1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 JUNE 21, 2011 9 10 PUBLIC HEARING 11 ITEM F1 12 PROPOSED ADOPTION OF REGULATION 1685.5, 13 CALCULATION OF ESTIMATED USE TAX - USE TAX TABLE 14 15 16 17 ---o0o--- 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 For the staff: Bradley Heller Legal Department 18 19 Robert Ingenito Research and 20 Statistics 21 22 23 24 ---oOo--- 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JUNE 21, 2011 4 ---oOo--- 5 MR. HORTON: Welcome back to the Board of 6 Equalization. 7 Ms. Olson, what is our next scheduled matter? 8 MS. OLSON: Our next scheduled matter, we're 9 going to move forward on the calendar to F1, Proposed 10 adoption of Regulation 1685.5, Calculations of estimated 11 use tax - use tax table. 12 MR. HORTON: Thank you very much, Ms. Olson. 13 Members, staff is here to present on this 14 matter. 15 Please introduce yourself and commence with 16 your presentation. 17 MR. HELLER: Good afternoon, Chairman Horton. 18 I'm Bradley Heller from the Board's Legal Department and 19 I'm here with Robert Ingenito from the Research and -- 20 Research and Statistics Section, I don't know why that's 21 sticking so badly, I apologize. 22 MR. HORTON: Don't worry. 23 MR. HELLER: It's in the Legislative Division, 24 in case you're interested. 25 We're here to request that the Board adopt 26 Regulation 1685.5. It's to prescribe the use tax look 27 up table for the 2011 taxable year and to prescribe the 28 formula that the Board would use to estimate -- estimate 3 1 income taxpayer's use tax based on their adjusted gross 2 income for future years, beginning with 2012. 3 I also wanted to mention that we've -- there is 4 a pending bill that has -- that was passed by the 5 legislature but has not been signed by the Governor, 6 ABX1-28. That would substantially rewrite the 7 provisions in Revenue and Taxation Code Section 6203 8 dealing with out-of-state retailers that are engaged in 9 business in California and required to collect use tax 10 from their customers. 11 And we were -- staff was asked to prepare an 12 alternative table and calculations in case that was 13 enacted. 14 And also I wanted to point out that we've 15 received public comments from Gene Johnson, who mostly 16 had some questions. We received public comments from 17 Cal-Tax, who opposes the current regulation, mostly 18 because, I believe, they did want interested parties 19 meetings to discuss the calculations before the Board 20 adopted it. And I believe they still -- they do intend 21 to think that, at least from their opinion, that there 22 is some taxpayers' estimated use tax might be overstated 23 by our table. We don't necessarily agree, but that's 24 their comments. 25 And we also received a comment from Katy Craig, 26 who inquired as to whether the Board was actually 27 imposing a brand-new tax on taxpayers. And I just 28 wanted to clarify for the record that this is just a use 4 1 tax look up table that taxpayers have the option to use 2 instead of reporting their actual use tax. But it does 3 not impose any brand-new tax or additional taxes on any 4 California taxpayers. 5 And, in addition, based on our discussion back 6 in April, staff did follow up with the Franchise Tax 7 Board as with regard to their deadlines for receiving 8 our finalized look up tables for inclusion in their -- 9 the instructions to their 2011 income tax returns. And, 10 basically, we're -- they confirmed that they still -- 11 their drop dead date is, essentially, still 12 September 1st, but they're -- if the Board wanted to 13 make changes today to -- to consider the alternative 14 table or to give them -- basically to -- to incorporate 15 two alternatives into the proposed regulations, that we 16 would give -- it would give the Board more time to wait 17 and see if ABX 1-28 is actually signed by the Governor. 18 And they've indicated that the FTB's willing to 19 go with the information -- the best information we can 20 provide them by September 1 and then hold off and, if 21 necessary, duplicate their instructional review process 22 to incorporate any changes we make that wouldn't be 23 finalized until closer to the end of September. 24 And that's mainly because we have to send them 25 to the -- once the Board adopts the regulation today -- 26 or in July, assuming that happens -- we have to submit 27 it to the Office of Administrative Law for review and 28 approval. And there's a slight delay before the 5 1 regulation would be approved by them and we would know 2 that it was a final and that that language becomes -- 3 would become the law. 4 And, so, the FTB basically understands our 5 situation and they're willing to work with us, but it's 6 definitely an inconvenience for them and it's -- creates 7 extra work. 8 With that, Robert discuss the new calculations 9 for the alternative table and I can answer any questions 10 you have about the legislation as well. 11 MR. HORTON: Thank you very much. 12 MR. INGENITO: Good afternoon, Mr. Chair, 13 Members of the Board. Robert Ingenito with the Board's 14 Research and Statistics Section. 15 Just as a quick overview of the alternative 16 table, as Mr. Heller mentioned, the original table you 17 were asked to consider looked at a specific use tax gap 18 which would be impacted by ABX 1-28, the bill that's 19 been passed by the legislature that is under 20 consideration for the Governor now. 21 So, what we were asked to do was to develop an 22 alternative table that assumes that, No. 1, the Governor 23 signs the bill and, No. 2, the revenues that are scored 24 are realized. That's alternative table that was 25 presented to you in a memorandum yesterday. I believe 26 you all have it in front of you. 27 What we did was we basically assumed that the 28 revenues that will be generated by the bill would close 6 1 roughly two-fifths of the business to consumer use tax 2 gap. 3 As a consequence, we brought down the use tax 4 liabilities for all the AGI classes commensurately. 