1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 FEBRUARY 28, 2012 9 10 BUSINESS TAXES COMMITTEE 11 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 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Michelle Steel 6 Member 7 Jerome Horton Member 8 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller 11 (per Government Code Section 7.9) 12 Diane G. Olson 13 Chief, Board Proceedings Division 14 15 16 ---oOo--- 17 For Staff: Susanne Buehler Chief 18 Tax Policy Division Sales and Use Tax 19 Department 20 Bradley Heller Tax Counsel IV 21 Tax and Fee Division Legal Department 22 ---o0o--- 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 FEBRUARY 28, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Olson, what is our next item? 6 MS. OLSON: Our next item on today's agenda is 7 the Business Taxes Committee. Ms. Yee is the Chair of 8 that committee. 9 Ms. Yee. 10 MS. YEE: Thank you very much. -- 11 Okay, let me have staff come up on this item. 12 We have one issue before the Business Taxes 13 Committee today and that's proposed amendments to 14 Regulation 1684, collection of use tax by retailers. 15 And I'll ask Ms. Buehler and Mr. Heller to 16 introduce this issue. 17 Good morning. 18 MS. BUEHLER: Good morning. I am Susanne 19 Buehler with the Sales and Use Tax Department. With me 20 today is Bradley Heller from our Legal Department. 21 We have one agenda item for the Committee this 22 morning. Staff requests your approval and authorization 23 to publish our proposed amendments to Regulation 1684, 24 collection of use tax by retailers. 25 Proposed amendments implement, interpret and 26 make specific the amendments made to Revenue and 27 Taxation Code Section 6203, by Section 3 of Assembly 28 Bill 155, which will change the definition of "retailer 3 1 engaged in business in this state," operative 2 September 15th, 2012 or January 1st, 2013. 3 At this point I will turn it to Mr. Heller, who 4 will provide additional information, after which we'd be 5 happy to answer any questions you may have. 6 MS. YEE: All right, thank you. Good morning. 7 MR. HELLER: Good morning, Members of the 8 Board. Again, I'm Bradley Heller with the Board's Legal 9 Department. 10 And I just wanted to mention that AB 155 made 11 California a substantial nexus state and set forth 12 several examples of how -- or I should say two specific 13 examples of how an out-of-state retailer may establish a 14 substantial nexus with California when a member of the 15 retailer's commonly controlled group performs services 16 in California, or the retailer's affiliate performs 17 services in California for the retailer. 18 Therefore, Board staff analyzed AB 155, the 19 legislature's statement of intent regarding AB 155, both 20 federal and State case law regarding substantial nexus, 21 and all of the interested parties' comments. 22 And Board staff is recommending amendments to 23 Regulation 1684 that staff thinks -- or staff believes 24 are necessary to give out-of-state retailers notice that 25 California is now a substantial nexus state, clarify the 26 types of in-state services that can give rise to 27 controlled group nexus under AB 155 and that -- and 28 clarify that they are services that help a retailer 4 1 establish and/or maintain a California market because 2 those are the types of services the US Supreme Court has 3 previously concluded create a substantial nexus for a 4 retailer in a taxing state. 5 And also we want -- and also have recommended 6 clarifying that an out-of-state retailer will establish 7 affiliate nexus with California under AB 155 if the 8 retailer enters into an agreement under which a person 9 or persons in the state actually solicit California 10 customers and that the legislature did not intend for 11 out-of-state retailers to establish affiliate nexus 12 solely because they purchased anonymous and passive 13 online advertising, as opposed to engaging in more 14 meaningful in-state activity that can be properly 15 characterized as solicitation. 16 Board staff's recommendations are based upon 17 the best available factual information at this time and 18 all of our understanding of available resources. 19 And, again, we're both available to answer any 20 questions you may have and we're recommending that the 21 Board adopt -- or publish the proposed amendments -- 22 recommended amendments, excuse me. 23 MS. YEE: Thank you, Mr. Heller. 24 Discussion, Members? 25 MR. RUNNER: I just have questions here -- 26 MS. YEE: Ms. Steel. 27 MS. STEEL: -- that presumption, the -- it's 28 very tough to have the presumption requires for any 5 1 retailer's prove it. 2 So, can you explain little more about that 3 presumptions? That's my first question. 4 And second question is Board didn't approve 5 here and who's liable? I guess it's the store owners. 6 And third, that one time certification that -- 7 you know, that they have to certified every year that 8 they have to apply it, that -- you know, how many staff 9 is going to work on it and how much it's going to cost 10 instead of doing that only one time certification and 11 then when there is any change they can report us back. 12 I think that's much better way to do it. 13 So, can you just answer those three questions? 