1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 25, 2016 10 11 12 13 14 ITEM F 15 PUBLIC HEARING 16 ITEM F1 17 PROPOSED AMENDMENTS TO SALES AND USE TAX 18 REGULATION 1703, INTEREST AND PENALTIES 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 of Equalization: Fiona Ma, CPA 4 Chairwoman 5 Diane L. Harkey Vice Chair 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 Joann Richmond 13 Chief Board Proceedings 14 Division 15 For Board of Equalization Staff: Scott Claremon 16 Tax Counsel III Legal Department 17 Bradley Heller 18 Tax Counsel IV Legal Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 25, 2016 4 ---oOo--- 5 MS. MA: Okay. Ms. Richmond, next item, 6 please. 7 MS. RICHMOND: Our next item is item F 8 Public Hearing; Item F1 Proposed Amendments to Sales 9 and Use Tax Regulation 1703, Interest and 10 Penalties. 11 MS. MA: Okay. This item does require a 12 vote. 13 To the Department, please commence your 14 presentation by introducing yourself for the 15 record. 16 MR. CLAREMON: Good afternoon, Chairwoman 17 Ma and Members of the Board. I'm Scott Claremon 18 with the Legal Department. With me is Brad -- 19 Mr. Bradley Heller. 20 We are requesting the Board vote to adopt 21 the proposed amendments to Sales and Use Tax 22 Regulation 1703, Interest and Penalties. 23 Consistent with the Board's longstanding 24 policy, the proposed amendments clarify that a 25 negligence penalty should not be -- generally be 26 imposed on a first-time audit unless the evidence 27 indicates that the taxpayer's errors cannot 28 reasonably be explained by the taxpayer's 3 1 inexperience. 2 Thank you. 3 MR. HORTON: Mm-hmm. 4 MS. MA: Any discussion? 5 Mr. Horton. 6 MR. HORTON: Yeah, Madam Chair. 7 Um, I'm supportive of this, but I do think 8 it's somewhat redundant. 9 But, um, I think -- well, let me clarify. 10 The statement that this is consistent with 11 current practice, um, is -- is true in that the, 12 uh -- the majority of the, uh, negligence penalties 13 that are assessed, you know, they follow this basic 14 rule that if it's a first-time audit and there is no 15 experience. 16 The inherent concern that I have is that I 17 think there needs to be additional direction to the 18 staff, through the Audit Manual, to sort of clarify, 19 if you will, the term "experience." 20 You have -- the audits are conducted 21 generally on a three-year period, which means that 22 the taxpayer has been operating for at least four 23 years before an auditor is there. And in a 24 four-year period of time, you know, the average 25 person is going to develop a level of experience as 26 far as determining whether or not they're making 27 profits, establishing their cost analysis, paying 28 their payroll and so forth and so on, even if they 4 1 don't hire a professional. 2 The circumstances in which there is no 3 negligence penalty is when the records are there, 4 uh, or some sort of records there but there's an 5 error that's somewhere. They made an error, they've 6 made a calculation error, an unintentional error on 7 their part that is due to -- to -- to experience. 8 But, uh, anyway, I'm supportive. Move 9 adoption. You know what I mean. 10 I just don't want -- I just don't want 11 confusion out there. Because with confusion, trying 12 to determine experience as an auditor, uh, you end 13 up with more negligence penalties because the -- the 14 statement in -- in the regulation basically says 15 that there's evidence, the lack of experience, but 16 yet still -- but if negligence exists, then the 17 penalty is due. 18 So it's on -- the determination turns on 19 whether or not they have experience. Well, if the 20 auditor is there four years after starting, 21 operating, setting up a business, running a business 22 for four years, there's a presumption that there's a 23 level of experience there in order for them to have 24 been able to operate for that period of time. 25 But, you know, I guess there could be 26 situations where you could operate a business for 27 four years and not have any experience with 28 accounting and keeping tracks of your sales and cost 5 1 of goods and all of those things. 2 So, when that circumstance exists is what 3 this basically says. And I think it should be 4 broader, quite frankly. But I don't know if we can 5 go there given the statutory restrictions. 6 I think that kind of gets my point 7 across. 8 MS. MA: Okay. So we had a motion by Mr. 9 Horton, a second by Mr. Runner, to adopt staff 10 recommendation. 11 Without objection, motion carries. 12 Thank you. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 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 certify 9 that on October 25, 2016 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 6 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: October 26, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 7