1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 APRIL 28, 2015 10 11 12 13 14 15 LEGISLATIVE COMMITTEE 16 17 18 19 20 21 22 23 24 25 REPORTED BY: Kathleen Skidgel 26 CSR NO. 9039 27 Juli Price Jackson 28 CSR NO. 5214 1 1 P R E S E N T 2 3 For the Board of Equalization: Fiona Ma, CPA 4 Chair 5 Jerome E. Horton Member 6 Sen. George Runner (Ret.) 7 Member 8 Diane L. Harkey Member 9 Yvette Stowers 10 Appearing for Betty T. Yee, State Controller 11 (per Government Code Section 7.9) 12 13 Claudia Lopez Staff Services Manager II 14 Board Proceedings Division 15 Joann Richmond 16 Chief Board Proceedings 17 Division 18 19 For the Department: Michele Pielsticker Chief, Legislative and 20 Research Division 21 Cindy Wilson Business Taxes 22 Specialist III Legislative and Research 23 Division 24 Joe Fitz Chief, Research and 25 Statistics Division 26 Kevin Hanks Chief, Sales and Use Tax 27 Department 28 ---oOo--- 2 1 INDEX OF SPEAKERS 2 SPEAKER PAGE 3 Freddie Quintana Legislative Aide Assemblymember Gomez 5 4 Marvin Pineda 5 Capitol Strategies Group 7 6 Travis Allen Assemblymember 16 7 Stephanie Freedman 8 Assistant to Assemblymember Allen 16 9 Tim Gibbs American Cancer Society 37, 77 10 Lindsey Freitas 11 American Lung Association 40, 78 12 Jay McKeeman California Independent 13 Oil Marketers Association 67 14 Alberto Torrico Assemblymember 87 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 28, 2015 4 ---oOo--- 5 MR. HORTON: Members, our next order of 6 business is the Legislative Committee, of which 7 Member Fiona Ma is the Chair. 8 Madam Chair. 9 MS. MA: Thank you, Mr. Chair. 10 We are going to start our Leg. Committee 11 now, Michele Pielsticker. And we'll just go in 12 order on the agenda. 13 MS. PIELSTICKER: Okay. 14 MS. MA: First item. 15 MS. PIELSTICKER: Good morning, Madam 16 Chair, Members. The first item is AB 88 by 17 Assemblymember Gomez. The subject is sales and use 18 tax exemption on energy or water efficient home 19 appliances. 20 Existing law imposes the sales or use tax 21 on energy efficient appliance sales and purchases to 22 the same extent as it imposes the tax on any other 23 tangible personal property sales that are not 24 otherwise statutorily exempted or excluded from tax. 25 While the law statutorily exempts tangible 26 personal property sales to the United States 27 Government, current law contains no statutory 28 exclusion or exemption merely because the purchaser 4 1 is a utility company or a local government agency. 2 This bill provides a sales and use tax 3 exemption for a public utility's energy and water 4 efficient home appliance purchases that are provided 5 at no cast to low income participants in an energy 6 efficiency program. 7 The purpose of the bill is to eliminate the 8 tax imposed on the utility company's purchase of 9 these energy and water saving appliances as the 10 addition of tax decreases the available funds 11 dedicated to replace them. 12 The estimated annual revenue impact is 13 $12.8 million State and local revenue loss. And the 14 status of the bill is that it currently sits in the 15 Assembly Revenue and Taxation Committee suspense 16 file. 17 MS. MA: Okay. We have two folks who have 18 signed up to testify, Mr. Freddie Quintana, 19 Legislative Aide to Assemblymember Gomez and 20 Mr. Marvin Pineda, Capitol Strategies Group. 21 ---oOo--- 22 FREDDIE QUINTANA 23 LEGISLATIVE AIDE TO 24 ASSEMBLYMEMBER GOMEZ 25 ---oOo--- 26 MR. QUINTANA: Thank you, Madam Chair and 27 Members. My name's Freddie Quintana. I'm with the 28 office of Assemblyman Jimmy Gomez. 5 1 I want to thank you guys for considering a 2 position on Assembly Bill 88 which aims to maximize 3 the amount of ratepayer funds used to provide energy 4 and water efficient appliances to low income 5 Californians. 6 This bill would provide sales and use tax 7 exemption for energy and water efficient home 8 appliances purchased by the public utility that are 9 provided for low income Californians at no cost. 10 The legislation also requires that any savings that 11 results from this program to go back to the program 12 that -- to maximize the amount of dollars that are 13 already being prescribed by the PUC to the utility 14 to pay for these energy efficient appliances within 15 the program. 16 The -- the target group of these low income 17 Californians are individuals who -- who just don't 18 simply have the ability to purchase -- for the most 19 part who don't have the means as it is to purchase 20 these appliances on their own. These often can 21 be -- these energy efficient appliances can often be 22 something that they don't have the means to purchase 23 because of the restraints of the economy or their 24 household income. And thus, we want to give them a 25 tool to have access to these energy efficient and 26 water efficient appliances. 27 This is also a measure that we feel is 28 consistent with Governor Brown's recent drought 6 1 Executive Order in which he directs the California 2 Energy Commission and the Water Board to implement a 3 statewide appliance rebate program for the 4 replacement of inefficient household appliances. 5 And I know that going forward as this bill 6 sits on the Assembly Revenue and Taxation Committee, 7 we are working with the Committee and with -- and we 8 want to continue working with the BOE to make sure 9 that we make this bill the best bill that it can be 10 and operable to -- to assist Californians across our 11 State. 12 And I thank you for your time. 13 ---oOo--- 14 MARVIN PINEDA 15 CAPITOL STRATEGIES GROUP 16 ---oOo--- 17 MR. PINEDA: Marvin Pineda with Capitol 18 Strategies Group here on behalf of our client 19 Appliance Recycling Centers of America. Dennis 20 Loper is head of Capitol Strategies Group. 21 We've, uh -- we've been working with 22 Assemblymember Gomez's office to ensure that this 23 bill passes so that we could continue to serve ten 24 percent families. If -- if -- if the bill would 25 fail, that means it reduces by ten percent the 26 number of families that are served. 27 Just an example, in southern California, 28 there's 140,000 refrigerators and washers have been 7 1 installed. So if you -- if this wasn't -- the bill 2 was not to, uh -- to be enacted, then it would 3 reduce by ten percent. So you're talking about a 4 significant amount of low income families. 5 At the Legislature there's bipartisan 6 support for the bill. There's about 24 co-authors. 7 There's a business component in here; and that is 8 that the savings that result from the tax exemption 9 would generate revenue because that means more 10 people would be employed to install the appliances 11 and that means there's more appliances being put 12 into the market. 13 We thank you for considering the bill, and 14 I know Mr. Horton's in support of the bill and we 15 appreciate that. And I'm here to answer any 16 questions. 17 MS. MA: Okay. Members, any questions? 18 Mr. Chair. 19 MR. HORTON: Madam Chair, thank you. 20 I wanted to voice my -- my -- my support of 21 the bill and to ask staff to take a look at the 22 revenue estimate that's been assigned to the 23 legislation. 24 The -- currently, I believe that the -- 25 Oh, wow, where's my brain? 26 MR. PINEDA: I -- I -- if I may. The -- 27 the BOE analysis takes into account not only washers 28 and refrigerators, but they take evap coolers, 8 1 lights and other appliances that are -- that 2 wouldn't fit under the bill. So we -- we intend to 3 also narrow the bill to those appliances. So it 4 should bring the estimate down. 5 MR. HORTON: That should be helpful as 6 well. But under the sales and use tax law, the 7 retailer has the option of actually selling these 8 items at 50 percent of its cost as opposed to -- 9 just a little bit above 50 percent of its cost is 10 still considered a retail sale. 11 If they were to do that, then that in and 12 of itself would reduce the taxable measure and 13 reduce the revenue to the State, regardless. Even 14 if the bill did not pass and they made the -- they 15 took the consideration to actually take advantage of 16 that and reduce their cost, which they have the 17 option of doing and still be considered a retail 18 sale. 19 I'd ask the staff to take a look at that 20 and give that some consideration in estimating what 21 our revenue loss could be because that is what I 22 believe the option that they would exercise. They 23 would actually exercise the option and thereby 24 reduce the overall cost. 25 And then if we could possibly have our 26 economist kind of take a look at and consider the 27 additional jobs and what that -- what that 28 extrapolates out as far as revenue, or potentially 9 1 could, revenue to the State of California. 2 MS. PIELSTICKER: Thank you, sir. Our 3 estimates have traditionally been static estimates, 4 but we will take a look as you have asked. 5 MS. MA: So can I -- can I also ask, so 6 you're going to narrow the bill to just washers and 7 refrigerators? 8 MR. QUINTANA: We're -- we're coordinating 9 with the Revenue and Taxation Committee. The 10 request was that what we currently have in place was 11 very expansive and we're trying to set it to a -- an 12 exhaustive list of appliances that we're targeting 13 to make sure that they get to these low income 14 families. So it's going to tweak as we move forward 15 in the Suspense Committee mid-May. 16 MS. MA: So how much are these energy 17 efficient washer and dryers these days? 18 MR. PINEDA: On average, about $500. 19 MS. MA: Okay. 20 MR. PINEDA: So it is a significant amount. 21 And not only does the family get the energy 22 efficient and water efficient appliances, but then 23 those appliances come with warranties. So that 24 means for years they will not have to pay 25 out-of-pocket expenses for repairs. 26 MS. MA: And then their utility bills 27 presumably are going to be lower, right? 28 MR. PINEDA: Yes, exactly. 10 1 MS. STOWERS: Chairman. Chairman. 2 MS. MA: Yes. 3 MS. STOWERS: When the utility companies 4 acquire the appliances, do they get any 5 reimbursement from federal funds? 6 MR. PINEDA: My -- my understanding is 7 that -- I don't have that exact answer for you. I 8 could get back to you on that. But it's -- I know 9 that they -- and I'm not going to answer your 10 question because I don't know it. But they -- what 11 they do is they recycle, they recycle the appliances 12 to make sure that everything's done appropriately, 13 nothing's dumped anywhere. But my understanding is 14 that they don't. 15 MS. STOWERS: There's no federal funding 16 for the program? 17 MR. PINEDA: Correct. It's all utility 18 ratepayer funded. 19 MS. MA: I have one more question. What 20 about toilets and air-conditioners, are these going 21 to be part of the bill? 22 MR. PINEDA: They won't be part of the 23 bill. 24 So what you have is that you -- washers are 25 water efficient certified. And then you have 26 refrigerators that are energy efficient certified. 27 So what we're doing is we're -- we're 28 basing the bill on appliances that are -- have 11 1 proven to be effective. And the more we expand the 2 bill, the more difficult it is for the bill to move 3 through the Legislature. 4 MS. MA: Well, I understand. So we're 5 talking about water conservation right now. How 6 much water savings does like an energy efficient 7 toilet -- 8 MS. HARKEY: Those are -- 9 MS. MA: -- save? Do they work or not 10 work? 11 MR. PINEDA: I -- I -- our client mainly 12 does appliances, so I wouldn't know. I'm -- I'm 13 sure that the answer's likely -- most likely yes, 14 and I could look for that information for you. 15 MS. MA: Okay. 16 Ms. Harkey. 17 MS. HARKEY: I believe I just read that 18 like 1.28 gallons per flush is an energy efficient. 19 And it just depends on how many times you flush. 20 But no. 21 And those, I do believe, Ms. Ma, are 22 covered under another rebate program for installing 23 water efficient appli -- not appliances but toilets 24 and faucets and whatnot. 25 MR. HORTON: Madam Chair, may I? 26 Just out of curiosity, as you head towards, 27 hopefully, the Appropriation Committee, any thought 28 given to having the local counties participate and 12 1 the local utilities somehow participate in the cost? 2 I understand the relationship as it relates 3 to the ratepayers and so forth. But the benefit is 4 is the overall environmental footprint in the -- in 5 the particular counties and uplifting the 660,000 6 individuals that are now considered working poor 7 within the State of California is a challenge that 8 we all face. 9 MR. PINEDA: So the bill currently applies 10 to public utilities and municipalities own 11 utilities. So some of them won't get this 12 exemption. Some of them, the municipality own 13 utilities will get the exempt -- that exemption 14 would apply to them. 15 So SMUD, for instance, that exemption would 16 apply to them where they would be exempt and then 17 have to use those funds to purchase more appliances. 18 Does that answer your question? 19 MR. HORTON: The question was somehow 20 reaching out to the counties and -- the counties, 21 county supervisors and that branch of government, to 22 see if they themselves are willing to absorb part of 23 the cost. 24 I'm not suggesting that we do that now, but 25 as it heads for Appropriations, costs may very well 26 be a factor, just in beginning the process to take a 27 look at if that's feasible and if there is a way in 28 the current system to allow SMUD and the rest of 13 1 them to also incorporate that as part of their 2 gift-giving, if you will. Each of them have a 3 corporate giving structure. I don't know. A 4 million, two million. Every little bit will be 5 helpful, I believe, to the Appropriation 6 Committee. 7 MR. QUINTANA: Mr. Horton, I -- I'd be more 8 than happy to engage with -- I know we've been 9 having conversations with the League of California 10 Cities and the CSAC, to have those conversations 11 about their concerns about our bill. 12 I'd be more than happy to have that 13 conversation with them to see if there's something 14 we can coordinate with. And I'll circle back with 15 your office just to make sure we get a clear vision 16 of how that conversation's going. 17 MR. HORTON: Okay, thank you. 18 Thank you, Madam Chair. 19 MS. MA: Okay. 20 Any other questions? 21 MR. RUNNER: Yeah, just real quick. I 22 assume -- in terms of some of the opposition, I 23 assume it's because -- from the local revenue side? 24 MR. QUINTANA: Yes. 25 MR. RUNNER: That you're not exempting 26 local revenue in terms of their -- their portion. 27 It's a full exemption as opposed to a partial? 28 MR. QUINTANA: Correct. 14 1 MR. RUNNER: Okay. 2 MS. MA: Okay. Any other questions? 3 Members, should we take a vote? 4 MR. HORTON: Move support, Madam Chair. 5 MS. HARKEY: I'll second. 6 MS. MA: Okay. The bill has been moved and 7 seconded. By unanimous consent? Okay. Yes. 8 We will -- the BOE will be sponsoring your 9 bill. 10 MR. RUNNER: Supporting. 11 MS. MA: Supporting. Supporting. 12 MR. QUINTANA: Thank you. Thank you for 13 your time. 14 MS. MA: Okay. The next item. 15 MS. PIELSTICKER: Next item is AB 89 by 16 Assemblymember Allen. It is related to a sales and 17 use tax exemption on public schools. 18 In general, public and private schools and 19 school districts are required to pay sales and use 20 tax on their purchases of tangible personal property 21 to the same extent as any other individual or 22 business in the State. In fact, local government 23 agencies, as well as the State of California, are 24 generally required to pay sales and use tax on their 25 purchases of tangible personal property. 26 The bill provides a partial 3.9375 percent 27 sales and use tax exemption for items purchased by a 28 K-12 public school or a K-12 public school district 15 1 for use by that school or district until January 1, 2 2021. 3 The purpose of the bill is to reduce 4 financial burdens on public schools and help them 5 provide better materials and resources to their 6 students. The annual revenue -- General Fund 7 revenue loss would be $76 million, and the bill is 8 currently scheduled to be heard in the Assembly 9 Revenue and Taxation Committee on May 4th. 10 MS. MA: Okay. 11 Here with us today is Assemblymember Travis 12 Allen, the sponsor of the bill, and his assistant. 