BILL ANALYSIS Ó AB 1717 Page 1 Date of Hearing: May 13, 2014 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Raul Bocanegra, Chair AB 1717 (Perea) - As Amended: April 2, 2014 2/3 vote. Urgency. Fiscal committee. SUBJECT : Telecommunications: prepaid mobile telephony services: state surcharge and fees: local charges collection SUMMARY : Establishes a new point-of-sale system for collecting and remitting specified fees, surcharges, and taxes applicable to prepaid mobile telephony services (MTS). Specifically, this bill : 1)Contains the following legislative findings and declarations: a) Maintaining effective and efficient communications services, 911 emergency systems, communications-related public policy programs to promote universal service, and various local programs across the state benefits all persons with access to the telecommunications system. b) Providers of end-use communications services, including providers of mobile voice telecommunications services, which the Federal Communications Commission terms MTS, are required to collect and remit communications taxes, fees, and surcharges on various types of communication service revenues, as provided by existing state or local law. c) Consumers purchase prepaid MTS at a wide variety of retail locations and other distribution channels, as well as through service providers. d) Prepaid MTS are an important and growing segment of the communications industry. Such services are often the only means by which persons with low incomes can obtain limited access to the telecommunications system. e) To ensure equitable contributions from end-use consumers of postpaid and prepaid MTS in this state, there should be AB 1717 Page 2 standardization with respect to the method used to collect communications taxes, fees, and surcharges from end-use consumers of prepaid MTS. f) Prepaid MTS are frequently sold by a third-party retailer that is not the provider of MTS, and collecting taxes, fees, and surcharges from prepaid consumers of MTS at the time of the retail transaction is necessary and the most efficient and competitively neutral means of collection. g) An equitable distribution mechanism is necessary to ensure that utility user taxes (UUTs) and other telecommunication charges are collected on behalf of cities and counties and are properly distributed to those jurisdictions. 2)Enacts the Prepaid MTS Surcharge Collection Act. 3)Imposes, on and after January 1, 2016, a "prepaid MTS surcharge" on each prepaid consumer. Sellers shall collect the surcharge from prepaid consumers at the time of each retail transaction in this state. 4)Specifies that the "prepaid MTS surcharge" shall be imposed as a percentage of the sales price of each retail transaction in this state. 5)Provides that the "prepaid MTS surcharge" shall be in lieu of any charges imposed under the Emergency Telephone Users Surcharge Act and the "Public Utilities Commission (PUC) surcharges" for prepaid MTS. 6)Defines the "prepaid MTS surcharge" as a surcharge consisting of the emergency telephone users surcharge and the "PUC surcharges", as specified. 7)Defines the "PUC surcharges" to include: a) The California High-Cost Fund-A Administrative Committee Fund program surcharge; b) The California High-Cost Fund-B Administrative Committee Fund program surcharge; AB 1717 Page 3 c) The Deaf and Disabled Telecommunications Program Administrative Committee Fund surcharge; d) The California Teleconnect Fund Administrative Committee Fund program surcharge; e) The California Advanced Services Fund program surcharge; f) The Moore Universal Telephone Service Act; and, g) PUC reimbursement fees. 8)Requires the PUC to compute annually, by October 1 of each year beginning on October 1, 2015, the following: a) A reimbursement fee as a percentage of the sales price for prepaid MTS, to be effective on January 1 of the following year and to be collected and remitted pursuant to this bill; and, b) The cumulative amount of the telecommunications universal service surcharges as a percentage of the sales price for prepaid MTS, to be effective on January 1 of the following year and to be collected and remitted pursuant to this bill. 9)Requires the State Board of Equalization (BOE) to calculate annually the prepaid MTS surcharge by November 1 of each year beginning on November 1, 2015, by adding the following: a) The emergency telephone users surcharge rate reported by the Office of Emergency Services (OES); and, b) The PUC's reimbursement fee and telecommunications universal service surcharges. 10)Permits sellers to deduct and retain 2% of the amounts collected from prepaid consumers for the prepaid MTS surcharge and local charges as vendor compensation, except in cases where the seller is the provider of prepaid MTS and sells the prepaid MTS directly to the prepaid consumer. 11)Requires the BOE to administer and collect the prepaid MTS surcharge pursuant to the Fee Collection Procedures Law. AB 1717 Page 4 12)Establishes the Prepaid MTS Surcharge Fund (Fund) in the State Treasury. The Fund shall consist of all surcharges, interest, penalties, and other amounts collected and paid to the BOE, less reimbursements to the BOE for expenses incurred in administering and collecting the prepaid MTS surcharge. 