1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 AUGUST 25, 2010 9 10 11 OTHER ADMINISTRATIVE MATTERS 12 ITEM P5 3a,b,c,d 13 2011/12 DRAFT BUDGET CHANGE PROPOSALS 14 15 16 17 18 19 20 Reported by: Juli Price Jackson 21 No. CSR 5214 22 Beverly Toms 23 No. CSR 1662 24 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Betty T. Yee of Equalization: Chair 4 Jerome E. Horton 5 Vice-Chair 6 Barbara Alby Acting Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per 11 Government Code Section 7.9) 12 Diane G. Olson 13 Chief, Board Proceedings Division 14 15 Liz Houser Deputy Director 16 Administration 17 Stephen Rudd Investigations 18 Division 19 Randy Silva Investigations 20 Division 21 Erin Little Sales and Use Tax 22 23 24 25 26 ---oOo--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 25, 2010 4 ---oOo--- 5 MS. HOUSER: My last item is to request the 6 Board's approval of four budget change proposals staff 7 had prepared for your consideration. These BCPs are due 8 to Finance by September 13th, so, we must proceed now in 9 order to meet their timelines. 10 If it pleases the Board, I will present a high 11 level overview of the four items, then respond to Board 12 comments or questions on the specific BCPs. 13 The first BCP requests the permanent 14 establishment of the Statewide Compliance and Outreach 15 Program, or SCOP, to identify and register entities that 16 are actively conducting business in California and 17 selling tangible personal property without a seller's 18 permit. SCOP has been very effective in coordinating 19 their efforts with cities, counties, the EEEC and the 20 Property and Special Taxes Department. 21 The Sales and Use Tax Department believes 22 there's a broader compliance effect by our greater 23 presence in the field. This effort contributes to the 24 legislature's intent to close the $1.5 billion gap 25 without increasing taxes. 26 The proposal requests $14,143,000 in fiscal 27 year '11-'12 and $14,119,000 ongoing and the conversion 28 of 147 limited term position to permanent. This is one 3 1 less position than the original proposal and 16 2 positions that have been in the Investigations Division 3 will be redirected to certain areas in Sales and Use Tax 4 Division. 5 BOE estimates $61.9 million in revenues for a 6 4.4 to 1 return. 7 The second BCP enhancing tax compliance 8 consists of three key components: enhancement of our 9 S. U. T. D. collection program, including resources to 10 enter into agreement without a State attorney to assist 11 in the collection of liabilities from out-of-state 12 debtors, additional auditors for the alcohol beverage 13 tax program, and resources to allow participation in the 14 high intensity financial crimes area task force, where 15 collection and enforcement activities can be enhanced. 16 The original proposal requests $7,885,000 and 17 74.5 new positions the first year and $7,739,000 and 18 80.5 positions ongoing. 19 BOE estimates revenues of 36.3 million for the 20 first year and 38.5 million ongoing. 21 We will be amending this BCP to add the appeals 22 and settlement cases revenue and acceleration programs. 23 We are still costing these elements, but our 24 initial analysis indicates an infusion of revenue of 25 approximately $113 million, 65.5 million for the 26 settlement cases and 47.5 million for the Appeals cases, 27 plus the acceleration of case resolution for the 28 taxpayer. 4 1 Staff's rough estimates of cost for this 2 program are $10.7 million for a benefit -- a rough 3 benefit to cost of 10 to 1 on this program element. 4 Once we have added the Appeals and Settlement component 5 to this BCP, a revised copy will be sent to your 6 offices. 7 ---o0o--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 1 ITEMP5.3C 2 MS. HOUSER: The third BCP, BOE Offices of the 3 Future, will also be modified to remove the request for 4 funding for the relocation of the San Diego and San 5 Marcos offices as we recently reached a tentative 6 agreement with the Department of General Services which 7 will allow BOE to terminate our lease at the San Diego 8 building and begin relocation in this fiscal year. 9 The revised BCP will request $150,000 in fiscal 10 year '11-'12 and for the first next two fiscal years to 11 begin the journey to relocate BOE to our headquarters of 12 the future campus. 13 We will provide copies of the updated BCP to 14 your offices. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 6 1 ITEM P5.3D. 2 MS. HOUSER: The final BCP, BOE Rent Increases, 3 would provide a budget augmentation of $2,336,000 that 4 would be needed to cover the estimated rent increases if 5 the State Treasurer sells bonds on the 450 N Street 6 building. 