13 ---oOo--- 14 TRAVIS ALLEN 15 ASSEMBLYMEMBER 16 ---oOo--- 17 MR. ALLEN: Thank you very much. 18 I'm here to present the Assembly Bill 89, 19 Investing in our Local Public Schools Act. AB 89 is 20 a simple bill that exempts public schools from the 21 State sales and use tax. 22 It's important to note that this bill only 23 addresses taxes that are going into the General Fund 24 and not the taxes that are going back to our local 25 communities. 26 Since 1978, California schools have relied 27 on the State budget to help fund our education 28 department. The 2013-'14 school year saw the 16 1 implementation of the new LCFF, the Local Control 2 Funding Formula, which created base, supplemental 3 and concentration grants in place of most previously 4 existing K through 12 funding streams. 5 According to the Center on Budget and 6 Policy Priorities, the '13-'14 school year saw 7 California spend 13.8 percent less per student than 8 it had in past years. This equates to a loss of 9 $873 per student. 10 California's currently ranked 38 in 11 expenditures per student and fell seven percent 12 below the national average in 2013. The average per 13 fall enrollment is $10,000 -- I'm sorry, $10,938 per 14 student nationally, yet California currently spends 15 only $9,060 per student. 16 AB 89 will help our local schools provide 17 better resources and materials inside the classroom 18 by allowing them to retain all of their funds 19 without being forced to pay State sales taxes on the 20 purchase of supplies. 21 Currently our public schools are subject, 22 as are all other entities in California, to the 23 State's 7.5 percent sales tax, yet our public 24 schools are funded by our tax dollars in the first 25 place. This is creating a double tax situation on 26 California taxpayers' money. So by taxing public 27 schools, the State is actually taking money out of 28 our local classrooms. 17 1 For example, last year L.A. Unified spent 2 over $50 million on supplies which generated about 3 $4 million in taxes that then had to be paid. 4 Simply put, reforming the current tax code will 5 distribute more local and community funds to our 6 students and our school districts. 7 This bill's earned the support of local 8 unified school districts as well as the California 9 Small School Districts Association. 10 With California currently ranked 46 in the 11 nation in providing quality education to our 12 children, it's our belief that we need to ensure 13 that our students and our public schools need to 14 have the appropriate resources to best educate our 15 next generation. AB 89 represents a great first 16 step in making this happen. 17 Thank you for your consideration. 18 MS. MA: Thank you, Members. 19 Ms. Harkey. 20 MS. HARKEY: Hello, Assemblyman. How are 21 you? 22 MR. ALLEN: I'm doing great. Great seeing 23 you again. 24 MS. HARKEY: Good seeing you, too. 25 Where is this presently? Is it in 26 suspense? Is it on the agenda, on rev and tax? 27 MR. ALLEN: It is agendized. 28 MS. FREEDMAN: For May 4th. We might be 18 1 moving it to mid-May. 2 MS. HARKEY: Okay. Really good. 3 Do you have -- who's supporting the bill? 4 MR. ALLEN: So currently we have local 5 unified school districts, California Small School 6 Districts Association. 7 Are these all current? 8 MS. FREEDMAN: Specifically Los Alamitos 9 School District as well as Fountain Valley School 10 District. And we have more letters of support 11 coming in. 12 MS. HARKEY: Okay. Yeah, it's hard to get 13 those circulated. 14 MR. ALLEN: That's right. 15 MS. HARKEY: Who -- what's your opposition 16 and what are -- what are the points? 17 MR. ALLEN: The current opposition that we 18 have listed is California Teachers' Association, and 19 they're worried about the hit to the General Fund. 20 MS. HARKEY: Of 76 million. 21 MR. ALLEN: Correct. Yes. 22 MS. HARKEY: Okay. Thank you, very much. 23 I wish you luck. 24 MR. ALLEN: Thank you. 25 MS. MA: Ms. Stowers. 26 MS. STOWERS: Yes. Is it for all items or 27 is it just limited to instructional items for the 28 schools? 19 1 MR. ALLEN: Steph? 2 MS. FREEDMAN: Instructional items, school 3 purchases and supplies. 4 MS. STOWERS: As in books, computer labs? 5 MS. FREEDMAN: Computer labs, printers, so 6 on and so forth. 7 MS. STOWERS: Well, in our analysis, staff, 8 we said we had "any" and gave an example of, I 9 believe, a vehicle? 10 MR. RUNNER: Yeah our says "vehicles." 11 MS. STOWERS: I was -- I was concerned with 12 that. 13 MS. PIELSTICKER: That is -- our analysis 14 is that it's any tangible personal property. 15 MS. STOWERS: Is there any consideration to 16 maybe making it a little bit more limited so that's 17 just instructional materials? 18 MR. ALLEN: We are absolutely open to 19 working with the BOE and your staff to craft a bill 20 that's going to get the most money back to our 21 schools. 22 That was actually one of our big purposes 23 of coming today, to -- to open the dialogue. And 24 this is why we potentially looked at moving our 25 hearing back to mid-May, so we can work with you. 26 We're looking forward to -- to hopefully gain your 27 full -- full support in this. We'd love to see this 28 moved forward. So if this is something we can look 20 1 at, we'd love to look at it. 2 MS. FREEDMAN: To clarify, the CTA has not 3 formerly come out in opposition quite yet. They've 4 expressed some concerns, but there's no formal 5 letter of opposition that has been submitted to the 6 Committee. 7 MS. MA: So it does kind of seem like we 8 collect tax, which means more goes to the General 9 Fund, which goes back to the schools. 10 MS. HARKEY: And we tax it again. 11 MS. MA: And are we taxing it again? 12 MR. ALLEN: You see my point. 13 So, currently, of the seven and a half 14 percent -- seven and a half percent State sales tax, 15 3.9375 percent of that goes to the General Fund. 16 And that's what this bill would address. 17 So, as opposed to sending it to the General 18 Fund and then having a portion of that come back to 19 schools with Prop 98 funding levels, etcetera, this 20 would just keep all of the money directly at the 21 local level with our schools. Which we believe is 22 consistent with what, you know, the taxpayers in 23 California are looking for. You know, voters want 24 the money to go to the schools and stay there, to be 25 spent for education. 26 MS. MA: Mr. Runner. 27 MR. RUNNER: Yeah, just quick, kind of 28 procedure question. How do -- how do you see this 21 1 actually happening in the terms of a school 2 district? 3 So they have this exemption, partial 4 exemption, and they need to go buy something at the 5 local store. How -- how do you -- because this -- 6 my issue is often times with these bills is how does 7 this actually work out in the real world when it is 8 that we go out and audit and, you know, somebody's 9 got to go buy something and now they don't have 10 full -- they have a partial exemption. How do you 11 envision that part of the process? 12 MS. FREEDMAN: The legislation as it's 13 drafted now has not specifically written out the 14 criterias how this would roll out, which is why we 15 are approaching you to discuss the theme of the bill 16 and hopefully work with your staff to talk about 17 implementation and specific logistics. 18 MR. RUNNER: Okay. So like, for instance, 19 an individual teacher goes out and buys -- needs to 20 buy some construction paper, would it apply to that 21 setting or would it have to be the school district 22 that would actually purchase it? 23 MS. FREEDMAN: It would be a school 24 district. 25 MR. RUNNER: So the school district would 26 have to actually make the purchase, not the 27 individual. 28 MS. FREEDMAN: Correct. 22 1 MR. RUNNER: Okay. Let me -- again, I get 2 the big picture in regards to the idea of schools 3 and making sure that these dollars don't go to -- 4 you know, that are -- that are now being a part of a 5 sales tax going then to -- to the State and then 6 leaving behind then more money for the school. 7 But can't that same argument be made for 8 community colleges, for hospitals that are 9 government hospitals, for cities or counties? I 10 mean, it's really -- isn't it kind of the same 11 challenge in terms of a -- the philosophy? You're 12 paying a tax and you're then having to know that 13 some of that money is going to be, you know, 14 coming -- coming -- you're going to pay it and it's 15 going to be coming back and not all of it? 16 I mean, I guess that's where I struggle or 17 where, for instance -- 18 And again, this is just K-12, right? 19 MR. ALLEN: Correct. 20 MR. RUNNER: So, you know, a preschool 21 program that is government -- State-funded, wouldn't 22 they end up with the same situation? 23 MR. ALLEN: I think it's -- 24 MR. RUNNER: Philosophically? 25 MR. ALLEN: Yeah, I think it's an excellent 26 point. I mean it really doesn't make sense if we're 27 sending this money to our entities, for them to go 28 execute the tasks with which they are tasked to 23 1 execute. And then we're taking a portion of their 2 funds back from them, only to be redistributed back 3 to them in the end. 4 We started with the K through 12 schools -- 5 MR. RUNNER: Mm-hmm. 6 MR. ALLEN: -- because if -- as I take a 7 look at California, probably the biggest problem we 8 have right now, other than the immediate concern of 9 water, is our education system. 10 So I think there's a great first step in -- 11 in taking a look at some reform. And I think the 12 beneficiaries of California students are probably, 13 you know, some of the best beneficiaries we could 14 choose, especially when funding levels with the 15 State are a couple thousand dollars lower than the 16 national average right now. 17 So I think you have a great point. I agree 18 with you entirely. When we took a look at the 19 priority of where we think this would be best -- 20 where this conversation would best be started, it 21 naturally came to education in schools. 22 MR. RUNNER: And again, that's part of my 23 challenge -- you know, I'm trying to -- I get it. 24 It's a good idea. But I'm trying to think it out in 25 terms of a logical conclusion. 26 So if you take the logical conclusion, 27 any time that, you know, the State ends up -- a 28 government-owned facility ends up, or program 24 1 service ends up paying a tax they shouldn't because 2 the money goes back to the government, my concern is 3 that many of those government agencies that compete 4 against the private side. For instance, whether you 5 go to community colleges, preschools, all of a 6 sudden -- and then I'm concerned that all of a 7 sudden you're giving a government-run program, you 8 know, kind of a competitive edge cost-wise at that 9 point to -- to the private sector. 10 So I guess that's kind of what I'm trying 11 to get my head around. 12 MR. ALLEN: I think it's a fair argument. 13 You know, as -- as I think about that, my first 14 reaction would be is that our public schools, they 15 kind of don't compete. They're kind of in a realm 16 of their own. 17 You know, we could say yes they're 18 competing against private schools, but that -- that 19 doesn't really reflect the reality. The majority of 20 education, K through 12, is done in our public 21 schools. 22 So I think that there is -- in other State 23 agencies, that might be more applicable than -- than 24 here in K through 12. But I think that here, you 25 know, this is, as I see it, relatively straight shot 26 because the majority of the education, an 27 overwhelming majority of education is done in our 28 public schools. 25 1 And -- and then to readdress your -- your 2 first point, I think you're exactly right that the 3 logic of sending money to our agencies and then 4 having them pay taxes back on that same money, it 5 seems like this -- it seems circular. 6 MR. RUNNER: Mm-hmm. 7 MR. ALLEN: And it doesn't seem like it's 8 going to get our desired result. 9 You know, if you're looking to send X 10 amount of dollars to an agency for them to 11 accomplish their task, they should be spending X 12 amount of dollars. But as we look at it, education 13 was the first thing -- 14 MR. RUNNER: Yeah. And I'm -- 15 theoretically, I'm in support of the concept. But I 16 got to just disagree when ten percent of the 17 students are educated in private schools. I'm not 18 sure that is basically then what you're basically 19 doing is asking them to compete at a higher -- at a 20 higher cost. And basically the goal is exactly the 21 same, to educate students effectively. 22 MR. ALLEN: I -- I can appreciate that. I 23 mean if the BOE is interested in potentially 24 extending that -- 25 MR. RUNNER: We're -- we're -- no, we don't 26 write the bills. 27 MR. ALLEN: Yeah. 28 MR. RUNNER: We don't write the bills. The 26 1 authors do. 2 MR. ALLEN: That's exactly -- you know, I 3 am the author of this and, you know, so this is 4 exactly the sort of conversation we're looking to 5 have. You know, if, you know in the collective 6 wisdom of the BOE if, you know, we say, look, we'd 7 like to extend this exemption to all educational 8 institutions, I'm open to that. 9 MR. RUNNER: Again, that's not -- that's 10 not what we do. 11 MR. ALLEN: Yeah, exactly. So -- so -- and 12 I guess, you know, with this, I'm looking for the -- 13 the perfect not to be the enemy of the good. 14 MR. RUNNER: Mm-hmm. 15 MR. ALLEN: And I think that the bill, as 16 written, takes a -- takes a first good bite. And it 17 gets the majority of what we're looking to do done. 18 And it's a great place. 19 I mean in the end of the day this is 20 $76 million we're talking about. It's not going to 21 be a huge dent, either to the General Fund, but what 22 it would do is it would be some substantive dollars 23 that we could send back to the classroom. And I 24 think the concept behind it is very 25 straightforward. 26 MR. RUNNER: Okay, thank you. 27 MS. MA: Ms. Harkey. 28 MS. HARKEY: Hi. I would just like to add 27 1 that I think part of the -- the issue, public and 2 private, is that this would be Prop 98 funds coming 3 back as opposed to, maybe, 76 million less. But 4 then in the long span probably more because when you 5 pay a tax it goes up, it gets divided. And then you 6 come back and you pay it again. You know, it kind 7 of has a -- has a, uh -- a growth factor. 8 So the private schools are not funded, as I 9 understand, by Prop 98 dollars. And that's really 10 what this affects, you know. 11 So I -- I, uh -- I understand Mr. Runner's 12 comment about competition, but I think this is 13 strictly a public school issue with regard to the 14 sales tax and how it gets distributed. 15 I also, I think if we could wind it down a 16 little bit such that it doesn't include vehicles and 17 others and is strictly for classroom supplies, I 18 think it's -- I think it's a good idea. It's a 19 place to start. It's at least a place to start the 20 conversation. And I do know that the schools under 21 LCFF, and whatnot, are struggling. They're 22 struggling to meet their -- meet their needs. 23 So I would support this, and I would like 24 to make a motion so doing as we work through it on 25 the BOE. 26 MS. MA: Okay. Any other discussion 27 before -- 28 MS. STOWERS: Just -- just clear up 28 1 supporting with the understanding that it be scaled 2 down? 3 MS. HARKEY: Supporting with the 4 understanding that we would -- we would limit it to, 5 as you said, Ms. Stowers, just strictly educational 6 supplies, not vehicles and other things. 7 MS. STOWERS: Second. 8 MS. HARKEY: Thank you. 9 MR. HORTON: Madam Chair. 10 MS. MA: Okay. Mr. Horton. 11 MR. HORTON: First, I want to commend the 12 author for bringing the bill forward. I remember in 13 2002 I sought to provide a credit to -- to the 14 teachers themselves on their income tax returns 15 because of the expenses that they put in, in paying 16 for supplies, that these are dollars that come out 17 of their pockets. 18 My teacher -- my sister's a teacher, aunt's 19 a teacher. So I'm surrounded by teachers who are 20 always complaining about having to dig into their 21 pockets to pay for these extra supplies. 