BILL ANALYSIS �
AB 1717
Page A
Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Steven Bradford, Chair
AB 1717 (Perea) - As Amended: April 2, 2014
SUBJECT : Telecommunications: prepaid mobile telephony
services: state surcharge and fees: local charges collection
SUMMARY : Establishes a uniform, statewide retail point-of-sale
collection mechanism for prepaid wireless services.
Specifically, this bill :
1)Enacts the Prepaid Mobile Telephony Service Surcharge and
Collection Act (MTS) beginning January 1, 2016.
2)Establishes a prepaid MTS surcharge based on a percentage of
the sales price of each retail transaction that occurs in the
state for prepaid wireless service. The prepaid MTS surcharge
would include the emergency telephone users surcharge (9-1-1)
and California Public Utilities Commission (PUC) surcharges
and any applicable local user utility tax.
3)Requires that on and after January 1, 2016, the aggregated
prepaid MTS surcharge be imposed on the sales prices of each
retail transaction of prepaid mobile telephony services, as
defined in statute.
4)Applies the MTS surcharge as a percentage of the sales price
of each retail transaction for prepaid mobile telephony
services.
5)Requires a retail seller to collect the prepaid MTS surcharge
from a prepaid consumer and remit the amounts collected to the
State Board of Equalization (BOE).
6)Allows a seller of prepaid services to receive equal to 2% of
the amounts that are collected from prepaid consumers with
certain exceptions.
7)Specifies the taxes to be separately stated on an invoice,
receipt, or other similar document provided to the prepaid
consumer, or otherwise disclosed electronically to the prepaid
consumer.
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8)Requires BOE, after deducting its administrative expenses, to
deposit the amounts collected for 9-1-1 user surcharge into
the Prepaid MTS 9-1-1 Account and to deposit the amounts
collected for PUC surcharges into the Prepaid MTS PUC Account
in the Prepaid Mobile Telephony Services Surcharge Fund, which
the bill would establish in the State Treasury.
9)Requires PUC to annually compute for prepaid mobile telephony
services the PUC's reimbursement fee and six universal service
program surcharges, to post notice of those fees and
surcharges on its Internet Web site, and to notify BOE and the
Office of Emergency Services (OES) of the amounts and the
computation method used to determine the amounts, which would
be adjusted, as specified, and together would be the PUC
surcharges.
10)Requires the PUC, 30 days prior to adopting any adjustment to
a reimbursement fee or universal service surcharge on both
postpaid and prepaid intrastate service, to prepare a
prescribed resolution or other public document proposing the
fee or surcharge, and publicize on its Internet Web site.
11)Exempts prepaid consumers from prepaid MTS surcharge if the
prepaid consumer is certified as eligible for the state or
federal lifeline program.
12)Requires OES to annually compute the intrastate portion of
the 9-1-1 surcharge to be collected on prepaid mobile
telephony services to post notice of those charges and to
notify BOE of the amount.
13)Requires OES to prepare a prescribed summary of the
calculation of the proposed 9-1-1 surcharge and make it
available to the public on its Internet Web site.
14)Revises the definition of mobile telephony services to
incorporate the definition of the MTS Act.
15)Creates statewide uniformity for user utility taxes (UUTs)
assessed on prepaid mobile telephony service and preempts
existing provisions pertaining to the tax or charge rate, base
and method of collection contained in all local ordinances,
rules or regulations concerning the imposition of a local
charge upon the consumption of prepaid mobile telephony
services, to the extent those provisions are inconsistent with
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the new provisions, as specified.
16)Requires a seller to refund prepaid consumers for any prepaid
MTS surcharges and local charges in excess of the surcharge
amount.
17)Allows a consumer to rebut the presumed location of a retail
transaction for the purposes of the collection of the local
charges by filing a claim and declaration under penalty of
perjury.
18)Includes an urgency clause.
EXISTING LAW :
1)States the PUC has regulatory authority over public utilities,
including telephone corporations, and is authorized to fix
just and reasonable rates and charges for services provided by
those public utilities.
2)Establishes the Public Utilities Commission Utilities
Reimbursement Account and authorizes the PUC to annually
determine a fee to be paid by every public utility providing
service directly to customers or subscribers and subject to
the jurisdiction of the PUC, except for a railroad
corporation.
