1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 SEPTEMBER 20, 2011 10 11 12 13 14 15 BUSINESS TAXES COMMITTEE 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Committee: Betty T. Yee Chair 4 Michelle Steel 5 Member 6 Jerome E. Horton Member 7 George Runner 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson Chief 13 Board Proceedings Division 14 For Board of Equalization Staff: Susanne Buehler 15 Sales and Use Tax Department 16 Robert Tucker Legal Department 17 Randy Ferris 18 Legal Department 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 20, 2011 4 ---oOo--- 5 MR. HORTON: Uh, let us call the -- today's 6 Board of Equalization meeting to order. 7 Ms. Olson, what is our first item? 8 MS. OLSON: Our first item on today's agenda is 9 the Business Taxes Committee. Ms. Yee is the Chair of 10 that committee. 11 Ms. Yee. 12 MS. YEE: Thank you very much, Ms. Olson. 13 Good morning, Members. 14 MR. HORTON: Good morning. 15 MS. YEE: We have one item on the agenda before 16 the Business Taxes Committee; it is the status update 17 regarding the implementation of AB 28x, the recently 18 enacted nexus statute. Let me have staff introduce the 19 issue. 20 MS. BUEHLER: Good morning. I am Susanne 21 Buehler from the Sales and Use Tax Department. With me 22 today are Mr. Randy Ferris and Mr. Robert Tucker from 23 the Legal Department. 24 We have one agenda item this morning. This 25 morning we will provide a status update regarding the 26 implementation of the expanded nexus provisions enacted 27 by ABx1 28. 28 In the July Board meeting we discussed the ABx1 3 1 28 implementation plan and also received your approval 2 to proceed with the interested parties process for 3 Regulation 1684. 4 Since that time, we have posted a Special 5 Notice and Frequently Asked Questions and Answers on our 6 website. Also, as explained in July, we have been using 7 our existing registration processes in our out-of-state 8 offices to implement this program. Specifically, these 9 offices routinely send out questionnaires to potential 10 out-of-state retailers who may have nexus in the state 11 but are not currently registered with the Board. 12 Our existing process provides that when a 13 retailer responds to the questionnaire, we evaluate 14 their response to determine whether a permit is required 15 and will follow up with the retailer for an application 16 if it is needed. For those retailers that do not 17 respond, we follow up with the business via a phone call 18 or, if necessary, a field visit. 19 Due to the changes of the nexus provisions of 20 ABx1 28, we modified our questionnaire and to date have 21 mailed 225 questionnaires to the top out-of-state, um, 22 Internet retailers. 23 This month the Legislature passed Assembly Bill 24 155, and it is currently on the Governor's desk for 25 signature. This bill revises the definition of a 26 retailer engaged in business in the state, temporarily 27 eliminating the provisions of ABx1 28. It also 28 increased the amount of total cumulative sales of 4 1 tangible personal property to purchasers in the state to 2 $1 million. 3 There are two contingent events in this bill. 4 The first is the passing of a federal law that 5 authorizes states to compel the collection of state 6 sales and use taxes by out-of-state retailers without 7 regard to the location of the seller by July 31st of 8 2012. The second is the state electing to implement the 9 new federal law by September 14th, 2012. 10 If federal law is not enacted by July 31st, 11 2012, this revised section of Assembly Bill 155 becomes 12 effective on September 15th, 2012. If federal law is 13 passed and the state does not elect to implement the law 14 by September 14th, 2012, then the revised section 15 becomes effective on January 1st, 2013. 16 Part of the complexity of the implementation 17 lies in whether the federal law will be passed as part 18 of the Streamlined Sales and Use Tax Agreement. 19 California does not currently participate in this 20 agreement; and if the state decided to do so, it would 21 take considerable effort in legislation to make all of 22 the changes required to participate in the agreement. 23 The BCP for the implementation of ABx1 28 is 24 also on tomorrow's Board calendar for your approval. 25 While we recognize that AB 155 may impact the resource 26 needs for the implementation, we believe that it serves 27 to continue the dialogue with the Department of Finance. 28 At this point staff requests direction from the 5 1 Board on what actions they would prefer to take with 2 respect to the interested party meetings currently 3 scheduled to begin in October for Regulation 1684, as 4 well as any planning to take place in preparation for 5 the Streamlined Sales and Use Tax Agreement should the 6 Governor sign or not veto the bill. 7 This concludes my remarks. 