LB 590 and Federal PACT Act Implementation. Updated August 2014

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1 LB 590 and Federal PACT Act Implementation Updated August 2014

2 MSA (Master Settlement Agreement) Signed in 1998 between tobacco companies and 46 U.S. states. Creates restrictions on advertising and cigarette promotion. Creates a focus on promoting smoking cessation and prevention of youth smoking in the U.S. Participating cigarette manufacturers agree to pay amounts to states for healthcare, prevention, and enforcement. Cigarette Manufacturers pay based on their market share. o States must monitor to ensure correct amounts are paid based on current market share. Non-participating manufacturers (NPM) place money into an escrow account based on state sales of their brands. o Revenue reports numbers of cigarettes sold by brand to Attorney General s office who collects the payments. PACT Act & LB 590 2

3 MSA States are required to accurately collect and report information regarding cigarette sales (referred to by industry as diligent enforcement ). In late 2010, the participating manufacturers (PM) filed a law suit contesting Nebraska s (and 34 other states ) diligent enforcement of the agreement. Arbitration consisted of a panel of retired federal judges that hear PMs and states arguments regarding diligent enforcement of the 2003 NPM adjustment. Results varied among the states. Nebraska has put into place additional reporting requirements to avoid future litigation, including more detailed reporting from all filers. PACT Act & LB 590 3

4 PACT Act (Prevent All Cigarette Trafficking) The federal PACT Act (July 2010) enforces the MSA decision and tracks all interstate sales of all cigarettes. o Stop cigarette trafficking through the U.S. postal service. o Stop Internet sales of cigarettes that could be sales to minors. o Require manufacturers and unlicensed distributors to report all sales by brand family to the state where delivery occurs. PACT Act & LB 590 4

5 Legislative Bill 590 Nebraska responded to the PACT Act and the MSA with legislation. LB 590, passed by the 2011 Nebraska Legislature, requires that manufacturers, distributors, and wholesalers report significantly more information than previously required. All cigarette tax reporting must be done electronically beginning with the January 2013 tax period. Tobacco reporting and stamp purchase orders will remain on paper forms as LB 590 did not mandate electronic reporting. All sellers importing unstamped cigarettes into Nebraska must register with Nebraska, whether or not they purchase cigarette tax stamps. PACT Act & LB 590 5

6 Cigarette Tax Filing & Processing Prior to LB 590 Nebraska wholesalers and licensed nonresident wholesalers filed monthly paper returns (Forms 55 and 55A). This was simply a list of subtotals without details. o Unable to identify specific brands to tie back to manufacturers. Manufacturers, and others who are not licensed wholesalers, filed reports to meet the PACT Act requirements through a variety of methods (paper, CD, ). o No consistency, and the variety of filing methods made gathering the necessary information cumbersome and time-consuming. The paper-filed Forms 55 and 55A were manually data entered, error corrected, and processed. PACT Act & LB 590 6

7 Types of Filers The new application, Form 20CT, allows the Department to code the taxpayer account to determine the information required to be reported each month. 1. Resident Cigarette Wholesale Dealer Stamping facility located in Nebraska, can legally possess unstamped cigarettes in Nebraska. 2. Resident Cigarette Wholesale Dealer Directory License Maintains all the privileges of Type 1, plus is allowed to possess cigarette brands not legal for sale in Nebraska. 3. Nonresident Cigarette Wholesale Dealer Stamping facility located outside of Nebraska. 4. Cigarette Manufacturer Imports unstamped cigarettes into Nebraska to resident wholesalers. 5. Distributor Imports unstamped cigarettes into Nebraska to resident wholesalers. PACT Act & LB 590 7

8 Form 20CT PACT Act & LB 590 8

9 Form 20CT (continued) PACT Act & LB 590 9

10 Reporting Requirements Type 1 and 2 Filers (Resident Wholesalers) Must report all cigarette transactions, stamp purchases, and all cigarette and stamp inventory amounts. Type 3 Filers (Nonresidents) Must report all Nebraska sales of stamped cigarettes to retailers and wholesalers, sales of unstamped cigarettes to wholesalers, stamp purchases, and inventory of existing cigarettes stamped as tax paid Nebraska. Type 4 and 5 Filers (PACT Act Filers) Must report their untaxed sales into Nebraska. All untaxed sales must be to licensed wholesalers. PACT Act & LB

