading the ledger finds the entry. If an item has been written off in past years, note it for step 8.

4. Decide which state each item belongs to

The state that gets an item is generally decided by priority rules the U.S. Supreme Court set in Texas v. New Jersey (1965): first, the state of the owner's last known address in your records; if there is no address, the state where the holder is incorporated or organized. Why this is its own step: a shop near a state line holds money for customers in two or three states, and each has its own dormancy periods, forms and deadlines. What changes the answer: an item with no address at all, such as an unapplied payment you cannot match to anyone, goes to your state of incorporation, which may not be the state you operate in. If your entity is organized somewhere else, ask your accountant which state that is.

5. Look up each state's period and treatment for each property type

For each state you hold items for, look up the dormancy period for each type, and the due diligence and reporting rules. Two types need extra care. Gift certificates are treated very differently from state to state, and some states exempt them. Unused prepaid plans are harder still: whether unused visits on an ended plan are owed to the customer, earned by the shop under the contract's terms, or reportable property depends on the state and on how the plan was written. Do not guess on those; send them to your accountant or attorney with the plan's terms. See related: Automatic Renewal Laws and Membership Plans.

6. Send due diligence letters inside the state's window

For each item reaching dormancy, send a letter to the last known address within the window the state sets before the report, stating what you hold, that it will be reported if unclaimed, and how to claim it from you. Email as well where you have it, if the state allows it. Why: the law requires the attempt for items above the state's floor, and in practice it is the step that returns the most money, because the customer simply had not noticed. What breaks if skipped: the report is filed without the required attempt, which is itself a compliance failure, and customers who would have answered a letter now have to find their money on a state website.

7. Report and remit by the deadline

Items still unclaimed after the letter get reported to the state on its form or through its online holder portal, many of which accept the standard electronic format the states share, and the money goes with the report. Keep a copy of what you filed. What breaks if skipped: penalties and interest the statute sets for late reporting, and in an audit, an estimate of what you should have reported, which is usually worse than the real figure.

8. Keep the records, and clean up the past properly

Keep the aging reports, the letters, the responses and the filed reports for the period your state requires. If step 3 found credits written off to income in prior years, do not quietly reverse them and report them as current; many states run voluntary disclosure programs that reduce penalties for a holder who comes forward before an audit. That is a decision to make with an accountant or attorney, and it is the point to stop working from this card.

Worked example: a shop's first credit-balance review

A twelve-person HVAC and plumbing shop has never reviewed customer credits. The office manager runs every report from step 1 and ages each item by last owner activity against the three-year dormancy period that applies in the shop's state to these property types (the shop's state; another state's figure could differ). The sheet:

TYPE                     COUNT  INSIDE 3 YR  AT/PAST 3 YR
Overpayments                18        12            6
Unapplied payments           9         9            0
Credit memos unused          6         3            3
Cancelled-job deposits       4         2            2
Uncashed refund checks       7         4            3
Expired prepaid plans        3         3            0
TOTAL                       47        33           14

The 33 inside dormancy. The 12 overpayments, 3 credit memos and 2 deposits are refunded to the original payment method, with the customer called first where the card on file has expired. The 4 uncashed refund checks are re-issued after a call confirming the address. Of the 9 unapplied payments, 6 are matched to an invoice by reading the check memo lines and applied; 3 cannot be matched and stay open, flagged to be re-worked each month. The 3 expired prepaid plans go to the shop's accountant with the plan terms, as step 5 directs. So 27 are resolved (12 + 3 + 2 + 4 + 6), 3 remain open and 3 are with the accountant, which accounts for all 33.

The 14 at or past dormancy. All have addresses in the same state, so step 4 is simple. The shop sends 14 due diligence letters. Four customers respond and are refunded. Two letters come back undeliverable; those are still reported, under the last known address the shop holds. Eight get no response. The shop reports and remits 10 items (14 minus 4) by the state deadline.

The finding that sends it to an accountant. While building the sheet, the office manager finds that a former bookkeeper ran a year-end entry for four straight years moving small credit balances to "other income". That is the step 8 case. The shop does not reverse and report them itself; it takes the ledger entries to its accountant to decide whether to use the state's voluntary disclosure program.

What changes the answer. If 5 of the 14 dormant items belonged to customers with addresses across a state line, those 5 would go to the neighbor state on its own dormancy period, letter window and deadline, which might put some of them outside dormancy there and not yet reportable at all. If the shop's state used a five-year period for credit balances instead of three, most of the 14 would not yet be dormant, and the job would be to refund them, not report them.

How to verify you got this right

• The credit-balance report for every account type is run quarterly and the list is shorter each quarter or holds steady with explanations.
• No journal entry in the last several years moves customer credits to an income account. Ask the bookkeeper to search for one.
• Every item reported has a matching due diligence letter dated inside the state's window, or a note saying it was below the floor.
• Your calendar carries each state's reporting deadline.

References

• Your state's unclaimed property statute and the state treasurer's or comptroller's holder reporting guidance
• National Association of Unclaimed Property Administrators (NAUPA), holder reporting standards
• Texas v. New Jersey, 379 U.S. 674 (1965), on which state takes the property
• See related: Automatic Renewal Laws and Membership Plans; Deposits and Prepaids: Money You Haven't Earned Yet