1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 2, 2012 10 11 12 13 14 15 ITEM P OTHER ADMINISTRATIVE MATTERS 16 ITEM P3 SALES AND USE TAX DEPUTY DIRECTOR'S REPORT 17 ITEM 1 DISCUSSION OF QUALIFIED PURCHASER PROGRAM 18 PROCEDURES 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 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Diane G. Olson 15 Chief Board Proceedings Division 16 17 Board of Equalization Staff: Jeff McGuire 18 Deputy Director Sales and Use Tax Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 2, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Olson. 6 MS. OLSON: Our next item is P3.1, Discussion 7 of Qualified Purchaser Program Procedures. 8 MR. HORTON: Mr. McGuire. 9 MR. MCGUIRE: That would be me again. Um, good 10 morning again. I'll repeat, I'm Jeff McGuire with the 11 Sales and Use Tax Department. And, as Ms. Olson 12 mentioned, I'll be providing an update, um, on the 13 Qualified Purchaser Use Tax Program. 14 Um, my last update was in July of '11, and at 15 that time the Board approved some staff recommendations 16 to change how we administered the program. I'll just 17 summarize those really quickly. 18 Uh, what we did is we decided to automatically 19 deregister those qualified purchasers that filed three 20 consecutive zero returns. Um, the second item that was 21 approved by the Board was we discontinued the simplified 22 convenience registration process for new qualified 23 purchasers who had not been previously contacted by us. 24 And then the third thing that was approved by the Board 25 is we allow qualified purchasers to close their permit 26 if their gross receipts drop below a hundred thousand 27 dollars for two consecutive years. 28 In my report today I will be covering four 3 1 specific items: The first being the results of our 2 deregistration process and next step on those accounts; 3 the second part will be accounts falling under the 4 $100,000 threshold; and the third will be status and 5 planned actions for the remaining delinquent accounts 6 that we still have for the program; and then finally, 7 just some key events that are coming up during the 8 current filing season. 9 Starting with the deregistration process. As a 10 result of the policy changes that were adopted in July, 11 just this last month we deregistered 296,000 of the 12 500,000 qualified purchaser accounts, those that filed 13 three consecutive zeros. An additional 10,000 accounts 14 will be deregistered this month. And beginning this 15 month, staff will start analyzing those accounts further 16 to identify any of the deregistered accounts that may be 17 in a type of business that has a high probability of 18 incurring a use tax liability. These accounts will be 19 identified based on NAICS codes -- those are their 20 industry codes -- um, along with other data that we have 21 that we've gained through our In-State Services Program 22 which is based on business types and sizes of business 23 related to the likelihood of them maybe owing use tax. 24 These accounts will be contacted by staff to determine 25 if any use tax is due and if there is a need to 26 re-register them under the Qualified Purchaser Program. 27 Moving on to accounts below the $100,000 28 threshold. Um, so far, we don't have exact solid 4 1 numbers on this, but it looks like we have maybe less 2 than 25 accounts that have actually closed out because 3 they fell under the twenty -- um, the hundred thousand 4 dollar threshold. However, when we send out the filing 5 reminder this year -- um, in March, I believe. Yes, in 6 March -- we will include a special notice with that 7 mailing that will explain the changes that we've made to 8 the program. So we believe other individuals who will 9 realize they've actually fallen below the hundred 10 thousand dollar threshold and can then close out their 11 accounts will probably contact us at that time and close 12 out their accounts. So we'll probably have some better 13 numbers a little bit later in the year. 14 Moving on with the remaining delinquencies that 15 we have. Um, I will just kind of summarize the actions 16 that we've taken. For those from the 2011 filing 17 season, that was last year, as you know, in May we sent 18 out, uh, delinquency notices to approximately 300,000 of 19 the qualified purchasers who did not file their return 20 by the April 2011 due date. In response to that notice 21 195,000 of those qualified purchasers did file their 22 returns. 23 So, as a result, we have about 105,000 still 24 remaining who haven't filed their returns. So what 25 staff is planning to do is sending a second notice to 26 the remaining 105,000 accounts this month. And that 27 notice has already gone to your offices through the 28 three-day Board member preview process. 