Electronic Waste Recycling Laws Challenge the Leasing Industry

The legislature describes the Act as establishing a “cost free” program that makes it convenient for the public to return and recycle electronic devices thereby reducing the amount of illegal disposal of these devices. Note, however, that the phrase “cost free” means no additional cost to state and local government. The manufacturers, sellers/leasing companies and consumers of these devices bear the cost of the new recycling program.

Under the Act, consumers of covered electronic products pay a recycling fee that is collected by the “retailer” of the product. Equipment leasing companies are considered to be “retailers” by the Act. Therefore, the responsibility for collecting the fee from the consumer, or lessee, and remitting the fees to the state falls upon the leasing company.

The California Electronic Waste Recycling Fee

The electronic waste recycling program is financed by the collection of an Electronic Waste Recycling Fee (“Recycling Fee”). Equipment leasing companies are required to collect the Recycling Fee from the consumer and then remit the fees collected to the California State Board of Equalization (“SBE”).

The Recycling Fee varies from $6 to $10 per covered electronic device, depending on the device's screen size. Recycling Fees collected are to be transferred to the Board of Equalization. The leasing company is allowed to retain 3% of the Recycling Fee as reimbursement for costs associated with the collection of the Recycling Fee.

Due to ambiguities in determining which products are subject to the Act, and which transactions are subject to the Recycling Fee, leasing companies engaged in California transactions are going to have to commit substantial resources to comply with the Act. It is unlikely that the 3% fee will cover a leasing company's administrative costs to comply. As more states join the electronic waste regulation fray, the burden will only increase.

ELA's Policy on Electronic Waste Recycling Fees

The Equipment Leasing Association (“ELA”) has developed a proposal with regard to state legislative proposals to levy an advanced recycling fee on electronic equipment. ELA believes that if advanced recycling fees are imposed on consumers and collected at the point of sale, the enactment and implementation of such a recycling fee should have the following elements: “(1) uniformity with like equipment subject to fees in other states, (2) the scope of equipment is certain and identifiable to the lessor, (3) collection responsibility provides clarity, (4) the fee allows for a bilateral election between equipment supplier (vendor, wholesaler or manufacturer) and lessor to pay the fee at point of purchase rather than point of lease.” See ELA's position paper on Electronic Waste Recycling Fees, Feb. 2005.

The ELA believes that commercial equipment lessors should not be treated as “retailers” as the term is contemplated by numerous electronic waste recycling proposals. The proposed legislation is generally drafted on a consumer retail model and is designed for wastes from households rather than the commercial sector. However, the proposals often unwittingly require lessors to collect the fee imposed. ELA maintains that this creates a difficult situation for leasing companies because lessors do not ever have physical possession of equipment prior to the lessee obtaining possession. Thus, lessors must often rely on equipment descriptions and information contained in vendor invoices, which are usually very general. According to ELA, this makes it challenging for a leasing company to reach an informed decision as to what equipment is subject to an advanced recycling e-waste fee. Without specific language addressing these hurdles, ELA believes legislation will hinder good faith efforts by equipment lessors to collect e-waste recycling fees. Id.

What Devices Are Covered By the California Act?

The first hurdle facing the leasing company is to determine which products are subject to the Recycling Fee. At first blush, the requirements look relatively simple.

The Recycling Fee must be collected from the consumer for the sale or lease of all “Covered Electronic Devices,” or “CEDs.” CEDs are new or refurbished video display devices that have a screen size of more than 4 inches measured diagonally including: televisions that contain cathode ray tubes; computer monitors that contain cathode ray tubes or use liquid crystal displays; laptop computers with liquid crystal displays; “bare” cathode ray tubes; and any other video display device that contains a cathode ray tube. (Note, there are exclusions for the Recycling Fee for electronic devices that are: used and not refurbished; part of a motor vehicle; contained within industrial, commercial, or medical equipment; contained within a clothes washer, clothes dryer, refrigerator, dishwasher, room air conditioner, dehumidifier, or air purifier.) In addition, a different fee is required depending on the size of the screen. Refurbished items are products the manufacturer has tested and returned to a condition that meets factory specifications, repackaged, and labeled as refurbished. Used equipment is not subject to the Recycling Fee. Because leasing companies do not ever see the equipment being leased, but rather depend on very general descriptions in vendor invoices, they often cannot determine whether to charge a fee and if so, how much without spending considerable time and resources.

