United States: New Electronic Waste Legislation

Electronics is not only a fast growing industry in America, but also a significant component of our waste stream. The United States Environmental Protection Agency estimates that 3.2 million tons of electronics enter our landfills each year. The California Integrated Waste Management Board (CIWMB) estimates that there are currently 6 million unused computers and televisions stockpiled in the private homes of California with thousands of electronic items becoming obsolete on a daily basis. Many of these products contain hazardous materials making their safe disposal difficult.

In September 2003, the California state legislature passed the Electronic Waste Recycling Act (EWRA or SB 20). Sponsored by Senator Sher and signed by Governor Davis in the waning days of his administration, EWRA is the first such law in the country. In essence, it creates a comprehensive recycling program for old televisions and computer monitors. Specifically, the law imposes new reporting duties on electronics manufacturers and establishes a fee system to cover the cost of recycling electronic waste. The law applies to "covered electronic devices" (CEDs). CEDs are cathode ray tubes, cathode ray tube devices, flat panel screens, or any other similar video display devices with a screen size greater than four inches as measured diagonally, and which the Department of Toxic Substance Control (DTSC) determines to be hazardous waste when discarded or disposed, with certain exceptions. The law pertains to CEDs sold in California regardless of place of manufacture as long as the CEDs are sold directly to California customers. Retailers of CEDs collect fees based on the size of the product that they then remit to the State.

Beyond its basic provisions, two elements make EWRA unique and somewhat complicated. First, EWRA involves several different state agencies: the State Board of Equalization (BOE), the DTSC, the California Environmental Protection Agency (CalEPA), and the CIWMB. While interaction between agencies is not unusual generally, some of these agencies are ones with which retailers and manufacturers have had little to no prior contact and do not have a working relationship yet developed. Another unique element of this law is that it closely mirrors a similar law from the European Union. Indeed, the California law tracks the EU law automatically changing as the EU law changes.

SB 20 unsurprisingly caused controversy among technology manufacturers and retailers of CEDs. Of special concern, was the requirement to collect fees upon the first retail sale in California starting July 1, 2004. Multiple groups advocated extending this deadline, alleging potential implementation difficulties. In response, Assemblywoman Jackson put forth AB 901, which proceeded rapidly through the House and was signed by Governor Schwarzenegger, to delay the fee collection obligation until November 1, 2004. AB 901 did not affect other provisions of SB 20 nor did it delay their implementation.

While the deadline for collecting fees has been extended, other portions of the bill are already in effect. By April 1, 2004, manufacturers were required to inform retailers if their products are CEDs regulated by EWRA. Beginning July 1, 2004 retailers had to stop selling any CEDs from manufacturers not in compliance with EWRA. Future deadlines place further obligations on manufacturers to label CEDs, to report on sales and component content of CEDs, and to provide information on recycling to consumers.

Penalties for non-compliance can be stiff. Under SB 20, the CIWMB may impose civil penalties up to $2,500 for each CED for which the front-end fee was not paid. Additionally, a court could increase that fee up to $5,000 per CED and civil penalties of up to $25,000 may be imposed in civil actions. Further, because the DTSC may enforce SB 20 pursuant to Hazardous Waste Control Law, criminal penalties are also possible under the act.

Assemblywoman Jackson felt that AB 901 was necessary to provide time to address the difficulties in establishing an efficient fee collection and remittal system. Although the bill provided time to address problems with EWRA, it did not present any proposals for attacking the identified problems. A concurrent bill, SB 50, put forward by Senator Sher seeks to address EWRA concerns. SB 50 is now moving through the legislative process. There may still be opportunity to influence the final condition of this piece of legislation, but the time for comment is now, as SB 50 is expected to pass in the coming weeks before the end of the legislative session.

SB 20 created many questions, which SB 50 seeks to clarify. Although the original version of SB 50 was not considerably clearer than SB 20, several stakeholder meetings held in the spring and summer addressed concerns with the law. Through these meetings, the legislation has undergone substantive changes. In its current form, SB 50 now exempts household appliances. Additionally, an original provision requiring reporting by catalog and internet retailers has been struck. Many industry groups have been active in reviewing the proposed legislation. For example, the Equipment Leasing Association has presented its own mark-up of SB 50 to address issues raised by equipment lessors and the financing industry.

Despite heavy involvement from industry groups and other stakeholders, many believe problems still remain in SB 50. Notably, the bill still covers sale of refurbished devices which some groups feel is inappropriate. As it appears SB 50 is on track to be completed within the next few weeks, there is a sense of urgency to identify specific concerns stakeholders may have. Alternatively, there may be possible remedies available through careful structuring of the regulations that will follow during implementation of the law. The current regulations were passed under "emergency" circumstances and will likely be reexamined.

Although there are many broad concerns over practical difficulties and fee handling, there are also elements that worry specific categories of affected parties. The following section examines certain concerns of three major industry groups that will carry out EWRA.

Retailers have expressed concerns relating to compliance difficulties and fee collection. EWRA establishes a recycling fee based on the size of the CED; the fee ranges from $6 to $10 per unit. The fee is not taxable and retailers may keep 3% for administrative costs.

Special fee collection concerns arise in relation to the leasing and resale community. In particular, there seems a potential for overcharging consumers recycling fees. If a recycling fee is paid each time a computer is leased or is charged when used computers are sold, consumers may pay fees on computers for which the fee has already been paid.