3)Requires the PUC to establish the fee, with the approval of
the Department of Finance, to produce a total amount equal to
that amount established in the authorized PUC budget for the
same year, and an appropriate reserve to regulate public
utilities, less specified sources of funding.
4)Establishes the state's telecommunications universal service
programs and authorizes the PUC to impose charges for the
purpose of funding those programs.
5)Defines mobile telephony services for purposes of the Public
Utilities Code.
6)Establishes the BOE with duties that include administering tax
and fee programs that provide revenue for state and local
government.
7)Fee Collection Procedures Law specifies procedures for BOE
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collection of fees and taxes that fund programs administered
by other state agencies, including taxes and fees that
retailers collect from customers and remit to the BOE for
transfer to another agency.
8)Requires the Department of Technology to administer the
state's 9-1-1 emergency telephone system with funds derived
from a surcharge on intrastate communication service that
providers remit to the BOE, which transfers the funds to the
Department of Technology.
9)Authorizes cities and counties to collect User Utility Taxes
(UUTs) on utility and communications service that providers
collect from end users and remit to BOE, which transfers the
funds to local agencies.
FISCAL EFFECT : Unknown.
COMMENTS : The author's purpose for the bill is to "modernize
our tax collection system to keep pace with the rapidly evolving
technology and market of the wireless industry". According to
the author, "doing so will ensure that prepaid wireless
customers, a growing segment of the market, pay the same,
existing taxes and fees that all other phone customers pay to
maintain effective and efficient 9-1-1 systems, while also
benefitting local governments and other public purpose programs.
AB 1717 ensures tax fairness and equity while also generating
stable revenue for 9-1-1 systems, local governments and other
public purpose programs. Thirty-two states and the District of
Columbia have enacted the point-of-sale collection model, and
the system is working in those states".
1)Background : The state's current system for collecting taxes
and fees is based on carriers
having a contractual relationship with customers and collecting
those taxes and fees on a monthly bill. These consumers pay
9-1-1 fees that help fund the network costs associated with the
delivery of wireless 9-1-1 services. They also pay
state-imposed fees to fund telephone service for low-income
households, broadband for underserved areas and more, and local
government services such as police, fire, parks and libraries
through local utility user taxes.
According to CTIA-The Wireless Association, the prepaid wireless
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market is anticipated to grow at a rate of 10% per year. Out of
300 million nationwide wireless consumers, it is estimated that
30% use prepaid services and California's share of the national
wireless market is 20%.
2)This bill looks familiar: This bill is nearly identical to AB
300 (Perea, 2013) introduced
last year with the exception of a few changes. AB 300
successfully passed the Legislature but was subsequently vetoed
by Governor Brown stating "there is no question that the state
needs an effective system for capturing local taxes related to
the sale of prepaid phones. The solution, however, proposed by
the bill is duplicative, complex, and will result in significant
and unnecessary costs to the state. I encourage the author to
partner with the local governments and State Agencies affected
by these revenues and craft a bill with a more cost effective
solution."
In reaction to the Governor's veto message, stakeholders have
been working to develop a cost-effective solution that addresses
the point-of-sale collection issues raised by the carriers while
at the same time creating a more flexible regulatory structure
in the state for communications providers to collect and remit
surcharges and fees.
3)Collection of fess and surcharges for postpaid services :
Current law imposes the
state 9-1-1 user surcharge on intrastate communications service,
administered by the Office of Emergency Services (OES), a PUC
Reimbursement Fee to pay for PUC's operations, and several
surcharges to pay for state universal service programs
administered by PUC as follows:
a) California High Cost Fund A
b) California High Cost Fund B
c) Deaf and Disabled Telecommunications program
d) California Teleconnect Fund
e) California Advanced Services Fund
f) Lifeline Telephone Service.
These state fees total approximately 2.5% of a customer's
intrastate service, calls or data sent within the state of
California. Post-paid fees and surcharges are easily assessed
as they are reflected on customer bills after service is used,
also known as end-user fees.
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1)Local 9-1-1 fees and UUTs : These fees are assessed on service
provided within the
Jurisdiction of the city or county imposing the tax. UUTs vary
by jurisdiction but not all cities and counties impose them.
There are approximately 150 local UUTs throughout the state.
