BILL ANALYSIS
SB 348
Page 1
Date of Hearing: June 30, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 348 (Cogdill) - As Amended: May 28, 2009
As Proposed To Be Amended
SENATE VOTE : 37-0
SUBJECT : Rental Car Companies: Increased Vehicle License Fee
KEY ISSUE : SHOULD EXISTING LAW ALLOWING RENTAL CAR COMPANIES TO
PASS-THROUGH INCREASED VLF CHARGES TO CUSTOMERS BE REVISED SO AS
TO AVERAGE THE COST OF THE INCREASE OVER THE NUMBER OF VEHICLES
IN THE CLASS, RATHER THAN THE EXACT FEE FOR THAT PARTICULAR
VEHICLE?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
The 2009 Budget Act temporarily increased the vehicle license
fee (VLF) from 0.65 percent to a rate of 1.15 percent. An
accompanying special session budget trailer bill, SB 10xx,
permitted a rental car company to recover ("pass-through") the
actual costs incurred by the company for the payment of that
increased VLF from rental car customers, and allowed the fee to
be shown and charged separately - i.e., "unbundled" from the
total rental price advertised to the consumer. Both of those
provisions were supported by the car rental companies,
reflecting their long-sought policy goals regarding
"pass-throughs" and unbundling, historically opposed by consumer
groups. However, the rental companies subsequently complained
that SB 10xx was unworkable because it provided that the
increased VLF passed-on to customers had to equal the VLF
increase actually paid for the particular vehicle rented - a
provision apparently designed so that renters of less expensive
cars were not required to subsidize renters of more expensive
vehicles. This bill, introduced at the request of the rental
companies, would revise how this fee is calculated so that the
amount of the fee charged to each customer represents the
average of the fee for vehicles in the "class" to which the
vehicle belongs, rather than the exact fee paid for the
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particular vehicle. This "class-average" fee is to be pro-rated
per day, at a rate of 1/365th of the increased VLF, as under
existing law.
The opposition, the Center for Public Interest Law (CPIL),
objects to the VLF consumer pass-through provision, contending
that the question of pass-through should be left to free market
competition, like other business costs, so that each rental
company would decide whether to pass through the charge; those
who do not do so may instead increase efficiency or absorb the
increase in order to gain a competitive advantage over those who
decide to pass it on to consumers. As explained above, this
argument is more directed at existing law than to the revised
VLF formula in this bill. However, CPIL argues that its concern
is not merely theoretical. It notes that rental car companies
secured 2006 legislation authorizing them to unbundle and pass-
through to consumers all or part of the "airport concession fee"
that they pay to airports for the use of their facilities.
Rather than making that decision individually, CPIL contends,
the rental companies colluded in deciding whether and how much
of the charge to pass on. CPIL notes that these allegations are
now the subject of a federal antitrust lawsuit now pending in
the U. S. District Court for the Southern District of
California. Although this bill does not appear to allow the
rental car companies to collude in deciding whether and/or what
percentage of the VLF to pass on to consumers, CPIL argues that
the Legislature should be aware that this industry has abused
prior legislation allowing a consumer pass-through.
SUMMARY : Changes how car rental companies are permitted to
impose VLF charges on customers. Specifically, this bill:
1)Defines "increased vehicle license recovery fee" to mean a
charge that is designed to recover the amount of increased VLF
actually paid by a rental company for the class of vehicle
rented. This bill would also permit this fee to be unbundled
and separately advertised, quoted, and charged.
2)Deletes existing law which provides that the yearly amount
that may be charged to consumers for the increased VLF be
pro-rated based on the annual VLF paid by the rental company
for the particular vehicle being rented, and would instead
provide that the amount of the fee shall reflect the increased
VLF prorated across on the general class of vehicles covering
the particular vehicle being rented. The amount that may be
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charged for each vehicle is to be the average of the total VLF
increase paid by the rental company for the number of vehicles
in that vehicle's class.
3)Provides that the total of all increased vehicle license fees
charged to customers by the rental company for each class of
vehicle shall not exceed the total of increased vehicle
license recovery fees actually paid for vehicles in those
classes on an annual basis.
4)Revises the formula and timing for calculation of the amount
of the VLF increase that may be charged directly to consumers.
