1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 OCTOBER 23, 2012 9 CHIEF COUNSEL MATTERS 10 ITEM J RULEMAKING 11 ITEM J1 Adoption of Emergency Regulations - 12 Lumber Products Assessment 13 14 15 16 17 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 26 27 28 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 13 Government Code Section 7.9) 14 15 Joann Richmond Chief, Board 16 Proceedings Division 17 18 For staff: Liz Houser Deputy Director 19 Administration 20 Robert Tucker Assistant Chief 21 Counsel 22 Bill Benson Acting Chief 23 Research and Statistics Section 24 25 ---oOo--- 26 27 28 2 1 INDEX OF SPEAKERS 2 Name/Affiliation Page 3 Mandy Lee 13 California Retailers' Association 4 Gerry Charron 15 5 Stock Building Supply 6 Ken Dunham 18 West Coast Lumber and Building Materials 7 Association 8 Craig Evans 23 Learned Lumber 9 David Bischel 24 10 Department of Forestry 11 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 23, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next item are the Chief 7 Counsel Matters, item J, rulemaking, J1, Adoption of 8 Emergency Regulations - Lumber Products Assessment. 9 We do have speakers. 10 MR. HORTON: Okay. Members, Mr. Tucker is here 11 and would like to introduce the issues in this case. 12 Prior to doing so -- let's see how many chairs 13 we have here. We have one, two, three, four individuals 14 who would like to testify. I'd ask that they come 15 forward and take a seat. We'll take their testimony 16 subsequent to the introduction of the issues. 17 Mr. Ken Dunham, the Executive Director of West 18 Coast Lumber Building Materials Association; Mr. Craig 19 Evans, Vice President of the Learn Lumber; Mr. Mandy 20 Lee, Director, Government Affairs for the California 21 Retailers' Association and -- strike that name, my 22 apologies. Mr. David Bischel, President of -- 23 MR. BISCHEL: Bischel. 24 MR. HORTON: -- pardon? 25 MR. BISCHEL: Bischel. 26 MR. HORTON: Bischel, okay, President of the 27 California Forestry Association; and Gerry -- 28 MR. CHARRON: Charron. 4 1 MR. HORTON: -- Charron. 2 MR. CHARRON: Charron. 3 MR. HORTON: Charron? 4 MR. CHARRON: Yes. Software Development 5 Manager for Stock Building Supply. 6 MR. HORTON: Oh, there you go, okay. 7 Just for consistency and maybe a little 8 balance, I'm going to ask that Mr. -- yes, please. You 9 can squeeze in there somewhere. 10 Okay, Mr. Tucker, since you are outnumbered, 11 I'm going to ask a few of -- other people to come up -- 12 just kidding. A little levity at 3 o'clock. 13 Okay, Mr. Tucker. 14 MR. TUCKER: Robert Tucker from the Legal 15 Department. With me are Steve Smith and for -- also 16 from the Legal Department, and Mr. Bill Benson from 17 Research and Statistics. 18 Staff requests approval and adoption of 19 Emergency Regulation 2000, retailer reimbursement 20 retention. 21 Assembly Bill 1492 provides for -- beginning on 22 January 1st, 2013 -- a 1 percent assessment on 23 purchasers of lumber engineered wood products. The 24 statute also authorizes the Board to adopt emergency 25 regulations to determine the reimbursement for 26 retailers. 27 The plain language of the Public Resources 28 Code, Section 4629.5, supports staff's interpretation 5 1 that this authorizes a one-time, Board-determined amount 2 of reimbursement. It's our position that the provision 3 for ongoing reimbursement is not provided for in this 4 section and would require legislation in order to make 5 it so. 6 Further, it's staff position that the Board was 7 not given the authority to define cost, but rather was 8 given the authority to set the amount of reimbursement. 9 The Board's economists, after reviewing 10 available information, determined that a reimbursement 11 of $250 is appropriate. Staff recommends that this $250 12 per location is a reasonable estimate of the average 13 startup cost for such retail lumber establishments. 14 The Board, if it approves and adopts this 15 regulation, the next step would be to promulgate a 16 permanent regulation. And that the Business Taxes Group 17 is ready to do so at the Board's direction. 18 Mr. Smith has just some questions that were 19 posed in a submission and he's ready to respond to 20 those. 21 MR. SMITH: Prior to the hearing we received a 22 written submission from the California Retailers' 23 Association and it included eight questions of -- 24 they're really not specifically to this regulation, but 25 general administrative matters. 26 And we responded to those questions in writing. 27 And we will be updating the Board's frequently asked 28 questions website to include answers to those questions, 6 1 as well as others. 2 But if it's the Board wish, I could go over 3 those answers here. 4 MR. HORTON: For the record, please. 5 MR. SMITH: There is a question posed about if 6 a retailer sells a product for which the lumber 7 assessment should have been collected, what happens? 8 And what happens is they are responsible for 9 reporting and remitting the assessment. 10 Secondly, does the assessment apply when 11 inventory is inbounded or just when inventory is sold? 12 And the assessment applies only once, when the 13 inventory is sold. 14 Third, is the lumber product assessment 15 included in the measure of tax for retail -- for sales 16 tax? 17 And it's not included in the measure of sales 18 tax. 19 Fourth, is the lumber product assessment 20 refundable if the merchandise is returned for refund? 21 And the assessment is refundable with the -- 22 when the gross receipts are refunded. 23 How -- fifth, how will the lumber products 24 assessment be handled if merchandise is exchanged in a 25 net zero transaction? 26 Because of the refund and the net sale, they'd 27 cancel each other out. And there'd be no additional 28 assessment due. 7 1 Sixth, is the lumber product assessment due on 2 sales made in California stores but shipped to customers 3 outside the state? 4 The assessment would not be due then because 5 the assessment's on the use by the purchaser and if that 6 occurs outside of California, it wouldn't be subject to 7 California assessment. 8 Seven, is the lumber products assessment due on 9 sales made from stores outside of the state, but shipped 10 to customers inside California? 11 In this case the assessment is due if the 12 retailer is engaged in business in California, they 13 would owe the tax. But if they're not engaged in 14 business in California, we would have to collect it from 15 the purchaser. 16 And, eight, is the lumber products assessment 17 due on tax exempt sales, such as sales to registered 18 California lumber resellers, sales to the U. S. 19 government, sales delivered to a Native American 20 customer on reservation lands? 21 For sales for resale, the assessment wouldn't 22 be due because the purchaser isn't using it. For exempt 23 sales in interstate commerce, the assessment would also 24 not be due because it wouldn't be used in California. 25 For sales to the U. S. government, it would be exempt 26 because of sovereign immunity. And, so, the assessment 27 wouldn't be due. And similarly for sales to Native 28 Americans on reservation land, similar to 8 1 Regulation 1616, the assessment might not be due. But 2 there is no general sales use tax that would exempt 3 people from the assessment. 4 So, aside from those examples that I cited, we 5 believe that the assessment would be due. 6 MR. HORTON: Any further testimony on the part 7 of the Department? 8 I understand West Coast Lumber Building 9 Material also posed some questions in advance? 10 MR. SMITH: They posed concerns. 11 MR. HORTON: Concerns? You view those as 12 concerns? 13 Okay, we'll move forward. I will now take the 14 testimony of our witnesses today. We'll start from 15 my -- yes? 16 MS. YEE: Can we hear from one more staff 17 before we go to them? 18 MR. HORTON: Sure. 19 MS. YEE: Mr. Benson's here and I just wanted 20 to get some -- 21 MR. BENSON: Could you -- I have an inner ear 22 infection and I can hardly hear. And that's one reason 23 why you heard me talking so loud. I can't hear myself 24 talk either. 25 MR. HORTON: All right. 26 MR. BENSON: So, if you could speak louder, 27 then I can answer your questions. 28 MS. YEE: I thought before we have the public 9 1 testimony, if you could comment on the reasonableness of 2 the $250 figure. 3 I think you did some work in that regard? 4 MR. BENSON: Yeah, we -- we based the $250 5 on -- on -- on two different items. There was a study 6 that was performed by Price Waterhouse in 2006 and this 7 related to streamlined taxable sales. And what they 8 looked at is all costs associated with any kind of rate 9 change or base -- base -- either rate change or base 10 change in the -- in the sales tax system across the 11 board for all states. 12 And, we -- we looked at, specifically, the -- 13 the cost of programming and -- and reprogramming and 14 also setting up the registers. 