13)Enacts the Local Prepaid MTS Collection Act. 14)Provides that on and after January 1, 2016, a "local charge" imposed on prepaid MTS shall be collected from prepaid consumers in the same manner as the prepaid MTS surcharge is collected if, on or before September 1, 2015, the local agency enters into a contract with the BOE for the BOE to perform specified functions. In the contract, the local agency shall certify to the BOE: a) That its ordinance applies its "local charge" to prepaid MTS and that the local agency agrees to indemnify the BOE for any and all liability for damages resulting from collection; and, b) The amount of the local 911 charge, or the applicable tiered rate for a UUT. 15)Defines a "local charge" as UUTs, as specified, and charges for access to communication services or to local "911" emergency telephone systems, as specified. 16)Suspends, on and after January 1, 2016, the authority of any city, county, or city and county to impose a UUT on the consumption of prepaid MTS at the rate specified by ordinance. Instead, establishes a "tiered method" for collection of the UUT rate, with rates ranging from 0 to 9%. 17)Suspends, on and after January 1, 2016, the authority of any city, county, or city and county to impose a charge applicable to prepaid MTS for access to communication services or to local "911" emergency telephone systems at the rate specified by ordinance. Instead, establishes a simplified "tiered method" for collection of these charges. 18)Requires the amount of the combined prepaid MTS surcharge and local charges to be separately stated on the invoice provided to the prepaid consumer. AB 1717 Page 5 19)Provides that a seller that relies in good faith on information provided by the BOE to match the location of a point-of-sale transaction to the applicable prepaid MTS surcharge amount and local charges, collects that amount from the prepaid consumer, and remits the amount to the BOE, shall not be liable for any additional MTS surcharge or local charges and shall not be required to refund any amounts. 20)Provides that this is an urgency statute necessary for the immediate preservation of the public peace, health, or safety. EXISTING LAW : 1)Imposes a surcharge, under the Emergency Telephone Users Surcharge Act, on amounts paid for intrastate telephone service. These surcharges provide revenues sufficient to fund "911" emergency telephone system costs. Amounts are determined annually by the OES and, upon collection, are paid to the BOE on a monthly basis by the telephone service supplier. Funds are then deposited into the State Treasury to the credit of the State Emergency Telephone Number Account in the General Fund, to be expended for limited purposes, including to pay the Department of General Services for its costs administering the "911" emergency telephone number system. 2)Grants the PUC regulatory authority over public utilities, including telephone corporations. Specifically, the PUC is authorized to fix just and reasonable rates and charges for services provided by public utilities. 3)Establishes the PUC Utilities Reimbursement Account and authorizes the PUC to determine annually a fee to be paid by every public utility (except railroad corporations) providing service directly to customers or subscribers and subject to the PUC's jurisdiction. Specifically, the PUC establishes the fee, with the approval of the Department of Finance, to produce funds sufficient to cover the PUC's budget and an appropriate reserve. 4)Establishes the state's telecommunications universal service programs and authorizes the PUC to impose charges to fund those programs. Pursuant to this authority, the PUC has established 6 end-user surcharges to fund 6 universal service AB 1717 Page 6 programs. FISCAL EFFECT : The BOE estimates that, in 2016, this bill will result in a revenue loss of $1.7 million. The BOE further notes that its estimate does "not take into consideration additional revenue lost under this measure for reimbursement to the BOE for administrative costs, which are substantial . . . ." As for local revenues, the BOE has identified over 150 local UUTs. Because of the high number of UUTs and the various rates involved, the BOE is unable to estimate the impact on UUT revenues. COMMENTS : 1)The author has provided the following statement in support of this bill: AB 1717 would modernize our tax collection system to keep pace with the rapidly evolving technology and market of the wireless industry. Doing so will ensure that prepaid wireless customers, a growing segment of the market, pay the same, existing taxes and fees that all other phone customers pay to maintain effective and efficient 911 systems, while also benefitting local governments and other public purpose programs. Everyone who uses phone services pays a small monthly fee as part of their bill to help fund 911 and support other important state and local programs. However, for prepaid wireless services, there is no collection mechanism for customers to pay these fees. Nearly 25% of all wireless customers are now prepaid customers. The current system leaves state and local governments without a reliable, predictable means for ensuring collection of these revenues. Modernizing state statutes to keep pace with evolving markets and technology in the prepaid segment of the wireless industry means implementing a point-of-sale collection method on prepaid wireless services. AB 1717 ensures tax fairness and equity while also generating stable revenue for 911 systems, local governments and other public purpose programs. Thirty-two states and the District of Columbia have enacted the point-of-sale AB 1717 Page 7 collection model, and the system is working in those states. 