22 Then we went through the whole process of 23 trying to look at the overall effect of doing so. I 24 didn't necessarily see it as a double taxation. But 25 I did see it as a redistribution of wealth, and so 26 that you're now redistributing the revenue to the 27 local entity so the local entity has control over 28 it. 29 1 And I think the challenge there is that you 2 make it -- it becomes categorical as funds, so that 3 they now use those funds in accordance with the Ed. 4 Code and so forth. And so it had taken a hit to 5 Prop 98, presents somewhat of a concern for me. And 6 would encourage a collaboration in working with CTA 7 to try to figure out how to accomplish the overall 8 objective of giving the local government more 9 control over their funding sources. 10 MR. RUNNER: It's $12 dollars per 11 classroom, per kid. 12 MS. MA: Okay. Any other discussion? 13 Okay. There was a motion by Ms. Harkey, a 14 second by Ms. Stowers. 15 Should we open the roll? Let's open the 16 roll. Madam Clerk. 17 MR. RUNNER: Well, I'm -- I'm -- do we have 18 an oppose? 19 MR. HORTON: Yeah. 20 MS. MA: We're going to open the roll. 21 MR. RUNNER: Okay. 22 MS. LOPEZ: Okay. Mr. Horton. 23 MR. HORTON: No. 24 MS. LOPEZ: Ms. Harkey. 25 MS. HARKEY: Aye. 26 MS. LOPEZ: Mr. Runner. 27 MR. RUNNER: Aye. 28 MS. LOPEZ: Ms. Ma. 30 1 MS. MA: No. 2 MS. LOPEZ: And Ms. Stowers. 3 MS. STOWERS: Aye. 4 MS. LOPEZ: Motion passes. 5 MS. MA: Okay. Next item. 6 MR. ALLEN: Thank you very much. 7 MS. MA: Thank you, Mr. Allen. 8 MS. PIELSTICKER: Our next item is AB 681 9 Ting related to the BOE's assessment practices and 10 procedures. 11 Under existing law, the BOE's required -- 12 pardon me -- to survey each county's assessment 13 procedures and practices at least once every five 14 years. The BOE must issue the final survey report 15 within two years after starting the survey, and 16 former assessors do not have an opportunity to 17 provide feedback on the survey. 18 This bill modifies the survey's schedule 19 and reduces the time the BOE has to publish a survey 20 from two years to one year. The bill also allows a 21 former assessor to provide survey feedback. 22 Currently, 22 surveys are in process at any 23 given time. And under this bill 11 survey's or 24 samples would be in process each year. Additional 25 staff would be needed to meet the compressed 26 schedule and maintain the audit scope and quality. 27 The status of the bill is that it's in Assembly 28 Appropriations Committee. 31 1 MR. HORTON: Move support of the bill. 2 MS. STOWERS: Second. 3 MS. MA: There's a motion and a second. 4 Ms. Harkey. 5 MS. HARKEY: I'm just -- I'm just 6 abstaining for the moment. 7 MS. MA: Okay. Why don't we just call the 8 roll. Madam Clerk. 9 MS. PIELSTICKER: If I may. 10 MS. MA: Okay. Sorry. 11 MS. PIELSTICKER: Assemblymember Ting would 12 like us to read his letter of support into the 13 record -- 14 MS. MA: Sure. 15 MS. PIELSTICKER: -- if possible. 16 MS. MA: That would be great. 17 MS. PIELSTICKER: Okay, thank you. 18 I appreciate -- this is from Assemblymember 19 Ting to Chairwoman Ma. 20 "I appreciate that the Board of 21 Equalization Legislative Committee is 22 considering a position of support on my 23 Assembly Bill 681. Due to a legislative 24 conflict, I'm unable to attend the Tuesday, 25 April 28th, 2015 meeting of the Legislative 26 Committee when this item will be 27 considered. But I am thankful for the 28 opportunity to be able to share why this is 32 1 an important bill for taxpayers across 2 California. 3 "As the former Assessor-Recorder of the 4 City and County of San Francisco, I 5 understand how important the assessment 6 practice survey program is to both 7 assessors and the BOE as it helps ensure 8 property is assessed properly throughout 9 the state. However, the final survey 10 reports can take up to two years to 11 complete and this prolonged length of time 12 prevents many assessors from making 13 immediate and necessary improvements to 14 assessment practices and procedures. 15 "I introduced AB 681 to improve the 16 efficiency of these surveys by allowing the 17 BOE to focus its energy on a larger 18 portion of the assessment roll in a shorter 19 period of time. Under a new three-tiered 20 system, the BOE will be able to reduce the 21 time needed to complete a survey report by 22 50 percent to a full year. Along with 23 other improvements that allow former 24 assessors to address matters that occurred 25 during their term, AB 681 will ensure 26 surveys reveal meaningful and timely 27 information. 28 "I appreciate the willingness of the 33 1 BOE to work with me on this important issue 2 in order to provide more consistent 3 assessment practices across the State. 4 "Thank you for your positive 5 consideration." 6 MR. HORTON: Madam Chair, if I may. 7 MS. MA: Okay. Mr. Horton. 8 MR. HORTON: I -- I just wanted to thank 9 Assemblyman Ting for methodically looking at this 10 and coming up with a way to -- to assure that the 11 knowledge, the experience and the skills of those 12 who were there at the time that the transaction took 13 place, that they have an opportunity to participate 14 in that, the deliberation, adjudication, all the 15 other discussions. Currently the extension of the 16 time the member -- and particularly in the case of 17 Member Ting could have moved on and there's an 18 entire discussion of -- of the best practices and so 19 forth that that former member doesn't have the 20 opportunity to participate in. So I think that's a 21 worthy thing for us to embark upon. 22 I also want to thank him for acknowledging 23 the need for additional staffing on our part in 24 order to accomplish some of the objectives, which I 25 think is beneficial to the State overall. 26 MS. MA: Okay, thank you. 27 Madam Clerk, please open the roll. 28 MS. LOPEZ: Okay. Mr. Horton. 34 1 MR. HORTON: Aye. 2 MS. LOPEZ: Ms. Harkey. 3 MS. HARKEY: Abstain. 4 MS. LOPEZ: Mr. Runner. 5 MR. RUNNER: Aye. 6 MS. LOPEZ: Ms. Ma. 7 MS. MA: Aye. 8 MS. LOPEZ: Ms. Stowers. 9 MS. STOWERS: Aye. 10 MS. LOPEZ: Okay. Motion passes. 11 MS. MA: Okay, motion passes. 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 35 1 ---oOo--- 2 MS. MA: Next item. 3 MS. PIELSTICKER: Next item is SB 140, by 4 Senator Leno, related to the STAKE Act and 5 e-cigarettes. 6 The existing Cigarette and Tobacco Products 7 Licensing Act requires -- excuse me, requires the 8 BOE to administer a statewide program to license 9 cigarette and tobacco products manufacturers, 10 importers, distributors, wholesalers and retailers. 11 The law requires a retailer to have a 12 license to sell cigarettes and tobacco products in 13 this state for each retail location that sells such 14 products. 15 The Stop Tobacco Access to Kids Enforcement 16 Act, or the STAKE Act as it is otherwise known, 17 established a statewide enforcement program to take 18 action against businesses that illegally sell 19 tobacco to minors. 20 The California Department of Public Health 21 administers the STAKE Act, which requires the BOE to 22 suspend or revoke a retailer's Licensing Act license 23 upon a third, fourth or fifth STAKE Act violation 24 and impose a $250 civil penalty. 25 This bill revises the Licensing Act tobacco 26 products definition to include an electronic device 27 that delivers nicotine or other vaporized liquids to 28 the person inhaling from the device, and any tobacco 36 1 product component part or accessory. 2 As a result, the bill requires the 3 licensure of electronic cigarette manufacturers, 4 importers, distributors, wholesalers and retailers. 5 The bill also requires the BOE to suspend 6 or revoke a retailer's Licensing Act license for 7 STAKE Act violations that involve e-cigarettes. 8 The purpose is to protect the public 9 against exposure to e-cigarettes. And the bill is 10 currently on the Senate Appropriations Committee 11 suspense file. 12 MS. MA: Thank you. I have two -- two 13 folks who have signed up to speak, Lindsey Freitas, 14 Senior Director for the Lung Association; and 15 Mr. Tim Gibbs, Government Relations -- Senior 16 Government Relations Director for ACS Can -- 17 American Cancer Society. 18 Thank you. 19 ---oOo--- 20 TIM GIBBS 21 AMERICAN CANCER SOCIETY 22 ---oOo--- 23 MR. GIBBS: Thank you, Madam Chair. 24 A new study out by the CDC a couple weeks 25 ago show that nationally the usage of e-cigarettes 26 amongst young people has tripled in just one year. 27 We've gone from over 600,000 high school students 28 using e-cigarettes in 2013 to around 2 million in 37 1 2014. 2 There's evidence that suggests once a young 3 person smokes an e-cigarette, they're more likely to 4 smoke traditional cigarettes than someone who has 5 smoked neither. 6 We're looking at an entire new generation 7 lured into a lifetime of tobacco addiction using new 8 technology, but the same old tricks. You know, 9 e-cigarettes have been described as training wheels 10 for cigarettes. 11 You know, comprehensive tobacco control 12 strategies in California have saved more than a 13 million lives and more than $1.34 billion in the 14 last 25 years. 15 The new pathway to tobacco addiction that 16 e-cigarettes represent threatens to undermine the 17 great progress California has made in tackling 18 tobacco use. 19 The explosion in popularity of e-cigarettes 20 amongst children should be a flashing red light that 21 we're facing a serious problem. 22 So, not only will this bill ensure that 23 youth avoid the lifetime of addiction, but it does 24 so in the most economical way by treating 25 e-cigarettes as a tobacco product. 26 You know, given that the tobacco companies 27 have embraced e-cigarettes and control an increasing 28 share of the marketplace, it's critical that we 38 1 treat e-cigarettes as -- as what they are, tobacco 2 products. 3 You know, the nicotine in e-cigarettes is 4 derived from the tobacco plant. Without tobacco 5 plants, there could be no nicotine delivery devices 6 like e-cigarettes. 7 Both Altria and RJ Reynolds acknowledge on 8 their website and their packaging that e-vapor 9 products are tobacco products. 10 And the federal government, through the 11 Food and Drug Administration, has said that 12 e-cigarettes should be regulated as a tobacco 13 product. 14 California, the State Health Officer, in a 15 report on e-cigarettes by the Department of Public 16 Health, said that e-cigarettes should be regulated 17 like a tobacco product. 18 And more than a hundred communities in 19 California, representing more than 40 percent of the 20 population of the State, have said -- have also 21 passed laws that treat e-cigarettes like tobacco 22 products. 23 And my colleague, Lindsey Freitas, will get 24 into some of the amendments that we've -- that we 25 are taking that -- that, you know, get into some of 26 the -- of the issues raised by the BOE analysis. 27 But, you know, with those amendments, we'd really 28 like the BOE to consider, you know, sponsoring the 39 1 bill. 2 ---oOo--- 3 LINDSEY FREITAS 4 AMERICAN LUNG ASSOCIATION 5 ---oOo--- 6 MS. FREITAS: Hi, Lindsey Freitas with the 7 American Lung Association in California. 8 SB 140 would redefine tobacco products to 9 include electronic cigarettes. And this really 10 creates the necessary framework to ensure that our 11 State's laws restricting youth access to tobacco 12 products will extend to electronic cigarettes. 13 While California currently bans the sale of 14 electronic cigarettes to minors under 18, many youth 15 are still able to access these products due to a 16 lack of oversight and enforcement. 17 SB 140 ensures that e-cigarettes fall under 18 the 1994 Stop Tobacco Access to Kids Enforcement 19 Act, which has successfully reduced illegal sales of 20 traditional cigarettes to minors in our State. 21 SB 140 also requires e-cigarette retailers 22 to be licensed under the existing Cigarette and 23 Tobacco Products Licensing Act. 24 Currently tobacco retailers pay a one-time 25 $100 fee. And, as many of you know, this fee does 26 not fully cover the costs of administering the fee. 27 The amendments that we worked out with BOE staff 28 would address that issue. 40 1 It would limit the license just to tobacco 2 retailer -- just to the retailers of electronic 3 cigarettes, of which -- based on initial research 4 out of Stanford -- there's about 1100 of them in the 5 state that sell just electronic cigarettes. And 6 that fee would be a one-time fee that would cover 7 the cost of administering it. So, it would cover 8 the full cost of the Board of Equalization for 9 administering those additional fees -- or those 10 additional licenses -- the -- in only those shops 11 that sell solely electronic cigarettes. This 12 adjusted fee covers everything associated with these 13 additional licenses. 14 Also, in addition, not pertinent 15 necessarily to the BOE, but this bill also includes 16 electronic cigarettes in all of our smokefree 17 workplace laws. So, whereas right now someone could 18 potentially be sitting here in this room using an 19 electronic cigarette, this law would wrap it in -- 20 wrap electronic cigarettes into all of those laws as 21 well. 22 So, thank you. 23 MS. MA: Okay. Questions, Members? 24 I do have questions. So, e-cigarettes, I 25 think they started out as just the cigarette and now 26 they've expanded to vape pens and all that. 27 And you don't necessarily put tobacco in 28 vape pens. You could put other substances in the 41 1 vape pens as well. 2 So, how do you define the difference if 3 you're putting a nicotine product into a vape pen 4 versus another type of product, let's say? 5 MR. GIBBS: Well, I mean it's definitely -- 6 you know, the vast majority of e-cigarette usage, 7 including vape pens, is to sustain a nicotine 8 addiction. 9 There are instances where people put other 10 things in them, including, you know, illegal 11 substances. But, you know, we think it's one of the 12 reasons we define this as a tobacco product is 13 because it sets a single, uniform standard. 14 The vast majority of -- of e-cigarette use 15 is, as I mentioned, in order to sustain, you know, 16 nicotine addiction. 17 MS. MA: Okay. And the one-time fee is 18 similar to cigarette retailers, right? 19 And then other tobacco product retailers 20 pay a fee every year that's essentially higher than 21 the $100? 22 MS. FREITAS: If you sell only -- only 23 electronic cigarettes, you would have a higher 24 one-time fee that would cover the cost of 25 administration. 26 And there are about a thou -- 1100 shops 27 estimated in California right now that would fall 28 into that category, until the -- you know, if and 42 1 when the time in which electronic cigarettes are 2 potentially taxed, at which point they get wrapped 3 into, you know, the entire tax scheme that we have 4 in place for traditional tobacco products. 5 MR. GIBBS: Right. And, so, that fee would 6 be slightly higher because e-cigarette retailers 7 don't pay any tobacco taxes at this point. 8 MS. MA: Right. So, how much would the fee 9 be again? 10 MS. FREITAS: About $280 per year. 11 MS. MA: Per retailer? 12 MR. GIBBS: Just one time. 13 MS. MA: One-time fee? 14 MR. GIBBS: Yes. 15 MS. MA: And, so, Ms. Pielsticker, so, can 16 you explain the one-time fee versus the annual -- 17 MS. PIELSTICKER: Yes. 18 MS. MA: -- fee? 19 What's the difference and why aren't we 20 charging an annual fee versus just a one-time fee? 21 MS. PIELSTICKER: Well, for cigarette and 22 tobacco products, I imagine you're referring to? 23 MS. MA: Correct. 24 Or in this case? 25 MS. PIELSTICKER: Well, in -- in this case 26 the incremental additional cost of licensing 27 e-cigarettes needs to be fully funded for the -- for 28 licensing. 43 1 And the -- and the reason is that currently 2 we have funds that benefit from the Cigarette and 3 Tobacco Products tax. And AB 71, which imposed the 4 licensing act, did not fully fund all of the costs 5 of the licensing act. 6 And, so, those costs get spread to the 7 benefiting funds. So, if we were to license 8 e-cigarettes at the same level as other retailers, 9 then those costs would likely get spread to the 10 existing benefiting funds. And they would be worse 11 off than they are now. 12 MS. MA: Okay. So, like how did you choose 13 280 versus $500 or -- I'm just trying to figure 14 out what -- 15 MR. GIBBS: Oh, that -- we're -- that's 16 just what we were told how much it would cost from 17 the -- 18 MS. MA: -- it would cost for the BOE to 19 administer -- 20 MR. GIBBS: -- yes. 21 MS. PIELSTICKER: Yes. 22 MS. MA: -- this new program? 