Underground Economy

• Background – California’s Underground Economy

• Current Underground Economy Enforcement Activities

• New Approaches to the Underground Economy – Tax Recovery & Criminal Enforcement

Board of Equalization

Established in 1879

• Board’s 5 members govern an organization of over four thousand staff located throughout California.

• Four Members are Constitutional Officers, elected by district.

• The fifth member, the State Controller, is elected at large and serves in an ex officio capacity.

BOE Revenue Distributions

21.1

5.8

5

2.9

2.9

5.5

1.4

State GeneralBradley-BurnsSpecial DistrictsLocal RevenueLocal Public SafetyLocal Revenue FundFiscal Recovery

2012/13-56 Billion

Definition of “Underground Economy”

“Underground Economy” is a term that refers to those individuals and businesses that deal in cash and/or use other schemes to conceal their activities, identities and their true tax liability from government licensing, regulatory, and taxing

agencies.

Spot, we’re going to get ourpiece of the underground

Economy.

The Underground Economy

Businesses/Individuals:

• Operating without proper licenses or permits

• Dealing in cash

• Dealing in stolen, counterfeit and/or pirated goods

• Paying under the table•Using indentured employees

(Human Trafficking)

• Underreporting sales/income

• Misclassifying employees

Taxation“Death and Taxes, they are certain”

Edward Ward – 1724

“Tis Impossible to be sure of anything but death and taxes.”

Christopher Bullock -1716

Causes of the UGE:

Individuals/companies trying to keep all of the profits for themselves.

Taxation, excessive regulations, efficiency of the bureaucracy and corruption.

Tax Evasion – The Burden

Do construction contractors need to register for a

Seller’s Permit? Most construction contractors are required

to register with the BOE for a seller's permit, which allows them to make retail sales of tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt, or touched.

A seller's permit also allows you to issue a resale certificate to your suppliers when making purchases for resale. Issuing a resale certificate allows you to purchase items that you intend to sell without payment of tax.

You are not required to hold a BOE Seller’s Permit if: You perform construction contracts

exclusively with the United States Government

You are a general contractor who hires subcontractors exclusively to perform construction contracts

You exclusively furnish and install materials under lump-sum contracts

How does Sales and Use Tax apply to construction contracts? It depends on the type of contract, how

contractors purchase materials, fixtures, machinery and equipment, and how they install such items under contracts to improve real property.

Generally, California's law considers construction contractors to be consumers of materials they use and retailers of fixtures they install.

Example 1:

You purchase this

lumber from out of state for

use on a job in state, you

would be the consumer of the

materials and you would need

to report the use tax on your

BOE return.

Example 2: You are selected to

remodel a hospital cafeteria. You purchase dishwashers, countertops, ovens, faucets, freezers and new flooring. These items are considered fixtures and sales tax is due on the retail selling price of these fixtures.

What’s the Problem? $9,000,000,000- Yes

Billion in corporate, personal, and sales and use taxes goes uncollected in California each year due to the underground economy according to a study performed by UCLA.

What do we see as the issue?

Unreported and underreported economic activity responsible for the vast majority of that total

Where is the fraud occurring? Cash Based Businesses:

Used Car Dealers

Restaurants

Liquor Stores

Corner Markets

Tobacco Distributors

Jewelry Stores

Gas Stations

Bars

Diesel Truck Stops

Bars

Contractors

Impact of the Underground Economy

Examples of Industry Revenue Losses:

• Music: 12.5 Billion US/1.64 Billion CA (Piracy)

• Recording Industry:•70,000 jobs lost (US)•2 Billion in lost wages (US)

•Movie: 25 Billion US/3.27 Billion CA•Computer Software: 1.25 Billion

CA•Prescription Drugs: 5.13 Billion

CA

Who Loses• Songwriters• Recording Artists• Graphic Artists• Engineers• Computer Technicians• Producers• Retailers• Employees• Consumers• Taxpayers…

How Does Tax Evasion Impact Labor Intellectual Property

Crimes, Organized Retail Theft

Lost business revenue Lost industry jobs

Lost downstream employment

Reduced taxes Lost tax revenue

More reliance on services

Less public services available

Other impacts Increased Product Costs

Generally coincides with other crimes

Increased Taxes

Business, Income, Payroll Tax Evasion

Unfair competition Lost jobs

Lost downstream employment

Reduced taxes Lost tax revenues

More reliance on services

Less public services available

Other impactsGenerally coincides with other

crimes

Increased Taxes

Just a California Problem?• The Port of LA and Long Beach

handle15 million shipping containers each year.

• The Port of LA alone handled 7.8 million containers in 2010, representing 240 billion in trade value across the US.

• 1.1 million loaded trucks, and over 20 million passenger vehicles enter CA from Mexico each year.

