Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Existing law defines sale and purchase for these purposes and provides certain exclusions from those definitions.

Existing law regulates pawnbrokers by, among other things, requiring every loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, a copy of which is required to be furnished to the pledgor. Existing law requires the loan period of a loan contract to be no less than 4 months, and requires the loan contract to set forth the loan period, the date on which the loan is due and payable, and to clearly inform the pledgor of his or her right to redeem the pledge during the loan period. Existing law provides procedures by which a pawnbroker may become vested with the title to pledged property.

This bill, until January 1, 2022, would provide that sale and purchase do not include the transfer of vested property, as defined, by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan if specified requirements are met, thus excluding that transfer from imposition of sales and use tax.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes cities and counties to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which generally conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Existing law requires the state to reimburse cities and counties for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding those provisions, no appropriation is made and the state shall not reimburse cities and counties for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Existing law defines sale and purchase for these purposes and provides certain exclusions from those definitions.

Existing law regulates pawnbrokers by, among other things, requiring every loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, a copy of which is required to be furnished to the pledgor. Existing law requires the loan period of a loan contract to be no less than 4 months, and requires the loan contract to set forth the loan period, the date on which the loan is due and payable, and to clearly inform the pledgor of his or her right to redeem the pledge during the loan period. Existing law provides procedures by which a pawnbroker may become vested with the title to pledged property.

This bill bill, until January 1, 2022, would provide that sale and purchase do not include the transfer of vested property, as defined, by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan if specified requirements are met, thus excluding that transfer from imposition of sales and use tax.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes cities and counties to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which generally conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

Existing law requires the state to reimburse cities and counties for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding those provisions, no appropriation is made and the state shall not reimburse cities and counties for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Existing law provides various exemptions from the taxes imposed by those laws. Existing law defines sale and purchase for these purposes and provides certain exclusions from those definitions.

Existing law regulates pawnbrokers by, among other things, requiring every loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, a copy of which is required to be furnished to the pledgor. Existing law requires the loan period of a loan contract to be no less than 4 months, and requires the loan contract to set forth the loan period, the date on which the loan is due and payable, and to clearly inform the pledgor of his or her right to redeem the pledge during the loan period. Existing law provides procedures by which a pawnbroker may foreclose on become vested with the title to pledged property.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Existing law provides various exemptions from the taxes imposed by those laws.

Existing law regulates pawnbrokers by, among other things, requiring every loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, a copy of which is required to be furnished to the pledgor. Existing law requires the loan period of a loan contract to be no less than 4 months, and requires the loan contract to set forth the loan period, the date on which the loan is due and payable, and to clearly inform the pledgor of his or her right to redeem the pledge during the loan period. Existing law provides procedures by which a pawnbroker may foreclose on pledged property.

This bill would declare the intent of the Legislature to enact legislation that would provide an exemption from sales and use taxes if an original pledgor reacquires from a pawnbroker tangible personal property he or she pledged to the pawnbroker as security for a loan within six months after title to the property is vested in the pawnbroker.

GOVERNOR'S VETO

GV Bill Id:AB 2365

Author:(Gipson)

As Enrolled Ver:August 15, 2016

2/3 vote

SUMMARY: Provides that the terms "sale" and "purchase" do not include the transfer of "vested property", as defined, by a "pawnbroker" to a person who pledged the property to the pawnbroker as security for a loan if specified requirements are met, thus excluding such transfers from taxation under the Sales and Use Tax (SUT) Law. Specifically, this bill:

1. Provides that, for purposes of the SUT Law, the terms "sale" and "purchase" do not include the transfer of title to "vested property" by a "pawnbroker" to a person who pledged the property to the "pawnbroker" as security for a loan and from whom title to the property transferred to the "pawnbroker" pursuant to Financial Code Section 21201, if both the following requirements are met:
   1. The transfer occurs no more than six months after title to the property transferred to the "pawnbroker" from the person pursuant to Financial Code Section 21201; and,
   2. As consideration for the transfer of the property, the person is required to pay the "pawnbroker" only the remaining unpaid balance of the amount borrowed under the loan as of the date the "pawnbroker" becomes vested with title to the property, together with one of the following:
      1. For an original loan amount not exceeding $2,499.99, charges and interest due under the loan pursuant to Financial Code Section 21200 et seq., from the date the "pawnbroker" is vested with title to the property to the date of the transfer to the person who pledged the property; or,
      2. For an original loan amount of $2,500 or more, charges and interest due in accordance with the last monthly contractual interest rate, from the date the "pawnbroker" is vested with title to the property until the date of the transfer to the person who pledged the property.
2. Defines the term "pawnbroker" by reference to Financial Code Section 21000.
3. Defines the term "vested property" by reference to Financial Code Section 21002(b).
4. Provides that, notwithstanding Revenue and Taxation Code Section 2230, no appropriation is made by this bill and the state shall not reimburse cities and counties for any SUT revenues lost by them under this bill.
5. Takes immediate effect as a tax levy.
6. Sunsets on January 1, 2022.

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 complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).
3. Regulates pawnbrokers by, among other things, requiring every pawnbroker loan for which goods are received in pledge as security to be evidenced by a written contract, a copy of which must be provided to the customer.
4. Requires the loan period of a loan contract to be no less than four months, and requires the loan contract to set forth the loan period along with the date on which the loan is due and payable, and to inform the customer of his or her right to redeem the pledge during the loan period.
5. Provides procedures by which a pawnbroker may become vested with title to pledged property.

FISCAL EFFECT: According to the Assembly Appropriations Committee, annual state and local revenue loss of approximately $33,000.

COMMENTS:

1. The author has provided the following statement in support of this bill:

When a debtor acquires a loan from a pawn shop, using their personal property as collateral, their collateral may be seized by the pawn shop upon default of the debtor.

Under current law, when a consumer defaults and seeks to reacquire their seized collateral, they must pay a sales tax on the item they are reacquiring, even though they already have paid the sales tax on their initial purchase. This bill seeks to provide a sales tax exemption for consumer purchases of seized collateral and provide a fair taxing structure for consumers.

1. Committee staff comments:
   1. Overview of existing law governing pawnbrokers: California's Department of Justice regulates pawnbrokers and enforces California's Financial Code provisions governing the industry. Every pawnbroker loan for which goods are received as security must be evidenced by a written contract, with a copy provided to the customer. By law, the loan contract must provide a loan period of at least four months. In addition, the contract must set forth the loan period and the date on which the loan will become due and payable. The contract must also clearly inform the customer of his or her right to redeem the pledge during the loan period by paying the loan amount and any applicable charges that have accrued through the date of redemption. Pawnbrokers are required by law to retain every article pledged for the duration of the applicable loan period.

If any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend the loan period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for a period of 10 days from the date of mailing or electronic transmission of that notice.

If any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes.

• 1. How does the SUT Law currently apply to pawnbrokers? Pawnbrokers are considered retailers under the SUT Law as they are in the business of making retail sales of TPP. As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer of TPP in this state.

As noted above, if a customer defaults on a pawnbroker loan, the collateral becomes the pawnbroker's "vested property." After title has vested with the pawnbroker, the customer no longer has any legal right to the property that would distinguish him or her from any other customer. Accordingly, when a customer subsequently seeks to purchase the collateral, the transaction constitutes a taxable retail sale under the SUT Law (unless an applicable exclusion or exemption applies).

• 1. What would this bill do? This bill would exclude from the computation of the SUT a pawnbroker's receipts derived from a transaction where a customer buys back his or her former property after defaulting on a loan. The BOE, which is sponsoring this bill, contends that this bill resolves a confusing area of the law and eliminates a barrier for some customers seeking to regain ownership of their former property.
  2. How did we get here? On November 23, 2015, the BOE's Legal Department received a petition on behalf of the California Pawnbrokers Association requesting an amendment to the California Code of Regulations. Specifically, the petition sought the addition of "clarifying language . . . to allow the original pledg[o]r to redeem personal property from a pawnbroker within six months of the expiration of the grace period as a non-taxable event." Legal Department staff recommended that the BOE deny the petition in its entirety because, as explained in a detailed memorandum, tax applies to the retail sale of TPP in California unless specifically exempt from taxation by statute; the petition would have, in effect, added an exemption for which there was no statutory basis.