23 MS. PIELSTICKER: Yes, that's to fully fund 24 the cost of licensing e-cigarettes. 25 MS. MA: Because now we have to go -- is 26 this inspection costs as well? 27 MS. PIELSTICKER: I believe so, but I would 28 defer to our Investigations Division on that. But I 44 1 believe so. 2 MS. MA: So, I presume it would include 3 outreach to these new retailers that they have an 4 additional obligation? 5 MS. PIELSTICKER: Yes, any costs associated 6 with licensing. 7 MS. MA: Okay. And then how about 8 enforcement, 'cause like our enforcement costs are 9 significant in comparison to just the licensing -- 10 initial licensing and outreach. 11 And how do we account for the license -- 12 the enforcement costs down the road? 13 MS. PIELSTICKER: I would like to request 14 that Cindy Wilson approach the dais. 15 MS. MA: Miss Wilson. 16 MS. HARKEY: She's in the hot seat. 17 MS. PIELSTICKER: Cindy Wilson is our 18 special taxes expert in the Legislative Division. 19 MS. WILSON: Good morning. Again Cindy 20 Wilson, legislative section. 21 I would think that the enforcement costs 22 or -- related to e-cigarettes would be much lower 23 because our enforcement team is out doing 24 inspections for cigarette and tobacco tax -- taxes. 25 And we don't have tobacco taxes on the e-cigarettes 26 at this time. 27 MS. MA: Okay. 28 MS. WILSON: So, it would primarily be just 45 1 making sure that they're licensed. 2 MS. MA: Okay. 3 MS. STOWERS: Chairwoman? 4 MS. MA: Ms. Stowers. 5 MS. STOWERS: You're saying you assume it's 6 going to be lower because our enforcement's team is 7 out looking at tobacco cigarette shops currently. 8 So, if those shops are also selling e-cigarettes, it 9 would be part of that inspection. 10 But what about those retailers who are only 11 selling e-cigarettes? Would we have to have another 12 enforcement team to investigate them? And have we 13 considered that cost in this 280? 14 MS. WILSON: Well, we would go out and 15 ensure that they're licensed or if their license was 16 suspended or revoked that they're no longer selling 17 the e-cigarette products. 18 But our enforcement team primarily is out 19 there making sure that the cigarette and tobacco 20 products taxes are paid. 21 And the e-cigarettes are not subject to the 22 tobacco products taxes. 23 MS. STOWERS: I'm still a little confused 24 because I thought this bill was putting the 25 e-cigarettes into the licensing act? 26 MS. WILSON: It is putting it into the 27 licensing act, but not into the cigarette and 28 tobacco products tax law subjecting them to the tax. 46 1 So, it's just a licensing for the 2 e-cigarette retailer. So, if there's a third 3 through fifth violation of the STAKE Act, we could 4 have the opportunity to suspend or revoke their 5 license and impose a $250 civil penalty. 6 MS. STOWERS: So, we wouldn't have to do 7 any enforcement? As long as they have a license, 8 we're -- we're satisfied because they're not subject 9 to the cigarette and tobacco tax. 10 Is that what you're saying? 11 MS. WILSON: Yeah, that's correct. 12 MS. STOWERS: Okay. 13 MR. HORTON: Madam Chair? 14 MS. MA: Mr. Horton. 15 MR. HORTON: Thank you, Madam Chair. 16 The STAKE Act violations are handled by 17 someone other than BOE. And, so, we're not -- 18 although we're there as far as our SCOP team, I 19 would believe, and as far as our audit departments 20 for -- to verify the licensing and all of that 21 nature can be absorbed, I would speculate. 22 But the investigation aspect does bring 23 about a question, if you will. Is there any -- do 24 you envision counterfeiting? Do you envision 25 taxation, other than the regular sales tax on 26 tangible personal property, excise taxes and things 27 of that nature? 28 And at some point this being subject to not 47 1 only the STAKE Act -- but the STAKE Act provisions, 2 but also the other tobacco taxation provisions of 3 the law? 4 MR. GIBBS: Right now, Senator Pan has 5 SB 591, which we'll be talking about later, but that 6 does not include e-cigarettes and raising that 7 tobacco tax. 8 MR. HORTON: Do you think the two of you 9 will eventually get together and kind of work it 10 out? 11 Seems like the opposition and support kind 12 of circling both bills, to try to get something that 13 works, or at least addresses the different areas of 14 the law? 15 MS. FREITAS: Meaning on -- as it relates 16 to taxing e-cigarettes, I think that there is a lot 17 of conversations going on about the mechanism in 18 which -- that would need to be put in place to tax 19 them because they are -- the line of distribution is 20 different than traditional tobacco products. And, 21 so, we have to kind of come up with a whole way of 22 addressing that. 23 And, so, while that's going on, I think we 24 definitely will continue to talk about it and if you 25 have any great ideas, we'd love them. 26 MR. HORTON: Question, Madam Chair, if I 27 may? 28 MS. MA: Yes. 48 1 MR. HORTON: Question of the Department, 2 placing this in the STAKE Act and under AB 71, is 3 there any conflict in the language? 4 I mean, I can't think of anything, but -- 5 by just merely placing it there does it cause the 6 definition of tobacco to alter or cigarettes? 7 Or is it just a separate definition that is 8 distinct from those two? 9 MS. WILSON: No, there's no conflict with 10 respect to the definition in the STAKE Act. 11 And then the proposed amendments were going 12 to limit the e-cigarettes definition for tobacco 13 products to just retailers. 14 And then that corresponds with the STAKE 15 Act violations, the third through fifth violation, 16 where we could suspend or revoke their license. 17 So, with the way the amendments are 18 proposed, it works. 19 MR. HORTON: And with the -- the violation 20 as far as the retailer's concerned, would the 21 violation -- the current violation that exists for 22 selling to minors, would the count be an aggregate 23 of the two or separate? 24 MS. WILSON: I believe it would be an 25 aggregate of the two. So, you could have a 26 cigarette and then could you have an e-cigarette 27 sales to minors, that would be two separate 28 violations if it happened on two separate occasions. 49 1 MR. HORTON: Is that the author's -- 2 MR. GIBBS: Yes. I mean, the author, as 3 well as the sponsors of the bill, believe that, you 4 know, e-cigarettes are tobacco products and to the 5 extent that we can, they should be treated the 6 same. 7 MR. HORTON: Okay, thank you. 8 MS. MA: Ms. Harkey. 9 MS. HARKEY: I just have one question and 10 it was brought up at the hearing here, so, I will 11 ask you. 12 What is the present line of distribution of 13 e-cigarettes? 14 MS. FREITAS: That's a great question. 15 You know, there -- some of it does follow 16 some of the more traditional, where you're talking 17 about the major tobacco companies that are 18 distributing the -- their products that are 19 electronic cigarettes. 20 But then some of the local cigarette -- 21 e-cigarette only shops are actually making and 22 manufacturing their e-cigarettes there on premises. 23 And, so, they're purchasing components, 24 and, you know, selling them out of their shop and 25 mixing the e-juice and, you know, different flavors 26 and things like that. 27 So, there is -- I think we're still sorting 28 some of that line of distribution out and figuring 50 1 that out. 2 MR. GIBBS: And that -- 3 MS. HARKEY: I just have another question 4 then, that leads me to another thing, is, you know, 5 taxing them, putting them under an act is one thing. 6 It's quite another thing -- what's in them? 7 I mean, do we -- I think most people -- I believe we 8 know what's in a cigarette and their brands are -- 9 are regulated. 10 What's going on with that? Anything? I 11 mean, 'cause I've read that, that there is all sorts 12 of different things. And we're now making them at 13 home and putting them on the shelf. 14 MS. FREITAS: Right. 15 Currently there's no oversight over what is 16 actually in an electronic cigarette. And initial 17 studies have shown that it's any number of things. 18 And it varies depending on brand and depending on 19 type. And the labeling of them is not consistent 20 with what actually is in them in a lot of cases. 21 And, so, the FDA is actually moving towards 22 overseeing that part of it. They are not there yet, 23 but they're looking at possibly releasing the 24 regulations, hopefully this summer, on that. And 25 hopefully then we'll get more clarity on what's 26 actually in them. 27 But that is part of the concern is we 28 just -- we really don't know. 51 1 MR. GIBBS: Right. And, you know, we're 2 waiting for the FDA to -- to regulate e-cigarettes. 3 And, you know, the last indication is that there'll 4 be some sort of ruling in -- in June. 5 But as it stands right now, there is no 6 entity that is monitoring what's in e-cigarettes 7 that are imported from overseas; that are made, you 8 know, in somebody's home; or that are sort of 9 distributed through the -- through the traditional 10 channels. 11 And we think it's one reasons, you know, 12 here in California what we can do is keep these 13 things out of the hands of children and protect 14 people in the workplace from exhaling -- from 15 inhaling the aerosol vapor. 16 And, so, that's sort of what this bill is 17 all about. But the federal government, through the 18 FDA, needs to act on that aspect as well. 19 MS. HARKEY: I just -- I guess I didn't 20 understand that. 21 I thought we were going to license them 22 and, you know, kind of, in essence, bring them up to 23 legal status. 24 And now you're talking about the FDA is 25 still investigating and as of June they should have 26 out something. 27 And you're trying to keep it away from 28 children, but we want to license them. 52 1 So, I think there is a little bit of 2 conflict and maybe you can explain that. 3 MS. FREITAS: Yeah, the -- the way that 4 we've -- when we have licensed our traditional 5 tobacco products, we've done it as a way to really 6 prop up our youth access laws. And that's kind of 7 how we see this working for electronic cigarettes as 8 well. 9 So, the STAKE Act really goes to all of our 10 youth access, ensuring that youth can't -- you know, 11 that you have to ID, ensuring that there's 12 vendor-assisted sales and all number of things that 13 really ensure that you can't just walk into a store 14 and purchase these products easily. 15 And, so, by wrapping electronic cigarettes 16 into that, by licensing them, we are then ensuring 17 that these same protections are in place for 18 electronic cigarettes to ensure youths don't access 19 them that way. 20 MS. HARKEY: Okay. Well, maybe then this 21 is a BOE question. 22 If we license them at this point and the 23 FDA comes out with different models, what happens to 24 our license? 25 And how do we -- if they prohibit certain 26 items, certain models, and we've licensed them, what 27 happens? 28 MS. WILSON: There wouldn't be any impact. 53 1 We would still defer to the definition of tobacco 2 products that we have in the licensing act, if it's 3 placed in there, and license those retailers. 4 And really what we're doing is -- is if 5 there is any of those STAKE Act violations, the 6 third to fifth violations, suspending or revoking 7 those licenses still. 8 MS. HARKEY: Thank you. 9 MS. MA: Mr. Runner. 10 MR. RUNNER: Yeah, just a couple quick -- 11 quick questions. 12 In regards to the -- the inspection issue, 13 I'm hearing us say that we'll do these and inspect 14 these in our normal times that we go and do our 15 inspections with other tobacco products or 16 cigarettes and other tobacco products. 17 I'm hearing from here is that there are 18 actually people who sell these that don't sell other 19 tobacco products; is that correct? 20 MS. FREITAS: Uh-huh. 21 MR. RUNNER: So, my question is, did we, in 22 our estimates, in our scheme there, identify the 23 fact that we may actually have to increase and deal 24 with other inspections that we currently don't do? 25 MS. WILSON: We haven't done a cost 26 estimate yet on this bill. 27 MR. RUNNER: But didn't we give them a -- I 28 thought we gave them a license amount in order to 54 1 cover our costs. 2 MS. WILSON: I have to defer to them on 3 where that number came from. 4 MR. RUNNER: Okay. 5 MS. FREITAS: And I thought we got it from 6 the BOE. So, we can go back and find that out. 7 MR. RUNNER: Okay. I guess I would want to 8 make -- I guess the bottom line is, I would like to 9 make sure that whatever we do in regards to our 10 licensing costs fully do cover our costs, and, 11 indeed, deal with this other kind of use, which may 12 not be a part of our regular inspection. 13 The other question I have is in regards to 14 Appeals. Is it the assumption that if -- if you are 15 covered under -- just like other tobacco products or 16 licenses -- that they have the normal appeal process 17 through the -- to the Board? 18 Is that the -- is that the understanding? 19 MS. WILSON: That's normally how it works 20 for cigarette and tobacco products. 21 But with the STAKE Act violations, if 22 there's a suspension or revocation, it would not go 23 through our normal appeals process. 24 MR. RUNNER: Okay. Help me out. I know I 25 get -- I get appeals up here for illegal sales and 26 counterfeit sales of cigarettes and whatnot, I 27 assume with the issue of license revocations and 28 things like that. 55 1 So, my question is, does -- would these 2 products follow that prog (verbatim)? 3 MS. WILSON: Yes. 4 MR. RUNNER: Okay. And that's also 5 considered part of the cost that we've established? 6 MS. WILSON: It will be, yes. 7 MR. RUNNER: Okay, it will be. 8 Okay, thank you. 9 MS. MA: Any questions, Members? 10 MR. HORTON: Where is First 5 on this? 11 MS. FREITAS: Great question. 12 We've been talking with them. I don't 13 think they've come on in support yet, but they 14 definitely are interested in the e-cigarette 15 issue. 16 MR. RUNNER: Actually, one other quick 17 question. 18 What do you -- what do you do -- I'm trying 19 to determine here -- in fact, I don't have a lot of 20 experience in this issue -- but it seems to me that 21 I have seen things that sometimes people use these 22 vapes for issues that are other -- other than 23 tobacco products. And I'm not talking about just 24 the issue of marijuana, but other kinds of flavors 25 and whatnot. 26 MS. FREITAS: Uh-huh. 27 MR. RUNNER: Is this consideration any -- 28 no matter what -- no matter what product you put 56 1 into it you need a license? 2 MR. GIBBS: Yes. 3 MS. FREITAS: With the exception of, you 4 know, a medicinal marijuana shop is not going to 5 need a license for medicinal marijuana purposes, 6 but -- 7 MR. RUNNER: Why not? 8 MS. HARKEY: -- oh, they will for med -- 9 they won't need a tobacco license, I'm sorry, I 10 misspoke. 11 MR. RUNNER: Okay. 12 MS. FREITAS: The -- the law 13 specifically exempts -- 14 MR. RUNNER: Right, they don't need -- 15 MS. FREITAS: -- medicinal marijuana. 16 MR. RUNNER: Right. 17 MS. FREITAS: Yeah. 18 MR. RUNNER: Right, but they do -- they 19 would need -- if they sell these, they would need a 20 license? 21 MS. FREITAS: If they sell -- 22 MR. RUNNER: If they sell -- 23 MS. FREITAS: -- electronic cigarettes? 24 MR. RUNNER: -- electronic cigarettes or -- 25 see, I guess the issue we get -- we oftentimes use 26 the phrase "electronic cigarettes." 27 So, we -- so, we right away go to nicotine 28 and those other issues. 57 1 But there are other uses -- at least I'm 2 told -- that also are not just for drug use, for 3 just pleasure and recreational. 4 And, so, the idea of doing this really is 5 even if it -- even if there's no use that -- I guess 6 the reason we're doing it is because it could be 7 potentially used for these other products, I guess? 8 Is that what we're coming too? 9 MR. GIBBS: The vast, vast majority of -- 10 MR. RUNNER: Right. 11 MR. GIBBS: -- e-cigarette usage is to 12 sustain nicotine addiction. 13 MR. RUNNER: Right. 14 MR. GIBBS: Another reason that we think 15 it's important to encompass, you know, potentially 16 other uses is so we don't undermine our smokefree 17 workplace laws. 18 I mean, because often things that are 19 smoked out of an -- out of an e-cigarette device or 20 electronic smoking device don't have, you know, a 21 smell or they don't smell quite the same way as -- 22 as a traditional cigarette. 