BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT NOVEMBER 17, 2009 LEGISLATIVE COMMITTEE PART I Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Committee: Jerome E. Horton Chair 5 Betty T. Yee 6 Member 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond Board Proceedings Division 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 1 2 INDEX 3 Page 4 ITEM I: 5 Sub-item 1-1 4 6 Sub-item 1-2 4 7 Sub-item 1-3 4 8 Sub-item 1-4 6 9 Sub-item 3-1 8 10 Sub-item 3-2 21 11 Sub-item 3-3 32 12 Speaker: Michele Pielsticker 33 13 Sub-item 3-4 55 14 Sub-item 4-1 4 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 SUB-ITEMS 1-1, 1-2, 1-3 AND 4-1 2 Sacramento, California 3 November 17, 2009 4 ---oOO--- 5 MS. YEE: The first item on the agenda is the 6 Legislative Committee meeting. Mr. Horton as Chair, 7 convening the committee. 8 MR. HORTON: Thank you. Thank you, Member. 9 The first item for consideration is the consent agenda. 10 We have two -- three items on there, a few items on 11 there. 12 I'd like to entertain a motion to adopt the 13 consent agenda. 14 MS. YEE: Okay 15 MR. LEONARD: So moved. 16 MR. HORTON: Unless there's any objection. 17 MS. YEE: I'll second and maybe for the record 18 could we just itemize what this -- 19 MR. LEONARD: My motion is 1-1, 1-2 and 1-3. 20 MS. YEE: Okay. 21 MR. LEONARD: Is that correct? 22 MR. HORTON: That's sufficient. 23 MS. SHEDD: 4-1. 24 MS. YEE: And 4-1. 25 MR. LEONARD: And 4-1, correct. 26 MS. YEE: Okay. I'll second that motion. 27 Okay. 28 MR. HORTON: Next, Members, we have a report 4 1 from the Director of the Legislative Research Division, 2 Ms. Margaret Shedd. 3 MS. SHEDD: Yes, thank you, Mr. Chair and 4 Members of the committee. I just want to go through a 5 couple housekeeping items. 6 There are a couple items that have been pulled 7 off the agenda. That's 1-5. It's been dropped by the 8 staff. And Roman numeral II, Table of Sections 9 Scheduled to Sunset, has been put over to December to 10 allow us to prepare a staff recommendation. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 1 SUB-ITEM 1-4. 2 MS. SHEDD: So the first item for consideration 3 for proposals in a Board sponsored legislative package 4 is 1-4. And this would extend from 30 to 90 days the 5 time for a disabled veteran to file a claim to receive 6 the disabled veterans exemption retroactively to the 7 effective date of disability in cases where that 8 disability rating was delayed and not timely issued by 9 the United States Department of Veterans Affairs. 10 This would also eliminate an unnecessary 11 restriction on receiving that exemption by eliminating 12 some unnecessary documentation that the claimant would 13 have to file. 14 MR. HORTON: Any discussion, Members? 15 Do we have a motion? 16 MS. MANDEL: Move sponsorship of the proposal. 17 MS. YEE: I'll second. 18 MR. HORTON: Moved and second. 19 MR. LEONARD: Question. 20 MS. SHEDD: Yes. 21 MR. LEONARD: Whose idea was this? 22 MS. SHEDD: I believe this came from the staff. 23 MR. LEONARD: Just want to thank whoever -- 24 MS. MANDEL: Yeah. 25 MR. LEONARD: Good idea. Don't know who did 26 it. 27 MS. SHEDD: Well, I think there was some issues 28 in San Diego County where the Assessor -- because the 6 1 law now says that there has to -- it has to show that 2 there was an untimely rating issued by the Department of 3 Veterans Affairs, and it was kind of difficult to prove 4 a negative. 5 So, this would -- 6 MR. LEONARD: Always. 7 MS. SHEDD: -- take out that proof requirement 8 and extend the time. 9 MR. LEONARD: Thank you. 10 MR. HORTON: It's been moved and second. 11 Unanimous consent? 12 Thank you very much. Ms. Shedd. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 1 SUB-ITEM 3-1. 2 MS. SHEDD: The next item is 3-1. This would 3 allow the Board to register certain persons that incur 4 Use Tax liability on a regular basis who would not 5 otherwise be required to be registered. 6 As you know, there was AB 18 at the fourth 7 extraordinary session that require businesses that have 8 an annual gross receipts of $100,000 or more, who are 9 not already registered with the Board to file an annual 10 Use Tax return with the Board. 11 The Board staff since July 1 of 2008 has been 12 looking at the service industry and they have identified 13 several -- about 165 taxpayers who do not fit into that 14 $100,000 minimum but have incurred a Use Tax liability 15 of $1,000 in the past consecutive three years. 16 So we're looking for authorization to go ahead 17 and register those, as well. 18 MR. HORTON: Discussion, Members? 19 MS. STEEL: Just question. 165 out of what? 20 MS. WATERS: Out of about 4300 taxpayers. 21 MR. HORTON: Mr. Leonard, I see you pondering. 22 MR. LEONARD: I'm just going to vote no. Thank 23 you, Mr. Chairman. 24 MR. HORTON: Oh, okay. 25 MS. MANDEL: I have a -- just a clarification 26 and -- it says that if they had consecutive three years, 27 is that like forever? It's a rolling three years? 28 MS. SHEDD: It would be a rolling three years 8 1 because the requirement would be regularly -- and the 2 regularly be in the three -- consecutive three years. 3 So, if they didn't meet that definition, they 4 wouldn't regularly have a substantial Use Tax 5 liability. 6 MR. HORTON: So at what point would it 7 trigger? I mean, it's a rolling three years. At what 8 point would it trigger? 9 MS. SHEDD: When they did not have a Use Tax 10 liability of $1,000, in a year. 11 MS. YEE: Mr. Chairman. 12 MR. HORTON: Yes. Ms. Yee. 13 MS. YEE: Let me -- I'd -- I'd like to move 14 sponsorship of this proposal. I think this just 15 furthers our efforts to continue to look at the Use Tax 16 compliance area, and to the extent that the AB 18 act 17 helps us identify this particular group of businesses I 18 think it makes sense to go ahead and proceed to assure 19 that these are businesses that are regularly registered 20 with us. 21 MS. MANDEL: Okay. My understanding was 22 it's -- is it just businesses or it's potentially -- 23 MS. SHEDD: It can be individuals. 24 MS. YEE: It can be individuals, also. 25 MS. SHEDD: Right. 26 MS. MANDEL: Okay. 27 MS. YEE: But who have regular Use Tax -- 28 MS. SHEDD: Right. 9 1 MS. MANDEL: That high an amount, which is 2 probably 10 or 12 thousand dollars of purchases a year 3 ex-tax. 4 And then the -- we don't -- we don't usually 5 have it, I guess, at this point but the -- the cost 6 impact to us since it's 165 is the estimate of 7 taxpayers, just -- 8 MS. SHEDD: We think it would be absorbable. 9 MS. MANDEL: Because of the new program that we 10 have to do? 11 MS. WATERS: Right. We got funding the 12 previous year for the in-state services tax gap program 13 combined with the AB 18 for "x" program. Because we're 14 already identifying these purchasers, anyway, through 15 those enforcement efforts we can absorb the cost to just 16 register these taxpayers. 17 MS. MANDEL: Thanks. I understand that. 18 MR. HORTON: Members, I have a couple of 19 concerns I just want to share. I'm -- I'm of course 20 supportive of this, but the concern -- one of the 21 concerns is, is that once the taxpayer does not meet the 22 required threshold they're automatically taken off of 23 the -- off of the program. 24 And so then would not want to communicate to 25 the taxpayer indirectly that the cost to remove from the 26 program that they no longer have the obligation of 27 reporting Use Tax. 28 So, in the communication once they're removed 10 1 some -- some communication has to take place to notify 2 the taxpayer first his obligation is not removed as a 3 result of you not having this particular return. You're 4 still required to report and pay your Use Tax and you 5 still have the option of either reporting it on the 6 Sales Tax or filing a return, itself. 7 So I think that's very, very important. The 8 other part is, is that we would not want this to become 9 a license to be punitive in any form or fashion. 10 So, I think it's important that as we go 11 through the process that there is some sort of 12 communication outreach to the taxpayer in the beginning. 13 Once they are placed on -- once they are now permitized 14 and then once they're removed from the process, as well. 15 That communication being that the requirement 16 to register is just an additional method in which to 17 ensure compliance or to assist you in complying with the 18 law. It doesn't change your obligations. The law 19 hasn't changed in that regard. It's still a Use Tax 20 transaction. And the Use Tax is still due irrespective 21 of this permitizing. 22 So as we sort of work through the process I 23 don't know if that would add an additional cost that 24 should be taken under consideration, but I'd like for 25 that to be sort of incorporated in the bill that we 26 intend to -- to have that outreach. 