BILL ANALYSIS Ó 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 300 - Perea Hearing Date:
July 2, 2013 A
As Amended: June 25, 2013 FISCAL/Urgency
B
3
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DESCRIPTION
Current law establishes the State Board of Equalization (BOE)
with duties that include administering tax and fee programs that
provide revenue for state and local government.
Current law , the Fee Collection Procedures Law, specifies
procedures for BOE collection of fees and taxes that fund
programs administered by other state agencies, including taxes
and fees that retailers collect from customers and remit to the
BOE for transfer to another agency.
Current law establishes the California Public Utilities
Commission (CPUC) to regulate utilities, including telephone
corporations, and establishes the CPUC Reimbursement Fee to be
collected from utility customers and remitted to the CPUC to
fund its operations.
Current law requires the CPUC to administer several universal
service programs, to ensure that all customers have
communications service, funded by surcharges on intrastate
communications service.
Current law requires the Public Safety Communications Office
(PSCO) within the Office of Emergency Services (formerly within
the California Technology Agency) to administer the state's 911
emergency telephone system with funds derived from a surcharge
on intrastate communication service that providers remit to the
BOE, which transfers the funds to the PSCO.
Current law authorizes cities and counties to collect User
Utility Taxes (UUTs) on utility and communications service that
providers collect from end users and remit to the BOE, which
transfers the funds to local agencies.
This bill enacts the "Prepaid Mobile Telephony Services
Surcharge and Collection Act," which establishes, effective
January 1, 2015, a method for collecting all of these state and
local fees on prepaid wireless communications service through a
point-of-sale collection by retailers, who are required to remit
the fees to the BOE, which is required to transfer the revenue
to the CPUC, the PSCO and local agencies.
This bill requires the BOE to calculate the surcharge rate for
the CPUC and state 911 fee for prepaid service based on a "safe
harbor" estimate of how many minutes of the prepaid service will
be used for intrastate communications.
This bill requires BOE to calculate and notify each local
jurisdiction that has a UUT or local fee the combined amount of
the surcharge for the CPUC and state 911 fees and the local fee
based on the fee in its jurisdiction.
This bill allows retailers to retain three percent of fees
collected on prepaid service and allows the BOE to retain two
percent of fees remitted for prepaid service as payment for
their expenses incurred in administration and collection of the
charges.
This bill provides that payment of these prepaid fees is the
liability of the consumer and not the seller or provider of
service.
This bill is an urgency measure, stating that it is necessary to
take effect immediately to provide a standardized collection
mechanism for prepaid mobile service in order to permit needed
financial support for programs necessary to serve the public or
telecommunications users.
BACKGROUND
Prepaid Wireless Service Growing - Telephone service
traditionally has been provided on a postpaid basis where
customers get a monthly bill for calls made and services
received in the prior month. With prepaid service, customers pay
in advance for a predetermined amount of calling minutes,
typically loaded onto a calling card or directly onto a mobile
phone, with options to reload once the calling minutes are used.
According to CTIA the Wireless Association, prepaid wireless is
an expanding multi-billion dollar business nationally, with
nearly a quarter of the nation's 300 million wireless consumers
currently using prepaid service. Prepaid service is popular for
"backup" phones kept in the car for emergencies and "starter"
phones for children so it is easy to control usage, and is an
attractive option for low-income customers unable to afford a
long-term contract or pass a credit check. Lack of a long-term
contract is making prepaid service increasingly popular for all
wireless customers.
About 30 percent of prepaid service is sold directly by a
provider to a customer, ether online, over the phone, or
otherwise. The other 70 percent is sold through retailers such
as grocery stores and big-box stores, to which providers sell
prepaid cards on a wholesale national basis, typically not
knowing in which state the cards will be sold or the service
used.
Statewide Fees and Surcharges - Current law imposes on
intrastate communications service a fee to support the state 911
system administered by PSCO, a fee to pay for the CPUC's
operations, and six separate surcharges to pay for the following
state universal service programs administered by the CPUC:
California High Cost Fund A
California High Cost Fund B
Deaf and Disabled Telecommunications Program
California Teleconnect Fund
California Advanced Services Fund
Lifeline Telephone Service.
