March 18, 2002

ENERGY BILL STILL BEFORE SENATE

The Senate continues to debate proposed energy legislation, with a large number of amendments still to be considered. Last week, debate on fuel efficiency standards for new autos ended with adoption of an amendment which rejected a huge increase in CAFE standards. Instead, per the amendment, future CAFE standards will be set by regulation rather than by law.

Of greater interest to marketers, a group of Senators is getting organized and rallying forces in opposition to the “renewable fuels standard” (RFS) which is currently in the bill. The RFS is the proposal to mandate the use of 5 billion gallons of ethanol per year in the U.S., with a credits and trading program. SIGMA members played a significant role in that effort through calls and faxes to Senate offices over the past two weeks. We think it is likely amendments will be introduced to at least modify the RFS.

Sen. Daschle (D-SD) does not expect to finish work on the energy bill this week, and there is word it may be set aside temporarily to deal with some other issues. Congress leaves town this Friday for a 2-week recess, returning on April 10. The Senate will likely complete action on energy legislation sometime in April.

CALIFORNIA MTBE BAN DELAYED

California Governor Gray Davis (D) announced late last Friday that he is suspending for one year the ban on MTBE in the state. He left open the possibility of further delays in the ban, by one or more years. This means that the California MTBE ban will be effective 1/1/04 at the earliest.

In making his announcement, Davis cited the fear of gasoline price spikes as a major factor. He also noted that the energy bill currently working its way through Congress could ease the situation for California – presumably because it deletes the oxygenate mandate for RFG.

HAZMAT TRANSPORTER FEE

RSPA, an agency within the Dept. of Transportation, is delaying action on a proposed rule to lower the registration fees paid by transporters of hazardous materials (including motor fuels). Current fee levels – $300 for small businesses and $2,000 for others – remain in place for registration year 2002-03, which begins July 1. Under current law, RSPA is restricted from collecting more than needed to fund its Hazmat program. RSPA has been collecting far more than needed, for the past 2 years, and proposed a decrease in fees back on 12/7/00. Since then, RSPA has delayed the decrease several times, hoping Congress will change the law to authorize higher collections. Several trucking groups are threatening to sue to force RSPA to obey the law and reduce fees.

MARKET STRUCTURE REVIEW

Chairman Art DeBlois has announced that a substantial portion of the agenda at the SIGMA Legislative Committee meeting in San Antonio will be devoted to a review of the structural problems marketers are facing – including but not limited to below-cost selling and price inversions – and various solutions that have been put forward to address those problems. To help you prepare for the discussion, SIGMA will distribute a large packet of materials within the next week to 10 days. It is our intent to distribute the package to all who are registered for the SIGMA Spring Convention, plus the “key contact” person at all member companies who do not have anyone registered.

Speaking of the Spring Convention, if you’re not already registered you should do so right away. Here are the Top Ten Reasons you should register today: 10) The deadline for Regular Registration rates is this weekend – register now to SAVE MONEY! 9) You’ve been cooped up at home for too long and are ready to travel again; 8) Drayton McLane will be the luncheon speaker on Friday; 7) The meeting is in beautiful San Antonio during Fiesta Week; 6) The cutoff date for hotel rooms is also this weekend; 5) The Westin LaCantera is rated as the #2 best resort in North America!; 4) There’ll be many fuel suppliers to meet with – even more than usual; 3) You will enjoy the golf tournament and social events; 2) You’ll benefit from the educational sessions; and 1) You want your voice heard on the issues affecting your business! Sign up now!!

TAX COURT RULES ON RENT

On March 8, the U.S. Tax Court held (Hunt & Sons, Inc. v. Commissioner, 2002-65 TCM) that a closely-held operator of several cardlocks that rented the land on which the cardlocks were located from its shareholders paid in excess of the fair market rental value on two of the properties. Accordingly, the company was not entitled to deduct the excess rent. The disallowed amounts were considered additional nondeductible dividends to the shareholders.

This case deals with a common technique used by closely-held petroleum distributor companies. To obtain directly the benefits of future appreciation and to reduce the level of company debt, the shareholders of a company (rather than the company itself) often acquire real property intended for use in the business. The shareholders then lease the real property to the operating company, which deducts the rental payments against its operating income. Thus, the rental payments and future gains on any sales of the real property are taxed only once, at the shareholder level. But if the rent is excessive, the company avoids a corporate level tax on what is otherwise nondeductible dividends to its shareholders.

In this case, the IRS asserted that the rental payments were excessive and disallowed the deductions. While the court agreed, it determined that the company was entitled to greater deductions than those allowed by the IRS. The court reviewed the operations of a cardlock system and concluded that the business entails a high degree of financial risk because of the potential for leaks. Both the IRS and the company presented expert appraisal testimony to establish the fair rental value of the properties. After a careful examination of the appraisal methods and information, the court determined that the fair rental value of the land was 13% of its fair market value, a rate that took into account the risks of allowing the company, as an independent operator, to carry on the cardlock operation with its associated environmental obligations. This rate reflected the court’s assessment that a 3% risk premium was appropriate in the context of a lease to an independent operator rather than a major oil company.

Companies considering similar rental arrangements should review this case when trying to establish the level of rent. Clearly, the court has opened the door to a risk premium analysis for the independent operator. For more information, review the decision at www.ustaxcourt.gov in the historical opinions section.

MONEY ORDER TRENDS

Of the 1 billion money orders sold annually, 94 percent are sold by “non-bank financial institutions” such as convenience and grocery stores. The average U.S. retail site sells 554 money orders per month, worth an average $120 each. That’s over $66,000 per month for each retail site. The average time between money order issue date and redemption date is 10.6 days of “float.” In some markets, this “float” time will reach 18 days. During this float period, the company issuing the money order can invest the funds to earn interest income.

Float income can add up surprisingly fast. In fact, it is one of the two main profit streams in the money order business – the other is abandoned property. If you manage your own money order system, you keep this interest income.

3T’s Total Solution is the leading in-house money order system, and as a SIGMA member, you’re entitled to an important discount. Call toll-free: (877) 343-9900. Or email: sales@3tsolutions.com.

OTHER INDUSTRY NEWS

A state water authority in Texas is proposing a rule to ban new USTs in the area where one aquifer forms. Not only would new underground tanks be banned, but existing USTs would be required to be brought aboveground within a decade, and all aboveground tanks would have to be triple-walled! . . . At a meeting last week of state and federal tank regulators, discussions by state officials continued to suggest that additional rules are needed. However, there was also some recognition of the need for better enforcement of existing rules, a position SIGMA has long taken . . . Hedy Halpert, widely known among our membership as former publisher of Convenience Store News magazine, died last Wednesday. Memorial contributions may be made to the Children’s Miracle Network.

SIGMA TIDBITS

Hotel phone numbers were listed incorrectly in the promotion for the SIGMA Masters Program in June in Baltimore. Call 410-547-1200 or 800-468-3571. We apologize for the error.

SIGMA member companies who are involved in mobile or on-site fueling operations of any kind are urged to sign up for membership in our Mobile Refueling Task Force. You may sign up as a full member, or merely as a “corresponding member” to get their mailings. The Task Force meets at both the spring and fall conventions.