BILL ANALYSIS Ó AB 2681 Page 1 ASSEMBLY THIRD READING AB 2681 (Dababneh) As Introduced February 21, 2014 2/3 vote. Tax levy REVENUE & TAXATION 7-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Bocanegra, Harkey, Beth |Ayes:|Gatto, Bigelow, | | |Gaines, Mullin, Nestande, | |Bocanegra, Bradford, Ian | | |Pan, Williams | |Calderon, Campos, | | | | |Donnelly, Eggman, Gomez, | | | | |Holden, Jones, Linder, | | | | |Pan, Quirk, | | | | |Ridley-Thomas, Wagner, | | | | |Weber | ----------------------------------------------------------------- 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 653(w) or United States Code, Title 18, Section 2320. 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 AB 2681 Page 2 last day of the calendar month following the date of conviction. 6)Takes effect immediately as a tax levy. FISCAL EFFECT : According to the Assembly Appropriations Committee: 1)Minor and absorbable costs to the Board of Equalization (BOE) to administer the tax. 2)An estimated General Fund revenue increase of approximately $2.1 million per year based on California's pro rata share of total seizures of counterfeit goods in the United State and the taxable value of those counterfeit goods. COMMENTS : 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. AB 2681 Page 3 Assembly Revenue and Taxation Committee staff comments: 1)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 sales and use tax (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. Despite the coordinated efforts of several state agencies, California's underground economy remains a serious problem. 2)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 alone. 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 AB 2681 Page 4 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. 3)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 imposition of the tax might actually legitimize the use of the drug. As such, imposing a sales tax on certain counterfeit TPP sales by a convicted seller may have the same effect. 4)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. AB 2681 Page 5 Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0003866