5 I'd be to happy to answer any questions you 6 have. 7 MR. HORTON: Thank you. 8 Discussion, Members? 9 Mr. Runner? 10 MR. RUNNER: Just a quick -- I appreciate, you 11 know, again things are -- you know, obviously, it's not 12 a very static world out there and so things are moving 13 around rapidly. 14 So, I appreciate the consideration of the fact 15 that there may, indeed, be some circumstances here with 16 the bill that is before the Governor in regards to that 17 table being adjusted. 18 That being said, I still don't like the table. 19 I don't like the assumptions. But I appreciate the fact 20 that there was recognition that, indeed, is something 21 that we need to consider. 22 MR. HORTON: Further discussion, Members? Is 23 there a motion? 24 MS. YEE: Move the staff recommendation. 25 MS. MANDEL: What -- can ask I what the staff 26 recommendation is now with this -- with this other 27 table? Where is the staff recommendation? 28 MR. HELLER: Ms. Mandel, the staff 7 1 recommendation is still the proposed regulation as 2 authorized for publication back in April. 3 And mainly right now there's a couple of issues 4 that, at least right now, don't lead staff to recommend 5 any changes and it's mainly that ABX 1-28 isn't signed 6 yet, so, we certainly don't know if it will become the 7 law. 8 And then the second issue is we really don't 9 know -- we really have to just estimate what compliance 10 we would receive from these out-of-state retailers. And 11 we're not super confident that they'll -- that we'll get 12 100 percent compliance beginning the day after the 13 legislation's enacted. 14 And, so, we -- we're not super confident that 15 the alternative table would actually reflect those 16 retailers' behavior if ABX 1-28 was actually enacted. 17 And we'd really like to see how those retailers 18 respond before we try to incorporate both the 19 legislation and their behavior into a future table. 20 But I do know the Board's already authorized 21 staff to do interested parties meetings regarding the 22 2012 table and the formulas. 23 So, if this -- if that legislation is enacted 24 and we do do start to see any change in behavior by 25 out-of-state retailers, we can make adjustments for next 26 year. 27 MS. YEE: Good. Follow-up? 28 MR. HORTON: Member Yee? 8 1 MS. YEE: So, just in terms of timing, should 2 28X become law, it takes effect immediately? 3 MR. HELLER: It's my understanding, yes. 4 MS. YEE: Okay. 5 MR. HORTON: Was that an -- I don't recall that 6 it was considered emergency legislation. I don't think 7 it gets enacted immediately, but I could be wrong. 8 MS. YEE: It's an extraordinary session bill. 9 MR. HORTON: Extraordinary, you are right. 10 MS. YEE: And is it contingent -- but, no, I 11 guess it depends. 12 Does it have an urgency? Otherwise, the enact 13 -- the effective date, I think, is triggered by the 14 adjournment of the extraordinary session. 15 MR. HORTON: I think so. 16 MR. HELLER: Well, Ms. Yee and Chairman Horton, 17 I'm -- the legislation itself says it's to take effect 18 immediately. 19 And so far staff's in agreement that it would 20 take effect immediately, but -- 21 MS. YEE: Okay. 22 MR. HELLER: -- but it'd not urgency 23 legislation. 24 MS. YEE: Okay. So, we -- we have the current 25 proposed table before us. You've provided an 26 alternative to try to respond to 28X, as we know it. 27 Are we going to be putting out-of-state 28 retailers in a different place than in-state retailers 9 1 with respect to -- well, I guess -- no, not retailers. 2 Are consumers going be confused, I guess, with 3 respect to what needs to happen relative to use tax 4 compliance once 28X becomes law? 5 MR. HELLER: Well, I would assume from the 6 consumer standpoint, you really need to know that a 7 retailer's registered to collect tax in California 8 before you can satisfy your use tax obligation by paying 9 use tax to that retailer. 10 So, essentially once we actually start to seek 11 compliance with the new few legislation and we can 12 update our permits, taxpayers can then get -- be able to 13 check whether or not these new -- these additional 14 retailers are permitized or are registered to collect 15 use tax. 16 And, in addition, we can do more outreach, 17 assuming we see large retailers that are registering, 18 but it -- I think right now it's probably premature to 19 day exactly how we'd have to inform the consumers. 20 MS. YEE: Okay. I guess to the extent that we 21 know this other -- these other provisions are out there, 22 I would just ask that we maybe start to focus some 23 specific attention on it -- whether it's enacted now or 24 later. 25 I mean, I don't think the issue's going away 26 relative to what will be putting in place as relates to 27 outreach and particularly if it's got a provision where 28 the provisions take effect immediately, what -- what 10 1 ought our response be to that? 2 I don't want put -- I don't want to add more 3 confusion to the whole use tax compliance landscape, as 4 Mr. Runner has alluded to in the past. And I think we 5 have an ability to make it easier with respect to these 6 look up tables. And I think just this added layer will 7 bring us back to a little confusion for consumers. 8 MR. HORTON: Okay. 9 MS. STEEL: Is that due date once already past, 10 April 15th for this year -- last year's for use tax 11 report? 12 MS. YEE: That was for the program. 13 MS. STEEL: This is over $100,000. 14 MS. YEE: The qualified purchaser program, 15 yeah. 16 MS. STEEL: Well, I really don't think that, 17 you know, more income means that you're buying more from 18 outside of California. 