1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 15, 2011 10 11 12 13 14 ITEM P OTHER ADMINISTRATIVE MATTERS 15 ITEM P3 SALES AND USE TAX DEPUTY DIRECTOR'S REPORT 16 1. PROPOSED COLLECTION COST RECOVERY FEE FOR CALENDAR 17 YEAR 2012 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 Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson 13 Chief Board Proceedings Division 14 15 16 For the Staff: Jeff McGuire Deputy Director 17 Sales and Use Tax Department 18 Richard Reger 19 Business Taxes Administrator III 20 Compliance & Technology 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 15, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson. 6 MS. OLSON: Our next item is P3.1, Proposed 7 Collection of Cost Recovery Fee for Calendar Year 8 2012. 9 MR. HORTON: Members, Mr. Jeff McGuire and 10 Susanne Beuhler and another distinguished gentleman, who 11 I've yet to meet, is here to make the presentation to 12 us. 13 MR. MCGUIRE: Good morning, Members. 14 I'm Jeff McGuire with the Sales and Use Tax 15 Department. With me today is Susanne Beuhler, and our 16 other esteemed colleague is Mr. Richard Reger -- 17 MR. HORTON: Welcome. 18 MR. MCGUIRE: -- all with the Sales and Use Tax 19 Department. 20 Today we're asking the Board for approval to 21 continue the Collection Cost Recovery Fee at the 2011 22 rate for 2012 while staff does some additional 23 assessment of the fee calculation for further Board 24 consideration. 25 In addition, we were requested to provide an 26 alternative for your consideration today that would 27 change the fee from the current stratified flat fee to 28 possibly a percentage-based fee. 3 1 I wanted to just give a little quick 2 background. As you recall, um, Senate Bill 858 created 3 the Collection Cost Recovery for BOE and it was 4 effective 1/1/2011. This legislation required BOE to 5 establish a collection fee that equals our collection 6 cost, um, and as reasonably determined by us as the 7 Board, and you as the Board. 8 At the December 2010 meeting, um, staff did, 9 um, bring forward some proposals for the Board, and the 10 Board approved a stratified flat fee that would be 11 applied to liabilities that are 90 days old or older, 12 without any corrective action on the part of the 13 taxpayer. However, for taxpayers who do contact BOE and 14 enter into installment payment agreements or actually 15 pay the liability in full, no, um, collection fee would 16 be charged. 17 In following this methodology and recalculating 18 the fee for 2012, we found that the fees did increase by 19 an average of 20 percent, which seemed a little 20 concerning or a little excessive, um, in light of the 21 economy and everything else. But there are a number of 22 key factors that I wanted to just point out really 23 quickly that actually did impact that increase. 24 First, the number of taxpayers entering into 25 installment -- installment payment agreements has 26 increased by 24 percent between 2009-10 and 2010-11. 27 This is directly in response to direction from you, the 28 Board, for collection staff to look for more 4 1 opportunities to grant installment payment agreements 2 and assist struggling businesses as a result of the 3 down-turn in the economy. So actually the outcome that 4 we had is actually a good thing for both the taxpayers 5 and the state. However, by reducing the number of 6 liabilities that would be subject to the fee, the 7 individual fee amounts did increase. 8 The second factor was we had a $1.8 million 9 increase in our overall collection program. This 10 occurred due to a budget augmentation that added 50 11 additional collector positions to the Sales and Use Tax 12 Program last year. Again, this is a good thing and it's 13 actually resulted in an overall increase of $13 million 14 in collections which is a seven-to-one benefit-to-cost 15 ratio. 16 Also, with the additional staff to work 17 collection cases and with the focus on early installment 18 payment agreements, the number of estimated cases that 19 would be subject to the fee has decreased by 11 percent. 