1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 16, 2010 10 11 12 13 14 15 BUSINESS TAXES COMMITTEE 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 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 Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson Chief 13 Board Proceedings Division 14 For Board of Equalization Staff: Suzanne Buehler 15 Sales & Use Tax Department 16 Randy Ferris Legal Department 17 Phillip Bishop 18 Property & Special Taxes Department 19 Also Present: Bruce Nissen Fox Barrel Cider 20 21 ---oOo--- 22 23 24 25 26 27 28 2 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 16, 2010 4 ---o0o--- 5 MS. YEE: Good morning. Let's convene this Board 6 of Equalization meeting. 7 Ms. Olson, our first item, please. 8 MS. OLSON: Our first item for this morning's 9 agenda is the Business Tax Committee, Ms. Yee. 10 MS. YEE: Thank you very much. 11 Members, we have one item before the Business Taxes 12 Committee. And this relates to classifying wine-based 13 products for taxation purposes. And let me have the staff 14 introduce the issue for us. Good morning. 15 MS. BUEHLER: Good morning. I am Suzanne Buehler 16 with the Sales and Use Tax Department. With me today are 17 Randy Ferris of our Legal Department, and Phil Bishop of 18 our Property and Special Taxes Department. 19 We have one agenda item for the committee this 20 morning. Staff is seeking your approval to begin an 21 interested parties process to clarify the alcoholic 22 beverage tax treatment for wine-based products containing 23 distilled alcohol. I would like to turn it over to 24 Mr. Ferris and Mr. Bishop to provide you with more 25 information. 26 We also have a visual presentation to help 27 illustrate the issue. Following the presentation, I 28 believe we have some speakers and we will be available to 3 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 answer any questions you may have. 2 MS. YEE: Okay. Very well. I think we have one 3 speaker signed up for this item, and it's Mr. Nissen. Are 4 you in the audience? 5 MR. NISSEN: Yes. 6 MS. YEE: Okay. If you'll come forward and have a 7 seat here, and then we'll proceed with the presentation and 8 have you speak. 9 Thank you. Mr. Ferris. 10 MR. FERRIS: All right. As the Board is aware, a 11 couple years ago the Board promulgated some regulations 12 that helped address a product that was unusual on the 13 market that was a beer-based product was the main focus, 14 that used flavorings to -- that had the effect of 15 fortifying or strengthening the alcoholic content of the 16 beer-based beverage. And the Board promulgated rules that 17 made it clear that while you can use a diminimus or a very 18 small amount of distilled spirits or distilled alcohol to 19 carry a flavor, it has to be under .5 percent of alcohol in 20 that beverage. If you exceed that, you're basically 21 fortifying, you're strengthening the alcoholic content of 22 the beer-based beverage through that flavoring. That's not 23 permissible for the tax classification. 24 In essence, if you're adding enough distilled 25 alcohol to the alcoholic beverage, such that it would be an 26 alcoholic beverage just from the distilled alcohol that you 27 added, it's a distilled spirit. You've added enough 28 distilled alcohol to make it an alcoholic beverage, and on 4 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 that basis alone it's a distilled spirit. So that was the 2 logic of the rulemaking. 3 Again, that whole process was focused on beer-based 4 products. And toward the very end of the rulemaking 5 process, some questions were raised as to how it might 6 affect wine-based products. There are similar types of 7 products that are made from a wine base as well. But at 8 that time no specific products were brought to the Board's 9 attention for consideration, and it was decided to go ahead 10 and make sure that we were making it clear that wine, as 11 it's defined in Business and Professions Code 23007, was 12 excluded from the Board's rulemaking, but leaving for 13 another day in a sense whether or not there might be some 14 tweener types of products as well that are wine-based that 15 might kind of run afoul of this same sort of fortification 16 versus flavoring distinction that the Board established 17 through the distilled spirits regulations. 18 So as staff has been out in the field and looking 19 at what's going on in the industry, we are becoming aware 20 that there are some of these products that are wine-based 21 but are not what you would call a traditional wine and are 22 more similar to these flavored malt beverage products, and 23 that there may be some issues with respect to fortifying 24 through flavoring that need to be addressed and clarified. 