11 Assistance From Others We worked with FTA/TIGERS on formatting the XML schema. Nebraska tried to follow FTA/TIGERS suggestions by creating a format following established best practices. Schema changes will be required as the uniformity committee moves forward to allow other states needs to be met. We hope our basic structure will not need to change significantly as our filers have been successfully using this structure for almost 2 years. FTA/TIGERS also helped us realize that communicating with filers early was essential. PACT Act & LB

12 Assisting Filers With Compliance A few taxpayers contacted us stating they would not be able to generate the XML on their own. Our IT staff developed an excel spreadsheet that converts to XML. Nebraska is currently allowing this spreadsheet to be used for taxpayers to create the XML file. Our hope is that as software becomes available, we will no longer be required to offer and maintain this spreadsheet. PACT Act & LB

13 Schema Structure Our cigarette schemas are structured similar to the corporate or individual income tax program schemas. We have two basic schemas for our filers: Type 1, 2, and 3 filers, wholesalers, must use the schema that requires Nebraska Form 55 to be completed so tax is calculated. Type 4 and 5 filers, manufacturers and distributors, must use the schema requiring Schedule 1, to report untaxed sales imported to Nebraska. This is the PACT Act filing. 13

14 PACT Act & LB

15 PACT Act & LB

16 Schedule I Transaction Reports Each Schedule I represents a cigarette invoice (transaction), and is identified by 1 of 6 types of transaction: 1. Untaxed purchases 4. Tax paid sales 2. Tax paid purchases 5. Untaxed credits 3. Untaxed sales 6. Tax paid credits Each Schedule I is divided into 3 distinct parts: 1. Invoice Header Contains information shown at the top of the invoice (seller, purchaser, address information, invoice number, and invoice date). 2. Invoice Detail Represents each line item from the invoice (tax jurisdiction, UPC code, manufacturer, brand, price, number of sticks). 3. Deliverer Details third-party delivery information, when applicable. May be shared with other states. PACT Act & LB

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18 Schedule I PACT Act & LB

19 Schedule I PACT Act & LB

20 Schedule II Nebraska Cigarette Tax Stamp Report The Nebraska Schedule II is used by resident and nonresident wholesalers (Filer Types 1, 2, & 3) to report Nebraska cigarette tax stamp activity. 1. The gross value of stamps for packs of 20 and 25 in beginning inventory. 2. All stamp purchases made during the month. 3. The gross value of stamps in ending inventory. Reported stamp purchases may be matched against Department records of purchases. The value of the stamp inventory and purchases will be used to determine if the taxpayer owned sufficient tax indicia to cover taxpaid sales reported. Cigarette stamp purchase orders are currently processed as paper. Taxpayers may pay for cigarette tax stamps electronically. PACT Act & LB

21 Schedule II

22 Schedule II

23 Schedule II

24 Schedule III Inventory The Nebraska Schedule III is used by resident and nonresident wholesalers (Filer Types 1, 2, & 3) to report their cigarette inventory. The Schedule III is divided into 3 sections: 1. Beginning inventory; 2. All adjustments to inventory made during the month, not reported on Schedule I; and 3. Ending inventory. The resident wholesaler s ending inventory includes all stamped and unstamped cigarettes in the wholesaler s possession, including stamped cigarettes for other tax jurisdictions and stale or otherwise un-saleable product. Nonresident wholesalers should only report Nebraska stamped inventory. PACT Act & LB

25 Schedule III

26 Schedule III

27 Form 55 Form 55 has 8 grand totals that are used to calculate tax. These represent combined totals from the 3 schedules. Form 55 will only be completed by resident and nonresident licensed wholesalers. The 8 grand total lines are processed in the tax processing system. All other data from the schedules that equal the subtotals will be stored in a database maintained by the Information Technology (IT) staff. PACT Act & LB