There is an additional requirement that a video display device must be classified as a hazardous waste when discarded in order to be considered a CED that muddies the water. There is at present no comprehensive listing of which video display devices are considered to be CEDs. So how does an equipment leasing company know which devices are covered and what devices are not covered? There are two sources of information: the manufacturer and the Department of Toxic Substances Control (“DTSC”).

The DTSC is responsible for defining what is and what is not a covered electronic device. The problem is that it has yet to comprehensively address this question and is proceeding on what some have termed an “ad hoc” or case-by-case basis. The manufacturers were required to notify retailers by April 1, 2004 if a device sold by that manufacturer is subject to the Recycling Fee and are required to label CEDs. Unfortunately, the manufacturers and the DTSC are not always in agreement as to which devices are covered. The ultimate say goes to the DTSC, assuming it has weighed in on the particular device. In any event, the leasing company is still required to collect the Recycling Fee even where the manufacturer does meet its notification requirements.

In light of the substantial penalties for noncompliance, it is critical that leasing companies of video display devices confirm the status of the devices with both the manufacturer and the DTSC before assuming a device is not covered.

What Sales Are Covered By the California Act?

Leases of new or refurbished CEDs are subject to the Recycling Fee. (“Sell” or “sale” is defined as any transfer for consideration of title or of the right to use, by lease or sales contract.) Since the definition of “sell” excludes wholesale transactions with distributors or retailers, sales between a wholesaler to a distributor or retailer (or any sale for resale) are not subject to the Recycling Fee. Therefore, leasing companies may not allow the manufacturer to assess the recycling fee on them; instead the lessor is required to collect the fee from the entity to which it is leasing the device. The Act only contemplates that the fee be imposed once per CED.

CEDs already under lease prior to Jan. 1, 2005 are not subject to the fee. Fees are only required for those leases commencing on or after Jan. 1, 2005. Lease renewals are also exempt from the recycling fee. Purchase options at the end of a lease are also exempt since the covered device is considered to be a used product at the end of the lease.

But how does the leasing company know which sales of CEDs are subject to the Recycling Fee? For straightforward intra-California sales where sales tax is collected there is no real question. Retailers that are required to have a California seller's permit or are registered to collect California use tax, must collect the Recycling Fee when selling CEDs to California consumers. Last summer the California EPA declared that only sales of CEDs that would be subject to California sales tax are subject to the Recycling Fee. However, in answering a specific question, the Board of Equalization (“BOE”) subsequently issued a contrary opinion saying that fees are not subject to sales tax rules that constrain collection from federal instrumentalities and therefore the fee is indeed due in such situations. This has created ambiguity with regard to the rules on those not registered to collect California tax.

However, there are a number of circumstances where the tax obligation is unclear.

What happens in the case of a “Broker's Deal” when a leasing company purchases both equipment and the lease for the equipment from a broker that originated the lease and collected the first lease payment? The BOE's answer is that it depends on who is the “retailer” in such a transaction and that the party required to remit the sales or use tax would be responsible for collecting the Recycling Fee. Such circular reasoning does not provide the leasing industry with the guidance and certainty required to comply with the law.

Other questions posed to the BOE for which no clear answers were provided included what happens when the leasing company is unaware that the CEDs will ultimately be shipped to California. One example was given where the equipment is accepted by lessee at some non-California location and subsequently shipped to California after configuration. Another was where the lessee accepted the equipment out of state and held it for 90 days. The BOE was unable to provide a general answer to such questions.

A bigger conundrum is the case of sales over the Internet by companies that have no physical presence in California, but that deliver their products to California customers. Such sales are not subject to sales tax and presumably therefore not subject to the Recycling Fee. The BOE has taken the position that such sales are exempt from the fee. However, the California legislative counsel has said, to the contrary, that the BOE can compel collection of the fee under the Act.