25 One thing that's very important to understand with 26 respect to the wine-based products is, because of the 27 definition of wine in Business and Professions Code 23007, 28 there is a distinction between wine-based products and 5 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 beer-based product and that the legislature permits 2 fortification of wine under very limited and specific 3 circumstances. 4 The legislature permits fortification of a 5 wine-based product if the distilled alcohol that's added to 6 create the fortified wine base is from the same 7 agricultural product of which the wine is made. So if it's 8 a grape wine, you could use spirits of grape to fortify the 9 wine. That's permissible. It's still wine as long as you 10 don't exceed 24 percent alcohol by volume. And so the 11 legislature treats wine differently than beer. Okay. 12 But the problem can arise in that you can also add 13 other things to the wine base. And the legislature has 14 said you can add up to 15 percent of colorings, flavorings, 15 and other blending material. So when you're adding 16 flavorings, care has to be taken that if distilled alcohol 17 is being used to carry those flavors, that it is from the 18 same agricultural product of which the product is made. 19 And for ease of expression we're going to refer to that as 20 conforming distilled alcohol, because it's too cumbersome 21 to keep saying distilled alcohol from the same agricultural 22 product of which the wine is made. That's too much of a 23 mouthful. 24 So we'll just call that conforming distilled 25 alcohol. That's the kind the legislature says you can add. 26 And we'll distinguish that from foreign distilled alcohol. 27 That's from a different agricultural product. That's the 28 kind that you're not supposed to be adding. You're not 6 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 supposed to be fortifying the wine base with foreign 2 distilled alcohol. 3 But consistent with how the Board is treating the 4 beer-based products, it seems right that a diminimus amount 5 of distilled alcohol could be added for flavoring purposes, 6 as long as it doesn't exceed the .5 percent threshold that 7 the Board has already established. 8 With that as background, let's look at a flow 9 chart. 10 MS. YEE: Okay. And this is consistent with the 11 handout that we have before us? 12 MR. FERRIS: Yes. 13 MS. YEE: Okay. 14 MR. FERRIS: And so what we're doing right now -- 15 again, we're not asking for approval of any of the concepts 16 that we're going to discuss here, but we're just giving you 17 a sense of where staff is at as we've been trying to figure 18 out. As we've been out in the field looking at these 19 products, coming to grips with how the Board's distilled 20 spirits regulation should be evenhandedly applied, 21 consistently applied, to this other universe of products, 22 this is our current best understanding of how that should 23 be applied. 24 MS. YEE: Okay. 25 MR. FERRIS: So in this flow chart, you start at 26 the top, and that's the beginning of the base, the wine 27 base. And let's assume that it's a grape wine. The two 28 middle diamonds have to do with the issue I was talking 7 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 about before, you're fortifying by adding foreign distilled 2 alcohol, and also whether or not you are adding flavorings 3 and whether or not those flavorings contain foreign 4 distilled alcohol. 5 On the far right we've got a diamond that's 6 addressing the issue that you can't add more than 15 7 percent other stuff, flavorings, colorings, other blending 8 material. 9 The diamond at the very bottom, in the middle, is 10 addressing the issue under Business and Professions Code 11 Section 23007 you can't have, at the end of the day, more 12 than 24 percent alcohol by volume. 13 So all of those diamonds, when you follow the flow 14 chart -- and we're going to break it down and make it 15 easier to see how this all works -- will lead you either to 16 reporting the product in question as a wine or reporting it 17 as a distilled spirit. 18 So let's break it down. This slide, again, is 19 emphasizing the fact that conforming alcohol is from the 20 same -- is distilled alcohol from the same agricultural 21 product. And for all these slides we're assuming that when 22 you're fortifying, you're adding at least .5 percent 23 alcohol, when you're fortifying with a conforming distilled 24 spirit. And again, foreign distilled spirit is from a 25 different agricultural product. 26 All right. So let's break it down. Here's the 27 first example. Start with your wine base. And you have to 28 ask if you're going to fortify it with conforming alcohol? 