GOVERNOR'S VETO MESSAGE:

This bill, until January 1, 2022, would establish a sales tax exemption to customers who buy back their pledged property from pawnbrokers after defaulting on a loan.

I continue to believe that the state's budget remains precariously balanced due to unexpected costs and the provision of new services. New sales tax exemptions, like new spending on programs, need to be considered comprehensively as part of the budget deliberations.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0004985

 CONSENT 

Bill No: AB 2365

Author: Gipson (D), et al.

Amended: 5/16/16 in Assembly

Vote: 21 - Urgency

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/29/16

AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 80-0, 5/31/16 (Consent) - See last page for vote

SUBJECT: Sales and use taxes: exclusion: pawnbrokers: transfer of vested property

SOURCE: Author

DIGEST: This bill establishes a temporary sales and use tax exemption to customers who buy back their property from a pawnbroker after defaulting on a loan.

ANALYSIS:

Existing law:

1. Imposes a sales and use tax (SUT) on the sale, storage, or use of tangible personal property unless exempted by state law.
2. Requires every pawnbroker’s loan, for which goods are received as security, to be evidenced by a written contract, and the loan contract must set forth the loan period and the date on which the loan will become due and payable. Pawnbrokers are required by law to retain every article pledged for the duration of the applicable loan period.
3. Requires if any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend the loan period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for a period of 10 days from the date of mailing or electronic transmission of that notice.
4. Requires if any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes. Pawnbrokers are considered retailers under the SUT Law, as they are in the business of making retail sales of tangible personal property (TPP). As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer of TPP in this state. When a customer seeks to repurchase the collateral, the transaction constitutes a retail sale.

This bill:

1. Establishes a temporary SUT exemption to customers that buy back their property from a pawnbroker after defaulting on a loan.
2. Provides that the terms "sale" and "purchase" do not include the transfer of "vested property", as defined, by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan.
3. Requires that the transfer occurs no more than six months after title to the property transferred to the pawnbroker from the person.
4. States, as consideration for the transfer of the property, the person is required to pay the pawnbroker only the remaining unpaid balance of the amount borrowed under the loan as of the date the pawnbroker becomes vested with title to the property, together with one of the following:
   1. For an original loan amount not exceeding $2,499.99, charges and interest due under the loan from the date the pawnbroker is vested with title to the property to the date of the transfer to the person who pledged the property; or,
   2. For an original loan amount of $2,500 or more, charges and interest due in accordance with the last monthly contractual interest rate, from the date the pawnbroker is vested with title to the property until the date of the transfer to the person who pledged the property.
5. Takes effect immediately and shall remain in effect until January 1, 2022.

Background

Pawnbrokers are considered retailers under the SUT Law as they are in the business of making retail sales. As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer in this state. Thus, if a customer defaults on a pawnbroker loan, the collateral becomes the pawnbroker's vested property. After title has vested with the pawnbroker, the customer no longer has any legal right to the property that would distinguish him or her from any other customer. Accordingly, when a customer subsequently seeks to purchase the collateral, the transaction constitutes a taxable retail sale. According to the State Board of Equalization, both pawnbrokers and customers are often surprised that the sale is subject to sales tax, and the additional sales tax sometimes serves as an impediment to regaining ownership. This bill eliminates this problem as long as the customer reacquires the item within six months of title transferring to the pawnbroker.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 7/27/16)

California Pawnbrokers Association

State Board of Equalization

OPPOSITION: (Verified 7/27/16)

None received

ARGUMENTS IN SUPPORT: According to the author, “When a debtor acquires a loan from a pawn shop, using their personal property as collateral, their collateral may be seized by the pawn shop upon default of the debtor. Under current law, when a consumer defaults and seeks to reacquire their seized collateral, they must pay a sales tax on the item they are reacquiring, even though they already have paid the sales tax on their initial purchase. This bill seeks to provide a sales tax exemption for consumer purchases of seized collateral and provide a fair taxing structure for consumers.”

