BILL ANALYSIS
AB 2914
Page 1
Date of Hearing: May 12, 2008
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 2914 (Calderon) - As Amended: May 8, 2008
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Taxation: Adult Entertainment Venue Impact Fund
SUMMARY : Imposes an adult entertainment tax to ameliorate the
negative secondary effects of the adult entertainment industry
in California. Specifically, this bill :
1)Contains legislative findings noting that:
a) A substantial percentage of adult entertainment and
adult entertainment merchandise is produced in California;
b) The in-state production of adult entertainment and adult
entertainment merchandise has numerous negative secondary
effects on the people of this state. Specifically, the
production:
i) Increases crime at or near production locations;
ii) Adversely impacts the mental health of, and leads to
increased alcohol and substance abuse by, those involved
in the production;
iii) Increases the performers' chances of contracting a
sexually transmitted disease;
iv) Encourages unsafe sex by consumers; and,
v) Often encourages sexually aggressive behavior toward
women.
c) The Internet provides the children of this state with
easy access to sexual content, which may negatively
influence their developing attitudes toward sexuality and
relationships;
d) Adult entertainment venues (AEVs) adversely impact the
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character of local neighborhoods by, among other things,
reducing local property values, curtailing development, and
engendering many types of criminal activities;
e) AEVs endanger the health, safety, and welfare of
citizens in their vicinity;
f) These findings are consistent with, and supported by,
the findings of numerous municipalities. For example, when
the City of Los Angeles conducted a comprehensive study of
AEVs, it concluded that such establishments are associated
with higher rates of prostitution, robbery, assault, and
theft in surrounding communities;
g) These negative secondary effects, in turn, drain public
resources dedicated to public social service programs, and
place a significant strain on the courts of this state;
and,
h) The taxes imposed by this bill are:
i) Not intended as a prohibition of legally protected
forms of expression;
ii) Intended to represent a balancing of competing
interests. Specifically, these taxes are designed to
balance the need to combat the negative secondary effects
of the adult entertainment industry against the legally
protected rights of adult entertainment producers and
consumers;
iii) Not intended to allow or license any business,
establishment, or activity that would otherwise be
unlawful under the laws of this state or of the United
States (U.S.); and,
iv) Not intended to affect, or in any way limit, the
ability of local governments to address the negative
secondary effects of AEVs.
2)Imposes, to the extent permitted by state and federal law, an
additional tax on retailers at the rate of 25% of the gross
receipts from the sale of "qualified tangible personal
property (TPP)" sold at retail through the Internet, or
similar electronic means, in this state.
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3)Imposes, to the extent permitted by state and federal law, an
excise tax on the storage, use, or other consumption in this
state of "qualified TPP" purchased from a retailer for
storage, use, or other consumption in this state at the rate
of 25% of the property's sales price.
4)Defines "qualified TPP" as any item including, but not limited
to, a book, magazine, periodical, film, videotape, digital
image, or digitally or computer-manipulated image, that falls
within the recordkeeping requirements of 18 U.S. Code (U.S.C.)
Section 2257.
5)Imposes an AEV Tax upon all AEVs at the rate of 25% of the
gross receipts received in this state on or after May 1, 2008.
6)Defines an AEV as any of the following:
a) A retail establishment whose gross receipts from the
sale or rental of "adult material" exceed 50% of all gross
receipts of the retail establishment;
b) The premises of any facility located in California that
provides a public or private viewing of "adult material";
or,
c) The public premises of any facility located in
California that offers live sexually-explicit conduct that
is prohibited to audiences under 18 or 21 years of age,
depending on the sale of alcoholic beverages on the
premises.
7)Excludes the following from the definition of an AEV:
a) A retail establishment that is open to the general
public and that segregates "adult material" by restricted
access to persons 18 years of age or older, so long as the
gross receipts from transactions involving "adult material"
do not exceed 5% of the retail establishment's gross
receipts; and,
b) A business whose primary purpose is the provision of
live performances that may include the display of complete
nudity, so long as the live performance is a legitimate
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play, opera, ballet, or concert at a concert house,
playhouse or theater, museum, or educational institution or
facility on whose premises alcoholic beverages may be sold
but which derives less than 20% of its gross receipts from
the sale of alcoholic beverages.
