BILL ANALYSIS
AB 1956
Page 1
Date of Hearing: April 14, 2008
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 1956 (Calderon) - As Amended: March 24, 2008
Majority vote. Fiscal committee.
SUBJECT : State Board of Equalization: sales and use taxes:
digital property report
SUMMARY : Requires the Board of Equalization (BOE) to submit a
report to the Legislature on transactions involving digital
property within California. Specifically, this bill :
1)Contains legislative findings noting that:
a) The Sales and Use Tax (SUT) Law, which BOE administers,
imposes a tax on the gross receipts from the sale in this
state of, or the storage, use, or other consumption in this
state of, tangible personal property (TPP).
b) BOE is authorized to prescribe, adopt, and enforce rules
and regulations relating to the administration and
enforcement of the SUT Law.
c) Under BOE's current regulations, policies, and
practices, the electronic transmission of information that
does not involve the transfer of TPP is not taxable under
the SUT Law.
d) The increased use and sophistication of the Internet and
electronic equipment like personal computers, cellular
telephones, and devices that store, organize, and play
audio and visual files has, in turn, increased the amount
of transactions in this state involving the electronic
transmission of information and "digital property" that is
received by a consumer through remote telecommunications
from a seller.
e) "Digital property" includes, but is not limited to,
products like music, movies, and books, which, if delivered
in a tangible storage media, would be subject to taxation
under the SUT Law.
AB 1956
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f) It is imperative that California's tax laws reflect
these developments in the types of transactions between
consumers and sellers.
2)Provides that, within 60 days of this bill's effective date,
BOE shall submit to the Legislature a report on transactions
involving digital property within California that includes the
following:
a) A draft of a proposed regulation that would provide that
sales of digital property are subject to taxation under the
SUT Law;
b) The revenue impact of the proposed regulation; and,
c) Changes required to administer the proposed regulation.
3)Exempts the adoption, amendment, or repeal of a regulation
authorized by this bill from the rulemaking provisions of the
Administrative Procedure Act.
EXISTING LAW :
1)Taxes the sale or use of TPP in California, absent a specific
exemption.
2)Defines TPP as personal property that may be seen, weighed,
measured, felt, or touched, or which is in any other manner
perceptible to the senses.
3)Authorizes BOE to prescribe, adopt, and enforce rules and
regulations to administer the SUT Law.
4)Requires, as a general rule, that all regulations issued by
state agencies be adopted pursuant to the Administrative
Procedure Act, unless specifically exempted by statute.
FISCAL EFFECT : Enactment of this bill would have no direct
effect on the state's revenues. However, BOE estimates that, if
it were to adopt a regulation subjecting digital property
transfers to the SUT Law, state and local revenues could
increase by approximately $114 million annually. The basis for
this estimate includes charges for digitally transmitted goods
like newspapers, periodicals, books, music, video games, movies
AB 1956
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and software, which would no longer be excluded from application
of the SUT Law.
Proposition 98 Fiscal Effect : None
COMMENTS :
1)The author notes, "AB 1956 directs BOE to examine digital
property sales in California and to report back to the
Legislature. The [SUT] Law was developed in the industrial
age and its application should be modernized to conform with
the realities of the 21st Century economy. In today's
technological age, it makes no sense to tax CDs and DVDs and
exempt the same products sold in digital form. It places
brick and mortar businesses, like independent music stores, at
a competitive disadvantage." The author goes on to note,
"Every year, consumers are driving up the popularity of
digital downloads, while sales of CDs go down. Digital music
sales tripled from 2004 to 2005. Last year alone, 29 million
people bought music online -- an increase of 5 million people
from 2006. Nationwide, digital music downloads total $2.6
billion. If sales tax were imposed on these music downloads
alone, California would collect an additional $20 million in
revenue annually."
2)Proponents note, "The sales of digital property such as music,
books, and movies has increased dramatically in recent years.
The vast majority of this material is sold to customers over
the Internet. These products are essentially the same as
their tangible personal property counterparts that are sold
and taxed in California-based brick-and-mortar stores."
Supporters also note, "[I]t is important for the State of
California to examine the growth of this potential sales tax
base and the economic impact of a regulation that would make
taxation of this base consistent with tangible personal
property that is currently taxed."
3)Opponents note, "[I]t is irresponsible when California is
facing a $15 billion budget deficit to advocate for new taxes
which, in this case, will increase sales taxes on digital
media businesses. These taxes will be borne out ultimately by
consumers in the form of higher prices. This deficit will not
be solved by taking the easy way out and continuing to place
more regulatory burdens on citizens, but only by taking a hard
look at the cuts we must make to balance the budget and make
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California prosperous again."
