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 and from whom title transferred to the pawnbroker 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 counties and cities and counties to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing laws authorize 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 the Sales and Use Tax Law are automatically incorporated into the local tax laws.

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

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, these provisions, no appropriation is made and the state shall not reimburse any local agencies 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, 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 and from whom title transferred to the pawnbroker 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 counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing laws authorize 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 the Sales and Use Tax Law are automatically incorporated into the local tax laws.

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

This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON TRANSPORTATION AND HOUSING

Senator Jim Beall, Chair

2017 - 2018 Regular

Bill No: AB 327 Hearing Date: 7/3/2018

SUBJECT: South Coast Air Quality Management District: fleets

DIGEST: This bill authorizes the South Coast Air Quality Management District (SCAQMD) to require public agencies to replace existing vehicles with vehicles which are the cleanest commercially available, as specified.

ANALYSIS:

Existing law:

1. Establishes the Air Resources Board (ARB) as the air pollution control agency in California and requires the ARB, among other things, to control emissions from a wide array of mobile sources and implement the Federal Clean Air Act.
2. Establishes the SCAQMD with the responsibility to, among other things, control stationary sources of air pollution in the South Coast Air Basin, including parts of Los Angeles, Riverside, and San Bernardino counties, and all of Orange County.
3. Allows SCAQMD to adopt regulations that:
   
   1. Require operators of public and commercial fleet vehicles, consisting of 15 or more vehicles under a single owner or lessee and operating substantially within the SCAQMD jurisdiction, when adding vehicles to or replacing vehicles in an existing fleet or purchasing vehicles to form a new fleet, to purchase vehicles which are capable of operating on methanol or other equivalently clean burning alternative fuel and to require that these vehicles be operated, to the maximum extent feasible, on the alternative fuel when operating within the SCAQMD jurisdiction.
      
      1. Exempts from regulation emergency vehicles operated by local law enforcement agencies, fire departments, or paramedic and rescue vehicles until the SCAQMD board finds and determines that the alternative fuel is available at sufficient locations so that the emergency response capabilities of those vehicles is not impaired.
      2. Specifies that “commercial fleet vehicles” is not limited to vehicles that are operated for hire, compensation, or profit.
         
   2. Encourage and facilitate ridesharing for commuter trips into, out of, and within the SCAQMD.
      
   3. Prohibit or restrict the operation of heavy-duty trucks during hours of heaviest commuter traffic on freeways and other high traffic volume highways.

This bill:

1. Defines:
   
   1. “Cleanest commercially available vehicle” as a vehicle operated with a fuel or technology that substantially reduces emissions of oxides of nitrogen and is technically feasible, as defined by SCAQMD.
      
   2. “Commercial fleet vehicle,” as not limited to a vehicle that is operated for hire, compensation, or profit, and is limited to a vehicle that is under contract or exclusive franchise to a state, regional, or local agency, as specified.
      
   3. “Medium-duty vehicle” as a vehicle with a gross vehicle weight rating of more than 6,000 pounds and less than 14,000 pounds.
      
2. Allows SCAQMD to adopt rules and regulations that require operators of public and commercial fleet vehicles, consisting of 15 or more vehicles under a single owner or lessee and operating substantially in the SCAQMD to purchase the cleanest commercially available vehicles that will meet the operator’s operational needs and require the replacement of no more than 15 percent of existing vehicles per calendar year with due consideration given to a vehicle’s useful life.
   
   1. Specifies that SCAQMD may require that these vehicles be operated, to the maximum extent feasible, within the SCAQMD’s jurisdictional area.
      
   2. Exempts from regulation emergency vehicles operated by local law enforcement agencies or fire departments or to paramedic and rescue vehicles until the SCAQMD board finds and determines that the cleanest commercially available vehicles will not impair the emergency response capabilities of those vehicles.
      

