1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 APRIL 15, 2009 9 10 LEGISLATIVE COMMITTEE 11 12 13 14 15 16 17 18 19 Reported by: Juli Price Jackson 20 No. CSR 5214 21 22 23 24 25 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Judy Chu of Equalization: Chair 5 6 Betty T. Yee Vice-Chair 7 Bill Leonard 8 Member 9 Michelle Steel Member 10 Marcy Jo Mandel 11 Appearing for John Chiang, State Controller 12 (per Government Code Section 7.9) 13 Joanne Richmond 14 Clerk, Board Proceedings Division 15 16 17 ---oOo--- 18 Board Staff: Margaret Shedd 19 Randie Henry 20 Sheila Waters 21 Robert Tucker 22 ---o0o--- 23 24 25 26 27 28 2 1 2 INDEX OF SPEAKERS 3 ---o0o--- 4 Name Page 5 6 Michele Pielsticker 9 7 Kyla Christoffersen 11 8 Michele Pielsticker 28 9 Kyla Christoffersen 30 10 11 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 15, 2009 4 ---oOo--- 5 MS. RICHMOND: Good morning, our first item is 6 the Legislative Committee. 7 Dr. Chu? 8 DR. CHU: Yes, I'd like call the meeting of the 9 Legislative Committee to order. We have status updates 10 on several BOE-sponsored bills and one bill where we 11 wanted to recommend an action. 12 If we could have the staff report? 13 MS. SHEDD: Sure. There is a consent agenda 14 and that is under Roman numeral II. There are three 15 bills that are recommended for staff position or Board 16 position, I'm sorry. 17 The staff recommendation for each of those -- 18 AB 1265, AB 1523 and SB 809 -- is support for each of 19 those. 20 A motion to adopt the consent agenda would be 21 in order at this point. 22 MS. YEE: I will so move. 23 MS. STEEL: Second. 24 DR. CHU: Okay, motion by Ms. Yee and second by 25 Ms. Steel to approve the consent agenda. 26 And without objection, then that will be 27 adopted. 28 Well, then, let's go to the actions on the 4 1 BOE-sponsored bills and the status update. 2 MS. SHEDD: Okay, I have before you here, just 3 for information and if -- discussion of all of the 4 Board-sponsored bills. 5 The first one is AB 347. The author for this 6 bill is Block. It's scheduled for hearing in the 7 Assembly Rev. and Tax on April 27th. 8 And it would provide a penalty for failure of 9 taxpayers to provide timely records for Board audit 10 inspection. 11 MS. YEE: Madam Chair? 12 DR. CHU: Yes, Ms. Yee? 13 MS. YEE: Thank you very much, Madam Chair. 14 I just wanted to speak to this bill and maybe 15 provide some perspective relative to the concurrent 16 regulation process that has been suspended. 17 We have had discussions with interested parties 18 relative to audit practices that had been part of an 19 interested parties meeting process. And it's been 20 suspended because I think there was a lot of concern 21 about the imposition of the 25 percent penalty that is 22 contemplated by AB 347. 23 My -- I think my sense of what I would like to 24 see going forward is to get that regulation process back 25 on track. I do think it is important to try to 26 memorialize a set of expectations for all parties to an 27 audit relative to how to achieve more timely completion 28 of audits and certainly expectations with respect to the 5 1 timely furnishing of records. 2 But what I wanted this bill to do was 3 to really -- I don't think the bill, as currently 4 proposed, is going to do it. It's going to have a tough 5 time in the legislature, I think. The cloud of a 6 25 percent penalty without much clarity about how it 7 would be applied and when it would be applied and 8 imposed really has raised a lot of different concerns. 9 What I would like to see is some effort to 10 clarify the bill that really speaks to the 25 percent 11 penalty being a last resort. We have other authorities 12 and powers by which to compel timely furnishing of 13 records, such as our subpoena authority. 14 And I would like to see -- and I've had some 15 internal conversations with the staff relative to just 16 being very clear about when we would actually look at -- 17 in looking at our subpoena authority and then also at 18 what -- what stage -- which would be at the very end 19 point -- this 25 percent penalty would actually be 20 imposed. 21 And I think certainly there would be a notice 22 of the penalty, but there are -- I think just laying out 23 that expectation very clearly would be very, very 24 helpful, so that the expectations are clear on the part 25 of the taxpayers as well as our own staff. 26 DR. CHU: Okay. And, in fact, there is a 27 proposal for the different layers of the procedures 28 before such a 25 percent penalty could be imposed for 6 1 failure to furnish information and -- 2 MS. YEE: I think that may have been a proposal 3 to -- I don't think all of us have seen the final 4 proposal. 5 So, I think what I'd like to do is maybe act on 6 this with direction back to the staff to put -- to 7 finalize the proposal that could then be amendments to 8 AB 347. 9 And I would incorporate that as part of the 10 action on this particular item. 11 DR. CHU: So, you would still like to have -- 12 to have some work on it done then? 13 MS. YEE: Yes, yes. 14 Although I think we've had enough conversations 15 internally to where -- Miss Shedd, when can we see a 16 proposal? 17 MS. SHEDD: As I understand your direction, 18 you'd like us to prepare at least conceptually 19 amendments that would address these concerns and set out 20 definite guidelines of when the penalty would be 21 imposed. 22 The staff has met and we're kind of thinking 23 that first there is a verbal request made for these 24 books and records. If those aren't forthcoming, then 25 there will be a second written request. And after a 26 certain amount of days, if that isn't -- hasn't been 27 responded to, then there will be a second written 28 request. And after a certain amount of days there will 7 1 be a demand notice. 