27 MS. YEE: Mr. Chairman. Yeah, and I -- I 28 appreciate your concern. I think as we have pursued the 11 1 various tax gap proposals that we've received funding 2 for, outreach has been a very integral component to 3 that, that I would concur with your concerns just to be 4 sure that taxpayers are knowledgeable about what their 5 requirements are. 6 MR. HORTON: Thank you. So it's been moved 7 and second. Mr. Leonard has indicated the 8 possibility -- 9 MR. LEONARD: Mr. -- 10 MR. HORTON: A comment? Yes, sir. 11 MR. LEONARD: Your comments prompted me. The 12 law is -- as Ms. Yee points out, already allows us to 13 seek collection from these folks. 14 To the extent we've already identified them it 15 sounds like 165 we actually know their name and address. 16 There's not an issue with tax collection, it's 17 registration, as you point out. 18 We don't de-register anybody. They have to 19 de-register themselves. And then they're subject to an 20 audit. 21 If they file a zero return one year because 22 they don't make these purchases, they're -- they have to 23 continue to file zero returns. 24 I -- unless you -- unless you're asking that 25 the proposal be amended that somehow a zero return 26 triggers an automatic deregistration, which I've not 27 heard of at the Board of Equalization, I -- I think you 28 got an interesting thought on that. But it's -- the 12 1 staff is silent and I don't -- I don't like that silence 2 because they're not going to do what you're suggesting. 3 MS. MANDEL: Well, you -- oh, I'm sorry. 4 MR. HORTON: Excuse me. I mean, I'm only 5 responding because I think the question was directed to 6 me, and possibly staff can give us some more insight 7 into this, but it sounds to me as if though -- that 8 aspect may be more of the regulatory process that once 9 the law is adopted or it could be conveyed in the -- in 10 the intent then at some point we would have to -- to 11 issue regulation policy relative to the law. 12 And I would just share with staff, as well as 13 my colleagues that in that process, the regulatory 14 process, I'd be very much interested in making sure that 15 the taxpayer is aware of the law and that there is a 16 process by which it is -- and I hate to say this, but 17 that is somewhat convenient for them and doesn't lead to 18 unintentional punitive action on our part just because 19 they fail to -- to -- to de-register, if you will. 20 So I think your -- I think your comments have 21 merit, Mr. Leonard, but I think it is probably better 22 discussed during the regulatory process and policy. 23 MS. MANDEL: Mr. Horton. 24 MR. HORTON: Marcy. 25 MS. MANDEL: This was the question that I had 26 asked staff in preparing for the meeting because when I 27 read the proposal it looked to me like if you were one 28 of these people who had three years that you were put in 13 1 the system and -- and then that was it, even if you 2 never made such purchases again, because perhaps the 3 other outreach that was done through the other program, 4 you know, part of that was collecting the tax. The 5 other part of it was educational to taxpayers about the 6 Use Tax and perhaps some people maybe decide that they 7 didn't realize -- maybe their story is that they didn't 8 realize that there was this Use Tax and they just 9 thought that they were getting a -- you know, a better 10 deal and doing everything on the up and up, and now that 11 they realize about the Use Tax perhaps they won't be 12 making as many out-of-state ex-tax purchases. 13 You know, it had those two components in that 14 program and I -- I saw this proposal as having a three 15 years and -- and you're in it forever. And that was why 16 I asked the question, before the meeting I wanted to 17 sort of clarify it here, how this was supposed to really 18 work. And as Mr. Horton says, maybe a lot of it has to 19 get nailed down in the regulatory process. 20 But it was explained to me -- the response I 21 got was, no, if it's a -- it's -- it's -- the way that 22 they had meant it when they drafted it was -- and you 23 can explain it, was that -- that it was a three year 24 rolling look. And that's not how it is, but maybe you 25 can -- because that -- that was why I asked the 26 question, I thought people would be in and -- and might 27 never have an obligation -- 28 MR. HORTON: Never -- 14 1 MS. MANDEL: -- never have a -- you know, never 2 be in that position again. 3 MR. HORTON: Now, there is an inherent danger 4 in drafting legislation. You can draft it in such a way 5 that it is inclusive or exclusive. And so therein might 6 be part of the concern, the actual language that -- 7 excuse me -- I just got off a plane, I could barely hear 8 myself. 9 MS. MANDEL: You want -- you want some -- you 10 want a water? 11 MR. HORTON: No, I think -- yeah. 12 MS. MANDEL: I'll get you one. 13 MR. HORTON: Thank you. So I would be 14 concerned as we draft the language to make sure that 15 there isn't language in there that all of a sudden 16 creates a situation where the taxpayer -- thank you very 17 much -- the taxpayer is -- is now permitized forever 18 unless they take an affirmative action. 19 I mean, I think the Board once they file that 20 zero return, which they will do automatically, at that 21 point they should be notified that they are no longer 22 required to have this permit. 23 Is that your understanding? I mean -- 24 Good morning, just the Board, I'm Geoff Lyle. 25 I supervise the Business Taxes Committee and Training 26 Section, and we coordinate the gathering of these 27 legislative proposals. 28 On this -- in answer to your questions on 15 1 this -- our intent at this time, what would happen is 2 someone would -- who qualifies for this, could register 3 with us, report their Use Tax if they meet these 4 particular criteria. 5 It would also be used by our sections that go 6 out and find people who owe this Use Tax. And if it 7 turns out they owe the Use Tax over this period of 8 particular time, three years, at least $1,000 they will 9 recommend or require them to obtain a Use Tax permit to 10 report this tax. 11 Actually, right now part of the problem is they 12 can say, no, there's nothing in your law that requires 13 us to get a permit even though we do owe a sizable 14 amount of Use Tax every three years. 15 If they went ahead and registered with us, 16 you're correct that there is not at this point something 17 built into it to de-register them after a -- they go 18 under that particular criteria. They could, of course, 19 close out their permit on their own and they could be 20 informed of this in advance, when they originally get 21 the permit, that they can do this when their Use Tax 22 liability falls back under that criteria or if they do 23 not have any Use Tax that they would owe for that 24 period. So that would be something we could tell them 25 in advance about. 26 I understand we do go through the returns 27 and -- periodically, and see if there are zero returns 28 reported by any taxpayers and essentially cull them out 16 1 of the system, close out their permits if they have a 2 zero return. I think that happens automatically. 3 MR. HORTON: That's concerning a tad bit, in 4 that, you know, once -- once a permit is involved in the 5 process, you know, the other elements of the law get 6 triggered. Failure to file. Negligence. Audits. And 7 so forth. 8 A taxpayer who files a zero return and if they 9 read the law and the law says, well, once you're -- once 10 you're filing a zero return, you're no longer required 11 to be permitized. So let's say they fail to close out 12 that permit, which is a little time consuming on their 13 part, considering that the obligation is there under 14 existing law to require them to report and pay the -- 15 the Use Tax, would there be any subsequent action taken 16 on the part of the Board. Even though if there's a zero 17 liability it wouldn't result in any additional tax, per 18 se. 19 But there might be a presumption on our part as 20 an agency that they -- if they fail to file subsequent 21 to filing a zero return that there's a potential 22 liability, therefore we began to take some sort of 23 action of trying to figure out whether or not they did 24 file. 25 It seems to me that the initial intent was to 26 be presumptuous in nature on our part. One, presuming 27 that this threshold triggers a consistent activity where 28 there's going to be ongoing Use Tax, and so somehow 17 1 staff has made that determination that if they meet this 2 threshold or we probably looked at the taxpayer's 3 activities and determined that there's -- there's a high 4 probability this is going to be ongoing, and therefore 5 other would be required and would be a method in which 6 to facilitate them reporting their tax liability. So, 7 the -- the presumption on the other end is that if they 8 file a zero return in any given year, from what you've 9 shared, is that they -- they're no longer going to have 10 this reoccurring activity of Use Tax. 11 I think if that's our presumption we ought to 12 codify that in a way that is most efficient, and the 13 most efficient way -- if that's our presumption given, 14 the most efficient way to do that is if the Board sees 15 that there's a zero return, is to close that return 16 out -- the Board, and then to notify them that our 17 presumption is that because you filed a zero return that 18 you're no longer incurring this Use Tax liability on a 19 regular basis. 