1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 22, 2017 10 (Prepared from audio recording) 11 12 13 14 15 16 LEGISLATIVE COMMITTEE 17 18 19 20 21 22 23 24 25 26 27 PREPARED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board of Equalization: Fiona Ma, CPA 4 Chair 5 Diane L. Harkey Member 6 Jerome E. Horton 7 Member 8 Sen. George Runner (Ret.) Member 9 Yvette Stowers 10 Appearing for Betty T. Yee, State Controller 11 (per Government Code Section 7.9) 12 13 Joann Richmond Chief 14 Board Proceedings Division 15 For Board of Equalization Staff: Michele Pielsticker 16 Chief Legislative and Research 17 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 22, 2017 4 ---oOo--- 5 MS. RICHMOND: So next is the Legislative 6 Committee. 7 MS. MA: Okay. Legislative Committee. 8 MS. RICHMOND: Ms. Ma is the Chair of that 9 committee. 10 MS. MA: Okay. 11 MS. RICHMOND: Ms. Ma. 12 MS. MA: Ms. Pielsticker, welcome. I 13 believe there are two items on the agenda today. 14 Just give us a second. 15 (Pause.) 16 MS. MA: Okay. Everybody ready? Okay. 17 Thank you. 18 Ms. Pielsticker. 19 MS. PIELSTICKER: Michele Pielsticker. 20 The first item is SB 11 Gaines. The 21 sponsor is the author and Board Member Runner. 22 Under existing law, we impose penalties and 23 interest for tax payments made or returns filed 24 after the due date. The BOE currently has the 25 authority to grant relief of interest and penalty in 26 the case of a BOE system outage that prevents a 27 taxpayer from filing or paying tax on a return. 28 However, the -- the taxpayer must request that 3 1 relief. 2 The BOE may not provide proactive relief 3 and must impose penalties and interest. 4 Under the, uh, proposed bill, the proposed 5 bill would allow the BOE to refrain from imposing 6 penalties or interest under the various business 7 taxes the BOE administers if a person's failure to 8 file timely returns or payments is attributable to 9 the BOE's website outage. 10 There is no revenue impact since currently 11 penalty and interest relief may be granted in the 12 case of a website outage upon the taxpayer's 13 request. 14 I also have a statement from Senator Gaines 15 to be read into the record. 16 May I proceed? 17 MS. MA: Yes. 18 MS. PIELSTICKER: Okay. 19 "Madam Chair and Members, thank you for 20 your consideration of Senate Bill 11, which 21 would ensure that taxpayers aren't forced 22 to ask for relief of interest and penalties 23 imposed as a result of a BOE website 24 outage. 25 "This isn't a hypothetical scenario. 26 Last year the BOE's website boe.ca.gov 27 failed four times, and two of those events 28 on 1/29 and 8/1 were during peak filing 4 1 periods. 2 "During the three-hour August 1 3 outage, taxpayers attempted to access the 4 BOE's website 24,000 times. More than 600 5 taxpayers subsequently filed requests 6 seeking relief of more than $600,000 in 7 penalties imposed because of the outage. 8 Even when BOE staff knows that a taxpayer's 9 failure to file a return or pay taxes on 10 time was caused by an unplanned website 11 outage. 12 "Under current state law, BOE staff 13 cannot unilaterally waive interest and 14 penalties for late returns or payments 15 related to failure of the agency's website. 16 "Each taxpayer must individually file 17 a request for relief even though the 18 taxpayer was not at fault. Additionally, 19 each taxpayer's request must be 20 administratively reviewed by BOE staff and 21 approved by BOE supervisors separately. 22 This is unacceptable treatment of taxpayers 23 and a waste of staff time. 24 "The state can collect as much as 25 $1 billion in a single day during peak 26 filing periods. Even a short unplanned 27 outage disrupts the lives of taxpayers and 28 state workers. 5 1 "Senate Bill 11 would untie BOE's 2 hands and allow common sense proactive 3 relief of interest and penalties when the 4 website fails. 5 "There is no revenue impact since this 6 bill is limited to taxpayers who would have 7 otherwise been entitled to relief from 8 penalty and interest, and taxpayers are 9 still required to file and pay their taxes 10 within a reasonable time after the BOE's 11 website failure. 12 "For these reasons, I urge your 13 support of the bill." 14 I'm happy to answer any questions. 