All of these fees are assessed as a percentage of a customer's
intrastate service, calls or data sent within the state of
California. These state and local surcharges are easily
determined and collected for post-paid service and included on
customer bills after service is used. With prepaid service,
neither providers nor retailers selling prepaid service know
ahead how many minutes will be intrastate calls or whether they
will be made within the city or county where the transaction
occurs. For prepaid service sold at retail, there is no direct
billing relationship with the user.
Local Fees and Charges - Local 911 fees and UUTs are assessed on
service provided within the jurisdiction of the city or county
imposing the tax. UUTs range up to 11 percent, but not all
cities and counties impose them. About 100 cities have utility
tax ordinances imposing charges on prepaid service at about 35
different rates. According to both service providers and local
agencies, local fees and UUTs are largely unpaid for prepaid
service.
National Strategy for Point-of-Sale Legislation - Given growing
customer demand for prepaid service, and lack of a convenient
way to determine intrastate use and bill prepaid customers, the
wireless industry has advocated nationwide a point-of-sale
collection methodology with model legislation endorsed in 2009
by the National Conference of State Legislatures. According to
CTIA, 31 states have adopted point-of-sale legislation based on
the model statute, although none of these other states has
multiple surcharges like California. Most of the other states
have only a state 911 fee, with a few also having local 911
fees. Point-of-sale legislation has been introduced in
California since 2009 but failed passage.
All Carriers Now Pay State Surcharges - TracFone is the
nation's, and California's, largest provider of prepaid wireless
service and provides only prepaid service, unlike other carriers
that offer both postpaid and prepaid wireless service. In 2003,
TracFone sought clarification through CPUC staff about whether
CPUC fees and surcharges apply to its service. TracFone claims
to have relied on staff indicating that it was exempt. The CPUC
opened a formal investigation against TracFone in 2009, and in
November 2011 issued a decision concluding that TracFone is a
telephone corporation subject to its jurisdiction and is
required to pay CPUC fees and surcharges (D.12-02-032). In March
2013, a state appellate court denied TracFone's petition for
review of that decision. A second phase of the CPUC's
proceeding is pending to determine the amount TracFone owes in
past due fees and surcharges and whether a penalty is
appropriate. Staff is seeking $12 to $20 million in unpaid
surcharges and fees, plus interest and penalties.
As a result of this proceeding, according to the CPUC, TracFone
and all other prepaid providers are now collecting and remitting
all necessary state surcharges and fees from their postpaid and
prepaid customers. The CPUC denied requests of carriers during
the TracFone proceeding to review the obligations of all prepaid
service providers to pay CPUC fees and surcharges and establish
a collection mechanism. The CPUC maintains that it
"intentionally does not prescribe any collection method for any
kind of wireless service, leaving carriers complete discretion
to implement the method that best meets their business needs,"
which may include embedding the surcharges and fees into the
rates for service.
Estimating Intrastate Minutes - Because California has authority
to impose surcharges only on communications within its state
borders, a customer's intrastate minutes of use must be
estimated in connection with certain services. The Federal
Communication Commission (FCC) allows for three different
methods to make this allocation, including books and records
(actual data), traffic studies, or a "safe harbor" estimates
that about 63 percent of service revenues is for intrastate
calling and 37 percent interstate. AB 841 (Buchanan, 2011),
which required VoIP providers to pay state universal service
program surcharges, endorsed these same three methods for
determining intrastate VoIP service subject to the surcharge.
COMMENTS
1. Author's Purpose . According to the author, this bill
would establish a statewide system for point-of-sale
collection of state and local fees imposed on
communications service that are currently paid by end users
of postpaid customers, thereby ensuring that the prepaid
wireless sector of the communications market equitably
shares in the responsibility to fund the state 911 system,
state universal service programs, and CPUC operations paid
with the CPUC Reimbursement Fee, and also contribute to the
revenue of cities and counties generated by local fees and
UUTs.
2. Who Benefits From This Bill ? After several years of
prepaid legislation that has failed passage, this bill
still faces opposition because it provides financial
benefits or compensation to some stakeholders but appears
likely to cause financial harm to others. Here's the
breakdown:
Ï Service providers benefit because they will no
longer be required to pay surcharges out of profits, and
prepaid customers will instead pay the surcharges on top
of the price for service.