2 And then, finally, if there's still no 3 response, an administrative subpoena would be issued. 4 And at that point the penalty would be imposed. 5 So, it would definitely be the last resort 6 after, you know, exhausting every other tool that we 7 have to -- 8 MS. YEE: With clear time frames in between 9 each of those steps? 10 MS. SHEDD: Yes. 11 MS. YEE: Okay. 12 MS. SHEDD: So, we'll take a stab at drafting 13 that. And then I can attach those to the minutes of the 14 committee and the Board Members can take a look at it 15 then. 16 DR. CHU: Okay, we have two speakers, Michele 17 Pielsticker from Cal-Tax and Kyla Christoffersen from 18 Cal Chamber. 19 Ms. Pielsticker? 20 ---o0o--- 21 22 23 24 25 26 27 28 8 1 MICHELEPIELSTICKER. 2 ---o0o--- 3 MS. PIELSTICKER: Good morning, Madam Chair, 4 Members of the Board, Michele Pielsticker with Cal-Tax. 5 First of all, I'd just like to thank you for 6 taking into consideration the comments of interested 7 parties with respect to the two year audit procedures. 8 That has been a great concern to us and we appreciate 9 your responsiveness to that. 10 With respect to the 25 percent penalty, that 11 also was a great concern. 12 But I do want to highlight that part of our 13 concerns with the audit procedures were with respect to 14 electronic records and the involvement of the Computer 15 Audit Specialists and their desire to obtain information 16 that many taxpayers felt was not necessarily relevant. 17 And, so, we would be concerned that a 18 25 percent penalty for failure to furnish records, even 19 as a last resort, does not necessarily take into account 20 that those records may be found to be immaterial to -- 21 to what the auditor needs to conduct the audit. 22 For example, with respect to electronic 23 records, some taxpayers don't keep their records in 24 electronic format. So, a concern would be that the 25 taxpayer could not produce the records in electronic 26 format, but could produce them in another format, such 27 as paper records and that the 25 percent penalty may be 28 invoked to compel production of electronic records or 9 1 compel production of electronic records that are beyond 2 what is necessary to the audit. 3 So, I would ask that you keep that in mind as 4 we move forward. 5 And, again, I do appreciate the responsiveness. 6 Thank you. 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 KYLA CHRISTOFFERSEN 2 ---o0o--- 3 MS. CHRISTOFFERSEN: We also appreciate the 4 responsiveness to the concerns and the time that you've 5 taken to discuss those concerns and give us the 6 opportunity to share those. 7 We are also concerned, just as a policy matter 8 with respect to AB 347, that it is too broad and that it 9 would end up applying to situations where certainly a 10 25 percent penalty would not be appropriate. 11 And, so, we share the same concerns as Cal-Tax. 12 Thank you. 13 ---o0o--- 14 DR. CHU: Okay, Ms. Mandel? 15 MS. MANDEL: And the minutes would come before 16 the Board this afternoon; is that right? 17 MS. SHEDD: Uh-huh. 18 MS. MANDEL: That's pretty fast -- pretty fast 19 drafting, Sheila. 20 MS. SHEDD: Well, we've been working on it, 21 trying to address the concerns. 22 MS. MANDEL: Have the people who -- who were 23 concerned about how the Board might -- auditors might 24 assert the penalty seen any draft language? 25 MS. SHEDD: No. 26 MS. MANDEL: And do we have -- I guess it 27 sounds like the idea is then that the details of 28 administering the penalty would wind up in the Rev. and 11 1 Tax Code itself? 2 Is that the concept? 3 MS. SHEDD: Well, the details of the steps the 4 staff would have to -- the audit staff would go through 5 before a penalty is imposed would be detailed in the 6 statute is what I'm understanding. 7 MS. MANDEL: All right. 8 And the sort of timing of -- I'm just wondering 9 about the people being able to see it or when we're 10 going to see it. 11 MS. SHEDD: Well, I'd like to get those 12 amendments back to you this afternoon with the minutes, 13 if that is agreeable to the Board Members. 14 Then we'll give it to the author and the bill 15 will be amended and will be in print before the hearing 16 on April 27th. 17 MS. YEE: So, you could have a draft by this 18 afternoon with the minutes? 19 MS. SHEDD: I think so. 20 MS. MANDEL: But we have speakers on the 21 subject that have expressed concern about how the 22 penalty might be imposed. 23 I'm not -- I am just wondering if they -- 24 MR. LEONARD: Madam Chair? 25 DR. CHU: Mr. Leonard? 26 MR. LEONARD: I think it would be wiser to 27 recess this committee until those documents are 28 available for public distribution -- including me. 12 1 MS. MANDEL: Yeah, I'd like to really read 2 them. 3 MR. LEONARD: I have some specific questions, 4 but it sounds like it may be better if I read the 5 suggestion before I ask something that's either already 6 addressed or is no longer an issue. 7 DR. CHU: Okay. Well, we do have a time 8 deadline, so, we do have to complete it by today, at 9 least, whatever we're going to do. 10 So, perhaps, we should recess this particular 11 matter up until the afternoon, when we get the actual 12 written copy back. 13 MS. SHEDD: Okay. 14 DR. CHU: So there could be an actual 15 discussion. 16 MS. SHEDD: Well, why don't we put together a 17 draft and allow you -- give it to the Board Members as 18 soon as possible and interested parties and we could 19 then discuss it this afternoon? 20 MS. YEE: That would be great. 21 DR. CHU: Okay, very good. 22 MS. SHEDD: Do you want me to go through the 23 rest the Board-sponsored bills? 