1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 TRANSCRIPT OF PROCEEDINGS 9 (Prepared from audio recording) 10 OCTOBER 27, 2015 11 12 13 14 15 ITEM P 16 OTHER ADMINISTRATIVE MATTERS 17 ITEM P5 18 ADMINISTRATION DEPUTY DIRECTOR'S REPORT 19 20 21 22 23 24 25 26 27 PREPARED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chairman 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 Division 16 17 For Staff: Edna Murphy Deputy Director 18 Administration 19 Michele Pielsticker Chief 20 Legislative and Research Division 21 22 23 ---oOo--- 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 27, 2015 4 ---oOo--- 5 MS. RICHMOND: Our next matter is P5, 6 Administration Deputy Director's Report, Item P5.1 7 Contract Over a Million Dollars. 8 MR. HORTON: Welcome to the Board. 9 MS. MURPHY: Thank you. 10 Good afternoon, Chairman Horton and 11 Members. I'm Edna Murphy, Deputy Director of 12 Administration. 13 My first item for today is a request for 14 approval of a contract over a million dollars. 15 A multi-year contract for encrypted 16 cigarette tax stamps was awarded to SICPA Product 17 Security, LLC by the Department of General Services 18 on July 23rd, 2010. The contract provides for 19 encrypted cigarette tax stamps, stamping machinery, 20 stamp validation equipment and necessary services to 21 support the administration of the California 22 Cigarette and Tobacco Product Tax Law, Revenue and 23 Taxation Code section 30161. 24 The contract was for a set term of five 25 years and contains optional provisions to extend the 26 terms up to an additional four years in two-year 27 increments. The total amount for the Amendment 28 No. 3, which is what we're requesting for day -- 3 1 today, is $21,362,800. 2 If it pleases the Board, I will ask for 3 your vote of approval for this contract. 4 MR. HORTON: Members, is there a motion? 5 MS. HARKEY: Yes. 6 MR. HORTON: Moved by Member Harkey, second 7 by Member Stowers. 8 Discussion? 9 Member Ma. 10 MS. MA: So, Ms. Murphy, is this 11 $21 million for a five-year contract? 12 MS. MURPHY: It is for the two-year 13 extension. So we've already paid for the first five 14 years. Now we're executing our first of the two 15 two-year extensions of the contract. 16 MS. MA: And so, why are we extending 17 versus contracting them for another full term? I'm 18 not -- I don't understand why. 19 MS. MURPHY: So the way the contract was 20 originally agreed upon, we had a five-year contract 21 with two two-year extensions that was four years, so 22 the total amount of the contract was for nine years. 23 So we're executing the first two-year 24 extension on that contract, primarily because they 25 provide all of the equipment, the services and we're 26 already kind of implementing that. And so, we're 27 just moving forward with the existing contract that 28 we have in place. 4 1 MS. MA: And so how much money do we create 2 from this program? Do you have that? You probably 3 don't have that on hand. 4 MS. MURPHY: I don't have that, but I can 5 definitely get that information back to you. 6 MS. MA: Yeah, I mean maybe at the next 7 meeting, just a little bit more about our cigarette 8 and tobacco, other tobacco-related program -- 9 MS. MURPHY: The program. 10 MS. MA: -- how much we actually 11 generate. 12 MS. MURPHY: Oh, absolutely. So I do have 13 that. 14 MS. MA: Okay. 15 MS. MURPHY: So I'll make sure I have that 16 for you. 17 MS. MA: Okay. 18 MR. HORTON: Further discussion, Members? 19 There's a motion, second. 20 Without objection, Members, such will be 21 the order. 22 MS. RICHMOND: Our next item is P5.3, the 23 Legislative Budget Change Proposals. 24 MS. MURPHY: Next before you today we have 25 three Legislative Budget Change Proposals for 26 information only. 27 The first one is AB 1534, the Assessment 28 Analyst Certification Program. The Board of 5 1 Equalization requested 316,000 for fiscal year 2 '16-'17 and 2,000 overtime hours, and 155,000 in 3 fiscal year '17-'18 and one permanent position 4 ongoing to implement the provision that requires us 5 to administer a new Assessment Analyst Certification 6 Program. 