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
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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;
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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.
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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.
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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
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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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