8)Defines "adult material" to include all of the following:
a) Harmful matter, as defined in Penal Code (PC) Section
313;
b) Live "sexually explicit conduct" provided at a business
establishment; and,
c) Any item that includes "sexually explicit conduct" or is
subject to the requirements of 18 U.S.C. Section 2257.
9)Defines "gross receipts" to include receipts, from whatever
source, received by the AEV, excepting any sales taxes
imposed.
10)Defines "sexually explicit conduct" as any of the following
actual, but not simulated, conduct:
a) Sexual intercourse, including genital-genital,
oral-genital, anal-genital, or oral-anal, whether between
persons of the same or opposite sex;
b) Masturbation;
c) Sadistic or masochistic abuse; and,
d) Lascivious exhibition of the genitals or pubic area of
any person.
11)Imposes, on and after May 1, 2008, an Adult Entertainment Tax
on each purchaser of a "pay-per-view" "adult entertainment
movie" in this state at the rate of 25% of the total gross
charges incurred by the purchaser for the pay-per-view adult
entertainment movie.
12)Defines "pay-per-view" as a delivery by a hotel owner or
operator, cable provider, or satellite television provider of
a single program or a specified group of programs, as to which
each such single program is generally uninterrupted by
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commercial advertising messages and for which recipients are
charged a separate fee for each program or specified group of
programs.
13)Defines "adult entertainment movie" as any motion picture
that is subject to the requirements of 18 U.S.C. Section 2257.
14)Provides that the Adult Entertainment Tax shall be collected
from the purchaser by the hotel owner or operator, the cable
provider, or the satellite television provider to the extent
permitted by state or federal law. If the Adult Entertainment
Tax is not collected by one of these entities, the purchaser
shall pay the tax directly to the Board of Equalization (BOE).
15)Imposes, to the extent permitted by state or federal law, an
Adult Entertainment Excise Tax on each "qualified business" at
the rate of 25% of the "qualified gross receipts" of the
qualified business.
16)Defines "qualified business" as a business engaged in those
lines of business described in Codes 334612, 512110, 512120,
512191, and 512199 of the North American Industry
Classification System, and that has more than 50% of its gross
receipts derived from the production, distribution, or sales
of movies or videos that are subject to the recordkeeping
requirements of 18 U.S.C. Section 2257.
17)Defines "qualified gross receipts" as gross receipts received
in this state that are derived from the production,
distribution, or sales of movies or videos that are subject to
the recordkeeping requirements of 18 U.S.C. Section 2257.
18)Requires every qualified business to register with BOE and
give the location of all production, distribution, or sales
houses or offices or other places of business in this state,
and any other information BOE may require.
19)States that it is the Legislature's intent that all revenues,
less refunds and administrative costs, derived from these
taxes be transferred to the State Treasurer to be deposited in
the State Treasury to the credit of the AEV Impact Fund
(Fund).
20)Provides that moneys in the Fund shall, upon legislative
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appropriation, be used to ameliorate the negative secondary
effects of adult entertainment and AEVs. Such uses include:
a) Increased funding to state and local law enforcement to
combat any increased criminal activity in the vicinity of
AEVs including, but not limited to, criminal activity like
the illegal sale of controlled substances, prostitution,
and crimes against women;
b) Funding for programs to address the negative secondary
effects of AEVs on property values;
c) Funding to address related health issues, including the
testing and treatment of sexually transmitted diseases and
mental health treatment;
d) Supplemental funding for existing state and local
substance abuse treatment programs;
e) Supplemental funding for Child Protective Services;
f) Supplemental funding to the courts to aid the effective
administration of justice within this state;
g) Supplemental funding for state and local administration
of elementary and secondary education;
h) Supplemental funding for state and local administration
of public assistance and public social service programs;
and,
i) Supplemental funding for state and local law enforcement
to aid in the effort to combat sexual predators.
21)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Requires producers of books, magazines, periodicals, films,
videotapes, or other items that contain visual depictions of
actual, but not simulated, "sexually explicit conduct" to do
both of the following:
a) Maintain records of each performer portrayed in a visual
depiction of sexually explicit conduct; and,
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b) Affix a statement to the product describing where the
records are located.