15 MS. MA: Okay. 16 Ms. Harkey? 17 MS. HARKEY: Sounds like an excellent bill. 18 And I'm always glad when we allow the staff to 19 exercise a little judgment call rather than putting 20 it through all -- I think we did that on our -- on 21 our refund policy here. We tried to streamline 22 processes and this -- truly when a taxpayer's not at 23 fault, when the BOE's not at fault, it just happens, 24 ought to be a time for discretion. 25 So I thank the author and, uh, Senator 26 Runner for bringing this forward. 27 MS. MA: Mr. Runner. 28 MR. RUNNER: Just, again, this just makes 6 1 sense on both sides. It costs us more money at the 2 BOE to actually implement the policy which then -- 3 which puts the taxpayer at a disadvantage. Um, and 4 so this is just, I think, a correction of that. It 5 empowers us to then help the taxpayer, I think 6 rightfully puts the responsibility where it 7 belongs. 8 MS. MA: Ms. Stowers. 9 MS. STOWERS: Yes. My question is, the way 10 its written, "The BOE would refrain from imposing 11 interest and penalty," exactly how would that work? 12 MS. PIELSTICKER: That would mean that, 13 rather than asking the taxpayer to file a claim for 14 relief, we would just automatically re- -- relieve 15 the penalty. So we would give them, after an 16 outage, we would give taxpayers that, uh -- whose 17 returns were due on that day a reasonable time 18 period within which to file the return. And that 19 reasonable time period would be decided by 20 regulation. 21 MS. STOWERS: So if there's an outage, in 22 like I think in the proposed bill they give an 23 example there was an outage when a quarterly return 24 was due. 25 MR. RUNNER: Mm-hmm. 26 MS. STOWERS: Um, so BOE would go into the 27 system and say these particular returns were due and 28 we're not imposing interest or penalty. We'll use 7 1 technology to -- to proactively not impose penalty 2 and interest? 3 MS. PIELSTICKER: That would be my 4 understanding, yes. 5 MS. STOWERS: Is there any cost associated 6 with changing our systems, or how would that affect 7 CROS? 8 MS. PIELSTICKER: There -- there would be 9 programming costs. And there, obviously, would be 10 additional work beyond CROS to accomplish this. 11 MS. STOWERS: Under the -- our current 12 system, like the ones that -- where we did have the 13 outage, did every taxpayer who requested relief, did 14 they receive relief? 15 MS. PIELSTICKER: It is my understanding 16 that they did. 17 MR. RUNNER: They would. Anybody who 18 requested would have received it. 19 MS. STOWERS: They did receive. No one was 20 denied. 21 MR. RUNNER: No. Because the law allows 22 that to take place. 23 MS. STOWERS: Okay. I just want to make 24 sure that -- 25 MR. RUNNER: Right. 26 MS. STOWERS: -- those who were affected, 27 they did get the relief. 28 MR. RUNNER: Yeah. 8 1 MS. STOWERS: Now, when -- when there -- 2 when there -- I know when there's an outage we all 3 get the little message. And I'm assuming that each 4 Member gets a special message because it's affecting 5 your constituents. 6 Um, do we do anything else when there's an 7 outage saying that, under current practice, to be 8 more proactive, that you may be entitled to interest 9 of penalty relief? 10 MS. PIELSTICKER: I do not believe -- 11 MS. STOWERS: Or is it up to the taxpayer 12 just to -- just to request it? 13 MS. PIELSTICKER: I -- I do not believe 14 that we do. When there's a system outage, there's a 15 note on the page that says, "BOE system failure. 16 Contact BOE or try later." But we do not provide 17 that kind of -- 18 MR. RUNNER: Right. 19 MS. STOWERS: I -- I support this concept 20 in theory, but if the systems are down and taxpayers 21 are trying to file, they -- there should be 22 something there. 23 I -- I am concerned with going in now and 24 changing the systems, whether we change it -- is it 25 IRIS or is it ISIS -- IRIS, or do we build it into 26 CROS? So that's -- that's where I'm hesitant. 27 And, you know, I asked, um -- asked earlier 28 in my briefing, you know, do -- does the Board 9 1 already have the authority, setting aside the need 2 to change technology, do the Board already have the 3 authority to grant this relief? 