ASSEMBLY FLOOR: 80-0, 5/31/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

Prepared by: Myriam Bouaziz / GOV. & F. / (916) 651-4119

8/3/16 19:33:35

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Sales and use taxes: exclusion: pawnbrokers: transfer of vested property

Establishes a temporary sales and use tax exemption to customers who buy back their property from a pawnbroker after defaulting on a loan.

Background

California law allows various income tax credits, deductions, and sales and use tax exemptions to provide incentives to compensate taxpayers that incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something that but for the tax credit, they would not do. The Department of Finance is required to annually publish a list of tax expenditures. Currently, tax expenditures exceed $57 billion dollars in forgone revenue.

State law imposes a sales and use tax (SUT) on the sale, storage, or use of tangible personal property unless exempted by state law. Cities and Counties may increase the SUT rate up to 2% as a transactions and use tax for either specific or general purposes with voter approval as required by the California Constitution.

The current state SUT is 7.5%, but beginning January 1, 2017, the state SUT rate on tangible personal property will be 7.25% and imposed as follows:

State law requires every pawnbroker’s loan, for which goods are received as security, to be evidenced by a written contract, and the loan contract must set forth the loan period and the date on which the loan will become due and payable. Pawnbrokers are required by law to retain every article pledged for the duration of the applicable loan period.

If any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend the loan period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for a period of 10 days from the date of mailing or electronic transmission of that notice.

If any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes. Pawnbrokers are considered retailers under the SUT Law, as they are in the business of making retail sales of tangible personal property (TPP). As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer of TPP in this state. When a customer seeks to repurchase the collateral, the transaction constitutes a retail sale.

Proposed Law

Assembly Bill 2365 establishes a temporary sales and use tax exemption to customers that buy back their property from a pawnbroker after defaulting on a loan. Specifically the bill:

• Provides that the terms "sale" and "purchase" do not include the transfer of "vested property", as defined, by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan.
• The transfer occurs no more than six months after title to the property transferred to the pawnbroker from the person.
• As consideration for the transfer of the property, the person is required to pay the pawnbroker only the remaining unpaid balance of the amount borrowed under the loan as of the date the pawnbroker becomes vested with title to the property, together with one of the following:
  • For an original loan amount not exceeding $2,499.99, charges and interest due under the loan from the date the pawnbroker is vested with title to the property to the date of the transfer to the person who pledged the property; or,
  • For an original loan amount of $2,500 or more, charges and interest due in accordance with the last monthly contractual interest rate, from the date the pawnbroker is vested with title to the property until the date of the transfer to the person who pledged the property.

AB 2365 takes effect immediately and shall remain in effect until January 1, 2022.

State Revenue Impact

The Board of Equalization (BOE) estimates annual state and local revenue losses of $33,250.

Comments

1. Purpose of the bill. According to the author, “When a debtor acquires a loan from a pawn shop, using their personal property as collateral, their collateral may be seized by the pawn shop upon default of the debtor. Under current law, when a consumer defaults and seeks to reacquire their seized collateral, they must pay a sales tax on the item they are reacquiring, even though they already have paid the sales tax on their initial purchase. This bill seeks to provide a sales tax exemption for consumer purchases of seized collateral and provide a fair taxing structure for consumers.”

2. Issue at hand. Pawnbrokers are considered retailers under the SUT Law as they are in the business of making retail sales. As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer in this state. Thus, if a customer defaults on a pawnbroker loan, the collateral becomes the pawnbroker's vested property. After title has vested with the pawnbroker, the customer no longer has any legal right to the property that would distinguish him or her from any other customer. Accordingly, when a customer subsequently seeks to purchase the collateral, the transaction constitutes a taxable retail sale. According to BOE, both pawnbrokers and customers are often surprised that the sale is subject to sales tax, and the additional sales tax sometimes serves as an impediment to regaining ownership. This bill would eliminate this problem as long as the customer reacquires the item within six months of title transferring to the pawnbroker.