24 DR. CHU: Yes, please. 25 Then it would be only this one item in the 26 afternoon. 27 MS. SHEDD: Okay. The next bill is AB 469. 28 This being authored by Assembly Member Eng. It'll be 13 1 heard in Assembly Rev. and Tax on 4-27 also. 2 And this is similar to the bill that we had 3 last year and it requires consumers who have failed to 4 report their use tax to the Board of their taxable 5 purchases for the preceding year to report it on their 6 income tax form. 7 This is -- we're also providing that there will 8 be a delayed operative date to give the taxpayers 9 adequate notice and time to understand that they have a 10 use tax obligation and provide a table that they can 11 look up at and it will give them an amount that they 12 would have to pay rather than save all their receipts. 13 The next bill is AB 592. This is authored by 14 Assembly Member Lowenthal. And it would give the same 15 enhanced confidentiality to the Board's 100 limited 16 peace officers, which are our investigations staff, as 17 those other peace officers. 18 And AB 659, carried by Hayashi, this is the 19 Board bill that would provide that specified garment 20 cleaning establishments shall be regarded as consumers 21 rather than retailers of tangible personal property they 22 sell, provided that the sale of those items do not 23 exceed one-half of 1 percent of their gross receipts. 24 And these are like the lint brushes and the collar 25 stays. This is going to be heard in Assembly Rev. and 26 Tax on May 4th. 27 AB 693 by Assembly Member Silva was heard 28 yesterday. This provides that if you're one day late 14 1 and you're paying electronically that you -- after 2 appealing the matter before the Board -- will be only -- 3 only one day's interest rather than the whole month's 4 interest will be imposed on that penalty. 5 Currently if you're ten minutes late filing 6 electronically, a whole month interest is charged. 7 It was heard on Monday. There were concerns by 8 the Committee Chair that the bill didn't treat taxpayers 9 paying by mail and those paying electronically the same. 10 So, the bill was put over. 11 We're working with the committee consultant and 12 the author to seek a resolution to that and it's set for 13 hearing on April 27th. 14 The next bill is AB 1547. This is carried by 15 the Assembly Revenue and Tax Committee. It is our 16 technical housekeeping business tax committee bill and 17 it also is scheduled for hearing on April 27th. 18 The next bill is 765, which is carried by 19 Senator Dutton. This is the same as AB 1919 last year 20 Silva and SB 1450 by Senator Dutton. Both those bills 21 were held in Assembly Appropriations, but it would 22 provide an exemption from sales and use tax of the sales 23 of tangible personal property by thrift stores operated 24 by nonprofit organization and partnerships with the Navy 25 and the Marine Corps which provide financial assistance 26 to military members, their families and survivors. 27 And this bill is currently referred to Senate 28 Rev. and Tax, but there is not a hearing date scheduled. 15 1 And, finally, SB 824. This bill is the same as 2 SB 1777 that the committee and the Board sponsored last 3 year and the committee carried for us. And it was one 4 of the victims of mass veto. And it carries our 5 technical and housekeeping property tax provisions and 6 also the provision that requires the Board of 7 Equalization to be meet monthly, but not exclusively in 8 Sacramento. And that is set for hearing in Senate Rev. 9 and Tax. It's a committee bill and it will be heard on 10 April 22nd. 11 Are there any other questions or issues 12 concerns about the Board-sponsored bills? 13 MS. STEEL: I have one question, Madam Chair? 14 DR. CHU: Ms. Steel. 15 MR. LEONARD: Let's just go back to AB 469 that 16 report on FTB return. 17 What's difference between now and after this 18 bill passes? 19 MS. SHEDD: Right now taxpayers may -- if they 20 buy purchases from out of state, they may report it to 21 the Board of Equalization or report it on their income 22 tax. 23 This bill will say if you did not report it to 24 the Board of Equalization, then you must report it on 25 your income tax. 26 MS. STEEL: So, is that more penalties or -- 27 MS. SHEDD: Well, it's just kind of an 28 enhanced -- 16 1 MS. MANDEL: My understanding was it was really 2 kind of in the nature of clarification because the use 3 of the word "may," which indicated that there were two 4 ways of doing it, people thought that they didn't have 5 to. 6 I mean, you have a use tax. If you have a use 7 tax -- and it wasn't collected by the seller, you have a 8 tax obligation to the State. And there are currently 9 two ways that you can report that, one is on a Board of 10 Equalization use tax form and the other is you can 11 report it on your income taxes. 12 But the prior -- the existing statute's use of 13 the word "may," it seemed that some people thought it 14 was elective whether they had to report or not. 15 That was my understanding of why then the 16 language became, look, you have this tax obligation, 17 you're either going to report it on the Board's form or 18 you're going to report it on your income taxes. 19 Is that -- 20 MS. SHEDD: That's absolutely correct. 21 And also with the "either, or may" language 22 there wasn't the duty on tax practitioners to tell the 23 taxpayers that they had that obligation and to report it 24 to their income tax. 25 MS. STEEL: Thank you. 26 DR. CHU: Okay. Then with that, we are at the 27 end of the agenda, except that we will bring back the 28 AB 347 for the afternoon. 17 1 MS. SHEDD: Okay. And I will distribute those 2 draft amendments as soon as we can get them ready. 