BILL ANALYSIS
AB 2249
Page 1
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
AB 2249 (Ruskin) - As Amended: April 13, 2010
SUBJECT : Disabled Veteran Business Enterprise: Tax Returns
SUMMARY : Requires the Department of General Services (DGS) to
require a Disabled Veteran Business Enterprises (DVBEs) to file
a completed form 4506-T from the federal Internal Revenue
Service (IRS), also known as a Request for Transcript of Tax
Return, in both of the following circumstances:
1)If DGS has received a complaint regarding the DVBE; or
2)If the DVBE is being audited by DGS.
EXISTING LAW:
1)Provides that DGS, except for contracts for certain
professional bond services, is the administering agency of the
California DVBE Program.
2)Sets an annual DVBE contract participation goal of 3% for each
state department which awards contacts, including school
districts, when expending certain state moneys for goods and
services.
3)Requires state entities contracting for materials, supplies,
equipment, alterations, or repairs to meet specified DVBE
participation goals when submitting a bid for a state
contract, including the requirement that the bid go to the
lowest responsible bidder that meets the goal.
4)Defines "DVBE" as a business certified by the administering
agency as meeting all of the following requirements:
a) It is a sole proprietorship at least 51 % owned by one
or more disabled veterans or, in the case of a publicly
owned business, at least 51 percent of its stock is owned
by one or more disabled veterans; a subsidiary that is
wholly owned by a parent corporation, but only if at least
51 % of the voting stock of the parent corporation is owned
by one or more disabled veterans; or a joint venture in
AB 2249
Page 2
which at least 51 % of the joint venture's management,
control, and earnings are held by one or more disabled
veterans.
b) The management and control of the daily business
operations are run by one or more disabled veteran. The
disabled veterans who exercise management and control are
not required to be the same disabled veterans as the owners
of the business.
c) It is a sole proprietorship, corporation, or partnership
with its home office located in the United States, and it
is not a branch or subsidiary of a foreign corporation,
foreign firm, or other foreign-based business.
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose : According to the author, this bill gives DGS an
effective tool when determining the eligibility of a business
for certification and recertification as a DBVE. The author
has received a great deal of information that makes him
suspect that some applicants are being certified when there
are indications that they should not be, such as the
applicant not being domiciled in California or the applicant
for certification not being the true owner of certain
equipment.
Even though DGS now requires DVBEs to file a copy of their
income tax returns for the past three years, under penalty of
perjury, as part of the application for certification, this
bill gives DGS the ability to verify those tax returns by
requiring a true copy of an applicant's federal income tax
return through the use of federal Form 4506-T.
The April 13, 2010 amendments narrow the bill to require the
use of federal Form 4506-T when there is a complaint lodged
against a DBVE, or when there is an audit of an already
certified DBVE.
2)DVBE Certification: Under the provisions of the DBVE program,
each state agency is required, when awarding contracts
throughout the year, to include DVBEs by taking all practical
actions necessary to meet or exceed the annual 3% DVBE
AB 2249
Page 3
participation goal. In order to become a certified DVBE, the
business must adhere to several requirements. For example,
businesses must be owned, at a minimum of 51% by a disabled
veteran, must be a California resident and the DVBEs home
office must be located in the U.S., just to name a few.
As part of the DVBE certification process, DVBE businesses
must re-apply for certification on a yearly basis. At the
time of re-certification, the business must submit an
application along with copies of the DVBE's income tax returns
for the previous three years. The author contends that if
complaints have been filed against the DVBE in the prior year,
then a more stringent review should be required and the tax
returns filed with the IRS should be part of that review.
3)Limited success in meeting state DVBE participation goals :
The DVBE Program was established in 1989 to address the
special needs of disabled veterans seeking rehabilitation and
training through entrepreneurship, and to recognize the
sacrifices of Californians disabled during military service.
Under the provisions of the program, each state agency is
encouraged to honor California's disabled veterans by taking
all practical actions necessary to meet or exceed the 3% DVBE
state procurement participation goal.
However, success in meeting the 3% goal has been elusive.
Even in 2007, when the state exceeded its 25% small business
participation goal, the state only awarded 2.8% of its total
contract dollars, $186 million, to contracts involving DVBE
contractors and subcontractors. Unfortunately, in 2008 DGS
reported that the DVBE contract participation rate decreased
to 2.39%.
California's progress in meeting this 3% goal has been further
limited by a significant number of claims that DVBEs have been
fraudulently added to contracts without any real intention
that they would perform a commercially useful function and
that too many bidders were fraudulently claiming to have made
a good faith effort to hire a DVBE without taking meaningful
action to offer the subcontract. While some progress has been
made in tightening the rules related to ensuring that DVBEs
perform a commercially useful function, little progress had
been made in strengthening the good faith effort provisions
prior to their elimination on July 28, 2009 (AB 21, 4th
Extraordinary Session, Chapter 19, Statutes of 2009).