19 But having said that, if Governor doesn't sign 20 it, then what happen? 21 MR. HELLER: Then there would be no change in 22 the statute determining whether or not an out-of-state 23 business is engaged in business in California and 24 required to collect use tax. 25 We would presume that the out-of-state 26 retailers' behaviors would stay the same and that they 27 would not register with the Board. And we'd have the 28 about same percentage of California consumers' purchases 11 1 from out-of-state retailers that aren't registered with 2 the Board. 3 MR. HORTON: Mr. Runner? 4 MR. RUNNER: Yeah, just -- just to see if I can 5 clarify, maybe I was premature in what I thought I 6 thanked you guys for. 7 Let me just say -- now, what you -- the staff 8 recommendation is to stay, no matter what happens to the 9 to the chart that was proposed at the last meeting? 10 MR. HELLER: The staff recommendation is still 11 the chart that the Board authorized for publication back 12 in April. 13 MR. RUNNER: Does the -- okay. 14 MR. HELLER: The alternative, the Board 15 certainly direct staff and I -- 16 MR. RUNNER: Hold on, I got -- we get that. 17 So, at this point the legislature in their 18 budget, which I guess is of much debate these days, but 19 at least in this particular bill an item in the budget 20 has booked $200 million to this. 21 So, I guess what I'm hearing is the BOE staff 22 does not think that that $200 million is going to come 23 in this year. 24 MR. HELLER: Mr. Runner, honestly, we're -- 25 mainly we were -- I was just responding to Ms. Steel's 26 question about what would happen if the legislation 27 wasn't enacted. 28 And if it wasn't enacted, we certainly wouldn't 12 1 realize the revenues. 2 MR. RUNNER: Yeah, but that's not -- that's not 3 my question. 4 MR. HELLER: But, in addition, at this point 5 I'm not very confident that large retailers that have 6 been refusing to register with the Board are just going 7 to immediately come in and register as of the day that 8 that bill's signed. 9 MR. RUNNER: So -- so, my point is the same 10 then, you do not believe that the legislation that's 11 gone to the Governor or is somewhere between the 12 legislature and the Governor is going to get the $200 13 million that they've -- that they have booked for it? 14 MR. HELLER: To me, it does not seem -- 15 MR. RUNNER: Well, let me put it this way, if 16 you did -- if you did believe it, then you would have to 17 recommend the second chart, right? 18 I mean, if you did believe the $200 million was 19 going to come in, then we would be double collecting? 20 MR. HELLER: Mr. Runner, if I was certain -- if 21 I had a steady certainty at all that the bill would 22 be -- would enacted, then I would definitely recommend 23 modifications, first of all. 24 MR. RUNNER: Okay. 25 MR. HELLER: But the size of the modifications 26 are kind of what I was getting to as far as what I think 27 the behavior would be. 28 I definitely think some retailers will come in 13 1 and register. But I don't know that -- 2 MR. RUNNER: But that's -- 3 MR. HELLER: -- there will be the kind of 4 response that the legislature -- 5 MR. RUNNER: Mr. Heller, that's -- I guess not. 6 I guess I'm trying -- that's what I'm trying to 7 get through here. And, that is, so, if you don't 8 believe they're going to register -- and they're not 9 going to collect it, then you must not believe -- the 10 BOE staff must not believe that the $200 million is 11 going to be collected. 12 That's an easy yes or no answer. Do you 13 believe it is or do you believe it's not? 14 MR. HELLER: Well, I'm -- Mr. Runner, I'm not 15 not speaking for all staff right now, I am just trying 16 to give you my opinion as far as -- as far as I 17 understand it, I have no expectations that those -- that 18 those retailers are going to immediately register and 19 start to pay those large amounts. 20 And I'm am really anticipating a lot of 21 litigation over that particular amendment to the 22 section. 23 MR. RUNNER: So, it would be fair to say that 24 the Legal Department, represented by you, Mr. Heller, 25 does not believe that the $200 million that is booked 26 right now in the budget proposal is going to be -- is 27 going to come in? 28 MR. HELLER: Well, yes. 14 1 MR. RUNNER: Okay, that's fine. 2 MR. HELLER: The Legal Department does not 3 believe it will get all that money in that first year 4 immediately. 5 MR. RUNNER: Okay, that's -- of course it's the 6 first year, it's the budget year. 7 So, again, I just want to clarify, what we -- 8 what we're saying here and that is -- because that's 9 what's driving us to that other chart, to the original 10 chart, because if you believed that the money was going 11 to come in, then the alternative chart would be 12 correct? 13 MR. HELLER: And also if the legislation was 14 enacted. 15 MR. RUNNER: Well, again, the legislation 16 enacted is an issue that we can deal with either 17 by passing both -- both charts and then letting them -- 18 one go into effect if the -- if the bill is signed or 19 not signed. 20 So, we can get through that issue in regards to 21 the bill enacted or not enacted. 22 But the point would be that -- at least I'm 23 hearing now BOE Legal staff, you representing them, 24 Mr. Heller, is that you do not believe that the 25 budget -- the bills that were passed by the legislature 26 that booked $200 million is going to come in? 27 MR. HELLER: My answer is essentially the same 28 as before. 