2)Defines "sexually explicit conduct" in the same manner as this
bill.
EXISTING STATE LAW :
1)Imposes sales or use tax on the sale or use of TPP in this
state, absent a specific exemption. Currently, the Sales and
Use Tax (SUT) Law contains no special provisions governing the
sale or use of sexually explicit TPP. The SUT Law applies to
such items as it does to items of TPP generally. The base
state and local sales tax rate is 7.25%.
2)Defines "harmful matter", under PC Section 313, as "matter,
taken as a whole, which to the average person, applying
contemporary statewide standards, appeals to the prurient
interest, and is matter which, taken as a whole, depicts or
describes in a patently offensive way sexual conduct and
which, taken as a whole, lacks serious literary, artistic,
political, or scientific value for minors."
FISCAL EFFECT : BOE has preliminarily estimated that this bill
will generate up to $665 million annually.
Proposition 98 Fiscal Effect : Unknown.
COMMENTS :
1)The author notes, "AB 2914 would tax adult entertainment and
adult entertainment venues in a manner similar to the way in
which cigarettes and alcohol are already taxed in this state.
Currently, these two products are taxed at higher rates, and
the additional revenues are used to address the negative
effects of their use. This measure would tax adult
entertainment in a comparable manner, with the intent to use
the funds to address the various secondary effects associated
with the production and consumption of adult entertainment.
The secondary effects of production are especially noteworthy
as California is the capital of the adult entertainment
industry in the United States. This measure creates an Adult
Entertainment Venue Impact Fund to support various programs to
address some of these secondary effects. Among other things,
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fund proceeds would be used for law enforcement, testing and
treatment of sexually transmitted diseases, treatment for drug
and alcohol abuse, health care and mental health treatment."
Finally, the author notes, "AB 2914 does not make a judgment
on the adult entertainment industry. It merely asks the
industry to help mitigate some of its ancillary effects in the
state that is its production capital, not unlike the state
already does with alcohol and cigarettes."
2)Proponents state, "Like the state's tobacco taxes, this
proposal recognizes that some activities have harmful impacts
that reach beyond those directly involved in the activity. AB
2914 will ensure that the extra costs incurred by local
governments dealing with the health, criminal, and substance
abuse problems related to adult entertainment venues will be
borne not by the general public, but by the producers and
consumers of adult entertainment. As California confronts
another multi-billion budget deficit, the state must find new
ways, like those outlined in AB 2914, of generating revenue in
order to protect the valuable state programs on which working
families rely."
3)Opponents state, "Adult entertainment industry professionals
have proven to be good neighbors. Peer reviewed and
scientifically validated secondary effects studies disprove
the claims within AB 2914. In summary, these studies
(including those in California), consistently show there are
no substantial negative secondary effects caused by adult
businesses. To the contrary, in some instances, positive
secondary effects have resulted from the presence of these
businesses." Opponents also state, "[A] tax upon this
industry could not come at a worst [sic] time. Like the
motion picture industry, the adult entertainment industry has
been repeatedly victimized by the piracy of their products,
resulting in lost revenues and reduced profit margins."
Finally, opponents question the constitutionality of this
measure.
4)Committee staff notes:
a) In recent years, a number of state and local governments
have either considered or enacted taxes on adult
entertainment. These taxes fall under two general
categories. The first is an excise tax on adult
entertainment businesses. For example, a 2006 Kansas
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proposal would have levied a 10% excise tax on businesses
and individuals providing "sexually explicit products and
services". The second type of tax requires adult
entertainment employees to pay an industry specific license
fee. This type of tax was enacted in Georgia, where a
county ordinance requires those working in the adult
entertainment business to pay a special license fee.
b) Most adult entertainment is entitled to some degree of
First Amendment protection. For example, in City of Erie,
et al. v. Pap's A.M. (2000) 529 U.S. 277, 289, the Supreme
Court noted that nude dancing is expressive conduct,
although the Court found that it fell "within the outer
ambit of the First Amendment's protection". It should be
noted, however, that there are two types of pornography
that receive no First Amendment protection - obscenity and
child pornography. Under the Supreme Court's 1973 decision
in Miller v. California (1973) 413 U.S. 15, jurors must
consider several factors in determining whether matter is
obscene. These include whether the:
i) Average person, applying contemporary community
standards, would find that the work, taken together,
applies to prurient interests;
ii) Work depicts or describes, in a patently offensive
way, sexual conduct specifically defined by state law;
and,
iii) Work, taken together, lacks serious literary,
artistic, political or scientific value.
c) Any law targeting the negative secondary effects of
adult entertainment will likely be subject to the
intermediate level of review set forth in United States v.