3 MS. YEE: Thank you. 4 DR. CHU: Very good. Then that concludes the 5 Legislative Committee. 6 (Whereupon other proceedings were had.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 (Legislative Committee reconvenes.) 2 MS. YEE: Okay, let's return to the Legislative 3 Committee, if we could? 4 Dr. Chu? 5 DR. CHU: I'd like to call the meeting of the 6 Legislative Committee back to order. 7 And we have our discussion about AB 347 and 8 specific procedures and timelines. 9 I believe everybody has the list in front of 10 them. So, could we have a staff report? 11 MS. SHEDD: Yes, as directed by the Legislative 12 Committee this morning, we did draft amendments to 13 AB 347 to clarify that the application of the 25 percent 14 penalty will only be made as a last resort, after three 15 requests and a formal notice and demand is made for the 16 information and after an administrative subpoena is 17 issued. 18 In addition, these amendments would clarify 19 that the Board may examine electronic data of any 20 taxpayer in order to verify the accuracy of return that 21 is made. 22 MS. YEE: Okay. Madam Chair? 23 DR. CHU: Yes, Ms. Yee? 24 MS. YEE: Two points -- could you clarify -- 25 actually, let me just state my first question first, but 26 if you can answer that one second? 27 I did want to go back to the issue that was 28 raised this morning about the Computer Audit Specialist, 19 1 just so we're clear about the role of that function. 2 But if you could, I am just looking at this 3 procedures and timeline that's articulated here in the 4 amendments. 5 The issuance of the administrative subpoena, it 6 says here once the administrative subpoena is issued, 7 the proposed 25 percent penalty will then apply to any 8 deficiency determined by the Board. 9 I think that that's suggesting that once the 10 administrative subpoena is issued, that's the time that 11 we are noting the 25 percent penalty -- that the 12 taxpayer could be subject to the 25 percent penalty, but 13 it actually would not be imposed until we actually 14 determine what deficiency there actually is. 15 MS. WATERS: Yes, that's correct. 16 MS. SHEDD: That's correct. 17 MS. YEE: I'm not so sure that -- I just wanted 18 to look at the language again to be sure that we're 19 clear about that. 20 It appears -- it reads as if the administrative 21 subpoena issuance and the 25 percent penalty application 22 kind of happen at the same time. 23 MR. LEONARD: That's exactly what it says. 24 MS. YEE: And if we're -- and if we're not 25 going to actually impose the penalty until the 26 deficiency is determined, perhaps we can split those 27 out. 28 Does that make sense? 20 1 MS. WATERS: In B it indicates when we add it 2 and it would be at the time the deficiency is determined 3 by the Board. 4 So, that's the moment in which it's actually 5 added, but we're just setting up the timing in which 6 this taxpayer becomes subject to it. 7 MS. YEE: Oh, I see, okay. So, in B is when -- 8 MS. WATERS: That's when we can add it. 9 MS. YEE: Okay. 10 So, at the conclusion of the information 11 request period, which is essentially after everything 12 under C, has been exhausted? 13 MS. WATERS: That's correct. 14 MS. YEE: Okay, gotcha, okay. 15 MS. MANDEL: And there's still a reasonable 16 cause exception? 17 MS. WATERS: That's correct. 18 MS. YEE: Yes, okay. 19 I guess, Miss Henry, on the issue of the 20 Computer Audit Specialist, can you comment on that? 21 And this is one area where I share concerns 22 with the interested parties. Perhaps when we get the 23 regulation process back on track, we can, you know, be 24 very clear about what our expectation is of the CAS. 25 MS. HENRY: Right. I think there were several 26 comments made about the Computer Auditor Specialist. 27 So, could you be specific as far as requesting 28 records? Is that your -- 21 1 MS. PIELSTICKER: Yes, hi, Michele Pielsticker 2 with Cal-Tax. 3 What we have heard from our members is that 4 there are times when a Computer Audit Specialist 5 requests samples that are broader than what is necessary 6 to conduct the audit. And sometimes the samples involve 7 proprietary information that the tax director who is 8 assigned the task of working with the auditor, that that 9 tax director doesn't necessarily have access to. 10 So, our concern is that whatever information 11 that is requested by the auditor with respect to what 12 the Computer Audit Specialist is working on, that that 13 be relevant and material to the -- to the items under 14 examination. 15 MS. HENRY: Okay. Well, you know, like -- 16 electronic data, you know, takes the place of the old 17 paper books and records. So, we ask to see that 18 electronic data, you know, in its entirety so that we 19 can validate the information, as if you would if you 20 were looking at invoices to make sure that they're in 21 sequential order or that pages aren't missing out of a 22 journal. 23 If we're asking for something that isn't 24 relevant, you know, if the Computer Auditor Specialist 25 who is asking that, the auditor really should be in 26 control of the audit so that the taxpayer or the 27 consultant should be talking to the actual auditor who 28 has been assigned the audit. 22 1 If there is concern, it can be elevated to the 2 supervisor or to the Principal Auditor or to the Chief 3 of Field Operations, for that matter. 4 But I think that there has been some -- there's 5 been some times where companies that keep electronic 6 data, they want to -- they want to choose which parts 7 they want to give us and that wouldn't be any different 8 than saying, "I'll give you page 1 through 23 of my 9 journal, but not give you 24 through 30 and then I'll 10 give you 31 to 50." 