BILL ANALYSIS Ó
AB 2365
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2365
(Gipson) - As Amended March 18, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exclusion: pawnbrokers:
transfer of vested property
SUMMARY: Provides that the terms "sale" and "purchase" do not
include the transfer of "vested property", as defined, by a
"pawnbroker" to a person who pledged the property to the
pawnbroker as security for a loan if specified requirements are
met, thus excluding such transfers from taxation under the Sales
and Use Tax (SUT) Law. Specifically, this bill:
1)Provides that, for purposes of the SUT Law, the terms "sale"
and "purchase" do not include the transfer of title to "vested
property" by a "pawnbroker" to a person who pledged the
property to the "pawnbroker" as security for a loan and from
whom title to the property transferred to the "pawnbroker"
pursuant to Financial Code Section 21201, if both the
following requirements are met:
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a) The transfer occurs no more than six months after title
to the property transferred to the "pawnbroker" from the
person pursuant to Financial Code Section 21201; and,
b) As consideration for the transfer of the property, the
person is required to pay the "pawnbroker" only the
remaining unpaid balance of the amount borrowed under the
loan as of the date the "pawnbroker" becomes vested with
title to the property, together with one of the following:
i) For an original loan amount not exceeding $2,499.99,
charges and interest due under the loan pursuant to
Financial Code Section 21200 et seq., from the date the
"pawnbroker" is vested with title to the property to the
date of the transfer to the person who pledged the
property; or,
ii) For an original loan amount of $2,500 or more,
charges and interest due in accordance with the last
monthly contractual interest rate, from the date the
"pawnbroker" is vested with title to the property until
the date of the transfer to the person who pledged the
property.
2)Defines the term "pawnbroker" by reference to Financial Code
Section 21000.
3)Defines the term "vested property" by reference to Financial
Code Section 21002(b).
4)Provides that, notwithstanding Revenue and Taxation Code
Section 2230, no appropriation is made by this bill and the
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state shall not reimburse cities and counties for any SUT
revenues lost by them under this bill.
5)Takes immediate effect as a tax levy.
EXISTING LAW:
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 complimentary use tax on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser; and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. 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).
3)Regulates pawnbrokers by, among other things, requiring every
pawnbroker loan for which goods are received in pledge as
security to be evidenced by a written contract, a copy of
which must be provided to the customer.
4)Requires the loan period of a loan contract to be no less than
four months, and requires the loan contract to set forth the
loan period along with the date on which the loan is due and
payable, and to inform the customer of his or her right to
redeem the pledge during the loan period.
5)Provides procedures by which a pawnbroker may become vested
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with title to pledged property.
FISCAL EFFECT: The BOE estimates annual state and local revenue
losses of $33,250.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
When a debtor acquires a loan from a pawn shop, using their
personal property as collateral, their collateral may be
seized by the pawn shop upon default of the debtor.
Under current law, when a consumer defaults and seeks to
reacquire their seized collateral, they must pay a sales
tax on the item they are reacquiring, even though they
already have paid the sales tax on their initial purchase.
This bill seeks to provide a sales tax exemption for
consumer purchases of seized collateral and provide a fair
taxing structure for consumers.
2)This bill is sponsored by the BOE, which notes the following
in its staff analysis of this bill:
a) Effect of the bill : "Excludes from the computation of
sales or use tax, a pawnbroker's receipts derived from a
transaction where customers buy back their property after
defaulting on a loan."
b) This bill simplifies a confusing area in the law : "This
bill would eliminate a complexity in the law that can
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potentially subject unaware pawnbrokers to liability for
the tax."
c) The sales tax comes as a surprise to customers :
"Customers are often surprised that they must pay sales tax
on their own item's reacquisition, and the additional sales
tax sometimes serves as an impediment to regaining
ownership. This bill would eliminate this problem as long
as the customer reacquires the item within six months of
title transferring to the pawnbroker."
d) The tax is counterproductive : "Imposing the tax when
customers return to buy back their property is
counterproductive to the public policy of allowing
customers to regain their property's ownership."
3)Committee staff comments:
a) Overview of existing law governing pawnbrokers :
California's Department of Justice regulates pawnbrokers
and enforces California's Financial Code provisions
governing the industry. Every pawnbroker loan for which
goods are received as security must be evidenced by a
written contract, with a copy provided to the customer. By
law, the loan contract must provide a loan period of at
least four months. In addition, the contract must set
forth the loan period and the date on which the loan will
become due and payable. The contract must also clearly
inform the customer of his or her right to redeem the
pledge during the loan period by paying the loan amount and
any applicable charges that have accrued through the date
of redemption. Pawnbrokers are required by law to retain
every article pledged for the duration of the applicable
loan period.
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If any pledged article is not redeemed during the loan
period and the customer and pawnbroker do not mutually
agree in writing to extend the loan period, the pawnbroker
must notify the customer within one month after the loan
period expires. This notice works to extend the right of
redemption for a period of 10 days from the date of mailing
or electronic transmission of that notice.
If any pledged article is not redeemed within the 10-day
notice period, the pawnbroker becomes automatically vested
with title to the pledged article. The pawnbroker may then
sell or dispose of the property as he or she wishes.
b) How does the SUT Law currently apply to pawnbrokers ?
Pawnbrokers are considered retailers under the SUT Law as
they are in the business of making retail sales of TPP. As
such, tax applies to pawnbroker sales to the same extent as
sales by any other retailer of TPP in this state.
As noted above, if a customer defaults on a pawnbroker
loan, the collateral becomes the pawnbroker's "vested
property." After title has vested with the pawnbroker, the
customer no longer has any legal right to the property that
would distinguish him or her from any other customer.
Accordingly, when a customer subsequently seeks to purchase
the collateral, the transaction constitutes a taxable
retail sale under the SUT Law (unless an applicable
exclusion or exemption applies).
c) What would this bill do ? This bill would exclude from
the computation of the SUT a pawnbroker's receipts derived
from a transaction where a customer buys back his or her
former property after defaulting on a loan. The BOE, which
is sponsoring this bill, contends that this bill resolves a
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confusing area of the law and eliminates a barrier for some
customers seeking to regain ownership of their former
property.
d) How did we get here ? On November 23, 2015, the BOE's
Legal Department received a petition on behalf of the
California Pawnbrokers Association requesting an amendment
to the California Code of Regulations. Specifically, the
petition sought the addition of "clarifying language . . .
to allow the original pledg[o]r to redeem personal property
from a pawnbroker within six months of the expiration of
the grace period as a non-taxable event." Legal Department
staff recommended that the BOE deny the petition in its
entirety because, as explained in a detailed memorandum,
tax applies to the retail sale of TPP in California unless
specifically exempt from taxation by statute; the petition
would have, in effect, added an exemption for which there
was no statutory basis.
e) Potential sunset : This Committee has a longstanding
practice of including a sunset date for any newly proposed
exemption. Sunset dates give the Legislature an
opportunity to both review a tax expenditure's application
and determine whether foregone revenues are in line with
original estimates. As such, the Author and Committee may
wish to consider adding an appropriate sunset date to this
bill.
REGISTERED SUPPORT / OPPOSITION:
Support
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State Board of Equalization (sponsor)
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098