unclaimed property: the changing landscape · unclaimed property: the changing landscape mark. k....
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©2010 – Treasury Alliance Group LLC and Duff & Phelps, LLC – All Rights Reserved
Unclaimed Property:The Changing Landscape
Mark. K. Webster / Treasury Alliance Group LLCRobert S. Peters / Duff & Phelps, LLC
March 12th, 2010
©2010 – Treasury Alliance Group LLC and Duff & Phelps, LLC – All Rights Reserved
Agenda
• Unclaimed Property: Overview• The Perfect Storm: State Trends• Types of Unclaimed Property• Gift Card Developments• Consumer Rebates• Planning to “meet, but not exceed potential
liability”
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A Little History
• Traditionally unclaimed bank accounts• On the corporate side, it does include uncashed
payroll and dividend checks.• Typically considered a ”pure compliance function”
often administered by low level personnel.• Historically state personnel responsible for
administration were sparse and enforcement of rules was lax.
• Due to lack of enforcement, most companies considered the area a low priority with nominal financial risk.
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Unclaimed Property
Unclaimed Property refers primarily to intangible items that for some reason or other remain uncashed, unapplied or otherwise unaccounted for:
• Bank Accounts• Safe Deposit Boxes• Uncashed checks
– Payroll– Vendor– Dividend
• Unapplied Credit Balances• Unused gift certificates, stored value cards, etc.
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Who Benefits?
• 1st Priority– Last known address of owner/payee
• 2nd Priority– Location of company/holder
• 3rd Priority– Location of transaction
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Growth In UP Collections$ Billions
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1015202530354045
2000 2003 2006 2007
CollectionsReturns
Source: “When Unclaimed Property Becomes Unclaimable” Marketplace Money 2007
$ Billions
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Sarbanes-Oxley Concerns
• Unquantified or potential liabilities for escheatment of unclaimed property present very real concerns for CFO’s, Controllers and Treasurers
• Public companies have been cited for material weaknesses resulting from unclaimed property
• Virtually all public and private companies are faced with the challenge of:
• Estimating exposure• Remediating past liabilities• Establishing ongoing compliance procedures
• Planning opportunities still exist to reduce liability
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New Awakening!
• States have aggressively stepped up audit and compliance campaign
• Ability by states to reduce budget deficits without raising taxes
• Bounty Hunters: third party contingent fee audit firms
• Audit firms are using sophisticated statistical audit techniques to uncover unreported unclaimed property
• Audits can extend for long periods (3+ yrs) tying up considerable internal resources
• No Statute of Limitations
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States Looking Everywhere
Expanded Definition of Unclaimed Property– Accounts receivable (customer) credit balances, customer
overpayments– Unidentified remittances, unapplied cash, security
deposits, refunds, credit memos, lease, royalty payments– Write-offs to miscellaneous income– Inventory received, not invoiced– Bottle deposits– Unredeemed gift certificates, gift cards, stored value cards$87 Billion in Gift Cards: $7.8 billion unredeemed
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GIFT CARDS
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Types of Product
• Gift certificates• Gift cards
– Closed-loop – Open-loop
• Other– Merchandise credits– Promotional cards– Telephone cards– Other stored value products (e.g., Mio card)
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Unclaimed Property?
Are unredeemed gift cards unclaimed property?• About 30 states have some type of exemption
for “gift certificates” and/or “gift cards”: BUT BEWARE!– Sometimes, conditions to receive exemption
• GCs cannot have expiration dates or fees• GCs must be below a certain dollar amount (e.g., $100)• GCs cannot be redeemable for cash
– State may not define “gift certificate” or “gift card”– Even if defined, inconsistent treatment of open-loop
cards, promotional cards, etc.
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Are Cards Escheatable?
If cards are escheatable, what is the amount subject to escheat?
• Majority States:“price paid” for gift certificate• Several States: 60% of face value• A few allow retailers to keep their profit margin
and escheat only cost of goods sold• If GCs have fees, may be deductible if:
• imposed pursuant to valid and enforceable written contract, • charges are not regularly waived and• charges are not unconscionable (new federal laws)
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How to Minimize Escheat
GC ReOrganizations• First-priority rule: Often a concern if GCs sold
online or with rewards/loyalty programs• Second-priority rule: The holder can be
domiciled in a state that has favorable unclaimed property rule for GCs
• Third-priority rule: Strong arguments that this rule is unconstitutional, but sometimes restructurings can be designed to avoid the rule altogether
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Legal Issues 1
• Consumer protection issues– Use of fees and expiration dates– Disclosure issues
• Contract issues, particularly in negotiation with gift card processing company
• Tax issues – Deferral of recognition of income under IRC Section
451, Rev Proc 2004-34, and newly issued TAMs– State tax nexus issues
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Legal Issues 2
• Potential application of “third priority” transaction-based custody rules
• Pre-existing GC liabilities• Potential challenges to Giftco structure:
– Lack of business purpose? – Lack of Economic substance?– On public policy grounds?– As a result of their independent dealings with
purchasers?