15 And this study indicated overall -- for all 16 companies, not just small or medium or large -- but the 17 weighted average for all companies was .01 percent. 18 Joe also looked at -- Joe Fitz, our economist, 19 he also looked at -- to come up with this estimate -- uh 20 -- the median amount -- median amount of -- of taxable 21 sales for building and material supply companies is $2.5 22 million. And, so, we applied that 2.5 million to the 23 .01 percent and came up with $250. 24 And that's how -- that's how we came up with 25 the 250. 26 Further in the study it -- it -- it talked 27 about either rate changes or base -- base changes. And 28 combined, it's about $244. 10 1 So, when we looked at the 250, we thought that 2 that was a reasonable amount based on the limited of 3 time -- the limited amount of time that we had to come 4 up with this amount. 5 If we have further time, you know, to further 6 do our due diligence, contact industry, we could come up 7 with a different amount. But I -- I don't think that 8 whatever amount that we do come up with -- it's not 9 going to fully reimburse any retailer. 10 The amounts that we've seen is -- are all over 11 the place. Home Depot said it would cost them a million 12 dollars. 84 Lumber said would be $21,000 per location. 13 Some -- some other information shows that $4500 startup 14 costs, $1500 ongoing costs. 15 The problem that we have with -- with having a 16 reimbursement so high with, you know, somewhere between 17 10 and 25, 30,000 retailers -- we believe that number is 18 more solidly at 10 -- is that you run into the problem 19 where the reimbursement will exceed the actual revenues 20 that the -- that the program is proposed to bring in. 21 There is a $35 million estimate that we have 22 out there in terms of how much this 1 percent lumber 23 assessment fee would bring in. We've got the 24 reimbursement that will offset that. Our reimbursement 25 is at 2.5 million. We've got also State costs, State 26 administrative costs, that's probably around another 2.5 27 million. So, that's $30 million in terms of the target 28 that they were also looking at. 11 1 And, so, again, we thought that the amount, the 2 250, though -- I am -- I'm -- I'm sure it's not going to 3 cover all of their costs associated with this, but it is 4 certainly -- it should certainly help in terms of -- of 5 covering costs in reprogramming registers and -- and 6 thus. And, so, that's why we -- we used that -- we came 7 up with the 250. 8 The Board can decide to -- that the amount is 9 too low. They can decide -- you all can decide to go 10 higher. You know, it's -- it all depends on what you 11 would like to do. 12 We have other programs, specifically the 13 E-Waste program, as well as the -- the -- the tire 14 recycle fee. They have a continuous reimbursement. 15 Tire recycle, I believe, is 3 percent of taxable sales. 16 At 3 percent of taxable sales, let's say, if we went 17 that -- that route at 35 million doll -- $35 million 18 that we're bringing in, that amounts to about a million 19 dollars a year. 20 And, so, in -- and with that, that 250 -- in 21 order to get to the 250, let's say if we had a 3 percent 22 reimbursement for their taxables, for their -- for their 23 receipts, it would take about two and a half years then 24 to recover that -- that entire $250. 25 So, just to kind of give you some kind of 26 perspective of what the 250 means with respect to a -- 27 a fixed 3 percent rate or 1 percent rate or any kind of 28 continuous reimbursement that you'd like to have. That 12 1 may take a legislative remedy, I'm not really sure. 2 MR. RUNNER: Okay. Mr. -- 3 MR. RUNNER: Can we -- again, just in terms of 4 operational here, if we have questions in regards to the 5 way the chart -- or the assumptions in the chart, do you 6 want -- can we have that discussion now, before we get 7 into the specific issue testimony? Or just to kind of 8 clarify the -- 9 MR. HORTON: Let's take the -- Members, let's 10 take the general testimony. 11 MR. RUNNER: Okay. 12 MR. HORTON: And then through the Q and A 13 process, we can -- we can try to drill down on the 14 specific concerns. 15 MR. RUNNER: Okay. 16 MR. HORTON: And, so, I'm now going to go to 17 Miss Lee with -- the Director of Government Affairs for 18 the California Retailers. 19 ---o0o--- 20 MANDY LEE 21 ---o0o--- 22 MS. LEE: Good afternoon, Chairman and Members, 23 thank you for the opportunity to provide a brief comment 24 today. 25 My name is Mandy Lee. I'm the Director of 26 Government Affairs for California Retailers' 27 Association. We have members that are impacted 28 retailers under AB 1492 and emergency Regulation 2000. 13 1 That said, we appreciate the work 2 wholeheartedly that everyone's put into this -- the BOE 3 staff, the Board Members that have in the time. We've 4 had several conversations, as well as the 5 administration. 6 However, our position on emergency Regulation 7 2000 is well documented in the public record. At the 8 risk of restating what is already known, I would like to 9 briefly reiterate that for the record. We are concerned 10 with the limitations in cost recovery that are proposed 11 in emergency Regulation 2000. We are encouraged, 12 however, that emergency Regulation 2000 does, indeed, 13 acknowledge that impacted retailers will incur costs, as 14 reflected by a prior BOE analysis on the bill, as well 15 as reflected in the action that Board Members are 16 preparing to take today with adopting emergency 17 Regulation 2000. 18 However, we believe that these costs that are 19 true costs will far surpass what is being proposed 20 today. And -- and hearing that it's not the intention 21 of the Board to fully reimburse us, we would hope that 22 the Board would try to get as close to reimbursing us to 23 the extent possible. We recognize there are 24 sensitivities there. 25 We would appreciate and look forward to and 26 encourage the opportunity to come back to the Board at 27 some later date to substantiate the cost. I know that 28 it was noted in the BOE memo that we were being asked to 14 1 be reimbursed for costs that we have not yet 2 substantiated. And that is a point taken. But if -- 3 if -- we would encourage the Board to allow impacted 4 parties the opportunity to come back to substantiate 5 those costs. 6 We in no way are asking for this to be a source 7 of revenue for us. We are being asked by the 8 legislature, by the State of California, to do 9 something, to collect a fee, to remit it to the BOE, in 10 order to carry out the goals of AB 1492 and we're happy 11 to do that. And we will strive to comply with the law. 12 But we are asking the Board for the opportunity in the 13 future to come back and re-visit this issue. 14 So, with that, I thank you so much for the 15 opportunity. 16 MR. HORTON: Thank you. 17 Mr. Charron, will you please introduce yourself 18 for the record? 19 And then we'll -- 20 MR. CHARRON: Good afternoon. 21 MR. HORTON: -- and then we'll just proceed on 22 down the line. 23 ---o0o--- 24 GERRY CHARRON 25 ---o0o--- 26 MR. CHARRON: Okay. Good afternoon, Chairman, 27 Board. 28 My name is Gerry Charron. I'm the Software 15 1 Development Manager for Stock Building Supply. 2 The reason I'm here is to express my concerns 3 about the reimbursement fee for what it'll be costing 4 our customer -- costing us in order to implement this. 5 MR. HORTON: Not -- not to interrupt you, but I 6 want to ask Miss Lee to come forward come forward and -- 7 just in case there are additional questions of the 8 Members. 9 My apologies, sir. 10 MR. CHARRON: No problem. 11 At the current rate of $250 per location -- we 12 operate 10 locations within California, which means we'd 13 be getting reimbursed approximately $2500. 14 We estimate that the cost to program our 15 software package, which is highly customizable, it's not 16 an off the shelf bought software package, is going to 17 take us approximately 250 hours in order to do design, 18 documentation, coding, testing and implementation. 19 And we estimate that that would be at 20 approximately $200 per hour is what we based our 21 estimates off. So, our estimated cost for this is 22 actually going to be about $50,000 in order to implement 23 this. 24 We have to modify our database. We have to 25 modify our screens in order to show these sales. We 26 have to modify the printed receipts. You have sales 27 receipts. You have invoices. You have quoting systems. 28 You have statements. You have everything that goes out 16 1 to the customer. And then after that we have to modify 2 reporting, which will then go back to you and everything 3 else. 4 So, this is not a small project for us, it's a 5 big project and it's going to cost a lot of money. And 6 at $250 per location, just doesn't even come close to 7 covering it. 8 Thank you. 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 1 MR. HORTON: Thank you. 2 Sir? 3 ---o0o--- 4 KEN DUNHAM 5 ---o0o--- 6 MR. DUNHAM: Good afternoon, Ken Dunham. I'm 7 the Executive Director of the West Coast Lumber and 8 Building Materials Association. 