4)BOE states that:
a) Its legal staff is generally responsible for drafting
any proposed regulation necessary to clarify the laws that
BOE administers. Once BOE staff prepares a proposed
regulation, it is distributed to various interested parties
for their input. Staff then meets with those parties to
identify and resolve any issues. After a series of
meetings, BOE staff prepares discussion papers that
highlight any unresolved issues, and submits those papers,
along with the proposed regulation, to BOE's Business Taxes
Committee for review. This committee then makes a
recommendation regarding whether BOE should authorize
publication of the proposed regulation. If BOE votes to
authorize publication, BOE holds public hearings on the
proposed regulatory action, and considers written and oral
testimony provided by interested parties and BOE staff.
b) Any action by BOE to tax retail transfers of digital
media would substantially deviate from existing precedent
and would place a significant burden on BOE to provide a
reasonable basis for the interpretive change.
c) It would incur some administrative costs in drafting the
proposed regulation, notifying interested parties, holding
public hearings, and preparing discussion and issue papers.
These costs would be absorbable.
5)Committee staff note that:
a) Currently, BOE has two regulations interpreting how the
SUT Law applies to digitally transmitted property.
Specifically:
i) Regulation 1502 interprets how the SUT Law applies
to sales of specified data processing services. This
regulation provides that the sale or lease of a
prewritten program is not a taxable transaction if the
program is transferred by remote telecommunications from
the seller's place of business, to or through the
purchaser's computer, and the purchaser does not obtain
possession of any TPP, such as storage media, in the
transaction. Likewise, the sale of a prewritten program
AB 1956
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is not a taxable transaction if the program is installed
by the seller on the customer's computer except when the
seller transfers title to or possession of storage media,
or installation of the program is a part of the sale of
the computer.
ii) Regulation 1540, in turn, discusses the application
of tax to electronically transmitted works of art.
Specifically, this regulation provides that a transfer of
electronic artwork in tangible form is a sale. However,
a transfer of electronic artwork from an advertising
agency or commercial artist to the client or to a third
party on the client's behalf that is not in tangible form
is not a sale of TPP, and the charges for the transfer
are not subject to tax.
b) BOE also has a substantial body of annotations
summarizing the conclusions reached in selected rulings of
BOE's legal staff that state that charges for remote
transfers of electronic data via a telecommunications
network are not taxable because there is no transfer of
TPP.
This interpretation appears to be at odds with that reached
by a number of other states. BOE reports that many states
already tax digital downloads. These states include
Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana,
Kentucky, Louisiana, Maine, New Jersey, New Mexico, South
Dakota, Texas, Utah, Washington, and West Virginia, as well
as the District of Columbia. Moreover, the Streamlined
Sales Tax Project's (SST's) April 15, 2002 Tangible Personal
Property Issue Paper noted that, as of that date, at least
four states (Idaho, Louisiana, Texas, and Washington)
appeared to tax them on the theory that they are TPP.
c) While there appears to be little guidance from
California courts on this issue, the Court of Appeal in
Searles Valley Minerals Operations, Inc. v. State Board of
Equalization (2008), 160 Cal.App.4th 514, recently held
that electricity is TPP for purposes of the SUT Law. In
its decision, the court noted:
Despite the obvious implications of the language of
section 6016, [BOE] contends that its decision in In
the Matter of the Appeal of PacifiCorp [citations
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omitted] and other authorities require the conclusion
that electricity is not [TPP] within its purview.
However, [BOE's] reliance on its cited authorities is
misplaced.
In reaching its conclusion that electricity is TPP, the
court cited the decision in Roth Drug, Inc. v. Johnson
(1936), 13 Cal.App.2d 720, 734, which defined TPP as "that
which is visible and corporeal, having substance and body
as contrasted with incorporeal property rights, such as
franchises, chooses in action, copyrights, the circulation
of a newspaper . . . and the like." Thus, the Searles
Valley court held that, "Based on the unambiguous language
of section 6016 and the evidence presented below, we
conclude that electricity is [TPP] for purposes of the
Sales and Use Tax Law." It would seem to Committee staff
that digital downloads are more akin to electricity than
franchises, chooses in action, or copyrights, which are
clearly intangible in nature.
d) A number of this bill's opponents claim that AB 1956
imposes "a sweeping new tax on 'digital property'" while
"ignoring California's Constitutional requirement that
California voters approve new taxes." Not so. AB 1956
does not impose any new tax. It merely directs BOE to
draft a proposed regulation subjecting digital property to
the state's SUT. While any such regulation would, under
the terms of this bill, be exempt from the provisions of
the Administrative Procedure Act, BOE's lengthy study and
review process would still apply. Moreover, BOE would have
complete discretion whether to adopt any such draft
regulation.
e) Opponents also state that, "By not limiting or precisely
defining the types of digital property subject to tax, the
regulation potentially imposes a new tax on all
electronically delivered products and goods."
Specifically, opponents note, "Legislation is currently
pending in Nebraska (LB 916) to impose tax on specified
digital products using the SST definitions; similar
legislation was recently enacted in Indiana (SB 233).
