BILL ANALYSIS Ó SENATE COMMITTEE ON PUBLIC SAFETY Senator Loni Hancock, Chair A 2011-2012 Regular Session B 3 9 1 AB 391 (Pan) As Amended April 18, 2012 Hearing date: May 8, 2012 Business and Professions Code (URGENCY) JM:mc SECONDHAND DEALERS AND PAWN SHOPS: FEES TO SUPPORT SYSTEM OF ELECTRONIC REPORTING OF TRANSACTIONS HISTORY Source: Attorney General Prior Legislation: SB 1520 (Schiff) - Ch. 994, Stats. 2000 SB 1893 (Burton) - failed in Assembly Business and Professions, 2004 SCR 63 (Yee) - Reso. Ch. 16., Stats. 2010 Support: National Federation of Independent Business; California Farm Bureau Federation; Broadway Jewelry and Pawn, San Diego; California Pawnbrokers Association; California Peace Officers Association; California State Sheriffs' Association; Capital City Loan and Jewelry; Bell Gardens Police Department; Fresno Police Department; Los Angeles County Sheriff; Novato Police Department; Santa Ana Police Department; Santa Barbara Police Department; Peace Officers Research Association of California; Royal Loan; San Diego County Chiefs' and Sheriff's Association; San Diego Jewelry and Loan; (More) AB 391 (Pan) PageB Trader Stan's Pawn Shop; Westminster Jewelry and Loan Opposition:Antiques by the Bay, Inc.; California Coin and Bullion Merchants Association (unless amended); AdvoCal (unless amended); California Alliance of Resale Merchants and Collectors (unless amended) Assembly Floor Vote: No longer relevant KEY ISSUE SHOULD THE CURRENTLY UNFUNDED SYSTEM FOR ELECTRONIC REPORTING OF TRANSACTIONS IN PAWNED AND SECONDHAND GOODS BE IMPLEMENTED THROUGH FUNDING OF THE SYSTEM BY FEES PAID BY PAWNBROKERS AND SECONDHAND PROPERTY DEALERS? PURPOSE The purpose of this bill is to implement the currently unfunded system for electronic reporting of transactions in pawned and secondhand goods through fees from secondhand property dealers and pawnbrokers. Secondhand Dealers and Pawn Generally Existing law includes a statement of legislative intent to curtail the dissemination of stolen property, to facilitate the recovery of stolen property and to detect possible sales tax evasion by means of a uniform, statewide, state-administered program of regulation of persons whose principal business is dealing in tangible personal property, as specified. (Bus. & Prof. Code § 21625; Fin. Code § 21051.) Existing law includes legislative intent that reports of transactions in pawned and secondhand property should be correlated with law enforcement reports so as to trace and recover stolen property. (Bus. & Prof. Code § 21625.) (More) AB 391 (Pan) PageC Existing law , for purposes of the system for curtailing dissemination of stolen property, defines a "secondhand dealer" as any person or entity whose business includes buying, selling, trading, taking in pawn, accepting for sale on consignment or auctioning any "tangible personal property." (Bus. & Prof. Code § 21625.) Existing law defines "tangible personal property" thus: All secondhand personal property that has a serial number or personalized markings; All tangible property, new or used, taken by a pawnbroker as security for a loan; All tangible personal property commonly sold by secondhand dealers that constitutes a significant class of stolen property. (Bus. & Prof. Code § 21627, subds. (a)-(b).) Existing law provides that tangible personal property does not include new goods purchased by a secondhand dealer from a bona fide manufacturer or distributor. (Bus. & Prof. Code § 21627, subd. (c).) Existing law provides that tangible personal property does not include coins, monetized bullion or commercial grade ingots of precious metals. (Bus. & Prof. Code § 21627, subd. (d).) Existing law defines a pawnbroker<1> as a "person engaged in the business of receiving goods in pledge for security for a loan." (Fin. Code § 21000.) Existing law defines a "coin dealer" as a person or entity "whose principal business is the buying, selling, and trading of coins, monetized bullion, or commercial grade ingots of gold, or --------------------------- <1> For purposes of this analysis, the terms pawnbroker and secondhand dealer are used interchangeably. Secondhand dealers also handle property for consignment sale and resale. (More) AB 391 (Pan) PageD silver, or other precious metals." (Bus. & Prof. Code § 21626, subd. (b).) A coin dealer is not a secondhand dealer, except as concerns transactions in tangible personal property. (Bus. & Prof. Code § 21626, subd. (a).) Existing law includes a statement of legislative intent to require the uniform statewide reporting of transactions in and acquisitions of secondhand and pawned property by pawnbrokers and secondhand dealers. (Bus. & Prof. Code § 21625; Fin. Code § 21051.) Existing law provides that pawnbrokers and coin dealers shall report daily on forms approved or provided by the Department of Justice (DOJ), all personal property purchased, taken in trade, taken in pawn, etc., to local law enforcement. The report shall include the following information: The name and current address and identification of the intended seller or pledgor of the property; A complete and reasonably accurate description of serialized or nonserialized property; A certification by the intended seller or pledgor that he or she is the owner of the property, or has the authority of the owner to sell or pledge the property and that any information provide is true and complete, and a legible fingerprint taken from the intended seller or