BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1086 HEARING: 5/9/12
AUTHOR: Dutton FISCAL: Yes
VERSION: 4/9/12 TAX LEVY: Yes
CONSULTANT: Phan
SALES AND USE TAX: BUNDLED TRANSACTIONS
Allows a wireless telecommunication device to be taxed on
the amount charged for the sale of the device in a bundled
transaction.
Background and Existing Law
Existing law imposes the Sales and Use Tax (SUT) on the
gross receipts from the sale in California of, or the
storage, use, or other consumption in California of,
tangible personal property. "Gross receipts" and "sales
price" are defined as the total amount of the sale or lease
or rental price, without any deduction on the account of
the cost of materials used, labor or service costs,
interest charged, losses, or any other expenses related to
the sale of the property.
Retailers of wireless telecommunication devices, such as
cellphones, pagers, and tablets, generally sell their
devices at a discount when purchased with a service
contract, or in a bundle. The State Board of Equalization
(BOE) requires that wireless telecommunication devices sold
in a bundled transaction be taxed on the unbundled sales
price of the device. Retailers generally pay taxes on the
sales price of a tangible personal property; taxes on a
wireless telecommunication device are different from other
taxes because retailers pay taxes on the device's retail
price. California's SUT is 7.25%, with some fluctuations
depending on the city or county.
Proposed Law
Senate Bill 1086 limits "gross receipts" and "sales price"
of a wireless telecommunication device to the amount
charged for that device when it is sold in a bundled
SB 1086 - 4/9/12 - Page 2
transaction.
This bill defines the following terms:
"Bundled transaction" as the retail sale of a
wireless telecommunication device that requires the
customer to activate or contract with a wireless
telecommunications service provider for a period
greater than one month as a condition of that sale.
"Wireless telecommunication device" as a portable
communication device requiring activation by a
wireless telecommunications service provider to send
and receive transmissions throughout multiple service
areas.
"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.
SB 1086 makes no appropriations and the state does not need
to reimburse any local agency for SUT revenues lost under
this bill. SB 1086 is a tax levy and takes effect
immediately, but its provisions only become operative on
the first day of the first calendar quarter commencing more
than 90 days after its effective date.
State Revenue Impact
The BOE estimates that this bill will result in a state and
local revenue loss of $182 million per year.
Comments
1. Purpose of the bill . Wireless telecommunications
devices can cost several hundreds of dollars at retail, but
can be discounted up to 100% when sold in a bundle.
Because of discounting, the SUT can sometimes account for
upwards of 40% of the device's cost. SB 1086 allows
wireless telecommunications device customers to pay SUT on
the bundled sales price of a device instead of the original
retail price. This bill will save tax dollars for
consumers of discounted devices. Because SB 1086 lowers
SB 1086 - 4/9/12 - Page 3
total cost for consumers, more customers can afford
wireless telecommunication devices, thus increasing sales.
The increased sales and consumer savings will generate
economic activity in other sectors. Although this bill
will result in an initial revenue loss to the state, city,
and county governments, a stimulated economy will allow
these governments to recoup the loss.
2. State and local government revenue loss . The BOE
estimates that this bill will result in state and local
government revenue losses of about $182 million per year,
which may increase in the future as more products are sold
and discounted in bundles. Currently, cellular phones are
the most common devices sold in a bundle, but tablets have
increasingly become a popular bundled product as well. It
is difficult to predict what future products will be sold
in a bundle. Local governments may not be able to generate
sufficient revenue to recover this loss, and because this
bill prevents the state from reimbursing city and county
governments for lost revenue, local governments will not
receive any financial help from the state. To alleviate
the effects of revenue decline, the Committee may wish to
consider allowing cities and counties to receive state
reimbursement if they find that this bill results in
decreased revenue.
3. More tax consistency ? Other tangible personal properties
are taxed at their sales price. When a consumer buys a
discounted item from a department store, they pay taxes
only on the price they pay, not the retail price of the
product. Some retail companies give away free gifts when a
customer purchases an item, and the gift is not taxed.
Proponents of this bill argue that this bill will simplify
the Tax Code by aligning the SUT policy of wireless
telecommunication devices with the SUT policy of other
tangible goods.
Conversely, opponents argue that this policy change will
result in more tax inconsistency. When a service is sold in
connection with a taxable sale of a tangible good, the
service is considered part of the sale and subject to SUT.
To be consistent with current law, the total cost of the
wireless service contract should be taxed as well. Because
the BOE did not want to burden customers with an SUT for an
entire service contract that can span two years, it adopted
SUT Regulation 1585 that requires SUT only on the retail
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price of the wireless device. Changing SUT laws to reduce
this tax would give the wireless telecommunication industry
even more of a tax break.
4. Consumer confusion . According to the author's office,
some wireless telecommunication device customers, not
anticipating the total SUT, are surprised and deterred from
buying the device when the final cost is higher than they
expected. Retailers, the BOE, and legislators have
received complaints from confused and angry customers
asking why their sales tax is higher than they expected.
Not only will this bill alleviate customer confusion, it
also will relieve retailers' burden of explaining
California's complicated SUT policy to customers.
In contrast, an AT&T sales representative states that few
customers stop purchasing a phone when they realize the
total SUT. Because this regulation has been in place since
1999, and most wireless telecommunication device purchasers
are not first time customers, most customers already know
they have to pay SUT on the retail price of a device. If
the intent is to minimize customer confusion, the state and
retailers can better educate consumers about the SUT of a
wireless telecommunication device, rather than changing the
way the tax is calculated that results in a revenue loss.
5. Related legislation . SB 1086 is nearly identical to AB
2320 (La Malfa, 2006) and AB 279 (Garrick, 2011), which
both died in the Assembly Revenue and Taxation Committee.
Support and Opposition (5/3/12)
Support : George Runner, Second District, State Board of
Equalization; Michelle Steel, Third District, State Board
of Equalization.
Opposition : Unknown.