AB 2249
Page 4
4)California Small Business : California's dominance in many
economic areas is based, in part, on the significant role
small businesses play in the state's $1.8 trillion economy.
Businesses with fewer than 100 employees comprise nearly 98%
of all businesses, and are responsible for employing more than
37% of all workers in the state.
As an example, small- and medium-sized businesses are crucial
to the state's international competitiveness and are an
important means for dispersing the positive economic impacts
of trade within the California economy. Of the over 52,000
companies that exported goods from California in 2006, 95%
were small- and medium-sized enterprises (SME) with fewer than
500 employees. These SMEs generated nearly half (44%) of
California's exports in 2006. Nationally, SMEs generated only
29% of total exports.
Historically, small businesses have functioned as economic
engines, especially in challenging economic times. During the
nation's economic downturn from 1999 to 2003, microenterprises
(businesses with less than five employees) created 318,183 new
jobs or 77% of all employment growth, while larger businesses
with more than 50 employees lost over 444,000 jobs. From 2000
to 2001, microenterprises created 62,731 jobs in the state,
accounting for nearly 64% of all new employment growth.
Unfortunately during the current recession, small business
have been especially hard hit, with small business
bankruptcies up 81% for the 12 months ending September 2009,
as compared to the same period in the previous year.
Nationally, bankruptcy filings were up 44%, according to
Equifax Inc.
Because of their importance in the state economy, small
business issues have been a particular focus of the Assembly
Committee on Jobs, Economic Development and the Economy (JEDE)
for the past several years. In March 2009, JEDE produced a
state economic recovery strategy that included several key
recommendations on the needs of small business, including
helping small businesses meet their short term capital needs.
In May 2009, JEDE held a special hearing to learn more about
how the recession was impacting small businesses and in
October, JEDE's review of the California Enterprise Zone
Program included a panel on how the program responds to needs
of small business.
AB 2249
Page 5
The JEDE committee has previously passed legislation to
increase enforcement of state procurement laws, AB 177
(Ruskin/VM Perez). AB 2249 furthers these actions by ensuring
the credibility of an applicant's tax returns.
5)Related legislation : Related legislation includes the
following:
a) AB 31 (Price) - Small Business Procurement Contracts :
This bill made several key changes to state procurement
procedures, including increasing the maximum contract
threshold amount for awards to a small business or DVBE,
under a specific streamlined procurement process, from
$100,000 to $250,000. Further, the bill requires
contractors that made contract commitments to include small
business or DVBE participation to report the final
percentage of the contract actually paid to these entities.
Status: Signed by the Governor, Chapter 202, Statutes of
2009.
b) AB 177 (Ruskin and V. Manuel P?rez) - Penalties under
the Small Business Act : This bill increases and conforms
penalties for persons who falsely engage in activities
relating to the Small Business Procurement and Contract
Act, including small businesses, microbusinesses, and
disabled veteran-owned business enterprises. Status: The
bill is pending in Senate Governmental Organization.
c) AB 309 (Price) - Small Business Participation: This
bill requires the establishment of a 25% small business
participation goal for all state entities and directs the
Department of General Services (DGS) to monitor each
agency's progress in meeting this goal. Status: Held on
suspense in Assembly Appropriations Committee in 2009.
d) AB 2708 (Bill Berryhill) - Small Business Procurement:
Prohibits the Department of General Services (DGS) and the
directors of other state departments or agencies that enter
into contracts from engaging in the bundling of contracts
and other requirements as specified. Status: Pending in
Assembly Jobs, Economic Development and the Economy
Committee.
e) AB 2627 (Nielsen) - DVBE Contracts : This bill would
AB 2249
Page 6
deem a disabled veteran business enterprise that rents
equipment to a contractor to be an equipment broker, would
revise various related definitions pursuant to those
provisions, including "broker" or "agent," "equipment,"
and" equipment broker. This bill also requires the
broker's commission fees of state funds expended through a
broker or equipment broker to be credited toward the
participation goals as DVBEs. Status: Pending in Assembly
Jobs, Economic Development and the Economy Committee.
f) AB 2773 (Price) - Small Business Procurement Contract
Act: This bill would have increased the maximum contract
threshold amount for awards to small business, including
microbusiness and DVBEs under the streamlined procurement
process, from $100,000 to $250,000, as specified. Further,
the bill required contractors that made contract
commitments to include small business or DVBE participation
to report the final percentage of the contract actually
paid to these entities. Status: Held under submission in
Senate Appropriations Committee in 2008.
6) Technical amendment : Currently there are three separate
codes that include procurement laws. The author may wish
to address how this measure integrates into the existing
statutory requirement all three codes addressing DVBEs.
REGISTERED SUPPORT / OPPOSITION :
Support
None received
Opposition
None received
Analysis Prepared by : Mercedes Flores / J., E.D. & E. / (916)
319-2090