pledgor. (Bus. & Prof. Code § 21628.) Existing law provides the following concerning the identification that must be offered by a pledgor of property in pawn or seller of property: The identification provided by the pledgor shall include a photograph, a description or both, and a signature. The identification shall be verified by the person taking the property. (More) AB 391 (Pan) PageE The following forms of identification are acceptable: o U.S. passport; o Driver's license issued by any state or Canada; o identification card issued by any state; o identification card issued by the United States; o Matricula Consular, in addition to another form; or o A passport from any other county, or a Matricula Consular, in addition to another form of identification bearing an address. Existing law generally provides that violations of the licensing and reporting requirements for transactions in pawned or (secondhand) tangible personal property are misdemeanors. (Bus. & Prof. Code § 21645; Fin. Code § 21209.) Existing Law on the Electronic Reporting of Transactions by Secondhand Dealers and Pawnbrokers in Tangible Personal Property Existing law requires secondhand dealers, as defined, to make reports to local law enforcement by electronic means about transactions in tangible personal property, as follows: DOJ and local law enforcement agencies, in consultation with representatives from the secondhand dealer and coin dealer businesses, to develop a standard format to be used statewide to transmit a report electronically of all pawned and secondhand property, as follows: Twelve months after the format and the categories have been developed, each secondhand dealer and coin dealer will be required to electronically report using this format the information required by this bill under these reporting categories. Until that time, each secondhand dealer and coin dealer (More) AB 391 (Pan) PageF will be allowed to either continue to report this information using existing forms and procedures or may begin electronically reporting this information under the reporting categories and using the format described in this bill as soon as each has been developed. (Pen. Code § 21628, subd. (j).) Existing law requires a coin dealer who engages in less than ten specified transactions each week involving tangible personal property to report the transaction on a paper form developed by DOJ. The form shall be transmitted each day by facsimile transmission or by mail to the chief of police or sheriff. A transaction shall consist of not more than one item. When a coin dealer engages in at least 10 transactions per week, the coin dealers shall report electronically, as with any pawnbroker or secondhand dealer. (Bus. & Prof. Code § 21628, subd. (j)(B)(3).) Implementation of the System of Electronic Reporting of Transactions by Secondhand Dealers and Pawnbrokers in Tangible Personal Property - Payment of a Fee by Licensees This bill provides that on the date that DOJ implements the statewide electronic reporting system for pawned or secondhand tangible personal property, each secondhand dealer, pawnbroker or coin dealer shall electronically report applicable transactions, as specified. This bill provides that the duty of a coin dealer to electronically report transactions in tangible personal property shall apply when the coin dealer makes at least 10 transactions per week, and the coin dealer shall otherwise provide reports on paper forms. This bill provides that for 30 days after implementation of the electronic system, dealers shall continue to report on paper forms. (More) AB 391 (Pan) PageG This bill provides that DOJ shall charge all secondhand dealers and pawnbrokers a fee for the operation of the electronic reporting system. This bill provides that the secondhand dealer licensing authority - the sheriff, police chief or police commission as applicable - shall collect the electronic system reporting fee and transmit the fee to DOJ. This bill provides that the secondhand dealer licensing authority may charge a fee, not to exceed actual costs, to process the renewal application. This bill provides that pawnbrokers shall comply with property transaction reporting requirements imposed on secondhand dealers. This bill provides the following as to the calculation of the electronic reporting system fee: The fee shall be paid at the time the original license is granted and when the license is renewed every two years. The fee shall be no more than $300 in any event. The fee shall be no more than necessary to reflect the costs of the following: o Processing of the initial application. o Processing renewal applications. o Implementing, operating and maintain the statewide reporting system. This bill provides that within 120 days of the effective date of this bill, all license holders, as specified, shall pay a fee not to exceed $288 to DOJ. This bill establishes the Secondhand Dealer and Pawnbroker Fund and continuously appropriates money in the fund to DOJ for the implementation, operation, and maintenance of the pawned and (More) AB 391 (Pan) PageH secondhand property electronic reporting system. This bill provides that any applicant for a secondhand dealer or pawnbroker shall submit fingerprints and related information required by DOJ for the purpose of determining, pursuant to Penal Code section 11105, subdivision (l) the applicant's criminal record, including convictions and arrests. Arrest records under this provision do not