1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 25, 2015 10 11 12 13 14 CHIEF COUNSEL MATTERS 15 J RULEMAKING 16 J1 PETITION TO AMEND SALES AND USE TAX 17 REGULATION 1525.4, MANUFACTURING AND RESEARCH & 18 DEVELOPMENT EQUIPMENT 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chair 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 For Staff: Robert Tucker Assistant Chief Counsel 18 Legal Department 19 Speaker: Therese Twomey Fiscal Policy Director 20 California Taxpayers Association 21 22 ---oOo--- 23 24 25 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 AUGUST 25, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, our next matter. 6 MS. RICHMOND: Our next matter is the Chief 7 Counsel matter, Item J, Rulemaking; J1, Petition to 8 Amend Sales and Use Tax Regulation 1525.4, 9 Manufacturing and Research and Development 10 Equipment. 11 And we do have someone that wishes to make 12 a public comment. 13 MR. HORTON: Thank you. 14 I would ask Therese Twomey to please come 15 forward. Welcome to the Board. We thank you and 16 appreciate your time traveling to southern 17 California. 18 Mr. Tucker, would you please introduce the 19 issues in this case. 20 MR. TUCKER: Yes. A petition to amend 21 Regulation 1525.4 was submitted by the California 22 Taxpayers Association. The petition offers 23 additional means to substantiate useful life of 24 property subject to the partial exemption. 25 Although staff has concerns about the 26 "deemed" provision of Revenue and Taxation Code 27 section 6377.1, we understand the perceived 28 ambiguities in the section's wording and we realize 3 1 that reasonable minds can differ on its 2 interpretation. 3 We do not regard this proposal as having a 4 revenue impact since, subject to the approval by the 5 Office of Administrative Law, it would be regarded 6 as consistent with the implementing statute. 7 Furthermore, for the first year, the exemption usage 8 was anticipated to be approximately $15 billion. 9 However, based upon returns to date, we have seen 10 approximately $3 billion of usage. 11 Today the Board can choose to: (1) deny the 12 petition; (2) grant the petition in part or in whole 13 and commence with the official rulemaking; (3) 14 direct staff to start the interested parties 15 process; or (4) take whatever action the Board deems 16 appropriate. 17 If the Board agrees, in light of the entire 18 statutory scheme, the Legislature intended to make 19 the partial exemption available in all circumstances 20 where a qualified person can establish that 21 otherwise qualified tangible personal property has a 22 useful life of one year or more, subject to the 23 approval by the Office of Administrative Law, this 24 proposed amendment will address the issues raised by 25 CalTax and effectuate such a legislative intent. 26 In the event the petition is granted, staff 27 would prepare and publish a notice for the November 28 Board hearing. If the amendments are adopted at 4 1 that public hearing, then staff would anticipate 2 filing with the Office of Administrative Law before 3 the end of the year, and the amendments would be 4 effective April 1st, 2016. 5 Thank you. 6 MR. HORTON: Members, let us hear from the 7 Fiscal Policy Director of the California Taxpayers 8 Association, Ms. Therese Twomey. 9 ---oOo--- 10 THERESE TWOMEY 11 ---oOo--- 12 MS. TWOMEY: Mr. Chair and Members, thank 13 you very much. 14 Thank you for the opportunity to come here 15 before you. And, also, thank you for allowing me 16 the opportunity to sit behind Rob Lowe and kind of 17 stare at the back of his head. Still a little bit 18 giddy about that. 19 On a more serious -- 20 MR. HORTON: Love is in the air. 21 MS. TWOMEY: I'm not sure about love, but 22 definitely admiration. 23 MS. HARKEY: His -- his wife was right 24 there. 25 MS. TWOMEY: Yes, that's why I didn't touch 26 him. 27 MR. HORTON: Okay, Members. 28 MS. TWOMEY: But on a serious note, thank 5 1 you for your continued leadership on this very 2 important issue. 3 I'd also like to take this opportunity to 4 thank your staff, as well as Board staff, for all of 5 their work and dedication on this issue. It's been 6 two years in the making and California's just 7 starting to implement this process and let other 8 states know that California's once again trying to 9 make ourselves more competitive with other states. 10 We are here today to ask you to approve 11 clarifying language and add that language to 12 Regulation 1525.4. As your staff have indicated, 13 there is ambiguity in the statute and in the 14 language itself; and this language and its ambiguity 15 has prohibited some taxpayers by -- to qualify for 16 the exemption and, therefore, generate the economic 17 activity that was intended by the Legislature. 