BILL ANALYSIS                                                                                                                                                                                                    Ó



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          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  








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            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.








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          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  








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            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.








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           Analysis Prepared by  :    Carlos Anguiano / REV. & TAX. / (916)  
          319-2098 


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