20 Again, this is good for the overall program, but it 21 results in fewer cases that must absorb the cost of the 22 collections that the fee applies to. 23 Finally, the factor that we used to determine 24 which portion of the collection program costs are 25 actually directly collections time versus delinquency 26 work or other compliance activities is currently based 27 on a workload study, a detailed time and motion workload 28 study that we did in the early 2000s. 5 1 So based on kind of all of these different 2 factors and the changing behaviors of our staff and 3 taxpayers to get into earlier installment payment 4 agreements, we really recommend that we keep the fee the 5 same for 2012 and that staff actually revisit some of 6 these workload indicators to ensure that the fee does 7 accurately represent the actual collection program costs 8 for these cases that age over 90 days. 9 The second part was, due to some questions that 10 we received regarding the regressivity of the -- the 11 stratified flat fee, meaning that people with smaller 12 liabilities proportionately pay more than people with 13 larger liabilities, um, we were requested to bring back 14 to the Board for their consideration possibly using a 15 percentage-based fee with the $50,000 cap. That's the 16 same that we proposed in December of 2010. 17 Um, one last thing I'd mention if the Board did 18 want to go to the percentage-based fee, is that 19 currently we would have to ask our Technology Services 20 Department to actually program a percentage-based fee 21 into the system. And while we don't have a firm number, 22 it looks like it might take them several months to 23 actually do that. So moving into 2012, which we will be 24 in a couple of weeks, we would actually need to still 25 stay with the stratified flat fee until those changes 26 could be made. 27 So with all of that said in summary, we do 28 request your approval, um, of, hopefully, staff's 6 1 recommendation to just continue the stratified flat fee 2 into 2012 at the 2011 rate. Or, again, if the Board 3 chooses, we could move to the percentage-based fee with 4 a $50,000 cap. 5 Under either of those alternatives, whichever 6 one you select, we will come back in about six months 7 with the results of our workload analysis and how we 8 calculate the fee moving into the future. 9 And that concludes my remarks. And, of course, 10 we're available to answer any questions that you may 11 have. 12 MS. MANDEL: Question. 13 MR. HORTON: Ms. Mandel. 14 MS. MANDEL: Um, I may have misread the 15 materials then. 16 So, when the materials said that revisit -- if 17 the strat -- whatever, come back in six months, revisit, 18 so I took that to mean that we were setting the fee, 19 like, for the first half of the year and that in six 20 months we'd look at it again. 21 So are you saying that we would be setting the 22 fee for 2012 and that would be that? 23 MR. MCGUIRE: Right. 24 MS. MANDEL: What -- what are you saying? 25 MR. MCGUIRE: I guess we're offering you two 26 alternatives, but obviously there is a third alternative 27 which would be to adopt the original recalculated 2012 28 fee. 7 1 MS. MANDEL: No, that's not what I'm asking. 2 MR. MCGUIRE: Okay. I'm sorry. 3 MS. MANDEL: I thought you were recommending 4 using the 2011 numbers, but for six months, while we 5 were looking at a workload study or whatever it was you 6 were going to do to figure out whether the stratified 7 number you did for two 12, you know, you thought that 8 there was something glitchy (verbatim) about it. 9 So I thought you were saying adopt the 10 stratified fee, which was the recommendation, the 11 stratified fee at the same amounts as in 2011, and we'll 12 look at it again in six months. 13 And my concern with that was how confident you 14 guys were that when you looked at it again in six 15 months, that it was going to drop significantly, um, 16 because I didn't want the second half of the year people 17 to, you know, bear more burden than the first half of 18 the year people of the workload study. 19 But maybe you're saying adopt the 2011 20 stratified fee and that will be the fee for 2012, no 21 matter what. 22 MR. MCGUIRE: Yeah, that's our -- 23 MS. MANDEL: Okay. 24 MR. MCGUIRE: That's what we're saying today. 25 And then we would -- again, we'd come back in six months 26 and we do believe there are some potential adjustments 27 based on some of those calculations. But, again, until 28 we figure that out -- 8 1 MS. MANDEL: I'm trying to figure out what's 2 happening in six months. 3 MR. MCGUIRE: Well, in six months we can come 4 back with you with kind of a proposal for how we move 5 towards 2013. And we'll be actually -- 6 MS. MANDEL: Okay. 7 MR. MCGUIRE: -- way ahead of 2013 instead of 8 in December of -- 9 MS. MANDEL: Okay. 10 MR. MCGUIRE: -- like we are this year. 11 MS. MANDEL: So I misunderstood that. 12 MR. MCGUIRE: We want to get ahead of the curve 13 this time. 14 MS. MANDEL: Okay. I misunderstood the 15 write-up then. 16 MR. MCGUIRE: Sorry. 17 MS. MANDEL: Okay. 18 MR. MCGUIRE: I apologize. 19 MS. YEE: So effectively for '12 we're using 20 '11. 