1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 15, 2013 10 11 12 13 14 ITEM P 15 OTHER ADMINISTRATIVE MATTERS 16 ITEM P4 17 PROPERTY AND SPECIAL TAXES DEPUTY DIRECTOR'S REPORT 18 2. UPDATE ON EMBEDDED SOFTWARE PROJECT 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 Board of Equalization Staff: David Gau 18 Deputy Director Property and Special Taxes 19 Division 20 ---oOo--- 21 Speaker: Gina Rodriquez CalTax 22 23 ---oOo--- 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 15, 2013 4 ---oOo--- 5 MS. RICHMOND: Our next item is P4.2, Update on 6 Embedded Software Project. 7 MR. GAU: Again, David Gau, Deputy Director 8 Property and Special Taxes. With me is Dean Kinney; 9 he's the Chief of the County-Assessed Properties 10 Division. 11 And as you'll recall at last month's Board 12 Meeting, a request was made for an update regarding the 13 Property Tax Embedded Software Project. And since that 14 time, um, staff's been working to -- along with Member 15 Runner and his team, to identify -- staff to identify 16 for a working group for the project and the goal or 17 goals of what that group would develop. 18 And I think, as you know and been aware, that 19 attempts during the past year to really gather evidence 20 necessary to support a data-driven study have not been 21 productive as the data necessary has really been proven 22 to be so highly confidential. 23 Um, so the next thought or goal was to 24 determine if a working group could be convened to 25 develop definitions and guidelines that could be 26 included in such a study. 27 At this time the working group members have 28 been identified as Mr. Kinney, who would be the lead on 3 1 the project; Mr. Richard Reisinger, he's the Principal 2 Property Appraiser in our State-Assessed Properties 3 Division; Mr. Jason Chao, Principal -- Principal with 4 Ernst & Young; and Mr. Peter Michaels, attorney. 5 Still needed are a Software Engineer, a member 6 from academia, and two members from the California 7 Assessors' Association. 8 And the CAA will be making formal consideration 9 of this matter at their conference which is scheduled 10 for later this month. Uh, their Ad Hoc Committee, 11 however, sent a letter signed by Santa Clara County 12 Assessor Larry Stone as the Chair of the Ad Hoc 13 Committee to the Board last evening indicating that they 14 will be recommending to the, uh, California Assessors' 15 Association that they actually respectfully decline to 16 participate at this point in the working group. Um, and 17 the details are in Mr. Stone's letter which have been 18 posted in the -- 19 That would really concludes my report, and I 20 would be happy to answer any questions at this time. 21 MR. HORTON: Before we go to question and 22 answer, I'm going to allow Ms. Rodriquez from CalTax 23 to -- 24 ---oOo--- 25 GINA RODRIQUEZ 26 ---oOo--- 27 MS. RODRIQUEZ: Thank you. I apologize -- 28 MR. HORTON: Go ahead. 4 1 MS. RODRIQUEZ: -- I didn't sign up for this 2 particular segment. 3 Um, we are aware, just recently, of the 4 assessors' ad hoc, um, letter to say that they don't 5 want to participate in the working group now. 6 Uh, I came before you in 2011 at the Taxpayer 7 Bill of Rights Hearing requesting that, um -- that the 8 Board help us with some guidelines for taxpayers and 9 provide some uniformity for assessors. Now, how we get 10 there, we're willing and open to discuss that. 11 After, though, a year and a half, we felt the 12 working group was the best, uh -- best move for 13 everybody to get together and agree with David's 14 recommendations on who should be on the -- the working 15 group. 16 So my concern is we need to continue to move 17 forward, likely with a working group, to, uh, get 18 guidelines out to taxpayers and, um -- and assessors as 19 well. 20 So, thank you. 21 MR. HORTON: Mr. Runner. 22 MR. RUNNER: Yeah, it's kind of an interesting, 23 perplexing issue that we find ourselves in the middle 24 of. 25 This came to us as a request from the 26 assessors. And so we're responding to the -- the 27 request from the assessors to put together a working 28 group, um, and it was a concern then for industry. 