8 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 No, it's not fortified based. But you still have to ask, 2 are you adding foreign distilled alcohol through flavoring? 3 No. Is it more than 24 percent alcohol by volume? No. So 4 it meets all the requirements to be a wine under 23007, so 5 it's reported as wine. 6 Here's another example. Again, you start with your 7 wine base. Is it fortified with a conforming distilled 8 alcohol? Yes, it is. That's permissible. Then you have 9 to ask whether or not more than 15 percent extra stuff has 10 been added? No. So you're still good. What about foreign 11 distilled spirits through flavoring? No. More than 24 12 percent alcohol by volume? No. So, again, it meets all of 13 the statutory requirements to be a wine under 23007. 14 Now we're going to see some examples that would run 15 afoul of staff's understanding of the requirements of 16 23007, that would cause it to fall into the distilled 17 spirit category for tax classification purposes. 18 Here we go. Again, you'd begin with the wine base. 19 Is it fortified with conforming distilled alcohol? No, 20 it's not. However, I believe we're going to see the -- 21 okay. And it doesn't have foreign distilled alcohol in it. 22 But it's more than 24 percent alcohol by volume. That's a 23 clear violation of 23007, and therefore it should be 24 reported as a distilled spirit. 25 Again, start with the wine base. Ask if the wine 26 base is being fortified. In this example it's not. Now 27 you look at the flavorings or other things that are added. 28 Yes, it exceeded a diminimus amount of foreign distilled 9 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 alcohol. So on that basis, just from the foreign 2 distilled -- the impermissibly added distilled alcohol, it 3 would be a alcoholic beverage on that basis alone. You 4 would report it as a distilled spirit. 5 Another example. The wine base. Is it fortified 6 with a conforming distilled alcohol? Yes, it is. That's 7 okay. You can do that. But more than 15 percent added 8 stuff came into play which violates 23007. You can only 9 add 15 percent coloring, blending material, that type of 10 thing. So again, since we know that there's a lot of 11 distilled alcohol in this, because the wine base was 12 fortified, and it doesn't meet the plain language of 23007, 13 it's going -- it's not a wine under 23007. It's got a lot 14 of distilled alcohol in it. It should be reported as a 15 distilled spirit. 16 I think this is the final example. Start with the 17 wine base. The wine base is being fortified properly. 18 There was not lots of water added or something like that, 19 so no problem there. But foreign distilled spirits in 20 excess of .5 percent were added through flavorings, again, 21 that's not permissible. There basically the formula is 22 fortifying the alcoholic content of the wine through 23 foreign distilled spirits. That's not permitted. So it 24 would be reported as a distilled spirit. 25 And that's just, again, an overview of all of the 26 flow chart. 27 So in conclusion, based on staff's experiences out 28 in the field and conversations we've had with those that 10 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 make some of these wine-based products, we believe that 2 there is a need for clarification with respect to the tax 3 consequences of adding distilled alcohol to wine-based 4 products. And we think an interested parties process would 5 be very helpful in understanding the industry more and 6 hearing their concerns and making sure that we provide 7 proper guidance through the proposed rulemaking that we 8 would anticipate bringing back to the Board. And again, 9 we're not presently seeking any approval of language or 10 concepts, but just permission to go ahead and talk with 11 interested parties. 12 MS. YEE: Okay. Thank you very much Mr. Ferris. 13 Any further comment at this point? 14 Okay. Let me hear from Mr. Nissen. But at the 15 outset I just want to thank the -- particularly those in 16 the wine industry that have brought this issue to our 17 attention. 18 I know certainly during the rulemaking process I 19 think there was a sense that all wine is wine, and we 20 really began to delve into the particulars of the various 21 products as we were able to meet with the various 22 representatives from the wine industry and really help us 23 clarify the confusion and certainly understand the 24 confusion that exists given the traditional sense of how 25 wine ought to be treated under the current statutory 26 framework. 27 Let's hear from Mr. Nissen, and then I have a 28 proposal with respect to how we should proceed. 