11 So, we're -- you know, I am not a Computer 12 Audit Specialist, I am not exactly technology savvy, but 13 that I understand that we ask for data in its entirety 14 so we can validate it. 15 Does that make sense? 16 DR. CHU: Ms. Mandel? 17 MS. MANDEL: Well, maybe that gets more toward 18 the discussions that I missed as part of the audit reg 19 stuff that was, you know, taken off. 20 Because I thought I had heard something about 21 the relationship of Computer Audit Specialist to the 22 auditor and reporting and that the auditors who should 23 be in control of an audit, some people think the 24 auditor -- or have the impression that the auditors are 25 not in control of the audit when there is a Computer 26 Audit Specialist. 27 So, I mean -- I hear what you're saying, but 28 it's just conflicting with something I heard before. 23 1 MS. HENRY: I heard those concerns too, 2 Ms. Mandel, and it's certainly something that we're 3 going to try to resolve where that is an issue. 4 Through the years that we've had Computer Audit 5 Specialists, many of them have now retired and we have a 6 lot of new Computer Audit Specialists. So, that -- that 7 might be a good time for the changing of that. 8 But as we replace the Computer Audit 9 Specialists, many of the people that used to be 10 supervisors are now Computer Audit Specialists. So, 11 they look like -- to the new Tax Auditor, like the 12 senior person, helpful person that might help guide them 13 what they need too. 14 We're really trying to open communication 15 between both the Chief of Field Operations and the 16 Computer Audit Specialists' supervisor to insure that we 17 are getting consistency of what types of records we're 18 requesting, the type of training that we're giving the 19 new Computer Audit Specialists. 20 And, so, we heard the complaints, and we're 21 trying to address them. 22 MS. MANDEL: I guess it would be interesting to 23 hear about the -- you know, hopefully they've had a 24 chance to read the language. 25 Is the No. 1, relevant and reasonable verbal 26 request, the relevant and reasonable verbal request for 27 information -- the relevant and reasonable request 28 aspect of that that carries through that each time it 24 1 moves to the next level of we really mean give us the 2 stuff that it's still the relevant and reasonable 3 request for information? 4 MS. SHEDD: Yes. 5 MR. LEONARD: I had a question on that line. 6 Can I -- 7 DR. CHU: Mr. Leonard? 8 MR. LEONARD: I am not sure what "relevant and 9 reasonable request" modified. Is it the request is 10 polite? Or the information is solicited is relevant? 11 Because in the language that's in the bill now, 12 supposed to be added to the law before these amendments, 13 so, it's new language, the current bill says that, 14 "If during the examination any person fails to 15 furnish any information requested by the 16 conclusion of the information request period 17 then," and it goes on, "the Board may add the 18 25 percent penalty." 19 And then subject to all of these relevant and 20 reasonable, that's where I am. If you can ask for 21 anything -- and that's not modified by anything relevant 22 to the audit, anything relevant to the question before 23 us, anything relevant to the audit period -- if that's 24 not modified and -- if the answer is we don't keep that 25 record, does that mean the penalty is automatically 26 triggered because there's a willful failure to respond? 27 My response is no, I don't have it. I don't 28 know how we deal with that. And we certainly have a lot 25 1 of smaller taxpayers without the Computer Audit 2 Specialists that their answer is, "I can't give you 3 those records, I don't have them." 4 And then we have other means. We may penalize 5 them for negligence, they should have a record, but we 6 don't penalize them the 25 percent, at least I hope we 7 wouldn't if this was in place, not only for negligence, 8 but because you said no to us and we're going to hit you 9 again. 10 And it's just not clear. 11 MS. HENRY: Well, we have no intention of 12 giving somebody a 25 percent penalty because they didn't 13 keep the books -- the records that we're requesting. 14 This is more to help compliance with the people 15 that have the records, but that they are not cooperating 16 with us and they're not giving us those records. 17 MR. LEONARD: I think the language needs to say 18 that more before we can assert these kinds of penalties. 19 And I'm not sure -- or please me, I will be 20 frank with you on that -- but it seems to me if you are 21 going to do it, this is a big and serious one and it's 22 on top of all of the others possible that we can hit 23 people with. 24 And, so, I would state clearly what we want the 25 taxpayer to never do in order to comply with us and 26 avoid this penalty, what we want them to always do. 27 It's -- it should be spelled out in more detail. 28 Because if -- you know, one of the allegations 26 1 here is that the Computer Audit Specialist, more than 2 the auditor who's worked the file regularly go on 3 fishing expeditions, "I'd like to see all of your 4 computer records." 5 "What do you mean all?" 6 "I mean all." 7 "You mean everything regarding production as 8 well as sales?" 9 "Yeah I want to see everything." 