14 MR. HELLER: Sure. Ms. Steel, could you 15 restate the middle question? I don't think I totally 16 understood what you were asking. 17 MR. RUNNER: Let's from the first go 18 presumptions part. 19 MR. HELLER: Okay, about how it applies to a -- 20 MS. STEEL: Right, right. 21 MR. HELLER: -- specific retailer? 22 MR. RUNNER: Right, right. 23 MR. HELLER: Perfect, okay. Thank you. 24 Essentially, as I indicated before, AB 155 25 makes California a substantial nexus state, which -- 26 which means that if a retailer has a substantial nexus 27 with California, the retailer's required to register to 28 collect California use tax. 6 1 Federal -- federal case law, particularly US 2 Supreme Court cases, have established what they call a 3 physical presence test for establishing whether -- or 4 determining whether an out-of-state retailer has a 5 substantial nexus. 6 And under that test, basically, if a retailer 7 has a physical presence in the taxing state and that 8 physical presence is -- is not considered so slight that 9 it cannot support a use tax collection obligation, then 10 that physical presence alone is sufficient for the State 11 to impose a use tax collection obligation. 12 The Supreme Court has not clearly defined what 13 is "the slightest physical presence." We have a few 14 cases out there with examples. 15 MS. STEEL: So, we are waiting for that ruling 16 or -- 17 MR. HELLER: We are not waiting for that at 18 this point. I don't believe the Supreme Court has any 19 cases on its docket or any that I'm expecting to get 20 there any time soon that would further clarify what is 21 the slightest presence. 22 And it's essentially a facts and circumstances 23 test where you have to look at the physical presence 24 and, essentially, compare the circumstances with the 25 ones that the Court has ruled on before and determine 26 whether or not we feel that they're so slight that it 27 wouldn't be reasonable or would be too burdensome to 28 impose a use tax collection obligation for -- on a 7 1 retailer who just -- who had those minimal contacts. 2 And, so, in this case, the reason staff's 3 recommending a presumption is really to let retailers 4 know that if they have a physical presence in 5 California, then essentially, under federal Supreme 6 Court cases, they are required to register -- they have 7 a substantial nexus with California and they're required 8 to register to collect California use tax unless their 9 presence is so slight, under the limited guidance we 10 have, that they can -- that they -- that, basically, 11 that California's prohibited under the federal 12 constitution from requiring them to register. 13 And in that case, we've created the presumption 14 to make sure that retailers understood that really if 15 they do have a physical presence and staff knows they 16 have a physical presence, staff's going to expect them 17 to provide information to establish that they are -- 18 that their presence is so slight that it can't support a 19 use tax obligation. 20 Otherwise, I think it's -- we'll proceed to 21 assume that that physical presence creates a substantial 22 nexus and we wanted create this presumption so that 23 retailers don't think that they can just have a little 24 contact here and a little physical presence there and 25 then ignore our notices when we contact them and have no 26 preparation in advance for explaining how -- how the 27 Supreme Court's interpretation of the interstate 28 commerce clause protects them. 8 1 And, so, it's really our hundred percent 2 intention of just providing real advance notice to those 3 out-of-state retailers. And, in addition, the way that 4 it's worded is it's a completely rebuttable presumption. 5 It doesn't apply until a retailer actually has a 6 physical presence in California. 7 And then we also tried to add language 8 consistent with other Supreme Court cases that clarifies 9 that you -- that there is no physical presence as long 10 as a retailer maintains all of their contacts through 11 interstate telecommunications and interstate -- 12 interstate deliveries through common carriers. 13 MR. RUNNER: But how we going to differentiate 14 slight presentation? I mean, how -- the presumption 15 gives all the stores, whenever they use for the 16 internet, just like, you know, using somebody else's 17 company and that's presentation to so slight 18 presentation, how you going to -- how we going to figure 19 it out that, you know, what's slight presentations? 20 I really cannot understand that we are not 21 really giving them -- it's not I cannot understand -- 22 it's we are not really giving them right guidelines 23 right there. 24 "Slight presentation" what is -- exactly what 25 slight presentations? 26 MR. HELLER: Ms. Steel, I absolutely appreciate 27 your concern and if I had a lot more guidance and there 28 was more -- if the US Supreme Court had explained 9 1 exactly what the bright line of "slight is to 2 substantial" actually is, then staff would be 3 recommending incorporating it into the regulation and 4 providing that guidance to retailers. 5 And, honestly, staff's in the same position you 6 are. We would like to have that guidance from some 7 court if we -- if it was available, but right now the 8 Supreme Court has just ruled on a few cases. They've 9 said in a few circumstances when something was too 10 slight, but they really have not ruled. And they've 11 also indicated in a few cases when something was more 12 than too -- or more than the slightest. 