9 The reason I have to say it that way is we used 10 to be the Lumber Association of California and Nevada. 11 We've now expanded. 12 We're a regional lumber industry trade 13 association headquartered in Folsom, California. We've 14 been around, in some form or another, since the early 15 1900s in California and the surrounding area. We have 16 in excess of 300 member firms -- a majority of whom are 17 here in California, but we also have members in 18 other 18 states. 19 Our principal membership category is the 20 independent lumber retail dealer. We represent about 21 200 of these locations that represents about 110 to 115 22 owners. Some have multiple yards. 23 From best we can determine, this is about 85 24 percent of the lumber dealers in the State of 25 California. Some do not choose to join. Plus we don't 26 represent the large chain firms as well. 27 We're here to just strongly oppose this 28 proposed $250 reimbursement. As this was coming out, we 18 1 took it on ourselves to survey our members, asking 2 them -- without prompting, I might add -- 3 "How much is it going to cost you to be 4 able to implement this? Give us your best 5 estimate." 6 In some cases people were actually able to 7 provide us with quotes that they had gotten from their 8 software providers. The average cost for implementation 9 reporting from the respondents -- and we had respondents 10 now from all -- about 65 firms -- was 4,000 -- the 11 average was $4,521 per location. That's what we're 12 requesting, $4,500. 13 We also know that there's going to be annual 14 costs as this list ebbs and flows with products added 15 and subtracted and we can deal with that another time. 16 I think it's also interesting to note that the 17 $4500 figure -- while I'm not representing them, I 18 happen to know that the Home Depot people have said 19 their costs in California will be a million dollars. 20 You divide a million dollars by 240 locations, which is 21 what they have, and it come up to $4,167. That's -- 22 that's pretty close to the cost that everybody else is 23 coming up with. 24 As Gerry said, this is not simple. This is not 25 something that people can do overnight to comply, to get 26 everything changed that they have to do in their 27 systems. 28 Additionally, you got a number of businesses 19 1 who have systems that are either outdated or so custom 2 made that they're going to have to buy totally new ones. 3 That's -- that's a -- that's a problem. 4 Your staff counsel's memorandum proposing the 5 $250 reimbursement appears to be largely based on this 6 2006 Price Waterhouse study that used 2003 data. I 7 don't know if anybody has taken the time to read that. 8 I have. It's -- it's pretty astounding what -- what's 9 in that. It's ten-year-old data and riddled with 10 inaccuracies. 11 The report focuses on updating cash registers. 12 I could not find any reference in here to updating 13 computer systems. And I read this darn thing again last 14 night -- while watching the Giants' game. There is no 15 mention of computers in here. It's cash registers. You 16 know, if you want to configure a cash register to handle 17 a simple increase or decrease in sales tax, that's 18 probably a pretty accurate cost. But to put that out as 19 the data for this, I -- I think is a problem. 20 The other part you need to read in there is the 21 comments that the Price Waterhouse people made about 22 coverage error, missing data, measurement error, 23 sampling error. They simply had a very difficult time 24 even coming up with what they got here. 25 I would very, very much question the statistics 26 of it. It's inaccurate. It's outdated. And it's 27 non-germane to what we're trying to talk about here. 28 Staff counsel also bases the recommendation of 20 1 $250 based on the calculation of a .01 percent by 200 -- 2 by $2,500,000. Somehow that that -- 50 percent of the 3 retail lumber yards in the State -- in the -- in this 4 country are doing 2 million 500 or less. I can assure 5 you that is not the case in California here. Our data 6 shows that less than 15 percent of the lumber dealers in 7 the State of California do 2.5 million. You have a 8 number that do in excess of 100 million. And you've got 9 some that probably approach 200, 250. That's just the 10 independent dealers. That's -- that's not the large 11 chain dealers. There aren't any of those that are doing 12 2.5 million or less at a location. 13 One of your staff commented to me and I -- I -- 14 I heard it again today here of how many people -- that 15 this maybe will effect 10,000 retailers in the State of 16 California. Our best estimate of -- is that there is 17 approximately 800 of what could be considered full 18 lumber yards in the State of California. That's 300 of 19 the major chains -- the Home Depots, the Lowes, a couple 20 of others -- and then about an equal number of 21 independent dealers in the State. And we'll throw in 22 that there's maybe some home and garden centers, some 23 hardware stores that may resell plywood, basic lumber. 24 There's got to be a few we're missing. But that number 25 is nowhere near 10,000, it's somewhere, probably, 26 between 800 and a thousand. 27 Finally, I just want to say a couple of quick 28 things about what's going on with this lumber industry. 21 1 This is an industry in crisis. I don't think anybody's 2 surprised about that. 3 In the past five years, we've had 72 4 family-owned lumber yards go out of business in this 5 State. Several of those businesses were in excess of a 6 hundred years old. 7 This kind of -- the action here today is going 8 to force some more closures. I've had one business tell 9 me that -- a multiple yard business -- that they will be 10 closing two of their yards within the next three months 11 because they're just so frustrated with the business 12 attitude in the State of California. 13 Data that I got last week, the average 14 lumberyard in this country lost $177,000 in net sales. 15 That was their net loss in 2011. This State of 16 California has been even harder -- hit harder than most 17 states. The average -- those who make a profit average 18 about 1.9 percent. And I did have another survey last 19 week that showed it was .93 percent of profit. 20 You know, we're not here to debate the merits 21 of AB 1492 that's done and gone. We think it was bad 22 law, bad policy. We're just asking now for fair 23 treatment for implementation costs as provided for in 24 the law. And that can figure can be very well justified 25 at 4500. 26 Thank you very, very much for your time today. 27 MR. HORTON: Thank you very much. 28 ---o0o--- 22 1 MR. HORTON: Sir. 2 ---o0o--- 3 CRAIG EVANS 4 ---o0o--- 5 MR. EVANS: Chairman Horton, the Board, thank 6 you for giving us the opportunity to appear today. 7 My name is Craig Evans. I'm with Learned 8 Lumber in Hermosa Beach, California. 9 I would best describe our situation as impacted 10 by this. Our current cost to implement the computer 11 programming needed to be compliant is $7800. And it 12 comes at a very inopportune time, at the end of the 13 year, when we're trying to get all of our other tax 14 burdens sorted out, get our books closed, proceed with 15 the holidays, start a new year. 16 We're going to experience a lot of overtime, 17 additional unaccounted for hours that are not included 18 in the $7800 by having people work late and work on this 19 programming in house, as well as our external vendor 20 that is going to be supplying us with some of this. 21 I can only ask the Board to consider the amount 22 that is being offered to reimburse lumber dealers. 23 Thank you. 24 ---o0o--- 25 26 27 28 23 1 MR. HORTON: Sir. . 2 ---o0o--- 3 DAVID BISCHEL 4 ---o0o--- 5 MR. BISCHEL: Mr. Chairman, Members of the 6 Board, my name is David Bischel, excuse me. And I am 7 President of the California Forestry Association. 8 The California Forestry Association was a key 9 sponsor of AB 1492, working closely with the legislature 10 and the administration. And we believe that the staff's 11 recommendation reflects the legislative intent regarding 12 the retailer compensation. Therefore, we urge you to 13 approve and adopt proposed Regulation 2000. 14 AB 1492 provided the State Board with the 15 authority to adopt an emergency regulation to determine 16 the amount of reimbursement. And we believe that -- we 17 concur with the staff's analysis and the methodology 18 they used in arriving at the -- at the recommendation to 19 you today. 20 As, so, we would again like to state that we 21 support the -- adopting the emergency regulation and 22 look forward to working with you in the future. 23 MR. HORTON: Thank you very much. 24 Discussion, Members? 25 Member Yee? 26 MS. YEE: I think Mr. Runner was first. 27 MR. HORTON: Oh, Mr. Runner. 