11 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 Mr. Nissen. 2 MR. NISSEN: Thank you very much. I represent a 3 very, very tiny part of the wine industry. 4 MS. YEE: Will you do me a favor? Introduce 5 yourself formally for the record. 6 MR. NISSEN: Oh, I'm sorry. My name's Bruce 7 Nissen. I'm the owner of Fox Barrel Cider Company -- 8 MS. YEE: Okay. 9 MR. NISSEN: -- Colfax, California. By definition 10 we are an O2 wine grower. We make products that are very 11 low alcohol that are from naturally fermented apples and 12 pears. 13 I'm here representing not only the Fox Barrel 14 interests but also Crispin Cider Company of Minneapolis and 15 Green Mountain Beverage Company in Vermont. 16 Essentially, it's my feeling from the presentation 17 that it's not the intent of the Board, you know, to not 18 understand the way that cider's made and the way it's 19 produced. It's a natural product. Two of the three 20 largest cideries in the US are located here in California. 21 On Fox Barrel's behalf we use about seven million pounds of 22 fruit a year to ferment. 23 There are certain elements of this proposal that we 24 just want to monitor in terms of one of the topics openly 25 discussed is considering water as an additive. And in the 26 cider-making process, because we're not making a normal 27 wine strength product at the end of the day, there's an 28 introduction of water essentially to dilute the product 12 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 down to the five percent or six percent that is presented 2 to the public. And if that were viewed as an additive, all 3 of a sudden now we're looking at legislation that could 4 move us into a distilled spirit classification. And I 5 don't believe that makes sense within the spirit of what 6 you're trying to achieve. 7 MS. YEE: No pun intended. 8 MR. NISSEN: So, you know, like I said, I believe 9 from what you presented, that's not your intent. We just 10 wanted to make sure that, as we're not an organized group 11 with a large lobby, that somebody came down and just said, 12 hey, please be aware that we're kind of tucked into this 13 category and sometimes the rules, you know, can overlook 14 the fact that we exist. 15 MS. YEE: Yeah. 16 MR. NISSEN: Let me see if there's anything else I 17 wanted really to address. That was primarily it. I mean, 18 my interest here is just to ensure that as the rules are 19 written, they cover all the different types of O2s that 20 operate within the state. 21 MS. YEE: Sure. Thank you very much. And we 22 appreciate your concern. And thank you for being here. 23 I really would encourage your participation in the 24 interested parties process that I'm going to be suggesting 25 that we pursue here. And coincidentally, I think the 26 confusion really -- or the need to clarify the confusion 27 that's been raised began with the -- how the addition of 28 water as a blending material ought to be treated. So it's 13 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 definitely germane to what we're going to be looking at in 2 the rulemaking process. Thank you. 3 Questions or comments, Members? 4 MS. STEEL: Question. 5 MS. YEE: Yes, Ms. Steel. 6 MS. STEEL: For that foreign object, whatever put 7 it in, what exactly foreign? How we define that language 8 right there? Because I just heard about the water, .5 9 percent. And how about like apple wine or how about 10 pineapple wine from, you know, other area? So how does 11 foreign define that you know -- we define that language? 12 MR. FERRIS: Right. Yeah, basically it's just -- 13 and maybe it wasn't the most helpful of words used, 14 conforming versus foreign. But really we're just trying to 15 get at the concept that Business and Professions Code 16 23007, which defines wine for California, says you can add 17 distilled alcohol if it's from the same agricultural 18 product of which the wine is made. 19 So if it's an apple wine, you could add spirits of 20 apple to it. That would be fine. But you couldn't add 21 spirits of orange because then you'd be mixing apples and 22 oranges. That wouldn't be permitted. 23 So it would have to be from the same agricultural 24 product. So if it's -- 25 MS. STEEL: So it has to be just one kind, if it's 26 made by grapes, and then has to be grapes but not other 27 stuff that you can put in as -- it has to be less than .5 28 percent. 14 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 MR. FERRIS: Correct. 