23 So, code enforcement officials have a 24 difficult time figuring out whether somebody is 25 inhaling a nicotine product or whether they're 26 inhaling a non-nicotine products. 27 And we've found that there is danger of, 28 you know, somebody, you know, going back to where we 58 1 were in -- you know, in "Mad Men," you know, 2 everybody sitting at their desk having -- having an 3 e-cigarette. 4 And, you know, we don't want take the step 5 backwards. So, we think it's important for 6 secondhand smoke laws to apply to e-cigarettes 7 currently. 8 And whether somebody is, you know, using a 9 non-nicotine device, they're still emanating, you 10 know, the propylene glycol that's used -- 11 MR. RUNNER: Right. 12 MR. GIBBS: -- to heat up the -- the 13 aerosol. 14 MR. RUNNER: Yeah, I get it and I'm going 15 to be okay with the license, 'cause I think it's an 16 issue. 17 But I want to be a little careful, I mean, 18 not to go too far afield, that is. 19 Secondhand smoke legislation and issues 20 have been based upon science and evidence, right? I 21 mean, that's -- 22 MR. GIBBS: Of course. 23 MR. RUNNER: -- right? 24 The -- here you're just making assumptions 25 when you talk about secondhand smoke with vape, 26 right? 27 MR. GIBBS: No, there are studies that show 28 that there are particulate matter in aerosol. There 59 1 -- you know, there's been a study that's found -- 2 MR. RUNNER: Study, but -- okay, okay, 3 okay. 4 Okay, I mean -- okay. But not to 5 conclusion, like, for instance, the way we have with 6 the Surgeon General's comments or other kinds of 7 official statements or in scientific -- I guess, 8 authorization -- and State -- where government has 9 identified this as specific danger to and, 10 therefore, warnings are put on? 11 MR. GIBBS: Well, I mean, the tobacco 12 companies, Altria and RJ Reynolds, have pretty 13 specific warning labels on their e-vapor products. 14 MR. RUNNER: Again I'm not talking about 15 just the e- -- see, this is where I guess I'm trying 16 to go for it. 17 MR. GIBBS: Okay. 18 MR. RUNNER: I'm not talking about just the 19 issue -- 'cause it can be used for other things. It 20 can be used for other things that are even not 21 nicotine-related and not -- and not drug-related. 22 And that's where I am just going to. So, I 23 am just -- I'm concerned that we might be trying to 24 do a bit of an overreach. But I'm sympath -- I'm 25 sympathetic to the issue to where the majority of it 26 is used. 27 MS. MA: So, perhaps you can just talk a 28 little bit about what the federal government, the 60 1 FDA, is looking at in terms of their guidance, you 2 know, marketing, distribution, packaging, warning 3 labels? 4 I mean, there is nothing out there for 5 e-cigarettes, right? The fact that you don't really 6 know what you're buying. You don't really know what 7 the causes are. You don't really know who's selling 8 it to who. 9 But perhaps you can talk about what the FDA 10 is looking at and, hopefully, will produce some sort 11 of guidelines at the end of the summer? 12 MS. FREITAS: All right. So, the FDA has 13 publicly announced that they do intend to regulate 14 electronic cigarettes as a tobacco product and that 15 that will likely include some kind of advertising 16 restrictions, some kind of oversight over what is 17 actually in the products, some kind of labeling 18 requirement. 19 You know, as I mentioned before, some of 20 these products, the labels don't necessarily match 21 what's actually in them and just providing some kind 22 of guidance. 23 But really what that all looks like we're 24 still trying to figure out because they haven't 25 actually released those regulations yet. So, we're 26 kind of in the waiting game. 27 But what folks at the CDC and FDA are 28 commonly saying about the electronic cigarettes is 61 1 it's the wild, wild west out there. There is no 2 kind of oversight or regulation. 3 Here in California we only have the one law 4 on the books, which is the -- restricting the sale 5 of electronic cigarettes to minors. 6 And our definition is actually so narrow on 7 that one that it -- it's very easy for a minor to 8 actually purchase these products right now, which is 9 why expanding the definition in the way we have will 10 really help ensure that you don't have access to 11 these products. 12 The other thing that we see happening is 13 that we have communities throughout our state that 14 have taken steps to do something about electronic 15 cigarettes, whether that's adding it to their 16 smokefree air laws or adding to their local tobacco 17 license. And they're doing this by treating them 18 like tobacco products in most instances because they 19 just feel that's the easiest, cleanest way to do it. 20 And, so, we see this, you know, culmination 21 at the federal level kind of coming down and this 22 culmination at the local level coming down. 23 And, so, we really feel like this is what 24 California can do to really take its place and do 25 what it needs to do at the state level to ensure 26 that there is some kind of oversight of these 27 products. 28 MR. RUNNER: One quick question. 62 1 I notice that the opposition has -- some of 2 them have opposed unless amended. 3 What -- what kind of amend -- are they all 4 pretty specific with their amendments? Or what are 5 they looking for? 6 MR. GIBBS: You know, in terms of formal 7 opposition, I don't think the real opposition has, 8 you know, submitted their -- the letters. 9 I mean, I think to this bill the only sort 10 of formal opposition through letters are a couple 11 sort of cannabis clubs. 12 I mean, you're looking at the -- the -- 13 MR. RUNNER: I just have a note that says 14 there is some opposition unless amended. 15 And I just wondered if they -- what the 16 specific amendments they were looking for are? Or 17 maybe you don't know? 18 MR. GIBBS: We don't know. 19 MR. RUNNER: Okay. 20 MS. FREITAS: Do you have -- 21 MR. RUNNER: That's okay. 22 MR. GIBBS: We know that the opposition 23 that has appeared in the analysis is, you know, 24 there is much bigger opposition coming from, you 25 know, the e-cigarette companies who have not -- 26 MR. RUNNER: Right. 27 MR. GIBBS: -- weighed in. 28 MR. RUNNER: Right. Okay, thank you. 63 1 MS. MA: Ms. Harkey. 2 MS. HARKEY: Thank you, Ms. Ma. 3 I am very supportive of what you're trying 4 to do. I don't personally think this is all baked 5 yet. 6 And, so, I have a little bit of a problem 7 supporting anything 'cause I don't know what the end 8 product's really going to be. 9 So, I'm going to have to probably lay off 10 of this. But, you know, I mean I'm -- I hear what 11 you're doing and I've read a little bit about it, 12 but I think there's a lot of issues here that we 13 still don't know. 14 And, so, it's a little premature for me, 15 but I just wanted to let you know that. 16 MS. MA: Okay. Seeing no further questions 17 from Members, do I have a motion? 18 I'm going to motion to support. Any 19 second? 20 MR. HORTON: I would support it in concept, 21 Members -- second it in concept, just to -- very 22 much supportive of the STAKE Act provisions and all 23 of the violations associated with this, the wharfing 24 (verbatim) of the bill as it relates to taxation and 25 so forth. 26 But, you know, I would -- support the 27 Chair, support. 28 MS. MA: Okay, second. Okay. 64 1 Okay, should we -- let's just open the 2 roll, Members. 3 Madam Clerk. 4 MS. RICHMOND: Ms. Ma. 5 MS. MA: Aye. 6 MS. RICHMOND: Mr. Runner. 7 MR. RUNNER: Aye. 8 MS. RICHMOND: Ms. Harkey. 9 MS. HARKEY: Abstain. 10 MS. RICHMOND: Mr. Horton. 11 MR. HORTON: Aye. 12 MS. RICHMOND: Ms. Stowers. 13 MS. STOWERS: Aye. 14 MS. RICHMOND: Motion carries. 15 MS. MA: Okay, motion carries. 16 Thank you very much. 17 MS. HARKEY: That doesn't mean we -- 18 MS. MA: Are there any more bills, 19 Ms. Pielsticker? 20 MS. HARKEY: Are we supporting the bill? 21 MR. HORTON: We are. 22 MS. PIELSTICKER: Next item is SB 321 by 23 Senator Beall, related to the fuel tax swap. 24 Existing law requires the BOE to determine 25 the excise tax rates for gasoline and diesel fuel on 26 an annual basis. 27 The legislation set the excise tax rate for 28 the first year of the swap and required the BOE to 65 1 adopt a revenue neutral excise tax rate for each 2 ensuing fiscal rear. 3 The calculation requires the BOE staff to 4 develop a forecast of both consumption and price for 5 both gasoline and diesel fuel. 6 BOE's rate of calculation also takes into 7 account the true-up portion, which is the one year 8 look back period to determine the difference between 9 what was estimated for the previous fiscal year and 10 what was actually collected. 11 This bill authorizes the BOE to make 12 specified adjustments to the gasoline tax block rate 13 using a five-year average fuel price estimate. 14 The purpose is to reduce volatility of the 15 revenues generated by the gasoline tax to assist 16 state and local governments in preparing multi-year 17 transportation budgets. 18 The status of the bill is that it is in the 19 Senate Appropriations Committee, scheduled to be 20 heard May 4th. 21 MS. MA: Okay, thank you. 22 We have a witness here. If you can please 23 identify yourself? 24 MR. McKEEMAN: Jay McKeeman with the 25 California Independent Oil Marketers Association. 26 ---oOo--- 27 28 66 1 JAY McKEEMAN 2 CALIFORNIA INDEPENDENT 3 OIL MARKETERS ASSOCIATION 4 ---o0o--- 5 MR. McKEEMAN: We are the entities that 6 have to struggle with the ever-changing tax rate 7 that's created by the tax swap. 8 We registered concerns with Senator Beall 9 on this -- on this item. Frankly, the question that 10 we asked, the opening question is, why can't we go 11 back to a stable flat rate tax? I think that's 12 really the essence of this discussion. 13 We find no compelling policy reason or tax 14 collection reason to go with this ever-changing tax 15 adjustment. 16 The fact is is that revenue neutrality is, 17 in fact, eye of the beholder. I think it can be 18 adjusted based upon different calculations and 19 different discussions. 20 If we're looking for predictability, which 21 I think the tax recipients are advancing this bill 22 to accomplish, let's go to a uniform tax rate, a 23 stable tax rate. 24 It doesn't -- it -- it creates significant 25 economic impact on our members in terms of trying to 26 deal with the tax changes. And I think it creates a 27 lot of uncertainty in the public and certainly for 28 the tax recipients. 67 1 So, our appeal really today is, isn't it 2 time to really look at a stable tax rate? 3 There's another bill that will be coming to 4 you, SB 16 by Senator Beall, that's a more of an 5 omnibus tax measure. It's going to add ten -- it's 6 proposing to add ten cents of excise tax to the 7 fuel -- fuel tax in this state. 8 It's -- we just think that it's absolutely 9 abundantly clear that it's time to have the 10 conversation of moving away from this kind of facade 11 of adjusting tax rates to go to a -- we can't find 12 any reason why a stable tax rate, a defined tax 13 rate, can't be distributed in the same way that 14 the -- that the tax swap revenues are distributed. 15 You just distrib -- you establish a simple 16 flat rate and you distribute the funds according to 17 the formula that's used for the tax swap revenues. 18 So, that's our two cents. 19 MS. MA: Thank you very much. 20 Senator Runner. 21 MR. RUNNER: Yeah. And I -- I actually 22 agree. We've actually asked the Leg. Analyst for 23 a -- some of the language and what would it cost to 24 actually unwind -- unwind the swap. 25 I think the public policy is crazy that 26 we're going every year through this process because 27 of a one year event. 28 And it makes it very difficult for 68 1 taxpayers to knowledge -- to know what they're 2 doing, plus it puts businesses in a difficult 3 position. 4 So, we -- I agree. And I think generally 5 that we've talked about it as Board at times, 6 thinking that -- you know, it's a real problem. 7 I think the challenge -- so, to that, I'm 8 with you. We're getting some language to figure out 9 what that is and then it's going to be up to the -- 10 up to the legislature to see where -- where it is 11 and how it is they can -- should fix that. 12 I -- because we -- I liked the day when you 13 could pull up to the gas pump and you could see 14 right what it was. And you didn't have to guess. 15 So, that being said, I do believe -- this 16 is a good step for the current system we have, 17 because I think this does smooth it out, which is 18 the -- which is the problem that I think we faced 19 where you have these dramatic shifts. 20 And I think even this year, as it came 21 before us, we ended up changing some dates in order 22 to try to smooth it out a little bit ourselves 23 within the range that we had. 24 And this allows us, I think, a little more 25 time in terms of smoothing it out. So, the -- so, 26 the dips aren't as dramatic when it does affect the 27 transportation funding out there. 28 So, I would move to support the Beall bill. 69 1 MR. McKEEMAN: Can I add -- 2 MR. RUNNER: Go ahead, yes. 3 MR. McKEEMAN: -- one more comment? 4 MR. RUNNER: Yes, real quick. 5 MR. McKEEMAN: So, if -- if the bill is -- 6 goes forward, we -- one of our concerns was the 7 rolling three-year adjustment. 8 That appears to have been taken out of the 9 bill. So, we're very happy about that. 10 And also there's adequate implementation 11 structure in the bill, 60 days post the 12 implementation of our signing into law the bill. 13 MR. RUNNER: Yeah. 14 MR. McKEEMAN: There is one other issue. 15 And that's -- we've approached the Board on this 16 issue before. 17 Our members incur significant cost in the 18 implementation of this. And many other states have 19 a -- have basically a tax collection credit that is 20 provided to fuel wholesalers for the cost, 21 recognizing the cost they incur in the -- in the 22 adjustment or in the collection and adjustment of 23 fuel rates based upon fuel taxation. 24 So, what we're requesting -- and this has 25 been -- the request has been forwarded to the 26 author -- a one percent tax credit the fuel 27 wholesalers could apply towards sales tax or state 28 taxes paid to the state on fuel. So, it would 70 1 just -- or provide a one percent credit on the 2 actual sale, the taxes they remit to the state going 3 forward. 4 It's a small amount, probably doesn't make 5 us whole, but it does, at least, recognize that -- 6 the fact that we do incur a significant expense in 7 this. 8 MS. MA: Thank you. 9 I just wanted to add to Senator Runner's 10 discussion that yes, I also agree that this should 11 be undone, unwound. 12 I was there in 2008. I understand why 13 everything happened. But we should have put a 14 sunset laws on it. It should have had a five-year 15 sunset and then we would have an easier opportunity 16 to actually go back and relook at this issue. 17 So, I definitely agree with you, as do, I 18 think, all of the Members here. 19 There is another bill coming up, SB 433, 20 Mr. Berryhill's bill. I'm sure you're going to 21 testify on -- 22 MR. McKEEMAN: Actually, I can just cut 23 that short. 24 We support that measure as well, so -- 25 MS. MA: Great. And basically Senator 26 Berryhill's bill just gives the Department of 27 Finance the authority to just set the rate and just 28 let us know. And we will send out the bills. 71 1 The Department of Finance actually looks at 2 these numbers at least four times a year. The 3 Governor's office is in charge of producing and 4 overseeing the budget. 5 And based on the conversation that we had 6 back in March, right, we really don't feel like our 7 agency is the economic projection agency to 8 determine what the gas price is going to be for the 9 next year. 10 So, I think they're both similar bills. 11 They're trying to, you know, get at the problem. I 12 don't think they are the ultimate fix. But, in the 13 meantime, you know, I'm going to be supporting both 14 of the bills as they move forward. 15 So, Ms. Harkey. 