BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 300 (Perea) - Telecommunications: prepaid mobile telephony
services: state surcharge and fees: local charges collection.
Amended: August 22, 2013 Policy Vote: EU&C 6-0; G&F 7-0
Urgency: Yes Mandate: Yes
Hearing Date: August 30, 2013 Consultant: Robert
Ingenito/Marie Liu
SUSPENSE FILE.
Bill Summary: AB 300 would (1) change the point of collection
for prepaid mobile services taxes (MTS) from service providers
to retailers and (2) clarify the imposition of tax directly on
the consumer, as opposed to the carrier. The bill's provisions
would sunset January 1, 2018.
Fiscal Impact:
The Board of Equalization (BOE) estimates that it would
incur annual costs of at least $9 million to $11 million
(special funds) to administer and collect the new tax
beginning in 2014-15 not including certain costs yet to be
determined.
The California Public Utilities Commission (CPUC) estimates
annual costs of $350,000 for four permanent positions. The
CPUC would also need approximately $250,000 in start-up costs
in 2014-15.
The bill permits MTS sellers to retain 2 percent of
collected surcharges for reimbursement of costs. The annual
cost would be $800,000 to $1 million.
Unknown annual costs to the Office of Emergency Services
(OES) to determine the state 911 system surcharge.
Additional revenues of approximately $40.3 million in 2015
for the double-collection of surcharges from consumers.
Annual costs, likely in the hundreds of thousands of
dollars, from the General Fund and various special funds to
the state as a user of telephony services.
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Background: Telephone service traditionally has been provided on
a postpaid basis where customers get a monthly bill for calls
made and services received during the previous month. Under
prepaid service, in contrast, 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 available minutes are exhausted.
According to industry estimates, 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 a fee on
intrastate communications service to support the state 911
system administered by the Public Safety Communications Office
(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 CPUC:
California High Cost Fund A (0.4 percent). This fund
provides a source of supplemental revenues to 14 small
local exchange carriers (LEC's) for the purpose of
minimizing any rate disparity between rural and
metropolitan areas.
California High Cost Fund B (0.3 percent). This fund
provides subsidies to carriers of last resort (COLRs) to
provide basic local telephone service to residential
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customers in high-cost areas that certain carriers
currently service, as specified. The fund keeps basic
telephone service affordable to meet the CPUC's universal
service goal.
Deaf and Disabled Telecommunications Program (0.2
percent). The CPUC implemented three telecommunications
programs for California residents who are deaf, hearing
impaired, or disabled.
California Teleconnect Fund (0.59 percent). Another
program established by the CPUC to meet universal service
goals. This fund provides a 50% discount on selected
telecommunication services to qualifying schools,
libraries, government-owned and operated hospitals and
health clinics, and community-based organizations.
California Advanced Services Fund (0.164 percent). A
two-year program that ran from January 1, 2008 to January
1, 2010, to provide grants to "telephone corporations" to
fund unserved and underserved areas with broadband
services. The program was extended beyond January 1, 2013,
pursuant to SB 1040 (Chapter 317, Stats. 2010), which also
established two new program elements: The Rural and Urban
Regional Broadband Consortia Account and The Broadband
Infrastructure Revolving Loan Account
Lifeline Telephone Service (1.15 percent). This program
provides discounted basic telephone (landline) services to
eligible California households.
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 the service is used. With prepaid service,
neither providers nor retailers selling prepaid service know in
advance 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 between the user and the
provider.
Local Fees and Surcharges: Local 911 fees and Utility User Taxes
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(UUTs) are assessed on telephony 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. Currently, with
respect to prepaid service, local fees and UUTs remain largely
unpaid.
Current collection of surcharges on prepaid service: 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.
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. All telecommunications carriers, postpaid and
prepaid, calculate and report universal service surges online
using the Telecommunications and User Fees Filing System (TUFFS)
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and remit the owned monies to the CPUC. 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.