COMMENTS

1. Author’s Statement. Los Angeles County has the most polluted cities in the country. A report issued by the American Lung Association said Los Angeles remained the city with the worst ozone pollution, and ranked fourth in terms of year-round particle contamination. This bill seeks to support SCAQMD in its effort to improve air quality and comply with ozone and particulate matter standards established by the EPA. This bill would provide SCAQMD with legislative authority to initiate local rules to require the accelerated purchase and use of the cleanest commercially available near-zero and zero emission vehicles that meet operational needs for public fleets within SCAQMD. Such rules would only apply to fleets with 15 or more vehicles including public fleets, which are owned and operated by local cities and counties, and commercial fleets under contract with the state and locals for specific services such as solid waste collection, sweeping services, and passenger bus transportation.
2. SCAQMD. The SCAQMD has the authority to regulate air emissions from stationary sources and certain mobile sources located in the South Coast Air Basin, an air basin which has particularly poor air. The SCAQMD is governed by a 13 member board: 10 are local elected officials, with the Governor, Speaker and Senate Rules Committee each appointing one of the remaining three board members. SCAQMD is the air pollution control agency for the 16.8 million people — about half the population of California — who live in the non-desert regions of Los Angeles and Los Angeles County, as well as Orange, San Bernardino, and Riverside Counties.
   
   This bill eliminates an out-of-date provision authorizing SCAQMD to require the purchase of methanol vehicles when a fleet operator is adding or replacing vehicles. That provision is deleted and replaced by new, more expansive, authority allowing SCAQMD to require specified fleet operators to annually replace up to 15% of existing vehicles with the cleanest commercial available vehicles. The authority provided in this bill applies only to public fleets and private fleets leased to a state, regional or local agency. Purely private fleets are excluded.
3. Tough Job. The SCAQMD has the difficult, but necessary, job of cleaning the air in the greater Los Angeles area, one of the dirtiest air regions in the state. As residents can attest, much progress has been made. Further progress, while necessary and desirable, will be costly. The SCAQMD’s task is balancing the cost of the regulation against the air quality benefits. Under this bill, SCAQMD may only require the purchase of vehicles that meet the operational needs of the fleet operator. And no rule can impact emergency vehicles operated by law enforcement agencies until the SCAQMD finds that the cleanest commercially available vehicles will not impair the emergency response.
4. Ongoing ARB Proceeding. The ARB has been considering how to transition public bus fleets to zero emission technology since May 2015. Several workgroups were formed and numerous workgroup meetings were held. Several proposed regulations have been issued and discussed; the most recent meeting was held earlier this month to discuss revisions to the latest proposed regulations. The ARB Board is expected to consider a final regulation later this year.
5. Answer in the Form of a Question. Because this bill was a gut and amend on June 4, interested parties have only recently become engaged. Transit agencies are opposed to the bill because of concerns about the overlapping and, potentially, contradictory regulations by the ARB. They seek relief from this double jeopardy.

Municipal utilities are opposed because they are concerned that the SCAQMD will not recognize the operational requirements of electric and water utilities, particularly with respect to their importance in providing emergency services. They seek additional assurance that SCAQMD will recognize and consider their operational requirements, as the bill provides for emergency vehicles. Sanitation Districts seek the same.

1. Who Pays? While there are grant programs available which can help offset some of the potential costs of the bill, much of those costs will be shouldered by the regulated agencies. This could take the form of higher fares and rates, service diminution, or greater efficiencies. One source of new revenue for transit agencies comes from the Road Repair and Accountability Act of 2017 (SB 1, Beall; Chapter 5 of 2017). But that revenue was intended to improve transit service, not upgrade the environmental performance of existing transit fleets.
2. What’s the Rush? Given the imminent decision by the ARB on transit vehicles, it is unclear why this bill is needed now. A similar bill was heard and defeated last year and a new bill dealing with this subject matter was not introduced this year. This bill was not amended to deal with this subject until earlier this month. Other organizations have only recently become aware of this bill and are considering whether to take a position. While the air quality in Los Angeles must be improved, is this bill necessary for those improvements to be made on a timely basis?
3. Recent Events. This bill was heard by the Environmental Quality Committee on June 20, 2018 and passed 5-2. In that hearing commitments were made to work with the opposition. Efforts have been made, but the fruits of that labor are not yet apparent.