8 MS. YEE: Thank you very much, Ms. Buehler. 9 Um, other comments from staff at this point? 10 Okay. Um, discussion, Members? 11 MR. RUNNER: Just a couple quick questions. 12 MS. YEE: Yes. 13 MR. RUNNER: Just in regards to some timing 14 issues. Um, you know, obviously the challenge with 15 something like this is it ends up being an incredibly, 16 uh -- uh, well, as we talked about, as was shared, a 17 complex issue made even more complex by what we'd just 18 call it changing rules, uh, and game -- game direction. 19 Um, and so certainly, um, that in itself then 20 makes it an interesting issue for us to figure out how 21 to -- how to implement, uh, in a -- in a clear and 22 concise way so that we actually don't in the process 23 create more confusion. Which I'm one of those who are 24 convinced that one of our challenges dealing with -- 25 whether it be use tax by consumers or retail, or 26 whatever, out-of-state Internet retailers, a big part of 27 our issue is just -- 28 (Music playing) 6 1 MR. RUNNER: Is somebody making music over 2 here? 3 -- um, is just the idea that, um, you know, 4 they're given clear direction, and so then helping the 5 taxpayer understand what the ground rules are. 6 To that end, um, as we were in those last few 7 weeks, um, and we were watching, you know, the 8 alternative legislation, um, coming down, the fact that 9 there was a potential -- still a potential discussion in 10 regards to referendum, um, we had -- we had sent out a 11 core piece of follow-up just -- because actually we got 12 some, as you can -- as you probably all well know, some 13 of us were more engaged in that discussion. Uh, and so 14 we were kind of getting hit by reporters, especially 15 during that last week: Uh, what'll happen? What's the 16 plan? What do you think the BOE will do in light of the 17 fact that there's this legislation? 18 Um, so we were just interested in time table. 19 And so we had, I think, like the first week of 20 September, sent over a request to say, hey, what's the 21 time table for our contact for -- for those out-of-state 22 Internet retailers? Um, and I think the response that 23 we got back was, hey, we're looking at it, uh, we'll 24 have somebody get back to you the following, I think, 25 Tuesday it would have been, because Monday was the 26 holiday. 27 Um -- and, um -- and then I guess it was 28 concerning, to me at least, then that in fact what we 7 1 were doing is preparing to send out a survey or a 2 questionnaire. And I would assume we would have known 3 that the week I asked the question. Because, and again, 4 remember, I was asking the question because reporters 5 were calling us and we were trying to give them some 6 clarity in regards to what we were going to be doing. 7 So I guess I was a little concerned that -- and 8 I guess I want to just ask what the normal procedures 9 are when a Board Member asks for something? Like, 10 what's the time table? And then we don't really get a 11 clear answer on the time table when in fact there's 12 actually a mailing going out. 13 And let me just -- and let me just kind of back 14 off from there. Part of my issue is not with the 15 mailing. Um, as you know, I'm not sure where the other 16 Board Members are, but I actually wrote a letter in 17 support of the alternative legislation. 18 Um, and, uh -- so my concern was the issue of 19 whether or not anything that we would do early would be 20 correct. Because I think what we've done, in a way, by 21 kind of jump-starting our questionnaire, our 22 questionnaire is probably incorrect. Because 23 specifically we ask -- we ask specifically ask a 24 question in regards to, uh, the amount of Internet sales 25 that they do. And we specifically asked about the 26 500,000, which is what the law is in AB 28x but not what 27 the law is in regards to the alternative legislation 28 that was actually passed, still waiting to be signed by 8 1 the Governor. 2 Um, so, in essence, by hurrying it up, we 3 basically have an incorrect question on our 4 questionnaire. 5 So let me start by at least asking, what's the 6 normal procedure when a Board Member would say, "Hey, 7 what's the time table on this?" Wouldn't we be 8 reflected -- wouldn't normally we be told, "Hey, we're 9 going to out in the mail next week." 10 MS. BUEHLER: The normal procedure is for us to 11 provide you with the implementation plan. And I 12 apologize if that was not provided to you in a timely 13 manner. 