BILL ANALYSIS Ó AB 781 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 781 (Bocanegra) As Amended August 12, 2013 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |78-1 |(May 28, 2013) |SENATE: |38-0 |(September 6, | | | | | | |2013) | ----------------------------------------------------------------- Original Committee Reference: PUB. S. SUMMARY : Provides new penalties for a person who knowingly sells, purchases, installs, transfers, possesses, or uses any automated sales suppression device, as specified. The Senate amendments : 1)Specify that any person who purchases, installs, or uses in California any automated sales suppression device or zapper or phantom-ware with the intent to defect or evade taxes due is guilty of a misdemeanor. 2)Clarify that any person who, for commercial gain, sells, purchases, installs, transfers, or possesses in California any sales suppression device, zapper, or phantom-ware with knowledge that the sole purpose is to defeat or evade taxes due is guilty of either a misdemeanor or felony. 3)State that the maximum fine is $5,000 or $10,000 depending on the number of devices the person sold, installed, transferred or possessed. 4)Exempts a person that is a corporation that possesses any automated sales suppression device or zapper of phantom ware for the sole purpose of developing hardware or software to combat the evasion of taxes by use of these devices. EXISTING LAW : 1)Provides that all property is taxable unless otherwise provided by the California Constitution or the laws of the United States. 2)Establishes the State Board of Equalization (BOE) which AB 781 Page 2 administers sales and use taxes, excise taxes, special taxes, and the state's fee programs. 3)States that it is a misdemeanor for any person required to make, render, sign, or verify any report, who makes any false or fraudulent return, with intent to defeat or evade the determination of an amount due required by law to be made. 4)Provides that a violation of the requirements set forth in the Revenue and Taxation Code related to sales and use taxes is a misdemeanor, and each offense punishable by a fine of not less than $1,000 and not more than $5,000, or imprisonment not exceeding one year in the county jail, or both the fine and imprisonment in the discretion of the court. 5)Specifies that any person who violates the requirements set forth in the Revenue and Taxation Code with the intent to defeat or evade the reporting, assessment, or payment of a tax or an amount due is guilty of a felony when the amount of unreported tax liability aggregates $25,000 or more in any 12-consecutive-month period. Each offense shall be punished by a fine of not less than $5,000 and not more than $20,000, or imprisonment for 16 months, two years, or three years, or both the fine and imprisonment in the discretion of the court. 6)Provides that any person who knowingly or willfully files a false return or report with BOE, and any person who refuses to permit the BOE or any of its authorized representatives to make any inspection or examination for which provision is made in this part, or who fails to keep any records prescribed by the BOE, or who fails to preserve the records for the inspection of the BOE for the time that the BOE deems necessary, or who alters, cancels, or obliterates entries in the records for the purpose of falsifying the records, is guilty of a misdemeanor and shall be punished by a fine of not less than $100 or more than $1,000, by imprisonment in the county jail for not less than one month or more than six months, or by both. 7)Specifies that any person who willfully evades or attempts in any manner to evade or defeat the payment of the fee imposed by the BOE is guilty of a felony punishable by imprisonment in the county jail for 16 months, two, or three years and a fine of not more than $5,000. AB 781 Page 3 AS PASSED BY THE ASSEMBLY , this bill: 1)Specified that a person who knowingly sells, purchases, installs, transfers, possesses, or uses any automated sales suppression device, zapper or phantom-ware is guilty of an offense punishable by a fine of not more than $10,000, by imprisonment in county jail for not more than one year, or in the county jail for 16 months, two years or three years, or by both a fine and imprisonment. 2)Stated that any person who uses an automated sales suppression device, zapper or phantom-ware shall be liable for all taxes, interest, and penalties due as a result of the use of that device. 3)Defined an "automated sales device" or a "zapper" as 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. 4)Defined "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. 5)Defined "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. FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. AB 781 Page 4 COMMENTS : According to the author, "California's tax system is based on the principal of voluntary compliance. Most taxpayers report tax liability to appropriate agencies and generally comply with California tax law. However, there are those who will try to evade paying their taxes. Such evasion takes the form of failing to report sales, keeping two sets of books, or even filing false tax returns. Newer and more sophisticated products like automated sales suppression devices, zappers, and phantom software have made this process much easier and faster to accomplish. In general, these devices electronically and systematically conceal and remove sale transactions from recordkeeping systems. The use of these modern devices also makes it much more difficult for auditors to detect fraud. "The Board of Equalization has estimated that California loses $214 million in annual sales tax revenue due to these kinds of devices. Not only do these kinds of devices place a burden on state and local governments, they also place a burden on honest and hardworking business owners who pay and collect taxes. A business owner that suppresses sales is able to reduce the amount of income tax paid, and the amount of sales tax collected. This provides a huge competitive disadvantage for honest taxpayers. "Making things worse is the fact that these kinds of devices and software are incredibly difficult to detect. Even when an audit is conducted, there are no guarantees of finding criminal activity. AB 781 addresses this problem by criminalizing not only the use, but the sale and possession of these devices and software. Instead of simply going after the user, this bill also goes after the seller and developer." Please see the policy committee analysis for a full discussion of this bill. Analysis Prepared by : Stella Choe / PUB. S. / (916) 319-3744 FN: 0002627