28 MR. RUNNER: Thank you. Just real quick couple 24 1 of questions. Let me start with staff. 2 In regards to the -- to the -- to the $250, the 3 study that was done -- see if I understand the study, 4 'cause I did look at it briefly, I did not read the 5 whole thing. I appreciate somebody did and you had the 6 good sense to do it while you're watching a baseball 7 game. 8 But the issue of that study, it seemed to me 9 was a -- what would be a law, what would be a broad 10 reprogramming or recalculation of a cash register -- I 11 don't know if it includes computers or not -- for an 12 event that would happen across the board. You're 13 readjusting, for instance, your sales tax from 8.5 14 percent to 8 -- to 9 percent. 15 Isn't -- isn't that the core of the study? 16 MR. BENSON: I would say that that would be 17 true, either that or also extending the tax base to, 18 let's say, services. 19 MR. RUNNER: Okay, okay. If -- you mean if 20 you're going to somewhere new and start? 21 MR. BENSON: Pardon me? 22 MR. RUNNER: If you were to go somewhere new 23 and create a new tax on things or -- well, let me -- I 24 won't go there. Okay, that's okay. 25 Let me just add -- in regards to that, though, 26 it seems to me that this requirement's a little 27 different than that for two reasons. And, therefore, it 28 seems to me that the ability to figure out the cost, 25 1 based upon the study, would be kind of erroneous because 2 two things, No. 1, this is only on a segment of stock -- 3 MR. BENSON: That's true. 4 MR. RUNNER: -- it's not across the board. 5 I would assume it would be easier to adjust 6 prices across the board on everything than having to 7 come up with a program to pick out certain things. 8 Is -- wouldn't that be a fair observation? 9 MR. BENSON: That would be fair. 10 MR. RUNNER: Okay. And the second thing is 11 this -- this requires another printed line on the -- on 12 the receipt. 13 MR. BENSON: Correct. 14 MR. RUNNER: And this study didn't anticipate 15 another printed line on a receipt, correct? 16 MR. BENSON: Not that I'm aware of, no. 17 MR. RUNNER: Okay. So, I would submit that the 18 study itself is kind of like an incomplete study and not 19 necessarily comparable to what this requirement is. 20 Now, let me even go a step farther. In that 21 study we chose -- when we came up with the $250 -- we 22 chose not to include training, correct? 23 MR. BENSON: No, we didn't -- we only -- we 24 only included programming and servicing of registers and 25 that's on page 13 -- 26 MR. RUNNER: Right, okay. 27 So, if -- if we were to include -- 28 MR. BENSON: -- of the report. 26 1 MR. RUNNER: -- the training aspect, which 2 would be a cost that the retailers are having to take 3 on, and we use then the study, the average reimbursement 4 jumps up to $1,000 per site. 5 MR. BENSON: It could. 6 MR. RUNNER: Well, it does, in terms of the -- 7 in terms of using the numbers that they -- you know, in 8 the study. 9 MR. BENSON: Uh-huh. 10 MR. RUNNER: So, anyhow -- so, I guess I'm at a 11 loss as to how applicable this particular study even is 12 in this discussion. 13 Now the other issue that I -- that I have a 14 question about and that is the comment that was made -- 15 and let me go to Legal on this -- the comment was made 16 is that -- this -- "We know that this is not going to 17 fully reimburse the retailer." 18 I think that was the comment that was made, 19 correct? 20 MR. BENSON: Right. I don't think it will, 21 no. 22 MR. RUNNER: Okay. So, let me go back to the 23 legislation, because it seems to me the legislation's 24 pretty clear. 25 And this is on page 8, bottom of the page, 26 Section -- 4629.5, No. 3, halfway through and it talks 27 about us. 28 It says, 27 1 "The retailer shall collect an assessment 2 from the people -- the person at the time of 3 sale and may retain an amount equal to the 4 amount of reimbursement as determined by the 5 Board of Equalization, pursuant to this 6 regulation." 7 So, clearly that's our job. 8 And then it says -- then it tells us what our 9 job is. Our job is to -- "for any cost associated with 10 the collection of the assessment." 11 Now, that doesn't sound to me like a po -- a 12 partial reimbursement. In fact, it's pretty -- it seems 13 to me it's pretty clear. It says, "for any cost 14 associated." 15 So, I would submit that not only includes all 16 costs, but even training. Because that's a part of the 17 cost that the retailer has. 18 So, I guess I'm trying to figure out, are we 19 actually fulfilling the intent of the legislation by -- 20 by admitting publicly here that this does not fully 21 reimburse the retailer? 22 Go ahead. 23 MR. TUCKER: Unfortunately, that's the first 24 I've heard of the admission that this doesn't fully 25 reimburse the retailer. 26 We -- 27 MR. RUNNER: Well, hold it. Let me back up. 28 We know that it doesn't fully reimburse -- 28 1 MR. TUCKER: Correct. 2 MR. RUNNER: -- the retailer because it's an 3 average. 4 MR. TUCKER: Correct. 5 MR. RUNNER: Right? 6 MR. BENSON: It's an average. 7 MR. RUNNER: So -- so, we all -- we know, right 8 off the bat, by taking the formula, we know that in 9 theory it under -- it under reimburses some and it over 10 reimburses some? Right? 11 MR. TUCKER: It could, yes. 12 MR. RUNNER: Well, no -- 13 MR. TUCKER: Well -- 14 MR. RUNNER: -- we know for sure it does, 15 right? I mean, we know that, for instance, everybody 16 out there isn't going to cost them $250? Because the 17 study -- 18 MR. TUCKER: Per location. 19 MR. RUNNER: -- is an average. 20 MR. TUCKER: Per location. 21 MR. RUNNER: Yeah. Because the study's an 22 average, right? 23 MR. BENSON: Correct. 24 MR. TUCKER: Correct. 25 MR. RUNNER: Okay. So, I just want to go back. 26 So, I think we all -- we should always have known that 27 not everybody is going to get a full reimbursement 28 because the study is an average. 29 1 So, there are some people who are going to get 2 under reimbursed. 3 MR. TUCKER: And we read the modification, the 4 clause that modifies is that, "The Board of Equalization 5 is there to set the amount of reimbursement." 6 It doesn't specify the costs that are to be 7 included, but it -- it looks to the costs for the 8 startup. And -- 9 MR. RUNNER: What do you do with that line that 10 says, 11 "For any cost associated with the 12 collection of the assessment."? 13 MR. TUCKER: -- Well, we are setting an amount 14 of reimbursement to cover any costs associated. 15 MR. RUNNER: No, we're not. We've already just 16 said that it doesn't cover everything. 17 MR. TUCKER: Well, it doesn't say -- 18 MR. BENSON: Let me -- can I clarify what I -- 19 MS. YEE: Yeah. 20 MR. BENSON: -- I'd like to clarify what I 21 said -- 22 MR. RUNNER: Okay. 23 MR. BENSON: -- what I meant when I said -- 24 MR. RUNNER: Okay. 25 MR. BENSON: -- it's similar to what you were 26 saying. That it is an average. There are -- there are 27 certain retailers that may get more than other retailers 28 because of the number of stores. 30 1 For example, Home Depot has 262 -- 262 stores. 2 MR. RUNNER: Right. 3 MR. BENSON: Their reimbursement would be -- 4 would be over $65,000. 5 If we look at Lowes, they have a 113 stores. 6 Their -- their reimbursement would be -- would be 7 28,250. We believe that that may be enough for that 8 larger retailer -- 9 MR. RUNNER: Uh-huh. 10 MR. BENSON: -- to cover that cost. 11 It's the smaller suppliers that may have 12 difficulty with covering the cost of the 250 because it 13 is an average. 14 For clarification, I want to -- 15 MR. RUNNER: Okay. 16 MR. BENSON: -- put that in. 17 MR. RUNNER: Let me just go -- okay, go ahead. 18 MR. TUCKER: I just want to clarify. It 19 appears that you're focusing in on "any costs." 20 MR. RUNNER: Right. 21 MR. TUCKER: We see that as -- to mean that 22 they're not required to specify -- that we haven't 23 created a list of costs which qualify and costs which 24 don't. We're looking at simply costs that are related 25 to implementing the assessment. 26 So, I -- I think it's just the matter in that 27 we read it in a different fashion. We don't read it to 28 mean all costs. 31 1 We read it to mean -- 2 MR. RUNNER: Well, let me ask you, if -- if -- 3 if the legislature intended it not to cover all costs, 4 which I think it says, "any costs associated with the 5 collection," why didn't they put the amount in? 6 MR. TUCKER: I don't know. 7 MR. RUNNER: I mean -- I mean -- I mean, if -- 8 if -- if -- if -- if -- if they felt that this was a 9 partial reimbursement for $250, why didn't they put the 10 amount in? 11 Why did they say for us to come and do -- and 12 take a look and then have a line in there that says, 13 "Any costs associated with the collection of the 14 assessment"? 15 MR. TUCKER: I don't know. I don't know why 16 they didn't put that in there. 17 But we don't read that to mean -- 18 MR. RUNNER: Okay. 19 MR. TUCKER: -- all costs. 20 MR. RUNNER: Okay. Let me ask -- let me ask 21 the folks that were involved in some of the discussion 22 at the legislature. 