Rebate Escheatment. What Is It And Why Should I Comply?

Rebates are a popular and effective way of enticing consumers to purchase your product. Recent analysis suggests that a lift of up to 20 percent is attainable with carefully planned and executed rebate programs. However, not all checks mailed to consumers are cashed. The fulfillment company often captures consumer name and address data from handwritten forms and uses address correction software to standardize the address for better deliverability. Even with these processes in place, some checks are undeliverable to the addressee or un-cashed because:

• There was illegible handwriting on the rebate form making if difficult to decipher.
• The consumer moved and gave no forwarding address.
• The check was lost, destroyed, or expired.

Over time, the un-cashed amounts can accrue to large sums, possibly even millions of dollars for national consumer product companies.

What happens to those rebate checks that do not get cashed?  Whose money is that?  How is the information tracked and reported?  These pertinent questions should be considered when offering a rebate to your customers.

The term escheatment is defined as the process of turning over unclaimed or abandoned checks, stocks and shares whose owners cannot be traced, to a state authority.  Every company is required to file unclaimed property reports annually and to make a good-faith effort to find the owners of their dormant accounts.  All states have some type of unclaimed property law on their books.

Laws about unclaimed property have been in existence for years and many states are now pursuing these funds aggressively. However, these laws are continuously challenged and legal rulings persist to evolve monthly.

• State reporting to all affected states for all escheatment liabilities.
• Funds transfer in a timely fashion in accordance with each individual state’s escheatment law.
• Assumption of the liability for managing the reporting and remittance of unclaimed property funds.

An Iowa District Court, [Fitzgerald v. Young America Corporation, Iowa Dist. Ct., No. CV6030, 1/5/09] denied the Summary Judgment Motions filed by a major pharmacy retailer and major wireless carriers (rebate sponsors) against the State of Iowa.

The state who was seeking to have these rebate sponsors declared “Holders” of unclaimed property (un-cashed rebate checks), which was allegedly not reported and transmitted to the state as required under state escheat laws.

The defendants (rebate sponsors) argued that they were not responsible to escheat the unclaimed property to the state because they alleged that their fulfillment agency was in possession of the funds (via retention of slippage).  This argument was based on the recently outdated slippage model that fulfillment agencies used.

Under the old slippage model, fulfillment agencies retained the uncashed check funds and recorded them as profits – today this is not allowed.  The Iowa court refused to hold, as a matter of law, that the rebate sponsors could not be the “Holder” of the unclaimed rebate liability merely because they were not in possession of the funds from the uncashed checks.

Bottom Line:  the rebate sponsors (in this case the major pharmacy retailer and major wireless carriers) may be declared “Holders,” possibly creating millions of dollars of unanticipated liability for their companies.

Winston & Strawn, LLC, summarized from public records.

Many states have declared that the “Holder” of any un-cashed rebate checks is responsible for reporting those amounts and escheating that property to the various states. The “Holder” is defined as the entity legally responsible for the obligation to the consumer.  Courts have ruled that it can be either the fulfillment company (if they have received and retained the full amount of the escrow funds to pay the drafts) or the rebate sponsor (if the sponsor has collected back the un-cashed portions of the rebate checks or used its own bank account instead of forwarding escrow funds).

Check with your fulfillment vendor to ascertain how they track and administer un-cashed consumer rebate checks.  PFC has a wellestablished escheatment system in place to ensure that rebate sponsors are in legal compliance in all states.

Each state has its own specific reporting requirements, which must be followed.  All states require an attempt to send a letter, which is knownas a “due diligence letter,” to the owner’s last  known address prior to filing the report.

Depending on the state’s defined dormancy period and due diligence factors, these letters are sent prior to the dormancy period end, which also variesby state.  If the owner does not respond within thespecified time period, the unclaimed funds are thenrequired to be escheated to the state.

PFC files all state annual reports within the guidelines of the National Association of UnclaimedProperty Administrators (NAUPA).  Final filing dates vary throughout the year, depending on the state. Other items that need to be included are:

• Check for the funds made out to the state.
• A signed cover sheet.
• CD or list of names of each consumer and the amount of un-cashed funds.

Either the rebate sponsor or its eCommerce fulfillment company can provide the escheatment reports to the various states.  If the client chooses to manage the escheatment of its own funds, the fulfillment company will have to return all escheatable funds and provide a detailed listing of all un-cashed checks.

The rebate sponsor will then have the fulfillment agency close all bank accounts related to the promotion, sign a release indemnifying the fulfillment agency from all state escheatment laws, and agree to have the fulfillment company cease processing any additional payments to consumers from that bank account.

Upon signing a release, all liability for compliance with escheatment law transfers to the Rebate Sponsor, and the fulfillment company has no other obligations or liabilities. The rebate sponsor will be fully responsible for managing its own escheatment program and making sure at the end of the dormancy period, all States Attorneys General are provided with the proper reports and funds.

This may require additional resources in the accounting or tax department, along with a system to track the various escheatment amounts.

PFC’s proprietary cash management system accurately monitors check-clearing activity, provided by its banking partners, with actual checks written.

This process helps identify potential fraud, as well as indicating detailed un-cashed check history.  On a scheduled basis, PFC can then re-connect with consumers that received their checks to offer a reminder to cash them.

Ultimately, those consumers that take no action are compiled for escheatment filings by state. Reports sent to individual states can be made available to the Rebate Sponsor on PFC’s reporting website or transmitted via a secure FTP data transmission.

If a rebate sponsor wishes to hire its fulfillment company to manage its escheatment, it pays to make sure that the fulfillment agency is well equipped to fully manage all escheatment issues on behalf of the client.

Companies should look for an experienced company with an established internal escheatment group. Talk with them about their internal procedures and reporting. Be sure to ask:

• Are there any current lawsuits against your company for escheatment issues?
• What are your processes for ensuring compliance?  (Ask for examples of programs  they have run recently.)
• How do they keep up-to-date in the everchanging laws of each state?

National Association of Unclaimed Property Administators

Official database of governmental unclaimed property

At PFC, our clients’ success is the number one priority. Since 1974, PFC has delivered outstanding results, with turnkey solutions in fulfillment, e-commerce, rebates, sweepstakes, coupons and contact center – all backed by leading technology. PFC allows clients focus on big picture business goals, while it skillfully manages all the details. For more information call (800) 493-7063 or visit pfcfulfills.com.

Sources: National Association of Unclaimed Property Administrators, Official Database of Governmental Unclaimed Property, unclaimed.org