7 The sponsoring programs to -- are here to 8 assist in answering any questions you may have regarding 9 these concepts. 10 MS. YEE: Thank you, Ms. Houser. Questions, 11 Members? 12 Ms. Steel. 13 MS. STEEL: I just have a comment, and my 14 concerns about SCOP program here that every time SCOP 15 program comes out that I've been talking about it that 16 we had non-compliance rate of approximately 3.6 percent 17 came out, and out of that 1.3 percent represented that 18 some of big companies they didn't add the other spaces. 19 So, we had only 2.3 percent of SCOP -- SCOP permit 20 license checks are the one that we exactly found out. 21 Out of that that we have Investigation Division already 22 knows some of people's -- some of businesses, their 23 license had been revoked. 24 And so this is very, very small numbers that we 25 found out after SCOP program started. So, that's my 26 first concern that we are making permanent that -- this 27 is very, very low rate of the percentage that, you know, 28 we found, so I don't think we really need the permanent 7 1 positions for that. 2 And second thing is if we are doing the great 3 job every year that try to find everybody out then why 4 do we have to have this one as a permanent job? If we 5 have some sunset date to cut it off then I think that's 6 going to be good enough. 7 And third one is I'm always concerned about the 8 small business owners get abused and harassed by SCOP 9 program officers -- auditors and the investigators going 10 out. And, you know, as is that especially Peace 11 Officers, when they go out with their badges and even 12 that they try to be very polite in giving out tax 13 agency's business cards, they get really scared. 14 And then on the top of it I heard so many 15 stories in my district, I don't know about other but my 16 district itself that people calling in that they have to 17 follow certain process of SCOP investigations, but some 18 of auditors are not following that. And then that 19 started the audit because they are asking some of 20 employees -- most of the small stores actually they are 21 hiring minimum wage people that they don't know exactly 22 how much sales per day and other leave the business card 23 and then they supposed to leave, but in -- and then they 24 have to come back when owners are there or some 25 supervisors are there. 26 Instead of that that they start asking 27 questions to these -- the employees that who didn't have 28 a clue that, you know, what's going on there. 8 1 So I have a lot of problem with the SCOP 2 program. So if we going to keep it I really want our 3 employees to be trained to be courteous to the taxpayers 4 and very gentle, and not really make them scared. 5 I mean, as is when you bring tax agency's 6 business card you really get scared. So I really want 7 to make sure that, you know, they -- we are giving out 8 to the business owners like a little more help and do 9 something what they have to do, but not other than what 10 those process -- you know, more than what they have to 11 do. That's what I'm asking. 12 I have -- I have so much concern about SCOP 13 program here. 14 MS. HOUSER: Mr. Rudd. 15 MS. YEE: Thank -- thank you. 16 MR. RUDD: On -- I'll -- I'll comment on your 17 final point first. I totally agree. I think we take 18 these issues very seriously. We want our staff -- we 19 have expectations of how they'll inter -- do an 20 interchange with a business and confidentiality is a 21 very important point. 22 We'll -- we would stress that with our staff. 23 I think you make a -- a valid point. We should -- we 24 have these expectations but we need to follow up with 25 staff and make sure that they understand and use and 26 follow those expectations. And so we -- you know, we 27 will make an effort to train and -- and do that as a -- 28 a routine followup with our staff. I -- I agree 9 1 completely with that -- that point. 2 MS. YEE: Okay. Other comments? Ms. Alby, 3 please. 4 MS. ALBY: I actually agree. Ms. Steel just 5 gave my speech, but I'll add another little something 6 and that is I have a question. 7 When they go out to these businesses we've had 8 a number of complaints that they're not just checking on 9 their Sales and Use Permit but they're checking on other 10 permits. And if they lack those permits, not relative 11 to FTB or BOE, but other permits they're required to 12 have, they don't have them that we alert the -- the 13 agencies of that fact. Is that true? 14 MR. RUDD: During our visits we do have a -- an 15 exchange -- a relationship that we've started with the 16 counties and cities for city business licenses. So we 17 would exchange that information with the -- with the 18 cities, and we have had some feedback from them that 19 they have had -- they found that successful for them in 20 terms of getting people properly with their business 21 licenses. 