23 I would assume that this was a really important 24 line in order to get this legislation passed, that there 25 was a concern that there'd be a bunch of retailers who 26 would end up with a -- with a -- with a cost, an 27 exposure. 28 And, therefore, there was this desire to make 32 1 sure that a business -- businesses wouldn't all of a 2 sudden be saddled with this cost. 3 Normally, when I was there, that would be the 4 nature of this. And I don't know. Again, I'm -- when I 5 would sit in the legislature and I would read a bill 6 that says, "Any costs associated with the collection," 7 and I was voting on that, I would assume that that means 8 any cost associated with the collection. 9 So -- at least that's how I would interpret it 10 if it was before me at that point. 11 What -- what was the -- what -- how did you all 12 anticipate as this was going through the legislature? 13 What did you believe the intent was of this particular 14 line in this particular effort? 15 I don't know who wants to answer that. 16 MR. DUNHAM: I'll -- I can answer that. I was 17 told by at least one timber industry lobbyist that there 18 was no intent to cost the dealers on this. And the -- 19 and the -- and you are correct, all costs -- all costs 20 associated with setting this up and moving forward. 21 MR. RUNNER: Okay. I mean, from the retailers, 22 I think you were going to make a mention? 23 MS. LEE: Yeah, sure. Mr. -- Board Member 24 Runner, as Board Members are probably aware, the 25 California Retailers' Association remained neutral 26 throughout negotiations. 27 And part of it was an effort to support the 28 goals of the legislation but part of it was also to try 33 1 to strike a -- a deal, if you will. 2 Part of it was we wanted to make sure that our 3 members were kept whole for complying with the duties of 4 AB 1492. And part of the tension was that we couldn't 5 come to an agreement on the dollar amount. 6 So, unlike the tire fee and unlike the E-waste 7 law that clearly states an ongoing percentage for cost 8 recovery for retailers is -- we could not come with 9 consensus on that issue. 10 So, the agreement was to have the BOE -- the -- 11 arguably the State's tax authority -- decide on this 12 matter. 13 Our hope was to leave it open-ended. Our hope 14 was that the BOE would do their independent cost 15 analysis to see how much retailers -- how much the 16 retailers' costs would be and -- and to -- and to decide 17 that matter (unintelligible) -- 18 MR. RUNNER: And as a -- as a negotiator in 19 that discussion then did the retailers interpret that 20 line, "Any costs associated with the collection of 21 assessment," mean that the retailers would be in rev -- 22 in -- be reimbursed all costs of taking on this new 23 regulation? 24 MS. LEE: In fairness, I wasn't in -- I wasn't 25 in the room. 26 We had our contract lobbyist negotiating many 27 of those points, but -- 28 MR. RUNNER: Would you assume that that would 34 1 be the position that the retailers would want to take 2 for their -- 3 MS. LEE: I would assume so, yes. 4 MR. RUNNER: -- okay. Let me ask the Forestry 5 Association. 6 Was it the Forestry's Association's position 7 that this was a partial reimbursement? 8 MR. BISCHEL: It was our -- this legislation, 9 as -- as it dealt with both the -- the determination of 10 what it applied to and -- and allocated that 11 responsibility to emergency rulemaking by the Board of 12 Forestry -- 13 MR. RUNNER: Right. 14 MR. BISCHEL: -- and they allocated -- the 15 legislation allocated the responsibility for eval -- for 16 developing a -- in effect, an average price that would 17 cover the one-time cost of -- of -- 18 MR. RUNNER: I don't see -- 19 MR. BISCHEL: -- implementing the -- 20 MR. RUNNER: -- I don't see -- 21 MR. BISCHEL: -- bill. 22 MR. RUNNER: -- any of that language just said 23 in the bill, "The average price for one time." 24 MR. BISCHEL: No, it is a single cost that the 25 Board is -- as staff as -- 26 MR. RUNNER: Right, right, I'm just -- again, 27 just clarifying that it's that and you believe that the 28 intent was to create an average price? 35 1 MR. BISCHEL: Well, let me step back and say it 2 was in the intent for the State Board of Equalization to 3 establish a reimbursement price -- 4 MR. RUNNER: Okay. 5 MR. BISCHEL: -- that was reflective of the 6 cost. 7 MR. RUNNER: Okay, okay. Good, that's how I 8 interpret this too, a reimbursement to the cost. 9 Okay, thank you. 10 MR. HORTON: Member Yee. 11 MS. YEE: Thank you, Mr. Chairman. 12 I think we're focused on one aspect of the bill 13 without regard to what the original intent of the bill 14 was and why the assessment was put into place. 15 And I would imagine that the representative 16 from the Forestry Association, you probably took 17 interest in some of the other parts of the bill with 18 respect to some of the activities that the Department of 19 Forestry would continue to be able to provide, given 20 that the impetus for this assessment proposal in the 21 first place was to offset some general fund expenditures 22 for those activities. Is that -- 23 MR. BISCHEL: Absolutely. 24 MS. YEE: -- so, your focus really wasn't on 25 the reimbursement aspect of it? 26 MR. BISCHEL: We did not -- this was not the 27 focus of our -- of our negotiations. 28 MS. YEE: Okay. 36 1 MR. BISCHEL: Certainly there -- retailers were 2 there and most ably were representing the retailers and 3 we were sponsors of the -- of the legislation. 4 MS. YEE: Okay, that's fine. 5 And I know the retailers and some of the other 6 suppliers were very interested in terms of what your 7 costs of compliance would be. And, so, you were very, 8 very focused on that aspect of the bill. 9 Okay. So, I think the legislature did a really 10 wonderful thing and we thank them for punching it all to 11 the Board of Equalization. 12 And -- but here's -- here's the dilemma that 13 we're in -- we are -- and, first, I want to thank the 14 staff for the tremendous work that they have done in 15 terms of really trying to get a handle on legislative 16 intent and looking at how to fashion a -- the framework 17 of a reimbursement program that would capture the intent 18 and spirit of the law, albeit, even trying to do so on a 19 practical level certainly doesn't cover the costs that 20 many of the retailers and the suppliers are going to be 21 experiencing. 22 I also just wanted to acknowledge that I think 23 that many of us received correspondence today from one 24 of the committee consultants in the Assembly about the 25 bill. And -- and here's the dilemma we're in, the idea 26 behind the assessment was to, essentially, save the 27 general fund about 15 and a half million dollars. 28 And -- and the assessment would, essentially, 37 1 take the place of the general fund dollars that 2 previously had gone towards the Forestry's -- Department 3 of Forestry's activity for timber harvest plan review 4 and also look at some forest -- forest restoration 5 projects. 6 My questions really are to the staff because 7 these are emergency regulations. I think when -- 8 certainly looking at the intent of what the legislature 9 wanted the Board to do, I don't think there was, 10 anywhere in the legislation, any citation of actual 11 costs that would be reimbursed. 12 Is that true? 13 MR. TUCKER: No, there is not. 14 MS. YEE: Okay. I think also with respect to 15 the analyses of the bills and -- and, frankly, without 16 us having been in the room, in the negotiations, that's 17 what we're relying on -- is that the idea here with the 18 reimbursement would be to look at reimbursement for the 19 costs of setting up collection systems for purposes of 20 collecting the assessments. 21 Is that -- 22 MR. TUCKER: That is correct. 23 MS. YEE: Okay. And the -- and as you continue 24 to look at how to put together this reimbursement 25 framework, how did you determine whether to go with a 26 per location reimbursement or per retailer 27 reimbursement? 28 MR. BENSON: We looked at per location because 38 1 we felt that $250 per retailer would not be fair. For 2 example, Home Depot, again with 262 retailers, will -- 3 you know, $250 is not going to take them very far with 4 262 locations -- 262 locations. 5 There are also other smaller retailers that may 6 have five to ten or, you know, locations and things like 7 that. So, we wanted to try to accommodate them and any 8 costs associated with -- with them. 9 And, so, that's how we came up with the -- the 10 per location. 11 MS. YEE: Okay. 12 MR. BENSON: As opposed to per retailer. 13 MS. YEE: Okay. 14 MR. BENSON: We thought it would be a fairer 15 measure than per retailer. 16 MS. YEE: Okay. So, is -- when you talk about 17 the range of retailers being from whatever, the 15,000 18 to the high end of what 30 some odd thousand, are you 19 talking about -- 20 MR. BENSON: Huh -- 21 MS. YEE: -- retailer -- 22 MR. BENSON: -- we feel that it's 10,000 23 locations, yeah. 24 MS. YEE: Okay, locations, okay. 25 MR. BENSON: That's -- 26 MS. YEE: Got it. 27 MR. BENSON: -- that's what -- 28 MS. YEE: Okay. 39 1 MR. BENSON: -- research has come up with -- 2 MS. YEE: All right. 