2)Proponents of this bill note the following: Prepaid wireless service's unique business model offers excellent wireless service to consumers at a very affordable rate, often less expensive than post paid service. Moreover, prepaid services are offered on a "pay-as-you-go" basis with no required contracts, term or volume commitments, early termination penalties, overage charges, or credit checks. These important factors make prepaid services available to those consumers to whom the security and convenience of mobile telephone service would not be available. This business model offers reliable service and affordable pricing. However, the fact that the service is not billed creates a challenge as to how to collect end user fees to fund programs such as 911, and the various public purpose programs administered by the California Public Utilities Commission. AB 1717 would establish a uniform, statewide retail point-of-sale collection for taxes and fees on prepaid wireless services. AB 1717 will create a transparent and predictable source of funding for critical 911 services. AB 1717 also promotes consumer equity and fairness by ensuring that all wireless customers who use the same 911 services pay the same taxes and fees to fund those services. In fact, point-of-sale collection methods have been successfully enacted and implemented in at least 33 states. 3)Opponents of this bill note the following: There already is a system in place to collect 9-1-1 fees. According to law, carriers are currently collecting and remitting the required fees and surcharges to the California Public Utilities Commission (CPUC). Currently, the State collects $480 million annually in surcharges at a cost of $2.5 million. Under the proposal of AB 1717, it will cost California $12-$14 million dollars annually to collect roughly 10% of the market ($48 million from prepaid wireless) while also continuing to pay $1 million to collect the remaining $430 million in surcharges. AB 1717 Page 8 In the recently published CPUC analysis of AB 1717, they estimate that the source of 9-1-1 funding would face severe financial losses annually. The CPUC also concluded that by creating a bifurcated collection system for public purpose surcharges and user fees, AB 1717 will raise administrative charges that are passed on to the consumer. In 2012, 50% of the prepaid market had an annual household income of less than $35,000. AB 1717 WILL unfairly hurt low income earners by creating additional revenue costs that will be passed on to the consumer. (Emphasis in original.) 4)Committee Staff Comments a) Where the law and market trends collide : In the case of traditional "postpaid" services, carriers know the personal identities of their customers and generally collect surcharges and fees by levying a certain percentage on top of the cost of monthly services billed. In the case of "prepaid" services, however, carriers often do not know the identity of individual purchasers, especially where services are provided through third-party retailers, rending the "collection" and "remittance" of surcharges for prepaid MTS a subject of considerable controversy. The PUC asserts that carriers are already collecting and remitting state surcharges and fees from both their postpaid and prepaid customers. The wireless telecommunications industry, on the other hand, asserts that carriers are currently remitting the taxes, fees, and surcharges with no standardized or feasible way to collect them from prepaid customers. With the use of prepaid services only expected to grow, carriers argue that it is time to establish a uniform statewide method for collecting and remitting fees and surcharges from prepaid consumers. b) What would this bill do ? This bill would establish a new point-of-sale system for collecting and remitting specified fees, surcharges, and taxes applicable to prepaid MTS. Beginning January 1, 2016, retailers would be required to collect a unified "prepaid MTS surcharge" from prepaid consumers at the time of sale. This surcharge would be imposed as a percentage of the sales price, and would be imposed in lieu of any 911 surcharge or PUC-administered surcharges imposed for prepaid MTS. AB 1717 Page 9 Retailers would be permitted to deduct and retain 2% of the amounts collected as vendor compensation, with the remainder paid to the BOE, which would be charged with administering the new system. The BOE, in turn, would be authorized to deduct its own administrative expenses. Essentially, prepaid MTS providers would no longer be required to remit surcharges and fees out of their existing (largely wholesale) revenue streams. Instead, carriers would be able to keep their existing revenue streams whole, by passing the surcharge and fee costs directly on to prepaid MTS consumers. This bill would also establish a new point-of-sale system for collecting and remitting locally imposed UUTs and 911 charges applicable to prepaid MTS. Specifically, this bill would establish a tiered rate structure for locally imposed UUTs. This tiered structure is designed to ameliorate the administrative complexity that would necessarily be involved in collecting the multiple rates imposed by the numerous jurisdictions with UUT ordinances applicable to MTS. c) The policy arguments on both sides : On April 10, 2014, the PUC voted unanimously to adopt an "Oppose Unless Amended" position on AB 1717. The PUC bases its opposition to this bill on four main policy objections. The discussion below outlines these four points, and summarizes the wireless telecommunication industry's response to each argument: i) The PUC argues that this bill creates a new bureaucracy