BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 1717 (Perea) - Telecommunications: prepaid mobile telephony
service: state surcharge and fees: local charges collection.
Amended: July 2, 2014 Policy Vote: EU&C 9-0, G&F 6-0
Urgency: Yes Mandate: Yes (see staff comment)
Hearing Date: August 11, 2014 Consultant:
Marie Liu
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1717 would create a point of sale mechanism to
collect surcharges for the state's universal service programs,
911 emergency response system, the California Public Utilities
Commission's (CPUC's) user fee, and local utility users taxes
(UUTs) on prepaid mobile telephony services (MTS).
Fiscal Impact:
$8.3 million for FY 2015-16, $13.6 million for FY 2016-17,
$12.3 million for FY 2017-18, and $12.1 million thereafter
from fee revenues (special) for the Board of Equalization
(BOE) to administer and collect the new collection mechanism
beginning in 2016, not including additional costs associated
with the potential sunset of the new collection mechanism.
$630,000 for the first two years of implementation and
$350,000 thereafter from the Public Utilities Commission
Utilities Reimbursement Account (special) to set the MTS and
track MTS revenues
Unknown changes in state revenues, but potentially an
increase in $4.99 million, to various special funds by
collecting surcharges on more services and on retail prices.
Staff estimates that after the subtraction of the state's
portion of the BOE and CPUC's increased administrative
costs, net revenues may be in the hundreds of thousands of
dollars.
Cost pressures on the General Fund for a loan for start-up
costs.
Background: Under existing law, customers in California pay the
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following surcharges based on their intrastate telephone use:
1.The 911 Surcharge- this charge funds the state's 911 emergency
response system. The charge is statutorily restricted to be
between 0.5 and 0.75% on revenues from intrastate voice
service and is determined by the Office of Emergency Services
(OES). OES recently raised the surcharge to 0.75% this past
fall. The BOE administers the surcharge, and remits revenue to
the State Emergency Telephone Number Account (SETNA), which is
administered by OES. The SETNA currently has a structural
imbalance, largely due to steep decreases in revenues over the
past eight years as texting and other communication
technologies have been replacing intrastate voice service. OES
anticipates the SETNA to have a negative fund balance in FY
2015-16.
2.CPUC universal program surcharges- CPUC can change the rates
to ensure stable fund balances based on forecast demand. Fees
include:
a. Universal Lifeline Account: 1.15% of the amount paid
for monthly service, which subsidizes landline services
for low-income households,
b. Deaf and Disabled Telecommunications Program: 0.2%
to aid deaf, hearing impaired, and disabled persons to
use telephones,
c. High Cost Fund A: 0.4% to subsidize rural
telecommunications carriers,
d. High Cost Fund B: currently 0 (because of a large
reserve) to subsidize carriers of last resort providing
residential telecommunications in high cost areas,
e. Teleconnect Fund: 0.59% to fund a 50% discount on
selected telecommunication services to qualifying
schools, libraries, government-owned and operated
hospitals and health clinics, and community-based
organizations.
f. Advance Services Fund: 0.44% to fund broadband
deployment unserved and underserved areas.
3.CPUC a user fee of 0.18% on telecommunications carriers based
on their intrastate revenues. This fee funds CPUC operations
and is also referred to as the reimbursement fee.
4.Utility users taxes (UUTs) are excise taxes imposed on
consumers of utilities by cities and counties on the
consumption of utility services, including electricity, gas,
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water, sewer, telephone, sanitation, and cable television. In
jurisdictions that impose a UUT, a utility company collects
the tax through the bills it sends to utility customers, and
remits the revenues to the local government that imposed the
tax. Although a city or county can impose a UUT as a special
tax, generating revenues that must be used for a specific
purpose, nearly all UUTs are imposed as general taxes, which
allow revenues to be used for any purpose. Additionally, some
local agencies also impose charges to fund local 911 systems.
Assessing surcharges: All these fees are assessed as a
percentage of a customer's intrastate telephone service. The
collection of these surcharges are relatively straightforward
when telephone service is paid for after the calls were made
(postpaid), whether the telephone service is landline or
wireless, as a telephone carrier can identify actual intrastate
calls and there is a billing relationship with the customer.