These two states utilized definitions that were jointly
developed by states and vendors of digital goods. In both
states the legislation imposes tax on specified digital
products - a phrase that is defined to include 'digital
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audio works' (e.g., digital music), 'digital audiovisual
works' (e.g., digital movies), and 'digital books' (e.g.,
digital books). These three discrete categories provide
vendors of digital products with certainty and clarity
regarding their tax collection responsibilities. While
industry members still opposed the Indiana and Nebraska
legislation for policy reasons, the specified digital
products approach taken is preferable to that employed by
AB 1956." This argument overlooks the fact that, even if
BOE were to adopt a regulation subjecting all digital
products to taxation, the Legislature would have full power
to exempt certain digital products prior to or after the
enactment of BOE's regulation.
f) Opponents argue that taxing digital downloads would
"cause a significant decline in the state's tax base due to
decreased business activity and sizable loss of employee
base in the state, resulting in significant costs to the
state's budget rather than generating any new revenues."
They offer no evidence, however, for this assertion.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
California Professional Firefighters
California State Association of Counties
California Tax Reform Association
California Teachers Association
Peace Officers Research Association of California
Opposition
Accounting Options
AeA
AGx Technologies, Inc.
Alight LLC
American Vanpac Couriers, Inc.
B Chem Engineering
B.W. Implement Company
C & H Clubs, Inc.
Cadence Design Systems, Inc.
California Alliance for Consumer Protection
AB 1956
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California Bankers Association
California Broadcasters Assn.
California Business Roundtable
California Cable & Telecommunications Association
California Cascade Industries
California Chamber of Commerce (behalf of itself and 106
business/employer organizations)
California Log Cabin Republicans
California Manufacturers and Technology Association
California Retailers Association
California Taxpayers Association
CAM Contractors, Inc.
Cato Research Ltd.
CEM Group, Inc.
Classic Installs, Inc.
CMA Insurance Services
Coastal Cardiology
Corinthian House Residence, Inc.
Corona Chamber of Commerce
Creativity, Inc
CTIA - The Wireless Association
Data Builders, Inc.
Dependable Cleaning
Ditch Witch Equipment Co., Inc.
DMAF Consulting
DRYKEF, Inc.
Einstein Industries, Inc.
Electronic Data Systems Corp.
Elite Control, Inc.
EMC Planning Group, Inc.
Entertainment Software Association
Esquire Plaza
Evapco, West
Facilitec West
Flo-Kem, Inc.
Fox Entertainment Group, Inc.
Fuller Sound/CSS Music/ D.A.W.N.
Fullerton Chamber of Commerce
G. A. Gertmenian & Sons
Galaxy Desserts
Gale Banks Engineering
Genica Corporation
Greater Bakersfield Chamber of Commerce
Green Way Building Group, Inc.
Growers' Refrigeration and Geneva Refrigerated Truck Service
AB 1956
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Harvey Titanium, Ltd.
Heal Staffing, Inc.
Help Me 2 Learn Company
Hermosa Beach Chamber of Commerce and Visitors Bureau
HR Jungle
Howard Jarvis Taxpayers Association
Humboldt Community Access & Resource Center (HCAR)
Hydra
Innovative Maintenance Solutions, Inc.
Irvine Sensors Corporation
JMR Electronics
KASL Consulting Engineers
Kennemetal
Kirker Glass, Inc.
Knight Transportation
Laminating Company of America
Lawyers Against Lawsuit Abuse
La-Z-Boy West
Live Oak Associates, Inc.
Lodi Grading & Paving, Inc.
LTG Associates, Inc.
Manheim Central California
Medical Benefits Administration, Inc.
Microsoft Corporation
Milpitas Chamber of Commerce
Mission Lodge
Morehouse Foods, Inc.
Motion Pictures Association of America, Inc.
Nagel Landscaping
Napa Chamber of Commerce
New Horizons
NLB Corporation
Ogletree's Inc.
Otto B Clean Equipment & Supply's
Oxnard Chamber of Commerce
Palm Desert Chamber of Commerce
Pandora Data System, Inc.
Pasadena Service Federal Credit Union
Peabody Engineering & Supply Inc.
Pier 39
Plan-It Interactive
Quality Metal Fabrication, LLC
Rare Service Heating & Airconditioning, Inc.
Reasons to Believe
Remote Visions, Inc.
AB 1956
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Risse Mechanical
RPP & Van Kleeck General Contracting, Inc.
SCP Insurance Service, Inc.
Santa Clara Chamber of Commerce
Seawright Custom Precast, Inc
Shachihata Inc. (USA)
Sierra Pine Rocklin
Smart Pumps, Inc.- dba -Smart Products, Inc.
Sony Pictures Entertainment
St. John's Retirement Village
Stephen P. McGee, Law Offices of
Stewart Heating & Air, Inc.
Superior Communications
T-Mobile
Tension Envelope Corp
The Klabin Company
The Maynard Group
The Spice Hunter
Time Warner Cable, Inc.
Tink, Inc.
Troll Systems
Troy Sheet Metal Works
Verizon
VLSI Research Inc.
Ware Malcomb
Way Financial
Western Jet Aviation, Inc.
William-Sonoma, Inc.
Z Gallerie
ZL Technologies, Inc.
35 Individuals
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098