4 MR. RUNNER: Well, the -- the -- the answer 5 is yes, we do. The problem is it takes the -- the 6 initiative of the taxpayer to do it. And so I think 7 this just basically assumes then that if it's our 8 problem, then we should initiate it as opposed to 9 the taxpayer initiating it. 10 Um, you know, in reality, we're gonna -- 11 we'll continue to do, um, a -- we'll be responsible 12 for doing the fiscal analysis on this. And so we'll 13 know exactly what the costs would be at that point. 14 Uh, I'm assuming it's going to be 15 negligible. Uh, but -- but at that point -- and 16 it's a one-time. And so we'll see how that -- 17 that -- that comes. But there will be in this 18 process of -- you know, we'll take responsibility 19 for that. 20 But it's a one-time adjustment, and it 21 seems to me we're actually in a good time to do it 22 because we're in the midst of having contractors on 23 with CROS. It seems like a easy thing to just begin 24 to -- continue to build in. 25 And let me just remind you right now, we 26 are -- we do have staff time happening now because 27 now it has to happen is we end up going at the back 28 end, right? The taxpayer has to then take on, take 10 1 on the, uh -- the, uh -- well, it's not an appeal. 2 The, uh -- the waiver. And -- and then we have to 3 then -- our -- our -- our staff then has to then 4 start dealing with the waiver. So we're already 5 engaged probably more extensively than if we just 6 did a one-time fix, I would assume. 7 MS. PIELSTICKER: That is correct. 8 MS. MA: Okay. Mr. Horton. 9 MR. HORTON: I'm supportive of the measure. 10 But, um, this recent discussion sort of threw me off 11 a little bit. 12 My understanding was is that the Board 13 couldn't proactively relieve the penalties. By 14 example, there's an outage, we simply go in, take a 15 look at whoever filed and don't assess the pen- -- 16 the penalty. Can we do that on the statute now? 17 MS. PIELSTICKER: Not -- not currently. 18 MR. HORTON: Yeah. 19 MS. PIELSTICKER: That's what this bill 20 seeks to do. But -- but currently we can, uh, grant 21 relief of penalty and interest and upon the 22 taxpayer's request. 23 MR. HORTON: They -- they have to make the 24 request. 25 MR. RUNNER: Right. 26 MS. PIELSTICKER: Yes. 27 MR. HORTON: The, um -- the other -- in 28 creating a rebuttable presumption, I'm sort of 11 1 presuming that the statute will provide the Board of 2 Equalization the opportunity to regulate around, um, 3 individuals who, uh, may not have filed or attempted 4 to file. They intentionally didn't file, uh, and 5 there's no record that they filed or attempted to 6 file, uh, and they're just late. And, uh -- uh -- 7 But I would imagine -- I'm just imagine 8 that if the period that we set is like three days, 9 we can probably reasonably presume that everyone 10 would have filed within a three-day period and even 11 make a further presumption that the outage is what 12 would have caused any taxpayer to have been 13 delayed. 14 MS. PIELSTICKER: That's correct. And if 15 they file after the outage date, they wouldn't be 16 granted relief. If they file well in advance of the 17 outage date, they wouldn't be granted relief from 18 any penalties either. 19 MR. HORTON: So is -- I mean I'm -- I'm 20 good with it. As long as we have some regulatory 21 authority over the rebuttable presumption, it's not 22 automatic, but for the most part the Board has the 23 authority to make that call. I think it's a good 24 deal. 25 Move support. 26 MS. MA: Okay. There's a motion to 27 support. 28 MS. STOWERS: Madam Chair, I'm going to 12 1 abstain from this one. 2 MS. MA: Okay. 3 Is there a second? 4 MS. HARKEY: Yes, second. 5 MS. MA: Okay. Ms. Harkey, to second. 6 Let's take a roll call vote if that's 7 okay. 8 MS. RICHMOND: Chairwoman Ma. 9 MS. MA: Aye. 10 MS. RICHMOND: Ms. Harkey. 11 MS. HARKEY: Aye. 12 MS. RICHMOND: Mr. Horton. 13 MR. HORTON: Aye. 14 MS. RICHMOND: Mr. Runner. 15 MR. RUNNER: Aye. 16 MS. RICHMOND: Ms. Stowers. 17 MS. STOWERS: Abstain. 18 MS. RICHMOND: Motion carries. 19 MS. MA: Okay, thank you. Next item. 20 MS. PIELSTICKER: The next item is SB 13 21 Gaines. It's sponsored by the author. 