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. TracFone, which has about 35% of California's prepaid
market share, currently remits surcharges based on a "books and
records" methodology that shows that 84% of revenues are a
result of intrastate calls.
Proposed Law: This bill would do all of the following:
Standard prepaid MTS Surcharge: The bill would change the rate
and method of computation and collection of taxes and surcharges
for mobile pre-paid wireless services (MTS surcharge) in
California. Specifically, this bill would aggregate the CPUC
User Fee, the State's six universal service surcharges, and the
911 surcharge into one "prepaid MTS surcharge" that would be
determined by the CPUC annually. The CPUC may adjust the
surcharges to account for any past overcollection or
undercollection from prepaid service in the previous year. The
CPUC must prepare a public document explaining the calculation
of the fee.
Point of Sale Collection: The bill would impose taxes (MTS
surcharge plus local charges) directly on the consumer at the
point of sale. Specifically, a seller must collect the taxes
from the prepaid consumer at the time of the "retail
transaction" as a percentage of the retail sales price. The bill
would also require the taxes to be separately stated on an
invoice, receipt, or other similar document provided to the
prepaid consumer, or otherwise disclosed electronically to the
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prepaid consumer. The bill would define a "retail transaction"
to mean "the purchase of prepaid mobile telephony services,
either alone or in combination with mobile data or other
services, from a seller for any purpose other than resale in the
regular course of business."
Surcharge Liability: The bill would impose the MTS surcharge
and local charges on a prepaid consumer rather than the seller;
however, the bill requires the seller to collect and remit the
MTS surcharge and local charges. Any unreturned amounts the
seller represents and collects as the MTS surcharge and local
charges owed by the
prepaid consumer that are not actually owed constitutes a
seller's debt to the state, or jointly to the state, for
purposes of collection on behalf of, and to the local
jurisdiction imposing the charge, respectively.
Furthermore, the bill provides that a seller that collects an
amount that exceeds the MTS surcharge and local charges owing
may refund those amounts to the prepaid consumer. The seller may
refund those amounts whether or not it submits the overpayment
to the BOE and no corresponding credit or refund is secured.
The bill also provides that every prepaid consumer is liable for
the MTS surcharge and local charges until paid to the state.
However, a prepaid consumer's payment to a registered seller
relieves the consumer from further liability. Nothing in the Act
imposes any obligation upon a seller to take any legal action to
enforce the collection of the surcharge and local charges
imposed.
Vendor compensation: The bill provides that all retailers that
sell prepaid telephones shall receive two percent compensation
of the MTS surcharge and local charges for each sale.
Administration: The bill would require BOE to administer and
collect the MTS surcharge pursuant to the Fee Collection
Procedures Law (FCPL), which generally provides for BOE's
administration of fee programs. Among other things, the FCPL
provides for collection, reporting, return, refund, and appeals
procedures, as well as BOE's authority to adopt regulations
related to the FCPL's administration and enforcement.
The bill specifically authorizes BOE to prescribe and adopt tax
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administration and enforcement regulations including, but not
limited to, collections, reporting, refunds, and appeals. In
addition, the bill authorizes the BOE to prescribe, adopt, and
enforce any emergency regulations as necessary to implement the
Act.
The bill also would require BOE to: (1) establish procedures for
a seller to document when a sale is not a retail transaction,
and (2) establish procedures for sharing specified MTS surcharge
collection information upon the request of the CPUC or the
Office of Emergency Services (OES).
After registering with BOE, the MTS surcharge and local charges
is due and payable electronically to BOE quarterly on or before
the last day of the next month following each calendar quarter.
