1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 AUGUST 23, 2011 9 ITEM P5 ADMINISTRATION DEPUTY DIRECTOR'S REPORT 10 ITEM 3 11 CONCEPT TAX GAP PLAN AND PLACEHOLDER BCP 12 13 14 15 16 17 18 19 20 21 Reported by: Juli Price Jackson 22 No. CSR 5214 23 24 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 18 For the Staff: Liz Houser Deputy Director 19 Administration 20 Jeff McGuire Deputy Director 21 Sales and Use Tax 22 Susanne Beuhler Division Chief 23 Tax Policy 24 Anita Gore Deputy Director 25 External Affairs 26 27 28 ---oOo--- 2 1 INDEX OF SPEAKERS 2 3 NAME PAGE 4 5 Gina Rodriquez 4 6 Mira Guertin 6 7 Brett Granlund 40 8 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 23, 2011 4 ---oOo--- 5 MS. OLSON: Our next item is P5.3, Concept Tax 6 Gap 2 Plan and Placeholder BCP. 7 MR. HORTON: Members, we have a couple of 8 individuals, guests, here today. 9 Gina Rodriquez, with the California Taxpayers' 10 Association, please come forward. 11 Mira Guertin, with the -- 12 MS. GUERTIN: Yes, here. 13 MR. HORTON: -- California Chamber of Commerce. 14 We'd like to hear from our guests today first 15 and then we'll go to the Department. 16 ---o0o--- 17 GINA RODRIQUEZ 18 ---o0o--- 19 MS. RODRIQUEZ: Thank you, Mr. Chair, Members, 20 Gina Rodriquez. I'm the Vice President of State Tax 21 Policy for Cal-Tax. 22 Two -- two issues, one -- first of which is 23 with respect to the consumer market data. Cal-Tax 24 continues to be concerned about fair and equitable tax 25 administration as well as taxpayer privacy. 26 And without hearing their testimony first, this 27 pilot does not seem to be very well defined. For 28 example, it's unclear how purchasers would know whether 4 1 or not they have opted in to the program. 2 And as we hear more from staff, you know, we 3 keep asking at what point would staff be considered to 4 be crossing the line and intruding on people's privacy? 5 With respect to the pilot program for shipping 6 records, we're not clear whether this is all shippers 7 they're going after or just private shippers. But once 8 staff does get a shipping manifest, then what happens? 9 That's unclear to us on how will they be able to tell 10 whether an item is taxable in the hands of a purchaser, 11 or, possibly, I don't know, maybe they're just going to 12 be sending "Dear John" letters. 13 But even if staff could determine what is 14 subject to tax and how they determine whether or not the 15 tax -- how do they determine whether or not the taxpayer 16 has already paid use tax? Because that certainly could 17 happen in some cases. 18 Finally, we are aware that staff has already 19 sent requests out for information to certain shippers 20 requesting eight years' worth of records and data. 21 And this -- this type of compliance program 22 seems completely unreasonable and unfair to businesses 23 who happen to be in the shipping business. 24 For these reasons, we are very concerned about 25 these two proposals. 26 Thank you for your time. 27 MR. HORTON: Thank you very much. 28 Miss Guertin? 5 1 ---o0o--- 2 MIRA GUERTIN 3 ---o0o--- 4 MS. GUERTIN: Thank you very much, Mr. Chair 5 and Members, Mira Guertin here on behalf of the 6 California Chamber of Commerce. 7 I came today to express some concerns with the 8 proposal just mentioned by my colleague, Miss Rodriquez. 9 You know, we've been involved in this 10 conversation for several years with the legislature and 11 also with Members of the Board. And, you know, I think 12 we're grateful for the opportunity to come here today. 13 I am grateful to come today and talk about this and just 14 raise some of these concerns. 15 And also it may be that, you know, as 16 Miss Rodriquez mentioned, that these concerns will be 17 addressed when we hear from staff. But, you know, we 18 know that the this is an ongoing problem for the State 19 in trying to find effective ways to increase our use tax 20 collection for the tax that is already due. 21 And we're very pleased with the Board's 22 efforts, which, I think, have been increasing greatly to 23 make sure that we educate individuals more and improve 24 voluntary compliance. 25 But in -- in specific regard to this proposal 26 dealing with third party collection from shippers, some 27 of it is just concerns because there is a little bit of 28 ambiguity about how it will play out. We don't know, 6 1 for example, who will the shippers be? 2 I presume it's things like FedEx, UPS. But we 3 don't know, does it go beyond to actual retailers that 4 do shipping directly? Could it potentially even be 5 ports and those kinds of things? 6 So, there's a lot of just kind of concern about 7 who this will even affect. It also -- you know, for 8 whoever it will eventually, we'd be making this -- 9 ask -- or imposing a tremendous burden and cost on those 10 businesses in order to help with enforcement, 11 potentially requiring they turn over millions of 12 documents annually to the BOE. And it's unclear how 13 much, you know, payback we'll really get at the end of 14 the day for the State in terms of, you know, being able 15 to use those documents to bring in the revenue. So, 16 that's a big concern. 17 Also, you know, we have some concerns, for 18 example, USPS, United States Postal Service, does the 19 Board have the ability to request shipping records from 20 them as well? 21 And if not, then does that create a whole 22 competitive disadvantage for companies, the private 23 companies who would have to comply with the law? And 24 now if you want keep your private -- your packages 25 private, you just ship them through USPS. So, that 26 creates a concern. 27 We also have some concerns about possible 28 liability for shippers with those privacy implications 7 1 about what information they might need to turn over. 2 So, just another thing for us to consider. 3 And, you know, I think the taxpayer privacy 4 issue is very different in some ways from what Colorado 5 did recently, but we know that that's being litigated. 6 Doesn't sound like there would be a lot of specific data 7 that you conceal to ultimately having BOE staff come to 8 someone's house to audit them and, basically, they would 9 have to come out and try to prove, basically, disclosing 10 whatever they happened to purchase -- be it embarrassing 11 or private -- to prove that they're subject to an 12 exemption. 13 So, there are just some issues that we'd like 14 to see addressed or clarified a little bit. 15 But we're happy to discuss those further and we 16 look forward to working with you to see if there's a way 17 to address these issues and find a workable solution. 18 Thank you. 19 MR. HORTON: Thank you very much. 20 I'm going to going to ask that you guys stay 21 while the Department makes their presentation. 22 Many of the Members have expressed similar 23 concerns in the past, but the primary, overall concern 24 is providing a method in which this input can be taken 25 into consideration prior to -- I know the Department had 26 expressed that they have reached out to the interested 27 parties to get their input and, yet, we still have 28 interested parties who want to share additional 8 1 thoughts. 2 So, we want to make sure that there's a 3 conduit, a method which that can occur. I mean, there 4 is some concerns that I've had with the proposal and in 5 regards to just reaching out to the various interested 6 parties that will be impacted by some of the legislative 7 proposals that we are putting forth and some of the 8 policy changes. 9 So, I am going to encourage you to continue to 10 do that. And to the extent possible, let's -- let's -- 11 let's make sure that we get everyone involved in this 12 process. 13 So, please commence with your presentations. 14 Commence starting with your introduction for the record, 15 please. 16 MR. MC GUIRE: Good afternoon, Chairman and 17 Members. I'm Jeff McGuire with the Sales and Use Tax 18 Department. 19 With me today is Susanne Beuhler, our Tax 20 Policy Division Chief. 21 And we're going to be presenting to you our 22 2011 to 2014 Tax Gap Plan, affectionately known as Tax 23 Gap 2. 24 I'd like to provide some initial background and 25 kind of an overview of the plan. And then Miss Beuhler 26 will provide some detail on the Budget Change Proposal 27 concepts that we have before you this afternoon. 28 As you do note, the Tax Gap is defined as the 9 1 difference between taxes owed and taxes paid. And for 2 context, the Sales and Use Tax program generated 3 $42.2 billion in fiscal year 2009-10, with an estimated 4 gap of $2.3 billion. 5 The good news is that 95 percent of the taxes 6 that are due are being collected, with a gap of only 5 7 percent. However, the gap still does represent a 8 significant amount of dollars. And as the Department 9 charged with responsibility for administering this 10 program, we feel a responsibility to constantly evaluate 11 the effectiveness of our efforts and seek new ways to 12 reduce the gap in a cost effective and fair manner. 13 As you know, California's tax system is a 14 voluntary compliance system that is based on the premise 15 that each taxpayer will correctly report and pay the 16 taxes owed. Voluntary compliance is the most effective 17 and efficient method of collecting tax and is improved 18 by implementing a tax program that is equitable and 19 committed to insuring compliance. 