BILL ANALYSIS Ó
AB 2681
Page A
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2681 (Dababneh) - As Introduced: February 21, 2014
SUSPENSE
2/3 vote. Fiscal committee. Tax levy.
SUBJECT : Sales and use tax: retail sale: storage use:
counterfeit mark
SUMMARY : Provides that a "retail sale" or "sale at retail" also
includes any sale by a convicted seller, as defined, of tangible
personal property (TPP) with a counterfeit mark regardless of
whether the sale is for resale in the regular course of
business. Specifically, this bill :
1)Provides that a "retail sale" or "sale at retail" also
includes any sale by a convicted seller of TPP with a
counterfeit mark on, or in connection with, that sale,
regardless of whether the sale is for resale in the regular
course of business.
2)Defines a "convicted seller" as a person convicted of a
violation under Penal Code Section 350 or 653w or Section 2320
of Title 18 of the United States Code. The conviction must
have occurred on or after the date of sale.
3)Defines a "counterfeit mark" as having the same meaning as
defined by United State Code, Title 18, Section 2320.
4)Provides that Business and Professions Code Section 17200 and
Civil Code Section 1750 shall only apply to a convicted
seller.
5)Provides that a notice of deficiency determination to a
convicted seller shall be mailed within one year after the
last day of the calendar month following the date of
conviction.
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6)Takes effect immediately as a tax levy.
EXISTING LAW
1)Makes it a crime, punishable by fines and imprisonment, for
any person to willfully manufacture, intentionally sell, or
knowingly possess for sale any counterfeit of a mark
registered with the Secretary of State or the Principal
Register of the United States Patent and Trademark Office.
2)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in California.
3)Defines a "retail sale" as a sale for any purpose other than
resale in the regular course of business. With respect to
illegal sales of goods in California, the law imposes a sales
or use tax on the retail sales and purchases of those goods in
the same manner as legitimate sales.
4)Provides that TPP sold to a person who resells the property
prior to any use of that property is not subject to Sales and
Use Tax (SUT).
5)Provides that TPP sold to a person who purchases the property
to incorporate into a manufactured item to be sold is not
subject to SUT.
6)Imposes a complementary use tax on the storage, use, or other
consumption in California of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
7)Establishes the BOE, which consists of five voting members:
the State Controller and four members elected for four-year
terms at gubernatorial elections. Among its many duties, the
BOE administers the SUT, sets property values for
state-assessees, monitors the property tax assessment
practices of county assessors, and serves as the
administrative appellate body for final actions of the FTB.
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8)Requires various state entities, including the BOE, the FTB,
and the Department of Justice, to enforce laws relating to the
taxation and legal operation of businesses throughout the
state under their respective jurisdictions.
FISCAL EFFECT : The BOE estimates an annual General Fund
revenue increase of $2.1 million. The BOE also adds that
persons from whom this property is seized may face significant
fines and imprisonment. Accordingly, total tax collections are
likely to be considerably less.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
California's underground economy has a severe and negative
effect on the state's competitiveness. The underground
economy refers to the selling of counterfeit goods designed
to exactly replicate a "name brand" item. These goods are
typically imported from overseas and sold at open markets
or in other unofficial venues.
Because it enables illegitimate businesses to steal
intellectual property and then sell it at below market
costs, the underground economy places law abiding
businesses at a tremendous disadvantage. Law abiding
businesses make significant financial investments to
develop their products, including: training and hiring
employees, building manufacturing capacity, and complying
with myriad state labor and environmental protection laws.
At each point in the production process, these law abiding
businesses also remit billions of dollars to the State in
the form of tax revenues that are used to fund schools,
transportation and other vital government services. The
underground economy bypasses this process, giving
illegitimate businesses an unfair advantage over legitimate
businesses that operate in good faith and comply with State
laws.