28 Form 55

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31 PACT Act filers should not complete Form 55 because they should only report untaxed sales into Nebraska. The information reported on Schedule I by PACT Act filers will be stored in the database (CIGTRAC) maintained by the IT staff. These numbers are used to generate error listings, matching listings, reports to the Attorney General s Office, and flagging potential audits. Form 55 The CIGTRAC has an inquiry feature, an error correction feature, and allows for on demand queries and reports by Department staff. PACT Act & LB

32 The Upload Process When the application, Form 20CT, is processed, all 5 types of filers will receive a state ID and PIN to login to the NebFile for Business program. Filers will then upload a previously-completed XML file stored on their computer, flash drive, CD, etc. The upload process is very quick, usually takes less than 1 minute. During the upload process, the file is validated against the schema and public business rules are applied. If the file does not contain good useable data, it is rejected. PACT Act & LB

33 The Upload Process If the file is rejected, a screen will be displayed showing all schema errors and up to 50 business rule errors. Once the file validates to the schema and meets all business rules, the taxpayer will be issued a confirmation number. Internal business rules are applied to generate error listings and various matching listings. Error-free and error-corrected files are stored in the Department s (CIGTRAC) program which includes multiple functions. PACT Act & LB

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41 Error Correction, Inquiry, and Matching Error Correction Information reported on schedules is used to generate electronic error listings that are worked by 4 full-time Audit staff members. Examples of errors include: o The beginning inventory for a month does not match ending inventory for the previous month. o UPCs, brands, vendors, federal IDs don t match the values on file with the Department. Research/contact may be necessary. o All sales identified as sales to the federal government. The error correction process includes: o Audit staff make minor corrections to the filed data. o Taxpayers being required to file amended returns. o Lookup tables for UPCs, brands, vendors, etc. being updated by Audit staff after research. o Contact with taxpayers by phone, , and letter. PACT Act & LB

42 Inquiry

43 Inquiry

44 Inquiry

45 Inquiry

46 Inquiry

47 Inquiry 47

48 Matching Matching The matching process identifies areas where reporting between filers is inconsistent. Some examples of matching errors that are reviewed by the Audit staff include: o Untaxed sales reported by manufacturers, distributors, and wholesalers are compared to untaxed purchases reported by licensed resident wholesalers. o Tax-paid purchases are compared to tax-paid sales from wholesaler to wholesaler. o We compare specific brand information reported as sales by the manufacturers/distributors to purchases by the wholesalers to be sure the report to the AG s office is correct and complete. We can ensure everything shipped into Nebraska is reported properly. PACT Act & LB

49 Database Reports The Department uses the electronic reporting and database to provide numerous reports to internal staff and to other parties. The monthly report to the Attorney General s Office is automated and includes the total of data reported by the filers. The Department uses a database query program to provide Audit staff with additional matching and error listings to identify inconsistencies in reported amounts. The Department is interested in sharing this information with other states to assist them in compliance and enforcement efforts. PACT Act & LB

50 Impact on Audit and the Cigarette Auditing Program Three NEW revenue agent positions were added to the Department s Audit staff prior to implementation of the electronic program. Their job duties include: o Contacting all taxpayers to make sure they are ready to begin e-filing. o Working with taxpayers to upload the xml file. o Working with taxpayers to correct the data they reported. o Review error listings and matching listings. o Contact taxpayers regarding balances due and non-filers. Changes to the cigarette audit program: o Desk audits can be performed for smaller time periods. o Audit prospects are identified by errors found in the monthly returns or matching listings. o Details reported can be extracted from the database to eliminate data entry of invoices during the Audit process. o Inventory observations have become more critical. PACT Act & LB

51 Current Issues and Status The Department s program is already considered a success! 100% of filers are filing electronically. For some larger companies, it has been a challenge to establish procedures to provide an accurate account of monthly tax activity. We are confident that our reporting requirements are correct and necessary to comply with existing MSA, PACT Act, and Nebraska law. We continue to work with filers to ensure correct and complete reporting. PACT Act & LB

52 LB 590 and Federal PACT Act Implementation Dawn Holtmeier Thank you!