BILL ANALYSIS Ó AB 160 Page 1 Date of Hearing: April 27, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 160 (Dababneh) - As Amended April 9, 2015 2/3 vote. Fiscal committee. SUBJECT: Criminal profiteering: counterfeit labels: sales and use taxes SUMMARY: Removes the sale for resale exclusion for tangible personal property (TPP) sold or purchased with counterfeit or illicit labeling, adds tax fraud to the list of crimes eligible for civil forfeiture as "criminal profiteering activity," and revises the definition of "organized crime" to include crimes that through planning and coordination of individual efforts, seek to conduct the illegal activities of tax fraud. Specifically, this bill: AB 160 Page 2 1)Adds, to the definition of a "retail sale" or "sale at retail," the sale of TPP with a counterfeit label or illicit label on the property, regardless of whether the sale is for resale in the regular course of business. 2)Adds, to the definition of "storage" or "use," a purchase by a convicted purchaser of TPP with a counterfeit label or illicit label on the property, regardless of whether the purchase is for resale in the regular course of business. 3)Defines "counterfeit label" as having the same meaning as United States Code (USC), Title 18, Section 2318. 4)Defines "illicit label" as having the same meaning as USC, Title 18, Section 2318. 5)Expands the list of offenses which can serve as a basis for a criminal profiteering action to include piracy, insurance fraud, and tax fraud. 6)Revises the definition of "organized crime" to include crimes that through planning and coordination of individual efforts, seek to conduct the illegal activities of tax fraud. 7)Provides that if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made. 8)Makes amendments to the Penal Code that are beyond the purview of this Committee. AB 160 Page 3 EXISTING LAW: 1)Requires the Board of Equalization (BOE) to seize any person's property, real or personal, when the person is delinquent in paying amounts due, and sell the property, or a sufficient part of it, at public auction to pay the amount due together with any interest or penalties imposed for the delinquency and any costs incurred on account of the seizure and sale. 2)Provides that the BOE is allowed to issue to a person a notice of jeopardy determination that requires the person to pay the amount immediately if the BOE determines that a delay will jeopardize tax collection. The amount determined is immediately due and payable. 3)Provides that a person receiving a jeopardy determination notice may, within 10 days of the notice, file a petition and pursue remedies through the BOE's appeal process. The person must make a security deposit with the BOE for the amount the notice requires. 4)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. 5)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. 6)Defines a "retail sale" as a sale for any purpose other than AB 160 Page 4 resale in the regular course of business. With respect to illegal sales of goods in California, the law imposes a Sales and Use Tax (SUT) on the retail sales and purchases of those goods in the same manner as legitimate sales. However, existing law also specifies that sales and purchases of tangible personal property with a counterfeit mark, when made by a "convicted seller" or "convicted purchaser," are subject the SUT, regardless of whether the sales are for resale in the regular course of business. 7)Provides that TPP sold to a person who resells the property prior to any use of that property is not subject to SUT. 8)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. 9)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). FISCAL EFFECT: The BOE projects revenue gain from asset forfeiture "of several million dollars annually beginning in fiscal year 2016-17" and a "potential gain of $1.1 million annually" from counterfeiting offenses. COMMENTS: AB 160 Page 5 1)Author's Statement : The author has provided the following statement in support of this bill: I authored AB 2681 (signed by Governor Brown on September 19, 2014) to grant the BOE increased authority to assess taxes on individuals convicted of trafficking in counterfeit goods. Under this Legislation, any transaction involving the sale of counterfeit goods will be taxable as a retail transaction. The legislative intent was to stop counterfeiters from profiting from their crimes, holds them financially liable, and captures tax revenues lost as a direct result of their criminal activities. This bill (AB 160) furthers this legislative intent by allowing enforcement to seize assets acquired directly and immediately from the proceeds of illegal activity including tax evasion, copyright infringement, counterfeiting and insurance fraud. Additionally, AB 160 would also allow the BOE to seek an order of restitution for sales and use tax liabilities owed to the State based [on] the retail sale or consumption of tangible personal property which violates a recorded copyright or contains an illicit label as defined under federal law. 2)Arguments in Support : According to the California District Attorneys Association, "California's 'little RICO' statute (patterned after the federal RICO forfeiture statute) is limited by its restrictions and lack of predures. Whereas the federal statute lists over 150 different crimes that can trigger forfeiture, that California statute lists only 33 crimes. Additionally, none of the 33 listed crimes in the California statute address tax fraud, despite California's rampant tax fraud problem and an underground economy that costs the states $9 billion in taxes every year." AB 160 Page 6 3)Underground Economy : 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, placing 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. 4)Evolution of Tax Recovery and Crime Enforcement Team (TRaCE) : In 2012, AB 1185 (Price), of the 2011-12 Legislative Session, would have established a multiagency partnership, known as the "Centralized Intelligence Partnership" (CIP), consisting of the Employment Development Department (EDD), the Franchise Tax Board (FTB), and the BOE, to collaborate in combating illegal underground operations. AB 1185 was held on Assembly Appropriations Committee's Suspense File. In January 2014, AB 576 (V. Manuel Perez), Chapter 614, Statutes of 2014, created the Revenue Recovery and Collaborative Enforcement Team Act (RRaCE) pilot program. The Legislature intended the act to enhance existing efforts to combat criminal tax evasion associated with underground economic activities by institutionalizing collaboration among state agencies. A key element of the effort is to authorize and facilitate data and intelligence sharing among participating state agencies. The intent of AB 576 is to focus on criminal and civil prosecution of those who operate in the underground economy and violate the tax laws. The Governor attached a signing