1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 30, 2012 10 11 12 13 ---oOo--- 14 PUBLIC HEARINGS 15 F1 PROPOSED ADOPTION OF AMENDMENTS TO REGULATION 1684, 16 COLLECTION OF USE TAX BY RETAILERS 17 ---oOo--- 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 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings Division 16 17 ---oOo--- 18 For Staff: Bradley Heller Tax Counsel IV 19 Tax and Fee Division Legal Department 20 21 ---oOo--- 22 Speakers: Fran Mancia 23 Al Koch 24 ---oOo--- 25 26 27 28 2 1 INDEX OF SPEAKERS 2 NAME PAGE 3 Fran Mancia 7 4 Al Koch 8 5 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 30, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, next item. 6 MS. RICHMOND: Our next item is F, Public 7 Hearings. 8 Our first public hearing is F1, Proposed 9 Adoption of Amendments to Regulation 1684, Collection of 10 Use Tax by Retailers. 11 MR. HORTON: Okay. 12 Members, Mr. Brad Heller, the tax counsel, 13 will, uh, report out on this matter. 14 Prior to reporting, I would just ask that, 15 uh -- we have several witnesses. I would ask that they 16 come forward, uh, and have a seat at the -- 17 Mr. Alberto Torrico, attorney for the City of 18 Fillmore -- 19 MR. RUNNER: Not on this one. 20 MS. MANDEL: That'd be for this one? 21 MR. HORTON: Oh. Oops. Oops. Sorry. Okay. 22 Not for this one. All right. 23 Mr. Heller, it's all in your hands. 24 MR. HELLER: Perfect. Thank you, Mr. Horton, 25 or Chairman Horton. 26 Uh, I'm Bradley Heller from the Board's Legal 27 Department, as you mentioned. And I'm here to request 28 that the Board adopt the proposed amendments to 4 1 Regulation 1684, Collection of Use Tax by Retailers. 2 MR. HORTON: Okay. 3 MR. HELLER: Uh, the proposed amendments make 4 the regulation consistent with -- 5 MR. HORTON: Thank you. 6 MR. HELLER: -- further clarify and implement 7 the amendments made to the definition of retailer 8 engaged in business in California by Assembly Bill 155. 9 Um, in addition -- or I should -- in addition, 10 I just wanted to mention that, uh, the notice -- uh, the 11 notice of proposed rulemaking has a typographical error 12 that indicates that the Board, uh -- the Board approved 13 a publication of the proposed amendments during a BTC 14 meeting in, uh, February 28th, 2011, and it should have 15 said "2012." 16 The date is correct in the initial Statement of 17 Reasons, and we've posted a notice of correction on the 18 Board's website. And we are -- I'm noting it for the 19 record as well today. And we've contacted OAL and we 20 understand we can go ahead and adopt the amendments if 21 the Board, uh, approves them today. 22 I can also answer any questions you may have or 23 respond to any public comments, if you -- 24 MS. STEEL: Just quick question. 25 Um, so one-time certification, or it's going to 26 be annual certification? 27 MR. HELLER: The -- for the, uh -- the contract 28 clause? 5 1 MS. STEEL: Right. 2 MR. HELLER: I believe that's an annual 3 certification. 4 MS. STEEL: So every time I -- 5 MR. HELLER: I have to go check. Let me make 6 sure. 7 MS. STEEL: Because last time when you came 8 that I requested to review that. 9 MR. HELLER: It would be -- let's see. 10 MR. HORTON: Oh, okay. 11 MR. HELLER: Yeah, it's an annual 12 certification. 13 MS. STEEL: So they have to come back every 14 year to get it. 15 MR. HELLER: Correct. And I believe, as I 16 mentioned during the Business Taxes Committee meeting, 17 the idea was so that -- to require the retailers to 18 actually check on the people who might be soliciting 19 business on their behalf in California on an annual 20 basis, as opposed to just setting a contract in motion 21 and never having to check on those, uh, activities ever 22 again. 23 MS. STEEL: Okay. Just, can you tell me one 24 more time? 25 MR. HELLER: Oh, sure. Let me reclarify. 