ccc towards a cigarette compliance center farrell delman president tobacco merchants association,...

CCCCCC Towards A Cigarette Towards A Cigarette Compliance CenterCompliance Center

Farrell Delman President

Tobacco Merchants Association, Inc.

September 13, 2005FTA Annual Meeting, Bozeman, Montana

Who is the TMA?Who is the TMA?• Founded 1915

• Non-Lobbying International Trade Association Dedicated to Tobacco Information Management

• Largest collection of regularly updated data bases on tobacco covering: News, Legislation and Regulation, Economic Data, Brands & Trademarks for the US and 124 Other Countries…4 E-Mail Publications Daily

• Tobacco Tax Guide (since 1962)

• MSA Guide (since 2004) including Company and Brand Compliance Data Bases updated Daily (since May)

• Financed by All Sectors of the Industry covering Tobacco Product Manufacturers, Distributors, Large Retailers, Suppliers of Leaf and Other Inputs, Financial and Consulting Firms…60% of Revenues from US

This is This is a Concept Piecea Concept PieceNot a Plan…Not a Plan…

A Suggestive ConceptA Suggestive ConceptNo More…No LessNo More…No Less

With Some Industry Support in With Some Industry Support in Principle…Principle…

Though Though By No Means A Commitment By No Means A Commitment

By Any Company in the IndustryBy Any Company in the Industry

1. A Brief History of How We Got 1. A Brief History of How We Got To Where We Are TodayTo Where We Are Today

2. A Conceptual Outline of Where 2. A Conceptual Outline of Where We Could Be TomorrowWe Could Be Tomorrow

3. What We May Wish to Do Now3. What We May Wish to Do Now

Achieving Greater ComplianceAchieving Greater Compliance


2.2. A Conceptual Outline of Where A Conceptual Outline of Where We Could Be TomorrowWe Could Be Tomorrow



Unintended ConsequencesUnintended Consequencesof the Master Settlement Agreementof the Master Settlement Agreement

US cigarette import escalation together with NPM domestic US cigarette import escalation together with NPM domestic manufacturing yielding much manufacturing yielding much higher 4higher 4thth tier tier growth growth

A A growing “Black”growing “Black” contraband (smuggled and bootlegged) contraband (smuggled and bootlegged) cigarette cigarette market market & growing counterfeit market & growing counterfeit market

Growing Internet & Native AmericanGrowing Internet & Native American sales delivered via sales delivered via common carriers creating youth control issues common carriers creating youth control issues

States’ difficulty collecting and keeping States’ difficulty collecting and keeping NPM escrow NPM escrow paymentspayments due to allocable share interpretations of the MSA due to allocable share interpretations of the MSA

NPM’s claim they are paying for the same units twiceNPM’s claim they are paying for the same units twice SPM’s withholding MSA PaymentsSPM’s withholding MSA Payments due to lack of adequate due to lack of adequate

enforcement…in their viewenforcement…in their view What is the true size of the US cigarette market for What is the true size of the US cigarette market for NPM NPM

adjustmentsadjustments and other reasons? and other reasons?

Unintended ConsequencesUnintended Consequencesof the Master Settlement Agreement of the Master Settlement Agreement

and New Law to Plug Loopholesand New Law to Plug Loopholes

Exhibit T Statute: Creates the NPM parity plan (1999)Exhibit T Statute: Creates the NPM parity plan (1999) Gray Market Ban (2000)Gray Market Ban (2000) Complementary Legislation (2002-05)Complementary Legislation (2002-05) Allocable Share Legislation (2003-2005)Allocable Share Legislation (2003-2005) State Internet Sale Bans (2001-05)State Internet Sale Bans (2001-05) Native American Compacts Native American Compacts HR 3199 Trafficking of Contraband Cigarettes (2005)HR 3199 Trafficking of Contraband Cigarettes (2005) Spitzer and MasterCard / DHL etc. (2005)Spitzer and MasterCard / DHL etc. (2005)