20 Under our core sales and use tax program, we 21 perform four core functions, which are registering 22 businesses, processing tax returns, collecting 23 delinquent taxes and auditing the businesses. All of 24 these functions are supported by providing taxpayers 25 with information and education to assist them in meeting 26 their tax obligations. 27 While our ideal goal is to completely close the 28 Tax Gap, we're realistic and we understand and 10 1 acknowledge that we cannot completely close the Tax Gap. 2 For example, individuals' liabilities may be 3 too small to justify even identification or collection 4 of those liabilities. And, in some cases, a liability 5 may be identified but the tax debtor just does not have 6 any resources to actually pay that tax debt. And we 7 acknowledge that that actually does exist. 8 As such, we believe that we're presenting a 9 plan that will help narrow the Tax Gap through cost 10 effective means of increasing voluntary compliance, 11 along with some enforcement efforts that are in 12 compliance with all of the State's tax laws. 13 Our plan does balance education and outreach 14 efforts to reach out to taxpayers and tax practitioners, 15 along with some enforcement-oriented approaches. It is 16 both of these elements that are the cornerstone of all 17 tax programs that rely on voluntary compliance. 18 To clarify what makes up the sales and use tax 19 gap, it falls into basically three component parts. And 20 our plan has identified efforts under each of those 21 component parts that actually fall into three additional 22 categories. 23 Those categories include efforts that we can 24 pursue without existing resources, legislative proposals 25 that would be formally considered by you, as the Board 26 Members, at future legislative committee meetings when 27 we bring those forward and, finally, efforts that would 28 require additional resources are being presented today 11 1 as Budget Change Proposal concepts. 2 Miss Beuhler will provide an overview of each 3 of those BCP concepts for your consideration in just a 4 moment. 5 Just to summarize the three areas of the Gap, 6 the first area is use tax liability. It is our largest 7 identified area of the Tax Gap, at $1.2 billion and it 8 involves transactions between businesses and businesses 9 as well as businesses and consumers and is really 10 focused on those businesses and consumers who are not 11 registered to report and pay use taxes. 12 As you know, use tax has gotten much attention 13 over the past couple of years, but the growth in 14 internet sales -- this is an area of the Gap that seems 15 to have a continuous growth factor. As such, most of 16 our efforts in our plan are focused on the area of use 17 tax. 18 As you know, we have recently made changes to 19 our Qualified Purchaser Program. And also we have 20 implemented the look-up table that was required by 21 legislation recently for individuals reporting on their 22 income tax returns. 23 In addition, our plan proposes six education 24 and outreach efforts under this use tax area. We have 25 three efforts that were referred to by our speakers that 26 involved third party data. We also have an element that 27 involves simplifying our stand alone use tax return and 28 then we also have four legislative proposals that will 12 1 come to you in the future. And then, finally, we do 2 have one Budget Proposal Concept that involves an 3 advertising and outreach campaign related to use tax. 4 The second area of the Gap is related to our 5 registered taxpayers. Those are those retailers, 6 wholesalers and manufacturers that hold sellers' permits 7 and regularly file sales and use tax reports -- returns 8 with us. And that involves either underreporting by 9 those businesses or underpayment of identified taxes 10 that they do owe. And that part of the Gap is 11 identified at $560 million. 12 Under this component we do have three proposals 13 that are included in our BCP concepts, that Susanne will 14 discuss in a moment, and one legislative suggestion. 15 The last area of our Gap is non-filers and tax 16 evaders. These are people who are not actually playing 17 in the system with everybody else currently. That part 18 of the Gap is identified at $584 million. And under 19 this component we have one proposal that is included in 20 our BCP concepts. 21 At this point I will turn it over to Susanne so 22 that she can summarize the BCP concepts that are 23 contained in the plan. 24 And then we do respectfully request your 25 approval of these five Budget Change Proposal concepts. 26 As I mentioned, the legislative proposals will 27 come back to you in the future at a -- for formal 28 consideration as part of the Legislative Committee. And 13 1 staff will move forward with those components of the 2 plan that do not require legislation or additional 3 funding, unless the Board wishes to direct or provide us 4 additional direction on those. 5 So, I'll turn it over to Susanne. 6 MR. RUNNER: I have a question of the Chair? 7 MR. HORTON: Sure. 8 MR. RUNNER: Just to -- the pleasure of the 9 Chair in regards to the discussion in these items, do 10 you -- are -- doesn't make any difference to me, I just 11 want to know what the -- what the rules are. 12 Do you want us to go all the way through the 13 presentation and then ask questions? Or do you -- or 14 are we going to like interrupt at certain sections of 15 the presentation? 16 MR. HORTON: To the extent we can, let's get 17 through the -- 18 MR. RUNNER: Okay. 19 MR. HORTON: -- entire presentation. 20 MR. RUNNER: That's fine. 21 MR. HORTON: I mean, personally, I had to hold 22 myself back on a couple of those. 23 MR. RUNNER: I just need to know if I need to 24 or not. 25 MR. HORTON: Okay, all right. 26 Thank you. 27 Miss Beuhler? 28 MS. BEUHLER: Good afternoon. 14 1 The concept BCP has five elements. The first 2 element is the use tax educational outreach campaign. 3 This full media campaign would include the development 4 of a message, paid media development, production and 5 placement and production of any collateral materials. 6 The information obtained through this effort 7 would also be leveraged in our other outreach efforts, 8 as we obtain them. 9 Staff recommends requesting a total of 5.5 PYs 10 and expenditures of $538,000. The anticipated revenue 11 from this component would be a $9.65 million. 12 The second item is the registered taxpayers 13 desk audit program. Staff is proposing to utilize third 14 party data to compare to amounts reported by taxpayers 15 on their sales and use tax return. 16 This proposal would also make permanent the 17 consumer motor vehicle recovery corporation fee data 18 program. The BCP would include 9 and a half PYs and 19 expenditures of $810,000 and an estimated revenue of 20 $3.4 million. 21 Our third item is registered taxpayers expanded 22 bankruptcy program. This item was included in Tax 23 Gap 1. It's been very productive, but it needs 24 additional positions to handle the increase in 25 bankruptcy filings due to the economic downturn. 26 The workload increase indicates an additional 27 need of 3 PYs and expenditures of $297,000. Staff 28 estimates the additional revenue to be 1.9 million. 15 1 Item 4 is the registered taxpayers' penalty and 2 interest reprieve program. As discussed in last month's 3 Board meeting, the BOE previously had a one-time penalty 4 and interest reprieve program. This proposal requires 5 legislation and would make the program permanent. 6 Because legislation is required, we would be 7 requesting 5 PYs in the second year and expenditures of 8 $414,000. The program is estimated to generate revenue 9 of 5 million. 10 Finally, item 5 is the non-filers tax evasion 11 reward program. BOE has statutory authority to conduct 12 a reward program, however, it has never been funded. 13 Additionally, regulations prescribed by the 14 Board would need to be promulgated to identify the scope 15 under which leads submitted would qualify for an award. 16 The BCP would be submitted to request the 17 funding. However, since this Tax Gap 2 Plan was 18 released, we have received the suggestion that it be 19 expanded to include resources in the BCP to conduct any 20 audits resulting from the leads. These PYs would be 21 included in the September BCP if this element is 22 approved today. 23 The program would result in expenditures of 1 24 million, plus costs for any added PYs and anticipated 25 revenue of 10 million. 26 If it pleases the Board, we would request 27 concept approval from the Board on the five items that 28 would be a part of this BCP. 16 1 We would also appreciate direction on any other 2 items included in the Tax Gap Plan. 3 MR. MC GUIRE: I just wanted to add one 4 clarifying point is that she was indicating the ongoing 5 costs of those, in the advertising campaign there's 6 actually, 2.5 million in year 1 to actually do the 7 advertising campaign, in addition to the staffing. 8 Just -- 9 MR. HORTON: Okay. Does that conclude your 10 presentation? 