20 However, if for some reason you do make a 21 purchase that is subject to the tax you're still 22 required to report it and at some given point when 23 you -- if you meet this threshold you will again be 24 required to -- to register. 25 So, I think we need to have some clarification 26 as we go forth with that. 27 MS. MANDEL: Can I ask (inaudible) a question? 28 MR. HORTON: Yes. 18 1 MS. MANDEL: Do -- do we have the capacity to 2 make a permit and maybe if -- if this proposal were 3 enacted that it would potentially only apply to this 4 type of registration to have a registration go inactive 5 and then go active? 6 I don't know what it takes to register -- close 7 the permit, open a new permit with a different number. 8 You know, like if you're -- if you have a 9 professional license, some of the professional licenses 10 you go inactive and then you can go active. But your 11 number -- you know, your number doesn't change. 12 I just -- I just wonder if that's -- I don't 13 know which is more work or -- but that's something that 14 I guess we get -- 15 MR. HORTON: Well, I would -- 16 MS. MANDEL: -- figure it out in the -- 17 MR. HORTON: I think we might want to consider 18 allowing the legal staff to take the discussions of the 19 Members and see if they can draft the legislation in a 20 way that gives us the autonomy, if you will, to -- to -- 21 to codify these concerns in the regulatory process. 22 So the -- the legislation might -- might use 23 terms such as "shall", "may" and so forth in order to 24 accomplish the goal of staff and then in the regulatory 25 process we can kind of codify what our intent, and I 26 would defer to -- to the Members to -- to hear from them 27 in that regard as well as Legal, to see if there's a way 28 to draft the legislation that -- that pushes that 19 1 responsibility of clarifying the intent of the Members 2 onto the regulatory process. 3 So, in essence the law would not be -- would be 4 mandatory relative to permitizing and then the Board 5 shall or may -- the taxpayer shall or may not be 6 required subsequent to the -- being mindful that as you 7 go through the legislative process there -- there are 8 Members in the Legislature that are going to share the 9 same concerns and we may end up with a -- with a more 10 descriptive and more restrictive legislation relative to 11 our -- our ability to be protective of -- of 12 overburdening the taxpayer. 13 Any other discussions? 14 MS. YEE: I -- I guess with that, Mr. Chairman, 15 let me modify my motion for -- to approve Board 16 sponsorship of this proposal, but with the revision to 17 address some of these concerns that have been raised 18 relative to the ongoing requirements for the taxpayer. 19 And I think we -- and maybe the way to do it is 20 to state the intent to try to address those requirements 21 and then have the Board elect language that we sometimes 22 have in legislation that allows the Board to promulgate 23 regulations to address them. 24 MR. HORTON: Okay. Is there a second? 25 MS. MANDEL: Yeah, second. 26 MR. HORTON: It's been moved and seconded. 27 MS. MANDEL: I'm waking up. 28 MR. HORTON: It's been moved and seconded. 20 1 Any objections? 2 MS. STEEL: Objection. 3 MR. LEONARD: Oh, yeah. 4 MS. YEE: Believe me we all (inaudible). 5 MR. HORTON: Ms. Olson, please call the roll. 6 MS. RICHMOND: Mr. Horton. 7 MR. HORTON: Aye. 8 MS. RICHMOND: Mr. Leonard. 9 MR. LEONARD: No. 10 MS. RICHMOND: Ms. Steel. 11 MS. STEEL: No. 12 MS. RICHMOND: Ms. Yee. 13 MS. YEE: Aye. 14 MS. RICHMOND: Ms. Mandel 15 MS. MANDEL: Aye. 16 MS. RICHMOND: Motion carries. 17 MR. HORTON: Thank you. 18 MS. SHEDD: Okay, the next -- 19 MR. HORTON: Ms. Shedd, please. 20 ---oOo--- 21 22 23 24 25 26 27 28 21 1 SUB-ITEM 3-2. 2 MS. SHEDD: The next item is 3-2. This would 3 eliminate the December 31, 2009 sunset date in order to 4 continue to require the Franchise Tax Board to provide a 5 line for payment of the Use Tax on the State income tax 6 returns. 7 This originally was put in in 2003, SB 1009, 8 that required the Franchise Tax Board to revise the 9 personal income tax and corporation tax returns to add 10 a separate line for Use Tax reporting, and accompanying 11 instructions in the booklet. 12 This has proved to be very successful in 2004. 13 We received 2.8 million in Use Tax revenue, and for 2008 14 that's gone up to $9 million. 15 The Use Tax line on the State income tax return 16 serves two primary purposes. First, it's a convenient 17 way for consumers and smaller businesses to comply with 18 the Use Tax law. And, second, it increases the 19 visibility of the tax for those who may not otherwise be 20 aware of their Use Tax liabilities. 21 So this would rein -- this would eliminate the 22 sunset date so the law would require the FTB to provide 23 that line on the income tax return in the future. 24 MR. HORTON: Discussion, Members? 25 MS. STEEL: Mr. Chairman, question. 26 That you say it's $2.8 million for 2004 and 27 then 2005 $9 million. This is -- I don't think it's 28 really successful. What's the com -- compliance rate 22 1 here? 2 MS. SHEDD: It's still very low. 3 MS. STEEL: So it's -- I heard it was less than 4 two percent. 5 MS. SHEDD: That's correct. 6 MS. STEEL: So why we are extending it? 7 MS. MANDEL: $9 million is $9 million. It's 8 doubled every year since it's been on the return, I 9 think, practically. 10 MS. STEEL: Yeah, but it's very low. And 11 people don't even have a clue that it's on the tax form. 12 MS. SHEDD: Well, I think the -- the average 13 Use Tax liability is like $35 per person. So there's 14 really not a cost efficient way -- 15 MS. STEEL: It's $47 per person. 16 MS. SHEDD: I'm sorry? 17 MS. STEEL: It's $47 per person. 18 MS. SHEDD: Okay, I -- 19 MR. HORTON: Just a point of clarification. 20 Not -- 21 MS. SHEDD: Okay, I'm sorry. 22 MR. HORTON: I don't know whether we need to 23 discuss it. 24 MS. SHEDD: That there really is not a cost 25 effective way to collect $47. 26 MS. STEEL: How we going to promote that 27 getting -- collecting more money? Just putting there on 28 the form doesn't mean that we can get more. 23 1 MS. SHEDD: Well, just in the past that we 2 have. We started at 2.8 of people voluntarily putting 3 it on the Use Tax line on the form, and it went up to 9 4 million in 2008. 5 MS. STEEL: Is it $9 million or 9 million 6 people? 9 million -- 7 MS. SHEDD: $9 million. 8 MS. STEEL: Okay. No more questions. 9 MS. YEE: Okay. 10 MR. HORTON: Members, I mean, one of the goals 11 of the Board of Equalization is to -- is to increase 12 compliance, and one of the ways that we do that is 13 through education, notification, making the taxpayer 14 aware of their liability or potential liability. 15 And inherent risk of not doing that is 16 subsequent penalties being imposed against the taxpayer 17 for failure to file, or failure to report their taxes. 18 Placing this information in a non-mandatory basis, I 19 don't know if there's anything mandatory about this, is 20 just giving notice to the taxpayer of a potential 21 liability. 22 I think it serves another purpose in that the 23 taxpayer now has another line item on the return that 24 gets included in their discussions with their client, is 25 that is there a Use Tax liability. 26 The -- the other side of this would be it would 27 also stimulate the discussion about a Sales Tax being 28 paid. Have you paid Sales Tax? Are there any other 24 1 deductions relative to this transaction of a Use Tax. 2 It might stimulate other legitimate discussions 3 about potential credit. So, I would be supportive of 4 this because it's just another means in which to -- to 5 notify, educate, inform and so forth. 6 I would be concerned if we started to move 7 along the lines of mandatory because in -- in doing that 8 there's a certain liability placed on the practitioner. 9 And I don't know that we want to necessarily go there at 10 this point. 11 Any other discussions? 12 MR. LEONARD: Mr. Chairman. 