In recent years, there has been significant growth in so called
"prepaid wireless" where customers purchase credits for their
accounts and usage is limited to the amount of purchased
credits. Both postpaid and prepaid services require a customer
account with a carrier and the services are largely the same.
The main difference is that prepaid services requires the
customer to pay before the service can be used, which allows the
customer to forgo the credit check that is required of postpaid
services. It is anticipated that prepaid wireless accounts may
exceed postpaid wireless contracts in the future. The CPUC and
the BOE estimate that prepaid wireless service represent 10.9%
and 13.6% of the total wireless revenues, respectively.
With prepaid service, it is unknown in advance how many minutes
will be used for intrastate calls and how much will be used for
other services (messaging, data, and non-communication services
such as ring tones). This breakdown is important as the
surcharges may only be applied to intrastate voice services
(i.e. phone calls). To address this problem, the FCC has
approved three different methods to estimate intrastate minutes.
Proposed Law: This bill would establish the Prepaid Mobile
Telephony Services Surcharge Collection Act, which requires
purchasers of prepaid wireless to pay a surcharge on retail
sales for state and local charges on and after January 1, 2016.
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Current surcharge collection will continue until December 31,
2015.
MTS Fee: The MTS Fee is a percentage of the sales price, and is
in-lieu of all other state charges, fees, and taxes that
currently apply. BOE would administer the MTS Fee according to
the Fee Procedures Collections Law, and would calculate the rate
according to the bill each year no later than November 1,
commencing on November 1, 2015 by adding the 911 surcharge rate
and the rates for the CPUC reimbursement and universal service
fees, as calculated by the CPUC for prepaid mobile telephony
services.
The MTS fee would be combined with any UUTs or other local
charges applicable to wireless services (e.g. local 911 fees).
The BOE would be required to post the combined rate for each
jurisdiction on its website by December 1st of each year.
Seller of wireless services would be required to collect this
combined rate on prepaid wireless services at the point of sale
and disclose separately the MTS fee, UUT, and other local
charges on the customer's receipt.
This bill would establish numerous provisions regarding the
obligations and liabilities for the seller as well as customers
to require collection. This bill would also establish provisions
specifying the collection of the MTS fee and local charges when
the purchase is not a retail transaction (i.e. online purchase).
The MTS Fee applies to the entire price where prepaid mobile
telephony services are sold in combination with mobile data
services or any other services or products for a single price.
The retailer can elect to apply the MTS fee only to the amount
charged for the prepaid service, and not to the whole amount of
the transaction when the retailer sells the prepaid service with
a cellular telephone, and the purchase price for the prepaid
service is separately disclosed to the consumer.
Local charges: Local agencies would be required to contract with
BOE annually to collect its UUT and local charges along with the
MTS fee. This bill would specify the provisions of the contract
including a requirement that the local agency certify that its
UUT and local charge ordinance applies to prepaid wireless
services. The bill provides provisions for the posting and
enactment of new rates should local rates change.
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This bill would suspend the authority of any local agency to
impose a UUT or local 911 charge at the rate specified in the
ordinance; instead the bill would set rates that approximate UUT
and local charge rates.
Surcharge administration- direct sales: For collections
collected by direct sellers, the portion of the combined rate
that is attributable to the 911 surcharge would be remitted to
the BOE, the portion that is attributable to the CPUC surcharges
would be remitted directly to the CPUC, and the portion that is
attributable to the local charges would be remitted directly to
the appropriate jurisdiction. Direct sellers are defined in this
bill as a prepaid MTS provider or service supplier. For example,
this would include an AT&T or Verizon store. This process would
be identical to the current practice.
Surcharge administration- indirect sales: Indirect sellers
would be required to remit funds collected from the combined
rate to the BOE, less up to 2% of the total collected to
compensate for the costs of collections.