EXISTING LAW :
1)Generally requires rental car companies to "bundle," most
charges so that consumers see the total price for the rental,
including the VLF, in any rental rate that is advertised,
quoted, and charged to rental car customers. Certain other
specified fees, such as taxes, customer facility charges, or
mileage charges are permitted to be unbundled and advertised,
quoted, and charged separately. (Civil Code Sec. 1936(n)(1).)
2)Temporarily increases the VLF from the current rate of 0.65
percent to a rate of 1.15 percent. (Rev. and Tax Code Secs.
10752, 10752.2.)
3)As of May 21, 2009, permits rental car companies to separately
advertise, quote, and charge the higher cost of this increased
VLF which shall be pro-rated at 1/365th of the fee increase in
the annual VLF actually paid on the particular vehicle being
rented for each full or partial 24-hour rental day that the
vehicle is rented. The total amount of all increased VLF fees
charged to renters may not exceed the fee increase in the
annual VLF actually paid for the particular vehicle rented.
(Civil Code Sec. 1936.015(a)(2).)
4)Requires a rental car company, if it imposes customer facility
charges, airport concession fees, or tourism commission
assessments to provide, at the time of a quote, a good faith
estimate of the rental rate, taxes, the increased VLF,
customer facility charge, if any, airport concession fee, if
any, and tourism commission assessment, if any as well as the
total charges for the entire rental. (Civil Code Sec.
1936.015(b)(3)(A).)
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5)Requires a rental car company, at the time and place of the
rental, to clearly and conspicuously disclose in the rental
contract the total of the rental rate, taxes, the increased
VLF, customer facility charge, if any, airport concession fee,
if any, and tourism commission assessment, if any, for the
entire rental, exclusive of charges that cannot be determined
at the time the rental commences. (Civil Code Sec.
1936.015(b)(3)(B).)
6)Provides that Civil Code Section 1936.015 shall only become
operative if the VLF is increased above 0.65 percent of the
value of the vehicle and will cease to become operative upon
restoration of the VLF to no more than 0.65 percent of such
value. (Civil Code Sec. 1936.015(e)(1).)
COMMENTS : The author explains the reason for the bill as
follows, "Senate Bill 348 makes several changes to SB 10xx which
was passed as part of the February 2009 Budget deal. In passing
SB 10 xx the Legislature intended to allow rental car companies
to "pass-through" the costs associated with the VLF increase.
However, several provisions of SB 10 xx make it nearly
impossible for rental car companies to do so. SB 348 makes
changes to these provisions n a manner that allows rental car
companies to utilize the pass-through while also ensuring that
customers are protected. Existing law requires rental car
companies to bundle, or include, the VLF paid in the rental rate
that is advertised, quoted, and charged to rental car customers.
As a part of the 2009 Budget Act, the VLF was increased
temporarily from the current rate of 0.65 percent to a rate of
1.15 percent. Beginning May 21, 2009, rental car companies are
permitted to separately state a portion of the increased VLF as
an unbundled charge that is not included with the current
bundled rental rate. This bill, which was introduced at the
request of several rental car companies, would revise how this
charge is calculated and allow rental car companies to recover
from rental car customers the actual costs incurred by the
companies for the payment of the increased VLF."
As the author notes, existing law authorizes rental car
companies to "pass through" the VLF increase that was approved
as part of the February 2009 budget deal. For practical
purposes, the customer pass-through allows rental car companies
to include the amount of the VLF increase as a separate line
item on a customer's bill.
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With respect to the change in calculating the assessment of the
VLF increase from the specific fee paid on the vehicle rented to
the average fee for the class of cars to which that vehicle
belongs in the rental company's fleet, the author writes:
Unlike an airport concession fee, which can easily be
calculated and applied to each car rented from an airport,
the VLF increase is much more difficult to calculate as it
is different for almost every vehicle. Since SB 10xx
requires that the VLF charge on a customer's bill reflect
the amount "actually paid (by the company) for the
particular vehicle being rented," to be in compliance, a
rental car company would have to know exactly what car
would be assigned to a customer at the time that the
reservation is made. . . . Even if the company were to
know the make and model of a car that a customer reserved,
differences in the original purchase price and options on
each individual vehicle lead to variations in the amount of
VLF paid by the company.
