BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JULY 26, 2011 ITEM F1 PUBLIC HEARING 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 Division 16 17 --oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 Sacramento, California 2 July 26, 2011 3 ---oOo--- 4 MR. HORTON: Ms. Olson. 5 MS. OLSON: Our next item is F1, Proposed 6 Adoption of Regulation 1685.5, Calculations of Estimated 7 Use Tax -- Use Tax Table. 8 And we have two speakers. 9 MR. HORTON: Okay. Members, Mr. Heller will 10 present on behalf of the Department. I'd like to take 11 the speakers prior to his presentation, but they don't 12 seem to be here -- but okay. 13 MR. RUNNER: Here comes somebody. 14 MR. HORTON: Okay. Members, before us is Gina 15 Rodriguez with the California Taxpayers Association. 16 And I believe there's one other speaker, Ms. Fosler. 17 Okay. Ms. Rodriguez -- Rodriguez. 18 MS. RODRIGUEZ: Thank you, Mr. Chair, Members. 19 Gina Rodriguez. I'm the Vice-President of State Tax 20 Policy for the California Taxpayers Association. 21 CalTax submitted a letter to the Board on April 22 25th. We also testified before the Board on April 26th 23 and sent another letter on June 20th to express our 24 concerns about the adoption of Reg. 1685.5. 25 To date, unfortunately, our concerns have not 26 been addressed. The 2011 table has quite a few problems 27 that I'd like to address today. And we recommend that 28 staff start to address these problems now so that when 3 1 July 30th comes around next year staff can release a 2 2012 Use Tax table that is more reflective of reality. 3 The table proposed in this regulation is 4 neither accurate nor a fair representation of what a 5 taxpayer's Use Tax liability would be under the law. 6 Excuse me. 7 First, CalTax questioned the need for a 8 regulation at all but Mr. Heller explained to us the 9 rationale and we agree that there is a need for a 10 regulation, so thank you, Mr. Heller. 11 However, we do not agree that the 2011 table 12 amounts should be placed in a regulation. Mr. Heller 13 explained that this was done only for the 2011 table to 14 set forth the template in -- in the regulation. 15 However, staff can set forth the template in the 16 regulation without use of the amounts in the reg. 17 So in the spirit of transparency, staff could 18 provide the amounts in a draft form much like FTB 19 provides us with draft forms of -- of their proposals. 20 Our concern is that the amount's overstated and 21 still need refining and fine tuning. 22 The law requires the BOE to make available to 23 the FTB such amounts in the form of a Use Tax table by 24 July 30th. And that's a quote from the law. 25 We don't think that the statute prohibits the 26 BOE from making changes to the amounts after July 30th, 27 but this cannot be accomplished if the amounts are set 28 forth in the regulation, which is why we propose taking 4 1 the amounts out of the regulation. 2 Second, the proposed table does not appear to 3 reflect the passage of AB 28x, the bill that expanded 4 the definition of nexus and is expected to bring in $200 5 million. 6 According to staff no one has yet changed their 7 behavior as a result of the passage of the bill and 8 staff has therefore not made any concrete adjustments to 9 the table to account for the full $200 million. 10 Also, and probably of greater concern, if 11 online retailers are held liable for Sales Tax for 2011 12 purchases, what assurance do we have that customers 13 won't be double-taxed if they use the table to report 14 their actual Use Tax for purchases of taxable tangible 15 personal property? 16 Third, the table uses a flat seven percent rate 17 across the board and assumes that the incident of Sales 18 Tax is proportional to income. Every study that -- with 19 which CalTax is aware shows that Sales Tax is actually 20 regressive to some extent. Mr. Heller has agreed to 21 review some of these studies and plos -- possibly make 22 adjustments to the table for 2012, including -- and this 23 is another one of our proposals -- allowing more AGI 24 ranges for taxpayers. 25 Fourth, the table does not account for 26 different local tax rates. Local tax rates differ by 27 City and County, as you know, and such differences 28 should be reflected in a look up table. 5 1 For example, I live in El Dorado County, which 2 has a lower rate than L. A. County, yet I will pay the 3 same amount as an L. A. County resident if I elect to 4 use the table. 