22 So that is something that we do do in -- in the 23 program. 24 MS. ALBY: That's -- I just totally object to 25 that just for the record. I mean, we are talking about 26 tax administration, fair tax administration. That's our 27 job. And we're not the police. And we're not the 28 business police. And I just think that it's way beyond 10 1 the scope of the SCOP. 2 MR. HORTON: I'd do that with you. 3 MS. YEE: Thank you. 4 MS. STEEL: But I thought SCOP program as we 5 try to find out that they have their sales permit and 6 paying sales taxes. And why we have to expand that -- 7 that not just harassing employees but on the top of it 8 that we have to check other licenses? 9 MR. RUDD: Well, we -- we wouldn't -- I would 10 clarify that we also check other Board administered 11 programs for. So if we -- if they need a -- some other 12 type of license, a cigarette or -- or environmental fee 13 or some other type of license that's part of our 14 auditing program and it's part of our SCOP program to 15 check for those other licenses. So, we would take that 16 information and pass it to those other programs so that 17 they can follow up for proper licensing. 18 It's -- it's something that we've tried to do 19 to make sure -- like in the tank -- tank program, that 20 they get the proper permits in a timely manner so they 21 can address those issues as soon -- as soon as they can. 22 MS. YEE: Let me ask you as a follow on to the 23 concerns raised, and I think it's great that you are 24 looking for not only possession of a seller's permit but 25 other relevant licenses and permits under the purview of 26 this Board, but how are we doing in terms of 27 coordinating with other agencies or departments, local 28 or State, that also make visits to businesses? 11 1 I mean, if I were a business owner I would not 2 be thrilled about getting half a dozen visits from 3 different agencies and looking at, you know, the 4 business operation for licensing and permit issues. 5 MR. RUDD: I could answer the question in terms 6 of our coordination with the EEEC. We -- we have 7 coordinated our visits with them when there's a business 8 of interest or types of businesses of interest with 9 them. 10 MS. YEE: Okay. Now, that -- that's an 11 enforcement effort. 12 MR. RUDD: Enforcement. 13 MS. YEE: Okay. What are we doing in terms of 14 other outreach efforts, with other State or local 15 entities? I'll -- I'll get to EEEC in a sec. 16 MR. RUDD: Okay. Just that our outreach 17 program discusses other entities. We go to speaking 18 engagements. We talk about it. We don't -- as of yet 19 hadn't -- haven't done a lot of coordination with cities 20 on visits. But we -- we do -- definitely they know that 21 we're visiting and provide that information to the -- to 22 the cities. So I -- 23 MS. YEE: Okay. Let -- let me -- 24 MS. LITTLE: One additional item -- thank you. 25 Erin Little at the Sales and Use Tax Department. 26 We have been contacted by some other agencies, most 27 recently the Employment Development Department. And we 28 are trying to combine effort so that we don't visit 12 1 separately. 2 So we have recently included them in some of 3 our canvassing. One of our items certainly is 4 confidential information. 5 MS. YEE: Right. 6 MS. LITTLE: So they do come and observe our 7 program. Some agencies are interested in our program. 8 But we do maintain a confidentiality with those agencies 9 while we're out there canvassing. 10 MS. YEE: Okay. And I guess what I'm looking 11 for in terms of an outreach component is that we're 12 all -- we're each each other's ears and eyes as we're 13 out in the field. Not necessarily sharing information, 14 but certainly if we detect anything that's under the 15 purview of another agency that there's coordination 16 there. 17 MS. LITTLE: We do have the exchange agreements 18 with the Franchise Tax Board and initially with EDD -- 19 MS. YEE: Okay. 20 MS. LITTLE: -- for the information that we 21 gather in the field. We have a program to exchange that 22 information when we come back to the office. 23 MS. YEE: Okay. 24 MS. LITTLE: Yeah. 25 MS. YEE: Thank you. Thanks, sir. 26 So then with respect to the EEEC program, which 27 is more enforcement oriented, at what point does SCOP 28 get involved there? Tell me kind of the chain of events 13 1 that -- how that interacts with SCOP. 2 MR. RUDD: The EEEC has selected a -- a group 3 of businesses of -- of interest that they describe. And 4 of that group some of them are retailers and some of 5 them are more service enterprises. 