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