O'Brien (1968) 391 U.S. 367. In O'Brien , the Supreme Court
applied a four-factor test in evaluating a restriction on
symbolic speech. The first factor of the O'Brien test is
whether the government regulation is within the
constitutional power of the government to enact. The
second factor is whether the regulation furthers an
important or substantial government interest. Under the
third factor, the government interest must be unrelated to
the suppression of free expression. The fourth and final
O'Brien factor is whether the restriction is no greater
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than necessary to the furtherance of the government
interest.
d) In City of Erie , the Court found that a municipal ban on
public nudity satisfied each of these four factors. First,
the Court noted that the city's efforts to protect public
health and safety were clearly within the city's police
powers. Second, the Court noted that, "[t]he asserted
interests of regulating conduct through a public nudity ban
and of combating the harmful secondary effects associated
with nude dancing are undeniably important." ( City of
Erie , supra , at 296.) Moreover, the Court stated that a
city need not conduct new studies or produce new evidence
independent of that already generated by other cities to
demonstrate that the targeted secondary effects pose a
threat. Third, the Court found that Erie's regulation was
content-neutral. Finally, the Court noted that the
ordinance regulated conduct, and any incidental impact on
the expressive element of nude dancing was de minimis.
e) Using similar reasoning, in 2004, the Georgia Supreme
Court unanimously upheld the constitutionality of a county
ordinance requiring any person - including dancers,
waitresses, bartenders, dishwashers and janitors - working
at an adult entertainment establishment serving alcohol to
obtain a special permit from the local tax commissioner.
The initial permit costs $350 and must be renewed each year
for $50. The state Supreme Court held that the ordinance
was content-neutral and "aimed at combating undesirable
secondary effects associated with adult entertainment
establishments." I.D.K., Inc. v. Ferdinand (2004) 277 Ga.
548, 552.
f) The negative secondary effects of the adult
entertainment industry are well-established. When the City
of Los Angeles conducted a comprehensive study of AEVs, it
concluded that such establishments are associated with
higher rates of prostitution, robbery, assault, and theft
in surrounding communities. In 2003, the Los Angeles
Police Department (LAPD) issued its own report noting that
police are often dispatched to AEVs for criminal
violations. LAPD noted that these violations often include
prostitution and violence. Specifically, LAPD noted, "The
reports document violent confrontations including stabbings
and fights with weapons other than knives, such as baseball
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bats. The fights appear to stem from the customers'
attempts to grab the entertainers, exposing themselves or
otherwise engaging in disruptive behavior." The LAPD
report also noted narcotics violations at AEVs.
g) This bill is designed to address these and other
negative secondary effects. As noted above, moneys from
the Fund established by this bill will be used to mitigate
the negative secondary effects of adult entertainment in
California. Such uses include, without limitation,
increased funding:
i) To state and local law enforcement to combat any
increased criminal activity in the vicinity of AEVs;
ii) For programs to address the negative secondary
effects of AEVs on property values;
iii) To address related health issues, including the
testing and treatment of sexually transmitted diseases
and mental health treatment; and,
iv) For existing state and local substance abuse
treatment programs.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
California Labor Federation
California Tax Reform Association
California Teachers Association
County Alcohol and Drug Program Administrators Association of
California
Los Angeles County Sheriff's Department
Pink Cross Foundation
Service Employees International Union
Opposition
Matt Gray on behalf of the following entities: Association of
Club Executives of California;
Food & Beverage Association of San Diego; Free Speech Coalition;
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Taxpayers for Improving Public Safety; and Victims Foundation
One individual
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098