BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT MAY 25, 2011 ITEM F3 PUBLIC HEARINGS PROPOSED ADOPTION OF REGULATION 2558.1, WINE Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 Board of Equalization 15 Staff: Bradley Heller Legal Department 16 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 Sacramento, California 2 May 25, 2011 3 ---oOO--- 4 MR. HORTON: Ms. Olson, what's the next matter? 5 MS. OLSON: Our next matter -- 6 MR. HORTON: One second, Ms. Olson. 7 I notice that there might be individuals who 8 want to testify on this. I would ask them to come 9 forward. And particularly Paul Kronenberg with the 10 Family Winemakers of California. And Mr. Heller will be 11 presenting this matter, as well. 12 Mr. Heller, please commence with your -- oh, 13 Ms. Olson, please introduce the matter. 14 MS. OLSON: Okay. 15 MR. HORTON: My apologies. 16 MS. OLSON: It's okay. It's F3, Proposed 17 Adoption of Regulation 2558.1, Wine. 18 MR. HORTON: Mr. Heller. 19 MR. HELLER: Thank you, Mr. Chairman Horton. 20 I'm Bradley Heller with the Board's Legal Department, 21 and I'm here to request that the Board adopt proposed 22 alcoholic beverage tax Regulation 2558.1, Wine. 23 The new regulation clarifies that alcoholic 24 beverage -- excuse me, clarifies that for alcoholic 25 beverage tax purposes the term "wine" does not include 26 any alcoholic beverage containing 0.5 percent or more 27 alcohol by volume obtained from the distillation of 28 fermented agricultural products other than those from 3 1 the particular agricultural product or products of which 2 the wine is made. 3 The new regulation also contains a prospective 4 January 1, 2012 effective date in order to give wine 5 growers and wine importers time without being penalized 6 to determine whether any of their wine-based alcoholic 7 beverages constitute distilled spirits for alcoholic 8 beverage tax purposes reformulate any wine-based 9 alcoholic beverage -- beverages so they can continue to 10 qualify as wine for tax purposes, if necessary, and 11 begin to report and pay the applicable wine or distilled 12 spirits excise tax on their wine-based alcoholic 13 beverages. 14 MR. HORTON: Thank you very much. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 PAULKRONENBERG 2 MR. HORTON: Mr. Kronenberg, would you please 3 introduce yourself for the record. Welcome. 4 MR. KRONENBERG: Chairman Horton, Members of 5 the Board. Paul Kronenberg on behalf of Family 6 Winemakers of California. 7 Family Winemakers represents about 650 wine 8 producers across the State. We continue to be opposed 9 to the proposed regulation before you today. Our 10 testimony is limited to an ongoing objection to the 11 Board of Equalization's assertion that it has the 12 authority to regulate in this area. 13 We raised that objection in the original 14 flavored malt beverage regulations and raised it again 15 in our January 3, 2011 submission to the Board on this 16 pending regulation. 17 We wanted to ensure that the record reflect the 18 basis of our objection since the public notice did not 19 acknowledge the ongoing Court case on the question of 20 authority, citing the Office of Administrative Law's 21 ministerial approval we don't believe is determinative 22 in this case. 23 We would urge the Board to defer adoption of 24 the regulation until the authority issue has been fully 25 adjudicated. As you know, the Diageo-Guinness USA and 26 Flavored Malt Beverage Coalition case against the Board 27 is still pending in the 3rd District Court of Appeals. 28 It's awaiting the scheduling of oral arguments. 5 1 We don't believe there's any urgency in 2 adopting the clarification proposed by the regulation 3 given the extensive discussion over many months among 4 the affected stakeholders. I think the people that make 5 these beverages clearly know what potentially might be 6 before them and if they haven't already taken a look at 7 reformulating that doesn't seem to suggest the normal 8 business model that goes forward. 9 We thank you for the opportunity to testify. 10 MR. HORTON: Thank you very much. 11 Mr. Heller, any comments on the witness's 12 testimony? 13 MR. HELLER: Thank you, Chairman Horton. 14 Briefly, I just wanted to also mention that E & J Gallo 15 Wineries -- Winery submitted a -- a written comment in 16 support of the -- the proposed regulation and that also 17 the Legal Department has looked at the -- at the Family 18 Winemakers of California's concerns about the authority 19 for this regulation and -- and we're pretty confident 20 that Article 22, Section 20 -- excuse me, Article 20, 21 Section 22 of the California Constitution gives the 22 Board the exclusive authority to administer any 23 alcoholic beverage taxes imposed by the Legislature, and 24 that Revenue and Taxation Code Section 32451 expressly 25 authorizes the Board to adopt regulations for the 26 administration and enforcement of the alcoholic beverage 27 tax law and including Regulation 2558.2 proposed today. 28 MR. HORTON: What's the current status of the 6 1 Court case? 2 MR. HELLER: It was correctly presented that 3 it's -- it's at the 3rd District Court of Appeal. It's 4 already been briefed and it has not been set for oral 5 argument at this time. 6 MR. HORTON: Any indication that they might 7 have a difference of opinion? 8 MR. HELLER: There's no indication at this 9 point and the appeal is from a decision that affirmed 10 the Board's authority at the Superior Court. 11 MR. HORTON: Okay. 12 Discussion, Members? 13 Member Yee. 14 MS. YEE: Thank you, Mr. Horton. I just wanted 15 to clarify, Mr. Kronenberg, that your objection today is 16 challenging the Board's authority to move in this area. 17 You had other concerns that you raised in your January 18 3rd submission. I wanted to be sure that those weren't 19 before us for discussion. 