Related Legislation:

AB 302 (Gibson, 2018) — Authorized SCAQMD to adopt regulations governing the purchase and use of public and commercial fleet vehicles in the South Coast air basin. This bill failed in the Assembly Transportation Committee.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

Assembly votes: Not relevant

POSITIONS: (Communicated to the committee before noon on Wednesday,

June 27, 2018.)

SUPPORT:

South Coast Air Quality Management District (sponsor)

California Air Pollution Control Officers Association

Coalition for Clean Air

OPPOSITION:

California Transit Association

California Association of Sanitation Agencies

California Municipal Utilities Association

Orange County Transportation Association

Southern California Public Power Association

-- END --

SENATE COMMITTEE ON ENVIRONMENTAL QUALITY

Senator Wieckowski, Chair

2017 - 2018 Regular

Bill No: AB 327

SUBJECT: South Coast Air Quality Management District: fleets

ANALYSIS:

Existing federal law:

1. Sets, through the Federal Clean Air Act (FCAA) and its implementing regulations, National Ambient Air Quality Standards (NAAQS) for six criteria pollutants, designates air basins that do not achieve NAAQS as nonattainment, allows only California to set vehicular emissions standards stricter than the federal government, and allows other states to adopt either the federal or California vehicular emissions standards. (42 U.S.C. §7401 et seq.)
   

Existing state law:

1. Establishes the Air Resources Board (ARB) as the air pollution control agency in California and requires the ARB, among other things, to control emissions from a wide array of mobile sources and implement the FCAA. (Health and Safety Code (HSC) §39500 et seq.)
   
2. Establishes the South Coast Air Quality Management District (SCAQMD) with the responsibility to, among other things, control stationary sources of air pollution in the South Coast Air Basin, including parts of Los Angeles, Riverside, and San Bernadino counties, and all of Orange County. (HSC §40410 et seq.)
   
3. Allows, pursuant to HSC §40447.5, SCAQMD to adopt regulations that:
   
   1. Require operators of public and commercial fleet vehicles, consisting of 15 or more vehicles under a single owner or lessee and operating substantially in the south coast district, when adding vehicles to or replacing vehicles in an existing fleet or purchasing vehicles to form a new fleet, to purchase vehicles which are capable of operating on methanol or other equivalently clean burning alternative fuel and to require that these vehicles be operated, to the maximum extent feasible, on the alternative fuel when operating in the south coast district.
      
      1. Specifies that “commercial fleet vehicles” is not limited to vehicles that are operated for hire, compensation, or profit.
         
      2. Exempts from regulation emergency vehicles operated by local law enforcement agencies, fire departments, or to paramedic and rescue vehicles until the south coast district board finds and determines that the alternative fuel is available at sufficient locations so that the emergency response capabilities of those vehicles is not impaired.
         
   2. Encourage and facilitate ridesharing for commuter trips into, out of, and within the south coast district.
      
   3. Prohibit or restrict the operation of heavy-duty trucks during hours of heaviest commuter traffic on freeways and other high traffic volume highways.
      
      1. Specifies that SCAQMD must consult with the Department of Transportation and the Department of the California Highway Patrol and the transportation commission of each county in the south coast district in adopting such a regulation.
         
      2. Specifies that SCAQMD may not prohibit or restrict the operation of any heavy-duty truck engaged in hauling solid or hazardous waste or a toxic substance, as specified.
         

This bill:

1. Defines:
   
   1. “Cleanest commercially available vehicle” means a vehicle operated with a fuel or technology that substantially reduces emissions of oxides of nitrogen and is technically feasible, as defined by SCAQMD.
      
   2. “Commercial fleet vehicle,” is not limited to a vehicle that is operated for hire, compensation, or profit, and is limited to a vehicle that is under contract or exclusive franchise to a state, regional, or local agency, as specified.
      