The BOE would deposit collections from the MTS rate into the
Prepaid Mobile Telephony Services Fund, which would be created
in the State Treasury by this bill, less BOE's expenses incurred
in the administration and collection of the MTS surcharge. BOE
would allocate its costs for collection on a pro rata basis
according to revenues collected for the 911 Fee, CPUC Fees, and
local charges. A proportional amount of the funds from the 911
component of the MTS fee would be deposited into the Prepaid 911
MTS account, created by the bill, and a proportional amount
funds for the CPUC fee component into the Prepaid MTS PUC
account, also created by the bill.
Collections of local charges by the BOE would be deposited in
the Local Charges for Prepaid Mobile Telephony Services Fund,
which would be created in the State Treasury by this bill, less
BOE's expenses. Monies in this fund would be required to be
transmitted to local agencies as specified. Local agencies must
pay all of BOE's costs of administering this part of the bill
and collecting local charges. The Director of Finance has final
decision-making authority to resolve disputes between BOE and
local agencies over costs. BOE must annually report on both its
reimbursed and unreimbursed costs for collecting local charges.
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BOE can prescribe and adopt tax administration and enforcement
regulations, as well as any necessary emergency regulations as
necessary to implement the bill.
911 Guarantee: The bill would require the BOE to calculate for
each fiscal year the total collections that is attributable to
the 911 surcharge less the amount retained by sellers and less
the proportionate share of BOE's administrative costs. If MTS
revenues fall below $9.9 million, BOE must bill each prepaid
wireless service provider according to its pro rata share of
California intrastate revenue. CPUC fees have no such
guarantee.
Lifeline exemption: Consumers eligible for the state or federal
lifeline program are exempt from the MTS fee if the seller is
authorized to provide lifeline service (e.g. a direct seller).
The exemption applies only to the amount paid for prepaid
service that the lifeline program specified is exempt from the
components of the MTS fee.
Calculation of CPUC MTS fees: This bill would require the CPUC
to compute its reimbursement fee as a percentage of the sales
price of prepaid MTS by October 1st for the following calendar
year, commencing October 1, 2015. The CPUC would also be
required to calculate the cumulative amount of
telecommunications universal service charges, which include all
the fees above, using identical dates. This bill contains
provisions regarding any past overcollection and undercollection
from the previous year as well as requirements to disclose this
calculation to OES and the BOE and on its website.
Calculation of the 911 fee: This bill would require OES to
determine the 911 fee for prepaid wireless according to the
intrastate portion of prepaid wireless based on the information
carriers send to the CPUC, commencing with the calculation made
on October 1, 2015, effective January 1, 2016. OES must inform
BOE of the total amount collected, including the amount from
prepaid wireless. OES must prepare a summary regarding its
calculation and post it on its website.
This bill would also require OES, when determining the 911 fee,
to include the costs it expects to incur to develop, implement,
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and operate Next Generation 911 technology and services. These
provisions are similar to those in SB 1211 (Padilla).
Sunset date: The provisions of this bill would sunset on January
1, 2020, except for the 911 guarantee provisions in Section 9 of
the bill, which would have a separate, unspecified sunset date.
Related Legislation:
AB 2545 (de La Torre, 2010) would have required a public process
to recommend a prepaid wireless service collection mechanism and
was essentially a study bill. 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. Died in the Senate Committee on Governance and Finance.
AB 300 (Perea, 2013) would have established a similar system to
collect state surcharges and local UUT on prepaid wireless
services. Vetoed.
SB 1211 (Padilla) would require OES to develop a plan, including
a timeline of target dates, for the development of a Next
Generation 911 emergency communication system. This bill would
also establish requirements for OES in determining the 911
surcharge rate. Currently on Asm. Appropriations's suspense
file.
Staff Comments:
All state surcharges are currently being remitted by
carriers...but not necessarily collected from the customer:
Under existing law, carriers remit the CPUC surcharges to the
CPUC, the 911 surcharges to BOE, and UUT surcharges to the
appropriate local government. The surcharges, whether they are
collected from landline, postpaid wireless, or prepaid wireless,
are submitted in a bundled amount. According to the CPUC, as a
result of recent legal action against TracFone (see analysis of
the Energy, Utilities, and Communications Committee for further
details), all state charges are currently being collected.