13 But they've really never had any kind of bright 14 line rule and it appears to be a completely facts and 15 circumstances test that's applied as long as there is 16 some actual person or property physically located in the 17 state and it's a -- kind of a cumulative test. 18 So, that's the main reason why we really felt 19 rather than printing a bright line test, which we can't 20 do at this time, we really wanted to warn retailers that 21 they need to speak with their tax counsels and be 22 comfortable in their own -- in their own understanding 23 of constitutional case law regarding interstate commerce 24 that they don't have substantial nexus. So that if we 25 do see it with the physical presence and we contact 26 them, they can quickly explain to us why they don't -- 27 aren't required to register. 28 And that's really the whole basis for that 10 1 presumption. And, again, we think it's completely 2 consistent with all of the -- the supreme Court's 3 interpretations of the interstate commerce clause. 4 MS. STEEL: It seems like presumption itself is 5 that all the retailers are responsible, no matter that 6 they use, how slight it is because if you don't know the 7 guidelines here -- and we don't know the guidelines -- 8 how tax counsels know that they going to advise their 9 own taxpayers that -- you know, how to report that? 10 So, you know, that presumption really hurts -- 11 I mean, you know, for this language comes in with a 12 presumption really bothers me. 13 Second thing is for the one time certification, 14 instead of that that we have to ask them to do every 15 year that -- how many people -- how many affiliations 16 out there that they have to do that? And then how many 17 people has to be on full-time to check all these that, 18 you know, they really did and they really applied 19 another certification annually or not? 20 I mean, why don't we change to one time 21 certification and there is any change, then they can 22 report to us, so, you knows we can change the status. 23 Why we printing that that annual certification required? 24 MR. HELLER: Thank you for the question, 25 Ms. Steel. 26 Essentially -- well, first of all, let me just 27 you some background on the origin of the provision and 28 then I can kind of, I think, hopefully answer the 11 1 questions about why we're recommending it and give you 2 some input on how or why we might want to change it if 3 the Board sees things differently than what staff's 4 recommending. 5 First off, New York has implemented an 6 affiliate nexus statute and their Department of Finance 7 and Revenue has adopted provisions for retailers to 8 establish that their agreements are not the types of 9 agreements that create affiliate nexus in New York. 10 And these provisions are substantially based on 11 those. And the New York provisions also have the same 12 annual certification requirement. 13 So, first and foremost, we were looking to 14 New York as a kind of a template. And then seeing if 15 their provisions were -- seemed reasonable to us in 16 California. We have made a couple of modifications to 17 take out one of the requirements that New York imposed, 18 which was a requirement that the agreement not allow for 19 the payment of a commission or similar types of 20 compensation to the affiliate. We've deleted that since 21 that doesn't seem to be a critical element for creating 22 affiliate nexus, although it's -- it's one element that 23 could be looked at in whole fact pattern. 24 In this case, though, we kept the annual 25 certification requirement, essentially because we really 26 agreed with New York that we didn't want to encourage 27 retailers to just obtain one certification, say at the 28 very beginning of a contract, and then, say, go off and 12 1 then ignore the affiliate's activities indefinitely, say 2 -- I mean it could be forever, hundreds of years even, 3 theoretically if we don't have any requirement that they 4 ever have to check in with that retailer again. 5 And there's really nothing under those 6 circumstances to prevent a retailer from just accepting 7 that one certification, ignoring the fact that their -- 8 that the affiliate may be doing any number of things 9 and, essentially, never being required to check on them 10 again and being able to disclaim all knowledge of 11 whatever solicitation activities that -- that affiliate 12 might be conducting way in the future, even, say, five 13 or six years in the future. 14 With that said, though, it's -- we're not 15 suggesting that this is the only way to address 16 affiliates. And this provision itself is really -- is 17 not a requirement in the sense that we're imposing a 18 requirement that every person who enters into a contract 19 with someone they think is an affiliate include this 20 provision or they will have nexus. 21 This provision is just an example of a way 22 where retailers can change -- can incorporate provisions 23 into their agreement to -- to show that their agreement 24 is not one of these types of agreements that -- that's 25 for solicitation activity. 