This means that out-of-state leasing companies are operating in an environment of considerable uncertainty and will either have to hire personnel with the expertise to address such questions or retain outside expert assistance to guide them through these and related issues.

California's Mechanics of Collecting Recycling Fees

In order for a company to collect the Recycling Fee, it must first obtain an Electronic Waste Recycling Fee Account (“Account”). An Account may be obtained by submitting an “Application for Electronic Waste Recycling Fee Account” to the BOE. Applications should be mailed to the: Board of Equalization; Electronic Waste Recycling Section, MIC: 88; P.O. Box 942879; Sacramento, CA 94279-0088.

The BOE will issue the applicant an electronic waste recycling fee account number 30 to 45 days following receipt of the completed application. The Electronic Waste Recycling Fee account number is a different account number from California Sales or Use Tax Permit account numbers also issued by the BOE. Companies covered by the Act were obligated to begin collecting the Recycling Fees Jan. 1, 2005, regardless of whether they have applied or received the electronic waste recycling fee account number.

Fees collected must be paid quarterly using the California Board of Equalization's Electronic Waste Recycling Fee Return. The return and fee are due on the last day of the month following the close of the calendar quarter. There is also an option to forward the fees collected by Electronic Funds Transfer, which requires filing of a separate authorization agreement form with the BOE. The first fee return was due April 30, 2005 for the first reporting period of Jan. 1 through March 31, 2005. The Fee Return forms provide for Retailer's retention of the 3% administration fee.

Retailers are required to maintain records necessary to determine the correct Recycling Fee liability. The records must show details of all transactions subject to the Recycling Fee. Records must be maintained for a minimum of 4 years.

California Penalties for Noncompliance

The Board of Equalization is empowered to impose an administrative civil penalty of up to $2500 per offense for each sale of a CED for which a Recycling Fee has not been paid. The superior court may impose a civil penalty of up to $5000 per offense.

Anticipated Developments in California and Nationwide

Following are some of the most anticipated changes on the horizon, both in terms of California's system, and in terms of possible solutions to the issues nationwide:

• Fee Changes. The California Integrated Waste Management Board and the DTSC must review and adjust, as necessary, the electronic waste recycling fee effective July 1, 2005.
• California Assembly Bill 575. This legislation authored by Assembly- woman Lois Wolk (D-8th District) and sponsored by the ELA would amend California's Electronic Waste Recycling Act to recognize vendor relationships in leasing transactions. Bill 575 proposes to establish a strictly voluntary program where vendors have the option of billing equipment leasing companies for the recycling fee and remitting the fee directly to the BOE. This would allow the equipment leasing company to be billed the recycling fee by the vendor and not have to pass the recycling fee to the consumer. The legislation will not change the amount the fees required or a lessor's obligation to pay the required fees.
• National Legislation. Nationwide legislation for recycling and disposal of electronic waste has been suggested in some quarters as a way to simplify management of these materials, provide purveyors of electronic devices with a level regulatory playing field, and curb the potential excesses and interstate conflicts created by regulation on the state level. Many observers believe, however, that neither EPA nor Congress has any such realistic regulatory scheme on the horizon that would pre-empt state government regulations.

An increasing number of state legislatures are deciding that there is a need to recycle computer components and other electronic waste, also known as “e-waste,” and thus are proposing diverse laws intended to encourage or require such recycling. Equally diverse, to the point of creating conflicts and confusion, are the ways in which the various state legislatures propose to raise the funds to pay for such programs. Two states, California and Maine, have enacted such legislation and, at press time, 14 states have proposed such legislation. On Jan. 1, 2005, California's law was the first to go into effect. This article describes the Equipment Leasing Association's policy on legislation requiring advanced recycling fees. The article reviews California's new e-waste law and highlights some of the concerns to the leasing industry with regard to California's law.

