BILL ANALYSIS Ó
SENATE COMMITTEE ON PUBLIC SAFETY
Senator Loni Hancock, Chair
2015 - 2016 Regular
Bill No: AB 160 Hearing Date: June 30, 2015
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|Author: |Dababneh |
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|Version: |May 5, 2015 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|JM |
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Subject: Criminal Profiteering: Counterfeit Labels: Sales and
Use Taxes
HISTORY
Source: Jerome Horton, Chairman of the Board of Equalization
Prior Legislation:AB 2681 (Dababneh) - Ch. 477, Stats. 2014
AB 90 (Swanson) - Ch. 457 Stats. 2011
AB 924 (Emmerson) - Ch. 111, Stats. 2007
AB 988 (Bogh) - Ch. 53, Stats. 2005
SB 968 (Bowen) - Ch. 125, Stats. 2004
AB 1990 (Liu) - Ch. 991, Stats. 2002
AB 662 (Wesson) - 1999, vetoed
Support: Association of Federal State County and Municipal
Employees; California Chamber of Commerce; California
District Attorneys Association; California College and
University Police Chiefs; California Police Chiefs
Association; California Retailers Association
California State Sheriffs' Association; California
Statewide Law Enforcement Coalition; California State
Lodge; Fraternal Order of Police; Independent
Insurance Agents and Brokers of California; Liberty
Mutual Insurance; Long Beach Police Officers
Association; Los Angeles Area Chamber of Commerce; Los
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Angeles County Professional Peace Officers
Association; Motion Picture Association of America,
Inc.; Sacramento County Deputy Sheriffs' Association;
Valley Industry and Commerce Association
Opposition:None known
Assembly Floor Vote: 77 - 0
PURPOSE
The purpose of this bill is to 1) add piracy of musical or
audiovisual works, and unemployment insurance fraud to the list
of crimes for which criminal asset forfeiture is authorized; 2)
expand the definition of "organized crime" for purposes of
criminal asset forfeiture to include pimping and pandering,
loan-sharking, trademark counterfeiting, the piracy of a
recording or audiovisual work, embezzlement, securities fraud,
unemployment insurance fraud, grand theft, money laundering, and
forgery; 3) define a "retail sale" or "sale at retail" to
include any sale by a convicted seller of tangible personal
property with a counterfeit label or an illicit label; 4)
provide that "storage" and "use" include a purchase by a
convicted purchaser of tangible personal property with a
counterfeit label or an illicit label; and 5) define
"counterfeit label" and "illicit label" as those terms are
defined in federal law - a label that appears to be genuine but
is not, and a genuine label that a person uses without
authorization respectively.
Existing law:
Includes the criminal profiteering asset forfeiture law, which
applies where the defendant is convicted of a specified offense
and the defendant has engaged in a pattern of criminal
profiteering activity, as specified. (Pen. Code § 186.3.) The
following assets or property are subject to forfeiture:
Any property interest whether tangible or intangible,
acquired through a pattern of criminal profiteering
activity.
All proceeds of a pattern of criminal profiteering
activity, which property shall include all things of value
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that may have been received in exchange for the proceeds
immediately derived from the pattern of criminal
profiteering activity.
Existing law states that forfeited cash and proceeds of the sale
of forfeited property shall be distributed as follows:
To the bona fide or innocent purchaser, conditional
sales vendor, or holder of a valid lien, mortgage, or
security interest, up to the amount of his or her interest
in the property or proceeds, as specified.
To the Department of General Services or local
governmental entity for all expenditures incurred in
connection with the sale of the forfeited property.
To the State General Fund or the general fund of the
local governmental entity, whichever prosecutes. (Pen.
Code § 186.8), except in the child pornography or recycling
fraud cases.
In a case of fraud involving the state recycling
program, to a special fund designated in the Public
Resources Code.
In the case of child pornography crimes, to the county
children's trust fund or State Children's Trust Fund.
In a case involving human trafficking of minors for
purposes of prostitution or lewd conduct, or a case of
procurement of a minor, to the Victim-Witness Assistance
Fund for child sexual exploitation and abuse counseling and
prevention programs. Fifty percent of the funds shall be
granted to community-based organizations that serve minor
victims of human trafficking.
Existing law states that any person who willfully manufactures,
intentionally sells, or knowingly possesses for sale any
counterfeit of a mark registered with the California Secretary
of State or registered on the United States Patent and Trademark
Office shall be punishable as follows:
If the offense involves less than 1,000 of the
articles with a total retail value less than the
standard for grand theft (over $400 - $487), the
defendant is guilty of a misdemeanor, punishable by
a fine of not more than $5000, imprisonment in a
county jail for up to one year, or by both. If the
defendant is a corporation, by a fine of not more
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than $100,000.
When the crime involves 1,000 or more articles,
or has a total retail value that meets the standard
for grand theft (over $400 - $487), the crime is an
alternate felony-misdemeanor, punishable by
imprisonment in a county jail for up to one year, or
in the state prison for 16 months, 2 years or 3
years, by a fine not to exceed $250,000, or both.