26 And, so, if the Board's more comfortable with 27 an annual -- or an initial certification, I think staff 28 could -- we've talked about that idea a little bit and 13 1 we think it's administerable. 2 We would probably prefer, though, that we 3 change what the certification says, to some degree, and 4 then add some language to the effect that they're 5 certifying, you know, that they have not solicited under 6 the agreement and they will not solicit under the 7 agreement and that they will notify the retailer if they 8 do solicit under the agreement at any time. 9 And then I think under those circumstances then 10 the retailer doesn't need to keep checking up on them. 11 If the -- they would need to go ahead and notify the 12 retailer if they're going to be soliciting, but at 13 least -- in our mind it creates some mechanism so that 14 it's not just an autopilot certification that goes in a 15 file and is being relied on 20 years later with no 16 understanding of the factual circumstances. 17 But, again, it was, you know, our best -- our 18 best effort to try to show retailers how they can set up 19 their agreements in a way that makes it expressly state 20 that this is not a solicitation-type agreement that's 21 designed to create that type of -- or hire a person to 22 solicit in California under the circumstances that would 23 create affiliate nexus. 24 So -- 25 MS. STEEL: So, how about the cost for staff -- 26 staffing and annual certification requirement? 27 MR. HELLER: Well, I'll add again -- 28 MS. STEEL: How many -- 14 1 MR. HELLER: The retailers themselves, if they 2 choose to go this way, will -- well, their own -- their 3 own costs would depend on how many times that they put 4 this statement in their agreements. 5 And if they have put this in a thousand 6 agreements with a thousand affiliates and the annual 7 requirement's in there, then -- and they want to enforce 8 that with their affiliates, then they're going to be 9 required -- the retailer themselves -- to go ahead and 10 get those certifications. 11 There's really nothing at all that Board staff 12 would be involved in at that stage. And the retailer 13 would just be maintaining those certificates in case the 14 Board was to start an investigation into whether or 15 not -- or even inquire, I should say, as opposed to 16 investigate -- just inquire into whether that retailer 17 had contacts with California and then the retailer would 18 have the certificates available to substantiate whatever 19 agreements it did have with affiliates in California 20 don't create affiliate nexus. 21 MS. STEEL: So, what you are saying is we don't 22 need the extra starving for that? 23 And second thing is you -- every time they do 24 renew their certification annually, then you just put 25 that one into the file and then you're not even going to 26 look at it until the investigation started? 27 So, that and one time certification, I mean, 28 it's almost same thing here. Seems like you just put 15 1 those, you know, in the file and you're not going to 2 even look at it. And we don't need extra staffing. 3 And then plus on -- you know, when the investigation 4 started, then you need those that they really did every 5 year, annually or not. 6 I don't see the difference between that, you 7 know, you do a one time certification or annual 8 certification there. Seems like just more work for the 9 taxpayers at this time that they have to apply it every 10 year. 11 Well, my comment is done. Thank you. 12 MS. YEE: Thank you, Ms. Steel. 13 Other discussion, Members? 14 MS. MANDEL: Sorry, just breathing. 15 MS. YEE: Okay. I wanted to pose a couple of 16 questions. 17 First I wanted to thank staff for working 18 through these regulatory amendments. I think this is a 19 topic that is fluid, at best. And certainly trying to 20 corral all of the existing authorities to try to fashion 21 a regulation to compliment AB 155 had its set of 22 challenges. 23 My concern that I want to address really 24 relates to the issue of online advertising. And I just 25 wanted to get a sense of how we're viewing some of these 26 authorities that you relied upon. 27 The current draft includes language that I 28 believe had been provided by some of the online 16 1 advertisers and these are the ones who are doing 2 advertising that is the result of algorithmic functions 3 that are anonymous and passive in nature, as you 4 referred to earlier in your introduction. 5 And I was just curious as to kind of where -- 6 what authority you relied on for that? I know during 7 the first interested parties' meeting there was some 8 thought that this concept of referral that was included 9 in the bill may have possibly extended to online 10 advertising and so there was kind of a different view 11 about how to look at some of these entities that were 12 doing more of this passive and anonymous-type of 13 advertising. 14 But could you just comment on kind of how you 15 ended up with that particular provision of the reg it 16 its current form? 17 MR. HELLER: Absolutely, Ms. Yee. And thank 18 you for the question. 19 First off, staff was -- let me -- let me go 20 back. The statute itself in the affiliate nexus 21 provisions basically uses three different terms. It 22 uses the term "refer." It also uses the -- refers to it 23 as "a referral" -- refer or referral and then also 24 "solicit" and then advertising -- and/or advertisements. 