13 MR. HORTON: Yes, sir. 14 MR. LEONARD: The juxtaposition of these two 15 ideas is interesting. I suggested in 2003 that we do a 16 threshold that triggers the reporting requirement on the 17 income tax form. That if you make a major purchase that 18 you don't have to register as a vehicle but it's -- it's 19 equivalent to buying a vehicle dollar-wise, that you 20 trigger the obligation and that -- that you pay it on 21 your income tax return. 22 We're now saying on the bill before that that 23 if you're some kind of business or something and you 24 have $1,000 or more in liability you must register, but 25 if less than $1,000 of liability you still owe the tax 26 but you don't have to register. 27 We also collect information at customs. If 28 you're a wealthy traveler and you go overseas and you 25 1 buy more than $800 worth of goods, you must declare that 2 at customs. We get a copy, we charge you the tax. But 3 if you buy 799 we don't even know about it, we never 4 know. 5 For the $47 that the average household holds, 6 we're putting an obligation on their income tax return 7 that we're not doing to some of these others in the same 8 way. I think we ought to acknowledge the difficulty to 9 collect Use Tax. We ought -- we ought to put that into 10 the law in the same way we practically done with customs 11 and with the bill before us in the item before and say 12 if your Use Tax obligations are less than, and we put it 13 right on the income tax return, don't fill out this 14 line. We -- we -- unless you have receipts or 15 documentation or something. 16 Because what you're doing is for that $47 17 average obligation that's theoretically out there per 18 household you're making them go through every receipt of 19 every purchase they made in the prior calendar year and 20 determine whether or not they paid a California Sales 21 Tax. And if so, not include it. If not, then include 22 it. And then determine if they paid a Sales Tax in any 23 state in making that purchase that they made, and -- and 24 file some kind of declaration for deduction on that. 25 It becomes a nightmare for very small dollars. 26 We know it's not enforceable and than yet we're imposing 27 it here. And I wish the Board would see that and would 28 push for a threshold. 26 1 MR. HORTON: Any comments on that? Comments 2 from staff? 3 I mean, I think the question is directed to 4 staff as well as to colleagues. Any comments? 5 MR. LYLE: Well, we currently have -- Geoff 6 Lyle speaking -- we currently have the line on the Use 7 Tax return, and it has been bringing -- generating 8 revenue that way. It does allow another -- one of a 9 number of ways people can report. They can report on a 10 return directly to us. 11 It's more convenient this way. We have not 12 added a threshold on it to this point other than as you 13 mention there is the $800 if you bring it in from out of 14 state, that is included in the law. 15 MR. LEONARD: Out of country. 16 MR. LYLE: We do not have the threshold in 17 there now and there's -- at this point has been no 18 discussion to add one in, if the Board -- 19 MR. HORTON: What happens -- what happens if 20 they don't -- they don't put anything in? What happens? 21 I mean, if -- if they don't fill out that particular 22 section of the return, what happens? 23 MR. LYLE: Those returns are not audited by us. 24 If they put zero down there, we assume they had zero to 25 report. 26 MR. HORTON: I mean, are they -- are they -- is 27 it mandatory that they comply with this? 28 MR. LYLE: They do owe the Use Tax and it has 27 1 to be reported. 2 MR. HORTON: -- they owe the Use Tax. 3 MR. LYLE: But it's not mandatory on the 4 Federal income tax return. I'm sorry, on the State -- 5 MS. YEE: State. 6 MR. LYLE: -- income tax return. 7 MS. SHEDD: They can either -- I think the 8 instructions say they may either pay it to the Board 9 directly on a Use Tax return -- 10 MR. HORTON: Uh-huh. 11 MS. SHEDD: -- or pay it on their income tax 12 return. 13 MR. HORTON: In -- in the past I think that -- 14 or in the past the taxpayer really had no way of 15 reporting their Use Tax. It was very confusing, you 16 know. I can recall getting several phone calls, okay, I 17 owe the tax; how do I report it? 18 Come into the Board of Equalization and fill 19 out a form. Well, I'm not going to do that. Catch me 20 if you can sort of became the -- the rule of the day. 21 So, I think this sort of came about as a method 22 in which to make it convenient for the taxpayer. 23 Mr. Leonard, I think the -- the process of 24 accumulating the data to comply with the law isn't 25 changed, and that obligation isn't changed, if in fact 26 they decide to collect and report the Use Tax. 27 Now, I would agree from a systemic perspective 28 this Use Tax liability, the -- the success of the 28 1 program might be a -- might be indicative of taxpayers 2 who would report their Use Tax instead of reporting it 3 however they reported it in the past just simply using 4 this form. So, I don't know if that's a -- a 5 measurement of success or a measurement of success 6 relative to the dollar amount, but it certainly seems to 7 be a measurement of success to the efficiency of the 8 process of the method in which to comply with the law. 9 But I -- I would concur and offer up that we as 10 an agency need to take a look at a way in which we can 11 actually collect the tax or encourage, if you will, 12 out-of-state retailers to begin to self-report this tax. 13 And by accumulating this data we might have a better 14 sense of who actually is collecting -- who actually is 15 making the sales into California and not self-reporting 16 or not registering and possibly develop leads to 17 identify out-of-state companies that we should give them 18 the option of self-reporting or -- or entering into an 19 agreement with the Board of Equalization to collect the 20 tax from their customers. 21 It might even be an incentive for them to do so 22 in order to relieve the burden from their customers and 23 possibly maintain their market share by not burdening 24 their customers beyond the simple acquisition of the 25 product. 26 So those are my thoughts on this. And any 27 other discussion? Ms. Yee. 28 MS. YEE: No, I was just going to -- just as a 29 1 reminder that the Use Tax requirement is -- has been law 2 since 1935 and I just want to be sure that we're doing 3 our part to -- as far as not disadvantaging in-state 4 businesses who obviously comply with the Sales and Use 5 Tax laws. And it would be very cost prohibitive to have 6 an enforcement program that goes after individual 7 consumers. So our best shot really is public awareness 8 campaigns every year. 9 And I'm just reading right here our annual 10 holiday press release about Use Tax for on-line 11 shoppers. 12 So even though the dollars seem small in terms 13 of what we're yielding, it is having some impact and I'm 14 hopeful that as we can continue to do more public 15 education around this that the dollars will continue to 16 increase. 17 MR. HORTON: With that there's been a motion 18 and second. 19 Any objections? 20 MR. LEONARD: Objection. 21 MS. STEEL: Objection. 22 MR. HORTON: I apologize. I'm so accustomed to 23 saying, "Madam Secretary, please call the roll," but, 24 Ms. Richmond -- 25 MS. RICHMOND: Yes. 26 MR. HORTON: -- please call the roll. 27 MS. RICHMOND: Mr. Horton. 28 MR. HORTON: Aye. 30 1 MS. RICHMOND: Mr. Leonard. 2 MR. LEONARD: No. 3 MS. RICHMOND: Ms. Steel. 4 MS. STEEL: No. 5 MS. RICHMOND: Ms. Yee. 6 MS. YEE: Aye. 7 MS. RICHMOND: Ms. Mandel. 8 MS. MANDEL: Aye. 9 MS. RICHMOND: Motion carries. 10 MR. HORTON: Thank you. Ms. Shedd. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 31 1 SUB-ITEM 3-3. 2 MS. SHEDD: The next item is suggestion 3-3. 3 This would amend the Business and Professions Code to 4 authorize the Board of Equalization to request the 5 Contractor State License Board to deny or suspend a 6 contractor's license for failure to resolve any 7 outstanding final tax or fee liabilities. 8 Current law authorizes the Board to refuse to 9 issue, reinstate, reactivate or renew or suspend that 10 contractor's license if they -- if there is an 11 outstanding final liability which includes taxes, 12 penalties, interest and any fees that are assessed by 13 the Contractor's State Licensing Board, the Franchise 14 Tax Board, EDD, and the Department of Industrial 15 Relations. 16 This would simply put us on the same plane as 17 EDD and FTB as having this enforcement tool. It is 18 something that we would use as a last resort. 19 We have currently identified about $68 million 20 in contractors -- construction contractor tax liability. 21 MR. HORTON: Discussion after, but Ms. Shedd, 22 so are we going to codify that in -- in the law only to 23 be used as a last resort? 24 Just kidding. You don't have to answer. 25 Any discussion? 26 MS. RICHMOND: Excuse me, Mr. Horton, we also 27 have a public speaker for this item. 28 MR. HORTON: Oh, we do? Please. 32 1 MS. RICHMOND: Michele PIelsticker. 