3 MR. BENSON: -- in terms of terms our estimate. 4 MS. YEE: Okay. 5 MR. BENSON: So -- 6 MS. YEE: Now -- now, as you look at those 7 locations, what type of retailers do they comprise? 8 MR. BENSON: -- this -- the -- probably 9 building material warehouses, building material supply 10 stores, okay. 11 That's -- those are the locations. It's -- it 12 is based on the NAICS Code -- 13 MS. YEE: Okay. 14 MR. BENSON: -- that we used. Humm -- 15 MS. YEE: Are we excluding any potential -- 16 MR. BENSON: Pardon me? 17 MS. YEE: Are we excluding any potential 18 retailers of engineered wood products? 19 MR. BENSON: I'm sorry. 20 MS. YEE: Are we excluding any potential -- are 21 we potentially excluding any other retailers? 22 MR. BENSON: Excluding, no. 23 MS. YEE: Okay. You think the NAICS Code 24 captures all that? 25 MR. BENSON: I think we're capturing all of 26 them -- 27 MS. YEE: All right, okay. 28 MR. BENSON: -- that could possibly be out 40 1 there, including the small nurseries and the things like 2 that that may have very little in terms of the taxable 3 goods that would be -- that would fall under AB 1492. 4 We think we've captured them all. 5 MS. YEE: Okay. So -- I mean, I understand the 6 $250 dollars that's being proposed is definitely less 7 than adequate. 8 And I certainly could make a case for even the 9 larger retailers that there are significant costs 10 associated with that to the extent that we're talking 11 about a California only assessment and there's 12 significant programming that would have to done related 13 to that. 14 But the -- the objectives that we have to meet, 15 in terms of fashioning a reimbursement program, really 16 also has to get to the outcome of what the bill was 17 originally trying to do, and that is to provide needed 18 funds for the Department of Forestry to continue their 19 activities with respect to timber harvest. 20 So, I'm a little concerned about how we move 21 forward and continue to do that, given the potential 22 costs of what the assessment may result in -- not only 23 with respect to the reimbursement to retailers, but also 24 our own administrative costs. 25 So, the 10,000 retailer locations, plus our 26 administrative costs, what's the total amount of that? 27 Do you recall? 28 MR. BENSON: I think the admin cost 2. -- Liz 41 1 could best speak to that. 2 MS. HOUSER: 2.4 ongoing. 3 MR. BENSON: 2.4 million ongoing. 4 MS. YEE: Okay. And -- okay. 5 So, I think, Mr. Chairman, I -- we are kind of 6 caught between a rock and a hard place. It's -- but I 7 think, given the objectives of the legislation overall, 8 we are going to have inadequate reimbursement to 9 retailers, even for -- even if we were to define the 10 costs as setup costs for collection systems. We know 11 those costs are going to be greater than $250. 12 I think there will probably need to be an 13 opportunity before the legislature to re-visit this 14 whole reimbursement issue. 15 I think our hands are tied, to some extent, 16 with respect to what that looks like and trying to 17 really honor the -- the overall objective of the -- of 18 the bill. 19 So, I just wanted to kind of put both those 20 sides up for discussion because we're not kind of 21 picking this out of a hat and doing this in a vacuum. 22 We really are trying to comply with the overall -- all 23 of the provisions of the bill. 24 And by just looking at the reimbursement aspect 25 of it, without looking at what the, you know, main 26 intention of the bill was with respect to generating 27 revenue for the Department of Forestry, that's -- we 28 have to look at the totality of what the bill is 42 1 intended to do. 2 Thank you, Mr. Chairman. 3 MR. HORTON: Further discussion, Members? 4 Mr. Runner. 5 MR. RUNNER: Just a quick observation. 6 Yeah, my understanding is that -- I mean, again 7 it's hard for us to get in the middle of what the 8 intention of the bill was when the language, it seems to 9 me, says that our responsibility is to go ahead and make 10 sure that the retailers have their costs covered. 11 And again -- and I guess I'm trying to take a 12 long view of this, over the next ten years, this 13 particular fee is going to raise well over $300 million. 14 So, you know, whether or not the issue of reimbursement 15 to retailers to start up ends up being 5 million, 10 16 million, 15 million dollars, it seems to me we are 17 a long ways from interrupting the goal of the 18 legislation, which, over the next ten years alone, but 19 it goes into perpetuity, is going to collect hundreds of 20 millions of dollars. 21 The issue for us, it seems to me, is the intent 22 of the legislation, which says, I believe, that they 23 just didn't want retailers to have to bear the costs. 24 They just didn't want the -- again, I mean -- I mean, 25 it's one thing to be talking about the Home Depots of 26 life and they'll figure out how to do it. 27 My problem is I've got hundreds of these little 28 retailers, thousands of these little retailers in my 43 1 district. And they -- they could care less about what 2 the big picture of the legislature is. What they're 3 concerned about is staying in business. 4 And to me the fact is that the State's going to 5 get plenty of money over the next 10 years, 15, 20, 30 6 years over this particular assessment. The problem is 7 it's the businesses this year that are the ones that are 8 saddled with the costs. 9 So, it seems to me -- again, stepping back to 10 say, 11 "Hey, all's we're trying to do and all the 12 legislature was trying to do, I believe, is to 13 clarify that retailers shouldn't be holding the 14 bag for the costs." 15 Now we can go a long ways and we'll have to 16 figure out how we do get to that matrix and how to 17 get -- find that reimbursement. But it's clear the 18 legislature didn't intend for retailers to be hurt with 19 this. They were trying to hold them harmless. And if 20 we don't have an adequate reimbursement, we haven't 21 accomplished that. 22 And -- I mean -- I think I'm getting contacted 23 right now by a couple of the legislators who actually 24 voted for this and I'm hearing that they thought 25 retailers would be fully reimbursed. 26 So, again, I get the big picture issue. But 27 the big picture needs to be not what's going -- not -- 28 not this year's effect, but what the effect, in terms of 44 1 public policy over a long period of time. 2 And I don't believe the intent was to try to 3 put the burden, basically a tax increase, because, 4 again, this is -- this is, in essence, a tax increase to 5 small business -- money out of their pocket in order to 6 do something that the State is asking them to do -- when 7 it is that the legislation itself says that they 8 shouldn't have to pay for it. 9 So, I -- I mean, I -- to me, it's pretty clear. 10 Now I guess the problem is that when it was going 11 through the legislature, people lowballed the costs. 12 But that doesn't change what the intent is and 13 what our responsibility is in the legislation and to 14 these small businesses. 15 MR. HORTON: Thank you. Further discussion, 16 Members? 17 This has been a very valued process, I think, 18 hearing from all the parties, those in support and 19 opposition as well as from the Department. 20 I certainly would be supportive of us going 21 through and would anticipate that we would go through 22 some rulemaking process in order to receive more 23 in-depth, methodical informative testimony, as well as 24 factual presentation to determine a number of factors -- 25 not only -- one, starting with the premise of the 26 litigation and the interpretation of the litigation 27 itself from a legal perspective as -- 28 MS. MANDEL: Do you mean legislation? Sorry. 45 1 MR. HORTON: Yes, legislation. 2 I'm sorry, what did I -- must be this cold 3 talking. 4 The legislation relative to cost, are we 5 referring to setup costs? Are we referring to cost 6 reimbursement? Are we referring to an ongoing cost 7 reimbursement? Those are the distinguishable issues 8 that seem to be out there. 9 Does the Board of Equalization have 10 quasi-legislative authority to actually do something 11 other than what is mentioned in the legislation? 12 Mr. Runner spoke to the -- striking an 13 equitable balance over a long term perspective, yet 14 trying to accomplish the intent of the legislation, as 15 pointed out by Member Yee. 16 So, those matters will be deliberated during 17 the rulemaking process. We are at an unfortunate 18 junction, as you always are when you are required to 19 implement emergency regulations and that we've got to 20 move forward based on the information that we have 21 currently, and then adjust as we go through the 22 rulemaking process. 