18 This generated economic activity was 19 intended by the Legislature as a result of the 20 manufacturing that has left California. We're here 21 to ask you to help California come back and retrieve 22 those manufacturing jobs that have been lost. 23 Specifically, we're asking that the 24 language be added to allow California taxpayers to 25 better verify and to have the Board substantiate 26 that the "useful life" language can be substantiated 27 through either a warranty that lasts more than one 28 year, a maintenance contract that lasts more than 6 1 one year, or industry replacement standards that 2 last for more than one year. 3 And we ask that you approve option number 4 (2) which is to initiate the regulatory rulemaking 5 process through public notice. 6 Thank you for your time. 7 MR. HORTON: Quick -- question. 8 What are your thoughts about the argument 9 that this should be done through budget trailing or 10 statute and that the timing is -- given that 11 it'll -- this won't go into effect until April, the 12 timing is the same and possibly running dual 13 parallel tracks in order to make sure that the 14 desires are ultimately reached? 15 MS. TWOMEY: Thank you very much for the 16 question, Mr. Chair. 17 The statute itself asks the Board of 18 Equalization to take a look at utilization as well 19 as to compare the utilization to the amount that was 20 estimated, and in the event that that utilization is 21 lower than what is estimated, that the Board make 22 recommendations and pursue changes in order to 23 garner the amount that was initially intended and 24 the economic activity that was intended. 25 We have discussed this with the Department 26 of Finance. And as a matter of fact, they have been 27 asking us why utilization is so low. They've relied 28 on us to provide the industry's perspective as to 7 1 why this is not being utilized. 2 Their discussion with us indicated that, 3 since we came in a little bit late in the May 4 revise, they would like to take a look at it in the 5 January budget process; but as you've indicated and 6 as you all know, that would delay this process for 7 industry. 8 If we were to get legislation, it's likely 9 that it may not be signed until two months later. 10 And as this is a time-sensitive issue since we don't 11 have a lot of time to try to get this fixed, we'd 12 like to ask the Board to expedite this and get this 13 clarification fixed as quickly as possible. 14 MR. HORTON: Discussion, Member? 15 Member Harkey. 16 MS. HARKEY: This doesn't fix everything 17 for you, is what you're saying in essence, correct? 18 MS. TWOMEY: This is just to fix a small 19 ambiguity. 20 One of the issues, you know, has to do with 21 "useful life" and how to qualify. But, absolutely, 22 I think there are other ways that this exemption can 23 be improved to maximize utilization. 24 As your staff indicated, we are way, way 25 under-utilizing this because of some of the 26 barriers. But this will help move us towards -- you 27 know, in the right direction and start with 28 clarifying language. 8 1 MS. HARKEY: Right. And I -- I had been -- 2 I was involved early on in determining that it 3 probably had to be done through the Legislature in 4 order to -- because the statute had mirrored the, 5 uh -- the regulation, or the regulation mirrored the 6 statute. And we went through a long discussion 7 about this with many of your -- of your members. 8 And so I know there's some other items that need to 9 be reconciled here and it may be a longer process. 10 So I would encourage the Board to grant 11 this petition, and then we can move it just that 12 step forward, a little bit forward. 13 MR. HORTON: We'll accept that as a grant 14 of petition and hold to commence the official 15 rulemaking process and to amend the regulation. 16 Is there a second? 17 MR. RUNNER: Second. 18 MS. STOWERS: I have a comment. 19 MR. HORTON: Further discussion, Member? 20 Member Stowers. 21 MS. STOWERS: Thank you. 22 CalTax, thank you for looking into this 23 issue. I know I wanted to say you guys have been 24 really dedicated, trying to find a resolution to the 25 problem. 26 Myself and Ms. Yee definitely support 27 having businesses benefit from this exemption and we 28 acknowledge that it is under-utilized. Not sure if 9 1 it's because of a problem within the statute with 2 "useful life" or if it's just because the exemption 3 amount is just not enough to encourage them to 4 accelerate their -- their investments in California. 5 But that being said, I am under the 6 impression that the requirement needs to be fixed in 7 the statute first, as opposed to the regulation. 