One of the serious long-term effects of the underground
economy is that it discourages law abiding businesses from
investing in the development of new products. This has a
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chilling effect on the entire value chain, from the
manufacturing equipment that would have been purchased to
the hundreds of good jobs that would have been created.
Under existing State law, sales taxes are imposed on the
"retail sale" or "sale at retail" (hereinafter referred to
[as] "retail sale") of tangible personal property in
California. Under Section 6007 of the Sales and Use Tax
Law, a retail sale is defined as a sale for any purpose
other than resale in the regular course of business. As
such, retail sales of counterfeit goods and pirated
intellectual property in the form of tangible personal
property is subject to sales tax to the same extent as
legitimate sales.
However, sales, possession for resale, and/or
transportation of tangible personal property (whether
counterfeit, pirated, or legitimate) for reseal are not
subject to tax.
2)Supporters state that "[c]ounterfeit activity is a pervasive
crime that undermines the competitiveness of legitimate
businesses that play by the rules. These inferior products
also damage the legitimate company's brand and can also
potentially cause harm to consumers. Counterfeit activity
also results in the State being shortchanged. According to the
Board of Equalization, the state loses out on approximately
$2.1 million in uncollected sales and use taxes associated
with the sale of counterfeit or pirated goods. Not only is AB
2681 sound tax policy, it will also serve as an important tool
to prevent these illegal products from entering the retail
stream."
3)Committee Staff Comments.
a) Why buy counterfeit goods ? A consumer either makes a
conscious decision to purchase a counterfeit item (market
equilibrium) or the consumer is fooled into thinking the
counterfeit item is authentic (market failure). Studies
have found that, under the first scenario, many consumers
are willing to compromise on the product<1>. According to
Vincent Wenxiong Yao, consumers may choose to compromise on
--------------------------
<1> Vincent Wenxiong Yao, An Economic Analysis of Counterfeit
Goods: the Case of China, Journal of the Washington Institute
of China Studies (2009).
AB 2681
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the product because it affords them the opportunity to try
a low-grade version with the intent of purchasing an
authentic item at some point in the future. (Id.)
Counterfeit products also provide lesser value at a lower
cost, which may be acceptable for an individual with
limited means. Finally, counterfeits have improved
dramatically. The ability to discern counterfeits from
authentic goods is becoming increasingly difficult. Under
a market failure scenario, however, the consumer is simply
fooled into thinking they have purchased an authentic item.
Because the quality of counterfeit items has improved
dramatically, the likelihood of the second scenario
increases.
b) Who buys counterfeit goods ? Under the market
equilibrium scenario, low-income communities are the ones
most likely to purchase counterfeit items; and for a person
with limited means, counterfeits may be a good substitute
for brand new authentic goods. Moreover, the tendency to
purchase counterfeit goods decreases as incomes increase.
(Id.) This is because counterfeit goods are considered
inferior products or negative goods. (Id.) When incomes
increase, consumers tend to demand better quality and
authentic products. Under a market failure scenario,
however, counterfeit goods will be sold to consumers
regardless of income because the seller has misrepresented
the product.
c) Enforcement of copyright laws . The underground economy
is a well-documented problem in the State of California.
The BOE has estimated that $8 billion in corporate,
personal, and SUT revenues go uncollected in California
each year, with unreported and underreported economic
activity responsible for the vast majority of that total.
This places a burden on state and local governments, and
legitimate businesses; tackling the problem has not been
easy. In 1993, the Joint Enforcement Strike Force was
created to combat the underground economy by aiding in the
sharing of information, coordinating enforcement efforts,
and developing methods to target enforcement resources.
Additionally, the Labor Task Force has also been launched
in an effort to curb the underground economy. Through its
information sharing program, the Labor Task Force attempts
to ensure that employees receive proper payments and that
California receives all employment taxes and fees owed.
