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Underground Economy. Background – California’s Underground Economy Current Underground Economy Enforcement Activities New Approaches to the Underground.

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Presentation on theme: "Underground Economy. Background – California’s Underground Economy Current Underground Economy Enforcement Activities New Approaches to the Underground."— Presentation transcript:

1 Underground Economy

2 Background – California’s Underground Economy Current Underground Economy Enforcement Activities New Approaches to the Underground Economy – Tax Recovery & Criminal Enforcement

3 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.


5 BOE Revenue Distributions 2012/13-56 Billion

6 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 our piece of the underground Economy.

7 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

8 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.

9 Tax Evasion – The Burden

10 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.

11 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

12 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.

13 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.

14 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.

15 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.

16 What do we see as the issue? Unreported and underreported economic activity responsible for the vast majority of that total

17 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


19 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

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

21 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 impacts  Generally coincides with other crimes  Increased Taxes

22 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.

23 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


25 California UGE Tax Loss

26 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

27 Efforts to Combat the UGE Statewide Compliance and Outreach Program Seven compliance Teams Operating in California Teams 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

28 Efforts to Combat the UGE AB71, 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.

29 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.

30 Big Pinch Task Force - Organization

31 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.

32 Operation Big Pinch

33 More Than One Crime Tax 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

34 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.

35 AB 576 – Revenue Recovery & Collaborative Enforcement Team Act

36 TRaCE Executive 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.

37 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.



40 Randy Silva, Chief Investigations and Special Operations Division Board of Equalization (916) 323-3964 QUESTIONS?

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