   3. “Medium-duty vehicle” means a vehicle with a gross vehicle weight rating of more than 6,000 pounds and less than 14,000 pounds.
      
2. Allows SCAQMD to adopt rules and regulations that require operators of public and commercial fleet vehicles, consisting of 15 or more vehicles under a single owner or lessee and operating substantially in the south coast district to purchase the cleanest commercially available vehicles that will meet the operator’s operational needs and require the replacement of no more than 15 percent of existing vehicles per calendar year with due consideration given to a vehicle’s useful life.
   
   1. Specifies that SCAQMD may require that these vehicles be operated, to the maximum extent feasible, in the south coast district.
      
   2. Exempts from regulation emergency vehicles operated by local law enforcement agencies or fire departments or to paramedic and rescue vehicles until the south coast district board finds and determines that the cleanest commercially available vehicles will not impair the emergency response capabilities of those vehicles.
      

Background

1. Air quality standards. The Federal Clean Air Act (FCAA) passed in 1963 and has been revised many times thereafter. The FCAA and its implementing regulations are intended to protect public health and environmental quality by limiting and reducing pollution from various sources. Under the FCAA, the United States Environmental Protection Agency (US EPA) establishes National Ambient Air Quality Standards (NAAQS) that apply to outdoor air throughout the country.
   
   In 1969 and 1971, ARB set the first air quality standards for ozone, Particulate Matter (PM), oxides of nitrogen (NOx), oxides of sulfur (SOx), and carbon monoxide due to their negative impacts on public health above specified concentrations.
   
   The federal government followed suit and set NAAQS for six “criteria pollutants.” These included ground-level ozone, PM, NOx, SOx, carbon monoxide, and added lead. Now, the US EPA reviews each NAAQS at five-year intervals to ensure that the standards are based on the most recent scientific information.
   
   Regions that do not meet the national standards for any one of the standards are designated “nonattainment areas.” The FCAA sets deadlines for attainment based on the severity of nonattainment and requires states to develop comprehensive plans, known as the state implementation plan (SIP), to attain and maintain air-quality standards for each area designated nonattainment for an NAAQS.
   
   The South Coast Air Basin (see below) is designated as extreme nonattainment for ozone and serious nonattainment for PM. It is important to note that ground level ozone is not emitted directly into the air, but is created by chemical reactions between NOx and volatile organic compounds (VOC) in the presence of sunlight. Emissions from industrial facilities and electric utilities, motor vehicle exhaust, gasoline vapors, and chemical solvents are some of the major sources of NOx and VOC. Breathing ozone can trigger a variety of health problems, particularly for children, the elderly, and people of all ages who have lung diseases such as asthma. Ground level ozone can also have harmful effects on sensitive vegetation and ecosystems.
   
2. South Coast Air Quality Management District (SCAQMD). The South Coast Air Quality District (SCAQMD) has the authority to regulate air emissions from stationary sources located in the South Coast Air Basin and is governed by a district board. SCAQMD is the air pollution control agency for the 16.8 million people—about half the population of California—who live in the non-desert regions of Los Angeles and Los Angeles County, as well as Orange, San Bernardino, and Riverside Counties.
   
   As noted in existing law, currently SCAQMD is allowed to adopt regulations that require operators of public and commercial fleet vehicles to purchase vehicles which are capable of operating on methanol or other equivalently clean burning alternative fuel, as specified.
   
3. Methanol as a fuel. Methanol is an alternative fuel for internal combustion and other engines and, depending on the engine, is directly combusted or mixed with gasoline. Despite being used in racing cars in many countries around the world, methanol is less utilized as an alternative to gasoline in the US than other alternative fuels, like ethanol. The reasons for this could be that ethanol is less toxic and has higher energy density than methanol, despite methanol being less expensive to produce sustainably and being a cheaper way to reduce the carbon footprint. Additionally, Midwestern states that grow corn for the purpose of ethanol production have significant political clout.
   