6 So, the Board has agreed to coordinate efforts 7 on those that are -- would be required to hold a 8 seller's permit that when they are going to do 9 enforcement activity because they have some leads that 10 indicate there's, you know, a reason for them to visit a 11 particular area or a group of businesses or they have 12 a -- a day set up for that, the Board -- the SCOP people 13 attend that day and visit the business and address the 14 Sales and Use Tax issues during that visit so it is a 15 coordinated effort. 16 MS. YEE: Okay. Let me express my concern 17 about the SCOP program and it really -- I'm going to 18 support the proposal because I do think that we're 19 underselling the program a bit given all of the other 20 legislative mandates that have been placed on this 21 agency, including a number of the more recent Use Tax 22 efforts that the Legislature has mandated on us. 23 And I hope SCOP is kind of expanding its reach 24 to also do outreach relative to Use Tax compliance, as 25 well. 26 But it's going to be a very, very tough sell to 27 make -- to have these 147 positions made permanent. 28 And I guess my question is, at some point does 14 1 the revenue gain begin to decline because we've done 2 such a great job at outreach and -- and ensuring 3 compliance? 4 I mean, the -- the revenue impact here is I 5 think -- what was it like, 61 million a year annually? 6 How does that change over time if we're doing a really, 7 really good job? 8 MR. RUDD: I -- I think we've -- have looked at 9 the data. We've covered about 27 percent of permits in 10 a three-year period of time. We recognize that there's 11 probably several -- many years left of -- of canvassing 12 before we would initially be able to look at the 13 original hundred percent. 14 But one of the big factors is that our -- our 15 Policy Division analysis says that there's a turnover 16 rate of permits, and that we're -- we're having, you 17 know, 15 -- 20 percent turnover in permits. 18 And so by the time we get through a five- or 19 six-year period we have a new group that had never been 20 visited before. 21 MS. YEE: Uh-huh. 22 MR. RUDD: And I guess our success really kind 23 of coordinates closely with our ability to address the 24 underground economy and get, you know -- and get our 25 information out there and do outreach and education 26 about reporting and getting permits and knowing what's, 27 you know, taxable and what's the right, you know, number 28 of permits or the type of permits to have. And so, 15 1 those are all elements that lead into the money. 2 But I think we feel that there's a fairly 3 straight line or stable revenue avenue there. 4 MS. YEE: Okay. And then to Ms. Steel's point 5 about training, how is training being handled with 6 respect to the newer legislative mandates that are being 7 placed on us, particularly in the Use Tax compliance 8 area? 9 MR. RUDD: Well, we are definitely 10 incorporating new programs in the SCOP. A good example 11 would be the ABX4-18, qualified purchaser program. 12 MS. YEE: Yes. 13 MR. RUDD: Visiting retailers that had seller's 14 permits has now expanded into, you know, visiting 15 businesses door to door, and determining whether or not 16 there is an -- a Use Tax permit requirement for those. 17 So, we are coordinating that and -- and working 18 that into the program. SCOP is pretty flexible in that 19 regard. We can add -- we can have the staff look for -- 20 for many, you know, different things as those mandates 21 come. And we were trying to do ABX through outreach and 22 through other -- because there's so -- the numbers are 23 so large. 24 MS. YEE: Right. 25 MR. RUDD: But the SCOP program would back -- 26 back that up and be informative and can -- and could 27 hand out information as they visit those locations 28 and -- and kind of maybe start to eliminate some of the 16 1 myths about that program because we're -- our feedback 2 is -- 3 MS. YEE: So, let me take the qualified 4 purchaser program as an example. So we are now visiting 5 businesses door to door because there are, obviously, 6 non-permitized businesses that are subject to the 7 qualified purchaser program, right? 8 MR. RUDD: Uh-huh. 9 MS. YEE: So what does that do with respect to 10 our penetration of the existing permit holders? 11 MR. RUDD: The way we were addressing that was 12 that we can tell when we make a visit into a zip code 13 area those who have permits and those who do not. 14 So those that have been issued an ABX4-18, 15 qualified purchaser permit number, would not necessarily 16 be a place that we would need to visit. They would have 17 a permit already for that location. 