include charges resulting in exoneration, or successful diversion, or deferred entry of judgment proceedings. This bill directs DOJ to provide subsequent arrest information of the applicant to appropriate local government licensing entities. This bill provides that DOJ shall charge a fee sufficient to cover the costs of the criminal record check process. RECEIVERSHIP/OVERCROWDING CRISIS AGGRAVATION ("ROCA") In response to the unresolved prison capacity crisis, since early 2007 it has been the policy of the chair of the Senate Committee on Public Safety and the Senate President pro Tem to hold legislative proposals which could further aggravate prison overcrowding through new or expanded felony prosecutions. Under the resulting policy known as "ROCA" (which stands for "Receivership/Overcrowding Crisis Aggravation"), the Committee has held measures which create a new felony, expand the scope or penalty of an existing felony, or otherwise increase the application of a felony in a manner which could exacerbate the prison overcrowding crisis by expanding the availability or length of prison terms (such as extending the statute of limitations for felonies or constricting statutory parole standards). In addition, proposed expansions to the classification of felonies enacted last year by AB 109 (the 2011 Public Safety Realignment) which may be punishable in jail and not prison (Penal Code section 1170(h)) would be subject to ROCA because an offender's criminal record could make the offender ineligible for jail and therefore subject to state prison. (More) AB 391 (Pan) PageI Under these principles, ROCA has been applied as a content-neutral, provisional measure necessary to ensure that the Legislature does not erode progress towards reducing prison overcrowding by passing legislation which could increase the prison population. ROCA will continue until prison overcrowding is resolved. For the last several years, severe overcrowding in California's prisons has been the focus of evolving and expensive litigation. On June 30, 2005, in a class action lawsuit filed four years earlier, the United States District Court for the Northern District of California established a Receivership to take control of the delivery of medical services to all California state prisoners confined by the California Department of Corrections and Rehabilitation ("CDCR"). In December of 2006, plaintiffs in two federal lawsuits against CDCR sought a court-ordered limit on the prison population pursuant to the federal Prison Litigation Reform Act. On January 12, 2010, a three-judge federal panel issued an order requiring California to reduce its inmate population to 137.5 percent of design capacity -- a reduction at that time of roughly 40,000 inmates -- within two years. The court stayed implementation of its ruling pending the state's appeal to the U.S. Supreme Court. On May 23, 2011, the United States Supreme Court upheld the decision of the three-judge panel in its entirety, giving California two years from the date of its ruling to reduce its prison population to 137.5 percent of design capacity, subject to the right of the state to seek modifications in appropriate circumstances. Design capacity is the number of inmates a prison can house based on one inmate per cell, single-level bunks in dormitories, and no beds in places not designed for housing. Current design capacity in CDCR's 33 institutions is 79,650. On January 6, 2012, CDCR announced that California had cut prison overcrowding by more than 11,000 inmates over the last six months, a reduction largely accomplished by the passage of Assembly Bill 109. Under the prisoner-reduction order, the inmate population in California's 33 prisons must be no more (More) AB 391 (Pan) PageJ than the following: 167 percent of design capacity by December 27, 2011 (133,016 inmates); 155 percent by June 27, 2012; 147 percent by December 27, 2012; and 137.5 percent by June 27, 2013. This bill does not aggravate the prison overcrowding crisis described above under ROCA. COMMENTS 1. Need for This Bill Updating the state's antiquated reporting process for pawnshops and secondhand dealers is long overdue and will provide tools for law enforcement agencies to use to curtail the sale of stolen goods and will expedite the rapid recovery of stolen property. The Department of Justice will create an on-line database in which secondhand dealers and pawn brokers will enter the information required on form, in lieu of submitting the JUS-123 - that information will be available for all law enforcement agencies in a searchable format. This system would be fully funded by increasing the application and renewal fees currently being paid by pawn brokers and secondhand dealers from $12 to $300. The new system will also streamline the existing burdensome reporting process for entities covered under existing law. This may provide for some level of economic stimulus in the affected industries as each covered store stands to save thousands of dollars. 