4. Low Carbon Fuel Standard (LCFS). The LCFS is designed to encourage the use and production of cleaner low-carbon fuels in California in order to reduce GHG emissions. The LCFS standards are expressed in terms of the Carbon Intensity (CI) of gasoline and diesel fuel, as well as their alternatives. The LCFS is performance-based and fuel-neutral, allowing the market to determine how the CI of California’s transportation fuels will be reduced. This program is based on the principle that each fuel has lifecycle GHG emissions associated with using that fuel. Subjecting this lifecycle GHG rating to a declining cap for transportation fuels in California will result in a decrease in the total lifecycle GHG emissions from fuels used in the state. Below is graph that shows the various CI scores for alternative fuels. Of note, where the fuel was produced, how it was produced, and other factors impact CI score, so there is not a single CI score for any given fuel.

Comments

1. Purpose of Bill. According to the author, “Los Angeles County has the most polluted cities in the country. A report issued by the American Lung Association said Los Angeles remained the city with the worst ozone pollution, and ranked fourth in terms of year-round particle contamination. In 2008, the U.S. EPA established an 8-hour ozone standard that set a benchmark for air quality across the nation. With an 8-hour standard of 75 parts per billion, (a measure of pollution in the atmosphere) the South Coast Air Basin (SCAB), which includes Los Angeles County, was designated as being in “extreme” nonattainment. The degree of nonattainment reflects how far away the region is from being aligned with the federal standards, with “extreme” nonattainment being considered the worst. After this designation, SCAB was given until July 20, 2032, to come into compliance.
   
   “Since then, SCAQMD has adopted a plan, along with a series of board directives focused on mobile sources of emissions, to ensure it continues to make progress towards coming into compliance with the federal ozone and PM standards. In 2015, SCAQMD released a report which concluded that around 68% of the carcinogenic risk associated with breathing local air can be attributed to diesel particulate emissions. Thus, reductions of diesel engine emissions is essential for the attainment of ozone and PM ambient air quality standards, as well as mitigating its toxic air quality impact.
   
   “Therefore, AB 327 seeks to support SCAQMD in its effort to improve air quality and comply with ozone and particulate matter (PM) standards established by the EPA. This bill would provide SCAQMD with legislative authority to initiate local rules to require the accelerated purchase and use of the cleanest commercially available near-zero and zero emission vehicles that meet operational needs for public fleets within SCAB. Such rules would only apply to fleets with 15 or more vehicles including public fleets, which are owned and operated by local cities and counties, and commercial fleets under contract with the state and locals for specific services such as solid waste collection, sweeping services, and passenger bus transportation.”
   
2. A small, but significant, change. The changes to the regulatory authority of SCAQMD by AB 327 seem significant when looking at the bill, but ultimately are fairly simple: changing the ability to regulate cleaner vehicles from those that can operate on methanol other equivalently clean burning alternative fuels to the cleanest commercially available vehicles. As noted in the background, the LCFS has spurred a variety of new, cleaner fuels. Updating the regulatory authority of SCAQMD given the innovations that the LCFS has spurred is appropriate.
   
   Additionally, AB 327 makes minor changes to how SCAQMD can compel vehicle fleet changes. Currently, SCAQMD can compel a change when a fleet owner purchases vehicles to form a new fleet or when a fleet owner adds vehicles to, or replaces vehicles in, an existing fleet. AB 327 would allow SCAQMD to compel a fleet owner to purchase the cleanest commercially available vehicles that will meet the operator’s operational needs and require the replacement of no more than 15% of existing vehicles per calendar year with due consideration given to a vehicle’s useful life.
   

DOUBLE REFERRAL:

If this measure is approved by the Senate Environmental Quality Committee, the do pass motion must include the action to re-refer the bill to the Senate Transportation and Housing Committee.

SOURCE:

South Coast Air Quality Management District

SUPPORT:

South Coast Air Quality Management District (sponsor)

OPPOSITION:

None received

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

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

Excludes from the Sales and Use Tax (SUT) Law a transfer of vested property by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan, if certain conditions are met.

