BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 781 HEARING: 7/19/13 AUTHOR: Bocanegra FISCAL: Yes VERSION: 4/18/13 TAX LEVY: No CONSULTANT: Miller SALES & USE TAXES: VIOLATIONS FOR NONCOMPLIANCE: SALES SUPPRESSION DEVICES Makes it a punishable offense for any person to knowingly sell, purchase, install, transfer or possess software programs that falsify reported sales Background and Existing Law Existing law<1> sanctions taxpayers who intentionally fail to accurately report and remit tax and fee liabilities. In addition to a variety of civil penalties, the law imposes criminal penalties for violations. For example, any person who makes a fraudulent return with the intent to evade the determination of an amount due, or any person who assists in the preparation or presentation of a document that is false to a material matter is guilty of a misdemeanor, punishable by a fine of at least $1,000 and not more than $5,000, or imprisonment up to one year in the county jail, or both fine and imprisonment in the court's discretion. In addition, the law makes it a felony if the unreported tax liability is at least $25,000 in a consecutive 12-month period, and is punishable by a fine of at least $5,000 and not more than $20,000, or imprisonment for 16 months, or 2 or 3 years, or both the fine and imprisonment in the discretion of the court. The existing Fee Collection Procedures Law<2> (FCPL) generally provides for the administration and collection of BOE-administered fees. Legislation that establishes a new ------------------------- <1> Revenue and Taxation Code (RTC) Sections 7152 through 7157. <2> Part 30 of Division 2 (commencing with Section 55001) of the RTC. AB 781 -- 4/18/13 -- PageB fee may reference the FCPL with minimal verbiage. Among other things, this law includes collection, reporting, refund, and appeals provisions, and, similar to the Sales and Use Tax Law, provides criminal penalties for violations. California's tax system is based on voluntary compliance. Most tax or feepayers (taxpayers) who report taxes and fees to the BOE generally comply with the law. However, some seek to skim or hide their sales to evade the tax due. Some cash-based businesses, for example, do not ring up all their sales through their cash register, keep two sets of books, or simply file false tax returns. Recently, there have been increased reports of electronic methods to "skim sales" whereby retailers conceal or remove sales transactions from recordkeeping systems. These devices are referred to as "sales suppression devices," and the software is referred to as "phantom-ware." The use of this technology makes the detection of understated sales difficult in tax and fee audits. Existing law does not specifically penalize a person for the sale, purchase, installation, transfer, or possession of sales suppression devices or software that conceals or removes sales transactions from retailers' recordkeeping systems. Proposed Law Assembly Bill 781 makes it a criminal offense for any person to knowingly sell, purchase, install, transfer, or possess any automated sales suppression device, zapper or phantom-ware (devices). The offense is punishable by a fine of up to $10,000 and imprisonment in the county jail for up to 3 years, with sentence lengths of: (1) not more than one year, or, 16 months, or (2) two or three years, or both that fine or imprisonment. AB 781 applies to the Sales and Use Tax Law, and the California Tire Fee and Covered Electronic Waste Recycling Fee, which are fees imposed on consumers at the retail level. In addition to the fines, AB 781 specifies that the person AB 781 -- 4/18/13 -- PageC shall also be liable for the taxes and fees, interest, and penalties due. AB 781 defines "automated sales suppression device," "zapper," "electronic cash register," "phantom-ware," and "transaction data" as follows: "Automated sales device" or a "zapper" is a software program carried on a memory stick or removable compact disc, accessed through an internet link, or accessed through any other means, that falsifies the electronic records of electronic cash registers and other point-of-sale systems, including but not limited to, transaction data and transaction reports. "Phantom-ware" as a hidden, pre-installed, or installed at a later time programming option embedded in the operating system of an electronic cash register or hardwired into the electronic cash register that can be used to create a virtual second till or may eliminate or manipulate transaction records that may or may not be preserved in digital formats to represent the true or manipulated record of transactions in the electronic cash register. "Transaction data" as including information regarding items purchased by a customer, the price for each item, a taxability determination for each item, a segregated tax amount for each of the taxed items, the amount of cash or credit tendered, the net amount returned to the customer in change, the date and time of the purchase, the name, address, and identification number of the vendor, and the receipt or invoice number of the transaction. State Revenue Impact According to the BOE, this bill will result in some increased revenue but the exact amount is unknown. The BOE provides the following statement: Currently, the BOE staff is studying the extent of California's sales suppression software problem in California. Based on BOE data for 2010, California's dining and beverage industry reported taxable sales of $51.3 billion. Using a 5% underreporting rate, California loses AB 781 -- 4/18/13 -- PageD $214 million<3> annually due to use of these sales suppression devices. If enacted, we anticipate these estimated losses will decrease. However, the extent of the decrease is unknown. Comments 1. Purpose of the bill . The author and the sponsors, BOE, provide the following statement: California must be proactive and curtail the use of these sales suppression devices. Use of this technology not only defrauds the state, but provides users an unfair competitive advantage over taxpayers who comply with the law and pay their fair share of taxes and fees. The Legislature has recognized through its enactment of criminal penalties for deliberate taxpayer fraud and evasion that criminal sanctions play an important role in tax administration. Specifically criminalizing and punishing the sale, installation, and use of sales suppression devices serve as a strong deterrent to potential offenders. 2. Crimes . The opposition to AB 781 says that it is "absolute proof of the necessity of a sentencing commission to examine California's penal statutes and determine whether or not the sentencing structure provides effective sanctions to prevent future criminal conduct and punish those individuals who have committed crimes. California can no longer afford [piecemeal] sentence enhancements without considering the need for acquiring, either through construction or out of state housing, additional prison beds." Because this bill creates a new crime; those provisions of the bill will be considered by the Senate Public Safety Committee. Assembly Actions Assembly Public Safety6 -0 Assembly Revenue & Taxation8 -0 Assembly Appropriations 16-0 Assembly Floor 75-1 ------------------------- <3> Based on California's average 2013 state, local, and district tax rate of 8.38%. AB 781 -- 4/18/13 -- PageE Support and Opposition (6/13/13) Support : State Board of Equalization (Sponsors); California Retailers Association; American Federation of State, County, and Municipal Employees. Opposition : Taxpayers for Improving Public Safety.