BILL ANALYSIS Ó
AB 575
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Date of Hearing: April 15, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 575 (V. Manuel Pérez) - As Introduced: February 20, 2013
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use tax: retail sale: counterfeit mark:
pirated intellectual property
SUMMARY : Amends the Sales and Use Tax (SUT) Law to include
within the definition of a "retail sale" any sale of tangible
personal property (TPP) with a counterfeit mark or any sale of
TPP that is pirated intellectual property, regardless of whether
the sale is for resale in the regular course of business.
Specifically, this bill :
1)Defines the terms "retail sale" and "sale at retail" to
include any sale of TPP:
a) With a counterfeit mark on, or in connection with, that
sale; or,
b) That is pirated intellectual property, regardless of
whether the sale is for resale in the regular course of
business.
2)Includes similar provisions for purposes of California's use
tax.
3)Defines "counterfeit mark" as having the same meaning as under
United States Code Section 2320 of Title 18.
4)Defines "pirated intellectual property" to include literary
works, such as novels, poems, and plays, television and film,
music and sound, artistic works, such as drawings and
photographs, software, and any other intellectual property
that has been distributed without permission from the
copyright owner or that violates any of the rights of the
copyright owner specified in law.
5)Defines "copyright owner" as the owner of any one of the
rights comprised in a copyright.
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6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Makes it a crime, punishable by fines and imprisonment, for
any person to willfully infringe a copyright, or to
intentionally traffic:
a) Goods or services and knowingly use a counterfeit mark
on or in connection with such goods or services;
b) Labels, patches, stickers, wrappers, badges, emblems,
medallions, charms, boxes, containers, cans, cases,
hangtags, documentation, or packaging of any type or
nature, knowing that a counterfeit mark has been applied
thereto, the use of which is likely to cause confusion, to
cause mistake, or to deceive; or,
c) Counterfeit drugs.
2)Defines a "counterfeit mark" as a spurious mark:
a) The use of which is likely to cause confusion, to cause
mistake, or to deceive;
b) Used in connection with the trafficking in any goods,
services, labels, patches, stickers, wrappers, badges,
emblems, medallions, charms, boxes, containers, cans,
cases, hangtags, documentation, or packaging of any type or
nature;
c) That is identical with, or substantially
indistinguishable from, a mark registered on the principal
register in the United States Patent and Trademark Office
(USPTO) and in use, whether or not the defendant knew such
mark was so registered; or,
d) Applied to or used in connection with the goods or
services for which the mark is registered with the United
States Patent and Trademark Office (USPTO), or is applied
to or consists of a label, patch, sticker, wrapper, badge,
emblem, medallion, charm, box, container, can, case,
hangtag, documentation, or packaging of any type or nature
that is designed, marketed, or otherwise intended to be
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used on or in connection with the goods or services for
which the mark is registered in the USPTO.
EXISTING STATE LAW :
1)Makes it a crime, punishable by fines and imprisonment, for
any person to willfully manufacture, intentionally sell, or
knowingly possess for sale any counterfeit of a mark
registered with the Secretary of State or the Principal
Register of the USPTO.
2)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
3)Defines a "retail sale" as a sale for any purpose other than
resale in the regular course of business. With respect to
illegal sales of goods in California, the law imposes a sales
or use tax on the retail sales and purchases of those goods in
the same manner as legitimate sales.
4)Provides that TPP sold to a person who resells the property
prior to any use of that property is not subject to SUT.
5)Provides that TPP sold to a person who purchases the property
to incorporate into a manufactured item to be sold is not
subject to SUT.
1)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
2)Establishes the Franchise Tax Board (FTB) as a three-person
board comprised of the State Controller, the Director of the
Department of Finance, and the Chair of the BOE. Among its
many duties, the FTB is charged with administering the state's
Personal Income Tax Law and the Corporation Tax Law.
3)Establishes the BOE, which consists of five voting members:
the State Controller and four members elected for four-year
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terms at gubernatorial elections. Among its many duties, the
BOE administers the SUT, sets property values for
state-assessees, monitors the property tax assessment
practices of county assessors, and serves as the
administrative appellate body for final actions of the FTB.
4)Requires various state entities, including the BOE, the FTB,
and the Department of Justice, to enforce laws relating to the
taxation and legal operation of businesses throughout the
state under their respective jurisdictions.