2. Secondhand Property Dealers are Broadly Defined in Existing Law - Separate Regulatory Scheme for Flea Markets and Swap Meets (More) AB 391 (Pan) PageK General Definition of Secondhand Property Dealers Business and Professions Code Section 21626 defines a "secondhand dealer" as any person or entity "whose business includes buying, selling, trading, taking in pawn, accepting for sale on consignment, accepting for auctioning, or auctioning secondhand tangible personal property." (Italics added.) A person or entity is a secondhand dealer regardless of whether or not secondhand property transactions form the major part of the person's or entity's business. For example, it would appear that a music store that regularly accepts a few instruments on consignment is a secondhand dealer. However, Business and Professions Code Section 21625 states that the intent of the reporting system for tangible personal property is to regulate "persons whose principal business" is dealing in tangible personal property so as to curtail theft and prevent and detect sales tax evasion. Limited Appellate Decisions on Secondhand Dealer Status There are surprisingly very few appellate decisions discussing who is a secondhand property dealer. A litigant in one appellate case has provided the Committee, the author and the sponsor with a decision from the Court of Appeal of California, Second Appellate District, in Los Angeles interpreting and applying the Los Angeles City ordinance regulating secondhand dealers. In that case, the appellate court held that a person who buys and collects, but does not sell, used books and "ephemera" is not a secondhand dealer within the meaning of the local ordinance. (Hopp v. City of Los Angeles (2010) 183 Cal.App.4th 713,717-722.) The Los Angeles ordinance at issue in Hopp is similar to state law in defining persons who buy property as secondhand dealers. As such, the decision in Hopp could well to apply to a similar challenge of state law. Separate Regulatory Scheme for Vendors at Flea Markets and Swap Meets - Paper Reporting would appear to continue for these Persons (More) AB 391 (Pan) PageL It would also appear that a person who occasionally sells items at a flea market or similar venue fits the statutory definition of a secondhand dealer. However, an article of the Business and Professions Code chapter on secondhand goods includes a regulatory scheme for flea markets and swap meets. (Bus. & Prof. Code §§ 21660-21669.1.) A swap meet is specifically defined as a flea market or open-air market at which two or more persons offer merchandise for sale and either 1) the operator charges a fee to vendors; or 2) the operator charges attendees for parking or admission. Further, regardless of the number of persons involved or whether or not a fee is charged, a swap meet includes events where secondhand property is offered on more than six occasions in a year. Swap meets do not include specified charitable sales or auctions. (Bus. & Prof. Code § 21661.) Swap meets or flea market vendors must report their names and addresses and vehicles used to transport property to the events. Vendors must list and describe property they offer for sale, including through any serial numbers or identifying marks or symbols. The information is recorded on forms provided by DOJ. Vendors give the forms to the operator of the swap meet or flea market, who then provides the form to the chief of police or sheriff. Swap meet and flea market operators must retain copies of the forms for six months and make the copies available for law-enforcement inspection. (Bus. & Prof. Code § 21663-21665.) The chief of police or sheriff can waive the reporting requirements if that "is not necessary or appropriate in the public interest." (Bus. & Prof. Code § 21668.) It appears that this bill would not apply to swap meet or flea market vendors. The paper reporting system would thus continue for these persons. 3. Determination of Electronic Reporting Fee This bill provides that each pawnbroker and secondhand property dealer shall pay a fee to support an electronic reporting system for transactions in secondhand and pawned property. The bill states that the fee shall be no more than necessary to implement, (More) AB 391 (Pan) PageM operate, and maintain the system. The fee is the same for each licensee, regardless of the number of transactions the licensee makes. Concerns have been raised that the existence of such a fee would cause law enforcement to become relatively aggressive in enforcing the laws applicable to secondhand dealers, regardless of the size of a person's business. Further, concerns have been raised that it would be unfair for persons who only engage in a relatively small number or transactions in secondhand goods to pay a fee that supports a regulatory system for full-time business, including pawnbrokers, who engage in the business of lending money and take property as collateral for loans. The sponsor and the author have stated that under Proposition 26 of the November, 2010 General Election, a proportional fee based on the number of transactions made by the licensee would require a 2/3 vote as a tax measure. Proposition 26 amends Section 3 of Article XIII A of the California Constitution: In relevant part, the proposition provides: (b) As used in this section, "tax" means any levy, charge, or exaction of any kind imposed by the State, except the following: (2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the State of providing the service or product to the payor. (3) A charge imposed for the reasonable regulatory costs to the State incident to issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof. (More) It appears that paragraph 2 and 3 could be said to apply to this bill. As concerns paragraph 2, a fee for the electronic reporting system maintained by DOJ can be described as a method provided to pawnbrokers and secondhand dealers to comply