In short, the rental car companies argue that SB 10xx requires
them to know at the time of the reservation which particular car
will be assigned to the customer when the rental commences,
which they claim is impossible since most customers reserve
rental cars days or even weeks prior to the rental period.
Since customers reserve a class of car rather than a specific
vehicle, SB 348 responds to these predicaments by permitting
rental companies to base their VLF recovery fee on how much more
they pay to license their fleets per year instead of calculating
the increased costs car-by-car.
Current Condition of the Car Rental Industry. According to a
recent New York Times article, the automobile rental industry
has been creating scarcity to increase consumer charges and
running older, less valuable, vehicles (and thus presumably
paying lower VLF) to bolster profits:
WHILE the global recession has sent prices plummeting on
airfares, hotels and cruises, it is having the opposite
effect on rental cars.
In May, the average rate for a weekly airport rental of a
compact car booked seven days in advance was $345.99, up a
whopping 73 percent compared with $199.65 for the same
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month last year, according to the Abrams Consulting Group,
based in Purchase, N.Y., which tracks rental rates.
In mid-June, weekly airport rental rates for a compact car
averaged $347.44, compared with $210.38 a year ago - a 65
percent jump. "There's a lot of sticker shock," said Neil
Abrams, president of the consulting group. "People don't
understand. The economy is caving around them," he said,
adding, "so how is it possible that rates are as high as
they are for car rentals?"
The reason is basic supply and demand. Although demand for
car rentals is down - by roughly 15 percent, according to
Mr. Abrams - rental agencies have cut their fleets by even
more, essentially creating their own shortage and jacking
up prices.
To trim fleets, companies have been selling cars to the
used car market and holding off on buying new ones. That
doesn't necessarily mean renters are getting clunkers, but
it's not unusual anymore to see a car with 30,000 miles on
it. The average age of a rental car is now about 11 months,
compared with about nine-and-a-half months a year ago, Mr.
Abrams said.
ARGUMENTS IN OPPOSITION: The Center for Public Interest Law
(CPIL) opposes the measure, writing with respect to the issue of
who should bear the burden:
The default rule for taxes, fees, and charges is that those
subject to them must pay them. They then compete in the
market. Some of them pass through the charge, while others
increase efficiency and gain a competitive advantage over
those who decide to pass through all of it. Some pass
through only part of it. This is an issue the market
should decide, not the legislature. A tax or fee on an
automobile applies to the owner of it, and is not a proper
subject for pass-through to consumers.
CPIL further writes:
CPIL respectfully notes in passing that these same rental
car companies secured 2006 legislation (AB 2592 (Leno))
authorizing each of them - separately - to unbundle and
decide whether to pass through to consumers all or part of
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the "airport concession fee" that they pay to airports for
the use of their facilities. Rather than making that
decision individually, we contend the companies colluded in
deciding (a) whether to pass on that charge, and (b) how
much of that charge to pass on. Those allegations are now
the subject of a federal antitrust lawsuit (Shames v.
Hertz, now pending in the U. S. District Court for the
Southern District of California). Although this bill does
not appear to allow the rental car companies to collude in
deciding whether and/or what percentage of the VLF to pass
on to consumers, the legislature should be aware that this
industry has abused prior legislation allowing a consumer
pass-through. This is a bad precedent to set. It applies
to no other industry. Neither history nor equity commend
it here.
Author's Clarifying Amendments. For inexplicable reasons, the
bill was recently amended to change the existing cap on VLF
charges that may be passed on to consumers under existing law to
a cap on the amount of increased VLF that rental companies would
be required to pay to the state. In order to correct this
dramatic - and, the author and sponsor contend, unintended -
departure from existing law, the author wisely proposes to
revise the bill as follows:
(3) The total of all increased vehicle license fees actually
paid charged to customers by the rental company for each class
of vehicle on an annual basis shall not exceed the total of
increased vehicle license recovery fees charged to customers
actually paid for rental of vehicles in those classes on an
annual basis.
In addition, the author properly proposes to retain existing law
in 1936.015(e)(2).
REGISTERED SUPPORT / OPPOSITION :
Support
Alamo Rent a Car, Inc.
Avis Budget Group
Hertz Corporation
Enterprise Rent-a-Car Co.
National Car Rental, Inc.
SB 348
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Opposition
Center for Public Interest Law
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334