BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 781 HEARING: 7/19/13
AUTHOR: Bocanegra FISCAL: Yes
VERSION: 4/18/13 TAX LEVY: No
CONSULTANT: Miller
SALES & USE TAXES: VIOLATIONS FOR NONCOMPLIANCE: SALES
SUPPRESSION DEVICES
Makes it a punishable offense for any person to knowingly
sell, purchase, install, transfer or possess software
programs that falsify reported sales
Background and Existing Law
Existing law<1> sanctions taxpayers who intentionally fail
to accurately report and remit tax and fee liabilities. In
addition to a variety of civil penalties, the law imposes
criminal penalties for violations. For example, any person
who makes a fraudulent return with the intent to evade the
determination of an amount due, or any person who assists
in the preparation or presentation of a document that is
false to a material matter is guilty of a misdemeanor,
punishable by a fine of at least $1,000 and not more than
$5,000, or imprisonment up to one year in the county jail,
or both fine and imprisonment in the court's discretion.
In addition, the law makes it a felony if the unreported
tax liability is at least $25,000 in a consecutive 12-month
period, and is punishable by a fine of at least $5,000 and
not more than $20,000, or imprisonment for 16 months, or 2
or 3 years, or both the fine and imprisonment in the
discretion of the court.
The existing Fee Collection Procedures Law<2> (FCPL)
generally provides for the administration and collection of
BOE-administered fees. Legislation that establishes a new
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<1>
Revenue and Taxation Code (RTC) Sections 7152 through
7157.
<2> Part 30 of Division 2 (commencing with Section 55001)
of the RTC.
AB 781 -- 4/18/13 -- PageB
fee may reference the FCPL with minimal verbiage. Among
other things, this law includes collection, reporting,
refund, and appeals provisions, and, similar to the Sales
and Use Tax Law, provides criminal penalties for
violations.
California's tax system is based on voluntary compliance.
Most tax or feepayers (taxpayers) who report taxes and fees
to the BOE generally comply with the law. However, some
seek to skim or hide their sales to evade the tax due.
Some cash-based businesses, for example, do not ring up all
their sales through their cash register, keep two sets of
books, or simply file false tax returns.
Recently, there have been increased reports of electronic
methods to "skim sales" whereby retailers conceal or remove
sales transactions from recordkeeping systems. These
devices are referred to as "sales suppression devices," and
the software is referred to as "phantom-ware." The use of
this technology makes the detection of understated sales
difficult in tax and fee audits.
Existing law does not specifically penalize a person for
the sale, purchase, installation, transfer, or possession
of sales suppression devices or software that conceals or
removes sales transactions from retailers' recordkeeping
systems.
Proposed Law
Assembly Bill 781 makes it a criminal offense for any
person to knowingly sell, purchase, install, transfer, or
possess any automated sales suppression device, zapper or
phantom-ware (devices). The offense is punishable by a
fine of up to $10,000 and imprisonment in the county jail
for up to 3 years, with sentence lengths of: (1) not more
than one year, or, 16 months, or (2) two or three years, or
both that fine or imprisonment.
AB 781 applies to the Sales and Use Tax Law, and the
California Tire Fee and Covered Electronic Waste Recycling
Fee, which are fees imposed on consumers at the retail
level.
In addition to the fines, AB 781 specifies that the person
AB 781 -- 4/18/13 -- PageC
shall also be liable for the taxes and fees, interest, and
penalties due.
AB 781 defines "automated sales suppression device,"
"zapper," "electronic cash register," "phantom-ware," and
"transaction data" as follows:
"Automated sales device" or a "zapper" is a software
program carried on a memory stick or removable compact
disc, accessed through an internet link, or accessed
through any other means, that falsifies the electronic
records of electronic cash registers and other
point-of-sale systems, including but not limited to,
transaction data and transaction reports.
"Phantom-ware" as a hidden, pre-installed, or installed
at a later time programming option embedded in the
operating system of an electronic cash register or
hardwired into the electronic cash register that can be
used to create a virtual second till or may eliminate or
manipulate transaction records that may or may not be
preserved in digital formats to represent the true or
manipulated record of transactions in the electronic cash
register.
"Transaction data" as including information regarding
items purchased by a customer, the price for each item, a
taxability determination for each item, a segregated tax
amount for each of the taxed items, the amount of cash or
credit tendered, the net amount returned to the customer
in change, the date and time of the purchase, the name,
address, and identification number of the vendor, and the
receipt or invoice number of the transaction.
State Revenue Impact
According to the BOE, this bill will result in some
increased revenue but the exact amount is unknown. The BOE
provides the following statement:
Currently, the BOE staff is studying the extent of
California's sales suppression software problem in
California. Based on BOE data for 2010, California's dining
and beverage industry reported taxable sales of $51.3
billion. Using a 5% underreporting rate, California loses
AB 781 -- 4/18/13 -- PageD
$214 million<3> annually due to use of these sales
suppression devices.
If enacted, we anticipate these estimated losses will
decrease. However, the extent of the decrease is unknown.
Comments
1. Purpose of the bill . The author and the sponsors, BOE,
provide the following statement: California must be
proactive and curtail the use of these sales suppression
devices. Use of this technology not only defrauds the
state, but provides users an unfair competitive advantage
over taxpayers who comply with the law and pay their fair
share of taxes and fees. The Legislature has recognized
through its enactment of criminal penalties for deliberate
taxpayer fraud and evasion that criminal sanctions play an
important role in tax administration. Specifically
criminalizing and punishing the sale, installation, and use
of sales suppression devices serve as a strong deterrent to
potential offenders.
2. Crimes . The opposition to AB 781 says that it is
"absolute proof of the necessity of a sentencing commission
to examine California's penal statutes and determine
whether or not the sentencing structure provides effective
sanctions to prevent future criminal conduct and punish
those individuals who have committed crimes. California
can no longer afford [piecemeal] sentence enhancements
without considering the need for acquiring, either through
construction or out of state housing, additional prison
beds." Because this bill creates a new crime; those
provisions of the bill will be considered by the Senate
Public Safety Committee.
Assembly Actions
Assembly Public Safety6 -0
Assembly Revenue & Taxation8 -0
Assembly Appropriations 16-0
Assembly Floor 75-1
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<3> Based on California's average 2013 state, local, and
district tax rate of 8.38%.
AB 781 -- 4/18/13 -- PageE
Support and Opposition (6/13/13)
Support : State Board of Equalization (Sponsors);
California Retailers Association; American Federation of
State, County, and Municipal Employees.
Opposition : Taxpayers for Improving Public
Safety.