2 MS. STEEL: How about the water part? 3 MR. FERRIS: Well, the water part is, I think, the 4 most interesting question. And, in general, if you're 5 making a traditional wine or a traditional cider, typically 6 you wouldn't be adding a lot of distilled alcohol to it 7 through flavorings, you know. So you wouldn't have to 8 worry about it. 9 So if you just used -- if you didn't add distilled 10 alcohol from another agricultural source, right, then even 11 if you added more than 15 percent water, you still would be 12 a wine because there wouldn't be enough distilled alcohol 13 in the product to make it a distilled spirit. 14 So you can exceed the 15 percent threshold with 15 water, as long as you're not adding foreign distilled 16 spirits into the product. And it will always default back 17 to wine because that product will be able to rebut the 18 presumption that it's a distilled spirit under the Board's 19 distilled spirit regulations because we allow it to be 20 rebutted. And if you can show that there isn't more than 21 .5 percent distilled alcohol in the product, and with wine, 22 we would also say from a foreign source, then you're going 23 to be able to rebut the presumption. That means you're not 24 a distilled spirit, you're going to be a wine. 25 MS. STEEL: That's really complicated. Let me ask 26 just really basic question. Why we are even considering 27 regulations for wine when we have so much problems with the 28 F&B regulations? 15 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 MR. FERRIS: I think with the flavored malt 2 beverage industry, they've all -- they've understood our 3 regulations to the extent they wanted to. They have 4 reformulated, and our experience out in the field is that 5 there is widespread compliance with the regulations that 6 the Board promulgated. And there doesn't seem to be a 7 problem in the industry with it. They may not be happy 8 that they had to reformulate, but they have reformulated if 9 they felt that they wanted to. 10 The reason why we are addressing the wine-based 11 products is because folks from this industry are coming to 12 us saying we need more clarification. We don't 13 understand -- 14 MS. STEEL: You mean wine industry is -- 15 MR. FERRIS: Yeah, is coming and saying, do we have 16 to reformulate or not? And if so, how can we reformulate 17 in a way to make sure that we're not taxed as a distilled 18 spirit? 19 So we think we want to help them to understand how 20 to apply these regulations to their industry. 21 MS. STEEL: So make more complicated then ever? 22 MS. YEE: Actually to hopefully make it easier so 23 they can make commercial decisions with an understanding of 24 how the reg applies. 25 MS. STEEL: I'm not sure this is going to be easier 26 though. Because another part of my question is that when 27 we did F&B regulations, the way set it up that I voted no, 28 our department came out that our estimate income was 16 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 revenue was $41 million. As of date -- as of today we 2 collected only $225,000. Is that cost effective for this 3 regulations that we going forward? 4 MR. FERRIS: Well, I think that the Board -- my 5 understanding is the Board made the decision that it did 6 with respect to the distilled spirits regulations because 7 the Board wanted to give clear guidance for tax 8 classification purposes as to what the definition of beer 9 is. And these were products that, even though the 10 Department of Alcoholic Beverage Control for California was 11 acquiescing to federal standards, the federal standards 12 that were being acquiesced to for labeling and licensing 13 purposes really weren't following the California statute. 14 So the Board said we have to follow the California 15 statutes, not the federal rules. 16 MS. STEEL: But that's really interesting because 17 federal regulation US Code Section 5041, it's much more 18 simple. It's only for excess of 24 percent of alcohol by 19 volume. I mean, that's very, very clean, very simple. 20 And then we are making these that, you know, when 21 we heard about the estimate revenue for 41 million, and a 22 lot of Board Members went for it because, you know, we 23 thought we going to bring more, but I think the industries 24 undershoot so much and they reformulate their alcohol so 25 they are not paying taxes. It's going to make these 26 industries much more complicated to change the alcohol 27 level, and it's not really helping businesses in 28 California, especially under the recession. And every 17 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 regulation that we make it gets tougher and tougher to ask 2 them actually move out of California to build a business, 3 to bring the wine in here. I don't know how much they can 4 bring it in. 5 And -- you know, it seems like, you know, for me 6 that F&B the regulation's been passed by BOE was not right 7 means that, you know, we -- and then we are going through 8 the wine regulations now, that two wrongs don't make a 9 right. 