2)Point-of-sale legislation in other states : Growing demand for
prepaid service and the lack of
a suitable billing relationship between the prepaid wireless
user and the provider of the prepaid
wireless service led the wireless industry to advocate for
nationwide a point-of-sale collection methodology with model
legislation endorsed in 2009 by the National Conference of State
Legislatures. According to CTIA-The Wireless Association, 32
states have adopted point-of-sale legislation based on the model
statute.
While most of these states collect only the 9-1-1 fee, CTIA
claims Maine, Nebraska and Minnesota collect additional public
purpose charges at the point-of-sale on prepaid services.
California, however, is rather unique in comparison to other
states, as it not only has the 9-1-1 surcharge to collect, but
also a number of other state and local government surcharges,
which could make the collection methodology used by other states
more challenging to adopt.
3)How are carriers currently calculating and paying their state
fees : With prepaid service, there
is no billing process. It is impossible for providers or
retailers selling prepaid service to determine in advance how
many minutes will be intrastate calls, nor where the transaction
will occur. Carriers claim they do not currently "collect" fees
from prepaid customers but rather "remit" the state fees and
local surcharges to the PUC and BOE from their profits through
an estimation methodology. Since California has authority to
impose surcharges only on communications within its state
borders, a customer's intrastate minutes of use must be
estimated in connection with certain services. The Federal
Communication Commission (FCC) allows for three different
methods to make this allocation, including books and records
(actual data), traffic studies, or a "safe harbor" estimates
that about 63% of service revenues are for intrastate calling
and 37% interstate. The PUC does not prescribe any collection
method for any kind of wireless service, leaving carriers the
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discretion to implement the method that best meets their
business needs.
Thus, according to the PUC staff analysis, "carriers are
currently collecting and remitting the required fees and
surcharges as required by law". PUC states "carriers will
sometimes claim that, as to prepaid revenue, they have to pay
the surcharges and fees "out of profits", because they cannot
collect from the end-user. The PUC notes all dollars currently
remitted as surcharges or fees are ultimately derived from the
end-user".
4)Carriers have a relationship with the customer, or do they :
Prepaid carriers have at least
three points of contact with a customer, and necessarily know
when a customer adds time to an existing prepaid account,
according to the PUC. Points of contact include<1>:
1. The point of activating the handset and setting up an
account - it appears that all or almost all carriers obtain
from end-users the Zip Code of the primary place of use
(needed to assign a telephone number), if not full address
information, from the customer; the customer then selects a
service plan;
2. The point of sale, where a direct electronic link to
cash register is established between the retailer and the
carrier, or the retailer and the carrier's aggregator
(necessary to activate cards on purchase);
3. At the point where the newly purchased airtime card is
"redeemed" on the system, and minutes are associated with
and credited to the account.
Wireless carriers object to #2, as the carrier does not receive
information from an aggregator. Aggregators specialize in
prepaid card transactions. Carriers negotiate different contract
partnerships with aggregators. For instance, Incomm (an
aggregator) is a company that specializes in prepaid card and
transaction technologies, among other things. Incomm has a
system that allows it to collect funds from retailers - on a
nationwide basis- then transmits money to the carriers once per
month. Transmitting funds appears not to be the issue but rather
the challenge is providing the necessary information with those
funds. According to the carriers, "the internal systems that
Incomm and other aggregators utilize are not designed to share
---------------------------
<1> CPUC AB 1717 Staff Analysis, dated April 8, 2014
AB 1717
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data at a granular level with retailers or carriers."
1)TracFone litigation : TracFone is the nation's, and
California's largest provider of prepaid
wireless service. In 2003, TracFone sought clarification
through PUC staff about whether PUC fees and surcharges apply to
its service. TracFone claims to have relied on staff indicating
that it was exempt. The PUC opened an enforcement proceeding
(I.09-12-016) against TracFone in 2009, and in November 2011
issued a decision concluding that TracFone is a telephone
corporation subject to its jurisdiction and is required to pay
PUC fees and surcharges (D.12-02-032). In March 2013, a state
appellate court denied TracFone's petition for review of that
decision. In Phase 2 of the proceeding, the PUC ordered
TracFone to pay approximately $24.4 million in past due
surcharges and interest to the various public purpose programs.