23 My concern is a concern of whether or not there 24 would be a challenge and, as a result of that challenge, 25 there is a writ of mandate that will invalidate the 26 regulation promulgated by the Board of Equalization, if, 27 in fact, we are not objective and balanced in our 28 assessment in determining what is fair and equitable to 46 1 the retailers that have to bear the burden of the costs. 2 Obviously, the legislature intended for some 3 costs of some sort to be reimbursed. And, so, defining 4 that and quantifying it is the challenge before this 5 body. 6 Unfortunately, as we are not in a position as 7 legislators are, to when they have bad legislation, 8 subject to litigation, to do a subsequent legislation to 9 bring clarity. That is punted to the judicial body. In 10 our situation, we're back to the legislature. 11 So, I guess what I'm saying is I could ask a 12 series of questions of the Legal Department in regards 13 to their interpretation of the legislation, but I think 14 it's clear that they have interpreted it a particular 15 way. 16 I could ask questions of the economists, but I 17 do want to say that $250 per location -- the 18 methodology, in and of itself, creates a windfall or a 19 loss, depending on where you are in respect to the 20 universal -- or your baseline, if you will. 21 That, in and of itself, exemplifies some 22 inequity whenever you create those windfalls. And 23 particularly when the -- and it seems to me that the 24 intent is to try to get to something actual. And, so, 25 possibly a flat rate of some sort that is fair and 26 equitable to all parties involved. 27 This is one of those -- what they refer to as 28 legislative sausage. And now they've asked us to 47 1 prepare and serve it up -- which is always quite 2 interesting. 3 So, Members, in our deliberation on the matter 4 before us, I would certainly encourage that we also 5 consider, I think it's anticipated by the Department, 6 that we establish a rulemaking process to take all of 7 those matters in consideration and assemble then 8 something based on what we have here, acknowledging the 9 inequity that seems to be acknowledged by all parties, 10 the disputes as it relates to what is cost, what is 11 reimbursable, what is not and so forth. 12 And let's see if we can establish a process in 13 which to get to -- to strike a balance, if we can, even 14 if that balance is a reimbursement over a longer period 15 of time, but not a reoccurring or administrative 16 reimbursement. 17 I think it's very clear that the legislation 18 did not intend to have an ongoing administrative 19 reimbursement, that this is a one-time reimbursement, 20 but yet, still, how do we get there? 21 And yet, at the same time, this body can't 22 negate the overall intent of the legislature in passing 23 the legislation. 24 Clear enough, all parties seem to see this as a 25 revenue generating measure based on the presumption that 26 it requires two-thirds vote and that there was no 27 offset -- that this is a revenue generating measure. 28 And, so, the debate whether it's a long term 48 1 revenue generation, short term -- all of that will, 2 hopefully, be resolved in the rulemaking process. 3 Quite frankly, I think we can get there. 4 Unfortunately, we got bad legislation that could be 5 subject to some sort of litigation. 6 And let's see if we can do what the legislature 7 didn't do and, that is, bring all the parties together 8 and see if we can come up with something that's fair and 9 equitable and still accomplishes the leg -- the intent 10 of the legislature. 11 Further discussion or comments, Members? 12 MR. RUNNER: Just a quick observation. 13 MR. HORTON: Mr. Runner. 14 MR. RUNNER: The BOE had no problem fully 15 getting reimbursed for the cost of implementing this 16 legislation. We have estimated that it's going to take 17 18,000 hours to program our computers in order to do 18 this -- millions of dollars. 19 So, I appreciate the fact that we're concerned 20 about keeping the intent of the legislation whole, but 21 it certainly isn't -- we certainly didn't take that to 22 heart when we talked about what our costs were. We went 23 ahead and said, "We need all of our costs." 24 So now, to all of a sudden, be nickel and 25 diming little businesses, say, "Well, we need you to be 26 patient. We need you to wait for our rulemaking 27 process," it just seems to me to be wrongheaded. 28 These are the businesses that are employing 49 1 Californians today. These are the businesses that are 2 helping produce our sales tax every day. And to now 3 throw greater responsibility on them and taking money 4 out of their pocket just doesn't make sense. 5 Now, I actually could be okay with a lower 6 amount, $200, but then add in there that there is a 7 process to which retailers can come forward with their 8 real costs. So, you set a floor. It can be a lower 9 floor and then we set a process that says, "Fine, if you 10 think you -- it cost you more than --," then let's 11 provide a path for them in order to really demonstrate 12 that." 13 And we don't need to upgrade people's computer 14 systems. They'll need to be upgraded. We don't need to 15 buy new stuff. 16 But, at the same time, I'm a little embarrassed 17 that we are not afraid to ask for our full reimbursement 18 for costs, but we're not willing to ask for full 19 reimbursement for businesses in California. 20 MR. HORTON: I feel somewhat compelled to 21 clarify. 22 MR. RUNNER: No, you don't have to clarify, you 23 could just state your own -- your own opinion. 24 MR. HORTON: Well, on the behalf of the Board, 25 as it relates to the cost of administering the program, 26 the Board certainly is a -- the Board certainly is a 27 body that has to administer not just one transaction or 28 not just one case, we're looking at all of the cases, 50 1 all of the returns and so forth. 2 And, arguably, the amount that the Board has 3 asked for doesn't nearly get to what the overall costs 4 would be for us to manage in this particular trans -- 5 transaction. 6 But, you know, that's a debatable thing that 7 would occur down the road. And it sounds almost as if, 8 though, we're on the same page with Mr. Runner -- 9 although certainly articulated a little bit differently. 10 But it sounds like we're somewhat on the same 11 page and that is, let's establish a process by which we 12 determine what that cost is. And that's what is 13 referred to as a rulemaking process. And, hopefully, we 14 will get there at the end of the day. 15 Member Yee. 16 MS. YEE: I was just going to renew the 17 invitation to the retailers and others, if you could 18 really bring more to light to what some of these true 19 costs are. 20 Obviously, it varies with respect to the type 21 of retailer, size of retailer, but, you know, 22 obviously -- and I think all of us are feeling not great 23 about not being able to deal with this added burden on 24 retailers, given the bill. 25 But, at the same time, I want to be sure that 26 our process is reflective of trying to get the best 27 information possible relative to what these true costs 28 are. 51 1 I mean, if we were to look at, you know, 10,000 2 retail locations and let's say the costs really were 3 4,000 per location, we've already exceeded what we 4 think -- what -- what was intended in terms of what the 5 term of the offset would be. 6 So, we just have to continue to get the best 7 information possible. 8 MR. HORTON: Yeah, there is a -- there is a 9 methodology in force to get there, it sounds like, which 10 is why this -- this discussion or this debate, if you 11 will is so helpful to me. I think there is a 12 methodology as far as to get there to the actual cost, 13 and yet, still, not negate the intent of the legislation 14 to actually generate revenue. 15 Because at the end of the day, this was a zero 16 sum game. Had this not occurred, the costs would have 17 been passed on some other way. The Department of 18 Forestry would have had to incur some additional budget 19 challenges. And, ultimately, it's going to be squeezed 20 out somewhere. 21 This is not necessarily the best way to govern. 22 And in my perspective, I'm of a mind that we ought to be 23 stimulating the economy in a number of different ways. 24 But it is what it is. And it is before us 25 to -- to interpret. And that's what our 26 responsibilities are. 27 Miss Lee. 28 MS. LEE: Chairman Horton, if I may, just add 52 1 to that point, sort of piggybacking on what Board Member 2 Yee raised, as well as you and several Members have 3 reiterated -- the need to establish a process, determine 4 the true cost -- or as close as we can to that number, 5 whatever it is. 6 It should probably bring to light, just for the 7 sake of public record, that it was noted on a previous 8 BOE analysis that because the intent was unclear -- or 9 at least it was interpreted to be unclear -- that there 10 was going to be an attempt to submit a letter to the 11 Journal to clarify the intent of the legislation. 