11 MR. MC GUIRE: Yes, it does. 12 MR. HORTON: All right, thank you very much. 13 Discussion, Members? 14 MS. MANDEL: Can I ask just a quick, fast 15 clarifying question? 16 MR. HORTON: Sure. 17 MS. MANDEL: I heard you say that this fourth 18 item, penalty and interest reprieve program requires 19 legislation, and, yet, you talked about it as being in 20 the BCP. 21 So, wouldn't you first bring something to the 22 Legislative Committee on penalty and reprieve and then, 23 if it gets -- legislation actually gets enacted, do 24 you -- there would then be a legislative BCP? 25 Is that how it would really work? 26 MS. HOUSER: It -- normally how this would work 27 is when they -- when the legislation is enacted, we 28 would -- 17 1 MS. MANDEL: You say, "normally," so, are you 2 proposing that it gets done differently? 3 MS. HOUSER: That would be the case with this 4 one. Also it would be done through our normal 5 legislative -- legislatively-enacted BCP process. It 6 would not be part of the -- 7 MS. MANDEL: A BCP that might -- 8 MS. HOUSER: -- the BCP -- 9 MS. MANDEL: -- come back in September -- 10 MS. HOUSER: -- a budget -- 11 MS. MANDEL: (Unintelligible). 12 MS. HOUSER: -- BCP, correct. 13 MS. MANDEL: Okay, thank you. 14 MR. HORTON: Thank you. 15 Mr. Runner? 16 MR. RUNNER: Yeah, a couple -- a couple of 17 observations and some questions. 18 One is on the -- on the gap itself and I just 19 wanted to clarify in terms of the -- the presentation of 20 the amounts, when we talk about non-filers and tax 21 evasion at that point, it's my understanding that we 22 don't really include then, for instance, the tax that's 23 missed on illegal activity. 24 And at this point I'm not -- I'm talking -- I'm 25 thinking in regards to, for instance, CD sales, DVD 26 sales that may take place out of somebody's trunk or 27 those -- these are -- these would be -- these would be 28 what we would think of as lawful businesses that are 18 1 evading tax? 2 Is that a fair -- 3 MR. MC GUIRE: That's a fair categorization, 4 yes, it would -- it does exclude -- because our research 5 folks put this together for us -- that they exclude 6 illegal activities, like illegal drug sales, like you 7 said, sales of illegal merchandise, these would 8 businesses who are acting what appears to be legally, 9 but not complying at all, like getting the required 10 permits and licenses or filing tax returns. 11 MR. RUNNER: Okay. I guess we could start 12 going through some of the specifics within -- within the 13 plan that I have some -- some questions about. 14 Is that how you want to work through this, 15 Mr. Chair? 16 MS. YEE: Can we take it section by section? 17 MR. RUNNER: Sure. That would be -- actually, 18 I'd be fine that with that. 19 MR. HORTON: Okay. Members, start out with the 20 first section. 21 Go ahead, Mr. Runner. 22 MR. RUNNER: That would -- I think are we 23 going -- I'm skipping over Tax Gap 1 as much and going 24 over to Tax Gap 2 -- 25 MR. HORTON: Okay. 26 MR. RUNNER: -- is where I would start. 27 MS. MANDEL: It's on page 4? 28 MR. RUNNER: Starts with page 4 and then goes 19 1 on, obviously, to -- and then starting then with the 2 discussions in regards to -- to use tax. 3 And let me ask some questions in regards to the 4 media outreach specific program. Obviously, it's an 5 issue that I think the Board needs to respond to. I 6 think we've -- I think it's our observation, certainly 7 observation by some of those in the media that we have 8 read and that have written about us that we have not -- 9 that we need to do a better job of educating. And I 10 would certainly concur with that. 11 My -- not my -- my observation would be that 12 $2.5 million in a California market is not a lot of 13 money. And, so, it seems to me that it's really 14 important for us to know how to target that money in 15 order to insure that, you know, we just don't all of a 16 sudden spend $2.5 million on bunch of billboards and 17 probably get very little return. 18 I guess I'm interested in hearing from -- from 19 you all in regards to how it is that you think, in your 20 observations, to make sure that we effectively spend 21 $2.5 million in order to make sure that we get the 22 return that is anticipated there. 23 MR. MC GUIRE: Okay. 24 MS. HOUSER: Yeah, let me ask Anita Gore, our 25 Deputy for External Affairs, to come and address that. 26 MR. RUNNER: Okay. 27 MS. GORE: Good afternoon, Anita Gore, Deputy 28 Director of External Affairs. 20 1 Any sort of money that would be spent on a 2 media campaign would be intended to contract with 3 someone, a professional organization, that would put 4 together a comprehensive program for us that would 5 include messaging, development of any advertisements, 6 collateral materials, which would be any fliers, 7 posters, handouts, mailers, that type of materials. 8 And 2.5 million is a very conservative approach 9 when you're talking about buying media in California. 10 You know, we -- picking a number is always a difficult 11 thing. I think we can make major inroads with the 12 $2.5 million. And then what we would do is, you know, 13 re-visit over time if we needed to continue with a paid 14 media campaign. 15 But what you have are tangibles from that 16 campaign that you can continue to use over time, enhance 17 and, you know, work to educate taxpayers in order to 18 increase voluntary compliance through the education that 19 they receive using those materials. 20 MR. RUNNER: So, I would assume then that in 21 that process, again, like any other -- any other group 22 who's doing media and you're trying to determine what 23 direction you want to go, you are going to want some -- 24 you're going to want information in regards to how to 25 target and who to target for the best return of that 26 response, you know, in terms of your dollars paid. 27 I know we -- we had a brief discussion about 28 this last month and I'm still of the great -- of the 21 1 great opinion that that requires us to do some outside 2 specific polling to figure it out to say who -- where is 3 our best money spent? Who are the folks that need to be 4 told what and who and what's their message need to be in 5 order to get them to change their behavior? 6 Because that's what this is really all about, 7 it's trying to figure out how to get the message, get 8 them to hear it and deliver it in such a way that their 9 behavior changes in order for the use tax to be paid. 10 And, so, I would hope that we would continue 11 to, again, use that as a -- as a tool that we would try 12 to figure out how to get the best return that way. And 13 I assume, again, I am not sure -- it depends how you 14 write your media plan as to whether or not they're going 15 to do that or not. You can write a media plan that says 16 give us cheap ways to go ahead and get to everybody or 17 you can write a media plan that says -- starts with, you 18 know, help us target this small amount of the money to 19 best demographics that are -- that we'll get the best 20 return on. 21 So, I think that'll be the challenge in doing 22 that. And I hope that we continue to look at that. And 23 I know internally we're going to have a discussion in 24 regards to the -- to some surveys. And I'll come back 25 to that, a broader discussion about that when we come 26 back. 27 Going on with the discussion in regards to the 28 use tax discussion, points that were brought up 22 1 earlier -- and, well, actually maybe go through all 2 three of those points. 3 The first point there on page 7 is, (reading), 4 "Identify high income earners most likely to 5 have purchases subjects to use tax. Provide 6 educational materials on use tax." 7 Again, I think -- I think that's a good idea, 8 but, again, I think you need to know what your message 9 needs to be to that. Because if our message to them is, 10 "Oh, by the way, you owe a use tax," we've done that 11 enough to know that we don't get very good response. 12 So, it seems to me part of the issue of contact 13 has got to be motivation, how do -- what's the message 14 that we have to go -- kind of goes back to the issue as 15 to how -- how -- how we develop our message at that 16 point. 17 The second item down, the pilot use of 18 purchased public consumer marketing data and whatnot, I 19 have some of the same concerns that I heard. 20 We've had a brief foray into this a couple 21 months ago in regards to try to figure out how to get 22 third party information and what that would mean and 23 who -- who would be available. 24 And I think I'd even say just because you can 25 legally get it doesn't necessarily mean that we should 26 use it. Because -- just because we can legally get it 27 doesn't necessarily mean that it becomes a tool -- 28 doesn't become a necessary tool or a real tool for us to 23 1 use. 2 So, I have a concern -- be concerned about that 3 particular -- in fact, I'll probably let -- if you want, 4 just respond to these three -- these two items. 