BILL ANALYSIS Ó
AB 1021
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Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1021
(Steinorth) - As Amended March 26, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: smartphones: bundled
transactions
SUMMARY: Provides that, for purposes of the Sales and Use Tax
(SUT) Law, "gross receipts" and "sales price" from the retail
sale or purchase of a "smartphone" shall be limited to the
amount charged for the sale of the "smartphone" when it is sold
in a "bundled transaction." Specifically, this bill:
1)Defines a "smartphone" as a cellular radio telephone or other
mobile voice communications handset device that includes all
of the following features:
a) Utilizes a mobile operating system;
b) Possesses the capability to utilize mobile software
applications, access and browse the Internet, utilize text
messaging, utilize digital voice service, and send and
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receive e-mail;
c) Has wireless network connectivity; and,
d) Is capable of operating on a long-term evolution network
or successor wireless data network communication standards.
2)Provides that a "smartphone" does not include a radio cellular
telephone commonly referred to as a "feature" or "messaging"
telephone, a laptop, a tablet device, or a device that only
has electronic reading capability.
3)Defines a "bundled transaction" as a retail sale of a
"smartphone" that contractually requires the retailer's
customer to activate or contract with a "wireless
telecommunications service provider" for utility service for a
period greater than one month as a condition of that sale.
4)Defines a "wireless telecommunications service provider" as a
utility regulated by the Public Utilities Commission or
Federal Communication Commission and that offers or provides
wireless communication or paging services.
5)Provides that, notwithstanding existing law, the state shall
not reimburse local agencies for SUT revenues lost under this
bill.
6)Takes immediate effect as a tax levy.
EXISTING LAW:
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1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's "gross receipts" from TPP
sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The tax is based upon the "sales price" of the TPP.
3)Provides, per State Board of Equalization (BOE) SUT Regulation
1585, that in the case of bundled transactions, tax applies to
the unbundled sales price of the wireless telecommunications
device.
FISCAL EFFECT: The BOE estimates annual state and local revenue
losses of $370 million.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
AB 1021 will eliminate the surprise sticker shock that
comes along with most smartphone purchases, and require
that the sales or use tax be calculated on the actual sale
price of a smartphone. California's tax code currently
allows the sales tax on cell phones to be charged on the
full retail price of the phone, even if a consumer is
paying a substantially discounted price, leaving customers
to feel confused and ultimately deceived. With retail
prices of smartphones reaching up to $949, the financial
impact of the existing policy upon consumers is
significant. AB 1021 will clean up California's tax code
to fix this flawed and unfair loophole.
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2)This bill is supported by the Howard Jarvis Taxpayers
Association, which notes the following:
AB 1021 serves to highlight the lack of transparency in our
tax system. Normally, when a retail store sells an item on
sale, the sales tax is imposed on that discounted price.
Why is this different for mobile devices? The tax should
always be based on the price at the point of sale. That
way individuals know how much they are paying for a given
good or service, nothing is hidden from them and they can
budget accordingly.
Perhaps this inequity is most glaringly seen in the
circumstance where somebody purchases a second generation
smart phone for free with a contract. However, because
sales tax is based on the retail price of the phone, the
tax will be approximately $20-40.
3)The BOE notes the following in its staff analysis of this
bill:
Normally, the law regards a service sold in connection with
a taxable good as part of the sale. Accordingly, the tax
is based on the total receipts derived from that sale.
However, the marketing and retail pricing strategies
associated with these devices and the telecommunications
industry contradict conventional retail practices. As a
result, in 1999, the Board of Equalization (BOE) adopted a
regulation to specifically address the application of tax
on these device sales and related service charges.
Under the regulation, retailers are required to compute the
tax based on whether they sold the device in a "bundled"
transaction. The regulation defines "bundled" transactions
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as those sales where the customer is required to activate
or contract for utility service with a wireless
telecommunications service provider for a one-month period
or greater as a condition of sale. Generally, to receive
the device's promotional or discounted sales price,
customers must agree to activate or sign up with a provider
for utility service for more than a one-month period.
Under the regulation, the retailer is required to compute
tax on the device's sale based on the "unbundled sales
price."
The regulation further defines "unbundled sales price" as
the price at which the retailer has sold specified devices
to customers who are not required to activate or contract
for utility service as a condition of sale.
4)Committee Staff Comments
a) Nothing is free : Wireless telecommunications devices
such as smartphones are often provided "free" or at a
significantly discounted price when a customer signs a
long-term service contract. If this bill were enacted, it
is not clear to Committee staff how SUT would apply in
cases where the telephone is provided "free of charge" as
part of a bundled transaction. Under a technical reading
of this bill, it would appear that no SUT would be due,
despite the fact that, in such cases, the cost of the
underlying device is simply incorporated into the service
contract. Thus, the amount of tax collected would depend
not on the underlying value of the good sold, but rather on
the method by which the sale is structured. This, in turn,
could lead to the disparate tax treatment of customers
purchasing the very same product.
b) Unsatisfied customers : Many purchasers are confused
when they are charged SUT on the unbundled price of a
phone. This confusion could be alleviated through better
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customer outreach and education, both by retailers and the
state. Better customer outreach and education might prove
significantly less costly than altering the manner in which
taxes are calculated.
c) Singling out smartphones : This bill's provisions would
only apply to "smartphones" sold in a bundled transaction.
Sales of non-smartphone devices, such as laptops or tablet
devices sold as part of a bundled transaction, would
continue to be taxed on the unbundled sales price. The
Committee may wish to consider whether "smartphones" are
deserving of this preferential tax treatment. Moreover,
creating such a statutory distinction based on the nature
of the technology involved may only exacerbate the consumer
confusion this bill is intending to address.
d) Sufficient lead time : This bill provides no lead time
for the BOE to notify impacted retailers and provide
instructions related to their reporting obligations. The
BOE has suggested amendments in its staff analysis of this
bill to address this issue.
e) Denied at the BOE : In February 2015, the BOE received a
petition seeking the repeal of SUT Regulation 1585.
Specifically, the petitioner asserted that the BOE
regulation is inconsistent with the statutory definition of
"gross receipts" contained in Revenue and Taxation Code
Section 6012. BOE staff recommended that the petition be
denied in its entirety on the grounds that the regulation
is consistent with the definition of "gross receipts" and
judicial precedent interpreting that definition. At the
March 26, 2015 BOE meeting, the members voted to deny the
petition as recommended by BOE staff.
f) Related legislation :
i) This bill is similar to AB 2691 (Harkey) of the
2013-14 Legislative Session. AB 2691 was held on this
Committee's Suspense File.
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ii) This bill is similar to AB 279 (Garrick) of the
2011-12 Legislative Session. AB 279 was held on this
Committee's Suspense File.
iii) This bill is similar to AB 2320 (La Malfa) of the
2005-06 Legislative Session. AB 2320 was held on this
Committee's Suspense File.
REGISTERED SUPPORT / OPPOSITION:
Support
Howard Jarvis Taxpayers Association
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098
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