26 MS. STEEL: When they do -- okay. 27 MR. HELLER: If it was just one 28 certification -- 6 1 MS. STEEL: Mm-hmm. 2 MR. HELLER: -- then basically once there's a 3 certification, the retailer would never have to check on 4 any activities of the person who is -- who did that 5 certification ever again. 6 So let's pretend I have you give me a 7 certification the minute we sign the contract. Well, 8 then I never have to check on the activities that you 9 actually are doing ever again. 10 MS. STEEL: Okay. 11 MR. HELLER: I could just rely on that 12 certificate. 13 MS. STEEL: Got it. Got it. Okay. 14 MR. HELLER: Perfect. 15 MR. HORTON: Okay. I ask that the witnesses 16 introduce themselves for the record, and then, uh, make 17 your presentation. 18 ---oOo--- 19 FRAN MANCIA 20 ---oOo--- 21 MR. MANCIA: Thank you, Mr. Chairman and 22 Members. My name's Fran Mancia. I'm with MuniServices. 23 Um, I'd like to thank you for the opportunity 24 to be here today. And I'm pleased to express our 25 support to the amendments that are before you today, uh, 26 for adoption. 27 We are -- had the pleasure of being a part of 28 the interested party process throughout. And, uh, I 7 1 thought it was a very positive and collaborative effort. 2 Uh, MuniServices has worked with local 3 governments for over 30 years and we've always 4 encouraged and supported efforts related to the 5 collection and remittance of use taxes that are owed. 6 And we also supported AB 155 during the legislative 7 process. 8 So, again, I just want to thank you and, in 9 closing, support the efforts to encourage the adoption 10 of these amendments. 11 Thank you. 12 MR. HORTON: Thank you very much. 13 Mr. Koch, will you please introduce yourself 14 for the record. 15 ---oOo--- 16 AL KOCH 17 ---oOo--- 18 MR. KOCH: Uh, yes, Mr. Chairman. Thank you. 19 My name is Al Koch, um, and I'm appearing here 20 today as a tax attorney and member of the public. 21 I thank you for the opportunity to appear and 22 to comment on, uh, the proposed amendments to Regulation 23 1684 which I support fully. 24 Staff has done an outstanding job in preparing 25 to implement difficult and very important legislation, 26 AB 155. I applaud their outstanding effort in this 27 regard. It's complicated work and, uh, I think they've, 28 uh -- they've done yeoman work. I apologize for not 8 1 having been involved in the interested party proceedings 2 earlier, but I have been otherwise occupied. 3 Notwithstanding my approval of the draft, I 4 suggest that it could be improved somewhat, uh, if the 5 Board Members would give serious consideration to adding 6 a sentence at the end of proposed subdivision (b)(3) of 7 Regulation 1684 to read as follows: 8 "A retailer will be regarded as having a 9 physical presence in California if it makes 10 substantial sales to California purchasers that 11 constitute sales on approval, within the 12 meaning of Regulation 1628 (b)(3)(C)." 13 And that's an existing regulation that's been 14 enforced for many years. 15 Regulation 1628(b)(3)(C) states: 16 "When the sale is on approval, the sale 17 does not occur until the purchaser accepts the 18 property." 19 Thus, the retailer still owns the property 20 until the purchaser accepts it. Thus, if the property 21 is shipped from out of state by a remote seller, uh, in 22 a sale on approval, the remote seller still owns it when 23 it is delivered in California. For a large retailer, 24 this could create substantial nexus. 25 Now, the addition of the proposed language does 26 not purport to decide that anyone is making or has made 27 sales on approval. Uh, it leaves that issue open for 28 decision by the administrator in the first instance. 9 1 Uh, now I did attach some materials to a letter 2 that I forwarded to you yesterday in which the Attorney 3 General took the position that remote sellers were 4 making, uh, sales on approval in litigation that took 5 place in 1991. Uh, I can go over those materials if you 6 would like me to, but I don't want to take any more 7 time, uh, than is necessary because I know you have more 8 things to do today. 