25 And, essentially, we -- it's clear from the 26 statute that advertisements are not intended to be 27 nexus-creating activities and that soliciting clearly is 28 intended to be a nexus-creating activity, as it was even 17 1 before AB 155 was enacted. And that staff was confused 2 whether -- what refer and referral exactly meant as to 3 mean where it laid in between advertising and soliciting 4 and how to look at a specific, let's say, online 5 activities as one or the other. 6 And, essentially, the statements of intent from 7 the authors of AB 155 and ABX 128 were provided to the 8 Board staff and indicated that -- at least -- or I 9 should say, shed a whole lot of light on the 10 legislature's intent with regard to where they, at 11 least, thought the line needed to be drawn as far as 12 determining when something online crosses from being 13 advertising to soliciting. 14 And I think we used this to kind of inform our 15 understanding of what the legislature meant by "refer" 16 and "referral." And when we -- when we look at the 17 statements of legislative intent, it seemed apparent 18 that the legislature was -- was not trying to create a 19 new, expanded definition of solicitation and that they 20 were really trying to direct the Board to -- to find 21 substantial nexus when, in fact, somebody's doing 22 something that's traditionally considered soliciting, 23 but via the internet or any other. 24 And, so -- and they weren't trying to say -- 25 start a slippery slope that converts what used to be 26 considered advertising before AB 155 into a soliciting 27 activity if it really didn't meet the traditional 28 definition of -- adver -- or soliciting beforehand. 18 1 We also understood from the legislature that in 2 their minds that they had considered general forms of 3 online advertising, including, I think it was, ads 4 generated by internet search engines, banner ads, 5 click-through ads, cost per action ads and links to 6 retailers' websites. And they concluded that those were 7 generally anonymous and passive in nature and they felt 8 that when an advertisement's anonymous and passive in 9 nature, it really does fall in what they intended as an 10 advertisement and it's not traditionally considered a 11 solicitation and they didn't intend for the Board, in 12 interpreting refer and referral, to kind of bring that 13 kind of advertising activity into the definition of 14 soliciting or treat it as creating substantial nexus. 15 With that, we also received comments 16 recommending language be included in the proposed amend 17 -- or the recommended amendments. And staff considered 18 that language very carefully and did not incorporate it 19 verbatim. We tried to consider the comments as well as 20 the statements of intent from the legislature. 21 And, essentially, as opposed to incorporating 22 language that just simply said, "The terms refer or 23 referral do not include online advertising," we added 24 language indicating that they do not include online 25 advertising generated as a result of algorithmic 26 functions that is anonymous and passive in nature, such 27 as the ones identified by the legislature, the ads tied 28 to internet search engines, banner ads, et cetera. 19 1 And, so, that's really the process that we went 2 through in making our recommendations with regard to 3 those definitions and how we looked at the legislature's 4 intent in formulating our recommendation. 5 MS. YEE: Okay. I appreciate that. 6 A couple of concerns I have about that and that 7 is, 1, as I alluded to earlier, technology is changing 8 so rapidly and I wanted to insure the flexibility of 9 this Board to be able to reflect any changes that could 10 happen in the advertising marketplace or in technology 11 that -- such that that these generic algorithmic 12 functions, in fact, aren't anonymous or passive in 13 nature, you know, going forward. And, so, should that 14 happen, the Board would have no flexibility but to 15 reopen the reg and to amend it to try to reflect what 16 the new reality is. 17 Is that correct? 18 MS. MANDEL: Well -- 19 MR. HELLER: Well, at this point, I mean, we'd 20 first be -- have to look at whether or not the regu -- 21 whether or not the regulatory language applied once we 22 understood what the additional facts were. 23 And then it's possible it could be limiting. 24 We might need to reopen it to clarify what kinds of 25 online advertising meet the -- what's the intended idea 26 of the -- kind of the anonymous, passive advertising as 27 opposed to what type of online activities that appear to 28 be advertising are really, in fact, soliciting. 20 1 And, so, I would just to have to know what all 2 the facts are before I would say for sure whether or not 3 we'd have to reopen the regulation or if the Board could 4 just conclude that this language doesn't apply to a 5 specific activity. 6 MS. YEE: Okay, I can appreciate that. 7 What if the functions were actually controlled 8 or manipulated a salesperson? 9 MR. HELLER: Well, I think that would be a 10 major difference, at least in our understanding, that 11 really -- assuming it was designed where it's -- there 12 is an individual controlling it, it probably wouldn't be 13 passive in nature. 