16 MS. HARKEY: Well, we keep going back to 17 that sunset date. And I wish we could get a sunset 18 date in one of these two bills. I -- 19 MR. McKEEMAN: That's a great idea. 20 MS. HARKEY: -- I know when we passed that 21 I was there in 2009 as well. And I opposed it at 22 that time. 23 I'm still very opposed to the method. I 24 believe it's been kind of codified by this existing 25 Governor and for good reason, we have shifted 26 funding sources for different transportation 27 projects to accommodate this now. 28 So, what you're trying to do, in essence, 72 1 is recover some of your costs of implementation of 2 the tax. 3 MR. McKEEMAN: Correct. 4 MS. HARKEY: Correct. Well, that seems to 5 be what the BOE tries to do when we get assigned a 6 new tax to collect. 7 So, I would think that would be -- either 8 author reassurance to you that that would happen or 9 not? 10 MR. McKEEMAN: We had a recent discussion 11 with Senator Beall on that. He said that it's 12 worthy of consideration. He didn't say absolutely 13 it's going into the bill, but at least he didn't 14 throw us out of the room either. So, we're hopeful 15 that it can get included. 16 Just as a frame of reference, when the tax 17 swap initially was implemented, there was a 18 protection for the state. There was a floor tax put 19 on on gasoline sold in June. And then -- and 20 then -- I mean, bought in June and sold in July, 21 that protected the state from an unevenness of 22 revenue collection. 23 That's never been allowed for our aspect of 24 the tax collection process. 25 MS. HARKEY: I've just -- I've just got a 26 problem with continuing to pummel an industry and a 27 source of employment in the state, which we 28 desperately need at this time. 73 1 So, thank you for appearing. 2 MR. McKEEMAN: Thank you. 3 MS. MA: Okay, do we have a motion and a 4 second? 5 MR. RUNNER: I had a motion. 6 MS. STOWERS: Yes. 7 MS. MA: Motion? 8 MS. STOWERS: Yes. 9 MS. MA: Second by Mr. Horton. 10 Let's take a roll -- roll call, please? 11 MS. RICHMOND: Ms. Ma. 12 MS. MA: Aye. 13 MS. RICHMOND: Mr. Runner. 14 MR. RUNNER: Aye. 15 MS. RICHMOND: Ms. Harkey. 16 MS. HARKEY: No. 17 MS. RICHMOND: Mr. Horton. 18 MR. HORTON: Aye. 19 MS. RICHMOND: Ms. Stowers. 20 MS. STOWERS: Aye. 21 MS. RICHMOND: Motion carries. 22 MR. McKEEMAN: Thank you very much. 23 MS. MA: Okay, thank you. Motion carries. 24 Next bill, similar in topic? 25 Ms. Pielsticker. 26 MS. PIELSTICKER: Yes, thank you. 27 SB 433, Senator Berryhill, related also to 28 the fuel tax swap. And I will be brief since we've 74 1 partially discussed this. 2 But the bill requires the DOF, instead of 3 the BOE, to determine the annual excise tax rate 4 adjustment for gasoline and diesel fuel under the 5 fuel tax swap provisions. 6 Note the bill is currently in 7 Appropriations and set for hearing in Appropriations 8 Committee on May 4th. 9 MS. MA: Thank you. 10 And I was in a meeting with the Department 11 of Finance and clearly they feel that this is part 12 of their ordinary course of business. It wouldn't 13 create unnecessary work. 14 If we could time it to May 15th, which is 15 when their May revised comes out, we were looking at 16 that possibility. 17 And I understand that Senator Berryhill is 18 also going to put a five-year sunset clause in his 19 bill as well. 20 MS. HARKEY: Yes. 21 MR. RUNNER: Move the bill. 22 MS. STOWERS: Second. 23 MS. MA: Move the bill, Senator Runner. 24 MR. RUNNER: Move to support the bill. 25 MS. MA: Move to support the bill by 26 Senator Runner, second by Ms. Stowers. 27 Roll call. 28 MS. HARKEY: Support the bill as amended? 75 1 MS. MA: Support the bill as amended, okay. 2 So, we have a unanimous -- 3 MS. HARKEY: Unanimous. 4 MS. MA: -- support. 5 MS. HARKEY: Thank you. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 76 1 ---oOo--- 2 MS. PIELSTICKER: Our next bill is SB 591 3 by Senator Pan. It would impose a new $2 per pack 4 cigarette tax and an equivalent floor stock tax and 5 indirectly increase the tobacco products tax. 6 Existing law imposes an 87 cent per package 7 of 20 cigarette tax. In addition, existing law 8 imposes a tax upon the distribution of tobacco 9 products based on the wholesale cost of these 10 products at a tax rate that is equivalent to the 11 combined tax rate on cigarettes and the 50 cent per 12 pack cigarette tax. 13 The bill enacts the California Tobacco Tax 14 Act of 2015 to impose the additional $2 per package 15 of 20 tax on and after January 1, 2016. The purpose 16 is to decrease smoking rates, improve access to 17 health care, and advance California's tobacco 18 prevention and control programs. And the bill is 19 currently in Senate Health Committee, scheduled to 20 be heard on April 29th. 21 MS. MA: Thank you. 22 And we have the same folks back with us: 23 Ms. Lindsey Freitas of the Lung Association and 24 Mr. Tim Gibbs of the American Cancer Society. 25 ---oOo--- 26 TIM GIBBS 27 AMERICAN CANCER SOCIETY 28 ---oOo--- 77 1 MR. GIBBS: All right, thank you. And 2 thanks again, Madam Chair. 3 SB 591, it's a $2 pack -- per pack of 4 cigarettes. California hasn't raised its tobacco 5 tax on tobacco in 17 years. You know, California's 6 now 33rd in the nation. Tobacco costs are stayed 7 about $13 billion in health care costs and 3.5 8 billion of that are -- are borne directly from the 9 taxpayer through Medi-Cal costs. 10 The American Cancer Society Cancer Action 11 Network estimates that just the tax alone would save 12 a hundred thousand lives every year, would prevent 13 150,000 kids from ever starting to smoke, and it 14 would reduce smoking in individuals or help them 15 quit altogether for about 250,000 people. 16 ---oOo--- 17 LINDSEY FREITAS 18 AMERICAN LUNG ASSOCIATION 19 ---oOo--- 20 MS. FREITAS: Thank you. 21 You know, the bill really looks at, as they 22 said, raising the tobacco tax by $2 and then using 23 this money by putting it into kind of four pots of 24 money. 25 The first and largest pot is into Medi-Cal 26 to kind of help ensure that the folks that use 27 tobacco and then suffer tobacco-related diseases 28 have access to the health care coverage that they 78 1 need to keep them as healthy as possible. 2 The second pot is into the tobacco control 3 and prevention funding. This is a program that has 4 been successful at lowering smoking rates and 5 discouraging youth from quitting (verbatim). It's 6 saved hundreds of thousands of lives and billions of 7 dollars to the State of California. 8 The third pot is into research. You know, 9 just trying to figure out how we can treat some of 10 these issues that come from the use of tobacco. 11 And then the fourth pot is into the -- some 12 funding for law enforcement, to ensure that if any 13 kind of issues arise, that we have bolstered that so 14 that they can take care of it. 15 This also includes backfill for both Prop 16 10 and Prop 99. But one of the interesting things 17 about this bill is it's a companion piece to 18 AB 1396, which is in the Senate right now. And the 19 most recent amendments have actually taken what was 20 591 in its entirety and kind of cut it in half. And 21 so now 591 and 1396 are conjoined, and 591 really 22 looks at raising the tax and developing the fund 23 that's needed to receive the tax revenue. And 1396 24 is the vehicle for the distribution of the funds 25 into those pots of money. 26 It's got a lot of support, not just from 27 the public health groups but from labor, from the 28 hospitals, from health access, the California 79 1 Medical Association, and all kinds of groups. So 2 it's a -- it's a very well-liked bill from a lot of 3 different groups. 4 MS. MA: Any questions, Members? 5 MR. RUNNER: We've brought up a number of 6 concerns in regards to the implementation schedule? 7 MS. PIELSTICKER: Yes. That is correct. 8 We would like administrative startup cost funding 9 and a delayed operative date. 10 MS. FREITAS: And we are working with the 11 BOE to figure all of that out and work on amendments 12 that will address those concerns. 13 MS. MA: Okay. Mr. Horton. 14 MR. HORTON: Thank you, Madam Chair. 15 It's anticipated that the underground 16 economy impact will double as a result of the 17 increase in revenue to those who operate in the 18 underground economy. 19 Do we have a funding source to address 20 that? I mean is part of the funding will come to 21 the BOE AB 71? 22 MS. PIELSTICKER: There is funding provided 23 for administrative enforcement. However, this bill 24 currently contains a two percent cap and we're 25 uncertain as to how the money is intended to be 26 used. It's a very broad term. And perhaps the 27 witnesses could further elaborate. 28 MR. GIBBS: There are significant funds 80 1 dedicated through the Attorney General's office to 2 combat, you know, as you said, the underground 3 economy. 4 MS. MA: But I do think we have found that 5 higher taxes doesn't necessarily equate to higher 6 tax evasion since we have very low tax rates on 7 cigarettes, yet we have, still, one of the highest 8 evasion rates, I think, in the nation, even with our 9 low rates; is that correct? 10 MS. PIELSTICKER: I can't speak to the 11 evasion rates as it relates to the nation as a 12 whole, but we do have an evasion rate of 13 approximately 126 million in cigarette taxes, along 14 with 88 million in tax on other tobacco products. 15 MR. HORTON: And what -- excuse me. 16 MS. MA: Mr. Chair. 17 MR. HORTON: Madam Chair. 18 MS. MA: Yes. 19 MR. HORTON: And what does the 20 Department -- does the Department anticipate an 21 increase in illegal sales of cigarettes? 22 MS. PIELSTICKER: Typically, we would 23 factor in some form of increased evasion as a result 24 of an increase in tax. 25 MR. GIBBS: We would say, you know, our tax 26 is -- is generally lower than our neighbor's. So 27 it's not that, you know, somebody's buying 28 cigarettes in Oregon and driving into California. 81 1 You know, there's issues of counterfeiting and other 2 things that, you know, are potentially the -- the 3 problem. 4 But again, dedicating significant funds to, 5 you know, the Attorney General's office to bolster 6 their enforcement operations, we think, is the -- 7 you know, the wise course of action in terms of 8 raising the tobacco tax. 9 MR. HORTON: I would suggest funding 10 directly to the Board of Equalization. I'm very 11 supportive of the AGs and the AG's effort. Our 12 effort is on -- we're on the front line of taking 13 the product off the street and discouraging the 14 distribution of the product, stopping it as it flows 15 into the State of California. 16 As a result of our efforts, we've taken 17 over 42 tons of illegal cigarettes off the street, 18 which poses even a greater health threat by virtue 19 that the counterfeit cigarettes contain, you know, 20 chemicals that are even more dangerous to the human 21 body. And so taking those off the street is 22 extremely important to me to assure that there's 23 funding in order to accomplish that objective. 24 Otherwise, we're shifting the 25 responsibility and at the same time, even though the 26 records will reflect a reduction in consumption, it 27 then becomes a question of who you're actually 28 buying the product from. And it's not -- it's not a 82 1 innerstate or out-of-state issue. They ship it 2 here. It's being distributed here. A number of 3 even the lowest retailers -- ice cream truck that's 4 selling the product illegally here in the State of 5 California. And so, would look for funding as it 6 relates to being able to address that. 7 Very much supportive of increasing the tax, 8 though, to address the health issues and some of the 9 other issues there. And historically, I think every 10 economist has -- has concluded throughout the nation 11 that a marginal increase in taxation does result 12 in -- in an increase in criminal activity associated 13 with it as well as -- I mean taxation historically 14 serves as a behavior modification. And when we look 15 at how it modifies the behavior, the marginal 16 increase has a direct behavior modification of those 17 who actually acquire the cigarettes to look to get 18 'em cheaper somehow, including illegal acts as well. 19 So I don't know where that breaking point 20 is or where that point of diminishing returns will 21 be as to how much we increase it. I know this is a 22 matter that has been taken before the public on a 23 number of occasions, and the California voters have 24 spoken on this. And I think we need to figure out 25 where that happy medium is in order to address the 26 healthy as well. And I just don't know, so -- 27 MS. MA: Senator Runner. 28 MR. RUNNER: The -- the two percent cap, 83 1 what does that -- what is -- what is it that we're 2 capping? 3 MS. WILSON: Cindy with the Legislative 4 Section. 5 It's capping administrative costs for all 6 agencies. 7 MR. RUNNER: Okay. So here -- here's my 8 concern -- 9 Well, let me ask you this question: Do you 10 believe this will result in less sales over time? 11 MR. GIBBS: Absolutely. It's the reason 12 we're doing it. 13 MR. RUNNER: Okay. Okay. So that's my 14 problem. Not that it produces less sales. But if 15 less sales are coming in and you're copping 16 administrative costs, then administrative costs are 17 going to go down. 18 Unfortunately, what we have found is that 19 even as use goes down, we still have just as many 20 inspections to do, maybe even more, we still have -- 21 and our costs go up because salaries, all costs of 22 administration goes up over time. And so by capping 23 the administrative cost in a decreasing -- in an 24 item that you believe is going to be decreasing in 25 revenue, just doesn't -- doesn't allow then for the 26 ability for us to do inspections. And so what then 27 the result ends up being is either we end up doing 28 less inspections, which then creates more 84 1 underground economy, or we end up spending money 2 that we get for other things, which we're not going 3 to do. And so far, quite frankly, the General Fund 4 has not been open to then backfilling these -- 5 these -- this lowering cost. 6 So that -- that's certainly a concern that 7 I would have in regards to trying to cap the 8 administrative costs, when in fact administrative 9 costs will go up even though the revenues go down. 10 MS. MA: Ms. Harkey. 11 MS. HARKEY: Thank you, Mr. Runner. I 12 believe that's the argument we're hearing now from 13 First 5. We have fixed costs to implement. And 14 when the revenues go down, our costs don't go down. 15 And I think that's -- that's the real -- the real 16 kicker. 17 I know that they're not happy. First 5 has 18 been around the building and in our offices as well, 19 as well as the Capitol. And they are -- they 20 understand that if the reimbursement gets fixed to 21 the BOE, that they end up taking that portion of 22 fixed costs that's not covered by the reimbursement. 23 So I think you're going to have a little 24 bit of a war on your hands with this. I think it 25 can be worked out, but it's just going to be -- 26 going to be an issue. 27 Thank you. 28 MS. MA: Okay. Anymore discussion? No 85 1 more discussion, Members? 2 Do we have a motion? 3 No motion? 4 In theory it should be easier here, a 5 majority vote bill. 6 No motion. 7 MS. STOWERS: No motion. 8 MS. MA: Okay. Well, no motion, no second. 9 Okay. 10 I'm sorry. 11 Next bill. 12 MS. PIELSTICKER: The next bill is SB 640 13 by Senator Beall, relating to direct refunds of -- 14 or assignment of direct refunds of excess tax 15 reimbursement. 16 Existing law allows retailers to collect 17 sales tax reimbursement from their customers if the 18 sales contract so provides. When a retailer 19 collects more sales tax reimbursement than is due 20 from a customer, that excess tax reimbursement must 21 either be returned to the customer or paid to the 22 State. 23 This bill authorizes a retailer to make an 24 irrevocable election to assign the right to file a 25 claim for refund of excess tax reimbursement in the 26 amount of $50,000 or greater to a single customer so 27 that the BOE may make a direct refund to that 28 customer. 86 1 The purpose of the bill is to allow, under 2 limited circumstances, direct reimbursement to a 3 customer who is overcharged sales tax. 4 The status of the bill is that it is 5 scheduled to be heard in Senate Appropriations 6 Committee on May 4th. 7 MS. MA: Witnesses? 8 Mr. Torrico, good to see you, 9 Assemblymember. 