15 1 MR. RUNNER: What's that a yes or no? 2 MR. HELLER: No. 3 MR. RUNNER: Thank you, thank you. 4 MR. HORTON: Member Yee? 5 MS. YEE: I was just looking up the bill. 6 Looks like there is some language in 28X that calls for 7 it to take effect immediately, but it's tied it being a 8 budget bill under the provisions of Proposition 25. So, 9 I think with the underlying budget having been vetoed, 10 it kind of puts everything up in the air. 11 But I think that generally then we fall back to 12 the effective date of extraordinary session bills to be 13 effective 90 days after the adjournment of the session. 14 So, we may have some time here. 15 My concern was just that if it were to take 16 effect immediately and immediately meant tomorrow, that 17 we have something in place that is consistent with what 18 you're asking us to continue to move forward with right 19 now as it relates to the use tax as we currently know 20 it. 21 MR. RUNNER: Just a follow-up question too and 22 can I real quick? 23 MR. HORTON: Sure, Mr. Runner. 24 MR. RUNNER: Just to get perspective. 25 I believe that the target amount that we 26 believe the tax gap is for this consumer use tax is 27 $800 million? 28 MR. Ingenito: That's correct. 16 1 MR. RUNNER: Okay. So, the $800 million is the 2 target to which this chart is -- its goal is to collect, 3 the target amount because that's what the -- that's what 4 the unpaid use tax is? 5 MR. HELLER: Mr. Runner, the legislation that 6 required the Board to -- to estimate people's use tax 7 based on their adjusted gross income I believe had a 8 revenue estimate of about $10 million, I believe, of 9 revenue. 10 I don't think it was -- 11 MR. RUNNER: That was based upon the compliance 12 level. 13 MR. HELLER: Well, you know -- 14 MR. RUNNER: If everybody complied -- if 15 everybody complied, it would collect far more than 16 $10 million, correct? 17 MR. HELLER: Oh, absolutely, yes. 18 MR. RUNNER: Okay, okay. So, the target -- 19 MR. HELLER: If everyone used it. 20 MR. RUNNER: -- so, it was -- so, again, you -- 21 the target of the chart was the 200 million. Now as to 22 how many people comply with it is a different issue, but 23 the target is -- was to close the consumer tax gap, 24 correct? 25 MR. HELLER: It is a tool to close the gap, 26 absolutely. 27 MR. RUNNER: Okay. So, the goal -- and that 28 tax gap on consumer use tax is $$800 millions? 17 1 And, so, again, the budget here and the bills 2 that have been booked by the legislature says that it'll 3 collect about 25 percent of those, which is the $200 4 million they booked against that. 5 But the chart then, just to make clear, the 6 chart in its -- in its goal, was to do the consumer tax 7 gap, which is $800 million. 8 MR. HELLER: Well, what -- 9 MR. RUNNER: If it wasn't, what was it for? 10 MR. HELLER: The chart itself is really just 11 designed to allow individual income taxpayers to 12 determine an estimate of their individual estimated -- 13 MR. RUNNER: And no relationship to what the 14 tax gap is? 15 MR. HELLER: But it really wasn't designed with 16 an estimate of starting working backwards from how could 17 we collect $800 million, right, and divide that by the 18 number of Californians or their AGI. That's not really 19 now it's done. 20 The calculations are really just based on the 21 spending behavior as a percentage of income. So, I mean 22 I don't disagree with you that in the end, if we could 23 get full compliance and every single taxpayer was 24 reporting on this, we might get somewhat close to -- 25 MR. RUNNER: Let me -- well, let me go about it 26 this way -- 27 MR. HELLER: But that's not the target. 28 MR. RUNNER: -- well, let me -- 18 1 MR. HELLER: -- exactly. 2 MR. RUNNER: Let me -- let me go at it this 3 way, what is the chart trying to accomplish? 4 MR. HELLER: It's trying to estimate the 5 California consumers use tax liability based upon their 6 adjusted gross income. 7 MR. RUNNER: And is there a target amount out 8 that there that we believe we -- that consumers aren't 9 paying? 10 MR. HELLER: We do -- we do have a consumer use 11 tax gap. 12 MR. RUNNER: And what is that amount? 13 MR. HELLER: We were just discussing that, we 14 think it's about 800 million. 15 MR. RUNNER: Okay. So, again, I would assume 16 that this -- the assumption is the chart helps -- is the 17 goal to help get there. 18 So, again, the bill that's before the -- the 19 bill that was passed by the legislature, it's before the 20 Governor, is to lower that by 25 percent by our -- 21 collect $200 million of that. 22 That's the goal of the -- of that legislation. 23 Again we'll see what happens, if it's going to get 24 signed or not signed, although the Governor said he was 25 open to that -- to that particular concept. 26 And, so, if indeed he signed that, then would 27 -- wouldn't this -- wouldn't this chart be overstated? 28 MR. HELLER: It could be. Would you -- 19 1 MR. RUNNER: Tell me under what conditions 2 would it not be overstated? 3 MR. HELLER: Well, it just depends on the 4 behavior of those retailers and if there are no -- if 5 retailers react in the way the legislature's 6 contemplated -- 7 MR. RUNNER: Uh-huh. 8 MR. HELLER: -- if all of them come in and 9 register, right, then they -- it's not actually, I don't 10 think, all of them register -- 11 MR. RUNNER: Yes, it's -- 12 MR. HELLER: -- it's a substantial portion. 13 MR. RUNNER: It's whatever's caught up in the 14 law, sure. 15 MR. HELLER: And if they were all to do that, 16 then we could, potentially, realize that 2 -- full 17 $200 million of general revenue -- general fund revenue. 18 But, again, anything in between there reduces 19 the effect. 20 MR. RUNNER: Okay. 21 MR. HELLER: And if very few or none of them 22 come in, then essentially the chart is still accurate. 23 MR. RUNNER: Okay. So, it's -- 24 MR. HELLER: So, at this point, I just don't -- 25 MR. RUNNER: Okay. 26 MR. HELLER: -- know how people are going to 27 behave. 