Tax Leakage in the U.S. Cigarette Tax Leakage in the U.S. Cigarette MarketMarket

Counterfeit / Smuggled Products: Not Counterfeit / Smuggled Products: Not Federally Federally taxedtaxed

Taxed at the State Level but not at the Federal LevelTaxed at the State Level but not at the Federal Level Not taxed at either Federal or State LevelsNot taxed at either Federal or State Levels

Federal tax-paid removalsFederal tax-paid removals:: Never taxedNever taxed in the states in the states

• Native American salesNative American sales Taxed in a lower tax stateTaxed in a lower tax state than where consumed than where consumed

• Cross-border bootleggingCross-border bootlegging• Internet – Mail Order salesInternet – Mail Order sales

US Postal Service (Jenkins Reporting)US Postal Service (Jenkins Reporting) Non-USPS (e.g. UPS)Non-USPS (e.g. UPS)

Federal Taxable Removals (TTB-PWC)Federal Taxable Removals (TTB-PWC)vs.vs.

State Taxable Removals (Orze.-Walker)State Taxable Removals (Orze.-Walker)(20.8 billion units in 2004…397bn vs. 377bn)(20.8 billion units in 2004…397bn vs. 377bn)

1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost

350

375

400

425

450

475

1998 1999 2000 2001 2002 2003 2004

Federal

State

455.22

14.12

2.43

422.00

18.00

17.10

401.49

22.63

14.89

383.31

26.70

18.70

364.31

30.67

28.20

344.61

29.57

32.74

337.65

38.10

21.91

0

50100

150200

250300

350400

450500

1998 1999 2000 2001 2002 2003 2004

NPMSPMOPM

U.S. Cigarette ConsumptionU.S. Cigarette Consumption by MSA Sector by MSA Sector

(397.66 billions of pieces)(397.66 billions of pieces)

Source: PWC, TMA Estimates Source: PWC, TMA Estimates (More Accurate Stick Counts Needed)(More Accurate Stick Counts Needed)

455.22

4.30

12.25

422.00

8.70

26.40

401.49

11.30

26.22

383.31

14.70

30.70

364.31

20.90

37.97

344.61

23.10

39.21

337.65

22.70

37.26

0

100

200

300

400

500

1998 1999 2000 2001 2002 2003 2004

OPM SPM/NPM Imports SPM/NPM Domestic

U.S. Cigarette ConsumptionU.S. Cigarette Consumption (397.61 billion pieces in 2004) (397.61 billion pieces in 2004)

Source: PWC, TMA Estimates (Source: PWC, TMA Estimates (More Accurate Stick Counts Needed)More Accurate Stick Counts Needed)

Estimated Data Leakage - 2005:Estimated Data Leakage - 2005:Total Known Market of 366 billion units with Total Known Market of 366 billion units with

Another 31-32 billion units, 8-9%…Less KnownAnother 31-32 billion units, 8-9%…Less Known

Total IndustryShipments (MSAi)Other

366 billion direct buy pieces via

public warehouses

31-32 billion pieces

Current MSAi ProcessCurrent MSAi ProcessCould be SupplementedCould be Supplemented

ParticipatingDistributors

ONLY

ManagementScience

Associates, Inc.

Send Weekly Brand Shipment

Data

1. Data from participating distributors only

2. No data from non-participating distributors

Managing Existing CSA Reporting…Managing Existing CSA Reporting…A Wealth of Data at Our Fingertips A Wealth of Data at Our Fingertips

(e.g. Michigan)(e.g. Michigan)

Tobacco Products Inventory Tax Return

Tobacco Products Tax Schedule

Tobacco Products Tax Return

Signature Authorization for Tax Stamps

Summary of Sales Worksheet/Tribal Gov’t

Schedule I: Tobacco Products Sold To TribesSchedule I: Tobacco Products Sold To Tribes