5 1 We're hopeful that at least 50 percent of those 2 accounts will clear and actually file their returns at 3 this point. Those that do respond and file three zero 4 returns will be deregistered in accordance with our new 5 policy. Those remaining accounts, along with any 6 outstanding delinquencies we have from 2010 year -- that 7 was our year one filing season -- will be evaluated, and 8 then we're going to break those accounts into two 9 groups. 10 Group one will be those accounts with the very 11 low probability of owing any use tax or those who might 12 have a use tax exposure but it's not cost-effective to 13 actually do any more work on those accounts, we will 14 actually deregister those accounts and send them a 15 notice. 16 The second group are those that have a higher 17 probability of owing use tax and -- or those where the 18 amount that might be owed is actually cost-effective for 19 us to do some additional work on. Um, and, again, we 20 will be determining who those groups are based upon the 21 results that we've had from our In-State Services 22 Program that was from our Tax Gap Program a couple of 23 years ago. 24 Based on this follow-up, as additional 25 information becomes available, accounts in the second 26 group will either be deregistered after we do some 27 follow-up with them, they'll file the required returns, 28 or it's possible that they may submit some documents to 6 1 us and then we will actually create a billing based on 2 the documents that they've submitted, you know, based on 3 asset purchases or something else. 4 We do not plan to make any estimated billings 5 on any of these accounts at all at this time. We do, 6 however, hope within the next year to have sufficient 7 data for some type business types from our In-State 8 Services Program where we may be able to come forward 9 with a process to the Board where we might recommend a 10 way that we could do some estimated billings for 11 accounts in these different groups. But, again, it 12 would probably be a limited number of groups initially 13 because, again, we're just still learning about these 14 service businesses. 15 Finally, I want to conclude with a quick update 16 on the 2012 filing season. Um, this year we're not 17 attempting to identify any additional new qualified 18 purchasers as we just are trying to work through the 19 remaining accounts we have from the first two seasons. 20 We will, on March 1st, be mailing the annual 21 filing reminder to approximately 200,000 accounts that 22 are still registered under the program. And as I 23 mentioned, this mailing will also include that special 24 notice that tells about the changes in the program. So 25 if someone really has had some changes and they weren't 26 aware of it, they can contact us and we'll adjust their 27 accounts or deregister them. 28 On April 1st, we will also send a courtesy 7 1 e-mail reminder to those accounts, just to remind them 2 of the April 17th due date. At the end of May, just 3 like last year, we'll, um -- we're scheduled to send out 4 delinquency notices for any of those accounts that 5 didn't file their 2011 -- or 2000 -- yeah, 2011 tax 6 returns. 7 That concludes my report. And, of course, I'm 8 available to answer any questions you may have. 9 MR. HORTON: Discussion, Members? 10 Member Steel. 11 MS. STEEL: Um, 105,000 delinquent accounts, 12 what are they? Is that they filed the tax return but 13 they didn't pay or -- 14 MR. MCGUIRE: No, the delinquent accounts would 15 be those who just haven't filed their return yet. 16 MS. STEEL: Haven't filed yet. 17 MR. MCGUIRE: Right. 18 MS. STEEL: So you said that BOE is going to 19 contact those people who never filed. Is that the 20 105,000 you're talking about? 21 MR. MCGUIRE: Yeah. What we're going to do is 22 we started with 300,000, and 195 filed their returns 23 after the first notice. So we will be, this month, 24 sending out a second notice to the remaining 105,000. 25 Then, based on those that actually file, you know, if 26 they file three zeros, we'll deregister them. If they 27 report tax, you know, they'll just -- 28 MS. STEEL: Right. 