If the defendant is a corporation, the maximum fine
is $500,000. (Pen. Code § 350, subd. (a).)
Existing law provides that a repeated violation of the
counterfeit trademark statute is an alternate
felony-misdemeanor, punishable by a fine of not more than
$50,000, imprisonment in a county jail for not more than one
year, or in the state prison for 16 months, or 2 or 3 years, or
both. If the defendant is a corporation, the maximum fine is
$200,000. (Pen. Code § 350, subd. (b).)
Existing law provides that where a defendant is convicted of a
trademark counterfeiting, the court shall order the forfeiture
and destruction of all of counterfeit marks and all counterfeit
items. The court, with specified exceptions for community
property vehicles, shall also order forfeiture and destruction
or other disposition of all means of making the marks, and all
other devices for making or transporting the marks used in
connection with the violation.
Existing law describes "fair use" of a trademark, which is not
subject to prosecution or a civil action, as any of the
following:
advertising or promotion that permits consumers to
compare goods or services;
identifying and parodying, criticizing, or commenting
upon the famous mark owner or the goods or services of the
famous mark owner;
noncommercial use of the mark; and
all forms of news reporting and news commentary. (Bus.
& Prof. Code § 14247.)
Existing federal law provides that it is a crime to "traffic" or
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"attempt to traffic" in counterfeit goods. The crime is
punishable by a fine of up to $2,000,000, imprisonment for up to
10 years, or both. The maximum fine for a corporation or an
entity other than an individual is $5,000,000. Repeated
convictions are punishable by imprisonment for up to 20 years, a
fine of up to $5,000,000, or both. Where the convicted
defendant of repeated violations is other than an individual the
maximum fine is $15,000,000. (18 U.S.C. § 2320.)
Existing federal law provides the following property is subject
to forfeiture following a defendant's conviction for trafficking
in counterfeit goods: the proceeds of the crime; any of the
defendant's property used or intended to be used in the crime;
any article bearing a counterfeit mark. (18 U.S.C. § 2320 (b).)
This bill:
Expands the list of offenses that can serve as a basis for
criminal profiteering asset forfeiture - employed against
organized crime - to include piracy of audio or audiovisual
works and unemployment insurance fraud.
Expands provisions from the "organized crime" element as it
pertains to criminal profiteering by the provisions that require
that the nature of the conspiratorial action be of an organized
nature to include such examples as:
pimping and pandering;
counterfeiting of any registered trademark;
illegal piracy of recordings or audiovisual works;
embezzlement;
securities fraud;
state tax fraud;
unemployment insurance fraud;
grand theft;
money laundering; and
forgery.
Adds, to the definition of a "retail sale" or "sale at retail,"
the sale of tangible personal property (TPP) with a counterfeit
or illicit label regardless of whether the sale is for resale in
the regular course of business.
Adds, to the definition of "storage" or "use," a purchase by a
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convicted purchaser of TPP in connection with a counterfeit
label or illicit label, regardless of whether the purchase is
for resale in the regular course of business.
Defines "counterfeit label" as having the same meaning as United
States Code (USC), Title 18, Section 2318 - a label that appears
to be genuine, but is not.
Defines "illicit label" as having the same meaning as USC, Title
18, Section 2318 - a genuine label that is used without
authorization.
RECEIVERSHIP/OVERCROWDING CRISIS AGGRAVATION
For the past eight years, this Committee has scrutinized
legislation referred to its jurisdiction for any potential
impact on prison overcrowding. Mindful of the United States
Supreme Court ruling and federal court orders relating to the
state's ability to provide a constitutional level of health care
to its inmate population and the related issue of prison
overcrowding, this Committee has applied its "ROCA" policy as a
content-neutral, provisional measure necessary to ensure that
the Legislature does not erode progress in reducing prison
overcrowding.
On February 10, 2014, the federal court ordered California to
reduce its in-state adult institution population to 137.5% of
design capacity by February 28, 2016, as follows:
143% of design bed capacity by June 30, 2014;
141.5% of design bed capacity by February 28, 2015; and,
137.5% of design bed capacity by February 28, 2016.
In February of this year the administration reported that as "of
February 11, 2015, 112,993 inmates were housed in the State's 34
adult institutions, which amounts to 136.6% of design bed
capacity, and 8,828 inmates were housed in out-of-state
facilities. This current population is now below the
court-ordered reduction to 137.5% of design bed capacity."(
Defendants' February 2015 Status Report In Response To February
10, 2014 Order, 2:90-cv-00520 KJM DAD PC, 3-Judge Court, Coleman
v. Brown, Plata v. Brown (fn. omitted).