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 7.25% and imposed as follows:

Pawnbrokers and sales tax. 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 extends 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.

BOE wants to end the form of “double taxation” that can occur when a borrower seeks to reclaim items pledged as collateral to a pawnbroker.

Proposed Law

Assembly Bill 327 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, for purposes of the SUT law, the terms "sale" and "purchase" do not include the transfer of "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 for failing to comply with the repayment terms of the loan, if all the following requirements are met:

• 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.
• The person has proof, such as a receipt or similar document provided to the purchaser, that the person originally paid sales tax on the item.

AB 327 takes effect immediately as a tax levy 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 $16,625.

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. Origin of this bill. 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 pledge[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. AB 327 Incorporated into 2017 Budget Trailer Bill AB 119. The entirety of AB 327 is included in one of the trailer bills to the 2017 Budget Act, AB 119 (Committee on Budget) passed by the Legislature on June 15, 2017 and pending before the Governor. If the Governor signs AB 119, as expected, AB 327 would be unnecessary.

3. Prior legislation. During the 2015-16 Legislative Session, the BOE unanimously sponsored AB 2365 (Gipson), which contained provisions substantially similar to this bill. Governor Brown, however, vetoed AB 2365. He noted:

“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.”

Assembly Actions

Assembly Revenue and Taxation 10-0

Assembly Appropriations 17-0

Assembly Floor 77-0

Support and Opposition

(6/21/17)

Support: California State Board of Equalization (sponsor); California Pawnbrokers Association

Opposition: Unknown.

-- END --

Date of Hearing: May 24, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 327

Author:(Gipson) – As Amended Ver:March 21, 2017

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

SUMMARY:

This bill excludes from the Sales and Use Tax (SUT) Law a transfer of vested property by a pawnbroker to a person who pledged the property to the pawnbroker as security for a loan, if certain conditions are met. This exclusion is operative until January 1, 2022.

FISCAL EFFECT:

Annual state and local revenue losses of approximately $16,500.

COMMENTS:

1. 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 within the designated 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.

1. Purpose. According to the author, AB 327 provides a fair taxing structure for consumers who are trying to reacquire their seized collateral from a pawn shop. This bill excludes 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.
2. Prior legislation. AB 2365 (Gipson), of the 2015-16 Legislative Session, which contained provisions substantially similar to this bill, was vetoed by the governor, whose veto message stated:

“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: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 15, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 327 (

Author:Gipson) – As Amended Ver:March 21, 2017

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 all of 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.
   2. As consideration for the transfer of the property, the person is required to pay the "pawnbroker" only the remaining unpaid balance of the loan, including accrued charges and interest, 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 allowable 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.
   3. The person has proof, such as a receipt or similar document provided to the purchaser, that the person originally paid sales tax on the item.
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: The BOE estimates annual state and local revenue losses of $16,625.

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 supported by BOE Member Fiona Ma, who notes the following:

Current law . . . stipulates that when the original borrower is interested in reacquiring the item used as collateral, the same sales tax is assessed on the TPP. This effectively works as a form of "double taxation", and can be a great frustration for the pledger.

AB 327 looks to end this unfair double tax, and will help taxpayers reclaim items they sold to pawn shops by lowering the overall cost to buy back those items. In addition, this bill would only apply to those pledgers who can prove that the sales tax was already paid on the item.

1. The BOE 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. 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."
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. Proponents contend 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. Prior legislation: During the 2015-16 Legislative Session, the BOE unanimously sponsored AB 2365 (Gipson), which contained provisions substantially similar to this bill. Governor Brown, however, vetoed AB 2365. He noted:

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.

REGISTERED SUPPORT / OPPOSITION:

Support

State Board of Equalization (Co-Sponsor)

BOE Member Diane Harkey

BOE Member Jerome Horton

BOE Member Fiona Ma

BOE Member George Runner

Opposition

None on file

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