2 ---oOo--- 3 MICHELE PIELSTICKER 4 MS. PIELSTICKER: Good morning, Madam Chair, 5 Members of the -- of the Board. Michele Pielsticker, 6 California Taxpayers Association. 7 A similar bill to this was sponsored by the FTB 8 and it failed passage in the last two years -- oh, in 9 the Legislature. 10 One significant concern is that if a contractor 11 is to lose his license due to non-payment of tax -- his 12 or her license, I should say, all of his or her 13 employees are also disadvantaged and could lose their 14 jobs. Revocation of a license in essence sets off a 15 chain reaction. 16 We find it counter-intuitive to remove 17 someone's ability to make a living to force payment of a 18 financial obligation, such as a tax debt. And for these 19 reasons we're opposed to this legislative proposal. 20 MR. HORTON: Any further discussions? 21 MR. LEONARD: Mr. Chairman. 22 MR. HORTON: Mr. Leonard. 23 MR. LEONARD: Why don't we just take these 24 people and throw them in the poorhouse? This is the 25 dumbest idea I've ever heard. We've taken away their 26 ability to earn the money to pay the tax they owe us. I 27 mean, we -- we know their assets are limited or they 28 wouldn't have the tax liability. We -- we know they're 33 1 under fire in some ways and now we're going to say, "You 2 can't work." 3 And Ms. PIelsticker points out, your employees 4 can't work. So we're making them illegal contractors, 5 which is another series of -- of crimes, with no ability 6 to -- to earn a living to pay us. This -- this is one 7 of the dumber ideas I've heard. 8 MS. MANDEL: I have a question. 9 MR. LEONARD: Count me as a no. 10 MR. HORTON: Thank you. 11 MS. MANDEL: It was my understanding, 12 Ms. Shedd, that the -- the -- the Franchise Tax Board 13 already is in this particular provision. This was not 14 the same as the recently failed FTB Leg. proposal. The 15 FTB's already provided for in this provision. 16 MS. PIELSTICKER: That's correct. Current law 17 already authorizes EDD and FTB. 18 MS. MANDEL: Okay. And with respect to the -- 19 this does not happen if the contractor makes an eff -- 20 resolves the final liability, does -- does in the BOE 21 world resolve a final liability mean getting on an 22 installment payment plan? 23 MS. SHEDD: Yes, that's correct. 24 MR. HORTON: Further discussion? 25 Oh, boy. There is some merit in the concern, 26 in my opinion, that you have a similar situation when an 27 individual is released from prison, or an individual 28 that owes child support where they actually will go in 34 1 and take away their driver's license. And what happens 2 is, is that you take away their driver's license, they 3 can't drive to work. They can't drive to work, you know 4 ultimately catching the bus to work and they ultimately 5 lose their job and they can't pay the -- they can't pay 6 their child support at all at that point. 7 So, somewhere in the middle we as a -- an 8 agency have to -- I'm -- I'm hesitating because I'm 9 trying to figure out how to get to where we need to be. 10 This is different legislation than what we -- 11 we saw in the Legislature over the last couple of years. 12 This is more conformity with what currently exists and I 13 sort of get that. 14 When I asked the question in the beginning we 15 will use this as the last resort, what I was getting at 16 was is that is there a way to ensure that, one, we have 17 the tool and that the tool is there and available in the 18 event that the contractor just fails to report and pay 19 their tax liability. 20 I mean at some point we have a fiduciary 21 responsibility to California taxpayers to make sure that 22 we're collecting the tax. But there's a measured 23 balance approach in doing so. We want to make sure that 24 we're not counter-intuitive in our action. Counter- 25 productive, if you will. And that our efforts of 26 enforcement limits our ability to ultimately collect the 27 tax liability. 28 So -- and I present this to staff to say is 35 1 there a way of establishing a chain of events that has 2 to take place in order for us to be able to take the 3 contractor's license away. Or is that subjective and up 4 to the Board of Equalization to establish that in the 5 existing language of the proposed legislation? 6 MR. LYLE: Geoff Lyle speaking. Currently our 7 collection staff does take into consideration -- we do 8 want to get the money in from the taxpayer and we would 9 not want to destroy that ability. 10 This is, as I believe you opened with, is a -- 11 towards the last resort sort of use of it. 12 MR. HORTON: Yeah, but how is that codified in 13 law? I mean, this is a regulation. We're giving the 14 Board of Equalization the authority to take away 15 someone's license, theoretically take away their 16 livelihood. 17 What is restricting the Board of Equalization 18 or do you anticipate that being -- again, part of the 19 regulatory process where the Board would say, for 20 example, you failed to pay your taxes. We've 21 established an installment program. You failed to 22 comply with that. You are dissipating assets. Whatever 23 the various actions that the taxpayer may be taking 24 which is indicative of the fact that we need to be more 25 aggressive and now take the license -- and in addition 26 to that is a step in the process we can actually 27 restrict the license temporarily where it's restricted 28 for 30 days. We're not stripping it entirely, we -- and 36 1 maybe this is another question where he has to go back 2 and go through the process again -- we're just 3 temporarily removing the license. 4 These are -- I know it's a series of questions 5 and I hope you're tracking with me here and you can 6 respond to them. Any response from staff? 7 MR. LYLE: You asked if this would be part of a 8 regulatory process to give direction to our staff. And 9 we don't have that necessarily for collection purposes, 10 regulatory process for that. Many of what staff would 11 look to is through our internal -- our compliance policy 12 procedures manual for how -- the steps to take in this 13 sort of -- how to handle collections. There's a 14 chapter which has been before the Board a number of 15 times, now coming back next month, on collections and 16 the procedures that we take in the collection process. 17 And the particular steps that you are asking about would 18 be described in there. 19 You did -- jumping to a bit of a different 20 question you had about a restriction on a license for 30 21 days, I -- I did not have any answers for that. That's 22 more with the California State Contractors License Board 23 would -- would have that. 24 MR. HORTON: Here's -- here's another question. 25 I mean, the taxpayer -- once the liability is 26 established the taxpayer has an option of filing a claim 27 for refund. Is this -- could this take place -- would 28 that be contingent upon them resolving their claim for 37 1 refund? We finalize the liability. They now have the 2 option of filing a claim for refund and adjudicating 3 this matter in Court. 4 Is -- are we allowed to take the -- would we be 5 allowed to take the license prior to that? When you say 6 the -- the -- you said earlier that the -- the 7 legislation allows us to take the license once the 8 billing is final than we've determined that we can't 9 collect the liability. 10 Now, what is final? Is final con -- subsequent 11 to them filing a claim for refund? I mean -- 12 MS. WATERS: Well, the liability would have 13 been paid in order for them to -- to claim a refund, so 14 it wouldn't be an issue at that point. 15 But if they're protesting the audit, for 16 example, they're protesting the liability, and it was in 17 the course of the appeals process, the liability 18 generally isn't final and we wouldn't have the ability 19 to -- to request the Contractor's License Board to 20 suspend the license. 21 MR. HORTON: And I asked that -- kind of a 22 leading question because we haven't really determined 23 that the taxpayer owes the tax until its final point of 24 adjudication. 25 And so -- 26 MR. LYLE: The collection action, this would be 27 part of them, would be on hold until they go through 28 the -- the complete appeals process. 38 1 MR. HORTON: Okay. I'm going to be supportive 2 of this. I'm going to ask my colleagues to be 3 supportive of it. I think it is -- it is a tool that 4 we -- we certainly need to -- to have in place. 