10 So I hope -- you know, I was hoping that our income 11 is not even quite close. It was just very minimal. 12 Actually we are paying more for our employees here than, 13 you know, what we are bringing in. I thought that instead 14 of proposing regulations for wine, I believe that we should 15 repeal the F&B regulation. That's the way I thought we 16 were going to move. I didn't know we were going through 17 now wine after beer, and this is making much, much more 18 complicated. 19 You keep going -- I know you guys did a great job, 20 tried to really make it clear. But there is a lot of 21 language, especially foreign, you know, we don't know 22 exactly what foreign means. Now when they come up to the 23 Board it's going to be very tough to make decisions that, 24 you know, how are we going to make is this foreign or not. 25 And I really like the US code better because it's 26 very simple, over 24 percent, than, you know, you put that 27 as a hard liquor, you know, taxes. 28 So this is another way to raise taxes from 20 cents 18 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 per gallon to $3.30 per gallon. So I am totally, totally 2 against it. 3 I know, you know, even wine vendor came out, I 4 heard a lot of beer industries were complaining that why 5 only beer and wine. Why don't we just get rid of beer and 6 wine, everything is the same rate taxes here. 7 So that's my opinion. Thank you. 8 MS. YEE: Thank you, Ms. Steel. 9 Just let me address a couple of points. When this 10 regulation was first initially before us, flavor malt 11 beverages really were products that didn't fit squarely 12 within the definition of beer and wine. And I think this 13 Board, certainly for taxation purposes, had an obligation 14 to provide that clarification, which we did through the 15 regulation. 16 We did have a wine exception in that regulation, 17 and that is what we're trying to clarify now. Actually, I 18 think with the clarification the wine industry can proceed, 19 and even as it relates to the cider-based products there 20 will be much more clarification. 21 I will say for the record, I for one did not vote 22 for that regulation for its revenue impact. I think the 23 response that we've gotten and the compliance that we've 24 seen certainly speaks to the clarity of the regulation. 25 And we are here now to try to provide additional clarity 26 with respect to equitable application of the regulation as 27 it relates to wine-related products. 28 I've had a number of different visits from 19 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 different wine wineries and wine manufacturers who really 2 are looking forward to the Board clarifying this 3 regulation. As I said, there are commercial decisions that 4 are on hold as a result of what product development ought 5 to be proceeding pending clarification of this. And I 6 think the last thing I want to see this Board do is to 7 really impinge upon commercial activity in that way. 8 Ms. Mandel. 9 MS. MANDEL: I didn't really have anything further. 10 We had heard some time ago from the Wine Institute that 11 there was an interest in clarifying the exclusion of wine. 12 But I think there was a desire to, you know, see how it 13 played out in the field with more information. I guess 14 that's what's going on now, staff went out and has more 15 information. 16 MS. YEE: Mr. Horton, did you have a comment? 17 MR. HORTON: (Shaking head.) 18 MS. YEE: Okay. What I'd like to do, and really 19 this is with sensitivity to -- 20 Oh, I'm sorry. Ms. Alby, please. 21 MS. ALBY: Thank you, Madam Chair. 22 I have a couple questions. One is, who in the 23 industry is asking for this process? 24 MS. YEE: I'm not sure the folks I met with are 25 wanting to be disclosed. But several wine manufacturers. 26 MS. ALBY: But we don't get to know that? 27 MS. YEE: They've been, I think, meeting with 28 various Members of this Board. 20 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 MR. FERRIS: They've been asking us questions in 2 their capacity as a taxpayer. So, I mean, I think they do 3 have some interest in their -- their information about how 4 they're reporting their taxes being held confidential. 5 I assume -- we can say with certainty, and it's a 6 matter of public record, that there are three major 7 producers of these wine-based alcopops. I mean, you know 8 that there are three main producers of wine-based alcopops, 9 and those are Gallo, Constellation and The Wine Group. 