21 MR. MCGUIRE: Yes. 22 MR. HORTON: Mm-hmm. 23 MS. YEE: Okay. Got it. 24 MS. STEEL: Mr. Chairman. 25 MR. HORTON: Yes, Member Steel. 26 MS. STEEL: You know, um, I didn't support the 27 Cost Recovery Fee in the past. And then I'm not 28 supporting this because $250 liability that somebody 9 1 has -- cannot pay for 250, struggling businesses. They 2 to have pay for $185 Cost Recovery Fee. I mean, those 3 numbers. And then in 2012 it goes up to $220. And then 4 there's one cents difference from moving from 185 to 5 550, and then 550 to 925. 6 These costs is -- this fee is very, very 7 expensive. And, you know, comparing to even Franchise 8 Tax Board, that I have it here, the collection fee's 9 about $154 here. 10 MR. MCGUIRE: For individuals. 11 MS. STEEL: Right. So, you know, I really 12 cannot support that. If somebody cannot pay for 250 13 liability, how they going to pay $220 fee? I mean, just 14 doesn't make any sense to me. 15 MS. MANDEL: When -- when does the -- 16 MR. HORTON: I think that's the question. 17 MS. STEEL: That's my -- 18 MR. MCGUIRE: Yeah. 19 MR. HORTON: Mr. McGuire. 20 MR. MCGUIRE: Again, when we originally brought 21 the proposal forward and the idea was your -- um, again, 22 what Ms. Steel's pointed out is the regressivity of the 23 fee where someone with a low liability pays 24 proportionately a higher amount. But basically once we 25 engage, after 90 days, a person -- a state resource in 26 to resolving the liability, there's kind of a fixed cost 27 to that of working that collection case. Which, again, 28 we do expend more effort and more cost on larger 10 1 liabilities, that's why we have the stratified amount. 2 And we realize that for large -- small 3 liabilities, it is -- again, it's regressive and the fee 4 amount is -- is large. But it's intended to be kind of 5 a fee for service to recoup the state's cost, and that 6 was the proposal that we brought forward previously, you 7 know, and how to calculate the fee. 8 MR. HORTON: Further discussion, Members? 9 MS. YEE: Are you ready for a motion? 10 MR. HORTON: Yeah. Um, I guess as we -- as we 11 conduct the workload study, uh, the regressiveness of 12 this is concerning. And possibly, as we look at 13 stratifying, we might be able to consider a flat rate 14 proposal, uh, combined with the, um -- uh, the, uh, 15 current proposal, to some degree, under the, um, 16 presumption that the lower the liability generally, 17 uh -- in anticipating a lower liability, the workload 18 should be less. Um, and so please consider that as you 19 begin to evaluate, uh, this project as we go forward. 20 Um, at this point we're sort of behind the 21 eight ball, if you will. Don't really have an option at 22 this particular point. And to do it to, um -- to adjust 23 it halfway would only have a, um -- would only further 24 aggravate the regressive nature of this -- this, uh, 25 method of estimating the costs proportionate to the 26 liability. 27 Thank you. 28 MS. YEE: I have a question. 11 1 MR. HORTON: Member Yee. 2 MS. YEE: I don't recall that this was covered 3 in the memo, but, um, what were the revenue assumptions 4 associated with this fee at the beginning? 5 MR. MCGUIRE: Oh, looking to Mr. Reger. The 6 revenue assumptions? 7 MR. REGER: It was planned that the, uh, fee 8 would generate approximately $20 million a year. 9 MS. YEE: And that's not likely going forward? 10 MR. REGER: At this point, uh, we're tracking 11 at about $10 million per year. 12 MS. YEE: Okay. And are we letting people know 13 about that? 14 MR. MCGUIRE: Yes, I report to the Department 15 of Finance twice a year -- 16 MS. YEE: Okay. 17 MR. MCGUIRE: -- on how that fee is -- 18 MS. YEE: All right. 19 MR. MCGUIRE: -- recouping. 20 MS. YEE: You know, it's a -- I mean, I think 21 it raises a question with respect the legislature maybe 22 wanting to revisit the feasibility of the fee going 23 forward. 24 Okay. Thank you. 25 MR. HORTON: Agree. 26 Is there a motion, Members? 27 MS. YEE: Move the staff recommendation. 28 MR. HORTON: Moved by Member Yee staff 12 1 recommendation. Second by Member Mandel. 2 Noted objection Member Steel. 3 Ms. Olson, please call the roll. 4 MS. OLSON: Mr. Horton. 5 MR. HORTON: Aye. 6 MS. OLSON: Ms. Steel. 7 MS. STEEL: No. 8 MS. OLSON: Ms. Yee. 9 MS. YEE: Aye. 10 MS. OLSON: Ms. Mandel. 11 MS. MANDEL: Aye. 12 MS. OLSON: Motion carries. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 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 December 15, 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 13 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Date: January 5, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 14