Assembly Actions

Assembly Revenue and Taxation 9-0

Assembly Appropriations 20-0

Assembly Floor 80-0

Support and Opposition

(6/23/16)

Support: State Board of Equalization.

Opposition: Unknown.

-- END --

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2365

Author:(Gipson) – As Amended Ver:May 16, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill excludes from the Sales and Use Tax (SUT) Law a pawnbroker’s receipts from a transaction where customers buy back their property after defaulting on a loan. This exclusion is operative on taxable years starting on January 1, 2017, and before January 1, 2022.

FISCAL EFFECT:

Annual state and local revenue loss of approximately $33,000.

COMMENTS:

1. Purpose. According to the author, AB 2365 provides a fair taxing structure for consumers who are trying to reacquire their seized collateral from a pawn shop. The BOE, who is a sponsor, argues that this bill resolves a confusing area of the law and eliminates a barrier for some customers seeking to regain ownership of their former property.
2. Pawnbrokers and sales tax. Every pawnbroker loan for which goods are received as security must be evidenced by a written contract, and the loan contract must set forth the loan period and the date on which the loan will become due and payable. Pawnbrokers are required by law to retain every article pledged for the duration of the applicable loan period.

If any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend the loan period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for a period of 10 days from the date of mailing or electronic transmission of that notice.

If any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes. Pawnbrokers are considered retailers under the SUT Law as they are in the business of making retail sales of tangible personal property (TPP). As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer of TPP in this state. When a customer seeks to repurchase the collateral, the transaction constitutes a retail sale.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 9, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2365 (

Author:Gipson) – As Amended Ver:March 18, 2016

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exclusion: pawnbrokers: transfer of vested property

SUMMARY: Provides that the terms "sale" and "purchase" do not include the transfer of "vested property", as defined, by a "pawnbroker" to a person who pledged the property to the pawnbroker as security for a loan if specified requirements are met, thus excluding such transfers from taxation under the Sales and Use Tax (SUT) Law. Specifically, this bill:

1. Provides that, for purposes of the SUT Law, the terms "sale" and "purchase" do not include the transfer of title to "vested property" by a "pawnbroker" to a person who pledged the property to the "pawnbroker" as security for a loan and from whom title to the property transferred to the "pawnbroker" pursuant to Financial Code Section 21201, if both the following requirements are met:
   1. The transfer occurs no more than six months after title to the property transferred to the "pawnbroker" from the person pursuant to Financial Code Section 21201; and,
   2. As consideration for the transfer of the property, the person is required to pay the "pawnbroker" only the remaining unpaid balance of the amount borrowed under the loan as of the date the "pawnbroker" becomes vested with title to the property, together with one of the following:
      1. For an original loan amount not exceeding $2,499.99, charges and interest due under the loan pursuant to Financial Code Section 21200 et seq., from the date the "pawnbroker" is vested with title to the property to the date of the transfer to the person who pledged the property; or,
      2. For an original loan amount of $2,500 or more, charges and interest due in accordance with the last monthly contractual interest rate, from the date the "pawnbroker" is vested with title to the property until the date of the transfer to the person who pledged the property.
2. Defines the term "pawnbroker" by reference to Financial Code Section 21000.
3. Defines the term "vested property" by reference to Financial Code Section 21002(b).
4. Provides that, notwithstanding Revenue and Taxation Code Section 2230, no appropriation is made by this bill and the state shall not reimburse cities and counties for any SUT revenues lost by them 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 complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).
   
3. Regulates pawnbrokers by, among other things, requiring every pawnbroker loan for which goods are received in pledge as security to be evidenced by a written contract, a copy of which must be provided to the customer.
   
4. Requires the loan period of a loan contract to be no less than four months, and requires the loan contract to set forth the loan period along with the date on which the loan is due and payable, and to inform the customer of his or her right to redeem the pledge during the loan period.
   
5. Provides procedures by which a pawnbroker may become vested with title to pledged property.

FISCAL EFFECT: The BOE estimates annual state and local revenue losses of $33,250.