5 1 I'll tell you, my bias has also been, and it's 2 why I was interested to see exactly what a workers 3 group -- working group could come up with, and that is, 4 I don't know if we'll find conclusion. But I thought -- 5 certainly thought a working group, at least bringing 6 people together for that discussion, would indicate 7 that. 8 And, you know, even as our discussion was today 9 on technology transfers, some of this stuff is complex 10 and it's not going to -- and I think sometimes we think 11 that they're going to be -- maybe there's a global 12 solution when, in fact, there's going to be -- just be, 13 uh, incremental solution and clarity, uh, maybe in small 14 things. 15 My concern, I guess, that I -- you know, now 16 that we've received a letter from the Assessors' 17 Office -- or from the Ad Hoc Committee Chair is a 18 couple. One is, um, I guess in one sense we were 19 responding to their request to do it. So now, if they 20 are formally withdrawing their request to do a working 21 group, I would assume that somebody else better step up 22 and decide that this is a request for a working group. 23 Um, the other issue is, this is really not from 24 the assessors but from the Ad Hoc Committee. Now, I 25 assume they're going to follow through on that. I would 26 assume that that's going to be the case. So I'm not 27 assuming that that would be anything different. 28 Um, and, uh, you know, there were concerns, I 6 1 think, in the letter that were -- that was done in 2 regards to the makeup of the committee. You know, 3 again, the working group, it's a complex issue. Um, I 4 can tell, right off the top, though, it was never our 5 intention to -- for instance, I think one of the 6 concerns is that assessors were on it. That was never 7 our concern, our issue. 8 We basically gave the assessors two spots to 9 appoint somebody to. They can appoint whoever they 10 think is best to do that, which is certainly, I think, 11 important. What I'm not too sure is that they can then 12 determine what the rest of the spots are. Um, and I 13 think that's, again, between us and the staff to 14 determine how to get, you know, a full -- a full 15 complement. And at that point if in the process we find 16 ourselves short or there needs to be additions or there 17 needs to be, uh -- uh, changes, then we can do that. 18 MS. YEE: Mm-hmm. 19 MR. RUNNER: Um, so I -- I think we can do 20 that. But the bottom line, I think, of the assessors' 21 letter is, no matter what it is and no matter whether 22 new definitions, or the group -- they no longer feel it 23 necessary to have a -- a, um -- a working group. Which, 24 again, I -- I -- I would hope that we could find our way 25 to some solution or partial solutions, if even it's 26 definitions. 27 So, uh, that's the dilemma we're in. Um, you 28 know, our intention, quite frankly, at this point -- I 7 1 can tell you what my intention would be, and that is to, 2 uh, since -- we'll wait and see if the assessors 3 actually formally remove their request for a working 4 group. 5 At that point then I think I would then 6 decide -- I think it would be best for the Board then to 7 wait to see if anybody fulfills that request for a 8 working group. Or, I suppose, we could decide here -- 9 decide ourselves that we -- that it's necessary to go 10 forward, um, and then go -- and then go forward. 11 And then if the makeup of the group needs to 12 change in the process, that's fine. If the -- if the -- 13 if the mission of the group needs to be defined as it 14 goes along, just like we did in -- in technology 15 transfer, that's fine, too. 16 But I think moving forward at least gets the 17 discussion on the table. And, quite frankly, I think we 18 have an obligation to do that. Because, quite frankly, 19 if we don't speak to it, the Legislature will. Of 20 course they probably will anyhow. 21 Um, but -- but I think at least -- I don't 22 think we can just ignore the fact that we do nothing at 23 that point. 24 So that would be kind of my observation as to 25 where we are. 26 MR. HORTON: Further discussion? 27 Member Yee. 28 MS. YEE: Uh, thank you, Mr. Chairman. 8 1 I, uh, echo many of Senator Runner's, um, 2 sentiments and, I think, a little frustration here as 3 well. 4 A couple thoughts here. And that is, uh, I 5 think the challenge here has been, What's our starting 6 point and how do we define the scope? And there may be 7 a solution here that at least gets the process, uh, to 8 move and maybe backing into, uh, ultimately the Board 9 adopting guidelines. 