Slippage & Escheatment
Clarifying the Mystery about Slippage and Escheatment
Rarely has there been a more controversial subject in the history of sales promotion than today’s debate on slippage (un-cashed rebate checks) and escheatment (the reversion of “unclaimed” property to the states in the absence of legal heirs or claimants).
It seems that everyone has a different opinion: legal, finance, fulfillment, and accounting.
This is because there is no one universally accepted process for so many different potential rebate funding scenarios, and there is a great deal of money at stake. Each situation is unique and requires its own analysis to determine risk and liability prior to the development of a sound fiscal strategy.
To put this in historical perspective, one must look back a few decades when the average rebate was 50 cents. With so few dollars involved, there simply wasn’t enough money to warrant anyone’s attention.
Fast forward to the late 1990s and early 2000s when rebates in some sectors - most notably wireless, technology and retail - were approaching, and even exceeding, $100.00.
With state tax revenues shrinking and state budgets under unprecedented scrutiny, enterprising legislators in their quest for new revenue sources suddenly determined that at least some of those checks were not going to be cashed, and hence should become the property of the state. Virtually ignored for years, now when there is significant money involved, all of a sudden everyone wants it.
Will escheat laws apply to us? Whose money is it? Who should we listen to? What should we do about it?
Unfortunately, the answers aren’t so simple. However, you will most likely need counsel from someone who has nothing to lose or gain from providing you with direction; at Promotional Marketing Insights we know this category intimately and can help formulate a strategy.
The controversy begins with identifying the rebate account "owner". Any party interested in quantifying the value of slippage will undoubtedly begin with the name on the account from which checks are drawn. It would most likely be either the rebate sponsor or their service provider. Some fulfillment providers claim that they are simply the account holder- essentially “holding” funds for the sponsor. However, this argument wouldn’t make sense in a scenario where the service provider is retaining the benefit of uncashed checks (slippage) and taking those funds in as income. Other suppliers will offer a low servicing fee for fulfillment if the sponsor allows the supplier to retain the benefit of uncashed checks. Some may offer to indemnify the client against any potential escheatment claims. In that this potentially creates a double-jeopardy situation, we recommend seeking professional advice before considering that option. It is possible that the funds resulting from slippage could be relegated to a supplier one day (perhaps in exchange for reduced service fees), only to discover that the 42 states seeking slippage for escheatment don't care about any special arrangements between client and supplier. The states still have the right to pursue the sponsor for those funds, regardless of any indemnification arrangements.
Understanding what causes slippage is a critical component of this issue. Among the factors that influence slippage are as follows:
- the length of time from when the original request is mailed by the consumer until the time check is received and presented at the bank
- the face value of the check
- legibility of the consumer's handwriting
- accuracy of data entry
- the deployment of a fulfillment provider’s address correction editing software
- the type of check on which the rebate is drawn (insertable, self-mailer, postcard type)
- class of postage used to mail the check
- check expiration date
- enforcement of check expiration date
Unfortunately, it isn’t entirely clear whether or not the states care about reasons for abandonment of funds or property. So it's critical to access the expertise required to make a sound business decision.
The most prudent course of action for any organization will become more clear with a thorough analysis of the following: how many checks are issued, what is the average dollar amount, how many total dollars are issued per year, who owns the account, what type of rebate vehicle is being used, is the account used exclusively for rebate checks, is more than one rebate offer being drawn on the same account, how long is the expiration date on the check, what does the fine print state in the agreement on funds management between a fulfillment supplier and the sponsor, etc.
One thing is certain: there is a direct correlation between the total dollars issued and the degree of risk.
The safest course of action is to be certain that all of your rebate accounts are 100% reconcilable. Whether you ultimately choose to report and return the uncashed funds to the states that require it or not, the best protection is be sure your vendor partners understand that you need 100% escheatment reporting: a complete listing of cashed and uncashed checks, and the total amounts for each category by state. In this way, at least the data is available for reporting purposes if you choose to do so.
We urge you to call us to discuss specifics- it is your money- do everything you can to protect it.
Click the "Contact Us" button to arrange a confidential discussion.