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.