14 MS. YEE: Uh-huh. 15 MR. HELLER: And I don't think that this 16 definition would apply if it's really a person who's out 17 there, like a salesperson targeting specific 18 communications at customers in our state. 19 MS. YEE: Okay. My other concern really 20 relates to the authority. The authority was a letter to 21 the Journal -- and Mr. Horton, I think, can appreciate 22 this -- it was not actual legislative intent stated in 23 the legislation's itself and it was a last minute 24 clarification by the authors of the bill. So, I don't 25 consider that to be adopted, at least on the substantive 26 policy by the legislature. 27 And, so, I -- I really many resistant to having 28 that be part of the record as the underlying authority 21 1 for this. And I just want to know that this Board has, 2 you know, the maximum flexibility to re-visit this issue 3 should there be, as I said, changes in technology or in 4 the advertising market. 5 So, I -- I just have a real problem with 6 including that as a part of the record for rulemaking, 7 the letters to the Journal. 8 MS. MANDEL: I don't think it's the first time 9 that the Board's looked at that type of material. 10 MS. YEE: It may not be, but I also understand, 11 having monitored this bill and the timing of this 12 letter, it was on the last day of the session, it was a 13 contentious bill. 14 And I think, frankly, if this was what they 15 meant and thought they could get the votes for this 16 bill, it would be in the bill. And it wasn't. 17 So, I -- I'm concerned about that and just what 18 it means in terms of our flexibility as a Board to, you 19 know, re-visit these issues going forward. 20 Mr. Horton? 21 MR. HORTON: Yeah, I would share those concerns 22 and particularly if this issue is ever litigated. We 23 often move forward in anticipation of looking at the 24 legislation, regulation and so forth, neither of which 25 is clarified until it's litigated. 26 In that environment, if that's -- if the basis 27 of that is the intent and subsequent intent, subsequent 28 to the -- the deliberation of the bill, it's going to 22 1 have very little weight in the process. 2 And -- but I'm also cognizant of the fact that 3 in the regulatory process, I believe, you know, that the 4 Board has the authority to -- and should exercise that 5 authority at whatever point that we deem necessary to 6 modify the legislation -- I mean the regulation based on 7 current -- current activities. 8 And, so, in regards to Ms. Yee's question, I 9 think that at any point in time in which we think that 10 the Board is of the opinion that the legislation is no 11 longer relevant, based on just the evolution in the 12 industry, we should make those adjustments, even if that 13 happens to be relatively soon, as we begin to sort of 14 implement this. 15 And Ms. Steel's concern, I believe, has merit 16 too, to the extent of trying to just see what the actual 17 implications are relative to practice, even though it 18 may not cost us something and even though I don't 19 anticipate the taxpayer really having an onerous 20 responsibility relative to the annual certification. In 21 fact, I see it as a check and balance and will actually 22 benefit them. Because the unfortunate part is that a 23 subsequent investigation, whether they have this or 24 don't have it, is not going to relieve them of the 25 liability, if, in fact, they of not complied with the 26 law as it exists. So, it's good to have a check and 27 balance in place. 28 So, you know, but, you know, this is -- this 23 1 is -- this is a work in progress. 2 MS. YEE: I mean I'm prepared to, obviously, 3 support the amendments, but I'm -- I'm just really -- 4 having monitored what happened on the legislation, I'm 5 really loathe to think that letters to the Journal are 6 going to be -- 7 MR. HORTON: Yeah. 8 MS. YEE: -- cited as authority. 9 MR. HORTON: Well, maybe -- we're actually 10 citing that as authority? 11 Mr. Heller? 12 MR. HELLER: Mr. Horton, we're not citing it as 13 authority, we are explaining, though, at least in 14 staff's view, that staff did interpret the statute in 15 light of that statement of intent. 16 And I think if the Board was to authorize 17 publication of the recommended amendments today, staff 18 could clarify that -- that the statement of intent isn't 19 a part of a binding statute, that the Board's looking at 20 it as just a -- you know, as just what it is, it's the 21 author's comments about their intent. And that it's -- 22 the Board's still free to re-visit the issue and, you 23 know, determine whether -- basically is it bound by that 24 statement of intent like it was a statute and certainly 25 can -- has the authority to determine whether or not any 26 activity is soliciting or referring or referrals and can 27 re-present the regulation itself if there's new facts. 28 MS. YEE: Yeah, I mean, I -- 24 1 MS. MANDEL: Go ahead. 2 MS. YEE: -- I think it's hard -- it's 3 difficult not to acknowledge the letters. Obviously, 4 the authors, you know, did want to make this 5 clarification. 6 I just don't want us to utilize the letter or 7 their stated intent as support or, you know, just 8 authority one way or the other with respect to what 9 we're doing with this regulation. 