22 Under existing law, beginning July 1, 2014 23 through July 1, 2022, we provide manufacturers and 24 certain other qualified researchers and developers a 25 3.9375 percent state sales and use tax exemption for 26 their qualifying tangible personal property 27 purchases such as machinery and equipment purchased 28 for use primarily in manufacturing activities. 13 1 Consumables with the useful life of less 2 than one year and a person's qualifying purchases 3 that exceed $200 million in a calendar year are not 4 qualifying purchases. Persons who apportion their 5 income or would be required to do so under specified 6 income tax provisions and persons whose businesses 7 are not primarily engaged in the specified 8 manufacturing or research related activities do not 9 qualify. 10 The proposed law makes the partial 11 exemption available to software publishers and 12 specified persons that conduct agricultural business 13 activities. It expands qualifying property to 14 include property with a warranty for a period of one 15 or more years and it increases the $200 million per 16 calendar year qualifying purchases cap to $500 17 million per calendar year. 18 Annual General Fund revenue loss is 19 estimated to be $43 million related to software 20 publishers and agricultural businesses. However, 21 reliable data is not available to determine revenue 22 impact from the other provisions. 23 We also have a statement from Senator 24 Gaines on this bill, as well, that we've been 25 requested to read into the record. 26 MS. MA: Yes, please. 27 MS. PIELSTICKER: "Madam Chair and Members, 28 thank you for your consideration of Senate 14 1 Bill 13, which aims to ensure all eligible 2 taxpayers are able to participate in the 3 state's partial manufacturing and research 4 exemption. Expanded participation will 5 provide greater fairness to taxpayers and a 6 vital boost to jobs and investment 7 throughout the state. 8 "As you may recall, in 2012 the 9 Legislature and Governor eliminated the 10 Enterprise Zone Program in its entirety and 11 replaced it with three new programs, 12 including the partial manufacturing 13 research exemption administered by the 14 Board of Equalization. 15 "The change was intended to be revenue 16 neutral. Unfortunately, despite strong 17 outreach efforts by the Board, the 18 exemption has fallen far short of its 19 intended reach. In fact, estimates show 20 only 21 percent utilization compared to the 21 original Department of Finance and BOE 22 estimates. 23 "The underutilization problem stems 24 from the way the law was drafted. As a 25 result, many other otherwise qualified 26 taxpayers, including small business owners, 27 software publishers, and agricultural 28 businesses, are unable to claim the 15 1 exemption. 2 "In its annual report to the 3 Legislative Budget Committee, the BOE 4 provided the following suggestions to the 5 Legislature to increase utilization: 6 Revise the statutory language regarding 7 the definition of "useful life" and to 8 include an additional test; increase the 9 amount of the $200 million cap on purchases 10 in each calendar year; and expand the 11 definition of a qualified person eligible 12 to claim the partial exemption. 13 "SB 13 simply adopts the BOE's 14 suggestions, allowing businesses to make 15 equitable use of the partial exemption, 16 thereby moving the partial exemption 17 towards the revenue neutrality intended 18 when the Enterprise Zone Program was 19 eliminated. 20 "For these reasons, I urge your 21 support of the bill." 22 I'm happy to answer any questions. 23 MS. MA: Mr. Runner. 24 MR. RUNNER: Yeah, this is, uh, I think an 25 issue we've kind of dealt with before when we've had 26 some -- some of the issues before us, uh, in regards 27 to those trying to qualify, uh, for the exemption. 28 And it really goes back to what the intent was of 16 1 the original effort. The original effort did roll 2 back some -- some tax benefits that were available, 3 uh, through, uh, enterprise zones. And then when 4 the Legislature moved forward with it, they created 5 this, uh -- this neutral exchange between these 6 exemptions and then the enterprise zone, uh, which 7 then made it so that they -- in terms of -- I guess, 8 in terms of revenue to the state remained in -- 9 would remain the same, impact it differently, uh, 10 or it would impact the state the same. 11 And of course what happened is the 12 description that ended up being in the Legislature 13 was so narrow, uh, that they could not attain the -- 14 the benefits to the taxpayers as was intended. Uh, 15 and so as a result of that there was a review of 16 what other kinds of things that could be added or 17 changed in this in order to bring up then to -- 18 closer to the goal that was set in regards to the -- 19 benefit the taxpayers as a result of doing away with 20 the enterprise zone. Um, and then this is the list 21 of those kinds of things. 