5 Finally, it is not clear how the tax will be 6 allocated among the locals. This ties to the fact that 7 the table doesn't seem to account for a rate 8 differential. So, in other words, will L. A. County be 9 getting more money than El Dorado County, for example, 10 because L. A. County has a -- has a higher rate? 11 The CalTax policy team does look forward to 12 continuing to work with staff in the coming months and 13 hopefully we can help you with any questions you have. 14 Thank you. 15 MR. HORTON: Thank you very much. 16 Mr. Heller, please commence with your 17 presentation. 18 MR. HELLER: Good afternoon, Chairman Horton 19 and Members of the Board. Again, I'm Bradley Heller 20 from the Board's Legal Department, and I'm here to 21 request that the Board vote to adopt Regulation 1685.5, 22 Calculation of Estimated Use Tax - Use Tax Table today. 23 The text of the regulation is the same text 24 that staff recommended and the Board approved for 25 publication during the April Business Taxes Committee 26 meeting. And staff recommends that the Board adopt the 27 proposed regulation today so that the Board can forward 28 the 2011 Use Tax table prescribed by the regulation to 6 1 the Franchise Tax Board by the statutory July 30th 2 deadline, and there will still be some chance that the 3 regulation will be approved by the Office of 4 Administrative Law prior to the FTB September 1st 5 deadline for transmitting its 2011 materials to its 6 publishers and the software developer so that they can 7 develop everything and publish all the materials and 8 have them ready for taxpayers in January of 2012. 9 I would also like to add that I spoke to the 10 FTB's Executive Director, Selvi Stanislaus, and she 11 stressed the need for the Board to adopt Regulation 12 1685.5 and have it approved by OAL prior to the FTB 13 September 1st deadline. And I have not received any 14 assurances or suggestions of any ways to accommodate the 15 Board if we -- we don't make the September 1 deadline, 16 although I'm certain that the FTB will try to do 17 something to accommodate us. 18 With that, the Board's Legal Department and the 19 Board Proceedings Division has already made arrangements 20 with the Office of Administrative Law to ask them to 21 expedite their review of Regulation 1685.5, assuming 22 it's -- assuming it's adopted today so that there would 23 still be that potential that we can meet the September 24 1st deadline. 25 I can answer any questions or address any 26 comments if you'd like. 27 MR. HORTON: Thank you, Mr. Heller. 28 Discussion, Members? 7 1 MS. STEEL: Just have a comment. 2 MR. HORTON: Member Steel. 3 MS. STEEL: Well, I think my concern's same as 4 CalTax that, you know, by the multiply Adjusted Gross 5 Income by .07 percent by the income level doesn't mean 6 that they are spending that much money. 7 And then second, it's not really accurate, you 8 know, it's most likely to overstate it. But I have one 9 more concern is when you put those tax -- tax -- the 10 table, Use Tax table, and then what happen is most of 11 the people when they do tax return and automatically 12 they think that they owe them, so they going to put 13 those amount down even they don't owe us anything. 14 And than Use Tax, though, you know we send a 15 letter out to these corporations that has gross -- gross 16 income more than $100 thousand, 86 percent of them send 17 us the tax report of zero. 18 So I really don't know this taxpay -- tax table 19 is really needed on the tax return because this is just 20 extra work that we never going to collect. 21 I'm done. 22 MR. HORTON: Oh, okay. 23 Mr. Runner. 24 MR. RUNNER: Just a couple of observations. 25 I think we are dealing -- dealing with this particular 26 table today because I think we've come to conclusion 27 that, yes, indeed, we're not going to collect the $200 28 million so therefore we have the -- the -- the -- the 8 1 larger amounts on the table. 2 Let me just -- a couple of questions that I 3 have and I think, Mr. Heller, we -- we had asked some 4 information, I think you had -- and you had provided 5 us -- to us, but let me step before I go there, the 6 universe of people who we're trying to catch with 7 this -- with this -- with this table would be those who 8 we would, what, consider business to consumer Use Tax? 9 MR. HELLER: Senator Runner, essentially we're 10 not trying to catch anyone. And in this case we're just 11 providing an optional Use Tax table for the convenience 12 of the taxpayer and in your -- 13 MR. RUNNER: I -- I -- 14 MR. HELLER: Isn't that your question? 15 MR. RUNNER: Let me back -- let me back. I 16 don't -- 17 MR. HELLER: Absolutely -- 18 MR. RUNNER: I don't mean catch in the sense 19 of, you know, a negative. I mean the ones who we're 20 trying to reach out to and help at this point. 