This past week, the Supreme Court decided on a case that, while ostensibly a ruling over somewhat esoteric legal issues, was in truth a decision over whether Delaware gets to continue raking in revenue from all around the country.
MoneyGram is an international money transfer company that facilitates peer-to-peer financial transactions. For the transactions at issue here, normally a payor pays MoneyGram on the front end, and then a creditor is able to withdraw that amount from MoneyGram on the back end. That fairly simple process is complicated when a payor pays MoneyGram but the creditor fails to then claim the money they are owed within a set period of time.
MoneyGram does not get to keep that money for itself. Instead, under the process of “escheat,” a doctrine which goes back to the common-law practice in feudal England of turning over found treasure to the king, states are allowed to take the unclaimed property.
The problem arises when more than one state has a claim on that property. For years, Delaware has claimed that unclaimed MoneyGram products from anywhere in the country should escheat to the state of Delaware, as that is where MoneyGram is incorporated. Unclaimed property has become an enormous source of revenue for Delaware — in FY 2021, Delaware brought in $449 million from it, more than double what it collected from its traditional corporate income tax.
However, other states argued that those unclaimed MoneyGram products should escheat to the state of the creditor’s residence. Escheat theoretically provides some benefit to a state’s taxpayers, allowing them to face lower taxes in other areas to fund the same level of government services. There’s little reason why this benefit should accrue entirely to Delaware.
In a unanimous decision, that’s exactly what the Supreme Court said. Though the decision hinged upon the Court’s interpretation of a statute from the 1970s, the upshot was the same — Delaware not only has to stop vacuuming up the unclaimed property of Americans around the country for its own use, it also has to pay other states back for its ill-gotten gains.
That’s a significant rebuke for Delaware, which despite its business-friendly reputation has a habit of trying to target nonresidents for tax obligations. On the recently-released Remote Obligations and Mobility (ROAM) Index, a measurement by the National Taxpayers Union Foundation of how burdensome states’ tax codes are for remote workers, Delaware actually came in last place.
That’s in large part because Delaware is one of just four states with a “convenience of the employer” rule. As often discussed in this space, “convenience of the employer” rules are anything but convenient, requiring taxpayers who switch to working remotely in another state for the same Delaware employer to continue paying Delaware income taxes. These illogical rules represent aggressive tax grabs, often catching taxpayers in a tug-of-war between two states expecting income taxes on the same income.
Hopefully, the Court’s decision to turn off the firehose of nonresident cash into the state will force a rethinking of Delaware’s budget. Importing tax revenues and exporting tax obligations will always be the ideal situation for legislators, as it supplies all of the political benefit with none of the political cost.
At the end of the day, the only thing guaranteed to stop state legislators from pursuing this preferred course of action is Congress or the courts telling them they can’t. Delaware should seek to bring in new residents, businesses and revenues through friendly tax policies — not underhanded money grabs.