5 I would express to staff that -- I share Mr. 6 Leonard's concerns and I think it would be 7 counter-productive for us to take away someone's 8 livelihood or ability to -- to work. I also feel that 9 it's counter-productive to allow a taxpayer not to 10 report their tax. And so somewhere there is -- we've 11 got to kind of balance the two. 12 And maybe in the process of giving direction to 13 compliance through CPM -- CPU -- 14 MR. LYLE: CPPM. 15 MR. HORTON: -- CPPM -- it's coming back. You 16 know, I haven't got there yet, but it will come back. 17 Maybe in that process we can put some 18 restrictive language in there that says, for example, 19 that the taxpayer -- this is the taxpayer's failed to 20 meet certain requirements, he's failed to -- he's failed 21 to -- we've established an installment program -- 22 installment agreement to allow him to pay his liability 23 and he's failed to do that. He's failed to do this and 24 he's failed to do that, and at that point the option is 25 available to remove the -- the license. 26 I see we have someone here that -- 27 MS. HENRY: Right. 28 MR. HORTON: -- is eager to testify on this. 39 1 MS. HENRY: Randie Henry, Sales and Use Tax 2 Department. 3 I just thought I'd share we have the authority 4 to suspend somebody's DMV dealership license or their 5 liquor license. And this would be similar. And -- and 6 when we decide to use this as the last resort, it's 7 after a taxpayer has already had their seller's permit 8 revoked because they didn't -- either they didn't file 9 their returns or they haven't paid the returns, they 10 haven't entered a payment plan with us. They're not 11 working with us at all. 12 So, under this provision suspending their 13 contractor's State licensing license would only be for 14 contractors who have permits with us, that got revoked 15 because they didn't file the returns. Because first of 16 all they entered the delinquency cycle. 17 Just to give you an example, if somebody 18 doesn't file their fourth quarter return this year due 19 January 31, 2010 they won't get revoked till July. 20 They'll receive three notices before they ever get 21 revoked. And after they get revoked we're going to call 22 them, we're going -- we're going to write them, we're 23 going to go out to their business. So they're going to 24 get plenty of chances to file and pay their taxes. 25 If they don't communicate with us at all, they 26 don't file their returns, they don't pay the returns 27 after a long period of time we would like to have this 28 as a tool to be able to revoke their license. Just one 40 1 more thing that we would -- trying to persuade somebody 2 to pay their taxes. 3 But like the suspension of the dealer's license 4 or the liquor license, they're hardly ever used. It 5 just -- it's just another tool. 6 MR. HORTON: Yeah, I mean here's -- here's -- I 7 don't know how many of you have watched this movie, 8 "Cool Hand Luke," where -- 9 MS. MANDEL: That's one of my favorites. 10 MR. HORTON: Yeah, where he has this -- 11 MS. MANDEL: We're showing our age, though, I 12 think. 13 MR. HORTON: Exactly. He says, "What we have 14 here is a failure to communicate." I don't think we 15 have that. But it seems to be -- this -- this 16 discussion seems to be predicated on trust. So, do we 17 trust the agency to exhaust all of their other remedies 18 before moving forward to strip the -- the contractor of 19 his livelihood because that's what you're doing. 20 I mean, if you take the license away we may 21 very well never collect the liability. And -- and so, 22 at some point we have to rely on the professional 23 judgment of those who are making those decisions. 24 And I don't know if you can codify in law 25 professional judgment and so forth. But I know that you 26 can -- we can as an agency give direction to the 27 compliance unit as to when and how they use this tool. 28 And so, again, I mean this is one of those 41 1 situations that -- that I think as Board Members that 2 we're probably better served in doing that and -- and by 3 modifying the compliance manual to make sure that if 4 this action is taken it is an act of the last resort, as 5 Ms. Shedd indicated. 6 MS. SHEDD: Correct. 7 MR. HORTON: So, any other discussions? 8 MS. STEEL: Just one comment. I think we need 9 certain -- certain regulations to collect taxes because 10 our job is collecting taxes. But I don't think our job 11 is stopping people doing businesses. 12 So this is another regulation that is going to 13 make much tougher to businesses out there, especially 14 under recession. As is they're having very tough time 15 and we're taking these licenses away. They have to go 16 through -- liquor license and other licenses are 17 different because they can just apply it and get it. 18 But this kind of licenses that, you know, they have to 19 go through other processes and I don't think this is 20 really right things that we have to do as a Board 21 Member. 22 MR. HORTON: A question of Legal. Is it 23 possible to incorporate in the law a term of 24 extraordinary circumstances which sort of requires a 25 subsequent definition of that, which would be at that 26 point codified somewhere in the definitions as well as 27 the -- possibly the intent? 28 MS. WATERS: There could be language added that 42 1 would -- that would indicate that this would only be 2 used in -- in a manner of extraordinary circumstances as 3 prescribed by the Board or subject to that effect if -- 4 something general. Is that -- 5 MR. HORTON: Yes. 6 MS. WATERS: -- perhaps what you -- 7 MR. HORTON: Yes. 8 MS. CAZADD: Kris Cazadd, Chief Counsel. Maybe 9 under these circumstances in order to address the 10 concerns it might be the best option if Margaret agrees, 11 to put language in the legislation that would give the 12 Board regulatory authority to implement this via 13 regulation. And that way a lot of these criteria and 14 threshold criteria and issues that you've learned about 15 could be addressed by Board regulation in the future, so 16 the implementation would be subject to further 17 discussion and consideration. 18 MR. HORTON: Does that exist in -- in the 19 other -- with the other agencies? 20 MS. WATERS: No, the statutes don't provide for 21 that now. 22 MR. HORTON: The other statutes just allow the 23 subjective evaluation of when and when not to do this? 24 MS. WATERS: Yes. 25 MR. HORTON: Oh. 26 MS. YEE: Although, Mr. Chairman, the -- the 27 legislation doesn't have to prescribe or even allow us 28 regulatory authority -- 43 1 MR. HORTON: Yeah. 2 MS. YEE: -- for us to even exercise regulatory 3 authority. So -- 4 MS. CAZADD: That is true. 5 MS. YEE: I mean, to the extent that we need 6 clarification we can do that on our own. 7 MS. CAZADD: That is true, and Ms. Yee is 8 correct. The only value in putting that language in is 9 that it demonstrates the Board has an intent to further 10 drill down in terms of creating a regulation to 11 implement the provision. 12 MR. HORTON: Well, I -- I would share that. I 13 personally would never be supportive -- if we have an 14 existing authority, the last individuals I want to give 15 option of voting on that authority is the Legislature. 16 What you will find is that they will begin to sort of 17 tell you when and when not to do that. With all due 18 respect to my wonderful, wonderful colleagues who have a 19 very difficult job over there, I don't want to make it 20 any more difficult, I'm trying to prescribe the agency. 21 So, but to put language in there says -- it 22 sort of begins the process of defining when this can 23 happen. Extraordinary circumstances might be -- might 24 be a direction that we can go, and I would ask that we 25 further -- that staff consider that and that we further 26 sort of discuss that as we go through this process. 27 MS. SHEDD: Would you like us to take a stab at 28 drafting it and bringing it back in December? 44 1 MR. HORTON: First I'd like to hear from my 2 colleagues. I mean, get their thoughts on -- on where 3 they are relative to discussion to date. 4 MS. YEE: Yeah. Mr. Chairman, I -- I 5 appreciate the sensitivity around the concerns as to 6 when we actually would utilize this authority that this 7 proposal would allow the Board of Equalization. 8 I guess my own personal preference would be to 9 leave the statute fairly unfettered since it is 10 conformity first and foremost with what's already 11 allowed for the Franchise Tax Board and the Employment 12 Development Department, but I would say that this is an 13 issue that I would certainly be interested in taking up 14 either through -- or both the regulatory process and 15 through our compliance policies and procedures manual 16 clarification to be sure that there is clear 17 expectations of when we would actually have staff 18 utilize this authority. 19 MR. HORTON: Okay. Any comment? 20 MS. MANDEL: Just -- this is also, I think -- 21 2009 is the first year that continuing businesses can 22 seek an offer in compromise. Is that -- previously you 23 had to be out of business to seek an offer in 24 compromise. 25 MS. HENRY: That's correct if they can show 26 that they did not reimburse themselves for the Sales Tax 27 that they owe. 28 MS. MANDEL: Right. 