18 So we would be looking more for businesses that 19 may not have been captured in that -- 20 MS. YEE: Okay. 21 MR. RUDD: -- in the process. So -- 22 MS. YEE: Here -- here's my heartburn. You 23 just gave me heartburn. 24 MR. RUDD: I give you heartburn. 25 MS. YEE: Okay. And that is -- 26 MR. RUDD: Well, it's -- it's a -- yeah, moving 27 target. 28 MS. YEE: No, no, no, I understand that. And 17 1 I'm still going to support this proposal but here's what 2 I want to be very clear about. We are layering 3 additional mandates on top of an already existing 4 effort. And I've spent -- Ms. Mandel, I have, Ms. Alby 5 in her private capacity since we've been part of this 6 organization -- have really done a lot to try to get 7 back to truth in budgeting. And I want this to be 8 honest about what this program is. 9 Is it SCOP as we originally initiated it or is 10 it something bigger? And if it's something bigger let's 11 talk about what that is. 12 It either helps a justification but I just 13 don't want there to be any misperception about what 14 we're doing in this program, who we're visiting and what 15 we're gonna -- and what the results will be. 16 MS. LITTLE: And if I may add -- 17 MS. YEE: Yes. 18 MS. LITTLE: -- Madam Chair, originally the 19 SCOP program was visiting all service businesses. That 20 was part of the original SCOP program. So in fact with 21 ABX4-18 we're able to limit some of those businesses, we 22 can see that businesses are already permitized. 23 So actually we're visiting less and focusing more on the 24 -- the retail location. 25 MS. YEE: Okay. And I'm just concerned because 26 not every mandate that we've gotten has had resources 27 attached to them. And so I just want to be clear about 28 what the resources are being directed to. And just so 18 1 there's no misunderstanding on the part of the 2 Legislature. Okay. 3 MS. STEEL: One more. 4 MS. YEE: Ms. Steel. 5 MS. STEEL: -- comment that Mr. Roger said that 6 when we make this program for permanent we're going to 7 have steady stream tax as being -- going to be 8 collected. How it can be when you did a good job and 9 find out that, you know, people -- the businesses that 10 who don't have permits and we are asking them to get the 11 permits, and how you do that? 12 And how can we have steady stream of taxes 13 going to be collected? That's the first question. 14 And second question is, compliance rate is less 15 than 2.3 percent right now, and out of that that 16 Investigation Division already knows a lot of businesses 17 out there, so we are actually wasting our resources that 18 have these petitions going out already know that those 19 businesses don't have it. 20 So, how we going to have more people working on 21 that and try to collect more money? If we did a good 22 job that you said, as -- as you said, and how much has 23 been collected, that how -- how we going to just keep 24 doing it? And same thing that then at that point within 25 few years point that they -- everybody has permits at 26 that point. So why we have to make this program for 27 permanent? 28 MR. RUDD: I guess my response is that over the 19 1 34 years I've worked here there's new people every year 2 that don't have seller's permits that should have 3 seller's permits. And that's because there's a turnover 4 in those accounts. 5 MS. STEEL: But is that going to be same amount 6 have that -- that is over 2.3 percent? 7 MR. RUDD: I think we're using the statistics 8 that we found in the pilot to project a fairly low 9 percentage of what that workload would be and the staff 10 that we would need to address that level. 11 MS. YEE: But -- but the turnover has been 12 fairly consistent, yes? 13 MR. RUDD: The turnover has been fairly 14 consistent -- 15 MS. YEE: Okay. 16 MR. RUDD: -- yes. We can -- 17 MS. STEEL: So the turnover is more than what 18 we found, that 2.3 percent -- it's more than 2.3 percent 19 of the -- 20 MR. RUDD: The -- the turnover of -- of 21 seller's permits and people who need seller's permits 22 feeds the 2.3 percent. The 2.3 percent probably is -- 23 is a figure that may stay relatively flat or the same. 24 We might make some, you know, inroads into that number 25 and -- and reduce it but I think that it -- because of 26 that turnover and -- and the fact that some people just 27 don't get the seller's permits in -- in a timely manner 28 that -- that our compliance enforcement and our -- and 20 1 our presence in the field is a -- is a factor that