10 It's out there. It really has no force of law. 11 But I also -- but even refrain from citing it as support 12 for what we're doing in this regulation. 13 And I -- and I think that really then maintains 14 the maximum flexibility for this Board. 15 MR. HORTON: Yeah. Member Yee? 16 MS. YEE: Yes, Mr. Horton? 17 MR. HORTON: Maybe some cumulative language -- 18 preponderance of the evidence -- not evidence, but the 19 intent. So, we're incorporating our thought process to 20 indicate that we're looking at the statute and we're 21 interpreting the statute. 22 And we're looking at all of the variables that 23 went into the legislature in determining those factors. 24 So, in its totality that information has informed us and 25 led us to this conclusion. 26 And I'm sure that there's -- for the linguistic 27 people out there, there are one or two words to 28 accomplish that. 25 1 MS. YEE: Yeah, I mean I -- if -- short of 2 withdrawing these letters as part of the record of 3 rulemaking, I would say we not cite them specifically -- 4 MR. HORTON: Yes. 5 MS. YEE: -- as authority or support or 6 anything. 7 We can certainly acknowledge them as part of 8 the record, but I just want it to be neutral. So, that 9 we have the ability to re-visit this. 10 MR. HORTON: Okay. 11 MS. MANDEL: So -- 12 MS. YEE: Ms. Mandel. 13 MS. MANDEL: -- but it's my understanding from 14 the definition of "advertisement" that -- that the 15 better advertisers get at slicing and dicing the online 16 community so that they can put up more targeted -- so 17 that their advertising's more targeted, you know, just 18 like it might be depending on what magazines they might 19 advertise in, but that they -- they may be reaching 20 eyeballs that might be more or less interested, that -- 21 that that sort of targeted advertising is still 22 advertising because it's -- it's anonymous. 23 I mean, it's not like they're sending an e-mail 24 to my e-mail address. Is that -- as opposed to 25 solicitation, just figuring out how to target the -- the 26 audience of the banner ads is -- is still an 27 advertisement. 28 MR. HELLER: Ms. Yee, though -- or excuse me, 26 1 pardon me, Ms. Mandel, sorry. 2 MS. MANDEL: We both have dark hair, it's okay. 3 MR. HELLER: Ms. Mandel, pardon me, that's -- 4 that's really staff's understanding of like the current 5 state of advertising online right now. And I think 6 that's consistent with what the legislature's 7 understanding is too, at least the authors' state, based 8 on their statements of intent. 9 And we think that generally banner ad and 10 click-through ads, while they still may be -- they're 11 still optimizing their placement, say, so that they're 12 trying to get in front of, you know, a group that's more 13 likely to be interested in clicking on the ad to see 14 products for sale, there -- we don't think that they're 15 at the level now that there's -- that they're being 16 targeted in the same way that somebody who's calling a 17 list of phone numbers of California residents to ask 18 them to buy specific products are targeted 19 solicitations. 20 And we don't think they are in the same way 21 that somebody who's like a paid -- a salesman sending 22 e-mails directly to California customers, trying to 23 solicit sales. 24 And, so, at this point we think that's 25 exactly -- your understanding's exactly how the 26 treatment of -- of online advertising is right now. And 27 if it doesn't change at all, it would stay that way, but 28 if it slowly becomes something that really does look 27 1 like the equivalent of targeting a customer and sending 2 them an e-mail, soliciting them for a particular cus -- 3 retailer or calling them and soliciting them for a 4 particular retailer or going to their front door and 5 knocking and asking them to purchase something, then 6 that's the kind of activity that we think is soliciting. 7 We think the legislature agreed that's soliciting. 8 And we'll keep our eyes open if that's what -- 9 that replaces what -- what is currently online 10 advertising in the future. But right now we don't know 11 that that's happening or see it happening in any way. 12 MS. YEE: Okay. I think it's not -- it's 13 conceivable that it could happen. I think it's more 14 likely to happen than not, but that's -- it's my own 15 sense. 16 Ms. Mandel. 17 MS. MANDEL: I am not going to say anything 18 else. 19 MS. YEE: Okay, all right. 20 All right, Members, any other discussion? 21 MR. HORTON: No. 22 MS. YEE: Okay. Hearing none, is there a 23 motion? 24 MR. HORTON: Move to authorize publishing the 25 proposal given the discussion by the Board. 26 MS. YEE: Actually, let me clarify that. 27 With respect to the discussion, do you want -- 28 I mean, I was proposing two things, but I am open. 28 1 One would to be not include the letters to the 2 Journal in the rulemaking file to OAL -- 3 MR. HORTON: So moved. 4 MS. YEE: Or -- okay. 5 MS. STEEL: Objection. 6 MS. YEE: What's that? 7 MS. STEEL: Objection. 8 MS. YEE: Okay, I'll second the motion. 9 Further discussion? 10 MS. MANDEL: Yeah. 11 MS. YEE: Ms. Mandel. 