8 And for that, I will not be voting yes to accept the 9 petition. 10 MR. HORTON: Okay. Thank you. 11 Further discussion, Members? 12 I think it should be fixed through statute 13 as well. However, what the hey, you know, let's see 14 if we can get it done. 15 MR. RUNNER: Right. 16 MR. HORTON: I mean that's -- that's sort 17 of my view. Even if we could expand it to do all 18 the other things, I mean the only thing that stands 19 in front of us is the Office of Administrative 20 Law -- 21 MR. RUNNER: Right. 22 MR. HORTON: -- and they'll always be 23 there. 24 So, that's my thoughts. 25 There's a motion on the floor. 26 MR. RUNNER: Let me, real quick. 27 MR. HORTON: Objection noted. 28 Member Runner. 10 1 MR. RUNNER: Yeah -- yeah, I would agree. 2 I think the backstop there if we go beyond what we 3 need to do is AO -- is the Office of Administrative 4 Law. So I think there's a backstop there if we go 5 beyond what we need to, or should. 6 But I think the other side weighs more 7 heavily, I think, for us. And that is, how can we 8 expedite this process in order to grow business in 9 the State of California? 10 That being said, let me -- I have a 11 question to CalTax. There are some other items that 12 I think you're wanting to address. 13 MS. TWOMEY: Not in this petition. 14 MR. RUNNER: Well, right. I understand 15 that. But let me ask you this, because one of the 16 other issues that I would have a question about is 17 whether or not there are some things -- for 18 instance, if you would think it would be helpful if 19 we did interested parties or other kind of 20 discussions in those other items in preparation then 21 for what would be taking place next year? 22 I would just let CalTax decide if that -- 23 if there's an involvement that we should have, 24 outside of this petition, to try to deal with some 25 of those other issues, I think we ought to take that 26 under consideration at some time, too. 27 MS. TWOMEY: Yes, thank you. And we will 28 be coming back to you -- 11 1 MR. RUNNER: Okay. 2 MS. TWOMEY: -- after we take a look at the 3 remaining items and talk to all of the Board Members 4 about that. 5 MR. RUNNER: Thank you. 6 MS. TWOMEY: Thank you. 7 MR. HORTON: Member Harkey. 8 MS. HARKEY: We -- we would be happy to 9 review this under Business Tax Committee and get -- 10 get the process rolling and see if we can move it 11 along. 12 MS. TWOMEY: Thank you. 13 MR. HORTON: Members, I might recommend as 14 well is that whenever you have a situation where 15 only 200 million or -- what is it -- 35 percent, 16 somewhere around there, of the tax credit is being 17 used, the communication to the Legislature is is 18 that the other 65 percent is unused and we can use 19 it for something else. 20 And so I would certainly encourage that we 21 begin the process now through the Business Taxes as 22 it relates to the rulemaking, but also through the 23 Legislative Committee as it relates to legislation, 24 budgetary changes, to begin to have that discussion 25 about all the other items, at least for a minimum to 26 be able to share with the Legislature, give the 27 Legislature the benefit of that deliberation. 28 Without that, the first of the year, what this is is 12 1 $400 million for whatever they want to use it for. 2 So there's a motion on the -- on the -- on 3 the floor. 4 MS. MA: I just want to add -- 5 MR. HORTON: Discussion by Member Ma. 6 MS. MA: I just want to add that the 7 manufacturing tax credit has been discussed a lot 8 with many folks because of the confusion. And 9 that's what we do sometimes in the Legislature; you 10 know, we only have nine months, we pass it, not 11 really very specific, and we leave it to the 12 agencies to promulgate the rules and the regulation. 13 So, I agree with the Chairman that I'd like 14 to see us try to tackle this. And if not, then, you 15 know, we can run legislation. And as the Chair, I'm 16 more than happy to work with you to accomplish 17 that. 18 MS. TWOMEY: Thank you. 19 MR. HORTON: Ms. Richmond, please call the 20 roll. 21 MS. RICHMOND: Mr. Horton. 22 MR. HORTON: Aye. 23 MS. RICHMOND: Ms. Harkey. 24 MS. HARKEY: Aye. 25 MS. RICHMOND: Mr. Runner. 26 MR. RUNNER: Aye. 27 MS. RICHMOND: Ms. Ma. 28 MS. MA: Aye. 13 1 MS. RICHMOND: Ms. Stowers. 2 MS. STOWERS: No. 3 MS. RICHMOND: Motion carries. 4 MR. HORTON: Thank you very much. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 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 August 25, 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 14 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: August 28, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 15