22 So, um, it -- it makes a lot of sense. It 23 just seems to me that was the intent when the 24 Legislature was done. It was really the story that 25 the people were told, uh, by both the Governor and 26 the Legislature, uh, when we were -- when we were 27 going to take away the enterprise zone. So we're 28 out really, I think in one way, helping to fill -- 17 1 fulfill the intent of that exchange that was 2 supposed to take place there. 3 MS. MA: Ms. Stowers. 4 MS. STOWERS: For this particular bill, I 5 appreciate the change in the definition of "useful 6 life" because I know we've definitely dealt with 7 that. We tried to do it through regulation and it 8 did not go through. I do believe that that's very 9 important to have so that more taxpayers will 10 qualify. 11 Um, I was shocked to learn that 12 agricultural on that during manufacturing is not 13 benefiting from the exemption. But the -- the other 14 provisions of the bill does give me pause to expand 15 it into, uh, the software publishers and to increase 16 the cap. 17 My notes are indicating 30 million -- 30 18 million loss revenue impact for ag. and software 19 publishers, and increasing the cap an estimate 20 couldn't be determined. 21 So because of the revenue impact, I -- we 22 cannot support this bill. 23 MR. HORTON: Madam Chair. 24 MS. MA: Mr. Horton. 25 MR. HORTON: Thank you, Madam Chair. 26 I think it's wise that we -- we try to 27 figure this out, what the expansion of the 200 28 million to the 500 million, what does that mean? 18 1 You know, this account as many of the 2 deductions put forth by the Legislature is zero sum 3 gain. And what happens is, is that oftentimes many 4 of these funds aren't used, which kind of makes this 5 bill a good thing. Uh, if all of these funds were 6 being used, then it would be a determination as to 7 whether or not you want to expand it to include 8 other individuals, which is -- goes back to the 9 intent of the Legislature as they sort of juggle all 10 of the exemptions that they provide. 11 And I know for the agricultural industry 12 there are a number of exemptions that they provide. 13 And when they go through that process, they're sort 14 of making a decision as to whether or not they want 15 to add on to those deductions. But that's a 16 decision for the Legislature. 17 Conceptually, uh, from my perspective, 18 should it be expanded? Certainly. Had issues with 19 taking away the redevelopment fund and -- and its 20 origin. Um, but in taking it away, it affected many 21 socially, economically challenged communities. And 22 the objective was to assure that those 23 communities would -- businesses that still operate 24 in those communities would have a benefit. I think 25 this would be indicative of the farm area, the 26 social economic element in the determination. 27 Um -- the, um -- um, the concern that I 28 have, even -- quite frankly, and I -- the concern 19 1 that I have is the categories, uh, who picks will be 2 included, the software and the farmers, software 3 industry and the farm industry, and what was the 4 basis for picking those? 5 But conceptually, I'm supportive of that. 6 I would ask, though, that one of the -- one of the 7 industries that has had a huge challenge over the 8 last few years is the independent film makers, uh, 9 and doing business. And what we've discovered is 10 that the majority of the independent film makers are 11 now doing their films outside of the State of 12 California. 