20 MR. KRONENBERG: Ms. Yee, as you know -- well, 21 to -- to answer your question directly, yes, the 22 objection today is -- is the ongoing question of 23 authority. 24 MR. HORTON: Okay. All right. 25 MR. KRONENBERG: Our submission on January 3rd 26 really dealt with the original proposal that the staff 27 had come forward and as you know it has morphed since 28 then -- 7 1 MS. YEE: Yes. 2 MR. KRONENBERG: -- based upon a lot of 3 discussion. 4 MS. YEE: Uh-huh. 5 MR. KRONENBERG: We don't really have an 6 objection -- setting aside our authority question we 7 don't have an objection to the clarification that has 8 been achieved in the proposed regulation. It seems to 9 make a lot more sense than what the original staff 10 proposal was. 11 MS. YEE: Okay. I just wanted to be sure that 12 we were -- 13 MR. KRONENBERG: Yeah. 14 MS. YEE: -- encompassing all of your concerns 15 today. Thank you. 16 MS. STEEL: Comment. 17 MR. HORTON: Member Steel. 18 MS. STEEL: Well, on February -- February 23rd 19 for Business Tax Committee that I opposed this 20 regulation and I commented the same thing that I'm going 21 to do it today; two wrongs don't make a right. And this 22 is another unnecessary burden to the small business 23 owners. Not only that -- that we didn't collect as much 24 as we thought we going to collect from this tax -- from 25 these taxes, that I don't think it's really necessary 26 that we really have to change and, you know, amendment 27 to this regulation. 28 So I'm opposed to it. Thank you. 8 1 MR. HORTON: Further discussion? 2 Mr. Runner. 3 MR. RUNNER: You know, these are always tough 4 when you've got industry who's split on their under -- 5 understanding of the issue in terms of the regulation. 6 And now it's my understanding, just to clarify, 7 that -- that we've not attributed any -- any additional 8 revenue as a result of this regulation, is that correct? 9 MR. HELLER: That is correct, Mr. Runner. 10 MR. RUNNER: Okay. So we're not projecting if 11 we do this then this will happen in terms of new 12 revenue? 13 MS. YEE: Right. 14 MR. HELLER: Not at all. We -- there's a -- 15 MS. STEEL: We -- we did -- I remember that we 16 supposed to get $42 million but we didn't get it. 17 MR. RUNNER: But -- but that's not on this -- I 18 don't believe that's on this regulation, is that 19 correct? 20 MR. HELLER: Senator Runner, that's correct, 21 not on this regulation. 22 And as to Ms. Steel's comment, that was with 23 regard to the adoption of the -- I believe it was -- 24 MS. STEEL: Flavored -- 25 MR. HELLER: -- Regulation 2558, 2559 2599.1 26 dealing is with the distilled spirits presumption. 27 MR. RUNNER: Right. And -- and I would agree, 28 that was one where again we didn't anticipate well -- 9 1 what the reaction was going to be and indeed the 2 revenues were not received as anticipated because of the 3 change of behavior in regards to those in the industry. 4 But in this case we're not anticipating any of 5 that in terms of its recognition. 6 And again I'm torn because I had plenty -- I 7 had a number of industry folks, including the port 8 industry who said if you do this -- if you don't do this 9 we'll be out of business in the State of California, I 10 understand the regulation. 11 So I think that's where we struggle in regards 12 to this particular issue. So, you know, I -- I -- I'm 13 anxious to see how the Court moves forward on the issue 14 but at this point I think it -- in terms of a fairness 15 for all industry the best we can, even when we got 16 people on both sides of the argument, it seems to me 17 that this regulation helps clarify. 18 MS. STEEL: Can I just make one simple -- 19 MR. HORTON: Sure. 20 MS. STEEL: -- comment? Well, the flavored 21 malt beverage regulations, when we changed it we did the 22 revenue estimation at that time, and then we didn't 23 really -- made not even closely to what we did. 24 So for this proposed amendment to Regulation 25 2558.1 we didn't even do the estimate -- revenue 26 estimation for this one because you know that we not 27 going to get it. That's another reason that we didn't 28 get it. 10 1 MR. HELLER: Ms. Steel, my understanding was -- 2 MR. HORTON: I believe it was a statement. 3 MS. STEEL: That's -- that's just my statement. 4 MR. HORTON: Yeah. 5 MS. STEEL: So, you know, I am -- totally 6 oppose this. 7 MR. HORTON: Further discussion, Members? 8 My concern is for the industry. If we don't 9 clarify this ultimately the measure of tax would be 10 higher, audits would result and different industries 11 would have to make huge adjustments and so forth. 12 And so I think it's in the best interests of 13 the industry that we provide this clarification. 14 In effect, it will actually reduce the burden 15 on the winemakers in the industry. And certainly 16 sympathetic of the -- of the position of the Family 17 Winemakers relative to the Court case. And that process 18 will certainly work itself out and we'll adjust 19 accordingly. 20 Is there a motion, Members? 21 MS. MANDEL: Move adoption. 22 MS. YEE: Second. 23 MR. HORTON: It's been moved by Ms. Mandel, 24 second by Ms. Yee to adopt. 25 With -- objection? 26 MS. STEEL: Objection. 27 MR. HORTON: Ms. Olson, please call the roll. 28 MS. OLSON: Mr. Horton. 11 1 MR. HORTON: Aye. 2 MS. OLSON: Ms. Steel. 3 MS. STEEL: No. 4 MS. OLSON: Mr. Runner. 5 MR. RUNNER: Aye. 6 MS. OLSON: Ms. Yee. 7 MS. YEE: Aye. 8 MS. OLSON: Ms. Mandel. 9 MS. MANDEL: Aye. 10 MS. OLSON: Motion carries. 11 MR. HORTON: Thank you very much. Appreciate 12 that. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 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 May 25, 2011 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 12 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: June 7, 2011. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 13