BILL ANALYSIS �
AB 2681
Page 1
ASSEMBLY THIRD READING
AB 2681 (Dababneh)
As Introduced February 21, 2014
2/3 vote. Tax levy
REVENUE & TAXATION 7-0 APPROPRIATIONS 17-0
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|Ayes:|Bocanegra, Harkey, Beth |Ayes:|Gatto, Bigelow, |
| |Gaines, Mullin, Nestande, | |Bocanegra, Bradford, Ian |
| |Pan, Williams | |Calderon, Campos, |
| | | |Donnelly, Eggman, Gomez, |
| | | |Holden, Jones, Linder, |
| | | |Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
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SUMMARY : Provides that a "retail sale" or "sale at retail" also
includes any sale by a convicted seller, as defined, of tangible
personal property (TPP) with a counterfeit mark regardless of
whether the sale is for resale in the regular course of
business. Specifically, this bill :
1)Provides that a "retail sale" or "sale at retail" also
includes any sale by a convicted seller of TPP with a
counterfeit mark on, or in connection with, that sale,
regardless of whether the sale is for resale in the regular
course of business.
2)Defines a "convicted seller" as a person convicted of a
violation under Penal Code Section 350 or 653(w) or United
States Code, Title 18, Section 2320. The conviction must have
occurred on or after the date of sale.
3)Defines a "counterfeit mark" as having the same meaning as
defined by United State Code, Title 18, Section 2320.
4)Provides that Business and Professions Code Section 17200 and
Civil Code Section 1750 shall only apply to a convicted
seller.
5)Provides that a notice of deficiency determination to a
convicted seller shall be mailed within one year after the
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last day of the calendar month following the date of
conviction.
6)Takes effect immediately as a tax levy.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Minor and absorbable costs to the Board of Equalization (BOE)
to administer the tax.
2)An estimated General Fund revenue increase of approximately
$2.1 million per year based on California's pro rata share of
total seizures of counterfeit goods in the United State and
the taxable value of those counterfeit goods.
COMMENTS : The author has provided the following statement in
support of this bill:
California's underground economy has a severe and
negative effect on the state's competitiveness. The
underground economy refers to the selling of
counterfeit goods designed to exactly replicate a
"name brand" item. These goods are typically imported
from overseas and sold at open markets or in other
unofficial venues.
Because it enables illegitimate businesses to steal
intellectual property and then sell it at below market
costs, the underground economy places law abiding
businesses at a tremendous disadvantage. Law abiding
businesses make significant financial investments to
develop their products, including: training and hiring
employees, building manufacturing capacity, and
complying with myriad state labor and environmental
protection laws.
At each point in the production process, these law
abiding businesses also remit billions of dollars to
the State in the form of tax revenues that are used to
fund schools, transportation and other vital
government services. The underground economy bypasses
this process, giving illegitimate businesses an unfair
advantage over legitimate businesses.
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Assembly Revenue and Taxation Committee staff comments:
1)Enforcement of Copyright Laws. The underground economy is a
well-documented problem in the State of California. The BOE
has estimated that $8 billion in corporate, personal, and
sales and use tax (SUT) revenues go uncollected in California
each year, with unreported and underreported economic activity
responsible for the vast majority of that total. This places
a burden on state and local governments, and legitimate
businesses; tackling the problem has not been easy. In 1993,
the Joint Enforcement Strike Force was created to combat the
underground economy by aiding in the sharing of information,
coordinating enforcement efforts, and developing methods to
target enforcement resources. Additionally, the Labor Task
Force has also been launched in an effort to curb the
underground economy. Through its information sharing program,
the Labor Task Force attempts to ensure that employees receive
proper payments and that California receives all employment
taxes and fees owed. Despite the coordinated efforts of
several state agencies, California's underground economy
remains a serious problem.
2)Death and taxes, not always certain. One of the reasons why
the government is unable to further crack down on the
underground economy, and specifically on counterfeit goods, is
because sellers of counterfeit goods rarely leave a paper
trail. According to an article by the New York Comptroller,
Bootleg Billions: The Impact of the Counterfeit Goods Trade
on New York City, the City of New York lost an estimated $380
million in unpaid sales taxes in 2003 because sellers did not
leave a paper trail. Although the lack of sales receipts
poses some problems, an estimate of the value of the
merchandise can be made available to the BOE upon conviction.
The BOE understands that it may not be cost effective to combat
counterfeit sales by enforcing the sales tax at the retail
level alone. The purpose of this bill is to expand the
imposition of the SUT Law to any sale of counterfeit TPP by a
convicted seller. By expanding the imposition of SUT to
transaction points along the supply chain, the BOE hopes to
gain a useful and cost-effective tool in combating the
underground economy. However, the collection of the SUT may
still be difficult because persons from whom the property is
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seized have already been convicted and possibly face
significant fines and imprisonment, which may not leave enough
funds to pay for the uncollected sales tax. Even if a lien is
placed on the property or a business, there is no guarantee
that it will lead to additional tax revenue. As such, the BOE
may find it no easier to collect from a person behind bars
than from a vendor on the street.
3)Fighting crime with tax. The "Tax Man" uses a number of tools
to both discourage and encourage behavior. State and federal
governments encourage homeownership by providing deductions
for property taxes and interest paid on mortgages.
Conversely, states have discouraged the use of certain
products, such as cigarettes, by imposing a high excise tax.
Despite using the tax code to discourage certain behavior,
California does not usually impose a tax specifically on
criminal activity. For example, California does not impose a
special excise tax on the sale of illicit drugs, such as
marijuana. One of the reasons for not imposing a special tax
on illicit drugs is that the imposition of the tax might
actually legitimize the use of the drug. As such, imposing a
sales tax on certain counterfeit TPP sales by a convicted
seller may have the same effect.
4)Supplier Business Model. Like most business models, a seller
of counterfeit goods makes a profit if sales revenues exceed
costs. However, unlike legitimate businesses, sellers of
counterfeit goods must additionally take into account the
potential costs of government prosecution and civil lawsuits
from genuine producers. These considerations may have a huge
impact on a seller's decision to carry counterfeit items,
especially if the government has improved enforcement of
copyright laws or increased jail time. The more active the
government becomes in enforcing laws, the more likely sellers
will choose not to carry counterfeit products. The threat of
sales tax, on its face, may be seen as one additional tool to
deter a person from selling counterfeit items because it
increases the costs of doing business. However, the
collection of sales tax is secondary to the threat of being
caught. When one considers the jail time, the seizure of
property, and the enormous criminal fines, it seems unlikely
that a person selling counterfeit goods would be deterred by
the possibility of having to remit sales tax, especially when
the imposition of the tax is only imposed after a conviction.
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Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
FN: 0003866