Ï Local governments benefit because they will have a
new revenue stream from UUTs and local fees that have
been largely unpaid by prepaid service providers to date,
thereby providing increased funding for local services
and programs.
Ï Retailers benefit by keeping three percent of all
surcharges collected as reimbursement for their expenses.
Although retailers currently have no legal obligation to
collect state and local taxes and fees on communications
service, some retailer groups have agreed to collect them
at point-of-sale for prepaid service provided they
collect a single aggregated charge statewide, remit all
funds to BOE (with which they are familiar for remitting
sales tax) rather than to different agencies, and get
reimbursed for their administrative costs.
Ï The BOE benefits somewhat by keeping two percent of
all surcharges remitted for their administrative costs in
collecting the surcharges from retailers and distributing
it to the CPUC, PSCO, and local agencies, although BOE
claims that two percent is not enough and would prefer to
be compensated for its actual costs, as it is now for
collecting the 911 fee.
Ï The CPUC does not benefit because surcharge revenue
transferred to it from the BOE will be reduced by the
three percent cut to the retailers and two percent to
BOE, thereby reducing revenues for CPUC programs. The
CPUC also objects to the loss of direct authority to
collect surcharges from the providers it regulates,
especially since it has prevailed in its TracFone
enforcement action and all prepaid service providers are
now remitting CPUC surcharges.
Ï The PSCO does not benefit because 911 fee revenue
transferred to it from the BOE will be reduced by five
percent, and currently it is reduced only by the amount
of BOE's costs to collect the state 911 fee. This
revenue hit is especially problematic given that the
state 911 fund already is in structural deficit just as
PSCO faces huge costs in the coming years to upgrade
state and local 911 infrastructure for text to 911 and
Next Generation 911, as discussed at an informational
hearing of this committee on February 11, 2013.
Ï Local public safety agencies and 911 dispatchers
(and the public they serve) do not benefit because the
reduction of 911 fee revenue will translate into less
funding for local 911 systems.
Ï Customers of prepaid service will not benefit
because they will be required to pay an additional amount
on top of the price of service, which will especially
affect low-income people who are a significant portion of
the prepaid market.
Ï Customers of all postpaid and prepaid landline,
wireless and VoIP communications service who pay all the
surcharges will not benefit if surcharge rates are
increased to offset the administrative costs of the new
collection system and potential reduced revenue for the
programs these charges fund.
1. Will Surcharge Revenues Increase or Decrease in the Long
Term ? Industry supporters, the CPUC and the BOE are engaged
in a numbers battle over whether this bill will result in
more or less surcharge revenue than currently collected for
prepaid service. The uncertainty inherent in any
projection of future revenue is exacerbated by the fact
that prepaid service is a rapidly growing market segment
and the need to estimate what portion of service will be
for calls within California versus interstate. Industry
claims that revenue will increase because carriers now
calculate surcharges based on wholesale cost of prepaid
service, which is at least ten percent less than the retail
price of service that the surcharge required by this bill
will be based on. Industry also points to the bill
requiring the surcharge to apply to minutes of service for
data rather than just voice minutes currently, which will
increase revenue, especially as customers' data use
increases.
The CPUC counters that the industry's prediction of a
revenue windfall is an illusion because carriers currently
are required to remit based on retail sales revenue,
administrative costs would outweigh any best-case revenue
increase, and estimates do not accurately account for the
30 percent of prepaid service the providers currently sell
directly to the customer rather than wholesale. In
addition, the CPUC claims that the bill's requirement to
calculate the prepaid surcharge rate based on a "safe
harbor" estimate of 63 percent of revenues being intrastate
is problematic. According to the CPUC, at least one
prepaid service provider (TracFone, which has about 35
percent of California's prepaid market share) currently
remits based on a "books and records" methodology that
shows 84 percent of revenues as intrastate.
The BOE and industry dispute what amount BOE will incur in
administrative costs, using different assumptions about the
amount of revenue per prepaid customer, among other
variables. The complex nature of the multi-tiered UUT
collection makes BOE's costs especially hard to predict,
which is why BOE objects to the fixed two percent
compensation and wants its actual costs compensated.