COMMENTS:

1. The author has provided the following statement in support of this bill:

When a debtor acquires a loan from a pawn shop, using their personal property as collateral, their collateral may be seized by the pawn shop upon default of the debtor.

Under current law, when a consumer defaults and seeks to reacquire their seized collateral, they must pay a sales tax on the item they are reacquiring, even though they already have paid the sales tax on their initial purchase. This bill seeks to provide a sales tax exemption for consumer purchases of seized collateral and provide a fair taxing structure for consumers.

1. This bill is sponsored by the BOE, which notes the following in its staff analysis of this bill:
   1. Effect of the bill: "Excludes from the computation of sales or use tax, a pawnbroker's receipts derived from a transaction where customers buy back their property after defaulting on a loan."
   2. This bill simplifies a confusing area in the law: "This bill would eliminate a complexity in the law that can potentially subject unaware pawnbrokers to liability for the tax."
   3. The sales tax comes as a surprise to customers: "Customers are often surprised that they must pay sales tax on their own item's reacquisition, and the additional sales tax sometimes serves as an impediment to regaining ownership. This bill would eliminate this problem as long as the customer reacquires the item within six months of title transferring to the pawnbroker."
   4. The tax is counterproductive: "Imposing the tax when customers return to buy back their property is counterproductive to the public policy of allowing customers to regain their property's ownership."
2. Committee staff comments:
   1. Overview of existing law governing pawnbrokers: California's Department of Justice regulates pawnbrokers and enforces California's Financial Code provisions governing the industry. Every pawnbroker loan for which goods are received as security must be evidenced by a written contract, with a copy provided to the customer. By law, the loan contract must provide a loan period of at least four months. In addition, the contract must set forth the loan period and the date on which the loan will become due and payable. The contract must also clearly inform the customer of his or her right to redeem the pledge during the loan period by paying the loan amount and any applicable charges that have accrued through the date of redemption. Pawnbrokers are required by law to retain every article pledged for the duration of the applicable loan period.

If any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend the loan period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for a period of 10 days from the date of mailing or electronic transmission of that notice.

If any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes.

• 1. How does the SUT Law currently apply to pawnbrokers? Pawnbrokers are considered retailers under the SUT Law as they are in the business of making retail sales of TPP. As such, tax applies to pawnbroker sales to the same extent as sales by any other retailer of TPP in this state.

As noted above, if a customer defaults on a pawnbroker loan, the collateral becomes the pawnbroker's "vested property." After title has vested with the pawnbroker, the customer no longer has any legal right to the property that would distinguish him or her from any other customer. Accordingly, when a customer subsequently seeks to purchase the collateral, the transaction constitutes a taxable retail sale under the SUT Law (unless an applicable exclusion or exemption applies).

• 1. What would this bill do? This bill would exclude from the computation of the SUT a pawnbroker's receipts derived from a transaction where a customer buys back his or her former property after defaulting on a loan. The BOE, which is sponsoring this bill, contends that this bill resolves a confusing area of the law and eliminates a barrier for some customers seeking to regain ownership of their former property.
  2. How did we get here? On November 23, 2015, the BOE's Legal Department received a petition on behalf of the California Pawnbrokers Association requesting an amendment to the California Code of Regulations. Specifically, the petition sought the addition of "clarifying language . . . to allow the original pledg[o]r to redeem personal property from a pawnbroker within six months of the expiration of the grace period as a non-taxable event." Legal Department staff recommended that the BOE deny the petition in its entirety because, as explained in a detailed memorandum, tax applies to the retail sale of TPP in California unless specifically exempt from taxation by statute; the petition would have, in effect, added an exemption for which there was no statutory basis.
  3. Potential sunset: This Committee has a longstanding practice of including a sunset date for any newly proposed exemption. Sunset dates give the Legislature an opportunity to both review a tax expenditure's application and determine whether foregone revenues are in line with original estimates. As such, the Author and Committee may wish to consider adding an appropriate sunset date to this bill.

REGISTERED SUPPORT / OPPOSITION:

Support

State Board of Equalization (sponsor)

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098