28 MR. RUNNER: Okay. So, it's fair, I guess, 20 1 from this whole discussion, I think it's fair for me to 2 hear that the BOE staff is not confident that the 3 $200 million will be realized and, as a result of that, 4 we need to go back to the original chart? 5 MR. HELLER: That's correct, although the -- 6 MR. RUNNER: Okay, okay. 7 I just -- that's fine. I just want to make it 8 clear that one of the issues that we will -- I will be 9 talking about is BOE is not confident that $200 million 10 to going to be collected from those bills because we're 11 so, in fact, concerned that it's not, that we've decided 12 to go ahead and adopt a chart that neglects any income 13 revenue from those particular bills. 14 MS. YEE: I'm going to take issue with that, 15 I'm sorry, Mr. Chairman. 16 MR. HORTON: Go ahead, Member Yee. 17 MS. YEE: I mean, I think the two issues have 18 to be bifurcated. 19 The reason these tables are before us is to 20 really make it easy for consumers to report and pay 21 their use tax so they don't have to collect the 22 individual receipts in shoe box every year, take it out 23 when they're ready to file their income tax return and 24 figure out what sales tax -- or what use tax they owe. 25 I mean, that's purely what it is, is to 26 simplify that process for consumers to, hopefully, 27 facilitate compliance. 28 I think 28X effect is -- I don't know that we 21 1 fully know what the dynamic of that will be yet. And, 2 so, I mean, when posed with the question of what would a 3 use taxable look in response that, I think that the 4 staff had done a pretty good job preliminarily to at 5 least respond to that. 6 But I'm sure further refinement will need to 7 take place. But the table before us now is solely to 8 deal with the use tax compliance issue that we have now 9 and to really just try to give consumers a tool by which 10 to be able to identify what amount of use tax they owe 11 based on income and report it and pay it. 12 I think that's -- I think we're reading way too 13 much more into this. I really don't and I want to kind 14 of move on and approve the table before us. 15 I think we're going to have to come back should 16 28X become law and really discuss what would be 17 appropriate with respect to similarly offering consumers 18 similar assistance with the use tax. 19 MR. HORTON: Thank you, Member Yee. 20 Members, we -- this sort of reminds of a couple 21 of oxymorons and one in particularly is a balanced 22 budget. 23 You know, the budget is never balanced. It's a 24 living document, much like the process that we're going 25 through here. It's a living process. There are a 26 number of conditions subsequent, economic variables that 27 will have to take place in order for any of this to come 28 true. 22 1 The unfortunate thing is is none of us have a 2 crystal ball and we just don't know. And, so, the 3 Department has made their best estimate and codified 4 that in this chart to provide the taxpayer some 5 direction or some assistance in complying. 6 They certainly still have the option of doing 7 it on an actual basis. And this chart would mean 8 absolutely nothing. If the conditions changed, this 9 chart means absolutely nothing relative to the totality 10 of what happens at the end of the day. 11 MR. RUNNER: Mr. Chair, real quick, though, 12 the chart is -- 13 MR. HORTON: One second, Mr. Runner -- one of 14 the benefits of being Chair. 15 MR. RUNNER: Yeah, go ahead. I appreciate 16 that. I get it. 17 MR. HORTON: The -- and, so, the way that the 18 chart was calculated took in a number of factors in its 19 consideration. 20 And I believe the question before us might be 21 did the chart take into consideration the new 22 legislation and its potential impact? And I would 23 speculate that the answer would be no at this point in 24 time, given that that is a condition subsequent. 25 And, so, the decision before us, it would be to 26 wait until that bill is enacted and then make an 27 assessment on the bill and re-do the chart. And if we 28 have that luxury, we certainly should have that on the 23 1 table. If we don't have that, luxury relative to the 2 timelines, we can move forward and always bring the 3 matter back if, in fact, the -- some action of the 4 legislature will ultimately influence the bill, the 5 equity of the chart relative to the taxpayer. 6 Do you have any comments on that, Mr. Heller? 7 MR. HELLER: Chairman Horton, I actually 8 just -- just one. 9 Essentially the Legal Department has looked at 10 the issue of kind of, you know, how to give the Board 11 more time to see what happens with whether or not the 12 Governor signs this particular bill. 13 And, like I said earlier, we did talk with the 14 Franchise Tax Board. And we've been told that we do 15 have a little bit more leeway in time. 16 So, the Board, if it wanted to -- and that's 17 100 percent within your discretion -- if you felt that 18 the alternative chart was indicative of what we think -- 19 what we think the taxpayer's estimates of their use tax 20 should be, based on their adjusted gross income after 21 ABX 1-28 is enacted, the Board could direct staff to 22 incorporate both -- both tables into our regulation and 23 specify which one will take effect if the bill is 24 actually signed. 25 Then we could make further adjustments to the 26 regulation so that the future calculations would be 27 based on the conditions of ABX 1-28, if you so chose. 28 But it makes it a kind of an unclean or 24 1 somewhat more convoluted process and the Board will have 2 to come back in the July meeting to adopt, one, the 3 regulation with the alternatives in it. 4 MR. HORTON: Yeah, Members and then I'll go to 5 you, Mr. Runner, and my apologies. 