Schedule K: Cigarettes/RYO Acquired From NPMsSchedule K: Cigarettes/RYO Acquired From NPMs

Notification of Compliance by NPM (Escrow)Notification of Compliance by NPM (Escrow)

Tax-Free Tobacco Products Sold To TribesTax-Free Tobacco Products Sold To Tribes

Physical Inventory of Tobacco ProductsPhysical Inventory of Tobacco Products

Current Monthly Data FlowsCurrent Monthly Data Flows

Manufacturer/ Manufacturer/ ImporterImporter

Distributor/Cigarette Stamping

Agent (CSA)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

AG/ATF/TTB

Share Data

Monthly Data Flows with CCCMonthly Data Flows with CCC

Manufacturer/ Manufacturer/ ImporterImporter

DistributorCigarette Stamping

Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF/TTB Access

Processed Data

Access Processed

Data

Current CSA ReportingCurrent CSA Reporting

CSA(Distributor)

In State TaxAuthority

Send Shipment Data

1. Filed every month by 3rd week2. Total # of units purchased from each manufacturer

3. In-state & out of state sales data

4. Brand information NOW provided as part of MSA compliance with AG’s5. Copies of out of state shipment data provided to In-State Depts.

Out ofState TaxAuthority

The Jenkins Act applies to the out-of-state deliverer that uses The Jenkins Act applies to the out-of-state deliverer that uses the US Postal Service.the US Postal Service.

The CCC AdvantageThe CCC Advantage

CCCCCC

(The (The JointJoint

ITITSystemsSystemsProviderProvider

&&DataDataBaseBase

ManagerManager&&

DataDataReconciler)Reconciler)

ManufacturersManufacturers

CSA(Distributors)

State TaxAuthority(from all States)

Send Data

Send Data

Send Data

1. Process data from both participating and non-participating distributors

2. Process out of state tax data

3. Determine total shipments by state

4. Share data with states attorney general, ATF, FBI etc. per Information Sharing Agreements & Confidentiality Controls

The CCC Advantage (cont.)The CCC Advantage (cont.)

CCCCCC

RECONCILES:

1. All manufacturer shipments to all CSA’s in all States in a given month

2. All CSA purchases for given manufacturer products in all States for a given month

3. All CSA shipments out-of-state showing number of cartons by manufacturer for a given month presumably bearing the out-of-state stamp and as a result an estimate of volume shipped in-state by manufacturer assuming no inventory build-ups

4. All purchases of in-state stamps by CSA’s provides a check to ensure the above on the assumption that CSA’s do not build up an inventory of stamps

5. All escrow payments by manufacturers with all anticipated escrow payments by manufacturers in all MSA states

6. All manufacturer volumes at the State level with all manufacturer volumes at the Federal level (the PriceWaterhouse Coopers – TTB reconciliation)

CCC Reconciliation #1CCC Reconciliation #1: All manufacturer shipments to : All manufacturer shipments to all CSA’s in all States in a given monthall CSA’s in all States in a given month

ManufacturerManufacturer


Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data



Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data

CCC Reconciliation #2CCC Reconciliation #2: All CSA purchases for given : All CSA purchases for given manufacturer products in all States for a given monthmanufacturer products in all States for a given month



Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data

CCC Reconciliation #3CCC Reconciliation #3: All CSA shipments out-of-state : All CSA shipments out-of-state showing number of cartons by manufacturer for a given showing number of cartons by manufacturer for a given

monthmonth



Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data

CCC Reconciliation #4CCC Reconciliation #4: All purchases of in-state stamps by : All purchases of in-state stamps by CSA’s provides a check to ensure that CSA’s do not build CSA’s provides a check to ensure that CSA’s do not build

up an inventory of stampsup an inventory of stamps



Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data

CCC Reconciliation #5CCC Reconciliation #5: All escrow payments by : All escrow payments by manufacturers with all anticipated escrow payments by manufacturers with all anticipated escrow payments by

manufacturers in all MSA statesmanufacturers in all MSA states



Agent (CSA)&

CommonCarriers

(US-HR 3199)