5 And then the third thing in regards to the 6 pilot use of shipping records, again, you know, I am 7 concerned that in these particular items that we -- that 8 we give clarity as far as what we're going -- what we're 9 going to deal with. 10 I think what -- and let me just say what I'm 11 looking forward to doing on this proposal, and I -- and 12 I think this is what's -- I think staff appreciates this 13 as we go down through it and that is we may disagree on 14 issues, and that's fine, but the important issue for 15 staff to know is -- is the direction to which then the 16 Board has given. 17 And I think that that's what I would hope that 18 we can do through this discussion. There might be a lot 19 of things in here that every one of us say, "Hey, that's 20 fine," on and we ought to go forward with it. 21 And I hope -- that we need to make to make it 22 clear as far as what those are. There might be other 23 items in this -- in this particular report where a 24 majority of the Board then says, "Fine, go for it." 25 That's clear direction then to the staff at that point. 26 But there is other items that I think maybe we 27 want to be careful of just by us not saying anything 28 about them that somehow the staff then gets confused as 24 1 to what they're supposed to do or they go out and do 2 something then all of a sudden somebody says, "Well, I 3 why did you do that?" And the answer is, "Well, it was 4 in the report." 5 And, so, I'm seeking to be able to help, at 6 least, provide clarity and direction as we go through 7 these particular issues. 8 Again, the concern that I will have and I'll 9 prepare -- I will be prepared when we're done with this 10 to make the motion that we actually leave out some of 11 these items. Not that we might not ever do them, but, 12 at least, we'd take them out of the -- out of the 13 discussion right now for further -- further 14 contemplation and -- and interested parties' meetings. 15 There's been some discussion about the fact 16 that there's been interested parties' meetings and some 17 of these have come out of that. 18 The difference is, I think, is those interested 19 parties' meetings were in -- in regards to the general 20 tax gap and I think the difference between having them 21 here now is that these are specific thoughts about what 22 to do. And I think, for that reason, they kind of -- 23 they're a little bit different and need to be pulled out 24 and then have a new round of interested parties on some 25 of these issues where we're going to be starting to work 26 with -- with other folks, whether it be through the 27 shipping records and those areas. 28 So, actually, those are my -- well, actually, a 25 1 couple more in regards to tax simplification or, 2 actually, use tax in regards to long term efforts. 3 I do have a difficulty in regards to the issues 4 in regards to, (reading), 5 "Require CPAs, enrolled agents, and other 6 licensed tax preparers that complete income and 7 tax returns to complete specific numbers of 8 hours required." 9 Again, I think that's a -- I think we need to 10 hear from those folks before we start deciding to ask 11 and the staff can move forward with that kind of plan. 12 I think we need to have some interested parties people 13 in that business to see if that is, indeed, what it is 14 that -- that -- that we should be doing. 15 And, again, certainly am concerned about -- 16 again, this is a legislation required item, so, you 17 know, a lot of these -- I guess we may not approve them 18 here today because they're going to require legislative 19 approval, so, we're going to hear them specifically 20 again, Mr. Chair, right, in regards to that? 21 But at the same time, I guess we want to be 22 careful, I would think, to say, if something doesn't 23 have a -- a support by the Board, I'm not sure why it is 24 that we would ask the staff to come back and do 25 legislation only to come back. 26 So, I am not sure what the Chair's pleasure on 27 that point is or if we just say, "Hey, yeah, go for all 28 six of those things," or whatever the number is, and 26 1 come back -- and come back see us or if want to then 2 even narrow those down to things that are conceptually 3 okay with the Board. 4 So, those would be my observations on the -- on 5 the use tax portion. 6 MR. HORTON: I might need some clarification on 7 the last one, Mr. Runner? 8 MR. RUNNER: My question? 9 MR. HORTON: Yes. 10 MR. RUNNER: And you mean in regards to the -- 11 the legislative issues? 12 MR. HORTON: I think it was a process 13 question. 14 MR. RUNNER: Okay. What was the -- 15 MR. HORTON: Well, why don't I just share? 16 The legislative component will go through a 17 fully vetted process. So, all of that legislation will 18 be vetted through the Legislative Committee process, 19 even to the point of maybe holding some actual 20 interested parties' meetings because I -- you know, I 21 think it's just important that we do that. 22 So, on that issues -- 23 MR. RUNNER: Yeah. 24 MR. HORTON: -- rest assured, as staff has 25 indicated early on that it will go through the 26 Legislative Committee and -- 27 MR. RUNNER: My only question in regards to 28 that was specifically, for instance, let me just choose 27 1 one, the requirement tax -- required tax preparers that 2 complete income tax, sales tax, to explain the use tax 3 and to ask clients if they have a tax liability when 4 preparing. 5 So, a requirement, a mandate, if you will, on 6 tax preparers. My only thought would be if, indeed, 7 right now -- and maybe we're not even going to get there 8 today -- but if, indeed, right now there were three 9 Members who say, "We don't like that idea," my question 10 is should we have the staff still go out and -- and -- 11 and do the research and write -- and have the interested 12 parties if we know it doesn't even start with the 13 support? 14 That's -- that's my specific observation, so -- 15 MR. HORTON: Yeah, my experience has been when 16 he engage the interested parties and the other 17 individuals who are impacted by this stimuli, if you 18 will, this catalyst, which is all it is, it's not really 19 a recommendation that we are going to vote on, it's just 20 something to stimulate the conversation and discussion. 21 Several of these I am not prepared to vote 22 positive -- a positive way for -- for these items. And 23 I would imagine some of the other Members aren't either. 24 So, thus the reason for taking it through the process. 25 But I am very much interested in seeing what 26 will evolve out of that process -- may not be mandatory, 27 it may be optional. It may -- on the -- on the required 28 courses for the CPA, it may just become an alternative. 28 1 Or it may become some certification by the Board of 2 Equalization where we can certify that an individual has 3 completed certain courses and, as a result of that, they 4 have something to tell their clients that they're -- 5 have a slight edge over everyone else because they're 6 certified by the Board of Equalization. 7 But I don't know. I mean, those are 8 hypotheticals that will, hopefully, evolve through that 9 process and ultimately be decided by the Board whether 10 or not it lives or dies. 11 MR. RUNNER: On the legislative process? 12 MR. HORTON: Yes. 13 MR. RUNNER: Okay. 14 MR. HORTON: Member Yee? 15 MS. YEE: Thank you very much, Mr. Chairman. 16 Let me start with the -- I am going run through 17 the components as Mr. Runner has just done as well, and 18 offer some observations. 19 With respect to the education and outreach 20 efforts, one of the questions I have is really since one 21 of the components of this plan is distribution of our 22 internally developed use tax survey is why aren't we 23 incorporating the development of that survey here? 24 Part of what I've been really uncomfortable 25 with is that I think we have an internal capacity issue 26 whereby we don't have expertise in market research. We 27 have no expertise in surveying people, to the ultimate 28 objective of changing behavior, if that is our 29 1 objective. 2 And the thought that I had here was that I 3 think there's been a lot of work done on the survey and 4 we're going to speak about that momentarily, but I'd be 5 more comfortable if we were going all out for a media 6 campaign to incorporate that survey element into this 7 proposal. 8 It does us no good if we have a faulty survey 9 tool that isn't going to really be consistent with where 10 we want to go with the general outreach plan. 11 The two and a half million dollars, I would 12 agree in terms of how we look at traditional media is 13 probably light, but as we know, today people get 14 information from a whole variety of sources. And I 15 think a very untapped resource is the use of social 16 media. And there is a whole lot we can do there. And I 17 think that's where a lot of people are plugged in today 18 in terms of where they get their information. 19 But on this piece of it, I wanted to just 20 understand how the survey fit into this. The 21 description and the concept plan speaks to funding to 22 cover the distribution of the survey. I would suggest 23 that we actually pull the survey in so that development 24 of the survey by an outside expert that meets our 25 objective is part of this proposal. 26 MR. HORTON: Miss Gore? 27 MS. GORE: We can certainly write that into the 28 scope of work when we put this out to bid so that a 30 1 survey could be part of -- part of it. The concept was 2 not meant to exclude a survey. 