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Do They Work?
• If undertaken for valid business purposes and properly implemented, GC reorganizations are, we believe, perfectly legal
• If properly structured, implemented and operated, a GC reorganization should result in the GiftCo being considered the “holder” of the unredeemed GCs for UP purposes
• States (including DE and NY) have consistently respected these structures on audit if properly implemented
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REBATES
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Rebate Agenda
• Rebate trends• Evolving positions of the states, courts and
holders?• Overview of the rebate controversy• Rebate replacement vehicles the “good, bad and
ugly”• What’s a company to do?• Likely next steps in ongoing controversy
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Rebate Trends
• Rebates continue to be growing trend in the consumer market industry for over the past 20 years
• Rebates have surged from less than $10 million to over $100 billion since 1990
• Rebates as a marketing strategy continue to attract customers into stores
• 75.4% More Likely To Buy • 15.4% No Effect
• Over 850 participating rebate sponsors in retail and manufacturing sector
• Estimates of slippage range from 6-12 percent, or more, of checks originally issued
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Rebate Controversy
• Fulfillment companies practice of treating uncashed rebates as “fee income”, not returned or escheated as unclaimed property
• Rebate sponsors agreed to reduced pricing, with little knowledge of escheat implications
• Consumer protection advocates sought broader regulation to curb abusive past practices
• States looking at potential windfall to recover funds from rebate sponsors and fulfillment companies
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Common Arguments
• We used the slippage to negotiate a lower fulfillment cost
• Rebates were actually funded by our vendors• Based on FTC CompUSA case, vendors looked to
retailer as responsible because they advertised the manufacturer rebate
• Our rebate form said offer is invalid if check is not presented according to our offer terms
• Our checks “expire” in 90 days (not actually accurate) – in most cases they would only be dishonored 90 days after the last check was issued
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Current Status
• Suit initiated by Iowa and 43 states against Young America, T-Mobile, Walgreens, and Sprint in 2006.
• Courts required each state to bring separate action, two have done so N.H. and Ak.
• Upheld auditors rights to obtain fulfillment company’s customer lists of rebate sponsors
• 2009 decision laid ground work to pursue rebate sponsors vs. fulfillment companies
• Settlements have been reached with Walgreens and T-Mobile and now Sprint ($22 million)
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Next Generation of Rebates
• Pre-paid gift cards: rebates or gift cards?– Closed Loop: Redeemable for merchandise only at rebate
sponsor or related retail store.– Open Loop: Issued by rebate sponsor, or financial
institution, redeemable at any retailer• State Restrictions against advertising “rebates” in
form of cards• 2009 Federal Credit Card Act
– Fees limited to monthly charge– Card must be inactive for at least 1 year, in order for fee
to apply– Expiration date cannot be less than 5 years – Loyalty cards excluded
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Pre Paid Cards
• Benefits include:– Higher levels of consumer confidence– Rebate sponsor can reinforce its identity on cards– Capable of reloading cards at retail locations– Potential to mitigate unclaimed property exposure
• Potential obstacles– Misrepresentation of “rebate”– State restrictions (MA. and Ct.)
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Prepare Yourself
• Broaden participation in current rebate negotiations• Take Inventory of:
– Past, present and future fulfillment supplier agreements– Personnel familiar with historical arrangements– Availability and access to historic bank accounts– Ability to credibly research outstanding rebate checks– Access impact of system conversion
• Consider Impact on consumers, fees paid to 3rd parties, coordination with state consumer regulatory requirements.
• Transactional planning is option much like gift cards.
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Join fellow alumni from this and other Treasury Alliance Group programs in networking about the issues discussed and simply keeping in touch. Go to: http://www.linkedin.com/e/gis/81318/37CD3F56BA8F
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©2010 – Treasury Alliance Group LLC and Duff & Phelps, LLC – All Rights Reserved
Contact Information
Mark K. Webster, CPA, CCM• +1 216-932-1678 • [email protected]
Robert S. Peters• +1 312-697-4924• [email protected]
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