10 Uh, I happen to think that the working group is 11 sitting right here, on this dais, being supported by the 12 staff. And, uh, I have a bias. I'm sensitive to the 13 assessors' letter only because, uh, they have wanted 14 resolution on this front for a long time. It's been a 15 few years. And, uh, what has stymied them exactly, 16 What's the starting point and what's the scope? 17 Um, I think if we get back to the original 18 stated purpose of what was requested and that is to have 19 guidelines that are, um, established and adopted for how 20 we value embedded software, there are a couple places 21 that we can go, at least to start the process of, um, 22 how do we begin to look at the issue. 23 One is -- and I know we assess state-assessed 24 property or value state-assessed property very 25 differently than local assessed property. But embedded 26 software has come up within the context of 27 state-assessed property. And, uh, I was pleased to hear 28 that, uh, Mr. Reisinger was going to be a part of the 9 1 working group from the state-assessed property side. 2 And I think, uh, that certainly could be a point of 3 support for the Board as a working group. 4 Secondly, I understand that, uh, there are a 5 handful of counties that have entertained studies, that 6 have actually made, uh, decisions about how to value 7 embedded software independently of any state-wide 8 guidance. And I think, uh, that would be appropriate 9 for the staff to look at in terms of, uh, what were the 10 considerations that were brought to bear in terms of 11 some of those local decisions. 12 And I think looking at what's already been done 13 or some of the existing considerations of how we 14 approach the issue may help us then begin to, um, 15 outline what this board needs to do to eventually adopt 16 some guidelines. 17 At this point, I would agree with the assessors 18 that if we have a working group that is, uh, occupied -- 19 the positions that are occupied with, you know, a lot of 20 different interests, we in some ways lose sight of the 21 goal. And, uh -- or don't have, uh, any kind of, uh, 22 concreteness with respect to the scope. And I think a 23 good starting point always is, What are we doing, what's 24 currently happening? 25 And so going out and making that assessment 26 with respect to what some of the counties are already 27 doing, looking at where there might be some lessons 28 borrowed from the state-assessed side -- 10 1 MR. RUNNER: Right. 2 MS. YEE: -- and seeing if that constitutes 3 enough for you to then come back to us as a board with a 4 proposal about how we proceed. 5 Uh, because I think we can spend the rest of 6 the year trying to figure out how to populate a working 7 group and we still aren't going to be that much farther 8 ahead. But work's already been done, so let's kind of 9 capture that and see whether -- if, uh, it brings any 10 kind of, uh, good information or instructs our purpose 11 for moving forward. 12 So that would be my -- my thought about how we 13 continue. And I want to applaud Senator Runner. This 14 has been a major undertaking and, you know, we're trying 15 to be fair in terms of being sure that all parties and 16 all of these perspectives are reflected. And yet, at 17 the same time, when you have a major interest that, uh, 18 is not interested in being seated as part of a working 19 group, but, among whose members have started to look at 20 this issue individually within their counties, I think 21 there's another way to approach this besides trying to 22 have a working group and having just reports back to 23 this board so that we can continue to refine what our 24 next steps are going to be. 25 MR. HORTON: Further discussion, Members? 26 MR. RUNNER: I -- 27 MR. HORTON: Member Runner. 28 MR. RUNNER: Yeah, I think that there are other 11 1 ways to do this. And I don't think, certainly it's not 2 my intention as -- as Chair of the Property Tax 3 Committee to feel like this has got to be done in a -- 4 in a -- in a -- in a, uh -- with a -- with a working 5 group where we have a segment of folks that say, for 6 whatever reason, are not wanting to -- to -- to 7 participate. 8 The -- the only issue I would have is 9 whatever -- there's going to have to be a -- I just 10 don't think -- I appreciate the fact that we can be a 11 working group. But I don't think we're going to end up 12 with the same kind of discussions and atmosphere that's 13 going to take place when you bring, um, technicians -- 14 we have our own technicians, but there are private 15 sector technicians, uh, industry together to have that 16 kind of conversation. That, by its nature, is outside 17 of this group that comes back with some conclusions for 18 us. 19 MS. YEE: Mm-hmm. 20 MR. RUNNER: Or some choices for us. 21 MS. YEE: Yeah. 22 MR. RUNNER: So I don't think we can avoid that 23 kind of process. 