3 MS. YEE: Yeah, and I -- what I am just trying 4 to get the pieces to kind of match up because they're 5 kind of discordant right now. And I don't understand 6 the relationship between our different efforts. 7 But if we're going to do a media campaign, 8 let's do it right -- be sure the tools are developed 9 appropriately to get to the outcome that we want or to 10 meet the objective that we want. 11 The issue of third party data, this reminds me 12 of what we've done, I think, in the tobacco area 13 relative to the Jenkins Act a lot. I think we've 14 learned some lessons in that area where we do get third 15 party data relative to purchases of cigarette and 16 tobacco products from outside the State. 17 And I'm sure each of our offices were inundated 18 with calls and concerns. And I think I had every 19 consumer reporter on my tail when we actually underwent 20 that effort. But I think we've learned a lot. 21 And Mr. Runner's point and Mr. Horton's point 22 -- Mr. Chairman's point is exactly right on. And, that 23 is, we have to be very clear about what it is that we're 24 looking at here. And I think we have a pretty good 25 feel. 26 And I also think that in response to our public 27 speakers we are talking about primarily -- we're not 28 talking about the United States Postal Service, we're 31 1 talking about common carriers. 2 MS. GORE: That's correct. 3 MR. MC GUIRE: Yes. 4 MS. YEE: And what about shippers who have -- 5 companies that ship directly? I don't know what that -- 6 who don't use a common carrier, but -- 7 MR. MC GUIRE: You know, we have a number of 8 programs currently where we're looking at shipping 9 information, U. S. Customs data, we utilize the 10 agricultural inspection station program that you're well 11 aware of where we -- you know, using agricultural 12 inspections -- inspectors actually get bills of lading 13 as trucks are entering California. 14 So, there's a number of ways that we look at 15 those other, like, direct shippers, like retailers who 16 do direct shipping. 17 MS. YEE: Uh-huh. 18 MR. MC GUIRE: This would really be shipping by 19 a third party carriers. 20 And again, just maybe to clarify a little bit, 21 is I think that -- as you're probably well aware, we've 22 somewhat criticized on how we've done outreach and how 23 our -- specifically related to use tax and how we've 24 tried to implement it. 25 I know the Qualified Purchaser Program was an 26 example that people somewhat felt just like a shotgun 27 approach instead of more of a surgical approach to 28 actually identify people who may actually owe use tax, 32 1 just like make everyone participate. And the big 2 complaints were a number of people that got sucked into 3 that program were people who weren't purchasers of 4 things over the internet that actually owed use tax. 5 So, the idea is to try to identify -- 6 potentially you have 37 million Californians and a 7 number of businesses, several million business on top of 8 that -- of who are the likely candidates that actually 9 owe use tax? 10 It's not saying that we know exactly that you 11 owe us use tax, but you actually are purchasing things 12 that are coming in from outside the State. 13 Again, same thing we do with U. S. Customs or 14 we do with the agricultural inspection stations. We 15 don't know that, actually, tax is due, but we know that 16 you potentially are likely because of that. 17 And, so, that's where if you target your 18 efforts towards those individuals that are -- appear to 19 be more likely, you should be more effective and get 20 fewer complaints of people going, "You're just 21 shotgunning." 22 I know it was a suggestion earlier by industry 23 that we send out a letter to every single Californian 24 letting them know what use tax is because it was unfair 25 to require or expect that they would be report on the 26 use tax line. 27 Sending out 37 million letters is a -- quite an 28 undertaking. And, as Senator Runner has pointed out, if 33 1 don't really know how to encourage them to even, you 2 know, want to read your letter or comply with it. 3 So, these efforts really are focused towards 4 trying to be more surgical in the approach, instead of 5 just more of kind of the broad based kind of hit 6 everyone at once. 7 MR. HORTON: Mr. McGuire, I don't recall a 8 recommendation to send out a letter to every taxpayer -- 9 MR. MC GUIRE: That wasn't part of the Tax Gap. 10 MS. YEE: No, it's not part of it. 11 MR. MC GUIRE: It's been a suggestion in the 12 past related to our use tax efforts. 13 MR. HORTON: By interested parties? 14 MR. MC GUIRE: Yes. 15 MR. HORTON: Okay. 16 MS. YEE: Okay. And then with respect to the 17 component about the rewards program, I wanted to just 18 make a comment on this. 19 This -- this proposal about funding our reward 20 program kind of comes up every now and then. On this 21 particular item, I really would strongly urge that we 22 look at development of the program -- further 23 development of the program before we fund it. 24 I think there are a lot of opportunities for 25 the intent of this program to not be clear. I think 26 there's a lot of opportunity for frivolous leads to come 27 to us, which would then constrain and drain staff 28 resources and the assignment of staff resources to 34 1 respond to them. 2 But if we're going to do this, I really would 3 like to see specific development of this program so we 4 know what the parameters are, what the criteria are and 5 we can express those so that we're not just having 6 people kind of come to us with, you know, just any kind 7 of -- 8 MR. MC GUIRE: Speculative leads? 9 MS. YEE: -- speculative leads, right, thank 10 you -- I'm glad you said it. 11 And then my last comment is just really overall 12 on the plan and that is these are concepts and, so, 13 obviously pending further development and refinement. 14 I do appreciate very much the work of the staff 15 on bringing these forward and particularly also with the 16 attention to some of the things that we're currently 17 doing. And, obviously, with the economy as it is and 18 our -- and, unfortunately, many more taxpayers having to 19 experience bankruptcy, our ability to respond to that 20 increased workload certainly is -- is important. 21 I just wanted to conclude by saying this, 22 Mr. Chairman, whether we decide to move forward with 23 this concept plan or not, this is going to be a subject, 24 a topic, an area of continued interest by the 25 legislature. 26 And I think what's happened -- I mean, it's how 27 we got QP, it's how we got Qualified Purchasers, it's 28 how we got the service industry mandate -- but I would 35 1 much prefer to be in the driver's seat about what these 2 programs look like than to be given a mandate that is 3 enacted by the legislature with no sensitivity about 4 time for implementation -- as we've learned -- and also 5 not being thoughtful about how we ought to communicate 6 with our taxpayers. 7 And, so, I do believe that these are rightfully 8 before us, obviously pending further refinement and 9 development, but even the specific proposal about tax 10 preparers, being sure that they are informed about the 11 use tax, is something that, I think, is in response to 12 what the legislature has attempted to do in prior years 13 and that is to really create a mandate, where the tax 14 preparers are on the hook for being sure that, you know, 15 use tax is properly reported and paid. 16 So, we're trying to kind of find, you know, 17 kind of a balance here that really furthers compliance 18 but -- and is a responsible approach, but also very 19 mindful that if we -- just an observation, if we should 20 abandon any pieces of these, we ought to be prepared 21 then to really respond to what the legislature is going 22 to propose in these areas. 23 Thank you, Mr. Chairman. 24 MR. HORTON: Thank you. 25 Further discussion, Members? 26 MR. RUNNER: Further in the study? 27 MR. HORTON: Sure. 28 MR. RUNNER: Again -- actually, my last -- last 36 1 discussion in terms of the -- in terms of the report 2 itself dealt with the penalty and interest reprieve. 3 And I guess if you could just take a moment, 4 and this is, I guess, the nature or the focus of my -- 5 my question you can help me with -- can you contrast 6 this particular program and with the estimated revenue 7 of $5 million with then what you included in the report, 8 which was some examples of what other states have done, 9 which oftentimes were in the hundreds of millions of 10 dollars? 11 Is that -- 12 MR. MC GUIRE: Sure. 13 MR. RUNNER: -- fair? Is that -- 14 MR. MC GUIRE: The other states -- 15 MR. RUNNER: -- I know they're not apples to 16 apples, but maybe you can -- 17 MR. MC GUIRE: -- right. 18 MR. RUNNER: -- help understand? 19 MR. MC GUIRE: Typically most of the other 20 states programs were actually amnesty programs that were 21 across the board, touching a number of tax programs in 22 those states. So, it could have been income tax, sales 23 taxes, payroll taxes, a number of tax programs. 