45 1 MS. HENRY: So that is -- 2 MS. MANDEL: And we wouldn't know how many of 3 all of those delinquent numbers that we have which are 4 just on the Sales Tax side for contractors -- 5 MS. HENRY: No. 6 MS. MANDEL: -- but that -- that would be 7 another method of resolving -- 8 MS. HENRY: Absolutely -- 9 MS. MANDEL: -- their liability that they in 10 past years would not have been able to take advantage. 11 MS. HENRY: Well, let -- let me share that 12 first it's -- our current policy and procedures when we 13 revoke a liquor license or we revoke a dealer's license, 14 the tax collector cannot do that on their own. It has 15 to be approved and has to be submitted to -- to our 16 Special Procedures -- forgive me, I forget what they 17 call themselves now. 18 So -- so that has to be done. So there's -- 19 there's levels of review. There's levels of -- of what 20 we do first. Certainly not our intent to revoke 21 everybody's contractor's license. It's more as -- it's 22 a way to say, please, you know, we're talking to you. 23 We want to make a payment arrangement with you. We want 24 to work this out with you. But at the last resort -- 25 we've already revoked your permit, but you're going to 26 force us to do one more thing if we can't try to resolve 27 the issue. 28 So it really is not our intent to suspend 46 1 everybody's contractor's license. 2 MS. MANDEL: And when -- when you do it on 3 dealer licenses and that sort of thing there's some 4 notice before it happens. 5 MS. HENRY: Absolutely. Absolutely. 6 MR. HORTON: So, let's see if we can do this. 7 I mean, at some point I think we ought to move the -- 8 the intent of -- of the proposal is -- is a good one. I 9 mean, it's a good tool. It's conformity. It's what 10 others -- others are doing and they found this to be a 11 good tool, evidently. They've seen that -- they've only 12 used it in extraordinary circumstances. 13 So let's see if we can codify this discussion 14 in one or two words in the law that says -- and I don't 15 know what those words might be, but let's just start 16 with extraordinary situations or something to that -- to 17 that degree. And then I think what that does is it sort 18 of obligates the agency to define that. And it empowers 19 us to define that, and -- and establish the intent that 20 seems to be shared by all of the Members. The 21 methodology in how do we proceed to accomplish this 22 goal, we may differ. But it seems to be everyone's 23 concern to make sure that the license is not taken 24 unless we just -- it is the last resort. 25 So with that we got a motion and a second. 26 MS. MANDEL: Second. 27 MR. HORTON: Any further discussions? 28 Ms. Richardson. 47 1 MS. RICHMOND: Richmond. 2 MR. HORTON: Richmond. Richmond. I'm going to 3 write it down here somewhere. 4 Please call the roll. 5 MS. RICHMOND: Mr. Horton. 6 MR. HORTON: Aye. 7 MS. RICHMOND: Mr. Leonard. 8 MR. LEONARD: No. 9 MS. RICHMOND: Ms. Steel. 10 MS. STEEL: No. 11 MS. RICHMOND: Ms. Yee. 12 MS. YEE: Aye. 13 MS. RICHMOND: Ms. Mandel. 14 MS. MANDEL: Aye. 15 MS. RICHMOND: Motion carries. 16 MS. SHEDD: Just to clarify, you would like the 17 proposal to say in the statute that -- now it just adds 18 the Departments -- Department of Industrial Relations, 19 EDD, Franchise Tax Board and then adds the Board of 20 Equalization. You would like language in the statute 21 that says "under extraordinary circumstances"? 22 MR. HORTON: Oh. 23 MS. MANDEL: Yeah, yeah, I don't know that 24 you -- 25 MR. HORTON: Aah. 26 MS. MANDEL: -- have the other agency -- 27 MR. HORTON: We can't do that. 28 MR. LEONARD: Maybe I'll support it then. 48 1 MR. HORTON: I -- I tell you what -- I mean, 2 here's the challenge with -- with that. Let's do this, 3 let's just have a subsequent -- subsequent discussion 4 subsequent to the take -- calling of the roll. 5 And -- and in in fact there needs to be a 6 subsequent motion, we'll entertain it at that time. 7 Hopefully not. 8 I don't think you can. I mean -- and now I 9 understand what Ms. Yee was saying relative to the 10 conformity -- 11 MS. YEE: Right. 12 MR. HORTON: -- which is dropping in the Board 13 of Equalization. So let me do this. 14 Let me commit to -- to Mr. Leonard that it -- 15 that it's my intent to -- to codify some controls, if 16 you will, or in the -- in the audit manual that -- that 17 codifies the intent of the Members relative to only 18 being able to use this tool in an extraordinary 19 circumstance as the last resort. And possibly staff can 20 begin to move in that direction. 21 Even in conformity bills I've seen the 22 Legislature say enough is enough. So there may be 23 Members that we may have to have that discussion with 24 that it is the intent of the organization to codify this 25 in our own way and our own process in order to garner 26 their support. 27 So, unless there's other discussions on that -- 28 Mr. Leonard. 49 1 MR. LEONARD: Don't try to please me. 2 MR. HORTON: No, no, I mean it --- 3 MR. LEONARD: Yeah, I understand your -- I 4 appreciate what you're saying and -- and I appreciate 5 the commitment of staff. And -- and I understand that 6 clearly this would be a last resort. 7 Nevertheless, I would still oppose it. It's 8 bad policy. Mom always said because other kids are 9 doing it doesn't make it right. And the idea we're just 10 conforming, it strikes me as the weakest argument of all 11 and I think you made a point, Mr. Horton, if -- if the 12 Legislature had -- had full attention to some of these 13 ideas I think they'd ask a lot of questions like does it 14 work. Has -- has FTB or EDD actually collected more 15 money because of these new powers? And of the $68 16 million, how much of that would we collect with this new 17 power. I doubt if it's a dollar more. 18 We can already garnish and attach their assets, 19 their bank accounts. We can already step in as a keeper 20 warrant on their cash register. We can do lots of 21 things to these businesses today that are extraordinary 22 that I assume that we are doing when necessary. So this 23 $68 million is calculated -- I believe is probably out 24 of reach. There may be nothing there to get. If 25 they're clearly hiding assets on that, we have -- we 26 already have extraordinary powers short of license 27 suspension to go after tax evaders. And we do use those 28 when necessary. 50 1 So I -- if I were a Legislator I'd start asking 2 those questions of does this -- does these -- these 3 great powers to actually suspend someone's ability to do 4 business in California actually work. 5 And I think the answer is no, it's -- 6 MR. HORTON: Well -- 7 MR. LEONARD: -- it doesn't. 8 MR. HORTON: Well, Mr. Leonard, first let me 9 just clarify when -- if I say to one of the Members 10 that -- reference their name I'm actually referring to 11 the -- the philosophy or the thought that's been put 12 forth by that particular Member. So I'm saying that I 13 concur with your -- with your thoughts relative to the 14 potential of the contractor losing his ability to 15 generate income and how that could have a negative 16 effect. 17 But I think to the argument the Board is saying 18 that after we've done all of that and we're not 19 successful, then we have one last tool. 20 The other thing that I would share that -- and 21 I would -- is that here in California we probably have 22 somewhere around a 95 percent compliance. I don't 23 think -- 24 MR. LEONARD: That's true. 25 MR. HORTON: -- the taxpayers are not complying 26 with the law. And I would speculate to say that the 27 majority of the contractors probably comparable to what 28 we see in other industries, 90, 95, 96 percent are 51 1 complying. Those who aren't complying, my concern goes 2 to them, and that there are contractors who are -- who 3 intentionally seek to evade the law, intentionally seek 4 not to comply with the law. And they will do everything 5 within their powers not to report and pay their Sales 6 Tax liability. 7 And all of the current techniques that we have 8 is not necessarily sufficient to be able to go after 9 those particular bad actors. 10 So, to have a tool that can deal with the 11 extreme circumstances, the bad actors who are evading 12 the law intentionally, at some point I think it's -- 13 there's a certain element of wisdom to have all the 14 enforcement powers you can possibly have to protect the 15 interests of the State of California when you're dealing 16 with those individuals, to have a -- a law that is 17 punitive to legitimate taxpayers, to those who are 18 making mistakes, to those who have fallen on hard times, 19 it's wrong to do that. 20 And so somewhere hopefully we'll be able to 21 strike a balance as we begin to give staff direction on 22 how to use this tool. 23 Ms. Shedd, please continue. 