• Less than 1 percent of all containers entering the US are physically inspected.

US Trade & Imports

Top Trading Partners• China• Japan• Taiwan• South Korea• Thailand• Hong Kong• Mexico

Top Imports• Furniture• Footwear• Toys• Automobile Parts• Women & Infant Appeal• Plastic & Rubber Products• Crude Oil• Electronics

California UGE Tax Loss

$9 Billion Annually

Current Efforts to Combat the UGE

Joint Enforcement Strike Force (JESF). Agencies include:

• Board of Equalization• Employment Development

Dept.• Department of Industrial

Relations• Department of Insurance• Franchise Tax Board• Department of Consumer

Affairs

Labor Enforcement Task Force (LETF). Agencies include:

• Board of Equalization

• US Department of Labor

• Employment Development Department

• Division of Labor Standards Enforcement (DLSE)

• Division of Occupational Safety and Health (OSE)

• Contractors State Licensing Board (CSLB)

Geared toward identifying unreported

wages and unsafe working conditions

Efforts to Combat the UGE

Statewide Compliance and Outreach Program

Seven compliance Teams Operating in CaliforniaTeams conduct door-to-door visits and telephone contacts with non-residential businesses to verify

appropriate licensing.FY 2010/11

•Visited approximately 91,000 business locations

•Identified 1,485 operating without a license

•Identified an additional 2,400 sub-locations not permitted

•Generated approximately $57 million in revenue

Efforts to Combat the UGEAB71, Cigarette & Tobacco Products Licensing Act

10 -5 person inspections teams operating in California

FY 2012/13 Statistics

•10,673 business Inspected

•124 Untaxed Tobacco Seizures ($110,000) wholesale cost

•189 Untaxed Cigarettes Seizures (2.3 million sticks)

•293 Citations written for 631 violations of the act

Part of a three pronged effort (Licensing, Encrypted Stamps and Enforcement). Recaptures approximately $80 million+ in additional tobacco revenue per year.

Current BOE Efforts to Combat UGE

In the U.S. 15,000 to 18,000 women and children, and thousands of men are

trafficked annually

Human Trafficking Victims can be found in:

Factories Criminal Activity Restaurant Work Transportation Hotel/Motel Housekeeping

BOE has provided training for SCOP and ID inspectors, posted training online, and is conducting training for field staff.

Big Pinch Task Force - Organization

Operation Big Pinch Five year investigation:

Search Warrants served in CA, IL, NV, and AZ.

27 businesses with illegal sales operations closed.

22 arrests

Identified tax loss of $110 million at shut down, based on $221.8 million in measure.

Left unabated, Excise Tax lost to these businesses operating in the underground economy would equal or exceed $280 million as of April 2014.

Operation Big PinchOut-of State Distributor

Calif Wholesellers Burn CompaniesOwnersDistributors

More Than One CrimeTax Search Warrants Encountered• Untaxed Cigarettes/ Tobacco Products

• Counterfeit Stamped Cigarettes

• Counterfeit Cigarettes

• Counterfeit Cable Boxes

• Illegal Imported Pharmaceuticals

• Manufacturing of counterfeit energy drink

• Assembly of counterfeit DVD Recorders (counterfeit product/labels/packaging)

• Assembly of counterfeit car speakers (counterfeit product/labels/packaging)

• Knock-off designer purses and other items.

• Undocumented workers

AB 576 – Revenue Recovery & Collaborative Enforcement Team Act

Develop a plan for a Central Intake Process and organizational structure to document, review and evaluate data and complaints.

Evaluate the benefits of a processing center to receive and analyze data, share complaints are research leads

Provide participating and non-participating agencies with investigative leads where collaborative opportunities exist for felony investigations, including referring leads to agencies with appropriate jurisdiction.

AB 576 – Revenue Recovery & Collaborative Enforcement Team Act

TRaCEExecutive Board comprised of the three tax agencies, The Office of the Attorney General, and the Department of Justice.

Executive Board Chair elected every year, and can serve no more than two consecutive years.

Day to day operations overseen by the Task Force Commander – DOJ

Investigators nominated by participating agencies, but serve at the discretion of the Executive Board.

TRaCE Partnership - Benefits

• Provides investigation continuity.

• Institutionalizes information sharing amongst the member agencies.

• Efficiently utilizes investigative resources across agency lines.

• Allows investigators, on rotation, to gain greater institutional knowledge of each agency’s tools, available resources, and data infrastructure.

• Provides greater opportunity for problem analysis and strategic planning.

• Demonstrates better criminal culpability, which is more attractive to prosecutors.

• Raises public/community awareness of the problem.

Randy Silva, ChiefInvestigations and Special Operations Division

Board of Equalizationrsilva@boe.ca.gov

(916) 323-3964

QUESTIONS?