911 Surcharge Rate: The surcharge rate established pursuant to
the 911 Surcharge Act as of October 1 of each year, which shall
be the surcharge rate established for intrastate telephone
communication service in this state, by dividing the costs that
OES estimates for the current fiscal year of 911 plans approved,
less the available balance in the State Emergency Telephone
Number Account in the General Fund, by its estimate of the
charges for intrastate telephone communications services, the
intrastate portion of prepaid telephony services, and VoIP
service to which the surcharge will apply for the next
succeeding calendar year. The surcharge rate shall not be
greater than 0.75 percent or less than 0.50 percent. In making
its computation of the charges applicable to the intrastate
portion of prepaid mobile telephony services, OES shall use the
computation method developed by CPUC. The OES must notify BOE of
the surcharge amount collected and the surcharge amount
applicable by October 15 of each year.
The bill would require OES to prepare a summary of the
calculation of the proposed surcharge and make it available on
its internet site. The summary shall contain the prior year's
revenues to fund 911 costs, projected expenses and revenues from
all sources, and the rationale for adjustments to the surcharge.
CPUC End-User Surcharges: The bill would require the CPUC to
compute, commencing October 1, 2014:
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A reimbursement fee as a percentage of the sales price for
prepaid mobile telephony services, and
The cumulative of the telecommunications universal service
surcharges as a percentage of the sales price for prepaid
mobile telephony services.
The bill would not restrict the CPUC's authority to adjust the
reimbursement fees or universal service fees or require that
they only be adjusted once annually.
The bill would provide the CPUC with enforcement authority "to
ensure the proper remittance over retail transactions" pursuant
to the Act where the prepaid MTS provider is also the seller.
However, CPUC must collaborate with BOE in the exercise of its
enforcement authority.
MTS Surcharge Calculation: The bill would require BOE to
calculate the MTS surcharge rate annually, no later than
November 1 each year commencing in 2014, by combining the state
911 surcharge rate, all the end user CPUC rates, and the CPUC
reimbursement fee.
Standard Local charges: The bill would create statewide
uniformity for UUTs assessed on prepaid mobile phone services,
stating "it is the intention of the Legislature that this part
shall preempt the provisions pertaining to the tax or charge
rate, base, and method of collection contained in all local
ordinances, rules, or regulation concerning the imposition of a
local charge upon the consumption of prepaid mobile telephone
services, to the extent those provisions are inconsistent with
the provisions of this part and Part 21 (commencing with Section
42000). It is not the intent of the Legislature to otherwise
preempt, limit, or affect the general authority of local
jurisdictions to impose a utility user tax, local 911 charge, or
any other local charges."
The bill provides that the any local taxes, pursuant to the
eight rates in the bill, must be paid at the same time and in
the same manner as that described in the "point of sale"
provisions, provided that on or before September 1, 2014, the
local agency enters into a contract with the BOE.
Notwithstanding any other law, on and after January 1, 2015, the
bill would replace all UUTs with the eight rates in the bill.
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The bill parallels the local sales and use tax collection
(Bradley Burns, transactions and use tax) in prescribing how
locals shall contract with BOE. Specifically, the local agency
must certify to BOE: (1) that its ordinance applies its local
charge to prepaid MTS and that the local agency agrees to
indemnify, and hold harmless BOE for any and all liability for
damages that may result from collection pursuant to the
contract; and, (2) the amount of the local 911 charge or the
applicable tiered rate for a utility user tax.
If a local agency increases its local charge, the local agency
must provide BOE with written notice of the increased local
charge on or before December 1st, with collection of the local
charge to commence April 1st of the next calendar year. If the
local charge is no longer accurate, no longer imposed, or has
decreased, the local agency must notify the BOE, who must
promptly post the recalculated rate.
Total taxes: The bill would require BOE to post on its Internet
Web site, no later than each December 1, the combined total of
the rates of the MTS surcharge and the rate or rates of local
charges for each local jurisdiction The posted combined rate
applies to all retail transactions during the calendar year
beginning April 1st following the posting.
Retail Sale Location: To account for internet sales, the bill
prescribes various ways that a sale occurs in the state, both an
in-store purchase and: if the consumer's address is in this
state (known-address transaction). A consumer's address is in
this state under any one of the following circumstances:
The retail sale involves shipping of an item to be
delivered to, or picked up by, the prepaid consumer at a
location in the state.