6 But Members, I would propose that we move 7 forward based on the information and facts before us 8 today. It -- it surprised when the Governor vetoed the 9 budget within 24 hours. 10 And, so, I would not make any prediction as it 11 is related to the budget these days. The only 12 prediction I would make is that I do have confidence in 13 their ability to ultimately resolve it and that's 14 because historically, we've always come out with a 15 balanced -- with a budget. It's just matter of when. 16 So, that would be my recommendations. 17 Mr. Runner? 18 MR. RUNNER: My only observation would be that 19 we do have the option of making sure that the correct -- 20 most correct table would be adopted and that would 21 simply be by moving both of them forward, coming back 22 then in a month, and making our action based upon what 23 did take place. 24 It's not like this a bill that's out there and 25 we don't know what's -- you know, that's in the 26 legislature somewhere. This is a bill that's actually 27 been passed by the legislature, is waiting for 28 signature. 25 1 And again we don't know, but yet it's a long 2 ways through the process. And by doing -- by having 3 both charts, we at least make sure that we are treating 4 taxpayers fairly. 5 And again I would submit that this first tax 6 chart was based upon an $800 million tax gap. That's 7 why -- that's the gap we're trying to fill with the 8 chart. 9 Certainly if you have a legislation plan that 10 reduces that by 25 percent, it would make sense that the 11 chart should be reduced by 25 percent. 12 Now the other issue I would make -- I would 13 have to say is, let's not pretend that this is just some 14 kind of a little chart to which people ca go and not go 15 to. 16 Remember what happens? If you use the chart, 17 you then have safe harbor. So, we are enticing 18 taxpayers to the chart. We are not just saying use it 19 or don't use it, doesn't make any difference. We're 20 directing them to it and giving them benefit if they do 21 use it. 22 So, my concern is that we could be directing 23 them toward a chart that's overstated at that point 24 based upon the legislation that had been given to the I 25 Governor. 26 The easy solution, go ahead and take both 27 charts out. In July we can make a decision in terms 28 of -- and we will know the lay of the land. 26 1 If we don't -- if we just pass this on today, 2 we won't know the lay of the land and we will be 3 actually enticing taxpayers to a chart potentially that 4 overstates their use tax liability. 5 MR. HORTON: Mr. Heller, when is the chart 6 enacted? 7 MR. HELLER: The chart itself? Well, the way 8 it would work is once the Board actually adopts the 9 regulation then we'll finalize the rulemaking file, 10 submit it to the Office of Administrative Law. They 11 have 30 business days to review and approve it. 12 Assuming they approve it, then we ill know that 13 that -- it will become a law, but it won't be effective 14 for 30 more days. It has to be filed with the Secretary 15 of State for 30 days before it's effective. 16 But essentially in our case the table won't be 17 used until people are filing their 2011 income tax 18 returns. So, the effective date's not as important as 19 the fact that we just have to have an approved chart to 20 give to the Franchise Tax Board so they can include it 21 in the instructions to their returns while they go 22 through the printing process, which is taking place 23 really right now. 24 MR. HORTON: Okay. So -- and if the -- I was 25 going to say if the world comes to an end, but -- 26 MR. RUNNER: That was last month. 27 MR. HORTON: -- if the legislature acts 28 differently than what we currently -- what's currently 27 1 before us, will we have the opportunity to amend the 2 chart? 3 MR. HELLER: I don't believe we would have any 4 opportunity to amend the chart because it's basically 5 already going to be published in the Franchise Tax 6 Board's instructions to the returns. 7 And I have talked with the Franchise Tax Board 8 and my understanding is that -- let me rephrase. 9 The Board absolutely could amend the 10 regulation. There is nothing that would stop -- 11 prohibit us from amending the regulation. But basically 12 all of the published materials that went out before that 13 amendment or based on the FTB's publications scheme 14 would already be published and taxpayers those returns 15 and instructions would already see the existing chart. 16 I have been been told that once -- if we were 17 to submit a revised chart to the FTB way after 18 publication, that they do -- they can update their 19 electronic instructions on their website so that those 20 are current and note that there's been a change. 21 So, I think there's some way to at least get 22 that information out to taxpayers when they update the 23 Franchise Tax Board's publications on a going forward 24 basis, but it might already where some taxpayers have 25 received their original instructions that have the 26 unamended table. 27 MR. HORTON: So, this is tied into a point 28 definite relative to printing the chart and a point 28 1 uncertain relative to the budget. 2 So, if the -- in printing the chart, how much 3 time does the Franchise Tax Board need in order to be 4 able to get the chart out in a timely manner and get 5 their forms out in a timely manner? 6 MR. HELLER: Well, they've told us for their 7 initial publication, the one which is typically their 8 only publication, is -- essentially they wanted to have 9 us have the regulation adopted by the Board and approved 10 by the Office of Administrative Law so that they would 11 be certain that that was the -- that was the regulation 12 and table by September 1st and that that was their 13 cutoff date for them to have all their final 14 instructions go to their upper management for the final 15 review and then to their publishers for publication. 