12 When we read that in the BOE analysis, we 13 subsequently followed up with the Governor's office, 14 with committee staff, et cetera, to figure out why that 15 letter was going to be submitted, given that the 16 agreement was for the BOE to establish that number. So, 17 the letter was not submitted to the file to clarify the 18 intent. 19 However, we have heard that there have been 20 subsequent attempts to submit a letter to the Journal to 21 clarify that the intent of the legislation was to 22 reimburse one time for several hundred dollars. 23 And I think that would be counterproductive, 24 given what we've discussed today. I just wanted to shed 25 light on that effort. 26 MR. HORTON: Member Mandel. 27 MS. MANDEL: Well, I can just say on the one 28 time that it was our reading of the language of the 53 1 statute, like staff, that it was a one-time 2 reimbursement to be taken on the first return. And if 3 that's not sufficient funds from this fee, subsequent 4 returns. 5 That's -- our understanding was that it was a 6 one time. 7 MS. LEE: If I may? 8 MS. MANDEL: Just stating that was -- 9 MS. LEE: Sure. 10 MR. HORTON: Member Steel. 11 MS. STEEL: Just comment. AB 1492, this is 12 unjustified lumber tax that, you know, I was not really 13 happy begin with. 14 And then the staff came out with $250 per 15 location. This is just almost -- it's -- it's -- it's 16 really -- I mean, as is, that this lumber tax itself is 17 going to hurt not just retailers but all the building 18 industries in California that they are just building a 19 little bit of moving up. Now we are pouring cold water 20 on the top of it. 21 But I totally agree with Member Runner that, 22 you know, when I came to the Board, then I asked Board 23 to recalculate from monthly interest rate to one day 24 interest rate. And staff came out with $750,000 cost 25 begin with and it went down to 25,000 something. 26 So, you know, when we are changing one glitch 27 of the computer system that we are talking about tens of 28 thousands of dollars and then we are asking this 54 1 money -- you know what, if we can be fair and try to, at 2 least, listen to these retailers and manufacturers and 3 that's the least we can do. 4 And this $250 for .1 percent of total sales, 5 it's almost outrageous number that I am looking at it. 6 So, for the future, that, you know, how much we are 7 collecting from this lumber tax, I think something, the 8 least we can do -- they going to lose so much businesses 9 because of this tax. So, you know what, at least we can 10 listen to retailers and manufacturers and come up with 11 a fair number. That's all I'm asking here. 12 And this one, you know, I try to abstain with 13 this bill, I mean this -- the recommendation itself 14 because I wasn't happy with AB 1492 that -- but now I 15 really have to step in. And I want to work with, you 16 know, these retailers that how much it's going to cost. 17 It's not just cash registers. It used to be just 18 changing one chip that's going to work. Now it's not 19 like that. 20 So, we really have to do -- put little more 21 work in it to help these businesses. That's the least 22 we can do. That's what I think. 23 MR. HORTON: Okay. Question of the Department. 24 Can you elaborate on what the rulemaking process will 25 entail. 26 MR. TUCKER: For the emergency regulation or 27 for the -- 28 MR. HORTON: In the event that the Board 55 1 Members are desirous to establish a rulemaking process 2 to resolve some of these issues. 3 MR. TUCKER: -- okay. First -- let me step 4 back then. 5 First what we would do is we would approve and 6 adopt the rulemaking -- the emergency regulation and 7 then that would be published and then forwarded to OAL. 8 Then this could be referred to -- what we would 9 recommend would be that we then go into a permanent 10 regulation. And that would be referred to the Business 11 Taxes Committee. 12 MR. HORTON: Uh-huh. 13 MR. TUCKER: The Business Taxes Committee would 14 have a number of options. Arguably, they could simply 15 publish the permanent regulation. 16 Staff, however, has worked up a schedule. So, 17 if -- at the pleasure the BTC, they could hold 18 interested parties meetings. We've already put together 19 schedules for one or two, at the -- at the pleasure of 20 the Business Taxes Committee. 21 So, we hold -- just -- and this is tentative, I 22 -- we even have prospective dates. There -- if we were 23 going to have simply one interested parties meeting it 24 would be on -- tentatively scheduled for January 10th, 25 2013. 26 Prior to that, we would have an analysis 27 provided to interested -- let me step back one step. An 28 analysis provided to interested parties on 56 1 December 18th, 2012, an interested parties meeting on 2 January 10th, 2013. 3 We would -- interested parties would be able to 4 respond by January 18th. And this would -- the 5 materials would be provided to the Board in March. 6 If we were to choose two interested parties 7 meetings, then we would have a second meeting on 8 February 28th -- interested parties would respond by 9 March 15th and then that would go to the Board by 10 May 17th, 2013. 11 MR. HORTON: Okay. Further discussion, 12 Members? 13 MS. YEE: Mr. Chairman. 14 MR. HORTON: Member Yee. 15 MS. YEE: I just want to thank all of the 16 public testimony today. And I -- I know this is a 17 burden that is facing you without a lot of advance 18 notice and certainly want to continue to invite your 19 participation as we try to work through this 20 reimbursement program and really would like to use our 21 rulemaking process to try to, you know, vet some of 22 these remaining issues. 23 My sense is that there will be a high degree of 24 interest in the legislature, and certainly on the part 25 of the administration, that there be as -- as -- the 26 fullest extent of compliance with respect to collection 27 of the assessment as possible. 28 But certainly I think these concerns that we've 57 1 heard today, they're going to be hearing about up the 2 street just the same. And I don't know what the 3 legislature will do, but I think part of this is going 4 to be, you know, obviously trying to put into place 5 what's already been enacted, but understanding full well 6 that there are outstanding concerns that still, 7 hopefully, we'll get some vetting here to the full 8 extent of our jurisdiction here, but also may re-visit 9 it in the legislature as well. 10 MR. HORTON: Okay. Further discussion, 11 Members? 12 Hearing none, is there a motion? 13 MS. YEE: I'll move to adopt the emergency 14 regulation that's before us and authorize staff to 15 commence rulemaking by publishing and -- the regulation 16 for notice and comment. 17 MR. HORTON: Okay. So moved by Member Yee. Is 18 there a second? 19 MS. MANDEL: I'll second. 20 MR. HORTON: Second by Member Mandel. 21 Objection? 22 MR. RUNNER: Objection. 23 MR. HORTON: Objection noted. 24 Is there a desire to bifurcate this or just 25 objection as it's stated? 26 MR. RUNNER: Yeah, if you would like to -- it 27 would be helpful to bifurcate the -- the fee portion -- 28 the reimbursement portion, thank you. 58 1 MR. HORTON: It's up to the maker of the 2 motion. 3 MS. YEE: Hmm -- 4 MR. HORTON: Motion as-is or bifurcated? 5 MS. YEE: -- yeah, that's fine. 6 MR. HORTON: Okay. Moved by Member Yee to 7 adopt staff -- adopt staff recommendation for emergency 8 regulation, second by Member Mandel, with objection 9 noted. 10 Member -- Ms. Richmond, please call the roll. 11 MS. RICHMOND: Mr. Horton? 12 MR. HORTON: Aye. 13 MS. RICHMOND: Ms. Steel? 14 MS. STEEL: I abstain from voting in protest 15 unjustified lumber tax. 16 MS. RICHMOND: Mr. Runner? 17 MR. RUNNER: No. 18 MS. RICHMOND: Ms. Yee? 19 MS. YEE: Aye. 20 MS. RICHMOND: Ms. Mandel? 21 MS. MANDEL: Aye. 22 MS. RICHMOND: Motion carries. 23 MR. HORTON: Moves to establish the rulemaking 24 process to the Business Tax Committee by Member Yee, 25 second by Member Mandel. 26 Objection? 27 Hearing none, such will be the order. 28 MS. MANDEL: And just -- are you going -- 59 1 MR. HORTON: Member Mandel. 2 MS. YEE: Yeah, we're also, Mr. Chairman -- 3 MR. HORTON: Uh-huh. 4 MS. YEE: -- let me work with staff on some of 5 the dates because I want to be sure that we're mindful 6 of the release date of the Governor's budget in 2013. 7 MR. HORTON: Okay. 8 MS. YEE: Okay. 9 MR. HORTON: Fabulous. 10 Thank you very much for appearing before us. 11 This is very helpful. We certainly encourage you to 12 participate throughout the rulemaking process. We look 13 forward to an equitable, balanced conclusion. 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 60 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 OCTOBER 23, 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 60 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: NOVEMBER 5, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 61