The prepaid consumer's address is known by the seller to
be in the state. The consumer's address is considered to
be "known by the seller" if the seller's records maintained
in the ordinary course of business indicate that the
prepaid consumer's address is in the state and the records
are not made or kept in bad faith.
The prepaid consumer provides an address during
consummation of the retail transaction that is in the
state, including an address provided with respect to the
payment instrument if no other address is available and the
address is not given in bad faith.
The mobile telephone number associates with a location
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in this state.
The bill states that a retail transaction occurs at only one
location for local charge determination.
Transaction Location: For a known-address transaction, the bill
allows the seller to collect the MTS surcharge and local charges
that corresponds to the prepaid consumer's five digit postal ZIP
Code.
The bill would discharge a seller from any additional MTS
surcharge or local charges and also relieves the seller from
refunding amounts collected and remitted to BOE if:
A seller relies in good faith on BOE-provided retail
location information to match either a point-of-sale
transaction location, or the five digit postal ZIP Code of
the prepaid consumer's known-address, to the applicable MTS
surcharge and local charges amount;
A seller collects that amount from the prepaid consumer;
and
A seller remits the amount to BOE in compliance with the
Act.
AB 300 would also discharge the seller from any additional local
charges, and relieves the seller from refunding amounts
collected and remitted, if the seller, with due diligence and in
good faith, relies on credible information to match the prepaid
consumer's five digit postal ZIP code to the correct local
charge, even if the ZIP code corresponds to more than one local
charge in a known-address transaction.
Miscellaneous Provisions: The MTS surcharge applies to the
entire price where prepaid mobile telephony services are sold in
combination with mobile data services or any other services or
products for a single price except if:
The prepaid MTS is sold with a cellular telephone and
the purchase price for the prepaid mobile telephony
services component is separately disclosed to the consumer
on a receipt, invoice, or other written electronic
documentation provided to the prepaid consumer, the prepaid
MTS surcharge and local charge apply only to the prepaid
mobile telephony services amount.
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A minimal prepaid MTS amount is sold in a single,
non-itemized bundled price with a cellular telephone; the
seller may elect not to apply the surcharge or local
charge. For these purposes, a minimal amount includes a
service allotment denominated as 10 minutes or less, or $5
or less.
Revenues: Pursuant to existing law, BOE must deposit the funds
as follows:
The 911 surcharge portion of the MTS surcharge would be
deposited into the Prepaid MTS 911 Account, which this bill
creates in the MTS Surcharge Fund.
The CPUC surcharges portion of the MTS surcharge would
be deposited into the Prepaid MTS CPUC Account, which this
bill also creates in the MTS Surcharge Fund.
Local Act Administration: The bill would require BOE to perform
all functions incident to the collection of the local charges of
a city or county. In addition, BOE must collect the local
charges in the same manner as the MTS surcharge in the MTS Act,
subject to specified limitations. Those limitations, for which
the city or county is responsible, include:
Defending any claim regarding the validity of the
ordinance in its application to prepaid MTS.
Interpreting any provision of the ordinance, except to
the extent specifically superseded by the Local Act.
Responding to specified customer claims for refund.
Certifying that the city or county ordinance applies the
local charge to prepaid MTS and agrees to indemnify and
hold harmless BOE, its officers, agents, and employees for
any and all liability for damages that may result from
collection of the local charge.
Reallocation of local charges as a result of correcting
errors relating to the location of the point of sale of a
seller, or the known address of a consumer, for up to two
past quarters from the date of knowledge.
The Local Act authorizes BOE to prescribe and adopt rules and
regulations as may be necessary or desirable for the
administration and collection of local charges and the
distribution of the local charges collected.
The Local Act limits BOE's audit duties to verification that the
seller complied with the Act and allows BOE to contract with a
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third party to:
Allocate and transmit collected local charges in the
Prepaid Mobile Telephony Services Fund to the appropriate
local jurisdictions.
Audit proper collection and remittance of the local
charge.
