BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2681 HEARING: 6/25/14
AUTHOR: Dababneh FISCAL: Yes
VERSION: 2/21/14 TAX LEVY: Yes
CONSULTANT: Grinnell
SALES AND USE TAX: COUNTERFEIT MARKS
Applies the Sales and Use tax to sales for resale of
property made by persons convicted of violating laws
against counterfeiting.
Background and Existing Law
State law imposes the sales tax on every retailer engaged
in business in this state that sells tangible personal
property, and requires them to collect the appropriate tax
from the purchase and remit the amount to the Board of
Equalization (BOE). Sales tax applies whenever a retail
sale is made, which is basically any sale other than one
for resale in the regular course of business. Unless the
person pays the sales tax to the retailer, he or she is
liable for the use tax, which is imposed on any person
consuming tangible personal property in the state. The use
tax rate is the same rate as the sales tax rate, and must
be remitted on or before the last day of the month
following the quarterly period in which the person made the
purchase. The Legislature added the use tax in 1935 in
response to complaints from in-state retailers that
California residents would evade the sales tax it enacted
in 1933 by purchasing property out-of-state, but use it
here.
Federal and state law make it a criminal act 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. Federal law also makes
it a criminal act to traffic in:
Goods and services knowingly using a counterfeit
mark in connection with the goods and services,
Specified products knowing that a counterfeit mark
has been applied to it, the use of which is likely to
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cause confusion, a mistake, or deceive someone,
Counterfeit military goods or service, knowing that
the use, malfunction, or failure of which is likely to
cause serious bodily injury or death, disclosure of
classified information, impairment of or significant
harm to combat operations, or to national security or
a member of the armed forces,
Counterfeit drugs.
Current law applies the sales tax to illegal sales, but
doesn't apply to sales for resale. BOE wants to apply the
sales and use tax to sales for resale of counterfeit goods.
Proposed Law
Assembly Bill 2681 provides that a sale includes any sale
of tangible personal property with a counterfeit mark by an
individual convicted of selling counterfeit merchandise
under state or federal law, regardless of whether it's for
resale.
BOE must mail a determination for any unreported tax to a
convicted seller or purchaser within one year from the date
of the last month of conviction. Any fine or restitution
amount must first be satisfied before BOE can collect the
tax. The measure disconnects unfair trade protection
provisions in the Business and Professions Code to any
person other than the seller once the tax is imposed.
State Revenue Impact
According to BOE, AB 2681 results in revenue gains of $2.1
million annually.
Comments
1. Purpose of the bill . According to the author,
"Counterfeit goods unfairly compete with legitimate brands,
while tarnishing the brand's reputation, and causing a
revenue loss to the state. Moreover some counterfeit
products potentially cause sickness or injury, such as
counterfeit drugs or auto parts. The removal of the sale
for resale exclusion under AB 2681 would deny a tax benefit
to counterfeit criminals that are otherwise available to
AB 2681 - 2/21/14 -- Page 3
legitimate businesses. AB 2681 reinforces California's
intolerance towards this criminal activity."
2. Collectible ? Criminal law applies sanctions to
individuals who sell counterfeit merchandise, which deprive
honest owners of the economic returns justly due to them
for the goods and services they provide. While AB 2681
adds a layer on existing criminal law deterrents against
counterfeiting, is applying the sales tax appropriate? The
bill only affects people convicted of crimes, who are
unlikely to have sufficient income or assets to satisfy the
debt, especially after satisfying criminal restitution
orders to those that hold the rights to the counterfeited
trademarks. As such, AB 2681 may only add to the state's
accounts receivables, and not to its revenues. The
Committee may wish to consider the tangible effects of
applying the sales and use tax to counterfeit goods sold
for resale.
3. Complications . AB 2681 disconnects unfair trade
protection provisions in the Business and Professions Code
to any person other than the seller once the bill imposes
taxes on these goods. Over the last several years, BOE has
been indirectly involved with lawsuits involving purported
unfair business practices pursuant to Business and
Professions Code section 17200, and has received protective
claims for refunds. These cases generally involve an
individual consumer or a class of consumers alleging that a
retailer has been collecting excess tax reimbursement on
otherwise nontaxable sales of tangible personal property.
The retailer in turn files a cross complaint against the
Board and files claims for refund. To avoid any associated
claims for refund by consumers or classes of consumers
alleging that a retailer has collected excess tax
reimbursement on otherwise nontaxable sales, the Measure
precludes such litigation against BOE that could result
from AB 2681.
4. Tax increase . AB 2681 increases a tax on any taxpayers
for the purpose of Section III of Article XIIIA of the
California Constitution, as Section III doesn't currently
provide an exemption for increasing taxes on individuals
convicted of crimes, who are likely behind bars. As such,
Legislative Counsel has assigned the measure a 2/3 vote
key.
AB 2681 - 2/21/14 -- Page 4
Assembly Actions
Assembly Floor 75-0
Assembly Appropriations 17-0
Assembly Revenue and Taxation 7-0
Support and Opposition (06/17/14)
Support : Board of Equalization, California Retailers
Association.
Opposition : None received.