24 MS. YEE: No. And I'm not suggesting that we 25 do. But I do think we -- that -- that that particular 26 broadening of the participation, I think, is premature 27 at this point. 28 I think we need to figure out, uh, what's been 12 1 done, what's currently being done from the state 2 valuation side, local assessment side. Uh, bring us 3 back some information about what actually is, uh, being 4 practiced, being put in practice at this point in time. 5 Have the staff begin to try to formulate a scope, uh, 6 that then gives whatever group we convene, you know, a 7 product to work with. 8 MR. RUNNER: Yeah. Yeah. 9 MS. YEE: Otherwise we're going to spend -- 10 MR. RUNNER: I -- I'm fine with that. But, 11 again, I -- you're basically -- is -- is -- those -- 12 that's exactly the process that got us to the point of 13 needing, you know, a group. 14 So I think we can certainly do that again. I 15 think the staff is prepared. We've done a lot of that 16 work already. 17 MR. GAU: Yes. 18 MR. RUNNER: Um, we can certainly bring that in 19 that total discussion. And I think we will be, whenever 20 we get done with that discussion, exactly where we are 21 today. 22 Um, which is, again, I -- I'm of the conclusion 23 this is probably not an answerable problem anyhow. So 24 I'm -- we can -- we can certainly have staff go compile 25 what's going on out there. I think at that point we're 26 going to hear from industry again. We're going to hear 27 from all those folks. 28 MS. YEE: Oh, yeah. No, I fully expect that we 13 1 will, yeah. 2 But have we done that, Mr. Gau -- I mean -- or 3 Mr. Kinney? 4 MR. GAU: We've made requests and inquiries. 5 Not -- not so much on a -- a formal basis. 6 MS. YEE: I guess I would -- 7 MR. GAU: And, again, just like I think what 8 you're bringing up as well is most of our experience has 9 been in the state-assessed area as far as what our staff 10 is. 11 MS. YEE: Right. Exactly. Exactly. But if -- 12 if ultimately what we're trying to do is issue 13 guidelines so that there's some semblance of uniformity 14 with respect to local valuation and assessment and we 15 know that there are some counties that are proceeding 16 independently, without -- absent state guidelines, let's 17 take a look and see what they're doing. 18 MR. GAU: Certainly. 19 MS. YEE: Um, and see what is informing them 20 and instructing them in terms of the considerations that 21 they're making that may be the same considerations that 22 are brought forth to a broader working group that 23 includes industry to comment on as to whether those 24 approaches have merit. 25 And then on the state-assessed side -- I mean, 26 obviously, different, uh, methodologies that are used. 27 But there might be some considerations on -- on the 28 state-assessed side that might be helpful as well. 14 1 MR. GAU: Certainly. 2 MR. HORTON: Further -- 3 MS. YEE: But it's less -- it's stronger than a 4 request. Like, get the information. 5 MR. RUNNER: Well, we'll take that on. 6 MR. GAU: That helps. 7 MR. RUNNER: We hear that, and that will happen 8 through Property Tax Committee. 9 MS. YEE: Okay. 10 MR. RUNNER: Um, and we will work with the 11 staff on that -- on that basis. 12 Again, I think we're going to go through that. 13 MR. GAU: Yes. 14 MR. RUNNER: We're going to end up with the 15 same discussions and we'll be where we are today, 16 whether or not we're going to go ahead and do one. So 17 we -- we're fine with that. 18 MS. YEE: Okay. 19 MR. HORTON: Um, staff? Um, Mr. Gau? 20 MR. GAU: I think we have our direction. 21 MR. HORTON: You're understanding the 22 directions the Board has provided? 23 MR. GAU: Yes, we do. 24 MR. HORTON: Okay. All right. Well, thank you 25 very much for the discussion. 26 The Board will, uh, await further direction 27 from the Property Tax Committee. 28 ---oOo--- 15 1 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, KATHLEEN SKIDGEL, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 January 15, 2013 I recorded verbatim, in shorthand, to 11 the best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 15 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: January 23, 2013 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 16