14 We did have an implementation plan that we had 15 discussed orally in July that called for those 16 questionnaires going out in the first 30 days following 17 the implementation of the bill. Unfortunately, that was 18 delayed because of the complexity of the questionnaire 19 and making sure that we were asking the correct 20 questions. 21 The questions, as they exist on the 22 questionnaire today, do reflect the law as it is today 23 and would need to be changed, um, if AB 155 is signed by 24 the Governor or passes without his action. 25 MR. RUNNER: So let me ask you at that point 26 then, what will be our procedure if indeed two things 27 could happen; one is, again, the Governor could sign the 28 bill. 9 1 MS. BUEHLER: Correct. 2 MR. RUNNER: Um, I guess we could have a couple 3 alternatives. The Governor could sign the bill, and, 4 therefore, the new requirements and the dates would all 5 be -- would all be changed. That would be one 6 alternative. 7 Second alternative, the Governor could veto the 8 bill, signatures are turned in, which then creates 9 another process to which we have to figure out what to 10 do. 11 Um, but let's just assume that the Governor's 12 going to sign the bill, and I hope that's what the end 13 outcome is. I think that that is going to give clarity 14 and time for us to correctly do our job. 15 Let me just ask then, what -- what will we be 16 doing to these 225, I think you said, letters that were 17 sent out? Would we be sending out a corrected version, 18 um, on the questionnaire? 19 MS. BUEHLER: Um, I think that really depends 20 on how -- what questions they're answering and how 21 they're answering them on the questionnaire. 22 We'd be holding them until we knew for certain 23 from our Legal Department what action should be taken. 24 Um, in essence, some of the questions, if 25 they're responding yes, they are doing it at the lower 26 threshold, we'd have to follow up with them to see if 27 they now meet the upper threshold. 28 But if they're responding no in these 10 1 situations, we'd just leave it as is and put it in the 2 file. 3 MR. FERRIS: And I think we would send a 4 follow-up letter to everyone -- 5 MR. RUNNER: Yeah, okay. 6 MR. FERRIS: -- that we contacted to let them 7 know that ABx1 -- 8 MR. RUNNER: And I guess that's kind of -- I 9 guess, in conclusion, I guess that's what my concern is. 10 I believe, quite frankly, if I would have gotten the 11 response when I had asked for it, what the 12 implementation plan was, and the implementation plan was 13 clear that there's a letter -- survey letter going out 14 next Wednesday, which will be two days before the end of 15 session, my response would have been, hey, look, why 16 don't we just wait two weeks. Because if we just wait 17 two weeks, we're going to -- going to know how to 18 correctly ask that question. 19 And I still think it would have been -- it 20 would have been a timely response to implementation, but 21 it would have enabled us to go ahead and do a correct 22 questionnaire at that point as opposed to one that we 23 most likely will have to follow up on. 24 So, I guess my concern is two-fold. One is, we 25 asked and didn't get an answer back when clearly there 26 was an implementation plan that we were just not made 27 aware of. That would be one issue. 28 The other issue is, because of that then, we 11 1 have a -- what I think is a survey that is probably 2 going to be incorrect. And we will, as Chief Counsel 3 said, have to go back and correct it, which then, only 4 then appears -- makes me feel like all those people we 5 corresponded just think, What's the BOE doing? Don't 6 they know what's going on? 7 So anyhow, that's my observations on this. 8 And, like I said, I think it's clear we need to go 9 through the implementation process. I hope the Governor 10 signs the bill. I think the extra year gives us lots of 11 time. I think that million-dollar threshold helps 12 narrow the field a bit, makes it more realistic. 13 Uh, but I think we might have just, you know, 14 tried to get a bit overzealous. And I'm disappointed 15 that we didn't get the answer that we asked for, or any 16 response. I should -- not the answer I asked for, but 17 any response. 18 MS. YEE: Thank you, Mr. Runner. 19 Other comments, Members? 20 Um, let -- let me speak if I may. 21 Um, you know, it's always a difficult position 22 to be in when we have provisions of current law, uh, 23 that we are in the process of implementing and the 24 potential of those provisions changing is, uh, pending 25 before the legislature now, currently before the 26 Governor. 