10 MS. ALBY: Great. Thank you. 11 The other thing I wanted to ask staff, if I could, 12 do you remember what the estimate was that we'd be 13 receiving as a result of the F&B regs, what that estimate 14 was? 15 MR. BISHOP: I think it was annually 41 million. 16 MR. FERRIS: If there was no reformulation. 17 MR. BISHOP: Right. 18 MS. ALBY: Right, if there was no reformulation. 19 Do you know what we actually received as a result of those? 20 MR. FERRIS: I think Ms. Steel was correct in the 21 200 -- 22 MS. STEEL: I'll give you exact figure. 23 $225,806. 24 MS. ALBY: Do you have any idea what it cost us to 25 implement that, the process? 26 MR. BISHOP: I don't believe there was an 27 accounting done. I know some of the staffing that we 28 requested, we did not receive. So it was done with 21 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 existing staff. 2 MR. FERRIS: It has been an absorbed cost. 3 MS. ALBY: Well, I can remember those discussions 4 clearly when Mr. Leonard was here, and I think one of the 5 things that both he and Ms. Steel said that this was going 6 to be a useless process, a costly process because the 7 industry would just reformulate. And they did. 8 And I guess I would associate my remarks with Ms. 9 Steel. I mean I learned at an early age if the stove is 10 hot, you get burned if you put your hand on it. And I feel 11 like we sort of learned a lesson here. So I am concerned 12 about going forward with this process, costing money, days 13 of furloughs deficits. So I have great concerns. 14 So thank you very much. 15 MS. YEE: Thank you, Ms. Alby. 16 I guess what I would say to that in response is 17 there is a process for how we repeal regulations and 18 there's a process for how we make statutory change. And I 19 will remind the Members we did have a bill that was vetoed 20 by this current Governor that looked at these products in 21 terms of how they ought to be classified, and the veto 22 message essentially appointed the authority of this Board 23 to make that determination with respect to how to look at 24 flavored malt beverages. 25 So it is a regulation that's in place. It's 26 effective. And, again, I really don't want to hold up the 27 wine industry and any other industry with respect to not 28 doing our due diligence in providing this clarification. 22 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 And what I'd like to do is to actually expedite the 2 interested parties process so that we can hopefully have an 3 interested parties meeting before the end of the calendar 4 year. I know I'm pushing the staff, but I really want to 5 be sensitive to, you know, the wine manufacturers and the 6 decisions that are pending this clarification, so that it 7 comes before this committee again back in February. 8 Okay. Other comments, Members? 9 MR. HORTON: Um -- 10 MS. YEE: Mr. Horton. 11 MR. HORTON: Thank you, Madam Chair. 12 I kind of wanted just to speak to the legislative 13 intent as it related to these items. The intent was not 14 revenue base. The intent was to try to control the use of 15 this product, to minimize the use of this product. And the 16 debate was over whether or not young folks actually used 17 this product because of its flavoring and so forth and so 18 on. And so the essence was to try to restrict the volume 19 of alcohol. 20 Of course the debate kind of -- one of the 21 underlying tones was this is not a -- whether or not it was 22 a beer or wine and so forth, but the real essence of it was 23 to try to restrict the item, to limit the content of the 24 item. And it's gone a little bit beyond that, but I just 25 thought I'd sort of share that. 26 And I would say to the extent that the 27 legislature's given us some direction and somewhat autonomy 28 to meet the legislative intent, we should attempt to do 23 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 that, with not only the guidance of the law, but also the 2 guidance of the industry and how this is impacting the 3 industry. 4 I agreed with Mr. Leonard at the time that what 5 would ultimately happen would be a reformulation of the 6 product. And in and of itself, many within the legislature 7 felt that was success. A greater success was to take the 8 product off the market altogether, which wasn't a -- wasn't 9 possible legislatively in order to get the majority of the 10 legislature and the government to concur with that thought 11 process. 12 I just share that. 13 MS. YEE: Thank you, Mr. Horton. Thank you for 14 that perspective. 15 Ms. Steel, please. 16 MS. STEEL: One quick question. Did we have any 17 study that how many young kids stopped drinking because we 18 raised taxes? 