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Despite the coordinated efforts of several state agencies,
California's underground economy remains a serious problem.
d) Death and taxes, not always certain . One of the reasons
why the government is unable to further crack down on the
underground economy, and specifically on counterfeit goods,
is because sellers of counterfeit goods rarely leave a
paper trail. According to an article by the New York
Comptroller, Bootleg Billions: The Impact of the
Counterfeit Goods Trade on New York City, the City of New
York lost an estimated $380 million in unpaid sales taxes
in 2003 because sellers did not leave a paper trail.
Although the lack of sales receipts poses some problems, an
estimate of the value of the merchandise can be made
available to the BOE upon conviction.
The BOE understands that it may not be cost effective to
combat counterfeit sales by enforcing the sales tax at the
retail level. The purpose of this bill is to expand the
imposition of the SUT Law to any sale of counterfeit TPP by
a convicted seller. By expanding the imposition of SUT to
transaction points along the supply chain, the BOE hopes to
gain a useful and cost-effective tool in combating the
underground economy. However, the collection of the SUT
may still be difficult because persons from whom the
property is seized have already been convicted and possibly
face significant fines and imprisonment, which may not
leave enough funds to pay for the uncollected sales tax.
Even if a lien is placed on the property or a business,
there is no guarantee that it will lead to additional tax
revenue. As such, the BOE may find it no easier to collect
from a person behind bars than from a vendor on the street.
e) Fighting crime with tax . The "Tax Man" uses a number of
tools to both discourage and encourage behavior. State and
federal governments encourage homeownership by providing
deductions for property taxes and interest paid on
mortgages. Conversely, states have discouraged the use of
certain products, such as cigarettes, by imposing a high
excise tax. Despite using the tax code to discourage
certain behavior, California does not usually impose a tax
specifically on criminal activity. For example, California
does not impose a special excise tax on the sale of illicit
drugs, such as marijuana. One of the reasons for not
imposing a special tax on illicit drugs is that the
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imposition of the tax might actually legitimize the use of
the drug. As such, imposing a sales tax on certain
counterfeit TPP sold by a convicted seller may have the
same effect.
f) Supplier business model . Like most business models, a
seller of counterfeit goods makes a profit if sales
revenues exceed costs. However, unlike legitimate
businesses, sellers of counterfeit goods must additionally
take into account the potential costs of government
prosecution and civil lawsuits from genuine producers.
These considerations may have a huge impact on a seller's
decision to carry counterfeit items, especially if the
government has improved enforcement of copyright laws or
increased jail time. The more active the government
becomes in enforcing laws, the more likely sellers will
choose not to carry counterfeit products. The threat of
sales tax, on its face, may be seen as one additional tool
to deter a person from selling counterfeit items because it
increases the costs of doing business. However, the
collection of sales tax is secondary to the threat of being
caught. When one considers the jail time, the seizure of
property, and the enormous criminal fines, it seems
unlikely that a person selling counterfeit goods would be
deterred by the possibility of having to remit sales tax,
especially when the imposition of the tax is only imposed
after a conviction.
g) Criminal penalty vs. tax increase . As currently
drafted, this bill increases taxes on at least one
individual and is, therefore, subject to a 2/3 vote. If
the author wishes to discourage the buying and selling of
counterfeit goods through a majority vote proposal, he may
wish to increase the criminal penalties already associated
with the sale of counterfeit TPP.
h) Related Legislation . AB 575 (V. Manuel Perez) amends
the SUT Law to include within the definition of a "retail
sale" any sale of TPP with a counterfeit mark or TPP that
is pirated intellectual property, regardless of whether the
sale is for resale in the regular course of business. AB
575 was held in this Committee.
i) Prior Legislation . SB 1185 (Price), of the 2011-12
Legislative Session, would have established a multiagency
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partnership consisting of the Employment Development
Department, the FTB, and the BOE, to collaborate in
combating illegal underground operations. SB 1185 was held
in the Assembly Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
Board of Equalization (Sponsor)
California Retailers Association
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098