and significantly increases costs : Specifically, the PUC states that this bill shifts responsibility for the collection and remittance of surcharges and fees from carriers to third-party retailers. By so doing, the PUC contends that this bill would require the creation of a new bureaucracy to collect surcharges and fees from roughly 45,000 retail locations instead of from approximately 20 prepaid carriers. According to the PUC, this additional administrative complexity would significantly increase costs, with estimates ranging from $12 to $14 million in recurring costs, not accounting for the millions of dollars in startup costs. AB 1717 Page 10 The telecommunications industry counters by asserting that, under current law, these surcharges are end-user consumer surcharges. According to industry, a point-of-sale system is the only method available to collect from end-users in a fair and equitable manner. Industry asserts that a point-of-sale system provides transparency not currently available in any other method of collection. Industry also asserts that this bill does not create a new bureaucracy, but instead builds upon the state's existing sales tax collection and audit structure. Finally, industry notes that, in the postpaid context, collection takes place when the customer pays - through a monthly bill. Thus, industry asserts that, in the prepaid context, collection should also take place when the customer pays - at the cash register. ii) The PUC argues that this bill would create an additional, parallel collection system : Specifically, the PUC argues that the proposed prepaid-only system would operate in addition to the existing collection and remittance systems that currently collect all telecommunications surcharge revenues for a fraction of the cost of the prepaid-, wireless-only solution proposed by this bill. The PUC notes that, under the current system, the state collects $480 million in surcharges for $2.5 million in annual collection costs. By comparison, the PUC contends that this bill's proposed system would cost $12 to $14 million annually to collect $48 million in surcharges. Industry counters by asserting that it would be impossible for this bill to create a parallel collection system for prepaid because there currently is no collection system for prepaid services. Specifically, industry notes that the current system does not work for prepaid services, which are often purchased anonymously from big box stores. As a result, carriers contend that they are incurring out-of-pocket costs by remitting taxes and surcharges without getting reimbursed from their prepaid customers. iii) The PUC argues that this bill would reduce industry oversight : The PUC contends that this bill would fragment state agency oversight into two inconsistent AB 1717 Page 11 surcharge collection mechanisms - one for prepaid and one for all other telecommunications service. The PUC argues that, under the proposed arrangement, the PUC does not have enforcement authority over the retailers and "no way to keep the ratepayers from having to pay all the additional costs associated with collecting from thousands of retail locations instead [of] 20-odd carriers." Industry contends that this bill would in no way fragment state agency oversight. Specifically, industry notes that this bill proposes a single state agency - namely the BOE - as the entity responsible for uniformly collecting taxes and fees from every single retailer that sells prepaid services. In addition, industry contends that this bill promotes oversight and transparency by designating the BOE, which already has expertise with a point-of-sale tax collection system. iv) The PUC argues that this bill proposes solutions to a problem that does not exist : The PUC notes that carriers currently remit all state surcharges and attest to remitting applicable local UUTs. According to the PUC, by mandating a single point-of-sale collection mechanism, this bill prohibits more efficient and less costly collection methods that already exist. The PUC notes that carriers often have multiple points of contact with their customers, and that prepaid carriers frequently collect detailed customer account information even for services purchased from third-party retailers. Industry contends that a problem does exist; namely, that end-users of prepaid service are not currently paying the end-user fees and surcharges. Industry also argues that it is inaccurate to suggest that carriers currently possess multiple ways of assessing surcharges, and that this bill is consistent with state policy because it proposes a method that itemizes surcharges for customers. Additionally, industry argues "AB 1717 is less confusing to consumers, because it proposes one uniform method that all carriers must follow, rather than leaving consumers to sort through a variety of unspecified methods that may or may not provide itemized disclosure." d) Issues raised by the BOE : The BOE has raised a number AB 1717 Page 12 of policy and administrative concerns with this bill. For a comprehensive discussion of these concerns, please refer to the BOE's staff analysis, which notes, among other things: i) MTS surcharge does not exclude ancillary services : In its current form, the surcharge consists of any and all state and locally authorized taxes, fees, and surcharges that are applicable to mobile telephony services, as described. Except as provided, the bill requires the surcharge to apply to the entire price if prepaid MTS [are] sold in combination with mobile