Possible Solution to Disposal of Electronic Equipment Containing Lead and Mercury; Definite Headache for Leasing Industry

California has attempted to address the issue of disposal of consumer electronics containing significant amounts of hazardous substances with the passage of the Electronic Waste Recycling Act (“the Act”). The most significant requirement of the Act for equipment leasing companies is the establishment of a system for paying for the collection and recycling of electronic wastes. In addition, the Act also has a number of other components including: 1) a prohibition on the sale of electronic devices that do not conform to European Union standards due to heavy metal content (not effective before 2007); 2) a prohibition on the sale of electronic devices that do not conform to the Act's labeling requirements; 3) distribution of recovery and recycling payments to qualified entities covering the cost of electronic waste collection and recycling; 4) a directive to establish environmentally preferred purchasing criteria for state agency purchases of certain electronic equipment; 5) the requirement that manufacturers make available to consumers instructions on how and where to recycle their products; and 6) provision for civil liability for violation of certain provisions of the Act.

The legislature describes the Act as establishing a “cost free” program that makes it convenient for the public to return and recycle electronic devices thereby reducing the amount of illegal disposal of these devices. Note, however, that the phrase “cost free” means no additional cost to state and local government. The manufacturers, sellers/leasing companies and consumers of these devices bear the cost of the new recycling program.

Under the Act, consumers of covered electronic products pay a recycling fee that is collected by the “retailer” of the product. Equipment leasing companies are considered to be “retailers” by the Act. Therefore, the responsibility for collecting the fee from the consumer, or lessee, and remitting the fees to the state falls upon the leasing company.

The California Electronic Waste Recycling Fee

The electronic waste recycling program is financed by the collection of an Electronic Waste Recycling Fee (“Recycling Fee”). Equipment leasing companies are required to collect the Recycling Fee from the consumer and then remit the fees collected to the California State Board of Equalization (“SBE”).

The Recycling Fee varies from $6 to $10 per covered electronic device, depending on the device's screen size. Recycling Fees collected are to be transferred to the Board of Equalization. The leasing company is allowed to retain 3% of the Recycling Fee as reimbursement for costs associated with the collection of the Recycling Fee.

Due to ambiguities in determining which products are subject to the Act, and which transactions are subject to the Recycling Fee, leasing companies engaged in California transactions are going to have to commit substantial resources to comply with the Act. It is unlikely that the 3% fee will cover a leasing company's administrative costs to comply. As more states join the electronic waste regulation fray, the burden will only increase.

ELA's Policy on Electronic Waste Recycling Fees

The Equipment Leasing Association (“ELA”) has developed a proposal with regard to state legislative proposals to levy an advanced recycling fee on electronic equipment. ELA believes that if advanced recycling fees are imposed on consumers and collected at the point of sale, the enactment and implementation of such a recycling fee should have the following elements: “(1) uniformity with like equipment subject to fees in other states, (2) the scope of equipment is certain and identifiable to the lessor, (3) collection responsibility provides clarity, (4) the fee allows for a bilateral election between equipment supplier (vendor, wholesaler or manufacturer) and lessor to pay the fee at point of purchase rather than point of lease.” See ELA's position paper on Electronic Waste Recycling Fees, Feb. 2005.

The ELA believes that commercial equipment lessors should not be treated as “retailers” as the term is contemplated by numerous electronic waste recycling proposals. The proposed legislation is generally drafted on a consumer retail model and is designed for wastes from households rather than the commercial sector. However, the proposals often unwittingly require lessors to collect the fee imposed. ELA maintains that this creates a difficult situation for leasing companies because lessors do not ever have physical possession of equipment prior to the lessee obtaining possession. Thus, lessors must often rely on equipment descriptions and information contained in vendor invoices, which are usually very general. According to ELA, this makes it challenging for a leasing company to reach an informed decision as to what equipment is subject to an advanced recycling e-waste fee. Without specific language addressing these hurdles, ELA believes legislation will hinder good faith efforts by equipment lessors to collect e-waste recycling fees. Id.

What Devices Are Covered By the California Act?

The first hurdle facing the leasing company is to determine which products are subject to the Recycling Fee. At first blush, the requirements look relatively simple.