Alternatively, there are concerns with the potential of consumers to underpay. Consumers may choose to purchase computers out of state and bring them to California to avoid paying the extra fee. Other consumers may purchase computers on the internet, which may allow them to buy from companies who do not charge this fee. One solution suggested by both retailers and recyclers is to create a type of labeling system marking items as CEDs with a designation as to whether the fee has been paid.

Complaints raised by the Equipment Leasing Association (ELA), as a representative of the equipment leasing industry, identified problems of implementing SB 20. In particular, the leasing industry is concerned with the definition of key terms including "retailer," "sale" and "CED." ELA has worked extensively with its members and with the relevant state agencies to understand how equipment lessors may become "retailers" under EWRA, and how to adapt transactions and procedures to properly finance retail sales of CEDs in California. SB 50 defines retailers as persons who make a retail sale of a new or refurbished device. Thus, determining whether lessors are retailers would depend on the definition of "retail sale." SB 20 defined sale specifically to include lease transactions. SB 50 currently proposes changing the language to "retail sale" and draws upon Section 6007 of the Revenue and Taxation Code definition, which defines a retail sale as "a sale for any purpose, other than resale in the regular course of business in the form of a tangible personal property."

Because the law imposes obligations on retailers, it is important to determine whether lessors are considered retailers. EWRA requires "retailers" selling CEDs in California to collect fees from consumers and remit them quarterly to CIWMB. Retailers then bear the direct burden of compliance with EWRA upon a "first sale" of CEDs in California, and may suffer significant monetary penalties imposed for infractions. One issue recently discussed among ELA, BOE and CalEPA officials is how to clarify "first sale" in the context of leasing and as related to the timing and applicability of sales and use taxes imposed under the Revenue and Taxation Code. This may result in more specific reference to a "use transaction" for new and refurbished CEDs as contemplated by the current draft of SB 50.

Although retailers do not need to begin collecting fees until November 1, as of July 1, they may no longer sell CEDs made by companies not in compliance with EWRA. It is not clear what the responsibilities of retailers are in relation to this provision. Is it the duty of the retailer to determine if a manufacturer is in compliance? Will an agency publish a "Do Not Sell" list? ELA is advocating that the statutory language be changed to protect retailers by changing the language to "knowingly sell." If a retailer is not informed by the manufacturer that a product is a CED, the retailer would not be liable for selling the product without charging the fee.

The complex definition of "CED" along with its list of stated exceptions and a presumption of the hazardous waste characteristics also leaves many open questions as to the applicability of EWRA, in particular with respect to certain motor vehicles, heavy equipment, health care devices, photocopiers, printers and karaoke machines. Retailers reviewing the legislation seek to clarify these definitions in the statutory text.

Under SB 20, manufacturers must perform four functions: (1) notify retailers of the new law and let them know which products are CEDs; (2) collect a fee when products are sold directly to consumers; (3) report sales volumes and a list of hazardous substances in products for any product sold in California; and (4) provide information to consumers on how to recycle their CEDs. In stakeholder sessions, manufacturers expressed concern over the uncertainty of these requirements. Public Resources Code section 42465.3 describes notification requirements but does not offer much detail. It is unclear whether manufacturers will have to contact every retailer in the state personally or whether there can be a consolidated notification process. Additionally, although the annual reporting has not yet begun, manufacturers question the details of these requirements wondering how often they will have to report.

The CMTA (California Manufacturers & Technology Association) has issued several statements about SB 20 and the subsequent legislation. Notably, they labeled SB 20 a "job killer" arguing that SB 20 makes the California electronics industry less competitive. Because out-of-state corporations can sell via the internet, they may be able to escape charging recycling fees. Payment of the fee by an out-of-state seller is voluntary. Because of these adverse impacts on local companies, CMTA is lobbying to delay implementation of the bill until a court delivers an authoritative decision on the statute.

Concerns from the recycling community focus closely on the dispersal of the money collected by the retailers. The recycling process generally consists of three large components: collecting the CEDs, transporting CEDs to recycling facilities, and actually recycling the products. Often, different companies perform these different elements. Often municipalities collect products and pay for transportation and recycling costs. The inclusion of multiple players creates a concern over how best to divide the monies between the different processes. Additionally, recyclers in rural communities argue that their costs are greater and therefore they should be able either to charge consumers an additional fee or to collect a larger portion of the fee revenues gathered throughout the state.

Some recyclers are also advocating for a change in method for calculating reimbursement. Because the fee will be charged to consumers on a per unit basis, currently recyclers are set to be reimbursed for their costs based on a per unit basis. Some recyclers feel that the per unit basis is overly cumbersome. Charging per piece means having to count every CED turned in. Recyclers argue it would be easier to weigh the materials and calculate the reimbursement amount on a per pound basis.

California has taken a bold step to try to solve problems related to the growing amount of e-waste in the State. It is important to take the time now to examine the law to ensure that it not only meets the recycling goals, but that it can be implemented efficiently and effectively. Most of the concerns raised above have already been voiced to the legislature and to the agencies who will implement the new law. These questions may demand further analysis, however, from experienced practitioners with environmental, regulatory, and financial expertise to guide stakeholders on proper management of risks related to understanding and implementing EWRA. In some cases, sound legal advice may involve structuring transactions to comply with EWRA, interacting with the relevant agencies to request express waivers, and posing further questions arising from the statutory amendments, together with the sequence of implementation, experience and possibly litigation that follows. Within the next few months, the legislature will likely pass SB 50 and by November 1, the fee collection provisions will be in effect. There will be a public hearing on SB 50 on August 4, 2004 in Sacramento.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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