8 1 MR. MCGUIRE: -- report again next year. Then 2 with that group that's still left over, which we're 3 hoping is maybe only about 50 percent the size, so maybe 4 around 50,000 accounts, that's where we'll try to break 5 those into two groups. And the really low likelihood 6 people that, you know, aren't in an industry group that 7 we have any indication they would owe use tax, we will 8 deregister them. 9 MS. STEEL: Okay. 10 MR. MCGUIRE: And send them a notice to let 11 them know that. 12 MS. STEEL: Is it possible that I can get 13 itemized costs that how many staff that we use and when 14 we send these letters out for hundreds of thousands of 15 businesses? And I saw the income estimate and how much 16 came in since then that, you know, we started this 17 program. Um, I want to see the cost and how many staff 18 and how much really we spend, uh, to register and 19 deregister, all the numbers. 20 MR. MCGUIRE: Okay. We can -- we can do 21 that. 22 MS. STEEL: Okay. Thank you. 23 MR. HORTON: Mr. Runner. 24 MR. RUNNER: Thank you, Mr. Chairman. 25 Um, I want to thank Tax Policy, and also Jeff, 26 for helping us through our concerns on -- on this issue. 27 Um, and, uh, I think -- you know, I think we found 28 ourselves in the middle of a program to which we didn't 9 1 necessarily initiate and it was our responsibility to 2 figure out what to do with. And, uh, I think the steps 3 that we took earlier -- and I think I've always had a 4 concern on what to do with this group that we started 5 and, um, you know, at this point I appreciate the tone 6 of the letter that's going out. I think it's -- it's 7 much improved. And, also, the fact that we kind of have 8 a plan to come to conclusion. Uh, and I'm sure 9 that's -- that's good for all of us. 10 And, uh, you know, again, I -- I worry about 11 the fact that how much effort are we putting in to do 12 this. But the fact is, at some point we're having to 13 also respond to what the legislature has instructed us 14 to do. So we're kind of caught to a degree. 15 Uh, and so thanks for -- for the help, the 16 cooperation. And hopefully we'll kind of move on to the 17 next chapter. 18 MR. MCGUIRE: Thank you. 19 MR. HORTON: Thank you very much. 20 Mr. McGuire, can you kind of elaborate on 21 deregulation? It has such a negative connotation. 22 MR. MCGUIRE: Oh, deregistration? 23 MR. HORTON: Deregistration, yeah. 24 MR. MCGUIRE: It -- it really is, in essence, 25 just like closing out an account. 26 MR. HORTON: Why? 27 MR. MCGUIRE: Um, why are we doing it? Yeah. 28 Again, it was staff's recommendation, because, as 10 1 Mr. Runner pointed out, that we had so many people in 2 this program and so few that were actually reporting use 3 tax and had a use tax liability that the time and effort 4 of managing those accounts and handling those is -- it 5 seemed like it was more efficient that if they showed no 6 use tax liability for three consecutive years, it just 7 made sense not to make them continue to participate in 8 the program. 9 But our deregistration letter or close-out 10 letter does notify them about -- you know, reminds them 11 about use tax. And if they do incur any use tax 12 liability or make purchases that, you know, are subject 13 to use tax in the future, that they need to re-register 14 in with the program. So it kind of, you know, explains 15 what they need to do if they have that exposure in the 16 future but at this time they have at least indicated to 17 us that they don't based on three zero returns. 18 MR. RUNNER: Yeah, remember -- Mr. Chairman. 19 MR. HORTON: Mr. Runner. 20 MR. RUNNER: This particular group, um, is the 21 group that we're dealing with right now that we -- that 22 we courtesy registered. They didn't register 23 themselves. We registered them. 24 And so in a lot of ways when we're -- we're 25 deregistering a group of people who never registered in 26 the first place and tried to clarify that for them. And 27 we've, in fact, changed our policy, uh, on that into the 28 future. 11 1 MR. HORTON: Yeah, I just wanted to make sure 2 that the public was aware that deregistration is a 3 positive thing. 4 MR. RUNNER: Right. 5 MR. MCGUIRE: Right. 6 MR. HORTON: It's a good thing, even though it 7 sounds -- 8 MR. MCGUIRE: Yeah. Sorry if I didn't phrase 9 that right. 10 MR. HORTON: -- as if though it's not 11 necessarily. 12 On the cost analysis, can we convert that into 13 a cost benefit analysis so we -- 14 MR. MCGUIRE: Absolutely. 15 MR. HORTON: -- see both sides of the spectrum? 16 MR. MCGUIRE: Yeah, we will absolutely do 17 that. 18 MR. HORTON: All right. Thank you for your -- 19 Further discussion, Members? 20 Thank you for your presentation. 21 MR. MCGUIRE: Thank you. 22 ---oOo--- 23 24 25 26 27 28 12 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 February 2, 2012 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 12 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: February 27, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 13