In February 2014, TracFone submitted a check under protest in
the amount as ordered in the Decision. As a result of this
proceeding, according to the CPUC staff analysis, "this bill as
written would undercut the PUC's decision in the TracFone OII
because it inaccurately implies that surcharge collection for
prepaid carriers is somehow impossible under current
conditions".
2)Proposed collection method : Beginning January 1, 2016, this
bill imposes on prepaid
consumers a prepaid MTS surcharge, which sellers shall collect
at the time of each retail transaction. Specifically, this
surcharge shall be imposed as a percentage of the sales price.
Sellers shall be required to register with the State Board of
Equalization (BOE) and the prepaid MTS surcharge shall be due
and payable to the BOE quarterly.
This bill also enacts the Local Prepaid Mobile Telephony
Services Collection Act. Specifically, effective January 1,
2016, local charges imposed by a local agency on prepaid MTS
shall be collected by sellers in the same manner as the prepaid
MTS surcharge described above. Specifically, this bill suspends
the authority of cities and counties to impose a utility user
tax on the consumption of prepaid MTS at the rate specified by
ordinance. Instead, the local agency shall use a tiered rate
structure, with rates ranging from 0 to 9%. The bill also
suspends the authority of cities and counties to impose a 9-1-1
charge applicable to prepaid MTS at the rate specified by
ordinance. Instead, the city or county shall use a statutorily
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specified rate structure. Applicable charges will be collected
by the BOE and held in trust for the local taxing jurisdiction.
The BOE is authorized to contract with a third party for
purposes of administering this act.
In addition, the bill authorizes third-party sellers to deduct
and retain 2% of the amounts collected from prepaid consumers
for the prepaid MTS surcharge and local charges. Carriers are
required waive the right to the 2% vendor compensation in their
stores when they are the direct seller of the prepaid mobile
services.
5) How does this bill impact the key parties involved :
According to the author and bill sponsors, AB 1717 ensures tax
fairness and equity while also generating stable revenue for
9-1-1 systems, local governments and other public purpose
programs. However, it is possible there will be "winners" and
"losers" should this bill become law. For example:
Carriers may benefit as they will have a uniform collection
method to remit state fees and local surcharges to the state
and local governments and no longer have to pay these fees
from their profits.
Retailers may also benefit from the program as they will
receive up to 2% compensation from the surcharges as
reimbursement for their expenses.
Local governments with ordinances to impose UUTs may benefit
as they will experience a revenue increase in the General Fund
from prepaid services since they are currently not being paid.
Conversely, the PUC staff analysis claims that "the formulas
contained in this proposed legislation (i.e. AB 1717) result
in carriers owing a lesser amount of UUTs than they owe now",
thereby causing local government to lose money.
BOE would receive compensation for the additional workload and
staff associated with administering collection of the fees and
surcharges. According to BOE, a detailed cost estimate is
pending. Last year, BOE projected AB 300 (Perea, 2013),
substantially similar to this bill, would range between $11
million - $13 million per Fiscal Year and result in a revenue
loss of $1.7 million annually.
PUC may be disadvantaged by this bill proposal as it would
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bifurcate the workload for staff by requiring creation of a
new unit to interface with the new BOE collection mechanism
and the prepaid account, and integrate the BOE collected
revenue data on prepaid services with the PUC collected
revenue for postpaid services in order to accurately determine
the fee and surcharge percentages applicable to prepaid
services. Additionally, the PUC opposes a proposal that
reduces its comprehensive oversight over carriers and the
universal service PPPs by inserting two more parties (BOE and
retailers) in the transaction that is currently between the
PUC and the carriers.
This proposal may not benefit the Public Safety Communications
Office as costs could increase due to the new state process
and system for collection. The State Emergency Telephone
Network Account (SETNA) is currently operating on a
constrained budget and has no mechanism, excluding legislative
authorization, to raise its fees should its costs increase.
Public safety may be disadvantaged by this bill. According to
the Northern California Chapter of the Association of Public
Safety Communications Officials, "it is imperative to the
Public Safety Answering Points (PSAPs) that the SETNA continue
to fund the acquisition of upgrades to the 9-1-1 customer
premise equipment for all 455 PSAPs in California."
The prepaid consumer will now be required to pay an additional
amount on top of the cost of prepaid service, which arguably
levels the playing field for postpaid consumers who are
currently paying the fees, taxes and surcharges.