19 MR. FERRIS: No. I mean, although a lot of the 20 folks that initiated the petition to begin with were very 21 concerned about the social policy issues. And so that was 22 always a part of the discussion. But from staff's point of 23 view, and I think from the action the Board took, it 24 wasn't -- it was -- we were focused on construing the 25 statutes. 26 MS. YEE: Right. 27 MR. FERRIS: And applying them properly for tax 28 classification purposes. So because staff was not 24 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 motivated by the social policy, we haven't done any social 2 policy studies. 3 MS. STEEL: So if we are not thinking about social 4 policy -- because I remember the Girl Scout members were 5 out there and picketing against me that I was for teenage 6 drinkers, and I was raising two teenager kids at that time. 7 And I was not happy with it because Girl Scout has to be 8 501(c) non-profit organizations they supposed to not get 9 involved within politics. 10 And second thing is, that, you know, if we are not 11 even thinking about the tax revenue on this, then why we 12 are even going through it? Because there is a simple law, 13 over 24 percent of the alcohol has to be charged for hard 14 liquor for $3.30 instead of 20 cents. That's my comment. 15 So it doesn't really make any sense here that we 16 are making everything really complicated and we are going 17 nowhere and we are having so much trouble. So we are not 18 getting even revenues, and we don't even know how many kids 19 stopped drinking because of tax raise. 20 And, you know, just don't understand it's going to 21 hurt small businesses that they have to charge more taxes. 22 I'm not talking about those big franchise markets, but I'm 23 talking about small Mom and Pop, small liquor stores that 24 they going to be in big trouble because every time you 25 raise from 20 cents gallon to $3.30 a gallon, that's a lot 26 of money. 27 That's my comments. Thank you. 28 MS. YEE: Thank you, Ms. Steel. 25 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 Mr. Horton, please. 2 MR. HORTON: I would somewhat concur with Ms. 3 Steel's comments. As Chair of the governmental 4 organizations, when I sort of looked at the legislation, at 5 the end of the day -- and I think I'm being somewhat 6 redundant -- at the end of the day we sort of anticipated 7 that the manufacturers, they would just reformulate. And 8 the end results would be a lot of work that wouldn't have a 9 real social impact or a financial impact. 10 However, without some clarification, it could have 11 a negative impact on the industry in that the clarification 12 would be a condition subsequent, subsequent to an audit, 13 subsequent to a liability, subsequent to the debate before 14 this body. So to the extent that we can provide that 15 clarification, I'm supportive of providing clarification. 16 I concur that it's one of those pieces of 17 legislation that at the end of the day, because of the 18 chemistry that's involved, at the end of the day it just 19 ends up with a reformulation. Hopefully, hopefully the 20 smaller operations can be made aware of what they need to 21 do in order to have their product fit not only their market 22 scheme, but also fit the tax scheme as established by the 23 legislature. 24 We didn't -- we don't necessarily pass laws here. 25 We try to bring clarity to it, and guidance based on the 26 law itself and the intent. 27 MS. YEE: Thank you, Mr. Horton. 28 Other questions or comments, Members? 26 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 Okay. Hearing none, let me put a motion on the 2 table. I'd like to move to direct staff to begin the 3 interested parties process to hold, on an expedited basis, 4 with an interested parties meeting to be scheduled before 5 the end of the calendar year. And this matter back before 6 us for action on the clarification, clarifying language, 7 hopefully that is developed during that process for our 8 February 2011 Board meeting. Is there a second? 9 MR. HORTON: I would second the motion. 10 MS. YEE: Okay. Second by Mr. Horton. Further 11 discussion? 12 Please call the roll. 13 MS. OLSON: Madam Chair. 14 MS. YEE: 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. Thank you very much. The Business 25 Taxes Committee is adjourned. 26 (The matter concluded at 10:42 a.m.) 27 ---oOo--- 28 27 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 November 16, 2010 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the above-entitled 11 hearing; that I transcribed the shorthand writing into 12 typewriting; and that the preceding pages 1 through 27 13 constitute a complete and accurate transcription of the 14 shorthand writing. 15 16 Dated: December 17, 2010 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 28 TOWN & COUNTRY DEPOSITION SERVICE (530) 642-0333