Centralized Intelligence Partnership

Underground Economy
• Background – California’s Underground
• Current Underground Economy
Enforcement Activities
• New Approaches to the Underground
Economy – Tax Recovery & Criminal
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
The fifth member, the State Controller, is elected at
large and serves in an ex officio capacity.
BOE Revenue Distributions
State General
Special Districts
Local Revenue
Local Public Safety
Local Revenue Fund
Fiscal 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
Spot, we’re going to get our
piece of the underground
The Underground Economy
• Operating without proper
licenses or permits
• Dealing in cash
• Dealing in stolen,
counterfeit and/or pirated
• Paying under the table
•Using indentured employees
(Human Trafficking)
• Underreporting
• Misclassifying employees
“Death and Taxes, they
are certain”
Edward Ward – 1724
“Tis Impossible to be sure
of anything but death and
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
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
 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
 Generally, California's law considers
construction contractors to be consumers of
materials they use and retailers of fixtures they
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
Unreported and
underreported economic
activity responsible for the vast
majority of that total
Where is the fraud occurring?
Cash Based Businesses:
Used Car Dealers
Liquor Stores
Corner Markets
Tobacco Distributors
Jewelry Stores
Gas Stations
Diesel Truck Stops
Impact of the Underground Economy
Examples of Industry Revenue
• 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
Recording Artists
Graphic Artists
Computer Technicians
How Does Tax Evasion Impact Labor
 Intellectual Property
Crimes, Organized
Retail Theft
 Lost business revenue
 Lost industry jobs
 Lost downstream employment
 Reduced taxes
 Business, Income, Payroll
Tax Evasion
 Unfair competition
 Lost jobs
 Lost downstream employment
 Reduced taxes
 Lost tax revenues
 Lost tax revenue
 More reliance on services
 More reliance on services
 Less public services available
 Less public services available
 Other impacts
 Increased Product Costs
Generally coincides with other crimes
Increased Taxes
 Other impacts
 Generally 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
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
Current Efforts to Combat the UGE
Joint Enforcement Strike Force
(JESF). Agencies include:
• Board of Equalization
• Employment Development Dept.
• Department of Industrial
• Department of Insurance
• Franchise Tax Board
• Department of Consumer Affairs
Geared toward identifying
unreported wages and
unsafe working conditions
Labor Enforcement Task Force
(LETF). Agencies include:
• Board of Equalization
• US Department of Labor
• Employment Development
• Division of Labor Standards
Enforcement (DLSE)
• Division of Occupational Safety
and Health (OSE)
• Contractors State Licensing
Board (CSLB)
Efforts to Combat the UGE
Statewide Compliance and Outreach Program
Seven compliance Teams Operating in
Teams conduct door-to-door visits and telephone contacts
with non-residential businesses to verify appropriate
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 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.
Current BOE Efforts to Combat UGE
Human Trafficking
Victims can be found in:
Criminal Activity
Restaurant Work
Hotel/Motel Housekeeping
BOE has provided training
for SCOP and ID
inspectors, posted
training online, and is
conducting training for
field staff.
In the U.S. 15,000 to 18,000 women and children,
and thousands of men are trafficked annually
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
 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 Pinch
Out-of State Distributor
Calif Wholesellers
Burn Companies
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
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
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.
TRaCE Partnership - Benefits
Provides investigation continuity.
Institutionalizes information sharing amongst the member
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
Provides greater opportunity for problem analysis and strategic
Demonstrates better criminal culpability, which is more attractive
to prosecutors.
Raises public/community awareness of the problem.
Randy Silva, Chief
Investigations and Special Operations Division
Board of Equalization
[email protected]
(916) 323-3964

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