10 I think a case has to be made by the auditor 11 that those other computer files are relevant to the 12 audit and put that in the record contemporaneous with 13 the request. So, if the taxpayer refuses, then you've 14 got the ongoing debate joined at that early point, 15 instead of later on. 16 MS. HENRY: Certainly that would be the 17 expectation as we go through the steps of the bill that 18 we're proposing, that we would have to document what 19 we're asking for and why we're asking for it. 20 DR. CHU: Well, I'd like to point out that the 21 Board voted to support this proposal as it is on a 3 to 22 2 vote at its November 2008 meeting. 23 Consequently, if there isn't an agreement on 24 the amendments today, actually the bill continues to go 25 forth as-is. 26 I would say that it's in our interest to have 27 some amendments if we wish to have this continue to go 28 forward. 27 1 MS. YEE: Yeah. 2 Dr. Chu, I'd like to make a motion to -- 3 DR. CHU: Before we do, maybe we could hear 4 from our speakers here. 5 So, from Michele Pielsticker from Cal-Tax and 6 Kyla Christoffersen from Cal Chamber. 7 ---o0o--- 8 MICHELE PIELSTICKER 9 ---o0o--- 10 MS. PIELSTICKER: Thank you very much. Michele 11 Pielsticker. 12 First of all, I just want to tell you that I 13 really appreciate the effort as far as the amendments 14 that you have drafted. I appreciate the intent to make 15 this penalty a last resort. 16 I understand that that's how it's applied at 17 the Franchise Tax Board. So, it makes sense that you 18 would also have a number of steps before going to the 19 penalty here. 20 I do want to point out -- and I think I've 21 pointed this out in my comments on the audit 22 regulations, that although Franchise Tax Board has this 23 penalty, Franchise Tax Board does not engage in the 24 level of data dumping in the BOE does. And, so, they're 25 not going to have the issue of what is an overbroad 26 audit request with respect to electronic data that you 27 would at the Franchise Tax Board. 28 And, so, while I appreciate the amendments, I 28 1 don't think at this point the amendments go far enough 2 in limiting the scope of the audit. 3 And I concur with Board Member Leonard's 4 comments on that. We are willing to work with the Board 5 as we move forward. I haven't had the opportunity to 6 vet the language with my members. I can just tell you 7 what my impression is, but not the full membership. 8 And, so, I would have to do that before I could commit 9 to supporting anything at this point. But I do 10 appreciate the effort. 11 Thank you. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 1 ---o0o---. 2 KYLA CHRISTOFFERSEN 3 ---o0o--- 4 MS. CHRISTOFFERSEN: Kyla Christoffersen. 5 Similarly, thank you very much for sharing the 6 amendments earlier today. We got them out as quickly as 7 we could to membership. 8 And the initial feedback that I received is 9 that they are -- the amendments are still too broad in 10 scope and would still have some of the consequences that 11 we discussed that are causing my members concern. 12 However we would like to continue to work with 13 the Board and with staff to see if we can resolve those 14 concerns because I am still getting feedback and still 15 vetting. 16 I also can't make any commitment at this time, 17 but certainly we would like to explore whether we can 18 come to an agreement. 19 DR. CHU: Okay, Ms. Yee you had a proposal for 20 a motion? 21 MS. YEE: I do. And I think it's both a motion 22 and I'd like to suggest direction back to the staff 23 because I do think that the ongoing attempts to resolve 24 the outstanding issues really is probably appropriate 25 during the interested parties process, I think. 26 And these amendments, really -- I mean, from my 27 perspective, I think we kind of led the discussion on 28 this whole thing with the 25 percent penalty, which just 30 1 got everybody all nervous and freaked out and we're 2 trying to just kind of calm the waters here. 3 And I think these amendments do make a great 4 attempt at identifying the 25 percent penalty as a last 5 resort tool of the Board. 6 With respect to some of the other issues that 7 have been raised, I would like to suggest that we get 8 the interested parties process back on track so that we 9 can continue to have a dialogue about the role of the 10 CAS, about how we're going to not be overly broad in 11 terms of the reach for information when we do make the 12 information requests. 13 But I think the bill, as the stands with these 14 amendments, really do clarify the intent of the penalty 15 and certainly is very clear with respect to when it will 16 be applied and imposed. 17 So, with that, I would like to move adoption of 18 these amendments and I can do a separate motion, if need 19 be, for getting the interested parties meeting back on 20 track. 21 MS. MANDEL: I am sorry, I missed the -- so, 22 you want to go forward with these amendments, but still 23 talk to the community about refinements in them? 24 MS. YEE: Yes. But I think that the 25 appropriate venue for continuing to have that dialogue 26 would be through the interested parties process. 27 Otherwise we're going to be before a committee 28 and we're going to have not an opportunity to really 31 1 contain the issues that have been raised so far. 2 MS. MANDEL: Okay, but now I am sorry, I'm just 3 being slow. 4 So, you would -- you would -- you would take 5 this proposal and put it into the interested parties 6 process? 7 MS. YEE: I would take this proposal and 8 actually adopt these amendments for inclusion in AB 347 9 but then to resume the interested parties process that's 10 been on suspense -- on hold until there has been some 11 movement on the bill with respect to what we mean by 12 "the penalty." 13 DR. CHU: Well, I'm just trying to clarify. 14 Because when I think of interested parties, I 15 think of a very long process that we have, the internal 16 process we have at the Board -- 17 MS. YEE: Yeah. 18 DR. CHU: -- whereas, in legislation, of 19 course, there is -- you know as each -- as the bill is 20 going through each step -- 21 MS. YEE: Yeah, and I am not -- 22 DR. CHU: -- of the process. 