State TaxAuthority

Send Shipment

Data

Send Shipment

Data

CCCCCC

Send Data

Send Compliance

Reports

Send Reports

AG/ATF TTB Access

Processed Data

CCC Reconciliation #6CCC Reconciliation #6: All manufacturer volumes at the State : All manufacturer volumes at the State level with all manufacturer volumes at the Federal levellevel with all manufacturer volumes at the Federal level

CCC BenefitsCCC Benefitsfor for State Tax OfficialsState Tax Officials

• Revenue Raising and Cost Reducing: Data would be cost-effectively placed in electronic formats allowing for improved and lower cost auditing and ensuring higher excise tax collections

• Data is centralized and can be accessed rapidly, securely and confidentially

• State Attorneys General can now enforce MSA compliance more effectively resulting in more escrow payments

• Higher overall prices for cigarettes making them less accessible to youth

CCC BenefitsCCC Benefits

• Improved TTB & ATF Anti-Diversion Efforts

for for Federal AgenciesFederal Agencies

• Data is centralized and can be accessed from anywhere securely by authorized personnel enabling improved enforcement

• Agents can query the CCC system to access processed data from 50 states

• Exceptions reports where reconciliation fails would be created as part of the overall enforcement effort resulting in tighter Federal-State cooperation

CCC BenefitsCCC Benefits

• Standardized and Automated e-Filing of all CSA State reports lowers the cost of remaining compliant in an increasingly demanding and challenging paperwork environment

for for CSA’s / DistributorsCSA’s / Distributors

• More focused ATF and State audits means that the legitimate CSA is hassled less and those CSA’s who are operating illegitimately are no longer competitive threats

• Centralized brand and company MSA compliance data bases would ensure that CSA’s do not stamp non-compliant product

CCC BenefitsCCC Benefits for for Legitimate ManufacturersLegitimate Manufacturers

• Elimination of an unfairly skewed competitive playing field by restoring the intended consequences of the MSA

• NPM Guarantee that a unit shipped to a CSA in one state and sold in

another will not result in two escrow payments

CCC Possible Next StepsCCC Possible Next Steps

• Bozeman Meeting: September 11-13• CCC Concept Presented• Key Industry Members & Tax Administrators

Potentially On-Board in Concept at Least• Working Group Composition & Mission Defined

• HR 3199: Conference After Labor Day •US AG / TTB Potentially on Board ($$$$$)

• Committee / Working Group Forms and Prototype Is More Fully Defined• Financing Options Discussed & Formulated• Data Management Team Forms• Full Business Plan Created

Possible Working Group Possible Working Group Mission StatementMission Statement

• Further Define What is Meant By “Compliance”• Define All Deliverables Needed from a

Centralized System to Ensure Compliance• Decide what Administrative Rulings and / or

Statutory Changes need to be made to enable the system to be built…and used as intended

• Study what the Fuel and Sales Tax Task Forces Did Right…and Wrong

• Engage A Consultant to Draft an RFP for the Centralized System and Standardized Reports

• Make a Recommendation on uniform back-end systems…and possibly negotiate a much-reduced delivery price for the software given the volumes involved

A Possible CCC A Possible CCC Public-Private StructurePublic-Private Structure

• Industry: 7 Representatives• 3 OPM’s• 1 SPM• 1 NPM• 2 Distributors

• Government: 7 Representatives• TTB• NAAG• 5 State Tax Department Officials

A Decision-Making Commission / Working GroupA Decision-Making Commission / Working Group

With Advisors / Consultants Drawn from FTA, MTC, TMA, MSAi, With Advisors / Consultants Drawn from FTA, MTC, TMA, MSAi, Orzechowski-Walker, GenTax, ACS et.al per the Working Group’s Orzechowski-Walker, GenTax, ACS et.al per the Working Group’s