24 Just like we had our last once-in-a-lifetime 25 amnesty program in the early part of this last decade 26 and it was 600 -- over $600 million in revenue. We 27 still have some that's, you know, in flux still from 28 that program. 37 1 So, again, a full-blown amnesty program is a 2 whole different animal that can generate a lot of money. 3 When we're talking -- this program is really focused on 4 those collectible debts where the taxpayer hasn't been 5 able to pay. We haven't been able to work with them to 6 get a debt. It's aged to the point that we're probably 7 going to write it off anyways and it gives them a chance 8 to completely clear that liability off of their 9 conscience, off of, you know, maybe a lien that's on 10 their record. And then it also gets the State some 11 money that maybe we would have, in the other case, not 12 gotten anything at all. 13 So, this is really kind of a scaled down 14 approach compared to those amnesty programs. 15 MR. RUNNER: And the idea is to make this a 16 permanent program then? 17 MR. MC GUIRE: Yes. It would be a permanent 18 program. 19 So, as debts, you know, reached that aging to 20 that point where we're really looking towards writing 21 them off, we would give kind of like that one last 22 chance to the tax debtor of like -- we can maybe relieve 23 your penalty and interest, you know, if you can pay the 24 tax debt. 25 And, you know, maybe they would borrow from a 26 relative or something because they want to remove like a 27 tax lien off of their record or maybe just their 28 conscience or other reasons that they would like to get 38 1 it resolved. And reducing the penalty and interest is 2 enough motivation to, you know, kind of meet us halfway 3 on that. 4 MR. RUNNER: Yeah, you know, conceptually, I 5 think -- I mean, again, I think it's a -- I think it's a 6 right idea, a good idea to do. 7 I am struggling with this idea of having 8 something permanent so that somebody already -- always 9 knows that this is coming at the end for them. 10 MR. MC GUIRE: I think that -- we feel 11 confident enough in our compliance efforts and our 12 collection program that if, you know, I owed the Board a 13 liability, that they would pursue me enough that if I 14 really did have assets to pay, I would end up paying 15 versus -- 16 MR. RUNNER: Waiting it out? 17 MR. MC GUIRE: -- right, waiting it out. 18 MR. RUNNER: Okay. 19 MR. MC GUIRE: We don't -- there's just not 20 that many people -- 21 MR. RUNNER: Okay. 22 MR. MC GUIRE: -- that somehow wait us out. 23 MR. RUNNER: Okay. 24 MR. MC GUIRE: Because we're pretty active. 25 MR. RUNNER: And then my other observation 26 would be, I'm still interested -- and I think that maybe 27 as we get into later on this year, maybe even the first 28 of next year, when, all of a sudden, we are looking for 39 1 additional -- the State is looking for additional influx 2 of cash, I think there could be another discussion to be 3 had in regards to looking at some of these other 4 programs that did result in tens of millions or hundreds 5 of millions of dollars that we might be -- we want to 6 explore in order to help bring cash into, I think, a 7 challenging State fiscal condition that we see 8 developing. 9 Thanks. 10 MR. HORTON: Okay, thank you very much, 11 Members. 12 Members, let's take these items up starting 13 with page 6, one at time. But before we do that, I'd 14 like to hear from another guest here today, Mr. Brett 15 Granlund with UPS to provide his testimony. 16 Just have a seat. 17 ---o0o--- 18 BRETT GRANLUND 19 ---o0o--- 20 MR. GRANLUND: Mr. Chairman and Board 21 Members, thank you for giving me an opportunity. I was 22 a little late getting in here, so, I did miss out and I 23 appreciate you taking just a moment. 24 I am Brett Granlund with Platinum Advisors. 25 MR. HORTON: Thank you very much, that 26 concludes your remarks. 27 MR. GRANLUND: Yes -- can't be bad if you're 28 really brief, right? 40 1 We just have a couple of real primary concerns. 2 Of course, first and foremost, UPS, being as prominent 3 as we are in the shipping business, we kind of feel like 4 we're the bright light out there. If there's a pilot 5 program, we're the biggest and the easiest to get to. 6 And we'd like to comply with, you know, anything that 7 we're supposed to do. 8 But as we've looked at this plan and tried to 9 figure out how -- how, ultimately, can we even be a part 10 of helping make this work when it relies -- collecting 11 the tax really relies on the honesty of the taxpayer? 12 I mean, just a couple of examples, if a -- if a 13 taxpayer elected to buy a Rolex watch direct from Rolex, 14 if they would sell one, and it's coming from Geneva and 15 they're paying $30,000 for it and it gets shipped in 16 here, they owe about $2700 use tax if they purchase 17 that. 18 How do you track that down if it comes through 19 UPS? And remember, these -- these are millions of 20 packages from around the world that are moving through 21 the system every day. It would be literally truckloads 22 of shipping labels. I don't know where you'd get the 23 staff to go through those and then try to -- we have no 24 way of knowing what's in that package. We don't have 25 any way of knowing if that's really a sale. 26 So, if a taxpayer were to buy that watch and 27 have it shipped from a jeweler in New York or direct 28 from Rolex, wherever it might come from, and comes 41 1 through UPS and you get the shipper's name that 2 there's -- you know, there's a jewelry package or a 3 watch maker sent something, you contact the taxpayer who 4 says, 5 "Yeah, I sent that in to have it repaired. 6 They get it fixed and it's working real nice." 7 You have no way to track down the invoice or 8 actually determine if there was really a sale. 9 You got a package coming in from Canada. It's 10 got prescription drugs in it, we don't -- we don't tax 11 prescription drugs. We have of no way of knowing what's 12 in that package. 13 Is it going to a residence? Is it going to a 14 business? Is it someone on their computer in their 15 that's buying goods and having them sent to them at 16 their office? 17 And, so, you don't -- you don't know. And is 18 it a shipper that's exempt because it's going to a 19 retailer, who has a, you know, a tax number and they're 20 going to collect the tax or are tax exempt on the 21 purchase side, they're going to collect the tax when 22 they retail it. 23 We just -- we just don't understand how -- how 24 we ever get this refined down to trying to identify what 25 is a letter? What is a box of candy from Harry & David 26 or See's? What is -- you know, what is -- what is a 27 taxable item as opposed to an exempt food item or a 28 business transaction in literally millions of packages? 42 1 MR. HORTON: Got it. 2 MR. GRANLUND: And we're -- we just don't know 3 how it ever gets implemented. We're afraid we'd get in 4 a mess, a reporting mess, that this just doesn't work. 5 So, we wanted to get that concern on the 6 record. 7 MR. HORTON: Appreciate that. 8 MR. GRANLUND: Thank you for your time. 9 MR. HORTON: We're going to thank and excuse 10 our witnesses today. 11 Please stay, though, as we conclude this. 12 Thank you. 13 Members, let's start with the use tax 14 educational outreach efforts. Your thoughts on that, 15 Members? 16 MR. RUNNER: Move to approve. 17 MR. HORTON: It's been moved by Mr. Runner to 18 approve with the qualifying conditions expressed by 19 Member Yee -- 20 MS. YEE: Which is to incorporate the 21 development of the survey. 22 MR. HORTON: -- development of the survey and 23 the messaging points. 24 And this is approving it to come back to the 25 Board once the concept is developed, continue to work on 26 it -- okay, very good. 27 Moved by Mr. Runner, second by Ms. Yee. 28 Discussion? Ms. Mandel? 43 1 MS. MANDEL: When that comes back that will 2 have a complete explanation of where you get revenue 3 numbers on the soft compliance efforts? 4 Because I want to make sure I understand where 5 those are coming from. 6 MS. HOUSER: Correct. Our plan is for the 7 elements that are approved by the Board today, we will 8 be bringing back a BCP for approval at the September 9 Board meeting. And it would include detail on revenues, 10 as well as the positions. 11 MR. HORTON: Okay. Further discussion? 12 Hearing none, without objection, such will be 13 the order. 14 Use of third party data, discussion first, 15 Members? 16 MS. YEE: Mr. Chairman? 17 MR. HORTON: Yes? 18 MS. YEE: I know we spent a lot of time talking 19 about the reliance or use of shipping records, but I 20 just wanted to point out the concept really looks to 21 piloting that particular aspect. 22 I guess what I would like to do is to see if 23 there's a desire to approve the remainder of this 24 particular item, but on this issue of the shipping 25 records, to ask staff to go back and really try to 26 define that a little bit better. 27 I'm not -- given the concerns we heard today, I 28 think we really need to learn more about how we would 44 1 use those records and how we would actually obtain the 2 records that were -- that would be useful and helpful. 3 MR. HORTON: We found -- discussion, Members? 