The Recycling Fee must be collected from the consumer for the sale or lease of all “Covered Electronic Devices,” or “CEDs.” CEDs are new or refurbished video display devices that have a screen size of more than 4 inches measured diagonally including: televisions that contain cathode ray tubes; computer monitors that contain cathode ray tubes or use liquid crystal displays; laptop computers with liquid crystal displays; “bare” cathode ray tubes; and any other video display device that contains a cathode ray tube. (Note, there are exclusions for the Recycling Fee for electronic devices that are: used and not refurbished; part of a motor vehicle; contained within industrial, commercial, or medical equipment; contained within a clothes washer, clothes dryer, refrigerator, dishwasher, room air conditioner, dehumidifier, or air purifier.) In addition, a different fee is required depending on the size of the screen. Refurbished items are products the manufacturer has tested and returned to a condition that meets factory specifications, repackaged, and labeled as refurbished. Used equipment is not subject to the Recycling Fee. Because leasing companies do not ever see the equipment being leased, but rather depend on very general descriptions in vendor invoices, they often cannot determine whether to charge a fee and if so, how much without spending considerable time and resources.

There is an additional requirement that a video display device must be classified as a hazardous waste when discarded in order to be considered a CED that muddies the water. There is at present no comprehensive listing of which video display devices are considered to be CEDs. So how does an equipment leasing company know which devices are covered and what devices are not covered? There are two sources of information: the manufacturer and the Department of Toxic Substances Control (“DTSC”).

The DTSC is responsible for defining what is and what is not a covered electronic device. The problem is that it has yet to comprehensively address this question and is proceeding on what some have termed an “ad hoc” or case-by-case basis. The manufacturers were required to notify retailers by April 1, 2004 if a device sold by that manufacturer is subject to the Recycling Fee and are required to label CEDs. Unfortunately, the manufacturers and the DTSC are not always in agreement as to which devices are covered. The ultimate say goes to the DTSC, assuming it has weighed in on the particular device. In any event, the leasing company is still required to collect the Recycling Fee even where the manufacturer does meet its notification requirements.

In light of the substantial penalties for noncompliance, it is critical that leasing companies of video display devices confirm the status of the devices with both the manufacturer and the DTSC before assuming a device is not covered.

What Sales Are Covered By the California Act?

Leases of new or refurbished CEDs are subject to the Recycling Fee. (“Sell” or “sale” is defined as any transfer for consideration of title or of the right to use, by lease or sales contract.) Since the definition of “sell” excludes wholesale transactions with distributors or retailers, sales between a wholesaler to a distributor or retailer (or any sale for resale) are not subject to the Recycling Fee. Therefore, leasing companies may not allow the manufacturer to assess the recycling fee on them; instead the lessor is required to collect the fee from the entity to which it is leasing the device. The Act only contemplates that the fee be imposed once per CED.

CEDs already under lease prior to Jan. 1, 2005 are not subject to the fee. Fees are only required for those leases commencing on or after Jan. 1, 2005. Lease renewals are also exempt from the recycling fee. Purchase options at the end of a lease are also exempt since the covered device is considered to be a used product at the end of the lease.

But how does the leasing company know which sales of CEDs are subject to the Recycling Fee? For straightforward intra-California sales where sales tax is collected there is no real question. Retailers that are required to have a California seller's permit or are registered to collect California use tax, must collect the Recycling Fee when selling CEDs to California consumers. Last summer the California EPA declared that only sales of CEDs that would be subject to California sales tax are subject to the Recycling Fee. However, in answering a specific question, the Board of Equalization (“BOE”) subsequently issued a contrary opinion saying that fees are not subject to sales tax rules that constrain collection from federal instrumentalities and therefore the fee is indeed due in such situations. This has created ambiguity with regard to the rules on those not registered to collect California tax.

However, there are a number of circumstances where the tax obligation is unclear.