As required by a CPUC decision, postpaid customers have the
various surcharges itemized on their bill and are explicitly
collected on their intrastate telecommunication services.
Postpaid customers are clearly paying the surcharges, which the
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carrier remits. However, in the case of prepaid customers, the
surcharges are essentially built into the purchase price.
Carriers are currently responsible for remitting the surcharges
but they do not have a convenient method (or at least
market-friendly method) to explicitly pass these surcharges onto
the customer. Thus, opponents to this bill feel that the
surcharges are being remitted, but not collected. By creating a
point-of-sale collection mechanism, this bill would allow the
surcharges to be explicitly collected from all customers.
Some UUTs are also currently being remitted by carriers: Of the
157 local agencies that have UUT ordinances, 125 of them apply
to wireless services. Based on a CPUC questionnaire sent to the
five largest carriers in California that cover approximately 90%
of the state's wireless market, three carriers are currently
remitting UUTs to at least some local governments. Based on
those carriers' market share, the CPUC estimates that 68% of
UUTs are currently being remitted. But as with the state
surcharges, some argue that these UUTs are being remitted, but
not collected from customers.
At least some of the UUTs that are currently uncollected are not
being paid but because the carrier does not believe the UUT
applies to their services, not because there lacks a collection
mechanism. The assertion that UUT does not apply to prepaid
wireless is currently being litigated in an action taken by
TracFone against the City of Los Angeles.
Staff notes that even under the collection mechanism under this
bill, some local agencies will have to modify their ordinances
and then be approved by their voters before they could receive
revenues.
Will the new point of sale collection mechanism increase state
and local revenues? The most recent BOE staff analysis of this
bill estimates that state and local revenues will increases as a
result of this bill, though the BOE analysis notes that the
increase is not necessarily due to more complete collection (see
next comment). Staff notes that the stakeholders do not all
agree with the BOE's estimates as those estimates are based on a
number of necessary assumptions, including the amount of UUTs
currently being paid, the wireless sales tax base, and portion
of wireless revenues that come from prepaid sales.
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The BOE estimates that there could be $40.958 million in extra
state and local collections- $4.99 million more for the state
and $35.968 million more for locals. This revenue will be offset
by increased administrative costs (see comment on net impacts).
Staff notes that the state surcharge rates are set accordingly
to raise the necessary revenues to fund program expenses and not
more. That is, if revenues increased, rates would be adjusted
downwards. Therefore the impact of this bill is not more or less
revenues for the state, but higher or lower surcharge rates for
the state.
Revenues may increase for various reasons, only one of which is
improved collections: Revenues to the state may increase for at
least three reasons under this bill.
First, by creating a point-of-sale collection point for
prepaid services, this bill will ensure that surcharges are
being collected on all services. As discussed above, the CPUC
believes that all state surcharges and a portion of local
charges are already being successfully remitted by the
carriers for prepaid wireless customers. This bill will
increase collections by capturing the remaining portion of
UUTs currently not being reemitted by the carriers.
Second, collections may increase because prepaid customers
will be paying for the surcharge on services other than
intrastate telephone communication services. Prepaid cards can
be used to pay for a variety of services associated with
mobile phone use beyond voice use, including voicemail
service, data, and messaging. Section 42018 of this bill would
require that the MTS be paid on the entire price if the MTS is
sold in combination with mobile data service or any other
services for a single price.
Third, CPUC rules currently require that surcharges be
assessed on retail, not wholesale, prices. However, the
carriers do not all seem to be complying with this
requirement. By assessing the surcharges at point-of-sale, it
is assured that surcharges are based on retail price. To the
extent that carriers are currently remitting based on
wholesale instead of retail price, this bill will result in
additional revenues.
In sum, this bill may increase revenues, partially due to
improved collections of the UUT, but also because surcharges
will be collected on more services and on retail prices.