9 I should also disclose that there has been 10 recent litigation on what is a sale on approval, uh, 11 that was before the SBE in a local tax misallocation 12 case in 2007. That case is pending in the San Francisco 13 Superior Court. But my understanding is, uh, that in 14 its current posture, the proposed, uh, statement of 15 decision issued by the judge in that case, uh, has 16 declined to rule on that issue one way or the other. 17 So it's not really currently, uh, an active -- 18 an active matter. And in addition, in that case, uh, 19 the taxpayer that was in the jurisdiction that's 20 involved in that case has moved. So there would be no 21 prospective impact, uh, from -- from the prospective, 22 uh, regulation that you're considering today. 23 If you have any questions, I'd be happy to 24 answer them. 25 MR. HORTON: Uh, Members, I'm going to ask 26 Mr. Heller to respond, uh, share his thoughts in that 27 regard. 28 MR. HELLER: Thank you, Chairman Horton. 10 1 Um, staff has looked at, uh, Mr. Koch's 2 comments and all of the background material that he 3 submitted yesterday. And, essentially, we just -- we 4 don't believe that the additional amendments are 5 necessary. And the first reason is that we don't 6 believe that there are -- there is a considerable amount 7 of sales on approval being made. And that part of that 8 may have to deal with our differing interpretations of 9 what exactly is a sale on approval. 10 But, in general, uh, the Legal Department does 11 not believe there's extensive amount of sales on 12 approval and that may be a very minimal amount of sales 13 on approval. Because it's essentially the situation 14 where the retailer truly ships the property to the 15 customer where, if it's not a completed sale until the 16 customer agrees that everything meets their 17 specifications or -- to put it loosely, and, um, 18 essentially that's just not a common business practice. 19 Uh, the second issue is, essentially, the way 20 that the -- the way that the presumption's written in -- 21 in the current, uh, proposed amendments, it just applies 22 to everyone with a physical presence. So by doing this, 23 we would really be saying that the presumption 24 automatically applies to everyone who does a sale on 25 approval and, therefore, indicating that we think that 26 those -- those, uh, retailers have a substantial nexus 27 with California and are required to register to collect 28 use tax. 11 1 And my understanding is, is that the Legal 2 Department does not agree that a person who just makes a 3 sale on approval is necessarily has substantial nexus 4 with the State of California and is required to 5 register. 6 So we're not really sure that this -- these 7 amendments would really clarify the regulation in a way 8 that would really help retailers or the Board's 9 administration of the regulation. And, essentially, if 10 a retailer has a physical presence, then the presumption 11 already applies and we can reach the issue of whether or 12 not a, uh -- a sale on approval, should it exist, 13 creates a physical presence at another time. 14 MR. HORTON: Thank you. 15 Discussion, Members? 16 MR. KOCH: Could I make one response? 17 MR. HORTON: Um -- 18 MR. KOCH: Very short. 19 MR. HORTON: Sir, I would end up in a colloquy. 20 So I'd rather -- 21 MR. KOCH: Okay. Thank you. 22 MR. HORTON: Um, is there a motion, Members? 23 MS. YEE: Um, move to adopt the, uh, regulation 24 as amended -- I mean, the amendments to 1684. 25 MR. HORTON: Moved by Member Yee to adopt the, 26 uh, staff recommendations -- 27 MS. YEE: Yes. 28 MR. HORTON: -- of the amendments as 12 1 recommended. 2 Second by Member Steel. 3 Without objection, Members, such will be the 4 order. 5 ---oOo--- 6 7 8 9 10 11 12 13 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 May 30, 2012 I recorded verbatim, in shorthand, to the 10 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 Dated: June 7, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 14