4 MR. RUNNER: Just a -- 5 MR. HORTON: We found in the legislature that 6 to be just a complete nightmare of trying to control the 7 shipping data, the records, look at the weight, whether 8 or not it's insured and so forth is certainly an 9 indication to be able to have other leads and maybe -- 10 maybe collaborate that -- that those leads with 11 information, but it is just difficult to start from that 12 premise. 13 So, I, for one, don't -- don't really, really 14 see the value unless it's secondary to accumulating 15 other information. 16 Mr. Runner? 17 MR. RUNNER: Yeah, I would agree. And, in 18 fact, I would -- I guess they're -- I guess we're 19 looking at this as three bullets, right, on -- 20 underneath the use tax there? 21 MS. YEE: Yeah. 22 MR. RUNNER: Third party -- I'm certainly fine 23 with No. 1. 24 I'd like to see if we could do a separate vote 25 on No. 2 also. It sounds like No. 3 does not have 26 support at that point or we'd ask staff to come back and 27 do a little more work with us to explain what that is. 28 But I'd like to specifically also have a 45 1 separate decision on bullet No. 2. I believe that 2 before we do a pilot program, which is what that calls 3 for, I'd like to see some -- some preceding meetings and 4 concepts and interested parties that would bring 5 something back to us before the implementation of a 6 pilot on that issue. 7 MR. HORTON: Well, instead of -- Ms. Mandel? 8 MS. MANDEL: Thank you. 9 My understanding with all of these, well, since 10 we're really talking now about the first two, was 11 that -- that ultimately -- and I guess the first one is 12 kind of like what Alabama did, which the Controller had 13 asked about sometime ago of staff and -- well, we asked 14 for more information about it and that's kind of what 15 this is. 16 My understanding is that the way these are set 17 up is that they're not -- they're not -- they're not 18 going to end up with a tax -- this isn't going to 19 generate a tax bill to these people, even the shipping 20 records that has these issues wasn't going to generate 21 a tax bill. 22 MS. BEUHLER: That's correct. 23 MS. MANDEL: This was more part of the 24 education and outreach and I think key in how those 25 letters get drafted so that they don't sound, you know, 26 so that they sound like what they should sound like 27 instead of, you know, send us everything you have for 28 the last eight years -- that's not an education piece. 46 1 But -- but that's my understanding, that that's 2 where these were going. They weren't -- this was more 3 of education again and might generate people to send us 4 a check when they realize that they did have something, 5 right? 6 Is that right? 7 MR. MC GUIRE: Yeah, you're absolutely right. 8 It's really focused on trying to educate the people that 9 might be likely to actually owe use tax versus 10 indiscriminately trying to educate everybody at once, 11 which is -- we know is a challenge in a State of 12 37 million people. 13 MS. MANDEL: Right. And my understanding was 14 that they had some level of success in Alabama in 15 sending out those kinds of letters. 16 MR. RUNNER: You're talking about bullet 1? 17 MS. MANDEL: Bullet 1, yeah. 18 MR. RUNNER: Uh-huh. 19 MS. MANDEL: Okay, thank you. 20 MR. HORTON: Okay, further discussion, Members? 21 MR. RUNNER: Can I -- 22 MR. HORTON: Mr. Runner? 23 MR. RUNNER: I'd go ahead and move use tax 24 third party data, with the exception of bullet 2 and 25 3. 26 MS. YEE: Can we just take each of them up, you 27 know? 28 MR. RUNNER: Okay, that would be fine, however 47 1 you want to do that. 2 MR. HORTON: Members, just to -- to sort of 3 expedite it, 2 and 3, let's ultimately bring that back 4 and see if they can refine it and not vote on it at all, 5 just give staff direction. 6 We'll vote on item No. 1 to move forward. Is 7 that okay? 8 MR. RUNNER: That's fine. 9 MR. HORTON: All right. Mr. Runner moves, 10 Member -- 11 MS. YEE: I'll second. 12 MR. HORTON: -- Member Yee seconds, without 13 objection, such will be the order. 14 MS. YEE: And can we give -- can we -- 15 MR. HORTON: Discussion, Members, on item 16 No. 2 and 3? 17 MS. YEE: Yeah, I'd like to be sure that 18 direction is clear to the staff. 19 MR. HORTON: Okay, Ms. Yee? 20 MS. YEE: I have no problem with the concept, 21 so, I'm not giving any direction -- 22 MR. HORTON: Okay. 23 MS. YEE: -- on that. 24 MR. HORTON: Mr. Runner? 25 MR. RUNNER: I guess the point would be that 26 there's going to be further discussion before -- before 27 a pilot program and if there are three votes, there's 28 three votes, right? 48 1 MS. YEE: But I'd like to hear the direction. 2 If there are concerns, I think we ought to put them on 3 the table and let's see if we can refine this further to 4 address those concerns. I -- 5 MR. RUNNER: You want -- you mean in terms of 6 the discussion right now? 7 MS. YEE: -- yes. I mean, I think I want to -- 8 I'd like to have -- 9 MR. HORTON: I got it. 10 So, let me start this, Mr. Runner -- I mean, if 11 you will? 12 Staff, on the shipping documents, I'd like to 13 have you consult with the various shipping agencies, 14 maybe they can refine this, maybe they can help you 15 target this, to the extent that that targeting is 16 available, I certainly, personally, would consider that. 17 I just think it's very, very challenging 18 because of the complexity in identifying the product, 19 the consumer, the source, the reason and so forth. 20 And, again, would -- would want to restrict 21 this to a secondary usage. 22 Item No. 2, I personally don't have a problem 23 with it the way it is. I think it's important to 24 educate this category, as many people as we possibly 25 can, because the goal -- the ultimate goal from an 26 education perspective, is to avoid penalty and interest 27 and unnecessary liability and the frustration that goes 28 with that. 49 1 So, it's education, it's a good thing. 2 Mr. Runner? 3 MR. RUNNER: On pilot, you're talking about 4 No. 2 in there -- in terms of those three bullets there? 5 MR. HORTON: Yes, sir. 6 MR. RUNNER: Okay. My concern with No. 3 -- or 7 No. 2 is just the fact that where do you get the 8 information and what is the information? 9 You know, when it talks about data may include 10 specific purchase information, you know, I think that 11 makes a lot of consumers nervous out there. The State 12 has actual activity and be able to -- so, my only issue 13 is I need more information before we start a pilot 14 program going in after people's specific spending, which 15 is what that says, or purchases, I'd just like to know 16 where we got the information, the kind of information we 17 can deal with. 18 So, that -- that's the extent of my concern 19 there. 20 MR. MC GUIRE: So, why don't we offer that we 21 can meet with the Members because in public they don't 22 want to talk about -- it's compounding the frustration. 23 MS. YEE: I have no problem with that except I 24 really hate development of these proposals kind of 25 Member by Member, as long as we can have it back for -- 26 MR. MC GUIRE: We just -- 27 MS. YEE: -- no, no -- I mean, this is 28 important. I mean, we all have sensitivity around this 50 1 -- excuse me, Mr. Chairman. 2 MR. HORTON: No, go ahead. 3 MS. YEE: I think what I am hearing -- and 4 there is some common themes between the second and third 5 bullets that maybe we can come back with some 6 information to the full Board about, and that is, what 7 is the nature of this information that we're pursuing? 8 You know, what's actually on it? You know, what is it? 9 What does it tell us? 10 And how are we then potentially going to 11 identify who we're going to provide use tax information 12 to? And what does that information look like? 13 I think are really kind of the key components. 14 We're not sending anybody a bill here. 15 MR. MC GUIRE: No, right. 16 MS. YEE: And, so -- but it really speaks to, 17 you know, just what is the information? What makes us 18 think that this is going to be useful information? 19 And it really, I mean, from my perspective, it 20 just sweeps kind of the universe of people who could 21 potentially have a use tax liability to give them 22 information, educate them. 23 And -- I mean, I am finding it very frustrating 24 because we're spending a lot of time doing this when, in 25 fact, just get the online retailers to collect the tax. 26 MR. RUNNER: Is that on this? Is that on this 27 sheet? 28 MR. HORTON: No. 51 1 MS. YEE: But that's, I think, what we're all 2 after. 3 It's just, you know, being sure that we know 4 what it is that we're obtaining, know how to use it, 5 know how we're going to educate consumers or purchasers, 6 whoever the party may be, about use tax and what the 7 nature of that education, you know, what is it that 8 we're going to provide? 9 MR. HORTON: So, Mr. McGuire, do you -- is that 10 helpful? `? 11 MR. MC GUIRE: Yeah, I guess. 12 Just so that I make sure that I'm understanding 13 appropriately, maybe what you'd like us to do and get on 14 bullet 2, where we actually have third party data that's 15 purchasable, public data, is that we would come back to 16 you with an explanation of kind of what that data 17 specifically entails, what it is, what we -- what are 18 the elements of that data, what it's telling us or how 19 it's rating different individual's purchasing patterns 20 or something, and then specifically what kind of 21 correspondence would we send to them in response to what 22 that information tells us. 23 MS. YEE: Uh-huh. 24 MR. MC GUIRE: So that you can say like, "Oh, 25 yeah, you're sending outreach letters." 