21 MR. HELLER: Oh, absolutely. And that is the 22 con -- ultimate consumers who are not themselves a 23 business who are -- 24 MR. RUNNER: Right. 25 MR. HELLER: -- purchasing from a retailer. 26 MR. RUNNER: Okay. So that's -- that's the -- 27 that's kind of the target that we're trying to assist by 28 giving them this chart? 9 1 MR. HELLER: Correct, those will be the people 2 eligible to use it. 3 MR. RUNNER: What -- do -- what is the amount 4 of tax gap that we've established that that particular 5 group owes? 6 MR. HELLER: My understanding it's 7 approximately $851 million for just that consumer set 8 part. 9 MR. RUNNER: Okay. So let me -- using that 10 then as the -- as kind of a target to which we're trying 11 to get with this particular group, $851 million is the 12 missing amount, in -- in one sense some of that gets 13 taken up, that 851 million, in our -- in our Qualified 14 Purchaser Program, right? Because Qualified Purchaser 15 is not only related to the issue of their business to 16 business tax in regards to their -- in terms of their 17 form for Qualified Purchasers, but it's also their 18 personal unpaid or paid Use Tax, too, correct? 19 MR. HELLER: It would total -- it would depend 20 on the type of business and the returns they file. But 21 if you had a Schedule C type business person I think 22 that could be the case. But essentially if you have a 23 corporation, the corporation's the business, the owners 24 of the corporation could file separate consumer Use Tax 25 returns for their purchases. 26 MR. RUNNER: Right. But -- but the point I 27 guess I was trying to make, and I think I got that 28 right, and that is if you are using the Qualified 10 1 Purchaser form, the form that you're filling out is not 2 only items that you bought for your business but it's 3 also items that you may have bought for your personal 4 use? 5 MR. HELLER: I think -- they could be included 6 in that return -- 7 MR. RUNNER: Okay. 8 MR. HELLER: -- if you are like a Schedule C 9 business -- 10 MR. RUNNER: All right, okay. 11 MR. HELLER: -- that the individual is 12 synonymous -- 13 MR. RUNNER: Okay. So -- 14 MR. HELLER: -- with the business. 15 MR. RUNNER: Okay. 16 MR. HELLER: I think that's possible. 17 MR. RUNNER: Okay. The other issue in this 18 table, and again my -- my concern is that the table is 19 overstated -- is that if the target is $851 million that 20 we project is -- is -- is the missing amount, the table 21 that at least was reported back to us, and this is the 22 figure you guys had given us, is that the -- the 23 assumption is that the tabl -- if everybody fully used 24 the table that the amount of dollars that would come in 25 would be around $700 million. Is that right? 26 MR. HELLER: Mr. Runner, that was -- my 27 understanding is that answer is based on the assumption 28 that every single California taxpayer regardless of 11 1 whether they owed any Use Tax liability or whether it 2 was really -- they had one that was eligible for use on 3 the Use -- with the Use Tax table would actually go 4 ahead and report the amount by AGI on their income tax 5 return. 6 MR. RUNNER: Well, our assumption is that 7 anybody who reports it owes it, right? 8 MR. HELLER: Our assumption is, but we never 9 assume that every single Californian who files an income 10 tax return owes Use Tax. 11 MR. RUNNER: Oh. Okay. But the assumption is 12 if they use the Use -- if they -- the assumption is if 13 they use the Use Tax table they're using it because they 14 believe they owe a Use Tax? 15 MR. HELLER: That is correct. Maybe I could -- 16 MR. RUNNER: Okay. 17 MR. HELLER: Could I rephrase real quickly? 18 MR. RUNNER: Sure. Sure. 19 MR. HELLER: Because I don't want to be -- I'm 20 not trying to have a tangent; I think assuming that 21 every California taxpayer actually in fact had a Use Tax 22 liability chose to -- to pay that liability by using the 23 tax look up table amount -- 24 MR. RUNNER: Right. 25 MR. HELLER: -- then we do believe it would be 26 about $708 million -- 27 MR. RUNNER: Okay. 28 MR. HELLER: -- approximately. 12 1 MR. RUNNER: So -- so here's where I think it's 2 overstated then, because the Use Tax table -- I mean, 3 the -- the instructions on the table indicate that it's 4 only for purchases -- purchases over $1,000, right -- 5 are to be added to it, correct? 6 MR. HELLER: That is correct. 7 MR. RUNNER: Okay. So, do we have any -- any 8 idea -- so -- so really the balance there is about $150 9 million. The assumption I guess we're making is that 10 there's only $150 million worth of Use Tax that's due 11 for consumer -- for retailer or business to consumer 12 sales that are over $1,000? 