24 MS. SHEDD: All right, the next item is 3- 25 MR. LEONARD: Are we going to act -- act on the 26 motion? 27 MR. HORTON: My -- 28 MR. LEONARD: Or are you putting it over? 52 1 MR. HORTON: No, it's been -- it's been moved 2 and second. I believe the motion -- 3 MR. LEONARD: Oh, that's -- was there no new 4 motion on the vote we already took? I guess that's what 5 I'm asking. 6 MR. HORTON: No. No. I mean I'm not -- 7 MR. LEONARD: Because the previous motion asked 8 that we -- 9 MR. HORTON: I'm -- 10 MR. LEONARD: -- change the proposal. You 11 dropped that, I thought. 12 MS. YEE: Yeah, I think -- 13 MR. HORTON: Well, I'm not interested in 14 adding the words at this -- 15 MR. LEONARD: I think you need a new motion 16 just to conform. 17 MS. YEE: Yeah. Why don't we -- I'm happy to 18 withdraw -- make a new motion to adopt the proposal as 19 it is before us with direction to staff to begin to 20 think about how to codify the concerns that have been 21 raised among us in the discussion this morning, either 22 through the regulatory process or through the CPPM 23 revision process. 24 MR. HORTON: Okay. It's been moved. Do I hear 25 a second? 26 MS. MANDEL: Second. 27 MR. HORTON: Moved and second. 28 Ms. Richmond, please call the roll. 53 1 MS. RICHMOND: Mr. Horton. 2 MR. HORTON: Aye. 3 MS. RICHMOND: Mr. Leonard. 4 MR. LEONARD: No. 5 MS. RICHMOND: Ms. Steel 6 MS. STEEL: No. 7 MS. RICHMOND: Ms. Yee. 8 MS. YEE: Aye. 9 MS. RICHMOND: Ms. Mandel. 10 MS. MANDEL: Aye: 11 MS. RICHMOND: Motion carries. 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 54 1 SUB-ITEM 3-4. 2 MS. SHEDD: The next proposal is to amend the 3 Unemployment Insurance Codes to allow the Board to use 4 the new employee register information maintained by the 5 EDD. Currently the new employee register information 6 may only be used by programs administered by EDD, the 7 Franchise Tax Board, public assistance programs, 8 Workers' Compensation programs, and enforcement of child 9 support obligations. 10 The BOE is not listed in that. Rather, we use 11 the EDD's on-line wage and employment information, which 12 is based on quarterly employment returns filed by the 13 employers. 14 Even though this information is available to us 15 shortly after the end of the quarter, the information is 16 relatively old when compared to the new employee 17 registry information, which is about four to six months 18 more current. 19 The FTB has -- says that this new employee 20 registry is a valuable tool and enforcement resource in 21 that it allows them to identify delinquent taxpayers and 22 begin collection action shortly after those taxpayers 23 have started a new job. 24 This proposal would allow the BOE to use that 25 new employee registry so they would have access -- we 26 would have access to the information to enhance our 27 ability to locate missing taxpayers and to collect 28 delinquent taxes. 55 1 MR. HORTON: Members, discussion? 2 MR. LEONARD: Mr. Chairman. 3 MR. HORTON: Yes, sir. 4 MR. LEONARD: I'm ambivalent -- more ambivalent 5 about this one but I have real privacy concerns. Most 6 of our -- our taxpayers are registered in a business 7 name and we get the taxpayer's name. I don't know if 8 it's their legal name. I don't know if it's a name 9 they'd use if they got a job with somebody. 10 So we're going to get a -- a list from EDD and 11 we're going to compare it to our delinquent list and 12 we're going to have some hits. 13 I -- I'd hope that we -- before we proceed to 14 billing that person that we would verify that they were 15 really the one that used to run that business that's now 16 closed owing money. If they're still open owing money, 17 I would assume we're going after them in the usual 18 collection process and they're not lost. 19 So this -- I think the only purpose of this is 20 somebody that just walks away from us, walks away from 21 their business, owes us money and we've lost them and 22 now that same name comes up in the EDD database, I -- 23 there's got to be some -- I don't know how difficult it 24 is because we don't -- I don't know if we have Social 25 Security numbers of the -- of the individual business 26 owners on our database that we can compare and run 27 against. I don't know what exactly data we're getting 28 out of EDD with this, so there -- there could be some 56 1 real privacy issues; we're billing people that aren't 2 the right people, and basically accusing them of owing 3 taxes when they don't. 4 So I -- I just had a lot of questions about 5 this, as whether it really is an effective tool for us 6 as it would be for other agencies. 7 MR. LYLE: In response -- this is Geoff Lyle 8 speaking. As explained in the beginning, that we do get 9 the same information, only four to six months later, and 10 we are working with it currently under those -- with the 11 information that we do have using confidentiality as 12 appropriate. This would -- all we're doing here is 13 getting it somewhat earlier -- earlier. And when it 14 comes to collections, the sooner you get the 15 information, the more opportunity or the more -- better 16 chance you have of actually making the collection. 17 MR. LEONARD: My question is slightly 18 differently. It's how useful this -- can you -- are 19 you really matching it up with delinquent accounts on 20 BOE. 21 MR. LYLE: Yes, that's how we are -- what we're 22 doing. 23 MR. LEONARD: Well, how do you do that? 24 MR. LYLE: Finding out whether or not they 25 have -- 26 MR. LEONARD: Are you -- are you just using the 27 name or do you have a Social Security number? What's 28 the identifier? 57 1 MR. LYLE: I think that Randie's going to hook 2 them for (inaudible). 3 MR. LEONARD: Ms. Henry. 4 MS. HENRY: Randie Henry. Social Security 5 number. 6 MR. LEONARD: So both we and EDD have Social 7 Security numbers on -- 8 MS. HENRY: Yes, that's correct. 9 MR. CHIANG: -- on all of our accounts -- 10 MS. HENRY: Right. 11 MR. LEONARD: -- as well as all of theirs? 12 MS. HENRY: Right. So we're -- we don't take 13 like -- you know, Randie Henry and try to see if they 14 have Randie Henry. 15 MR. LEONARD: Right. 16 MS. HENRY: We take my Social Security number 17 and we have to do that with -- in conjunction of there 18 has to be an account on our ACMS, our collection 19 program. So there has to be a liability or delinquency. 20 So it's like our -- our employees can't check this 21 with -- just arbitrarily check to see if there -- you 22 know, where their old boyfriend's working, or something. 23 They have to have a collection account, either because 24 it's delinquent or -- or because they owe money. And 25 then we run the Social Security number. 26 And we -- we do this all -- it's not -- it's 27 not even a list. It's just all through the collection 28 program. It just -- like Geoff Lyle was saying, we get 58 1 the information sooner, like the other taxing agencies. 2 MR. LEONARD: Okay, and we've never had a 3 problem with mis-identification? 4 MS. HENRY: No, there's -- there has been those 5 problems. Usually that happens maybe because -- 6 MR. LEONARD: I've heard horror stories about 7 Social Security numbers -- 8 MS. HENRY: Yeah. Yeah. 9 MR. LEONARD: -- which I'm -- 10 MS. HENRY: Right. Right. 11 MR. LEONARD: -- sure is what you're referring 12 to. 13 MS. HENRY: So -- I mean, we always have to be 14 mindful. If somebody calls us and they say this was 15 sent to the wrong person, we need to take the -- you 16 know, the extra steps to make sure that they are who 17 they say they are, and if we do indeed have the wrong 18 person. 19 You know, just like my -- my brother's the same 20 name as my father was and his father before him. 21 Those -- those things happen. So we need to be careful. 22 Usually when we have a mix-up is maybe because 23 we've sent a levy to a bank and -- and didn't have the 24 Social Security. Or maybe we're sending to where we 25 thought somebody worked, but the EDD match with the 26 Social Security number is actually very good. 27 MR. LEONARD: Thank you. 28 MS. HENRY: Uh-uh. 59 1 MR. HORTON: Any other discussion? 2 We'll entertain a motion. 3 MS. YEE: Move to approve the proposal for 4 Board sponsorship. 5 MR. HORTON: It's been moved. Is there a 6 second? 7 MS. MANDEL: Second. 8 MR. HORTON: Marcy Jo second. 9 Ms. Richmond, please call the roll. 10 MS. RICHMOND: Mr. Horton. 11 MR. HORTON: Aye. 12 MS. RICHMOND: Mr. Leonard. 13 MR. LEONARD: No. 14 MS. RICHMOND: Ms. Steel. 15 MS. STEEL: No. 16 MS. RICHMOND: Ms. Yee. 17 MS. YEE: Aye. 18 MS. RICHMOND: Ms. Mandel. 19 MS. MANDEL: Aye. 20 MS. RICHMOND: Motion carries. 21 ---oOo--- 22 23 24 25 26 27 28 60 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 November 17, 2009 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 60 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 18, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 61