16 They have expressed to me that if the Board 17 felt that they wanted to look at alternatives and could 18 adopt in July, that they're willing to kind of -- kind 19 of throw a little wrench and slow down their review 20 process and make it somewhat redundant so that what we 21 send them -- what we send them as a placeholder gets 22 reviewed and then what we send them in September also 23 goes back in the secondary review process. 24 But they've indicated that if the Board has 25 adopted the regulation and it's approved by OAL by 26 October 1, that they could still incorporate it into the 27 initial publication. 28 MS. MANDEL: Because of when they print? 29 1 MR. HELLER: Right, because -- 2 MS. MANDEL: When they actually print. 3 MR. HELLER: But essentially, it's -- they're 4 very much accommodating the Board in that case. And in; 5 general it would have been September 1. But they 6 understand that this is a very -- 7 MR. HORTON: So -- 8 MR. HELLER: -- peculiar situation. 9 MR. HORTON: -- so, what if we put this over to 10 our July meeting? 11 MR. HELLER: We can put the whole regulation 12 over. 13 The only issue I would say and I -- and while I 14 would agree with Mr. Runner just in the respect that 15 from a procedural standpoint, if the Board wanted to 16 adopt changes to the regulation, then we need to -- we 17 need to -- we need to incorporate those into the 18 proposed text and issue a 15-day notice so that the 19 public has notice of those changes and can comment on 20 them. 21 Then the Board would be in a position to adopt 22 the changed regulation at the July meeting. 23 If we don't -- if we don't make those changes 24 now and then we discuss the changes at the July meeting, 25 then we would have to go through that notice process 26 afterwards and we would not make the October 1 date and 27 the FTB would not not be able to include anything in the 28 initial publication. 30 1 So, we just have a a blank. 2 MS. MANDEL: Can I ask -- 3 MR. HORTON: Sure, Ms. Mandel? 4 MS. MANDEL: -- one question? 5 I don't know if this applies. But if the Board 6 goes forward and adopts the recommended table. And if, 7 for some reason, this bill gets signed and goes into 8 effect that in such a way. I don't know, it sounds a 9 little attenuated -- 10 MR. HORTON: At best. 11 MS. MANDEL: -- yeah, it sounds kind of 12 attenuated because the budget bill was vetoed and the 90 13 days in the extraordinary session and everything. 14 But does -- I know we sometimes make 15 Section 100 changes because of legislative changes, is 16 this the sort of thing that would fall in -- do you 17 think would fall under Section 100, which has -- I mean, 18 I thought Section 100 changes had a different like 19 thing -- way that they time frame and everything. 20 I am just wondering. It occurred to me. 21 MR. HELLER: Well, in this case if it was -- I 22 think what would happen is is we would actually be -- it 23 wouldn't be a Rule 100 change or a nonsubstantive change 24 because -- 25 MS. MANDEL: Oh. 26 MR. HELLER: -- we would actually be -- 27 MS. MANDEL: Changing the number? 28 MR. HELLER: -- a discretionary decision about 31 1 what we think the impact of the legislation is and 2 then -- 3 MS. MANDEL: All right, I just was wondering. 4 I understand what you are saying, thank you. 5 MR. HORTON: So, Mr. Heller, it seems to me -- 6 so, if from a timing perspective the chart may not go 7 out in the FTB's first printing, but a subsequent chart 8 would go out in time for the taxpayers to file? 9 MR. HELLER: Well, my understanding is that the 10 FTB deals with the fact that legislation changes all of 11 the time. 12 And they do send stuff to publication and they 13 can't change the printed forms that they've printed up. 14 But, essentially, they will re-do the electronic 15 documents and forms on their website and post notices. 16 And they try to do it in a somewhat real time 17 fashion when there's changes to law. 18 So, my understanding is if -- that we didn't -- 19 either -- even if we have a table in the original 20 publications or not, once we were to forward them an 21 adopted table, they would do their best to get it 22 implemented into the electronic instructions and 23 available to the public in real time, based on their -- 24 just their physical practical constraints. 25 And I am not sure exactly what time frame that 26 is, I think it's a few weeks before they can actually 27 have a fully approved revised form. But, essentially -- 28 it would just depend on when have it, how quickly they 32 1 can get to taxpayers. 2 And, mainly, no one should be filing before 3 January 1, 2012. So, if they were to have this -- have 4 the finally adopted table by then, then they at least 5 could make it available to the public in the 6 instructions on the website. 7 MR. HORTON: You know, our actions of getting 8 this right is being governed by the printing press? 9 Makes absolutely no sense to me. 10 MR. RUNNER: Again, just to clarify, though, if 11 we adopted both of them with the caveat that we only use 12 the alternative if, indeed, the AB 1-28 is adopted, then 13 we -- then everything still makes all the timetables, 14 right? 15 MR. HELLER: If the Board was to direct staff 16 to make changes just to incorporate the alternatives so 17 that it would be effective if ABX 1-28 was -- was signed 18 into law and then the Board adopted the regulation with 19 those changes in July, then I've been told that we can 20 -- we would be able to get that to the Franchise Tax 21 Board in time so that -- assuming we, by then knew what 22 had been -- 23 MR. RUNNER: Right. 