we 2 think really helps, you know, get that information out 3 there. And hopefully that that -- that will reduce that 4 number over time. 5 MS. STEEL: Reduce number over time? 6 MR. RUDD: Well, reduce the number of people 7 without seller's permits over time. But based on our 8 historical -- 9 MS. STEEL: So if we do that then why we need 10 the permanent program here? 11 MR. RUDD: Because our historical data 12 indicates that that number consistently shows that there 13 are people that do not have seller's permit when we do 14 these -- these visits. So -- 15 MS. STEEL: But these 2 -- 2. -- out of 2.3 16 percent that we already know some of -- some businesses 17 their license been already revoked. So we know that -- 18 that who we are going out. 19 So, I -- I really don't see the numbers here 20 that, you know, why we have to make this one for 21 permanent, too. 22 MR. RUDD: Yeah, the 2.3 percent doesn't 23 include any of the revoked accounts. 24 MS. STEEL: No, no, no, 2.3 percent are revoked 25 and 1.3 percent together is 3.6 percent. And this is 26 what your report says, not what I'm just making up here. 27 I'm just reading it. 1.3 percent are the one they 28 already have businesses -- business permits, but they 21 1 just didn't add for other stores that they have. So -- 2 MR. RUDD: Right, they didn't have a 3 sub-permit. 4 MS. STEEL: Right. Exactly. 5 MR. RUDD: And the 2.3 percent of those that 6 don't have a permit at all. 7 MS. STEEL: Right. But out of that that 8 Investigation Division already know that -- knows that 9 some of the number out of 2.3 percent that they don't 10 have it. So it's much less number than that, but I 11 never got their number from the Department. 12 MR. SILVA: You're looking at about 26,000 13 unlicensed permits -- 14 MR. RUDD: It -- 15 MR. SILVA: -- statewide and we're looking at 16 300 for -- 17 MR. HORTON: We can hear you. 18 MR. RUDD: He's saying that the 2.3 percent ren 19 -- represents about 24 -- 21,000 unpermitted businesses, 20 but we only refer 300 cases a year to Investigations to 21 -- to deal with revoked sellers' accounts. 22 So there's a -- you know, a vast difference. 23 MS. STEEL: I want to know exact number, 24 though, not just 300 or so. But I'd rather have the 25 exact number, exactly then how many that we know. 26 MR. RUDD: We -- we have a number for last 27 fiscal year. We can send you the report that we get 28 from the Investigations Division. 22 1 MR. SILVA: How many we know are revoked. 2 Excuse me, Randy Silva with the Investigations Division. 3 MS. STEEL: How many of that 2.3 -- how many 4 out of that 2.3 percent that how many businesses and 5 then how many businesses we already know that they don't 6 have license but they are still having their businesses? 7 So that's what I'm asking. 8 MS. YEE: Okay. Thank you, Ms. Steel. 9 Other questions? Mr. Horton. 10 MR. HORTON: Yes, Madam Chair. Thank you. 11 I'm -- I share my colleagues' concerns about the 12 sensitivity training and think it should be incorporated 13 and in actual training course where we take a moment and 14 if necessary contract out so that someone coming -- can 15 come in and provide -- if it's not internally, certainly 16 if that skill set is within the organization I want to 17 make sure that that training is there. Many of the -- 18 of the taxpayers or potential taxpayers, there are a 19 number of challenges. Certainly, some of them don't 20 file and obtain their permit because of a lack of 21 knowledge of the necessity to do so and -- and -- and 22 timing on when that actually occurs. 23 So, I think in order to address the lack of 24 knowledge in -- in some cases language barriers and so 25 forth that we need to incorporate how do we go about 26 approaching these particular type of business folks. 27 But God willing and the creek don't rise we 28 will have more folks entering the business. The number 23 1 of individuals who will be taking out permit -- permits 2 will just grow. In fact, California needs that to -- to 3 happen. 4 I also want to sort of share, I had the same 5 sentiments when I first started auditing. I went in and 6 I conducted an audit and I spent enormous amount of time 7 making sure that the taxpayer was aware of what was 8 required. Because at that time the focus of the 9 organization was on compliance. We did very little 10 evaluation -- I mean, we did the evaluations but that 11 was not -- the evaluation as to the tax collection, but 12 the focus was on compliance, to ensure that -- in this 13 case last year the $53 billion that is administered by 14 this organization in some form or fashion continues to 15 be reported and that everyone that has a permit 16 continues to -- to report. 