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CCC Towards A Cigarette Compliance Center. Farrell Delman President. Tobacco Merchants Association, Inc. September 13, 2005 FTA Annual Meeting, Bozeman, Montana. Who is the TMA?. Founded 1915 Non-Lobbying International Trade Association Dedicated to Tobacco Information Management

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Ccc towards a cigarette compliance center

CCCTowards A Cigarette Compliance Center

Farrell Delman

President

Tobacco Merchants Association, Inc.

September 13, 2005

FTA 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 a Concept PieceNot a Plan…A Suggestive ConceptNo More…No LessWith Some Industry Support in Principle…Though By No Means A Commitment By Any Company in the Industry


1. A Brief History of How We Got To Where We Are Today2. A Conceptual Outline of Where We Could Be Tomorrow3. What We May Wish to Do Now

Achieving Greater Compliance


1. A Brief History of How We Got To Where We Are Today2.A Conceptual Outline of Where We Could Be Tomorrow3. What We May Wish to Do Now

Achieving Greater Compliance


Unintended Consequencesof the Master Settlement Agreement

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

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

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

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

  • NPM’s claim they are paying for the same units twice

  • SPM’s withholding MSA Payments due to lack of adequate enforcement…in their view

  • What is the true size of the US cigarette market for NPM adjustments and other reasons?


Unintended Consequencesof the Master Settlement Agreement and New Law to Plug Loopholes

  • Exhibit T Statute: Creates the NPM parity plan (1999)

  • Gray Market Ban (2000)

  • Complementary Legislation (2002-05)

  • Allocable Share Legislation (2003-2005)

  • State Internet Sale Bans (2001-05)

  • Native American Compacts

  • HR 3199 Trafficking of Contraband Cigarettes (2005)

  • Spitzer and MasterCard / DHL etc. (2005)


Tax Leakage in the U.S. Cigarette Market

  • Counterfeit / Smuggled Products: Not Federally taxed

    • Taxed at the State Level but not at the Federal Level

    • Not taxed at either Federal or State Levels

  • Federal tax-paid removals:

    • Never taxed in the states

      • Native American sales

    • Taxed in a lower tax state than where consumed

      • Cross-border bootlegging

      • Internet – Mail Order sales

        • US Postal Service (Jenkins Reporting)

        • Non-USPS (e.g. UPS)


  • Federal Taxable Removals (TTB-PWC)vs.State Taxable Removals (Orze.-Walker)(20.8 billion units in 2004…397bn vs. 377bn)1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost


    U s cigarette consumption by msa sector 397 66 billions of pieces
    U.S. Cigarette Consumption by MSA Sector (397.66 billions of pieces)

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


    U s cigarette consumption 397 61 billion pieces in 2004
    U.S. Cigarette Consumption (397.61 billion pieces in 2004)

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


    Estimated Data Leakage - 2005:Total Known Market of 366 billion units with Another 31-32 billion units, 8-9%…Less Known

    31-32 billion pieces

    366 billion direct buy pieces via public warehouses


    Current msai process could be supplemented
    Current MSAi ProcessCould be Supplemented

    Send Weekly Brand Shipment Data

    Participating

    Distributors

    ONLY

    Management

    Science

    Associates, Inc.

    1.Data from participating distributors only

    2. No data from non-participating

    distributors


    1. A Brief History of How We Got To Where We Are Today2. A Conceptual Outline of Where We Could Be Tomorrow3. What We May Wish to Do Now

    Achieving Greater Compliance


    Managing existing csa reporting a wealth of data at our fingertips e g michigan
    Managing Existing CSA Reporting…A Wealth of Data at Our Fingertips (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 Tribes

    Schedule K: Cigarettes/RYO Acquired From NPMs

    Notification of Compliance by NPM (Escrow)

    Tax-Free Tobacco Products Sold To Tribes

    Physical Inventory of Tobacco Products


    Current monthly data flows
    Current Monthly Data Flows

    Manufacturer/

    Importer

    AG/ATF/

    TTB

    Send Shipment Data

    State Tax

    Authority

    Share

    Data

    Distributor/

    Cigarette

    Stamping

    Agent (CSA)

    Send

    Shipment

    Data


    Monthly data flows with ccc
    Monthly Data Flows with CCC

    CCC

    Manufacturer/

    Importer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Access Processed Data

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send

    Shipment

    Data

    Send Compliance Reports

    AG/ATF/

    TTB

    Access Processed Data


    Current csa reporting
    Current CSA Reporting

    CSA

    (Distributor)

    Out of

    State Tax

    Authority

    Send Shipment Data

    In

    State Tax

    Authority

    1.Filed every month by 3rd week

    2.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’s

    5.Copies of out of state shipment data provided to In-State Depts.

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


    The ccc advantage
    The CCC Advantage

    CCC

    (The

    Joint

    IT

    Systems

    Provider

    &

    Data

    Base

    Manager

    &

    Data

    Reconciler)

    Manufacturers

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

    Send Data

    State Tax

    Authority

    (from all

    States)

    2.Process out of state tax data

    Send Data

    3.Determine total shipments by state

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

    Send Data

    CSA

    (Distributors)


    The ccc advantage cont
    The CCC Advantage (cont.)

    RECONCILES:

    CCC

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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


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

    CCC

    Manufacturer

    Send Reports

    Send Shipment Data

    Send Data

    State Tax

    Authority

    Distributor

    Cigarette

    Stamping

    Agent (CSA)&CommonCarriers(US-HR 3199)

    Send Compliance Reports

    Send

    Shipment

    Data

    AG/ATF

    TTB

    Access Processed Data


    Ccc benefits
    CCC Benefits

    for State 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 benefits1
    CCC Benefits

    for Federal Agencies

    • Improved TTB & ATF Anti-Diversion Efforts

    • 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 benefits2
    CCC Benefits

    for CSA’s / Distributors

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

    • 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 benefits3
    CCC Benefits

    for Legitimate 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


    1. A Brief History of How We Got To Where We Are Today2. A Conceptual Outline of Where We Could Be Tomorrow3. What We May Wish to Do Now

    Achieving Greater Compliance


    Ccc possible next steps
    CCC 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 mission statement
    Possible Working Group Mission 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 public private structure
    A Possible CCC Public-Private Structure

    A Decision-Making Commission / Working Group

    • Industry: 7 Representatives

      • 3 OPM’s

      • 1 SPM

      • 1 NPM

      • 2 Distributors

    • Government: 7 Representatives

      • TTB

      • NAAG

      • 5 State Tax Department Officials

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


    One Basis for the CCC: HR 3199

    • To Conference July 29, 2005: Coble Amendment to the US Patriot Act to include Trafficking of Contraband Tobacco Products; House vs. Senate Versions

    • Except for Tribes, reduces to 10,000 units (and 500 smokeless cans) from 60,000 sticks the quantity that anyone can move without maintaining records in such form that the US AG needs to enforce compliance:

      • Beginning and ending inventory

      • Total quantity of cigarettes and cans received

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

    • All US AG Reports to be Shared With:

      • US Treasury Secretary & State AG’s and State Tax Administrators: where shipments originated and concluded


    Ccc possible next steps1
    CCC 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)vs.State Taxable Removals (Orze.-Walker)(20.8 billion units in 2004…397bn vs. 377bn)1 bn packs @ 80 cents (wtd avg) State Tax a pack = $800 million lost


    Ccc cost benefit valuation
    CCC 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….


    Conclusion
    Conclusion

    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.


    Conclusion1
    Conclusion

    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


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