BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 160


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          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:  










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          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. 









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          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  








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            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:  










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           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."










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           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  








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            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  








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            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  








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            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  








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            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









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          California District Attorneys Association (Co-Sponsor)


          California Chamber of Commerce




          Opposition


          None on file




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