FISCAL EFFECT : The BOE estimates that the annual state and
local SUT revenue associated with the seizure of counterfeit and
pirated property is $1.8 million. However, persons from whom
this property is seized may face significant fines and
imprisonment. Accordingly, the total tax collections are likely
to be considerably less.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
California's underground economy has a severe and negative
effect on the state's competitiveness. The underground
economy refers to the selling of counterfeit goods designed
to exactly replicate a "name brand" item. These goods are
typically imported from overseas and sold at open markets
or in other unofficial venues.
Because it enables illegitimate businesses to steal
intellectual property and then sell it at below market
costs, the underground economy places law abiding
businesses at a tremendous disadvantage. Law abiding
businesses make significant financial investments to
develop their products, including: training and hiring
employees, building manufacturing capacity, and complying
with myriad state labor and environmental protection laws.
At each point in the production process, these law abiding
businesses also remit billions of dollars to the State in
the form of tax revenues that are used to fund schools,
transportation and other vital government services. The
underground economy bypasses this process, giving
illegitimate businesses an unfair advantage over legitimate
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businesses that operate in good faith and comply with State
laws.
One of the serious long-term effects of the underground
economy is that it discourages law abiding businesses from
investing in the development of new products. This has a
chilling effect on the entire value chain, from the
manufacturing equipment that would have been purchased to
the hundreds of good jobs that would have been created.
Under existing State law, sales taxes are imposed on the
"retail sale" or "sale at retail" (hereinafter referred to
[as] "retail sale") of tangible personal property in
California. Under Section 6007 of the Sales and Use Tax
Law, a retail sale is defined as a sale for any purpose
other than resale in the regular course of business. As
such, retail sales of counterfeit goods and pirated
intellectual property in the form of tangible personal
property is subject to sales tax to the same extent as
legitimate sales.
However, sales, possession for resale, and/or
transportation of tangible personal property (whether
counterfeited, pirated, or legitimate) for resale are not
subject to tax.
2)Proponents state:
AB 575 would require sales tax to be collected on any sale
of counterfeit or pirated intellectual property. In doing
so, this bill would not only assist in cracking down on
counterfeit sales and pirated intellectual property prior
to such items reaching the retail level, it would also
shore up additional tax revenue.
Because AB 575 would assist in generating additional tax
revenue, which, in turn, could aid the state and local
governments in funding vital public services, including
fire protection, we urge your support for this bill.
3)Committee Staff Comments:
a) Why buy counterfeit goods ? A consumer either makes a
conscious decision to purchase a counterfeit item (market
equilibrium) or the consumer is fooled into thinking the
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counterfeit item is authentic (market failure). Studies
have found that, under the first scenario, many consumers
are willing to compromise on the product<1>. According to
Vincent Wenxiong Yao, consumers may choose to compromise on
the product because it affords them the opportunity to try
a low-grade version with the intent of purchasing an
authentic item at some point in the future. (Id.)
Counterfeit products also provide lesser value at a lower
cost, which may be acceptable for an individual with
limited means. Finally, counterfeits have improved
dramatically. The ability to discern counterfeits from
authentic goods is becoming increasingly difficult. Under
a market failure scenario, however, the consumer is simply
fooled into thinking they have purchased an authentic item.
As noted earlier, the quality of counterfeit items has
improved dramatically, which increases the likelihood of
the second scenario.
b) Who buys counterfeit goods ? Under the market
equilibrium scenario, low-income communities are the ones
most likely to purchase counterfeit items, and for a person
with limited means, counterfeits may be a good substitute
for brand new authentic goods. Moreover, the tendency to
purchase counterfeit goods decreases as incomes increase.
(Id.) This is because counterfeit goods are considered
inferior products. (Id.) When incomes increase, consumers
tend to demand better quality and authentic products.
Eventually, individuals will move away from counterfeit
products as their incomes increase. Under a market failure
scenario, however, counterfeit goods will be sold to
consumers regardless of income because the seller has
misrepresented the product.
c) Enforcement of copyright laws . The underground economy
is a well-documented problem in the State of California.
Last year, the BOE estimated that $8 billion in corporate,
personal, and SUT revenues go uncollected in California
each year, with unreported and underreported economic
activity responsible for the vast majority of that total.
This places a burden on state and local governments, and
legitimate businesses. However, tackling the problem has
not been easy. In 1993, the Joint Enforcement Strike Force
--------------------------
<1> Vincent Wenxiong Yao, An Economic Analysis of Counterfeit
Goods: the Case of China, Journal of the Washington Institute of
China Studies (2009).