letter to AB 576 designating the Department of Industrial Relations (DIR) as the lead agency; it is believed this was done to avoid AB 160 Page 7 duplication of efforts with other state agencies and task forces that address elements of the underground economy (i.e., the labor laws focused on by the Joint Enforcement Strike Force (JESF), and the Labor Enforcement Task Force (LETF).) Despite the more formal efforts of establishing RRaCE and CIP, the BOE has been working since 2011 with several agencies to establish a working body of investigators to collaborate on underground economy cases involving felony tax evasion. According to the BOE, these independent efforts eventually lead to the establishment of TRaCE. TRaCE combats criminal tax evasion related to underground economic activity. Team members and other participating agencies are authorized to exchange information to investigate, prosecute, and recover revenue lost in connection with illegal underground tax evasion. The task force is comprised of public officials from the BOE, Department of Justice, FTB, Department of Alcoholic Beverage Control, EDD, Federal Bureau of Investigation, and U.S. Immigration and Customs Enforcement's Homeland Security Investigations. The BOE states that the development of TRaCE was not dependent on the enactment of AB 576 or SB 1185. However, when SB 1185 or AB 576 moved through the legislative process, it appeared that explicit legislative authorization was required to implement a program of this nature. Additionally, despite the Governor's appointment of DIR as the lead agency for RRaCE, DIR is not one of the participating members of the current TRaCE pilot program. DIR's lack of direct participation in TRaCE may be due to the fact that DIR was only given an advisory position within RRaCE. In order to fully implement the Governor's signing message and appointment of DIR as the lead agency, the Committee may wish to add DIR as a partner equal to FTB, BOE, and EDD within RRaCE and TRaCE. 5)Expansion of the Control of Profits of Organized Crime Act (CPOC) : It was the intent of the Legislature, when enacting the CPOC, to punish and deter criminal activities of organized AB 160 Page 8 crime through the forfeiture of profits acquired and accumulated as a result of such criminal activities. Under the CPOC, asset forfeiture is allowed upon conviction of more than 30 crimes, including extortion, pimping and pandering, robbery, grand theft, trafficking in controlled substance, money laundering, and offenses related to counterfeiting. Proceeds can be forfeited if the proceeds were gained through a pattern of criminal activity and were gained through involvement in organized crime. This bill adds offenses related to tax fraud to the list of "criminal profiteering activity," and tax fraud to the definition of "organized crime." Generally, tax evasion and fraud is a consequence of the underlying criminal activity. For example, earnings generated from the prostitution are subject to income tax, and the failure to report income on those activities is tax fraud. Additionally, California imposes a sales and use tax (SUT) on the final sale of illegal goods in the same manner as legitimate sales. Therefore, a person selling counterfeit items on a street corner would be liable for the SUT owed. Under these examples, the act of selling counterfeit items and engaging in prostitution is already illegal. As noted in the following example, despite not having the authority to seize assets because of tax fraud, assets were still seized because of other unlawful acts. The BOE provides an example of a case where a defendant had committed tax evasion on tobacco products. In the example, BOE was unable to seize the assets because it lacked authority to do so, and had to turn to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). The defendant was charged with wire fraud and money laundering, which gave ATF the authority to seize the assets. Because ATF seized the assets, ATF received 37% of the assets and California received the remaining 63%. According to the BOE, the lack of authority prevents the BOE, FTB, EDD, Department of Justice, and AB 160 Page 9 Department of Insurance, who have worked hard to obtain a warrant, from potentially collecting restitution for tax evasion. As mentioned before, assets are seized despite not having the authority to do so under tax fraud. The concern, therefore, does not appear to be focused on preventing criminals from fleeing with millions of dollars in assets. Rather, this bill appears to be addressing, as explained by the BOE, the state's inability to collect restitution amounts in full. The Committee may wish to consider weighing the benefits of an increased restitution amounts against the potential negative unintended consequences of criminalizing "tax fraud" under the CPOC. 6)Unintended Consequences : The prosecution of tax fraud within CPOC appears to include individuals not contemplated within this bill. The author's intent is to go after serious offenders with $500,000 in tax evasion or more, but this bill appears to primarily focus on increasing the BOE share of restitution proceeds and broadening its authority to seize assets. The language of this bill potentially covers a husband and wife filing a tax return who knowing overestimate the value of an item donated to a charitable organization in order to reduce tax liability. Husbands and wives filing a joint tax return, small owners of convenience stores, and other small business partners could potentially be swept within a web of organized crime under the language of this bill. As such, the Committee may wish to consider deleting the tax fraud provision from this bill. 7)SUT on Counterfeit Item . AB 2681 (Dababneh), Chapter 477, Statutes of 2014, expanded the definition of "retail sale" or "sale at retail" to include any sale by a convicted seller of TPP with a counterfeit mark regardless of whether the sale is for resale in the regular course of business. This bill again expands the definition to further include "counterfeit label" and "illicit label." As discussed in this Committee's analysis of AB 2681, it is unclear if imposing a tax on AB 160 Page 10 counterfeit items, regardless of whether the sale is for resale in the regular course of business, would discourage criminals from selling counterfeit items. 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. 8)Double Referral : This bill was double referred to the Assembly Committee on Public Safety, which passed this bill on April 7, 0215, with a vote of 7-0. For additional discussion of this bill, please refer to the analysis prepared by the Assembly Committee on Public Safety. REGISTERED SUPPORT / OPPOSITION: Support AB 160 Page 11 California District Attorneys Association (Co-Sponsor) California Chamber of Commerce Opposition None on file Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916) 319-2098