23 MS. YEE: -- and I'm not speaking to process as 24 it relates to resolving the 25 percent penalty. I think 25 that the issues that have been raised really speaks to 26 the scope of what we're going to be requesting relative 27 to information and that Board not be overly broad in its 28 reach in terms of requesting information -- certainly 32 1 what the role of the Computer Audit Specialist is going 2 to be relative to the Senior Auditor, to the Field -- 3 Chief of Field. 4 I think those issues can get resolved in an 5 interested parties discussion. 6 I am proposing now to adopt these amendments to 7 347, to actually get them incorporated into the bill 8 before the hearing on April 27th. 9 DR. CHU: So, you're talking about a separate 10 process for the bill -- 11 MS. YEE: Which is this. 12 DR. CHU: -- and then a separate process for 13 the Computer Information -- 14 MS. YEE: All of the other concerns that have 15 been raised -- 16 DR. CHU: -- Specialists? 17 MS. YEE: -- which I think are serious concerns 18 that I think that the venue is really the interested 19 parties process to resolve those issues. 20 MS. MANDEL: And I thought that -- that's why I 21 asked the question about relevant and reasonable, 22 because I thought part of that inclusion of that 23 language here was to try to recognize that -- that at 24 least from -- for whoever -- for the drafting of it, for 25 whoever wanted the drafting of it, was that -- recognize 26 that from the staff perspective, at least, they think 27 they're making relevant and reasonable requests or 28 requests for information that's relevant -- the request 33 1 is reasonable, like we don't -- you don't have to 2 construct new records that you never had before and that 3 the information requested is relevant to what they're 4 looking at on the audit. 5 And it -- it -- I just wonder if it's -- if 6 it's clearly in the right place, if -- for these 7 amendments. 8 I mean that's why I kind of asked the question 9 if it's -- if this does get hammered out somewhere? 10 MS. YEE: I mean, I guess my feeling is that 11 this is -- this, at least, states kind of an intent of 12 what we are going to be requesting, relevant and 13 reasonable as it relates to that information that 14 pertains to the area under examination. 15 So, if there are more specific concerns, 16 because I certainly don't want the bill to be overly 17 prescriptive, I don't think statute is the right place o 18 kind of flesh that out, but certainly our regulation, we 19 can be very much more specific and prescriptive about 20 what it is we are going to be -- I mean, really kind of 21 define the parameters of what information we are going 22 to be seeking. 23 So, I think -- I am actually fine with 24 subdivision 1 because I do think it states the intent 25 of, certainly, what the Board is interested in pursuing 26 relative to information. 27 To the extent there are still concerns about 28 what "relevant and reasonable" means, we certainly can 34 1 further define and refine that in the regulation. 2 MS. MANDEL: No, I'm not saying -- I mean, as a 3 general sort of principle putting the details of 4 administration in the Code is, you know, not -- 5 MS. YEE: All right. 6 MS. MANDEL: -- the most fabulous thing, but -- 7 and, I guess I was really talking about whether -- it's 8 the construct between B and C because B is -- B is the 9 penalty if you don't furnish any information by the 10 conclusion of the request period and C just defines what 11 the conclusion of the request period is. 12 And I guess what staff is -- staff is saying, 13 "Well, it has to be a relevant and reasonable 14 information request." 15 And if you don't have that to start with, you 16 never get through the information request period, so, 17 you never get to having failed to provide any 18 information, you know. 19 MS. SHEDD: Would it help if we struck in C 20 "any" and substituted "relevant and reasonable 21 information"? 22 So we have it both in B and C -- C1? 23 MS. WATERS: And then, perhaps, change the 24 order in C1 to say, 25 "Made a verbal request for relevant and 26 reasonable information." 27 So it doesn't sound like we're just trying to 28 make a polite request? 35 1 MS. MANDEL: That's why it's Hard to do it kind 2 of right here. 3 MS. SHEDD: So, in other words, clarify that 4 we're not fishing in B for any information, but we're 5 limiting it to relevant and reasonable at that point and 6 when we go through the steps. 7 DR. CHU: Are you saying that it's at that line 8 where it fails or refuses to furnish any reasonable or 9 relevant information? 10 MS. WATERS: Right. 11 DR. CHU: That's what you are saying? 12 MS. SHEDD: Uh-huh. 13 DR. CHU: Okay. 14 MR. LEONARD: I have another line of questions 15 if they're are done with that one? 16 DR. CHU: Mr. Leonard? 17 MR. LEONARD: They may not be. 18 DR. CHU: Why don't you ask your question? 19 MR. LEONARD: Can someone explain more to me 20 what an administrative subpoena is? 21 I fear the words. If somebody hit me with a 22 subpoena, I'd do everything to comply because I would 23 think that the consequences would be dire. 24 What are they? What powers do we have if 25 somebody takes our subpoena and tears it up in front of 26 us? 27 MR. TUCKER: Robert Tucker on behalf of the 28 Legal Department. 36 1 MR. LEONARD: Yes, Mr. Tucker? 