12 MS. MANDEL: I have a question for the -- well, 13 we're not at the point of making a rulemaking file 14 because the rulemaking file, as I understand it, doesn't 15 happen until this thing -- what we're doing now is we 16 are voting, if it gets approved, to send it into the 17 formal rulemaking process and that it's the start of 18 that formal rulemaking process with the notice that has 19 whatever it has in it, which Miss -- which they can tell 20 us -- because I'm having a brain freeze -- what really 21 goes into that and that the rulemaking file itself 22 doesn't include, necessarily, all of the informational 23 stuff that came to the Committee, which is why when we 24 go to formal hearing, people who have comments have to 25 make the same comments all over again. 26 Does that -- that's my understanding of where 27 the rulemaking file really is. 28 MR. HELLER: Ms. Mandel, if I could just add? 29 1 In -- generally, your understanding's correct, 2 the rulemaking file is prepared after the Board 3 authorizes publication. 4 However, as part of the initial statement of 5 reasons, we generally, as part of our procedure, we 6 identify the issue paper or Chief Counsel memorandum 7 that staff's submitted to the Board Members with all of 8 its recommendations as a document that the Board Members 9 relied upon in making their decision to go ahead and 10 approve publication of the recommendations set forth in 11 that document. 12 And, so, in this case, those -- all of the 13 exhibits -- I shouldn't say that -- the exhibits to our 14 issue paper include -- include the com -- all of the 15 comments from interested parties that we thought were 16 relevant for today. And, so, those, at least under our 17 current practice, those would be included as just -- it 18 would still be exhibits to the issue paper. And the 19 issue paper, under our current practice, would be 20 identified as a document that the Board relied upon. 21 But we can make it expressly clear that the Board did 22 not rely upon the statement of intent in the way that 23 the Board's already indicated, after we've identified 24 the issue paper itself as a document that the Board did 25 rely upon. 26 And, mainly, it's just because the Board -- we 27 do feel like in most cases the Board does rely on the 28 issue papers and Chief Counsel memos for the basis of 30 1 the general analysis. And, so, that's our current 2 procedure. I just wanted to make the Board aware of it 3 in case -- and if you do want to instruct us to not 4 refer to the issue paper, we can. 5 It's just -- I'm not sure what the Office of 6 Administrative Law would think. They may still think 7 the Board relied on it and we should have identified it, 8 but we're certainly going to follow the Board's 9 direction and I just wanted to make that clear, so -- 10 MS. YEE: All right. Thank you, Mr. Heller. 11 Motion by Mr. Horton, okay, I have seconded, to 12 authorize publication of the proposed amendments and 13 to -- 14 MS. MANDEL: Can you -- can you just split it, 15 split the motion? 16 MS. YEE: Okay. 17 MS. MANDEL: You can -- 18 MS. YEE: Mr. Horton, you want to remake the 19 motion? 20 MR. HORTON: Yes, sure -- bifurcate the motion, 21 the first motion is to -- wow, bifurcate it. 22 We would probably have to take the motion as-is 23 and if it fails, then take up the second motion because 24 they're interconnected, I would think. 25 Would that be your desire, Ms. Mandel? 26 MS. MANDEL: Well, I'm okay with the 27 amendments, I'm just -- I just think I'd abstain on the 28 other piece, so -- 31 1 MR. HORTON: Okay. 2 MS. MANDEL: -- that's -- 3 MR. HORTON: Move to -- move to adopt the 4 amendments as proposed -- well, strike that. 5 MS. YEE: Authorize publication. 6 MR. HORTON: I move to authorize publication, 7 with the exclusion of -- move to authorize publication, 8 as-is. 9 MS. YEE: Yeah, okay. 10 All right, we have a motion by Mr. Horton to 11 authorize publication of the proposed amendments. 12 I'll second that motion. 13 Please call the roll. 14 MS. OLSON: Ms. Yee? 15 MS. YEE: Aye. 16 MS. OLSON: Mr. Horton? 17 MR. HORTON: Aye. 18 MS. OLSON: Ms. Steel? 19 MS. STEEL: No. 20 MS. OLSON: Ms. Mandel? 21 MS. MANDEL: Aye. 22 MS. OLSON: Motion carries. 23 MS. YEE: Okay, second motion? 24 MR. HORTON: Move to exclude the -- what's the 25 letter called? 26 MS. YEE: Letters to the Journal. 27 MR. HORTON: Letters to the Journal as the 28 supporting documents for the amendments. 32 1 MS. YEE: Okay. Motion by Mr. Horton to 2 exclude the letters to the Journal, which -- Assembly 3 Journal, as supporting documents for the proposed 4 amendments. 5 I will -- 6 MR. HORTON: In and of themselves. 7 MS. YEE: Yeah. 8 MR. HORTON: In and of themselves. 9 MS. YEE: I will second that motion. 10 Please call the roll. 11 MS. OLSON: Ms. Yee? 12 MS. YEE: Aye. 13 MS. OLSON: Mr. Horton? 14 MR. HORTON: Aye. 15 MS. OLSON: Ms. Steel? 16 MS. STEEL: No. 17 MS. OLSON: Ms. Mandel? 18 MS. MANDEL: Abstain. 19 MS. OLSON: Motion carries. 20 MS. YEE: Okay, I just want to be sure, is 21 staff -- are you clear about that? 22 MR. HELLER: We're very clear. 23 MS. YEE: Okay, thank you very much. 24 MR. HELLER: Thank you. 25 MS. YEE: That concludes the Business Taxes 26 Committee. Thank you very much. 27 MR. HORTON: Thank you. 28 ---o0o--- 33 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 FEBRUARY 28, 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 33 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: March 19, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 34