13 Spielberg was just recently received an 14 award for doing a film in Australia somewhere 15 because of the tax credits and incentives to do 16 that. 17 So, whereas, I'm supportive of the -- of 18 the software publishers industry and the food 19 manufacturers, I would also ask that they include in 20 this as individuals who could take advantage of this 21 would be the independent film makers, because I 22 think for every -- it would be beneficial to 23 California as well, as far as providing a credit 24 that actually stimulates the creation of jobs and 25 revenue for the State of California. 26 MS. MA: So, I would agree also. I mean 27 the intent is good. I also wonder why just these 28 two industries are included and not more perhaps. 20 1 I would like to hold off at this moment and 2 kind of follow the bill and see who is supporting 3 and who is opposing the bill, um, as we move 4 forward. 5 As you know, these type of bills are 6 probably going to be a little more controversial 7 than we all think. But, um, if we can maybe bring 8 it back at our next meeting, just get some more 9 updates on, you know, why these industries were 10 chosen and what the real cost estimates are, is 11 going to be obviously a concern to some of us. 12 So, um, can we just move to hold off on 13 this bill? 14 MR. RUNNER: Let me just -- let me just 15 double-check on one thing, too. Again, I'm 16 double-checking here. But the issue was there was a 17 cap related, too. So the issue of overextending in 18 terms of additional revenue over the intent would 19 not exist, right? 20 MS. HARKEY: Right. 21 MR. RUNNER: The original bill had a -- had 22 a cap. 23 MS. PIELSTICKER: Oh, right. 24 MR. RUNNER: Right. So the idea of the 25 revenue losses would never exceed the amount of the 26 original agreements that were made in the 27 Legislature. 28 MS. PIELSTICKER: Well, I believe that this 21 1 bill would propose increasing that cap from 200 2 million to 500 million. 3 MS. STOWERS: Isn't that cap per person, 4 per -- per entity, per year? 5 MS. PIELSTICKER: Yes. 6 MS. STOWERS: It's not like -- 7 MR. RUNNER: Total. 8 MS. STOWERS: -- only 200 million was set 9 aside per year for the exemption. 10 MS. PIELSTICKER: Right. 11 MS. STOWERS: No allocation here. 12 MS. PIELSTICKER: Correct. 13 MR. RUNNER: Okay. Well, let's bring it 14 back and we'll talk some more. But I think the key 15 -- the key is -- to me the issue for us is, you 16 know, we've all had the industry -- different 17 industries and if there's others that need to be 18 talked to or dealt with, that -- that -- that's 19 fine. 20 I think the point that I think is important 21 for us that I think it's okay for -- it would be 22 okay for -- it'd probably, I think it's okay for us 23 to take the leadership position when it is that the 24 Legislature or the Governor promises something to 25 taxpayers, that we actually fulfill it. 26 MR. HORTON: Madam Chair. 27 MS. MA: Mr. Horton. 28 MR. HORTON: I mean, such that the -- the 22 1 Senator Gaines has sort of brought this forward to 2 the Legislature, uh, maybe if the Senator was to not 3 specify and deal with the issues that restrict 4 taxpayers from being able to participate, uh, the 5 issue should they be expanded because expanding it 6 makes it economically viable for someone to actually 7 take the credit and spend the time and should there 8 be the useful life be expanded and leave it at that. 9 There will probably be several bills on 10 this. And all of that will -- who gets the benefit 11 is probably going to be one of the major debates. 12 But I commend the Senator for taking the leadership 13 thus far. And such that he has somewhat taken this 14 leadership, uh, you know -- 15 MS. MA: Keep working on it. 16 MR. HORTON: Yeah. Yeah. There you go. 17 MS. MA: Okay. All right. So we'll bring 18 this back at a future meeting and more discussion 19 and research and analysis. 20 Thank you very much, Ms. Pielsticker. 21 This concludes the meeting of the 22 Legislative Committee. 23 ---oOo--- 24 25 26 27 28 23 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization state 9 that I transcribed from recorded audio, to the best 10 of my ability, the proceedings in the above-entitled 11 hearing; and that the preceding pages 1 through 23 12 constitute my transcription of the proceedings. 13 14 Dated: March 24, 2017 15 16 17 ____________________________ 18 KATHLEEN SKIDGEL, CSR #9039 19 Hearing Reporter 20 21 22 23 24 25 26 27 28 24