BILL ANALYSIS Ó
AB 279
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Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 279 (Garrick) - As Amended: March 8, 2011
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: wireless communication devices:
bundled transactions
SUMMARY : Provides that, for purposes of the Sales and Use Tax
(SUT) Law, "gross receipts" and "sales price" from the retail
sale of a "wireless communication device" shall be limited to
the amount charged for the sale of the "wireless
telecommunication device" when it is sold in a "bundled
transaction." Specifically, this bill :
1)Defines "bundled transaction" as a retail sale of a wireless
telecommunication device that contractually requires the
retailer's customer to activate or contract with a wireless
telecommunications service provider for utility service for a
period greater than one month as a condition of that sale.
2)Defines "wireless telecommunication device" as a portable
communication device, such as a wireless telephone or pager,
requiring activation by a wireless telecommunications service
provider or seller of utility services in order to send and/or
receive transmissions via a network of wireless transmitters
throughout multiple service areas, or otherwise. The term
includes devices based on analog technology and devices based
on digital technology.
3)Defines "wireless telecommunications service provider" as a
utility regulated by the Public Utilities Commission or
Federal Communication Commission and that offers or provides
wireless communication or paging services.
4)Provides that, notwithstanding existing law, the state shall
not reimburse local agencies for SUT revenues lost under this
bill.
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5)Takes immediate effect as a tax levy, but only becomes
operative on the first day of the first calendar quarter
commencing more than 90 days after the bill's effective date.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's "gross receipts" from
TPP sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The tax is based upon the "sales price" of the TPP.
3)Provides, per State Board of Equalization (BOE) SUT Regulation
1585, that in the case of bundled transactions, tax applies to
the unbundled sales price of the wireless telecommunications
device.
FISCAL EFFECT : The BOE estimates that this bill would reduce
state and local revenues by $181 million annually.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
BOE Regulation 1585 bases the computation of sales tax on
cell phones and other wireless devices on the full retail
value of the device, rather than the discounted or
promotional price, when a customer is required to activate
or Ýcontract] with a wireless service provider as a
condition of buying the device at a reduced price. This is
patently unfair and confusing not only to the customer, but
also for the business selling the product.
2)Proponents state, "The current interpretation of law applied
by the Board of Equalization undermines customer relationships
with their carriers because purchase expectations are dashed
when wireless companies are required to charge the customer
tax on the full price of the mobile device. In other words, a
customer finds themselves paying sales tax on a $300 phone
that they might otherwise receive for free because it is being
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purchased in conjunction with a contract. This type of
taxation system creates consumer confusion and frustration,
and places our representatives in the awkward position of
having to explain state tax law."
3)Opponents state, "Without a tax on the wireless service, the
vendor of the phone can shift all costs to the non-taxable
item, which is the service, allowing the product itself to go
entirely untaxed. It would be the equivalent of requiring a
service contract for a computer, and then putting all costs
into the service contract, avoiding taxation of the product.
The precedent set in this bill is one that allows significant
tax avoidance for cell phones immediately and could be
extended to too many other products."
4)BOE notes the following in its staff analysis of this bill:
Normally, a service that is sold in connection with a
taxable sale of tangible personal property is regarded as
part of the sale, and therefore subject to tax on the
receipts derived from the sale of that service.
However, due to the marketing and retail pricing strategies
that contradicted conventional and customary retail
practices of the wireless telecommunications industry, the
Board in 1999 adopted existing Regulation 1585, Cellular
Telephones, Pagers, and other Wireless Telecommunications
Devices, to specifically address the application of sales
and use tax in connection with these devices and related
charges for services.
Under the regulation, the amount upon which tax is computed
is generally dependent upon whether the device was sold in
a "bundled" or "unbundled" transaction. "Bundled"
transactions are defined in the regulation as those sales
in which the customer is required to activate or contract
for utility service with a wireless telecommunications
service provider for a period greater than one month as a
condition of the sale. Generally, in order for customers
to receive the promotional or discounted sales price of the
devices, they must agree to activate or sign up for utility
service with a provider for more than a one-month period.
Under the regulation, generally, the retailer is required
to compute tax on the sale of the device based on the
"unbundled sales price."
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The "unbundled sales price" is defined in the regulation as
the price at which the retailer has sold specific types of
devices to customers who are not required to activate or
contract for utility service as a condition of the sale.
5)Committee Staff Notes:
a) Nothing is free . Wireless telecommunications devices
are often provided "free" or at a significantly discounted
price, when a customer signs a long-term service contract.
If this bill were enacted, it is not clear to Committee
staff how SUT would apply in cases where the telephone or
pager is provided free of charge as part of a bundled
transaction. Under a technical reading of this bill, it
would appear that no SUT would be due, despite the fact
that, in such cases, the "cost" of the underlying device is
simply incorporated into the service contract. Thus, the
amount of tax collected would depend not on the underlying
value of the good sold, but rather, the method by which the
sale is structured. This, in turn, could lead to the
disparate tax treatment of customers purchasing the very
same product.
b) Unsatisfied customers . Many purchasers are confused
when they are charged SUT on the unbundled price of a phone
or pager. This confusion could be alleviated through
better customer outreach and education, both by retailers
and the state. This might prove significantly less costly
than altering the manner in which taxes are calculated.
c) Related Legislation : This bill is nearly identical to
AB 2320 (La Malfa) of the 2005-06 Legislative Session. AB
2320 was held in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
AT&T
California Senior Advocates League
California Taxpayers Association
Corporate Helicopters
CTIA
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Jenstar Capital
Language Network
Modesto Modular
Pathfinder Partners, LLC
RPC Raider Painting & Coating
Senator George Runner (Ret.), Member, Board of Equalization
SFR Short Sales & Foreclosure Resource
TCE Constructions Inc.
T-Mobile
208 individuals
Opposition
California Nurses Association
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098