with and perform their statutory duty to daily report transactions in specified property. As concerns paragraph 3, a fee for the electronic reporting system can be described as a charge for the reasonable regulatory costs to the State incident to the regulation of licensees who deal in pawned and secondhand property. The sponsor has analogized the electronic reporting fee to a business license imposed by a local government entity or the fee for the issuance of a driver's license. Each holder of commercial driver's license pays the same fee, regardless of the number of miles driven by the operator, or the amount of property or persons transported. SHOULD THE FEE PAID BY EACH PAWNBROKER AND SECONDHAND DEALER LICENSEE BE THE SAME FOR EACH LICENSEE? IS A UNIFORM FEE FOR EACH PAWNBROKER OR SECONDHAND DEALER REQUIRED TO AVOID A DETERMINATION THAT THE FEE IS A TAX? 4. No Specificity About How and to Whom Pawnbrokers Pay the Electronic Reporting Fee - Suggested Amendment This bill requires secondhand dealers and pawnbrokers, as part of the licensing process for these businesses, to pay a fee of up to $300 for the operation and maintenance of an electronic reporting system to track transactions in pawned and secondhand goods. The bill specifically provides that secondhand dealers shall pay the fee to the local licensing authority - the sheriff or police chief - and that the local law enforcement entity will transmit the fee to DOJ. The bill does not specify how or to whom pawnbrokers shall pay the fee for the electronic reporting system. The bill merely states that DOJ shall charge a fee for the reporting system and that the local licensing authority may charge a fee to cover the cost of processing the application by (More) AB 391 (Pan) PageO the pawnbroker. In discussions with Committee staff, representatives of the Attorney General (the bill sponsor) stated that the process for paying the fee for the electronic reporting system should be the same for pawnbrokers and secondhand dealers. Making this clear in the bill would prevent confusion and inconsistent application of the bill. It is suggested that the bill be amended to provide that pawnbrokers shall pay the fee for operation and maintenance of the electronic reporting system to the local licensing authority at the time the pawnbroker applies for an original license or renews an existing license. SHOULD THE BILL BE AMENDED TO SPECIFY THAT PAWNBROKERS SHALL PAY THE FEE FOR THE ELECTRONIC REPORTING SYSTEM TO THE POLICE CHIEF OR SHERIFF THAT LICENSES THE PAWNBROKER AND THAT THE POLICE CHIEF OR SHERIFF SHALL TRANSMIT THE FEE TO DOJ? 5. Electronic Reporting of Secondhand and Pawn Transactions in other Jurisdictions When this Committee heard SB 1893 (Burton) in 2004, Committee staff noted that Minneapolis had instituted an electronic reporting system. Since that time, a number of jurisdictions have begun electronic reporting. These include Tulsa, Oklahoma, Scottsdale, Arizona and Madison, Wisconsin, among others. Reporting is done voluntarily in Tulsa, but by law in other jurisdictions. The Madison ordinance became effective in February, 2012. A company called Leads Online<2> markets databases for reporting pawned and secondhand goods, as well as numerous other law enforcement tracking systems, such as purchases from pharmacies. The company Website states that "thousands of law enforcement agencies across the country" and businesses that are required to --------------------------- <2> http://leadsonline.com/main/about-leadsonline/about-leadsonline.p hp AB 391 (Pan) PageP report pawn and secondhand transactions use the company's systems. Another company called Business Watch International<3> (BWI) markets products specifically for reporting pawned and secondhand property. BWI states that its products are used by 280 law enforcement agencies in 200 cities in the United States and Canada. It is not known how many other companies market such services to law enforcement or state and local legislative bodies. Concerns have been raised by Tulsa, Oklahoma, pawn shop owners about using a private, third-party to transmit pawn information to law enforcement. The Minneapolis Police Department's pawn reporting system, APS - Automated Pawn System, is distributed to other law enforcement agencies through a consortium called Gov to Gov Solutions. APS is a trademark registered to the City of Minneapolis. As implied by the name, Gov to Gov Solutions operates through sharing of technology across government entities. The Gov to Gov Solutions system<4> appears to be cost-effective. APS is used in many jurisdictions in Minnesota and Wisconsin. The Website states: The Automated Pawn System service is available to all law enforcement agencies. Agencies that license pawn and/or secondhand shops will find APS is a proven, low cost way to effectively manage and regulate their shops, as well as all the transaction information their shops are required to report. Law enforcement agencies use the customizable tools within the APS application to manage and regulate their licensed dealers according to local ordinance requirements, and to investigate reported crimes. Pawn and secondhand dealers use the point-of-sale software of their choice, with minor customization required to accommodate APS transaction reporting requirements. *************** --------------------------- <3> http://www.bwipolice.com/ <4> http://www.govtogovsolutions.org/Default.aspx AB 391 (Pan) PageQ