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was created to combat the underground economy by aiding in
the sharing of information, coordinating enforcement
efforts, and developing methods to target enforcement
resources. Additionally, the Labor Task Force has also
been launched in an effort to curb the underground economy.
Through its information sharing program, the Labor Task
Force attempts to ensure that employees receive proper
payments and that California receives all employment taxes
and fees owed. Despite the coordinated efforts of several
state agencies, California's underground economy remains a
serious problem.
d) Death and taxes, not always certain . One of the reasons
why the government is unable to further crack down on the
underground economy and, specifically, on counterfeit
goods, is because sellers of counterfeit goods rarely leave
a paper trail. According to an article by the New York
Comptroller, Bootleg Billions: The Impact of the
Counterfeit Goods Trade on New York City, the City of New
York lost an estimated $380 million in unpaid sales taxes
in 2003 because sellers did not leave a paper trail. Even
if a seller is caught, and the remaining inventory seized,
the sales tax, which is based on gross receipts, will
likely go uncollected because sales receipts are generally
not kept when operating an illicit business.
The BOE understands that it may not be cost effective to
combat counterfeit sales by enforcing the sales tax at the
retail level. The purpose of this bill is to expand the
imposition of the SUT Law to any sale of counterfeit and
pirated TPP, regardless of whether it is done by a
manufacturer, wholesaler, or distributor. By expanding the
imposition of SUT to transaction points along the supply
chain, the BOE hopes to gain a useful and cost effective
tool in combating the underground economy. However, the
collection of the SUT, as noted in the BOE's analysis, may
still be difficult because persons from whom the property
is seized may face significant fines and imprisonment,
which may not leave enough funds to pay for the uncollected
sales tax. Even if a lien is placed on the property or a
business, there is no guarantee that it will lead to
additional tax revenue. As such, the BOE may find it no
easier to collect from a person behind bars than from a
vendor on the street.
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e) Fighting crime with tax . The "Tax Man" uses a number of
tools to both discourage and encourage behavior. State and
federal governments encourage homeownership by providing
deductions for property taxes and interest paid on
mortgages. Conversely, states have discouraged the use of
certain products, like cigarettes, by imposing a high
excise tax. Despite using the tax code to discourage
certain behavior, California does not usually impose a tax
specifically on criminal activity. For example, the state
does not impose a special excise tax on the sale of illicit
drugs, such as marijuana. One of the reasons for not
imposing a special tax on illicit drugs is that the
imposition of the tax might actually legitimize the use of
the drug. As such, imposing a sales tax on certain
counterfeit and pirated TPP sales may have the same effect.
f) Supplier business model . Like most business models, a
seller of counterfeit goods makes a profit if sales
revenues exceed costs. However, unlike legitimate
businesses, sellers of counterfeit goods must take into
account the potential costs of government prosecution and
civil lawsuits from genuine producers. These
considerations may have a huge impact on a seller's
decision to carry counterfeit items, especially if the
government has improved enforcement of copyright laws or
increased jail time. The more active the government
becomes in enforcing laws, the more likely sellers will
choose not to carry counterfeit products. The threat of
sales tax, on its face, may be seen as one additional tool
to deter someone from selling counterfeit items because it
increases the costs of doing business. However, the
collection of sales tax is secondary to the threat of being
caught. When one considers the jail time, the seizure of
property, and the enormous criminal fines, it seems
unlikely that a person selling counterfeit goods would be
deterred by the possibility of having to remit sales tax,
especially when sales records were not kept and enforcement
of the sales tax is unlikely.
g) Criminal penalty vs. tax increase . As currently
drafted, this bill increases taxes on at least one
individual and is, therefore, subject to a 2/3 vote. If
the author wishes to discourage the buying and selling of
counterfeit goods through a majority vote proposal, he may
wish to increase the criminal penalties already associated
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with the sale of counterfeit and pirated TPP.
h) Related Legislation . SB 1185 (Price), introduced in the
2011-12 legislative session, would have established a
multiagency partnership consisting of the Employment
Development Department, the FTB, and the BOE, to
collaborate in combating illegal underground operations.
SB 1185 was held in the Assembly Committee on
Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County, and Municipal Employees,
AFL-CIO
California Professional Firefighters
California Tax Reform Association
Service Employees International Union California
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098