BILL ANALYSIS �
AB 2691
Page 1
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2691 (Harkey) - As Introduced: February 21, 2014
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and Use Tax Law: wireless communication
devices: bundled transactions
SUMMARY : Provides that, for purposes of the Sales and Use Tax
(SUT) Law, "gross receipts" and "sales price" from the retail
sale of a "wireless communication device" shall be limited to
the amount charged for the sale of the "wireless
telecommunication device" when it is sold in a "bundled
transaction." Specifically, this bill :
1)Defines a "bundled transaction" as a retail sale of a wireless
telecommunication device that contractually requires the
retailer's customer to activate or contract with a wireless
telecommunications service provider for utility service for a
period greater than one month as a condition of that sale.
2)Defines a "wireless telecommunication device" as a portable
communication device, such as a wireless telephone or pager,
requiring activation by a wireless telecommunications service
provider or seller of utility services in order to send and/or
receive transmissions via a network of wireless transmitters
throughout multiple service areas, or otherwise. The term
includes devices based on analog technology and devices based
on digital technology.
3)Defines a "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.
4)Provides that, notwithstanding existing law, the state shall
AB 2691
Page 2
not reimburse local agencies for SUT revenues lost under this
bill.
5) Takes immediate effect as a tax levy.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's "gross receipts" from TPP
sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The tax is based upon the "sales price" of the TPP.
3)Provides, per State Board of Equalization (BOE) SUT Regulation
1585, that in the case of bundled transactions, tax applies to
the unbundled sales price of the wireless telecommunications
device.
FISCAL EFFECT : The BOE estimates annual state and local revenue
losses of $383 million.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 2691 specifies that sales tax on wireless
telecommunication devices is to be based on the actual
purchase price of the item rather than the fair market
price. This addresses the confusion and frustration that
occurs when a consumer purchases a cell phone with a
service plan for a discounted price but must pay California
sales tax on the fair market value of the product.
Wireless devices are the only products in state sales tax
statute that are treated in this manner. The current law
is seen as a "gotcha" by many consumers and leads to
frustration and anger at the point of sale creating
problems for retailers. In some cases retailers have
remained confused over how much sales tax is required to be
paid by the consumer, which has led to businesses with
large unpaid tax bills that can remain uncollectable.
AB 2691
Page 3
Additionally, it is low-income consumers, students, and
seniors that are most harmed by this unfair and confusing
loophole in the law.
This bill treats taxpayers fairly by allowing them to
accurately estimate the cost of their purchase and tax
owed. Cell phone purchases should be treated the same as
any other retail sale. Additionally, the law will be
clearer for retailers since all sales will be taxed at a
uniform rate.
2)Proponents of this bill note the following:
California consumers reasonably believe they owe sales or
use tax on the discounted price they pay because it is
their experience with nearly every other type of purchase.
Not surprisingly, consumers are often confused and
frustrated by the higher taxes they are charged when
purchasing new cell phones or other wireless devices.
Further, this confusing tax policy imposes a burden on
retailer who are asked to explain the higher tax.
3)The BOE notes the following in its staff analysis of this
bill:
Normally, the law regards a service sold in connection with
a taxable good as part of the sale. Accordingly, the tax
is based on the total receipts derived from that sale.
However, the marketing and retail pricing strategies
associated with these devices and the telecommunications
industry contradict conventional and customary retail
practices. As a result, in 1999, the Board of Equalization
(BOE) adopted a regulation to specifically address the tax
application on these device sales and related service
charges.
Under the regulation, retailers are required to compute the
tax based on whether they sold the device in a "bundled" or
"unbundled" transaction. The regulation defines "bundled"
transactions as those sales where the customer is required
to activate or contract for utility service with a wireless
telecommunications service provider for a one-month period
or greater as a sale condition. Generally, to receive the
device's promotional or discounted sales price, customers
AB 2691
Page 4
must agree to activate or sign up with a provider for
utility service for more than a one-month period. Under
the regulation, generally, the retailer is required to
compute tax on the device's sale based on the "unbundled
sales price."
The regulation further defines "unbundled sales price" as
the price at which the retailer has sold specific device
types to customers who are not required to activate or
contract for utility service as a sale condition.
4)Committee Staff Notes:
a) Nothing is free : Wireless telecommunications devices
are often provided "free" or at a significantly discounted
price when a customer signs a long-term service contract.
If this bill were enacted, it is not clear to Committee
staff how SUT would apply in cases where the telephone or
pager is provided free of charge as part of a bundled
transaction. Under a technical reading of this bill, it
would appear that no SUT would be due, despite the fact
that, in such cases, the cost of the underlying device is
simply incorporated into the service contract. Thus, the
amount of tax collected would depend not on the underlying
value of the good sold, but rather on the method by which
the sale is structured. This, in turn, could lead to the
disparate tax treatment of customers purchasing the very
same product.
b) Unsatisfied customers : Many purchasers are confused
when they are charged SUT on the unbundled price of a phone
or pager. This confusion could be alleviated through
better customer outreach and education, both by retailers
and the state. This might prove significantly less costly
than altering the manner in which taxes are calculated.
c) Sufficient lead time : This bill provides no lead time
for the BOE to notify impacted retailers and provide
instructions related to their reporting obligations. The
BOE has suggested amendments in its staff analysis of this
bill to address this issue.
d) Related legislation :
i) This bill is nearly identical to AB 2320 (La Malfa)
AB 2691
Page 5
of the 2005-06 Legislative Session. AB 2320 was held in
this Committee.
ii) This bill is nearly identical to AB 279 (Garrick) of
the 2011-12 Legislative Session. AB 279 was held in this
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
George Runner, Member, State Board of Equalization
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098