27 Uh, we don't know what the Governor is going to 28 do with the bill. And, um, I also support a federal 12 1 solution to this issue. Although, um, we've been down 2 this road before in terms of, um, be careful what you 3 wish for. Um, it could be also coupled with other 4 provisions, when Congress does ultimately act, that 5 could hurt states as well. So we're going to be 6 monitoring that, obviously, very closely. 7 Um, I -- and, Mr. Runner, I apologize and I 8 know we had an implementation plan, as Ms. Buehler had 9 said, that was brought before the Board. There was some 10 slippage in that schedule. Um, but actually, I think 11 that the letters that went out, it was to a limited 12 universe. And, yes, perhaps we could have waited. But 13 if the Governor doesn't sign the bill, we're that much 14 further behind. 15 So we really are caught in this little bit of 16 an untenable situation. And, uh, obviously we'll be 17 monitoring what the Governor's action is on AB 155 and 18 correct our course, um, appropriately. 19 I suspect that the staff will be coming back 20 with a new revised implementation plan should the bill 21 be signed. 22 MS. BUEHLER: Yes. 23 MS. YEE: And obviously a revised 24 implementation plan should the referendum qualify as 25 well. 26 So, um, I think there are a lot of moving parts 27 to this, and every day we're just kind of seeing, you 28 know, what we're waking up to and acting accordingly. 13 1 Uh, the other thing I will say is, um, if the 2 Governor should sign the bill, our focus on this issue 3 doesn't go away. If we are pursuing a federal solution, 4 this Board is going to have to come to grips with how we 5 want to participate, uh, in the federal discussions 6 around this issue, whether it's going to be, uh, in an 7 official capacity through the Streamlined Sales Tax 8 Project, which we have been a member of previously, we 9 certainly continue to have -- I continue to have 10 concerns about California being a member of that, um, 11 particular effort. And if not, how we get our input 12 known before certainly our Congressional delegation and 13 just in Washington generally. 14 Uh, but I think, uh, what I'd like to see the 15 staff do is perhaps, because this is a new Board -- and 16 Ms. Mandel has spent many a meeting, uh, with the 17 Streamline Sales Tax Project participants. I've, uh, 18 indulged myself in a few myself. But there's been, uh, 19 many concerns about, uh, the particular agreement and 20 the, um, operation and governance of that project that, 21 uh, creates concern for California. 22 Uh, but perhaps you could bring back to the 23 Board at our next meeting, or even in between meetings, 24 prepare a background document for the Members of this 25 Board about where we are currently with the Streamline 26 Sales Tax Project, little bit of history about our 27 involvement, and more importantly, uh, what has actually 28 taken place relative to this issue of nexus in those 14 1 discussions. 2 Uh, currently we have the proceedings of that 3 project being monitored for us by a number of federal, 4 um, entities of which we are, uh, members of. And I 5 think if something should happen in Congress, if the 6 Governor signs the bill, we're going to need to 7 contemplate more direct action and participation in that 8 effort. 9 MS. BUEHLER: Okay. 10 MS. YEE: So if you could prepare that for the 11 Board -- 12 MS. BUEHLER: I will. 13 MS. YEE: I appreciate that. 14 Uh, other comments, Members? 15 MR. HORTON: Yes, Ms. Yee. 16 MS. YEE: Mr. Horton. 17 MR. HORTON: Members, I believe the Governor 18 will sign the bill. Uh, I think the -- it will create 19 certain challenges for us, uh, as an agency and as a 20 state. 21 The, uh -- the current legislation that's 22 before Congress is not in our best interests. It's tied 23 to the streamline, uh -- uh, process. And that in 24 itself is inconsistent with just our basic fundamental 25 method of taxation. It's going to throw us off. It's 26 going to cost the State of California, I believe, a 27 significant amount of proceeds if we follow that line of 28 thinking. 15 1 So, um, I'm concerned about that and would like 2 to have a report back to the Board in October on the 3 impact -- if in fact the current legislation was to 4 pass, the impact that that would have on the State of 5 California, uh, relative to, uh, the proposed interested 6 parties meetings. 7 I think we continue along those lines. I agree 8 with Member Yee, uh, that this is not an issue that is 9 just germane just to the passage of this bill. The 10 sales and use tax -- the Use Tax Law passed in 1934. 11 And there are certain obligations that exist under the 12 existing law that we ought to be pursuing and soliciting 13 information. 