While significant gains have been made in reducing the prison
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population, the state now must stabilize these advances and
demonstrate to the federal court that California has in place
the "durable solution" to prison overcrowding "consistently
demanded" by the court. (Opinion Re: Order Granting in Part and
Denying in Part Defendants' Request For Extension of December
31, 2013 Deadline, NO. 2:90-cv-0520 LKK DAD (PC), 3-Judge Court,
Coleman v. Brown, Plata v. Brown (2-10-14). The Committee's
consideration of bills that may impact the prison population
therefore will be informed by the following questions:
Whether a proposal erodes a measure which has contributed
to reducing the prison population;
Whether a proposal addresses a major area of public safety
or criminal activity for which there is no other
reasonable, appropriate remedy;
Whether a proposal addresses a crime which is directly
dangerous to the physical safety of others for which there
is no other reasonably appropriate sanction;
Whether a proposal corrects a constitutional problem or
legislative drafting error; and
Whether a proposal proposes penalties which are
proportionate, and cannot be achieved through any other
reasonably appropriate remedy.
COMMENTS
1.Need for This Bill
According to the author:
The problem with current Penal Code section 186.2 is
that it is internally inconsistent. The list of 33
crimes set forth in subd. (a) to which the statute is
supposed to apply, does not mesh with the additional
requirements found in subd. (d), i.e., that it also be
"organized crime." "Organized crime" is defined in
such a way in subdivision (d) (by listing 12 other
types of illegal activity), that it is hard to match
it up with one of the 33 enumerated crimes the statute
was intended to address.
Additionally, the list of crimes addressed in Penal
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Code 186.2 is deficient; it does not take into account
all of the crimes that make up the underground
economy. Indeed, after over a year of investigation
and testimony, the Little Hoover Commission released
on March 9, 2015, a report about underground economy
crimes (tax evasion, counterfeiting, worker's comp
fraud, etc.) and listed as one of its recommendations
that "The state should refine and expand its asset
seizure laws to improve the collection of victim
restitution." (Lit. Hov. Comm. Report, #226, p. x.)
The report specifically mentions AB 160 in this
regard.
2.The Basics of Criminal Asset Forfeiture
History: In 1982, the California Legislature passed the
California Control of Profits of Organized Crime Act. The
express purpose of the Act was to punish the activities of
organized crime through the forfeiture of profits acquired and
accumulated as a result of engaging in a pattern of criminal
profiteering activity. All property gained through that
activity is subject to forfeiture. (Penal Code §§ 186 and
186.1.)
Procedure: Criminal profiteering asset forfeiture is a criminal
proceeding held in conjunction with the trial of the underlying
criminal offense. Often, the same jury that heard the criminal
charges determines whether the defendant's assets were the
ill-gotten gains of criminal profiteering. As a practical
matter, the prosecution must assemble its evidence for the
forfeiture matter simultaneously with the evidence of the crime.
Proceeds: Under existing law the forfeited proceeds of criminal
profiteering are placed in the county general fund with no
directions for use. There are limited exceptions. For example,
forfeiture in child pornography cases is deposited in the county
or State Children's Trust Fund for child abuse and neglect
prevention and intervention. (Pen. Code § 186.8; Welf. Inst.
Code §§ 18966 and 18969.)
Contrast with Drug Asset Forfeiture: In contrast to criminal
asset forfeiture, drug asset forfeiture is a separate civil
action. With limited exceptions, a conviction for an underlying
drug offense is required. However, the prosecution in drug
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asset forfeiture can conduct substantial civil discovery to find
the defendant's assets. Law enforcement receives 65% of drug
forfeiture proceeds. Federal forfeiture law authorizes a
federal agency to "adopt" a state seizure and return as much as
80% of the proceeds to the state or local agency. The United
States Attorney General has recently limited adoption of state
forfeitures. SB 443 (Mitchell) would rewrite the California
drug asset forfeiture law. Most notably, SB 443 would prohibit
state or local law enforcement agencies from transferring seized
property to a federal agency for adoption, require that property
seized pursuant to federal law be distributed to state and local
law enforcements according to state law formulas, and that
convictions be obtained before the agencies could share in
federal forfeiture proceeds.
3.Expansion of the Control of Profits of Organized Crime Act -
Criminal Asset Forfeiture
It was the intent of the Legislature, when enacting the criminal
asset forfeiture law, to punish and deter criminal activities of
organized crime through the forfeiture of profits acquired and
accumulated as a result of such criminal activities. Criminal
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 music and
video piracy and unemployment insurance fraud to the list of
"criminal profiteering activity." The bill also matches the
definition of "organized crime" - to the list of specific crimes
for which criminal asset forfeiture is authorized. That is, the
bill essentially what members of criminal organizations do match
what how criminal organizations are defined.
4.The Underground Economy
The underground economy is a well-documented problem in the
State of California. The Board of Equalization (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, placing a burden on state
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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
5.Sales and Use Tax on Counterfeit Items
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."
It is unclear if imposing a tax on 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 trademark laws or increased sentences.
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. Thus, a person selling counterfeit goods would
not likely be deterred by the possibility of having to remit
sales tax, especially when the imposition of the tax is only
imposed after a conviction.
However, there are well-known cases where organized criminals
were prosecuted for tax fraud when prosecutors had difficulty
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proving the crimes from which the organizations derived income
that was not reported. The most notable and well-known case is
the conviction of Al Capone for tax fraud.<1> Tax fraud charges
could also be used in plea bargaining.
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<1>
http://law2.umkc.edu/faculty/projects/ftrials/capone/caponeaccoun
t.html