24 MR. HELLER: -- signed, they would know which 25 chart to publish and they would include it in the 26 initial publications on the hard copy. 27 MR. RUNNER: And if it didn't get signed or it 28 all went away then -- then we'd just move right ahead to 33 1 the -- 2 MR. HELLER: That's right. 3 MR. RUNNER: -- first recommended chart? 4 MR. HELLER: That's correct. 5 And then it would just depend if the Board 6 agrees that they -- if they think that chart is accurate 7 as to what the effects of ABX 1-28 is, because that's 8 what -- 9 MR. HORTON: What -- 10 MR. HELLER: -- would be in effect. 11 MR. HORTON: At what point in time is that 12 decision made and by whom? 13 MR. HELLER: Which decision? 14 MR. HORTON: The decision as to which chart to 15 use? 16 MR. HELLER: Well, I was recommending that 17 basically when we -- when we change the regulation to 18 incorporate the second chart that the amendment specify 19 that the alternative chart would only take effect, as 20 opposed to the other chart, if ABX 1-28 was signed. 21 MR. HORTON: And what the happens if the 22 legislature changes its mind? 23 MR. HELLER: And if it's not -- if it's not 24 signed -- 25 MR. HORTON: Decides to do something different? 26 MS. YEE: Right. 27 MR. HELLER: Then that chart would not take 28 effect and the initial chart would or the one that we've 34 1 already -- 2 MR. RUNNER: Contingency. 3 MR. HORTON: No, I mean, decides to do 4 something different that actually affects the chart? 5 MR. HELLER: Then we would have no ability 6 to -- well, let's just say the Board couldn't meet that 7 October 1 deadline because we would have to then -- if 8 you wanted to incorporate any effects from that 9 legislation, we'd have to make additional changes to the 10 regulation. 11 We'd have to notice the public on those changes 12 so they can comment on them. So, it would delay us and 13 we probably wouldn't be able to get the -- whatever 14 chart into the printed publication instructions from the 15 FTB. 16 But, again, once we actually had an adopted 17 chart, we could get the FTB to publicize it and put it 18 in there electronic instructions. 19 But again, it's very hard. And I would just 20 mention, Chairman Horton, the legislature actually 21 completely contemplated placing the Board under these 22 kind of time constraints based on FTB's printing 23 requirements and they specifically incorporated the 24 July 30th date into the statute requiring us to transmit 25 all of the information to the FTB for its instructions 26 by that date. 27 And the FTB has been very accommodating for the 28 Board because they recognize that the legislature didn't 35 1 give us enough time for the Board to actually consider a 2 regulation and adopt it and get it approved by OAL. 3 To have made it by July 30th, which would -- 4 which is impossible, even if the Board was to adopt the 5 regulation today. 6 And, so, they've originally accommodated us all 7 of the way out to September 1st and now they've really 8 gone out of their way to say that they can wait until 9 October 1. 10 But the legislature absolutely talked with the 11 FTB and got their drop dead publication date originally 12 and codified it. 13 MS. YEE: Mr. Chairman? 14 MR. HORTON: Member Yee? 15 MS. YEE: I'm going to propose that we put this 16 over 'til the July meeting. It gives us a little bit 17 more time just to see what the -- action may be taken on 18 28X, AB 28X. 19 I don't feel comfortable moving out ahead of 20 its enactment to put a table out there -- even with the 21 caveats and the regulation itself that it's effective -- 22 it's -- it would be effective only if AB 28X is enacted. 23 And I don't want to create more confusion than 24 there already is. 25 MR. HORTON: I agree. 26 MS. MANDEL: Okay. 27 MR. HORTON: Further discussion, Members? 28 Without objection -- is it -- I don't believe 36 1 we need a motion to put this over, so -- 2 MS. MANDEL: You can do it. 3 MR. HORTON: Let's -- so be it, Members. 4 We will take this matter up in our July 5 meeting. At that time we would ask that the staff, and 6 in particular Miss Shedd the legislative process, make 7 us aware of it expeditiously and particularly if there 8 is any significant changes and then at that time, please 9 notify the Internal Revenue of our action. 10 MS. YEE: Franchise Tax Board. 11 MR. HORTON: Franchise Tax Board, my 12 apologies. 13 MS. YEE: IRS may be interested. 14 MR. HORTON: And my apologies. 15 And for the legislature, I really don't know 16 what they're going to do if we don't meet their 17 deadlines. 18 Just out of curiosity, I mean, what's the 19 penalty for not not meeting the deadline? 20 MR. HELLER: My understanding is right now 21 there is -- there is really no penalty. 22 The -- the only outcome is -- 23 MR. HORTON: Just kidding. 24 MR. HELLER: -- just, you know, we do want to 25 make this -- this tool available. 26 MR. HORTON: I think my point, my point, 27 Mr. Heller is is that this agency wants to get it right. 28 MS. YEE: Right. 37 1 MR. HORTON: Irrespective of when the printer 2 needs to print, when the FTB needs to send it out and so 3 forth. 4 We want to minimize the confusion as it relates 5 to the taxpayers that we represent. And we want the 6 chart to be as accurate as possible, based on the 7 information that we have at the time that we make the 8 decision. 9 I am not going to make to decision contingent 10 upon what the legislature might or might not do. 11 So, let's take it up again at our July meeting. 12 And we look forward to your presentation then. 13 Thank you. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 38 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 JUNE 21, 2011 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 38 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: July 13, 2011 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 39