10 ---oOo--- 11 ALBERTO TORRICO 12 ASSEMBLYMEMBER 13 ---oOo--- 14 MR. TORRICO: Always a pleasure, Madam 15 Chair, Mr. Chairman, Members of the Board. Alberto 16 Torrico appearing on behalf of Ryan as was -- as -- 17 First of all, I want to extend my gratitude 18 to the Members of the Board. I've engaged, on this 19 issue, some of you for several years. I want to 20 extend my, also, appreciation to your staff, and in 21 particular the staff of the BOE. It's been very 22 helpful and willing to work with us on -- on various 23 pieces of this legislation. 24 When we had our first hearing in Senate 25 Government and Finance, your staff suggested some 26 technical amendments which were adopted by the 27 author. We supported those amendments. So we hope 28 to continue working with you. 87 1 As mentioned by the analysis and in the 2 presentation, we're trying to streamline the process 3 for refunds to customers, trying to make it easier 4 for folks to get these refunds. In order to contain 5 the costs, we've put a $50,000 threshold to trigger 6 this new procedure. 7 We think it's a -- it's common sense 8 legislation. We're proud to have the support of 9 various business, groups including the California 10 Chamber of Commerce, California Manufacturers 11 Technology Association, the Retailers Association, 12 the Taxpayers Association, and Tech -- America and 13 Technet. And so a wide range of support for the 14 bill. And very much appreciate the support of the 15 BOE on this matter. 16 Thank you, Madam Chair. 17 MS. MA: Members, any -- 18 MS. HARKEY: Motion to -- 19 MS. MA: -- discussion? 20 MS. HARKEY: -- support. 21 MS. MA: Motion to support. Seconded by 22 Chairman Horton. 23 Anything, Mr. Hanks? 24 MR. HANKS: No. Just here to respond to 25 questions, yes. 26 MS. MA: Okay. 27 MR. HORTON: Madam Chair. 28 MS. MA: Mr. Horton. 88 1 MR. HORTON: Madam Chair, thank you. 2 I'm -- I'm supportive of the bill in 3 concept for a number of reasons. We ran into this 4 with the CVS lawsuit and a number of other lawsuits 5 where the retail entity just refused when he decided 6 not to issue the credit to their customers. And in 7 the case when there's a large liability, that 8 decision is now vested in the hands of the retailer. 9 And so this may simplify that and allow us 10 to -- to issue refunds that theoretically are 11 legally due, will be legally due. Theoretically is 12 legally due to someone and should almost be 13 construed as an excess tax reimbursement to some 14 degree, which, um -- which I'm sort of curious if -- 15 And maybe this is -- Madam Chair, if you 16 will -- a question -- an aside question that the 17 Committee could take up, is whether or not there is 18 some excess tax reimbursement -- 19 I know it's not. I just got through 20 running the law through my head. 21 Okay. So supportive of the bill. The 22 challenge still may remain how do you get the little 23 guy -- how does the little guy get his -- his credit 24 back as a result of this in absence of a -- in 25 absence of some sort of class action lawsuit or 26 something? I don't know. Which is something I just 27 encourage the author to kind of look at. 28 I know the $50,000 threshold lies there and 89 1 so forth, but look at some remedy to the little guys 2 who are losing out as a result of this impediment. 3 MS. MA: I do have a question, Mr. Hanks, 4 since you're here. 5 MR. HANKS: Mm-hmm, yes. 6 MS. MA: The administrative costs to 7 implement this bill is estimated to be 500 to 8 $600,000 so that BOE staff would develop and 9 maintain a database. And, as I understand, on 10 previous bills, AB 599, the lender bad debts bill, 11 like we didn't have -- we didn't ask for any staff 12 costs. We didn't need a database. 13 Why do we need a database for this bill? 14 MR. HANKS: Right. Ms. Ma, Kevin Hanks 15 with the Sales and Use Tax Department. 16 Yes, that's an excellent question. The 17 database would be required because, under this 18 provision actually, the retailer could assign the -- 19 the refund to the customers. And so what we'd need 20 to do is to make sure that we don't have both 21 parties actually filing claims for refund. So we 22 just need to maintain that database to ensure that 23 if we're refunding amounts to the customer, that we 24 don't have like claims for refund that are being 25 processed and handled for the retailer. 26 Just in general, regarding the cost 27 estimate, too, we're knowledgeable too, that we've 28 only requested four field positions associated with 90 1 this. It's -- it's really an estimate that we made. 2 It's really indeterminate at this time whether or 3 not we would incur additional costs, you know, 4 associated with -- with handling these claims for 5 refund. There was a preliminary estimate that we 6 had supplied when discussions of -- of the bill were 7 under way. 8 There are some one-time programming costs 9 that were associated with this as well. 10 MS. MA: Okay. 11 MR. HORTON: Madam Chair, if I may. 12 MS. MA: Mr. Horton. 13 MR. HORTON: I, um -- on the database, are 14 we anticipating keeping an ongoing database? How 15 extensive will the database be? 16 MR. HANKS: The database would just 17 identify the -- the nature of the refunds, who's 18 requesting the refund, over what time period they 19 covered, what transactions were subject to refund. 20 And so it would just identify who's -- who the party 21 basically is that's -- that's claiming the refund so 22 that we can ensure that duplicate refunds weren't -- 23 weren't issued to both the buyer and the seller. 24 MR. HORTON: Okay. So we anticipate an 25 increase in the number of refunds that we -- that 26 will be filed, is that the reason for the additional 27 work? 28 MR. HANKS: There was a potential for that. 91 1 As I say, the staff was really uncertain how many 2 additional refunds we -- we might see. To the 3 extent now where it would be easier actually for us 4 to issue a single refund to the retailer, this bill 5 would actually allow customers, multiple customers, 6 to contact the Board in place of just having the 7 retailer file a single claim for refund. 8 So there's a possibility that -- that we 9 could have several people filing refund claims to 10 us. But we think that the threshold limit is -- is 11 really going to narrow the scope of the numbers of 12 refund claims that we'd see. 13 MR. HORTON: I would encourage the 14 Department to take another look at the -- the number 15 of claims that will result from this bill and the 16 nature of the claims in that the claims themselves, 17 at a $50,000 rate, would probably be a traditional 18 claim for refund for the Board of Equalization. 19 Arguably, the challenge that we really face 20 with the claims for refund is when the amount is 21 so -- is smaller and, therefore, the retailer has 22 the challenge of trying to give those funds back, 23 and that's a huge challenge. 24 But at the $50,000 rate, it is going to -- 25 I would speculate that it's going to be more of a 26 convenience thing to assign that opportunity to 27 their customers. They in fact, at that large of a 28 rate, would probably file a claim for refund 92 1 themselves. 2 I don't know that we're going to have -- 3 well, I would ask the Department to consider that at 4 that rate there's a high probability that the 5 retailer would have filed a claim for refund 6 irrespective of the legislation. This gives them an 7 opportunity for their own convenience to shift it. 8 Because at $50,000 you're really talking about some 9 of the larger retailers in the State of California 10 and you're talking about some of the larger items as 11 well -- airplanes -- so I'd reconsider the $500,000 12 cost to be more closer to the cost that we're going 13 to incur at any rate, probably should be absorbed by 14 the agency. 15 MS. MA: Yeah. So I'd like to just go back 16 to the lender bad debt. 17 So do lenders assign their bad debt 18 sometimes to other parties? 19 MR. HANKS: So, yes, there's an assignment 20 that can be made. 21 There's -- it's somewhat different though 22 in a lender bad debt situation and you might have 23 sales of accounts receivables to other entities or 24 you can just assign that bad debt. For instance, 25 with -- with -- let's say we've got a bank that 26 serves as the lender and we've got multiple 27 retailers, we could have just that bank as a lender 28 file a single claim for refund even though you might 93 1 have multiple retailers that were associated with -- 2 with making sales of, let's say, vehicles. 3 MS. MA: But we didn't need a database for 4 that process. Like how many -- what's the dollar 5 amount in this lender bad debt refunds that have 6 been issued so far? 7 MR. HANKS: $600 million of refunds have 8 been issued under AB 599. We anticipate, however, 9 that the number of -- of refunds in connection with 10 that legislation is actually quite in excess of that 11 amount because we understand retailers are deducting 12 those -- those bad debts on their returns. 13 Sometimes they're netting those amounts from their 14 returns. So our best estimate is actually probably 15 closer to a billion dollars in refunds in connection 16 with AB 599. 17 MS. MA: So thank you very much. 18 So I would agree with the Chairman that 19 since we didn't ask for additional money for a 20 database for that bill yet, it's already reached a 21 billion dollars and has kind of the same situation, 22 you know, I don't see why we would need a new 23 database and an additional appropriation for 500, 24 $600,000 in this case for -- for this bill. 25 MS. PIELSTICKER: Madam Chair, may I -- 26 MS. MA: Yes. 27 MS. PIELSTICKER: -- just add a point. 28 It is my understanding from program staff 94 1 as well that while they did not request additional 2 resources, they ended up redirecting a number of 3 resources to pay for the program, and in retrospect 4 would have requested additional resources had they 5 known the level of impact on the agency. 6 MR. HORTON: Madam Chair, may I? 7 MS. MA: Yes, Mr. Horton. 8 MR. HORTON: Is -- is the -- the $50,000 9 threshold, is that measure or tax? 10 MR. HANKS: Tax. 11 MR. HORTON: And that's a cumulative 12 transaction or a single transaction? Is it the 13 50,000 can be a cumulative for one person? 14 MR. HANKS: Correct. 15 MR. HORTON: Or it's transactional? 16 MR. HANKS: Not transactional. Cumulative 17 for a customer; so one person. 18 MR. TORRICO: Within the statute of 19 limitations of course. So -- 20 MR. HORTON: So that's $500,000 per 21 individual. Just the threshold. So each individual 22 would have to have had $500,000 in transactions in 23 order to be able -- 24 Help me understand. 25 MS. PIELSTICKER: $50,000. 26 MS. HARKEY: Transactions or -- 27 MR. HORTON: So again, let me ask is it tax 28 or is it measure? 95 1 MS. PIELSTICKER: Oh, I see what you're 2 saying. Gross receipts. 3 MR. HORTON: If it's measure, then the 4 transaction -- 5 MR. HANKS: It's tax. 6 MR. HORTON: -- cumulative transactions are 7 going to be $500,000. 8 Well, then my argument would hold then. I 9 think it's such a high rate, you're going to have 10 participation on the part of both the retailer and 11 the consumer. And more often than not the 12 consumer -- I mean the retailer would have filed a 13 claim for refund at any rate, it's such a high rate, 14 and we would have absorbed that cost in our normal 15 course of business. 16 I just encourage staff to take a look at 17 it. I don't want to -- you know, I defer to you in 18 that regard. But certainly we ought to take a real 19 good look at it in this case. 20 MS. MA: Mr. Runner. 21 MR. RUNNER: Yeah, I -- I -- I hesitate 22 negotiating costs here from the dais in terms of 23 this discussion because, again, I don't know all the 24 parts and pieces, nor do I necessarily think staff 25 has looked at all the parts and pieces. 26 But I think clear what you have here is the 27 support of the con -- the bill with a desire for the 28 staff to really do some fine-tuning in terms of 96 1 where it is that they came up with the cost, what it 2 is that they can absorb, what isn't absorbable, how 3 much -- I mean, how broad is this program? And it 4 seems to me that we're asking that the -- the staff 5 have that conversation back to the author's office, 6 and certainly back with us in regards to how the 7 costs were -- were -- were calculated. 8 MS. MA: Thank you. 9 Did I -- who made the motion? Did someone 10 make a motion. 11 MS. STOWERS: Harkey/Horton. 12 MS. MA: Harkey motion, seconded by Mr. -- 13 MS. HARKEY: Thank you for remembering. 14 MS. MA: -- Horton. She's writing it down. 15 Okay, I think by unanimous consent, 16 Members -- yes, by unanimous consent we will be 17 supporting the bill. 18 MR. TORRICO: Thank you, Madam Chair. 19 MS. MA: Any other items, Ms. Pielsticker? 20 MS. PIELSTICKER: Yes, as a matter of fact. 21 ---oOo--- 22 23 24 25 26 27 28 97 1 ---oOo--- 2 MS. PIELSTICKER: I am presenting on behalf 3 of the Research and Statistics Section on the 4 revenue estimate that we provided to the Senate 5 Governance and Finance Committee related to revenue 6 to be received from a sales tax on services. 7 So, just a high level overview of our 8 estimate and how we came up with it -- we looked at 9 15 different service industries, 293 different sub 10 industries, over 30,000 product and service codes 11 were reviewed. We looked at 3 million plus employer 12 and non employer California establishments and 13 determined that there could be possibly more than 14 2.5 million new permits to administer and estimated 15 total receipts of $1.5 trillion and potentially 57.3 16 billion in dollars to the General Fund. 17 Our data sources were the US economic 18 census, which is completed every five years and 19 collects data for the states and the nation as a 20 whole. 21 National industry data is more detailed 22 than the individual state data. And the Census 23 Bureau has not released much of the 2012 data for 24 individual states. 25 So, the last complete census with detailed 26 national and state data was 2007. And we're looking 27 at both the 2012 and 2007. 28 We also looked at the county business 98 1 patterns, which provides 2012 California data 2 related to the numbers of business establishments 3 for employer firms. 4 And we looked at IHS Global Insight, which 5 is a forecasting service that we used to forecast 6 economic growth. 7 So, some of the definitions that we used -- 8 probably the most important to understand would be 9 the difference between a firm and an establishment. 10 A firm is a business organization or entity 11 consisting of one or more domestic establishments. 12 And an establishment is a single physical 13 location where the business is conducted. 14 So, you can have a firm, like a law firm, 15 with a number of locations that are considered to be 16 establishments. 17 So, the total potential sales and use tax 18 revenue, state and local, that we determined was 19 $122.6 billion. 20 One interesting set of data that we came up 21 with is that employers make up about 17.5 percent of 22 the establishments that would be subject to tax and 23 the non employers about 82.5 percent as matter of 24 population. 25 So, as a matter of population, non employer 26 establishments predominate; but employers generate 27 91 percent of the total receipts, while non 28 employers account for approximately 9 percent. So, 99 1 the small businesses generate less receipts, despite 2 the fact that they form a larger segment of the 3 population to be taxed. 4 So, the methodology that we used was to 5 first determine the service industry from the US 6 economic census and calculate the California 7 percentage of that industry, also from the economic 8 census, and then deduct current taxable sales based 9 on a US census product line report. 10 And, so, that would be if you have the 11 service business that is also telling tangible 12 personal property, we backed that out. 13 We applied the industry sector growth rate 14 through Global Insight and then an average statewide 15 sales tax rate of 8.42 percent. 16 And the other -- the other thing that we 17 did was to back out utilities and insurance because 18 utilities are currently exempt as tangible personal 19 property. And the insurance industry is largely 20 exempt from most forms of tax, but the gross 21 receipts tax. 22 And, so, we wanted to take a look at those 23 industries, but not necessarily include them in our 24 overall services tax total. 