data services or any other service or products for a single price. This bill requires the MTS surcharge rate calculation to include the 911 surcharge and CPUC-surcharge rates applicable to intrastate telephone communication services, as determined by the OES and CPUC, respectively. However, the application of the resulting MTS surcharge rate does not exclude ancillary services, such as voice-mail service, data, and messaging (texting). Assuming no difference between post- and pre-paid wireless service cost, MTS consumers will pay a higher surcharge than post-paid wireless consumers since the 911 surcharge and CPUC surcharges do not apply to ancillary services. (Emphasis in original.) ii) This bill imposes a MTS surcharge at the time of each retail transaction for prepaid wireless services in this state : This bill states that a retail transaction occurs in the state if the prepaid consumer makes the retail transaction at a retail location in this state, or if the prepaid consumer makes a known-address transaction, as described. A known-address transaction that occurs in this state generally relates to an Internet-based or telephone-based transaction. In this case, the seller likely transfers the prepaid wireless services to the consumer by: (1) Mail as a physical prepaid wireless card or a card bundled with a mobile phone; or, (2) Directly adding the prepaid minutes to the consumer's device. AB 1717 Page 13 In a known-address transaction, the seller may be located in this state or outside this state. It is questionable whether or not the state may legally require an out-of-state MTS retailer, who has no physical presence in California, to remit the surcharge on services sold to an in-state consumer. While service suppliers are currently registered with the BOE for purposes of the 911 Surcharge, some prepaid MTS sellers may be located outside this state even though they sell to California consumers. e) Double-referral : This bill was double-referred to the Assembly Committee on Utilities and Commerce (U&C), and passed out of that Committee on a 9-0 vote on April 21, 2014. For additional discussion of this bill's provisions, please refer to the U&C analysis. f) Potential amendment : The U&C analysis suggested that the author and sponsors consider requiring entities that are currently remitting state user fees and public purpose program fees to continue remitting to the PUC on their own direct prepaid sales. Indeed, U&C Committee staff argued that such an amendment might ensure that the PUC maintains its comprehensive oversight of carriers. This Committee might also wish to consider whether this bill's proposed point-of-sale collection and remittance system should apply to cases where carriers sell prepaid MTS directly to customers (as opposed to third-party retail transactions). Excluding direct sales from the new regime might enhance oversight and could potentially reduce some of the administrative costs involved in having the BOE collect and remit fees. That said, such an amendment might also further complicate an already bifurcated proposal for prepaid sales. g) Related legislation : AB 300 (Perea) contained provisions substantially similar to the current bill and would have established a point-of-sale system for collecting and remitting specified fees, surcharges, and taxes applicable to prepaid MTS. AB 300 was vetoed by the Governor, who noted the following in his veto message: This bill would establish an additional system for collecting and remitting AB 1717 Page 14 fees, surcharges and taxes applicable to prepaid mobile services. These charges would be collected from prepaid customers and remitted to the Board of Equalization, while fees collected from postpaid customers would continue to be remitted directly to the Public Utilities Commission, State 911 Fund and local governments. There is no question that the state needs an effective system for capturing local taxes related to the sale of prepaid phones. The solution, however, proposed by this bill is duplicative, complex and will result in significant and unnecessary costs to the state. I encourage the author to partner with the local governments and State Agencies affected by these revenues and craft a bill with a more cost effective solution. i) Prior legislation : (1) AB 1050 (Ma), of the 2011-12 Legislative Session, would have imposed an MTS surcharge similar to this bill. AB 1050 died in the Senate Committee on Governance and Finance. (2) AB 2545 (De La Torre), of the 2009-10 Legislative Session, would have required the PUC to conduct a public process to develop recommendations for an equitable and uniform method to collect state and local fees and surcharges from consumers of prepaid MTS. AB 2545 died on the Senate Inactive File. REGISTERED SUPPORT / OPPOSITION : Support Boost California Professional Firefighters AB 1717 Page 15 City of Burbank City of Culver City City of Gilroy City of Glendale City of La Verne City of Sacramento City of San Gabriel CTIA - The Wireless Association MuniServices Peace Officers Research Association of California Sprint T-Mobile TracFone Wireless, Inc. Verizon Virgin Mobile Opposition California Chapter of the National Emergency Number Association California Fire Chiefs Association California Peace Officers' Association California Public Utilities Commission California State Sheriffs' Association Northern California Chapter of the Association of Public Safety Communications Officials Office of Ratepayer Advocates Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098