None of the disputed claims account for whether prepaid
service for lifeline-eligible customers (for whom prepaid
is a popular service) would suddenly be subject to
surcharges if AB 1299 (Bradford) is enacted. Lifeline
eligible customers currently do not pay surcharges and do
not have a wireless option, and AB 1299 would enable them
to use a lifeline subsidy for prepaid wireless service but
they would have to pay surcharges.
2. Are Safeguards Against Revenue Decrease Possible ? If the
Legislature agrees with industry's claim that there is a
public benefit to having a predictable, standardized
point-of-sale collection mechanism for ensuring that end
users of prepaid service pay their share of state and local
surcharges and fees, the question then is whether there is
a way to safeguard against the risk of a reduction of
revenues for the programs they fund. Options include:
Ï Require calculation of the prepaid surcharge
be on a higher percent of revenues than the inverse
federal safe harbor for intrastate revenues now in the
bill.
Ï Require local agencies that now receive
virtually no UUT and local fee revenue on prepaid
service to pay a portion of the new revenue stream to
BOE.
1. Ensuring Transparency to Assess Revenue Impact . If a new
prepaid collection mechanism is enacted, the CPUC and PSCO
- and the public - must be able to accurately assess the
revenue impact to all the CPUC public purpose programs and
the state 911 system, respectively, and whether that
contributes to the agencies needing to increase the
surcharges. Currently, the CPUC annually (or as needed)
adjusts its surcharges through a resolution that is open
for public comment 30 days prior to a commission vote. The
resolutions include a status report on the program fund and
an accounting of revenues, along with a projection of
expected program expenses for the period to which the
adjusted surcharge will apply, typically a year. The PSCO
has no similar process but instead simply notifies BOE of
the rate for the coming year with no public process. This
bill specifies the dates by which the CPUC and PSCO must
annually determine its surcharge rates. To ensure
transparency, the author and committee may wish to amend
the bill to require the CPUC and PSCO, when annually
determining surcharges to fund their programs, to issue a
public resolution or similar document that includes a
summary of prior year revenues, including those from
prepaid service, along with projected expenses and revenues
from all sources, and a summary of rationale for adjustment
to the surcharge, including all impacts from prepaid
service surcharge collection.
2. Does Requiring Safe Harbor Methodology Violate Federal
Law ? Federal law authorizes states to determine the manner
in which to require providers to contribute to state
universal service programs as long as not inconsistent with
federal requirements. Federal rules allow carriers to use
multiple different methods for calculating interstate
revenues subject to federal universal service contribution,
including the safe harbor. This bill requires providers to
use the inverse of the federal safe harbor for calculating
the intrastate portion of prepaid service revenues. This
inconsistency between federal and state law potentially
would allow carriers to use different and inconsistent
methods, which possibly could result in the combined
federal-state payment being based on less than 100 percent
of revenues.
3. Local Government and Taxation Issues . This bill raises
many issues related to the collection of UUTs and local
fees, which will be considered by the Committee on
Governance and Finance, and which stakeholders state they
are still working to resolve.
4. Related Legislation . AB 2545 (de La Torre, 2010)
required a public process to recommend a prepaid wireless
service collection mechanism and was essentially a study
bill. It failed passage on the Senate floor.
AB 1050 (Ma, 2012) required a point-of-sale collection of
state and local surcharges on prepaid service somewhat
similar to this bill. AB 1050 died in the Senate Committee
in Governance and Finance.
5. Double Referral . Should this bill be approved by the
committee, it should be re-referred to the Senate Committee
on Governance and Finance for its consideration.
ASSEMBLY VOTES
Assembly Floor (75-3)
Assembly Appropriations Committee (17-0)
Assembly Revenue and Taxation Committee
(9-0)
Assembly Utilities and Commerce Committee
(13-0)
POSITIONS
Sponsor:
CTIA - The Wireless Association
Support:
American Federation of State, County and Municipal Employees,
AFL-CIO
AT&T
Boost
California Fire Chiefs Association
Sprint
SureWest Communications
T-Mobile
TracFone Wireless, Inc.
Virgin Mobile
Oppose:
California Chapter of the National Emergency Number Association
California Grocers Association
California Public Utilities Commission
Consumer Federation of California
Division of Ratepayer Advocates
The Greenlining Institute
The Utility Reform Network
Jacqueline Kinney
AB 300 Analysis
Hearing Date: July 2, 2013