26 MR. HORTON: Okay, you got it. 27 MR. MC GUIRE: All right and so that -- 28 MR. HORTON: All right. 52 1 MR. MC GUIRE: -- what the -- with the 2 shippers, though, I understood a little bit different 3 and I just want to clarify is that you'd really like to 4 talk a little bit closer with the shippers about what 5 data could we maybe get from them that would useful 6 specifically. 7 And kind of following that same thing is what 8 information would we use and then what would we send to 9 people in response to that information? 10 MR. HORTON: Yeah, on the shipping -- on the 11 shipping data, it's -- I mean, for me, it's just a 12 little more complicated, but I certainly want to be open 13 and objective to sort of hear from the industry. 14 We -- they may be able to give us some guidance 15 on how you can narrow it down, even -- when we were 16 dealing with this in the legislature and we looked at it 17 from the New York legislation, we finally got down to 18 the insurance, if something was heavily insured, then 19 that was an indication that there was a value there. 20 That was about as far as we could go with that. 21 That's one area that I believe we need to 22 consult directly with the industry. And they're going 23 to give you the best guidance onto whether you can move 24 forward or is there something that -- that it would be 25 an impediment to -- to that effort? 26 MR. RUNNER: Yeah, and I -- I'm sensitive that 27 part of the discussion that went on in regards to the 28 business advantage that then you give to the United 53 1 States Postal Service, who we don't get -- who we don't 2 have a requirement from, as compared to then to private 3 carriers that we do have requirement. 4 I think that's something we need to consider. 5 MR. HORTON: According to UPS, they won't be 6 around long. 7 MS. YEE: Yeah. 8 MR. HORTON: Just kidding. 9 Anyway, so, there's a motion to move forward on 10 item No. 1, moved by Mr. Runner, second by Ms. Yee. 11 Without objection, such will be the order. 12 Direct staff to come back with further 13 clarification on item No. 2 and 3 relative to the 14 specifics, consult with the -- with the industry on item 15 No. 3. 16 Without objection, such will be the case. 17 Let's move forward to use tax simplification. 18 MR. RUNNER: Move to approve. 19 MR. HORTON: It's been moved to approve, 20 Mr. Runner, second, Ms. Mandel. 21 Without objection, Members, such will be the 22 order. 23 Use tax long term efforts -- 24 MR. RUNNER: These are all going to come back 25 to us? Is that my understanding then? We're really -- 26 MR. HORTON: -- this is -- we don't need any -- 27 MR. RUNNER: These are legislative. 28 MR. HORTON: -- any action on this, Members. 54 1 MR. RUNNER: Right. 2 MR. HORTON: We will move -- we will submit 3 that to the Legislative Committee, which we will bring 4 back and possibly conduct -- set up a hearing 5 environment so we can actually hear from all the players 6 on that -- interested parties' meetings, so to speak. 7 Desk audits, move approval, second by 8 Mr. Runner. 9 Without objection, Members, such will be the 10 order. 11 Registered taxpayers, expand bankruptcy 12 program, move approval, second by Mr. Runner. 13 Without objection, Members. 14 Registered taxpayers, top delinquencies, I 15 don't know what we're approving here, but help me out? 16 MS. MANDEL: We already did. 17 MR. HORTON: It's already done, it's out there, 18 we're just going to use that information, so be it. 19 Registered taxpayers, penalty and interest 20 reprieve, discussion, Members? 21 Hearing none, is there a motion? 22 So moved. 23 MS. YEE: Second. 24 MR. HORTON: And is there another one? I 25 thought there was one -- 26 MR. RUNNER: Well, yeah, there's the non-filer 27 evasion right -- reward fund? 28 MS. YEE: The reward program. 55 1 MR. HORTON: Yeah, okay. 2 MR. RUNNER: Remember that one? 3 MR. HORTON: Yeah. Members, I think we all 4 have some concerns with this. 5 MR. RUNNER: Yeah. 6 MR. HORTON: At least I seem to have heard 7 that. 8 Let's see if we can refine that a little bit, 9 address the concerns of the Members and -- 10 MS. YEE: This is the reward program? 11 MR. HORTON: -- the reward program. 12 MS. YEE: Can we move it to -- can we move it 13 to the BTC interested parties' process? 14 MR. HORTON: There you go. That's a good way 15 to go. 16 So be it, it's been moved to the Business Taxes 17 Committee. 18 Hearing no objection, such will be order, where 19 we'll conduct an interested party, kind of vet that out. 20 And -- and let me just share, as the Franchise 21 Tax Board brought forth with similar -- 22 MS. MANDEL: We -- the Franchise Tax Board did, 23 a couple of times, in -- what did I tell you, in 2005 24 and 2007, there were BCPs. 25 MR. HORTON: Right. 26 MS. MANDEL: I think -- did you check on the 27 status 'cause some were -- either one or both of them 28 made into the proposed budget, but didn't make it out of 56 1 the -- 2 MS. HOUSER: Yeah, our -- 3 MS. MANDEL: -- budget budget. 4 MS. HOUSER: -- yeah, our -- 5 MS. MANDEL: So, it's never been funded at FTB. 6 MS. HOUSER: -- right. Our understanding from 7 just the initial conversations with Franchise Tax Board 8 is they -- they went through their Board process and -- 9 MS. MANDEL: Right. 10 MS. HOUSER: -- and their agency process and 11 then when it got to Finance, the Department of Finance 12 did not move them forward. 13 We're still trying to find clarification as to 14 whether or not they were able to tie it to revenues. 15 So, we're working with them to get that information. 16 MS. MANDEL: Yeah, the BCPs that came before 17 the Franchise Tax Board are available on the Franchise 18 Tax Board website from the Board meetings that I think I 19 gave you or can give you again. 20 And I had thought that one of them wound up in 21 a budget only because of the timing of the newspaper 22 articles and the one article that said the Franchise Tax 23 Board and the Governor, but I didn't go back and check 24 the actual budgets. 25 MS. HOUSER: When we -- we'll bring back 26 additional information on Franchise's efforts also. 27 MR. HORTON: Yeah, I think it -- I can only 28 echo Member Yee's statements in regards to refining and 57 1 clarifying and defining exactly how one would be 2 entitled to this reward. 3 Therein was the challenge in the legislative 4 process. The presumption is that this is part of the 5 responsibilities of duties of the agency and, therefore, 6 why would we give out a reward for something that is 7 innate within the agency and the process and so forth? 8 And, so, I think it's very important that we 9 delineate or differentiate where that -- that -- that 10 red line is, if you will, where the Board feels that 11 they've reached the point of diminishing returns and in 12 order to take it to the next level, we believe this is a 13 valuable tool. 14 You have to -- I think it's -- it's important 15 that we have to communicate that and, at the same time, 16 as I have shared with staff, that's going to entail some 17 additional work, otherwise, it's not necessary. 18 So, is that helpful? 19 MS. HOUSER: Yes. 20 MS. HOUSER: Mr. Chairman, if I may, just a 21 technical clarification? 22 As the elements that the Board approved today, 23 we plan to place into a BCP that we'll bringing back to 24 the Board at the September meeting. 25 Many of these elements are requesting funding 26 for the '12-'13 fiscal year. So, we do have a timing 27 challenge with the date that BCPs are due to Finance, 28 they're due September 12th. 58 1 If the Board is in agreement, what we could do 2 is the BCP will be prepared and posted on our public 3 agenda notice on September 9th, that's the Friday before 4 they're due to Finance. 5 If it's agreeable to the Board, we could 6 forward that BCP to Finance as a draft pending Board 7 approval so that we would be timely in our submission. 8 MS. YEE: I think that's what we talked about 9 earlier. 10 MR. HORTON: Yes. 11 MS. HOUSER: I just want to make sure on this 12 one you're comfortable with that. 13 MR. HORTON: So, the -- yeah. 14 MR. RUNNER: The one BCP that will not moving 15 forward will be the reward program, correct? 16 MR. MC GUIRE: Right. 17 MS. HOUSER: Correct, yeah. We will only be 18 voting -- the ones you voted on. 19 MR. HORTON: Correct is good enough. That's 20 enough. Further discussion? 21 Members, does that -- that concludes this 22 presentation? 23 MS. HOUSER: Yes. 24 MR. RUNNER: Thank you. 25 MR. HORTON: Okay, thank you very much, we 26 appreciate that. 27 Very thoughtful on your part. 28 ---o0o--- 59 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 AUGUST 23, 2011 I recorded verbatim, in shorthand, to 11 the 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 59 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: SEPTEMBER 6, 2011 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 60