25 So, last, and I think probably most 26 importantly, we have a number of qualifying remarks 27 to this estimate because we were asked to just look 28 at everything under the sun and assume 100 percent 100 1 compliance. 2 And, as we know, we won't likely achieve 3 100 percent compliance, particularly with services. 4 Services are harder to track. And they're 5 oftentimes cash businesses. So, we would have the 6 same compliance issues associated with those service 7 businesses we do with current cash businesses 8 related to tangible personal property. 9 We don't account -- it's a static estimate. 10 We don't account for any changes in economic 11 activity, except to look at the growth rate from 12 IHS, or Global Insight. 13 And the other thing that we did not do is 14 back out sales for resale. And we did not back 15 out -- we did not back out fabrication and 16 installation labor. However, fabrication and 17 installation labor, we believe, would be a fairly 18 insignificant portion of the estimate. 19 So, with that, I have Joe Fitz, with the 20 Research and Statistics Section, to answer any 21 detailed questions that you may have. 22 MS. MA: Ms. Harkey. 23 MS. HARKEY: Thank you. 24 I had requested that we provide some kind 25 of dynamic analysis. What -- how do we go about 26 doing that within the BOE? 27 MR. FITZ: Well, dynamic analysis, I think, 28 would require a pretty significant modeling effort, 101 1 where traditionally we're used to looking at our own 2 taxes. 3 But in a dynamic world you really consider 4 the whole universe of businesses and households and 5 how they interact in the economy, which is probably 6 more along the lines of something that Finance would 7 do in terms of you need a pretty comprehensive 8 econometric model to do that, which, you know, could 9 be done, I think, within BOE. It would be a 10 significant modeling effort. 11 But I guess I see two issues here. One is 12 simply, you know, technically doing it, a very large 13 scale econometric model. 14 But the difficulty I see with a dynamic 15 analysis of this kind of -- 16 MS. HARKEY: Major overhaul. 17 MR. FITZ: -- major overhaul is we have a 18 real data problem, in that we don't -- we don't have 19 experience to draw upon in terms of how are 20 consumers and businesses going to react to such a 21 radically different tax system than what we 22 currently have? 23 So, there would be a lot of guesswork 24 involved, unfortunately. 25 MS. HARKEY: Well, I think we have a few 26 states that have tried this in either limited or 27 full -- full areas. 28 I know Massachusetts did not want to exempt 102 1 businesses from taxes. And, so, they chose to not 2 eliminate the sales on resale because no matter 3 which way you're doing it, it's business purchases 4 that are getting exempted from taxes. And that 5 makes great political fodder, especially I think it 6 would in this state. 7 And, so, but if they didn't -- they didn't 8 do that, so, their system failed because it is a 9 form of double taxation. There was a big hue and 10 cry. 11 And, so, that kind of -- they wanted to tax 12 businesses, that was their purpose. And then it 13 ended up being a massive failure. 14 Other exemptions, such as health care, 15 education, I believe we'd have some -- some issues 16 with that. 17 I thought that -- I thought that health 18 care and education were going to being exempted by 19 the author. 20 Have you heard anything about that? 21 MS. PIELSTICKER: The author has indicated 22 that that is his intent. 23 However, this is an estimate of just 24 a broad-based sales tax on services. It wasn't 25 specific to SB 8. 26 MS. HARKEY: Right, okay. 27 Well, one of reasons I'm saying this is 28 because when this came out in the press, everybody 103 1 went hog wild over the potential for billions of 2 dollars and very little administration costs. 3 So, I'm kind of trying to hone in on this 4 in a public hearing that there are some -- there are 5 some issues with it. 6 Because I, for one, don't want the BOE to 7 once again be hunting down all of the little guys to 8 try to eke a few dollars out of them. 9 I think it was -- there was -- there were a 10 couple of other -- maybe -- was it -- I'm trying to 11 think of what states it was. I don't have the study 12 in front of me, I probably left it in my office. 13 But one of them had tried it and -- was it 14 Illinois? I don't know. 15 Anyway, advertising was taxed, as were 16 attorneys. And that killed their measure because 17 all of the press was opposed. And all of you can 18 imagine the social media if you're taxing everything 19 that goes up there, you're going to have a huge 20 contingent that's going to be really upset. 21 So, you know, if you start exempting some 22 of these items from this -- this -- what appears to 23 be a real healthy take, you find out that you're 24 probably down to the 82 percent non employers that 25 only pay 9 percent. 26 So, I'm not real pleased with this. I 27 think it's -- it's going down a path, that unless we 28 totally overhaul all taxes in the state, this 104 1 probably doesn't work. And I think we'll build up a 2 ton of opposition. 3 I do appreciate your study. But, like I 4 said, I just wanted to hone in on some of these 5 things in a public hearing because it just sounds 6 like it's such good deal, boy, I mean, I have heard 7 a lot of comments, "Oh, my gosh, that's a lot of 8 money." 9 But the reality, the take would not be that 10 in real terms. I think we'd -- we'd be gathering 11 sufficiently less. 12 And we all know that there are -- there are 13 dynamic analyses. People make choices and companies 14 make choices. And I can tell you definitely 15 attorneys make choices. So -- and school districts 16 and medical providers. And, so -- 17 MS. MA: CPAs. 18 MS. HARKEY: -- CPAs, yes. So, thank you 19 for -- and lobbyists. 20 Thank you very much for your -- for your 21 report. And I just -- I would like to have my 22 comments added to anything that goes out in the 23 press -- at least something a little more 24 finely-tuned than $122 billion. 25 Thank you. 26 MS. MA: Mr. Runner. 27 MR. RUNNER: Thanks. You know, I -- I 28 actually appreciate the report. 105 1 I think it -- I think it responded to what 2 the request was. And I think that's important for 3 us to be able to give when the -- when the 4 legislature asks us for something, we need to give 5 them the numbers in regards to that. 6 Now, I think -- I think -- but I especially 7 appreciated within the report that you had the 8 number of -- of accounts that would be, 'cause 9 that's what derives then the cost for us. 10 I mean, in very specific numbers in theory, 11 we have what, about a million, right now, accounts 12 that we deal with permits to deal with our current 13 business -- those who have certificates and licenses 14 with us for resale -- for sale. 15 This, actually, if you did it, in theory, 16 you got to what, two and a half million or something 17 more and what -- you have 5,000 employees to get to 18 that point, then you would need another 15,000 19 employees in order to do this. 20 So, I think that's -- that's a clarity in 21 regards to -- I appreciated that that was part of 22 it. 23 The other thing I assume that this will do, 24 at least the way we will use it -- the way I've used 25 it in the legislature -- is this is just the 26 starting point. 27 Now -- now it's going to come down to what 28 you're really talking about? What programs are you 106 1 talking about? Which -- which groups are you 2 talking about? Because then it becomes an issue of 3 reality. 4 I look at this as just a base, you know, 5 information. And then it's going to be up to the 6 legislators down the street to figure out then how 7 to narrow the bill. 8 I think, as Senator Hertzberg has said, 9 he's got some thoughts in his head in regards to how 10 narrow -- how -- what he is going to include and 11 exclude. 12 And I think the next -- the next 13 discussion's going to take place is, "Well, who's 14 in? Who's in? Who's out?" 15 And that's -- as I have talked to folks 16 that are in the industry, in various industries, 17 that's what they're waiting for. 18 And again I've heard from many folks, not 19 just legislators, who are looking for more money, 20 but, actually, those who are opposed to the bill -- 21 opposed to the concept -- very much appreciative of 22 the report because it gave a very specific number -- 23 and in terms of not the total number of dollars, but 24 the number of industries and how -- how impactful 25 this would be. 26 And, so, I think you guys did a stellar 27 job. I think it's an issue to which we can be proud 28 of in regards to the information. 107 1 Now what they do with the information, 2 we're going to get another shot at, because at that 3 point, when all of a sudden another bill comes down 4 and the bill has these certain industries that are 5 included in the sales tax for services, we, all of a 6 sudden, now can implement some issues, which I think 7 are important, like the dynamic analysis. The 8 success or unsuccess of what's happened when they've 9 applied it to those industries in other states, 10 'cause the track record isn't very good. 11 So, I think it gives us then the 12 credibility in the beginning and then the ability to 13 respond when we see something specific as the 14 legislature comes down with it. 15 So, again, I've heard from lots of folks 16 who are in the industry in terms of who are 17 concerned about it, feeling like this gives them 18 some things, some real meat for them to deal with. 19 And they're doing exactly what this -- what 20 Member Harkey talked about -- now let's talk about 21 what the real money is. Now let's talk about what's 22 really there and going down and honing down on that. 23 But you can't get there unless you start 24 with the big number. And, so, I appreciate that. 25 MS. MA: Mr. Horton. 26 MR. HORTON: The one thing that I would -- 27 I mean, the interesting thing about this process is 28 is that there really isn't any language out there 108 1 that says it's going -- I mean, it's just a theory 2 out there, like a shell. 3 And, so, what is done is it stimulated the 4 discussion about the problems that California faces. 5 And, so, I think therein is where we have an 6 opportunity to really look at this intellectually. 7 And that's where Member Harkey's 8 recommendation for a dynamic study comes into 9 play -- and Member Runner as well. 10 Because as we look at it intellectually, 11 one of the things that I would encourage the 12 legislature to do is to not necessarily view 13 taxation from a revenue perspective -- it's going to 14 generate so much revenue. 15 And when we view it from that perspective, 16 there's always just challenges because you're just 17 looking at the revenue. 18 But if you look at the -- what I believe 19 the initial purpose of the -- that founding fathers 20 had when it came to taxation was to modify the 21 behavior. 22 And if the behavior that we want in 23 California is to create jobs, if the behavior we 24 want is to address poverty and those things in our 25 society, I believe we can find a consensus in order 26 to be able to fund that. 27 Part of the challenge is -- I think, is 28 that there are folks that fundamentally believe that 109 1 the money isn't spent right. And the return on the 2 investment isn't there. 3 And, so -- but I commend Senator Hertzberg 4 for initiating the debate. I mean, he's ignited the 5 discussions, not only here in California, but 6 throughout the entire nation; and the BOE, for its 7 participation in coming up with these numbers as 8 well as the disclaimers that we put forth that, 9 "Hey, look, you know, there's a lot of work to be 10 done here." So that no one comes back, as 11 Mr. Runner indicated, and -- and challenges what we 12 put forth. 13 MS. MA: Any other comments? 14 MS. STOWERS: Just to the staff. 15 Suffering from a cold, excuse me. 16 I commend you guys. The schedule's very 17 detailed, provides a lot of information. And I do 18 know that the Controller's council of economic 19 advisors will be looking at as we move forward. 20 So, thank you very much. 21 MS. MA: Ms. Harkey. 22 MS. HARKEY: I'd just like to add one more 23 comment. I was with several people that were up 24 here on another piece of legislation and the whole 25 group -- the whole industry. And they were very 26 panicked about this bill. So, I do think it is 27 having an effect. 28 And one of them even said that -- if I -- 110 1 I've been asked by a lot of people -- individuals, 2 companies, CEOs -- is this is really -- do you think 3 this really going to happen? 4 And the particular industry representative 5 said, 6 "You know, we're planning on some 7 expansion here and we're -- we really 8 need to know because we're not going to 9 go forward if this is going to happen." 10 So, I do think that these little ideas that 11 we think are academic affect business transactions. 12 People watch California. And, you know, 13 this academic discussion we're having, I think is -- 14 it could -- it could very dramatically affect 15 capital investment. 16 So, I would just like to caution that I 17 know we -- you know, we think it's academic. But I 18 do believe people make investment decisions based on 19 what our academic thoughts are and what they see 20 could potentially happen. 21 So, I want to thank you for having this 22 discussion. I think it's good. And I appreciate 23 the work product. I went through it one by one by 24 one. 25 And I picked out all of those I though 26 would probably -- we probably would have to exempt 27 in order to pass it. And the number was 28 considerably less. 111 1 I went through the entire spreadsheet and I 2 targeted out the big dollars and who in these big 3 dollar categories is actually going to cooperate or 4 stay in California. And the number got really 5 small. 6 Thank you. 7 MS. MA: Chairman Horton. 8 MR. HORTON: Thank you, Madam Chair. 9 Another consideration -- I'd like the staff 10 to -- to take a look at all of the existing and -- 11 credits that exist out there, the existing and those 12 that have sunsetted and so forth. 13 And in order to position us, or me, for 14 this discussion about behavior modification, as was 15 indicated, capital investment, an offset would be -- 16 could be very well to ensure or increase -- an 17 incentive to increase capital incentive, an 18 incentive to increase manufacturing, an incentive to 19 increase jobs. 20 I mean, other conversation I've had with 21 the medical industry -- or I don't want to single 22 out the industry -- but it was that taxation itself 23 to -- to -- to raise the taxes, the goal here is to 24 increase the bottom line, profit margin or to be 25 able to sustain the level of profit comparable for 26 your ingenuity and creativity, which can be 27 accomplished, but not necessarily with taxes. 28 We've got regulations. We've got 112 1 offsetting fees. We've got other things that are 2 impediments to doing business here in the State of 3 California. 4 And this provides an opportunity for that 5 overall view. And I'd like to be armed with the 6 information in order to be able to participate in 7 what potentially could be alternatives in order to 8 address California's needs as a whole. 9 Thank you, Madam Chair. 10 MS. MA: Okay, thank you. 11 Members, thank you and Michele and staff. 12 And this concludes our Legislative 13 Committee. 14 I'll turn it back to you. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 113 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 April 28, 2015 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 35 and pages 14 77 through 97 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: June 1, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 114 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on April 28, 2015 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 36 through 76 and pages 14 98 through 113, constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: May 26, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 115