13 MR. HELLER: Senator Runner, it's really not 14 the way that our table's constructed and what -- the way 15 our assumptions were done. And as I said back during 16 the June Board meeting, we were never trying to aim at 17 closing a specific tax gap amount. And we worked 18 backwards from the amount of percentage of AGI that 19 California consumers spend at the types of retailers who 20 wouldn't be registered with the Board. 21 And so there was never an assumption that there 22 was a certain amount of money that's maybe coming from 23 the Qualified Purchasers or purchases over $1,000 and 24 shouldn't be accounted for in the table. 25 MR. RUNNER: Uh-huh. 26 MR. HELLER: Because we worked back from a 27 different starting premise. 28 MR. RUNNER: Okay. Well, here -- here -- 13 1 MR. HELLER: That's not to say that that's not 2 a relevant idea, it's just not what we did. 3 MR. RUNNER: Okay. Here -- here's my concern, 4 though, is that with the guideline that we may be giving 5 our taxpayers out there, and it could be a bit 6 overstated, it -- because if indeed they all paid it 7 according to the chart and they also then paid the 8 additional amount of -- of Use Tax for the purchases 9 over -- over $1,000 indeed I believe under that scenario 10 we'd be collecting far more than the $850 million 11 supposedly gap -- tax gap. 12 The reason why I think that's a concern for us 13 is because we're actually steering them toward that 14 chart. It would be one thing if we just said use the 15 chart, but the fact is we actually steer them toward the 16 chart by giving them a safe harbor. 17 So we can say, hey, you can use the chart if 18 you want. Oh, by the way, if you use the chart you're 19 going to have some protection. 20 So we are steering them toward a chart that I 21 feel is probably overstated. And, again, I'm -- this is 22 my opinion and that's, I guess -- I guess the issue I 23 just want to get on record at that point. 24 But that's my concern in regards to the chart. 25 I think it's overstated. It makes assumptions. 26 Let me just conclude by this -- by these 27 obser -- or by at least some issues, and this is going 28 to come up I think a little bit later when we start 14 1 talking about people's issues and concerns tomorrow when 2 we start talking about Use Tax and people's 3 understanding. 4 L. A. Times had an article last week in a poll. 5 And in the L. A. Times poll that they had done their 6 poll indicated that by their record, and this was a -- a 7 legitimate I think poll that went to 1600 people -- 8 that they did for 1600 people -- and in their poll, in 9 this story, they related the fact that 82 percent of 10 the -- 82 percent of the people they polled said they 11 never or rarely make internet purchases. 12 And so, my concern is that certainly this chart 13 does not make that this assumption. The chart actually 14 makes the assumption that everybody does. And because 15 of where we -- because, again, we're going to gather all 16 the money. 17 The other issue that I think is of interest, 18 and I think it does go back to the point that Member 19 Steel said, and that is it does not reflect the 20 information we're getting back from our own Qualified 21 Purchaser returns, which are closer between 90 -- 85 and 22 90 percent of the people who return those say "no tax 23 due." 24 So I guess that's my concern by then having a 25 the chart and steering people toward a chart, assuming 26 and promising them kind of -- some kind of safe harbor 27 is we're kind of directing them to a chart I believe is 28 overstated. 15 1 Thank you. 2 MR. HORTON: Further discussion, Members? 3 Hearing none, is there a motion? 4 MS. YEE: I'm going to move to adopt the staff 5 recommendation. 6 MR. HORTON: Been moved by Ms. Yee to adopt 7 staff recommendation. Is there a second? 8 MS. MANDEL: Second. 9 MR. HORTON: Second by Ms. Mandel. 10 Presume objection. 11 MS. STEEL: Objection. 12 MR. HORTON: Ms. Olson, please call the roll. 13 MS. OLSON: Mr. Horton. 14 MR. HORTON: Aye. 15 MS. OLSON: Ms. Steel. 16 MS. STEEL: No. 17 MS. OLSON: Mr. Runner. 18 MR. RUNNER: No. 19 MS. OLSON: Ms. Yee. 20 MS. YEE: Aye. 21 MS. OLSON: Ms. Mandel. 22 MS. MANDEL: Aye. 23 MR. HORTON: Motion carries. 24 ---oOo--- 25 26 27 28 16 1 REPORTER'SCERTIFICATE 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 July 26, 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 16 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: July 28, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 17