6) Impact on state surcharge revenue : Supporters of this
measure predict this measure will bring a revenue windfall to
the state because current remittances are based on wholesale
revenues, and the new system under AB 1717 would collect
surcharges based on retail sales revenue. The PUC objects to
this predication stating "this assertion is misleading, because
revenue needed for public purpose programs and user fees is a
fixed sum, independent of the means of collection". In
addition, the PUC argues "if the surcharge base is increased,
the surcharge rate would decrease, because the revenue target
would remain the same (except where additional dollars are
needed to fund for the new systems and retailer fee)".
7) Treatment of eligible LifeLine consumers : The LifeLine
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program provides discounted basic telephone service to eligible
low-income California households. The PUC recently adopted
rules to allow wireless providers to participate in the LifeLine
program. The bill extends the exemption of the prepaid MTS
surcharge to eligible LifeLine consumers. The exemption is
applied only to the amount paid for the portion of the prepaid
mobile telephony service that the lifeline program specifies is
exempt from the surcharges and fees that comprise the prepaid
MTS surcharge. Since retailers like Target or WalMart have no
way of verifying Lifeline eligibility for a prepaid consumer, it
would be a challenge under the proposed point-of-sale framework
to allow Lifeline customers to be exempt from the surcharges as
they are under PUC General Order 153. As the bill moves
forward, the author and sponsors may wish to develop a process
to allow Lifeline eligible customers to receive their discount
if prepaid services are purchased at an unauthorized third-party
retail establishment. If parties determine the aforementioned
option is not available, then the commission should establish
the appropriate method for informing Lifeline eligible customers
about their options to receive a discount on prepaid services.
8) Greater accountability and transparency : While this proposed
collection method is contentiously opposed by a number of
parties for a variety of reasons, the author states his
commitment to continuing conversations with stakeholders to
arrive at a mutual solution that does not inflict harm on the
state or communications customers. As the bill moves forward,
the author and sponsors may wish to consider requiring entities
that currently remit state user fees and public purpose program
fees to continue remitting to the CPUC on their own direct
prepaid sales. This may ensure the CPUC maintains its
comprehensive oversight of carriers and the universal service
public purpose programs.
9)Recent amendments : The introduced version of AB 1717 included
a requirement that carriers
pay the fees and surcharges as they do today for one year while
the new tax begins. A three-year sunset provision was also
included to address the revenue impact concerns. The April 2,
2014 version of this bill no longer contains these provisions.
10)Double Referral : This bill addresses issues relating to
collection of UUTs
and local fees which will be addressed in the Assembly Revenue
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and Taxation Committee.
11)Related legislation : AB 2545 (de La Torre, 2010) required a
public process to recommend a
prepaid wireless service collection mechanism. It failed passage
on the Senate Floor.
AB 1050 (Ma, 2012) required a point-of-sale collection of state
and local surcharges on prepaid service somewhat similar to this
bill. AB 1050 failed passage in the Senate Committee on
Governance and Finance.
AB 300 (Perea, 2013) required a point-of-sale collection of
state and local surcharges on prepaid service. AB 300 was vetoed
by Governor Brown.
REGISTERED SUPPORT / OPPOSITION :
Support
AT&T
Boost
California Communications Association (CalCom)
California's Independent Telecommunications Companies (CITC)
City Council of the City of Culver City
City of Bellflower
City of Burbank
City of Hawthorne
City of Lakewood
City of Rancho Cordova
City of Redwood City
City of Sacramento
City of San Gabriel
City of Santa Barbara
City of Santa Fe Springs
Consolidated Communications Inc. (CCI)
CTIA - The Wireless Association
MuniServices, LLC
Sprint
T-Mobile
TracFone Wireless, Inc. (TracFone)
Verizon
Virgin Mobile
Opposition
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California Chapter of the National Emergency Number Association
(CALNENA)
California Fire Chiefs Association (CFCA)
California Peace Officers' Association (CPOA)
California Police Chiefs Association
California Public Utilities Commission (CPUC) (unless amended)
Greenlining Institute
Northern California Chapter of the Association of Public Safety
Communications Officials (NAPCO)
Analysis Prepared by : DaVina Flemings / U. & C. / (916)
319-2083