Respond to requests from sellers, customers, boards, and
others regarding local charges.
The bill would apply existing disclosure laws to any third party
contract, and prohibits contingent fee arrangements as payment
for services rendered.
This bill would provide for a double collection of charges in
2015 by allowing the simultaneous collection of the following:
The CPUC surcharge.
The state 911 surcharge.
The new total tax, which includes the state 911
surcharge, all CPUC surcharges, and would be remitted to
the BOE.
Beginning January 1, 2016, only the new total tax would be
collected until January 1, 2018, when all provisions of the bill
would be repealed.
Related Legislation: 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.
Staff Comments: Impacts to BOE: BOE administrative costs related
to this bill would be substantial. These costs include:
surcharge-payer identification, notification, and registration;
regulation development; manual and publication revisions;
surcharge return design; computer programming; return, payment,
and refund claim processing; audit and collection tasks; staff
training; and public inquiry responses. BOE estimates the likely
costs to be $9.1 million in 2014-15, $9.5 million in 2015-16,
$10.8 million in 2016-17, and $10.7 million in 2017-18. These
figures, however, do not reflect costs related to the measure's
January 1, 2018, sunset date and the requirement that service
suppliers continue to remit an amount equal to the 911 surcharge
imposed on mobile telephony services that would have otherwise
been imposed, collected, and remitted to the BOE for the 2015
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calendar year. These costs are still being determined by the tax
agency.
The timing of the bill is such that BOE would need to begin to
implement it in 2014-15, before any revenues are received.
Typically, the BOE seeks administrative cost reimbursement from
the account or fund into which tax proceeds are deposited.
However, as this is a new collection (to the MTS Surcharge
Fund), there would be no funding to reimburse the BOE prior to
collection of the tax. Current law prohibits BOE from using
special fund appropriations to support the administration of the
proposed MTS program. Without start-up cost funding, it may be
necessary for BOE to divert General Fund dollars to implement
the proposed tax program. Such a diversion typically results in
a negative impact on General Fund-supported programs and related
state and local government revenues.
Impacts to CPUC: This bill would require CPUC to bifurcate its
collection of surcharges between prepaid and postpaid services.
Thus, the CPUC would be required to maintain its current systems
for collections of postpaid services while creating a new system
to set the MTS surcharge and interface with BOE. Enforcement
actions would also need to proceed on two tracks. Annual costs
are estimated at $350,000. Before the new taxes are received,
the CPUC would incur start-up costs of approximately $250,000
for programing and legal workload.
Revenue impacts: In the years 2015 through 2017, this bill would
result in a net revenue loss to the 911 and universal service
programs in the millions to tens of millions of dollars.
Revenues under this bill are unknown, but are estimated to
between $40.3 million (BOE) and $50.6 million (CPUC). Annual
costs would include an average of $10.5 million to BOE, $350,000
to CPUC, and between $800,000 and $1 million being retained by
retailers. Therefore, annually there would be a loss between
$2.8 and 12.9 million. Over the three-year operative period of
this bill, the losses could total between $8.4 million and $38.7
million
These annual losses do not account for the set-up costs incurred
by BOE and CPUC which are at least $9.3 million.
These losses will be partially offset by the double-collection
of approximately $40.3 million in fees from consumers in 2015.
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Program impacts: Any losses of revenues as a result of this bill
are presumed to result in reduced revenue for the 911 and
universal service programs. As this bill does not impact the
budgets of these programs, surcharge increases will likely be
necessary to offset the reduced revenues to the service
programs. The state, as a ratepayer, will likely incur costs in
the hundreds of thousands dollars as a result of increased
rates.
Staff notes that the CPUC surcharges and state 911 charges are
currently being collected on all prepaid services. However,
local charges are not. The point-of-sale collection proposed by
this bill would allow for the collection of local charges, but
at the expense of tens of millions of dollars in state
administrative costs, subsequent program impacts, and customers
paying double surcharges for one year.