17 And I figured I did a yeoman's job and at the 18 end of the day three years from now wouldn't be a 19 problem. But that wasn't the case. Three years later 20 there was still some issues and still some problems out 21 there. 22 But I -- I would share with the -- with my 23 colleagues as I dealt with this in the Legislature 24 focusing on the underground economy, starting out with 25 AB 71 to establish the investigators and then the bill 26 to establish the disclosure of the top 250 cheat -- tax 27 cheats and a number -- about four or five other sort of 28 investigation type legislation relative to the Board of 24 1 Equalization and Franchise Tax Board, Internal Revenue. 2 There are a number of reports out there that 3 indicate that in the State of California there's about 4 $30 billion in the underground economy, and that the 5 number of un-permitees in California is extremely large. 6 Our agency focuses on those who are filing permits or 7 the basic honest taxpayers. And -- and in doing so, 8 we're only looking at a small percentage of those. 9 And the SCOP program as a pilot has only taken 10 a look at a small percentage and a small category. But 11 as we begin to hopefully expand that -- the duties of 12 that group or the -- or the activities and the 13 investigation area, if the numbers presented by the 14 Internal Revenue and a number of other study groups is 15 true and if in fact there is quite a bit of revenue out 16 there that's being -- that we can recapture for the 17 people of the State of California, this will be the tip 18 of the iceberg. The functions of this group will be 19 just the tip of the iceberg. And I think we can get 20 there relatively quickly. 21 The other things that the organization is 22 doing, the restructuring, the new office policies and so 23 forth, will enable us to do that. I would share that in 24 the City of Los Angeles we're looking at reconciling -- 25 having the ability to have the City of Los Angeles, 26 their computer communicate with the Board of 27 Equalization's computer so that we can have a 28 cross-reference and identify those who have business tax 25 1 permits but don't have Sales and Use Tax permits. So we 2 have an immediate exception report and just as a 3 courtesy, we don't even have to go visit them, we can 4 send them a notice and say maybe you didn't know that 5 you needed to also obtain a seller's permit. And now if 6 Randie Henry is correct, we -- you can get -- you can 7 even do it on line. You don't even have to come in. 8 So, I got to tell you, I'm excited about the 9 potential of this; not only the potential revenue but 10 most of all the -- the potential enhancement of business 11 opportunities, individuals who have the opportunity to 12 comply with the Sales and Use Tax law, and report their 13 fair amount of -- of taxes. 14 There -- there certainly has to be some 15 training and we've got to be smarter about what we do. 16 I think that the existing program can actually be more 17 efficient and proficient, if you will. I think we can 18 broaden our focus to other areas. 19 I was recently reading a report that indicated 20 that California is the number one target for counterfeit 21 pharmaceutical products that are being manufactured 22 abroad and shipped into the State of California. 23 I think maybe three months ago we did an 24 audit -- someone did an audit of the Blockbusters, three 25 or four Blockbusters here in Sacramento. And what we 26 found was, is that a number of the videos that were 27 being sold at Blockbusters, in one of the larger video 28 stores, were counterfeit. And so this is growing very 26 1 rapidly, and I think I shared before in Los Angeles, and 2 particularly downtown Los Angeles, you actually have 3 organized crime that is -- has decided that they can 4 enter into the retail business and the penalty for not 5 reporting your taxes is quite different than the penalty 6 for participating in other illegal activities. 7 So, that counterfeit -- those counterfeit 8 products are coming in on a regular basis into our ports 9 and being distributed. And not to mention -- well, I 10 won't go there, but -- so, I -- I think this is just the 11 tip of the iceberg, and I think we ought to articulate 12 that as we move the bill forward. 13 I mean I agree -- agree with Madam Chair as to 14 full disclosure as to what the potential of this program 15 is, and what the agency sees on the horizon as to what 16 we can deal with. And there's quite a bit of 17 information out there that deals with this in the 18 construction trade, alone. 