14 And for the online retailers that have this 15 moratorium for a short period of time, uh, we should 16 continue to encourage them to voluntarily comply and to 17 voluntarily level the playing field, to the extent that 18 they can, and contribute to the, um -- contribute to the 19 infrastructure of the State of California, and 20 particularly since they are a benefactor of our customer 21 base, if you will. 22 So, we would encourage that that continue and 23 that those issues be considered and brought back to the 24 Board. 25 MS. YEE: Okay. Great. Thank you. Thank you, 26 Mr. Horton. 27 I think the bill that the Senator -- and this 28 is Senator Durbin's bill. And I don't know that it does 16 1 a whole lot right now. But, uh -- but obviously take a 2 look at that. 3 But I'm more concerned about the current status 4 of the agreement of the Streamline Sales Tax Project and 5 particularly how it addresses this particular issue and 6 what mandates we would actually be, um, obligated to 7 enact -- or to respond to as -- as a -- as a result of, 8 uh, being able to take advantage of the federal 9 solution. 10 MR. FERRIS: Yeah. 11 MS. YEE: Mr. Ferris. 12 MR. FERRIS: My understanding is the Durbin 13 bill, as currently written, addresses the ability of 14 states to impose a use tax collection obligation on 15 out-of-state retailers -- 16 MS. YEE: Right. 17 MR. FERRIS: -- that do not have substantial 18 nexus under the Quill Standard with that taxing 19 jurisdiction. 20 MS. YEE: Mm-hmm. 21 MR. FERRIS: Uh, which is kind of a different 22 issue than what ABx1 28 and AB 155 address which is 23 coming to grips with California's understanding of what 24 substantial nexus means under the Federal Commerce 25 Clause. 26 So -- and I would assume, uh, that the federal 27 discussion that may follow may involve discussions, uh, 28 addressing substantial nexus as well. You know, I would 17 1 assume that industry would want kind of a solution that 2 applies across the board, those with substantial nexus 3 and those without. But -- and that would be different 4 than the Durbin approach is right now. 5 So the conversation could shift, I guess -- 6 MS. YEE: Mm-hmm. 7 MR. FERRIS: -- is what I'm wondering. 8 MS. YEE: Absolutely. Absolutely. Okay. 9 MR. HORTON: Okay. 10 MS. YEE: Um, I want to respond to something 11 Mr. Runner raised. And it's something I've asked the 12 staff to prepare, and you all have received it. 13 But, uh, given the state of flux that we are in 14 relative to the use tax, I've asked the staff to prepare 15 a matrix of all of the, uh, use tax programs that we 16 currently have under the jurisdiction of this Board, 17 because they all have different registration 18 requirements, reporting, uh, methods and also due dates. 19 And, uh, it's the state of affairs of the use tax right 20 now in California. 21 And so, um, I actually found this at least to 22 be helpful in terms of having all this information in 23 one place so that if we have to make reference to it, 24 uh, we have that information. I just wanted to thank 25 the staff for preparing this. 26 Did the Members all receive this? 27 MS. MANDEL: Yeah, I have it. 28 MS. YEE: Okay. 18 1 MR. RUNNER: Yes, I saw that, yes. 2 MS. YEE: Okay. 3 MR. HORTON: Great. 4 MS. YEE: Great. Thank you. 5 MR. RUNNER: I think we -- I think there was 6 one that we -- there was one form we thought was left 7 out. I'll get back to you exactly, uh, which that was; 8 76B or was there a -- is there a -- but we'll work -- 9 we'll get back to you on that. We -- we -- we thought 10 we had identified something that should have been 11 included that was not there. But we'll -- we'll -- 12 we'll follow up more specifically. 79B. 13 MS. BUEHLER: Yeah, that is actually, um, the 14 publication. The form itself that they fill out is the 15 401-DS and it's the first item listed on the matrix. 16 MR. RUNNER: Okay. So then -- okay. So we 17 just need to clarify that then on the -- okay. Thank 18 you. 19 MS. BUEHLER: You're welcome. 20 MS. YEE: Thank you, Mr. Runner. 21 Other comments, Members? 22 Okay. Hearing none, uh, let me thank the staff 23 again. This is, uh, a challenging issue and obviously 24 with, uh, much fluidity as we move forward. So I 25 appreciate the diligence in keeping on top of all of 26 the, uh, pending legislation, also potential action in 27 Washington. Thank you. 28 MS. BUEHLER: You're welcome. 19 1 MS. YEE: That concludes the Business Taxes 2 Committee, um, and the Committee is adjourned. 3 ---oOo--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 September 20, 2011 I recorded verbatim, in shorthand, to 10 the 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 pages 1 13 through 20 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 4, 2011 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 21