What happens in the case of a “Broker's Deal” when a leasing company purchases both equipment and the lease for the equipment from a broker that originated the lease and collected the first lease payment? The BOE's answer is that it depends on who is the “retailer” in such a transaction and that the party required to remit the sales or use tax would be responsible for collecting the Recycling Fee. Such circular reasoning does not provide the leasing industry with the guidance and certainty required to comply with the law.

Other questions posed to the BOE for which no clear answers were provided included what happens when the leasing company is unaware that the CEDs will ultimately be shipped to California. One example was given where the equipment is accepted by lessee at some non-California location and subsequently shipped to California after configuration. Another was where the lessee accepted the equipment out of state and held it for 90 days. The BOE was unable to provide a general answer to such questions.

A bigger conundrum is the case of sales over the Internet by companies that have no physical presence in California, but that deliver their products to California customers. Such sales are not subject to sales tax and presumably therefore not subject to the Recycling Fee. The BOE has taken the position that such sales are exempt from the fee. However, the California legislative counsel has said, to the contrary, that the BOE can compel collection of the fee under the Act.

This means that out-of-state leasing companies are operating in an environment of considerable uncertainty and will either have to hire personnel with the expertise to address such questions or retain outside expert assistance to guide them through these and related issues.

California's Mechanics of Collecting Recycling Fees

In order for a company to collect the Recycling Fee, it must first obtain an Electronic Waste Recycling Fee Account (“Account”). An Account may be obtained by submitting an “Application for Electronic Waste Recycling Fee Account” to the BOE. Applications should be mailed to the: Board of Equalization; Electronic Waste Recycling Section, MIC: 88; P.O. Box 942879; Sacramento, CA 94279-0088.

The BOE will issue the applicant an electronic waste recycling fee account number 30 to 45 days following receipt of the completed application. The Electronic Waste Recycling Fee account number is a different account number from California Sales or Use Tax Permit account numbers also issued by the BOE. Companies covered by the Act were obligated to begin collecting the Recycling Fees Jan. 1, 2005, regardless of whether they have applied or received the electronic waste recycling fee account number.

Fees collected must be paid quarterly using the California Board of Equalization's Electronic Waste Recycling Fee Return. The return and fee are due on the last day of the month following the close of the calendar quarter. There is also an option to forward the fees collected by Electronic Funds Transfer, which requires filing of a separate authorization agreement form with the BOE. The first fee return was due April 30, 2005 for the first reporting period of Jan. 1 through March 31, 2005. The Fee Return forms provide for Retailer's retention of the 3% administration fee.

Retailers are required to maintain records necessary to determine the correct Recycling Fee liability. The records must show details of all transactions subject to the Recycling Fee. Records must be maintained for a minimum of 4 years.

California Penalties for Noncompliance

The Board of Equalization is empowered to impose an administrative civil penalty of up to $2500 per offense for each sale of a CED for which a Recycling Fee has not been paid. The superior court may impose a civil penalty of up to $5000 per offense.

Anticipated Developments in California and Nationwide

Following are some of the most anticipated changes on the horizon, both in terms of California's system, and in terms of possible solutions to the issues nationwide:

• Fee Changes. The California Integrated Waste Management Board and the DTSC must review and adjust, as necessary, the electronic waste recycling fee effective July 1, 2005.
• California Assembly Bill 575. This legislation authored by Assembly- woman Lois Wolk (D-8th District) and sponsored by the ELA would amend California's Electronic Waste Recycling Act to recognize vendor relationships in leasing transactions. Bill 575 proposes to establish a strictly voluntary program where vendors have the option of billing equipment leasing companies for the recycling fee and remitting the fee directly to the BOE. This would allow the equipment leasing company to be billed the recycling fee by the vendor and not have to pass the recycling fee to the consumer. The legislation will not change the amount the fees required or a lessor's obligation to pay the required fees.
• National Legislation. Nationwide legislation for recycling and disposal of electronic waste has been suggested in some quarters as a way to simplify management of these materials, provide purveyors of electronic devices with a level regulatory playing field, and curb the potential excesses and interstate conflicts created by regulation on the state level. Many observers believe, however, that neither EPA nor Congress has any such realistic regulatory scheme on the horizon that would pre-empt state government regulations.