19 I mean, the estimates are just through the roof 20 as it relates to construction activity which has a 21 direct correlation, if you will, to Sales and Use Tax 22 and that the cost -- the tax that's attributed to the 23 material and the fixtures that are being used in this 24 process. 25 So, the -- I agree with my colleagues that 26 we're -- we're not the business tax investigators. But 27 we may have an investigative unit that is responsible 28 for doing that. But when you approach the legitimate 27 1 taxpayers from am investigator's perspective, the 2 presumption is something's wrong. And typically that's 3 based on -- on previous or -- information. 4 So, I think it's important that when we go into 5 these businesses that we go in with the presumption that 6 the taxpayer is -- is -- that the error -- excuse me, 7 strike that -- that the error is a result of a -- of a 8 human error, lack of knowledge, and our job is there to 9 assist, to educate, to enhance compliance and not to 10 prosecute, arrest or -- or collect taxes for that 11 matter. 12 At the end of the day I think if we do -- if we 13 do our due diligence, if you will, in enhancing 14 compliance, the money will be collected. I mean, the 15 history of the Board of Equalization is such that we 16 audit -- we examine a very, very small percentage of 17 California taxpayers, and we continue to generate 18 revenue year after year after year after year. For some 19 reason it just doesn't go away. 20 I'm one of those that -- that would like the 21 SCOP program to go away. In fact, I'd be okay if the 22 Board of Equalization went away. Unfortunately, I doubt 23 if that happens. I mean, history has said that there 24 will always be a place for this agency in this business 25 climate that we have called capitalization. 26 Thank you. 27 MS. YEE: Thank you, Mr. Horton. 28 Other comments, Members? 28 1 Okay. Pleasure of the Members -- 2 MR. HORTON: I don't want anyone to lose their 3 job now. 4 MS. YEE: Oh, now. Pleasure of the Members? 5 Would you like to take these up one at a time for a 6 vote -- for a motion? 7 Okay, very well. 8 So the first item is the -- excuse me, let's go 9 back. 10 Okay. Our first Budget Change Proposal is the 11 permanent establishment of the SCOP positions. Is there 12 a motion? 13 MR. HORTON: Move adoption. 14 MS. YEE: Motion by Mr. Horton. Is there a 15 second? 16 I'll second that motion. 17 Any further discussion? 18 Please call the roll. 19 MS. OLSON: Madam Chair. 20 MS. YEE: Aye. 21 MS. OLSON: Ms. Alby. 22 MS. ALBY: No. 23 MS. OLSON: Ms. Steel. 24 MS. STEEL: No. 25 MS. OLSON: Mr. Horton. 26 MR. HORTON: Aye. 27 MS. OLSON: Ms. Mandel. 28 MS. MANDEL: Aye. 29 1 MS. OLSON: Motion carries. 2 MS. YEE: Okay. Next Budget Change Proposal is 3 the enhancing tax compliance proposal to expand our 4 audit and collection programs and resources for our 5 HIFCA pro -- initiative. 6 Is there a motion? 7 MR. HORTON: Move adoption. 8 MS. YEE: Motion by Mr. Horton, seconded by 9 Yee. 10 Further discussion? 11 MS. STEEL: Objection. 12 MS. YEE: Okay. Please call the roll. 13 MS. OLSON: Madam Chair. 14 MS. YEE: Okay. Aye. 15 MS. OLSON: Ms. Alby. 16 MS. ALBY: No. 17 MS. OLSON: Ms. Steel. 18 MS. STEEL: No. 19 MS. OLSON: Mr. Horton. 20 MR. HORTON: Aye. 21 MS. OLSON: Ms. Mandel. 22 MS. MANDEL: Aye. 23 MS. OLSON: Motion carries. 24 MS. YEE: Okay. Next proposal is the field 25 office footprint funding for -- yeah, this is the Office 26 of the Future field office footprint funding. 27 Is there a motion? 28 MS. ALBY: So moved. 30 1 MS. YEE: Motion by Ms. Alby. Is there a 2 second? 3 Yee will second. 4 Any further discussion? Objection? 5 Hearing none, motion carries. 6 And the final Budget Change Proposal relates to 7 our rent increase. It's a placeholder proposal. 8 Is there a motion? 9 MR. HORTON: Move adoption. 10 MS. YEE: Motion by Mr. Horton, seconded by 11 Yee. 12 Discussion? 13 Without objection, that proposal is approved. 14 Thank you very much, Ms. Houser. Thank you 15 everyone. 16 MS. HOUSER: Thank you very much. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 31 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 *datetaken I recorded verbatim, in shorthand, to the 10 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 pages 1 13 through 5 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 1, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 32 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 August 25, 2010 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 pages, 13 pages 6 through 31 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 10, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 33