2 MR. TUCKER: Mr. Leonard, the administrative 3 subpoena is our request for those records as authorized 4 by law. 5 To the extent -- and generally they are 6 complied with -- but if someone were to, as you said, 7 tear it up, then we would work through the Attorney 8 General's office to seek enforcement of that subpoena 9 through the courts. 10 MR. LEONARD: So, we'd change the 11 administrative subpoena into a court order and judicial 12 subpoena, in effect? 13 MR. TUCKER: In effect. 14 MR. LEONARD: And then it would be contempt of 15 court if they didn't do it? 16 So, that -- that would imply it's a pretty big 17 step there. I guess the question is, is we're defining 18 the conclusion of the request period, since an 19 administrative subpoena isn't really concluded until we 20 go to the AG, do we have a choice to not go to the AG 21 and then assert this 25 percent penalty saying we're 22 done when the natural course of action on an 23 administrative subpoena is the AG if it fails to deliver 24 the information requested? 25 MS. WATERS: We're only saying that for 26 purposes of this section, and this section alone, the 27 conclusion of the information request period is just for 28 purposes of this statute, not for all subpoena 37 1 information requests. 2 MR. LEONARD: No, but this question is relevant 3 to this statute. 4 At -- you serve this subpoena, how long do we 5 wait before we impose the 25 percent penalty, knowing 6 that we have a -- we have a hammer of going to the AG 7 and the civil courts that's available to us also at that 8 time? 9 Do we -- do we decide to do one or the other? 10 Do we go through the courts? 11 MS. MANDEL: I thought that the enforcement of 12 the subpoena gets the documents. 13 MR. TUCKER: Correct. 14 MS. MANDEL: And this is a -- this is a penalty 15 for -- I don't know how to say it politely. 16 MR. LEONARD: Well, see, this is -- 17 MS. MANDEL: I don't know how to say it 18 politely, this is -- 19 MR. LEONARD: -- the penalty to deter -- 20 MS. MANDEL: -- this is -- 21 MR. LEONARD: -- bad behavior others or is this 22 a penalty to produce the document that we'll waive it -- 23 MS. MANDEL: -- it's the -- 24 MR. LEONARD: -- when you show up with it? 25 Yeah, I don't know which. 26 MS. MANDEL: -- well, if they respond to the 27 subpoena under threat of having to go to court and 28 threat of 15 percent, or whatever this is, 25 percent 38 1 penalty, they don't get the penalty? 2 MS. WATERS: What's at issue is once that 3 subpoena is issued, they'd be subject to the penalty. 4 MS. MANDEL: They'd be subject. 5 MS. WATERS: But we're hoping we never have to 6 assess that penalty. We're hoping these are strong 7 enough, you know, measures for them to comply with our 8 earlier requests. 9 So, we're really hoping we never have to apply 10 the penalty. 11 MR. LEONARD: Well, I do too, I share that. 12 It just seems like we're listing out a very 13 lengthy process that is become more and more 14 legalistic -- and I don't know if I made this that 15 suggestion publicly, but I would think at some point, on 16 some really recalcitrant business who's not a member of 17 these two fine organizations, you just send them a 18 Notice of Determination, you pick a number. 19 And if they don't like the number, they can 20 come and appeal to us and explain to us why they didn't 21 deliver relevant information. I think it would be a lot 22 faster. 23 DR. CHU: Well, I'd like to bring this item to 24 a conclusion here. 25 So -- so, the last suggestion was to include 26 the terms "reasonable and relevant" to -- to B, so fails 27 or furnishes -- or "refuses to furnish any reasonable or 28 relevant information," and then to do a parallel thing 39 1 with C1. While -- it's basically the same thing, but 2 you're just moving the term to say, "Made a verbal 3 request for reasonable and relevant information." So, 4 there is a parallel track there. 5 So -- so, if that if that is acceptable? 6 MS. MANDEL: Is it -- I'm sorry, is it -- is it 7 that the information is reasonable or the request is 8 reasonable? 9 What was your -- what were you thinking when 10 you wrote this? The information has to be relevant. 11 MS. WATERS: We're going to ask for -- we're 12 going to ask for information that is -- it's reasonable 13 for us to ask for it and it's relevant to the audit. 14 MS. MANDEL: So, we use that magic phrase, then 15 you anticipate that perhaps it might be explicated in a 16 regulation? 17 Is that the concept? 18 MS. WATERS: That would be the in the 19 interested parties process, right. 20 DR. CHU: Okay. So, Ms. Yee, you had a motion 21 and would that terminology be acceptable? 22 MS. YEE: Yes. 23 DR. CHU: Then I'll second that motion. 24 MS. YEE: Okay. 25 DR. CHU: And let's call for the vote. 26 MS. OLSON: Dr. Chu? 27 DR. CHU: Aye. 28 MS. OLSON: Mr. Leonard? 40 1 MR. LEONARD: No. 2 MS. OLSON: Ms. Steel? 3 MS. STEEL: No. 4 MS. OLSON: Ms. Yee? 5 MS. YEE: Aye. 6 MS. OLSON: Ms. Mandel? 7 MS. MANDEL: Well, I'll vote yes because I 8 think it's better than having nothing. If the bill is 9 otherwise going forward, it's better than having 10 nothing. 11 MS. OLSON: Motion carries. 12 MS. YEE: Madam Chair, I would like to notice 13 that we do get the interested parties meetings back -- 14 resuming again so that we can continue discussion and 15 resolving some of these issues that have been raised. 16 DR. CHU: Okay. With that then the Legislative 17 Committee is concluded. 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 41 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON Hearing Reporter for the 9 California State Board of Equalization certify that on 10 APRIL 15, 2009 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 41 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: June 22, 2009 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 42