unclaimed property: the changing landscape · unclaimed property: the changing landscape mark. k....

©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


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

05

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

8


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

19


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

21


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

22


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)

23


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.)

25


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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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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unclaimed property: the changing landscape · unclaimed property: the changing landscape mark. k....

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