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Administrative costs will be substantially higher for both the
BOE and the CPUC : Under the current system, the administrative
costs to determine how much state and local surcharges to remit
are being borne by the carrier. This bill would shift the
administration, and the associated costs, to the state.
To collect the MTS and local combined surcharges from indirect
sellers of prepaid wireless services, the BOE estimates
administrative costs of $8.3 million for FY 2015-16, $13.6
million for FY 2016-17, $12.3 million for FY 17-18, and $12.1
million thereafter. The BOE also anticipates incurring
additional unknown costs associated with the sunset of this
bill's provisions.
The CPUC estimates initial costs of $630,000 for the first two
years of implementation and $350,000 ongoing to create the new
collection mechanism, set the MTS surcharge, and interface with
BOE.
The BOE and the CPUC currently incur $2.6 million in
administrative costs under the existing system. These costs are
ongoing and are likely to continue unchanged by this bill as
this system will need to continue to operate to receive
surcharges from landline, postpaid wireless, and direct sales of
prepaid wireless.
Potential net impact on the state: Assuming the MTS surcharge
rate is 3.514% (the sum of the existing state surcharges) and
the statewide weighted average UUT rate is 5.72% (estimate from
the BOE analysis this bill), then the state will be responsible
for approximately 38% of the increased administrative costs or
$4.7 million of the ongoing costs. Given that the BOE's estimate
is that state revenues will increase by $4.99 million, the net
state impact may be $300,000 in additional revenues. Once this
amount is spread across seven special funds, the impact of this
bill on state revenues is likely to be minimal if BOE
projections are correct.
Potential net impact on local agencies: Based on the same
numbers as above, locals will be responsible for approximately
$7.7 million of ongoing costs which will result in net increased
local revenues of $28.2 million, spread amongst the
approximately 125 local agencies that have UUTs applicable to
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wireless services for an average increase of $226,000 each.
Who pays for the cost of the new administrative costs caused
under this bill? This bill is unclear whether the administrative
costs are to be recovered in the calculation of the MTS fee rate
or whether the administrative costs are to be paid
proportionally by each of the special funds that receive
revenue. In the former case, the administrative costs would just
be borne by the prepaid customers and in the latter the
administrative costs would be spread out by all telecom
customers. The bill has several provisions suggesting that the
administrative costs are to be built into the MTS fee rate only
because the MTS fee is specific to prepay consumers.
Specifically, in �3 of the bill, the bill directs the CPUC to
calculate a specific prepaid MTS fee for the user fee, the
cumulative universal service surcharges, and the 911 surcharge.
Furthermore, the bill directs the CPUC to take steps should
there be over or under collection of surcharges from prepaid MTS
customers, implying bifurcation of funds between prepaid
wireless customers and all other telecom customers. The bill
also explicitly requires the CPUC to calculate expenses from
prepaid services. The CPUC notes that if the administrative
costs for the new collection mechanism for indirect prepaid
sales must be paid by just prepaid customers, the MTS surcharge
rate will be 11.88% plus local charges.
According to the author's office, the intent is that the MTS fee
rate would simply be the sum of all the surcharge rates meaning
that all customers will bear the increased administrative costs
of the state and the indirect sellers.
No initial costs provided under this bill : In AB 300, initial
costs were covered by a one-year overlap between the existing
surcharge collection system and the point of sale collection.
That is, for one year, carriers would continue to be responsible
for remitting state and local surcharges while consumers would
start paying point of sale surcharges for the same purposes.
This double-pay provision does not exist in this bill. As a
result, there is no mechanism to pay for the BOE and CPUC's
initial costs. Presumably these costs would be borne by the
General Fund as a loan.
Technical issue : Staff notes that the bill is inconsistent with
the term "MTS surcharge" as to whether it includes local
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charges. Staff recommends that the bill be amended to make clear
that the MTS surcharge only include the state surcharges.
Non-reimbursable state mandate: This bill requires that the MTS
and local fees be collected in accordance with the Fee
Collection Procedures Law. As a violation of that law is a
crime, this bill would impose a state-mandated local program.
However, under the California Constitution, such mandated costs
are not reimbursable by the state.