Requirements Requirements

One Basis for the CCC: HR 3199One Basis for the CCC: HR 3199 To ConferenceTo Conference July 29, 2005: Coble Amendment to the US Patriot July 29, 2005: Coble Amendment to the US Patriot

Act to include Trafficking of Contraband Tobacco Products; Act to include Trafficking of Contraband Tobacco Products; House vs. Senate VersionsHouse vs. Senate Versions

Except for Tribes, reduces to 10,000 unitsExcept for Tribes, reduces to 10,000 units (and 500 smokeless (and 500 smokeless cans) from 60,000 sticks the quantity that anyone can move cans) from 60,000 sticks the quantity that anyone can move without maintaining records in such form that the US AG needs to without maintaining records in such form that the US AG needs to enforce compliance:enforce compliance: Beginning and ending inventoryBeginning and ending inventory Total quantity of cigarettes and cans receivedTotal quantity of cigarettes and cans received Total quantity shipped to each person other than a “retail Total quantity shipped to each person other than a “retail

purchaser” with the latter included if done through the purchaser” with the latter included if done through the mails addressing Internet Sales if done via “interstate mails addressing Internet Sales if done via “interstate commerce” (defined to include use of a web site etc. commerce” (defined to include use of a web site etc. outside the state even if the cigarettes remain in-state all outside the state even if the cigarettes remain in-state all the time)the time)

All US AG Reports to be Shared With:All US AG Reports to be Shared With: US Treasury Secretary & State AG’s and State Tax US Treasury Secretary & State AG’s and State Tax

Administrators: where shipments originated and concludedAdministrators: where shipments originated and concluded

CCC Possible Next StepsCCC Possible Next Steps

• Travel Money Needed: Some Options

• Coordinate Meetings With Other Travel Plans For the Key Government Participants

• HR 3199 – Patriot Act Funding to Ensure that A Full-fledged Compliance System is In

Place So Terrorists Don’t Use Tobacco Products to Finance Terrorism

• Grant Money – Need to Ensure No Conflicts

Federal Taxable Removals (TTB-PWC)Federal Taxable Removals (TTB-PWC)vs.vs.

State Taxable Removals (Orze.-Walker)State Taxable Removals (Orze.-Walker)(20.8 billion units in 2004…397bn vs. 377bn)(20.8 billion units in 2004…397bn vs. 377bn)

1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost

350

375

400

425

450

475

1998 1999 2000 2001 2002 2003 2004

Federal

State

CCC Cost-Benefit ValuationCCC Cost-Benefit Valuation

KPMG’s IRM Group Estimates that the Cost of Building a Joint Reconciliation System would be around $25 million, provided that States have their data in a standardized electronic format such as GenTax provides. This cost would include the front-end templates needed to standardize all form delivery by manufacturers and distributors, something that States would need to build individually anyway.

Compare this with the $1 billion annual problem the industry now has….

ConclusionConclusion

The CCC system ensures accurate reporting of cigarette sales in all states to address the NPM Adjustment issue and the need for fair and equitable payments by all MSA participants, whether PM’s or NPM’s, creating a win-win-win situation for all stakeholders, both industry and

government alike, and would cost a fraction of the cost of what government

is now losing by failing to count all sticks.

ConclusionConclusion

Montana Department of Revenue Director Dan Bucks Told Us Monday That The Decade Ahead Would See Increased

Interstate Cooperation and Coordination By Leveraging Joint and Common

Computer-Based Data Management Systems…If We Can do Sales Tax in 5 Years, We Surely Can Do Tobacco in

Under 3…Especially if We Take Advantage of What Various States Have

Already Done

ccc towards a cigarette compliance center farrell delman president tobacco merchants association,...

Documents

us cigarette market

cigarette consumption

bootlegged cigarette

lower tax state

tax leakage

state taxable removals

msa guide

msa payments