7 The requested position will work -- will be 8 working together with the county assessor's office 9 and in consultation with the California Assessors' 10 Association to develop regulations on program 11 implementation details and establishment of a 12 training and education criteria. 13 The bill requires any county assessor 14 employee that makes changes in the ownership 15 decision for property tax exemption decisions in 16 those counties who have passed a resolution upon the 17 recommendation of the assessors to require 18 certification, the BOE will issue assessment 19 certification -- analyst certifications effective 20 January 1 of 2016. 21 Our second BCP is AB 681, the Assessment 22 Procedures and Practice. The Board of Equalization 23 requested 619,000 in fiscal year '16-'17 for four 24 permanent positions and 562,000 in '17-'18 and 25 ongoing to implement the provision of this bill. 26 Currently the survey program is functioning 27 within the timeframe mandated by statute and the BOE 28 is publishing reports within two years. However, 6 1 this bill requires that the survey start on or after 2 July 1 of 2017, that the BOE is to issue a final 3 survey report within 12 months after the date the 4 BOE began the survey. And this is to allow the 5 assessors who administrate -- who administrate over 6 these areas to have opportunity to input on the 7 assessment. 8 Lastly, I have AB 266, Medical Marijuana. 9 The Board of Equalization requested 434,000 and two 10 permanent positions in '15-'16, 627,000 and four 11 positions in '16-'17 and ongoing to administer the 12 provision of this bill. 13 AB 266 adds Revenue and Taxation Code 14 section 10 -- 31020 that requires the BOE in 15 consultation with the California Department of Food 16 and Agriculture to adopt a system to report 17 commercial cannabis and cannabis product movement 18 throughout the distribution chain. 19 AB 266 becomes operative January 1, 2016. 20 Are there any questions on these 21 Legislative BCPs? 22 MR. HORTON: Discussion? 23 Member Ma. 24 MS. MA: I have a question specifically on 25 AB 266. 26 MS. MURPHY: Okay. 27 MS. Ma: You know, the Governor just signed 28 the bills earlier this month, and I know that the 7 1 first operative date is January 1st, 2016 and then 2 more to come January 1st, 2017. 3 I don't believe I've seen any details in 4 any of the bills yet regarding what our role at the 5 BOE is in terms of how much we're supposed to do, 6 how little we're supposed to do. And I'm just 7 wondering, this BCP for two full-time positions, I 8 guess this year, four full-time positions next year, 9 what are these people going to do? 10 MS. HARKEY: Very little. 11 MS. PIELSTICKER: I can address that. 12 Michele Pielsticker, Chief of the Legislative and 13 Research Division. 14 It is -- it's planned that those folks 15 would backfill our more experienced folks who would 16 be working on the track and trace procurement. So 17 they would be working with our technology people 18 to -- to develop requirements; and they will be 19 quite detailed requirements, and they will need to 20 meet with the other agencies that are also doing 21 track and trace. And so that, of course, takes -- 22 takes that type of, um -- of personnel time. 23 MS. MA: So are these people going to be 24 technology people or are they going to be in our 25 audit? I mean who are these folks? 26 MS. PIELSTICKER: I believe -- do we have 27 one TSD person? 28 MS. MURPHY: Right. 8 1 MS. PIELSTICKER: And the rest are program 2 folks. 3 MR. HORTON: Maybe it might be helpful if 4 you articulate the role of the Board of Equalization 5 pursuant to the legislation, even though it's just 6 one paragraph. 7 MS. PIELSTICKER: Yes. The role of the 8 Board of Equalization is to in -- to work with the 9 other agencies to adopt a track and trace system. 10 So the legislation says specifically that 11 we are to work in consultation with the California 12 Department of Food and Agriculture as they're 13 responsible for a unique identifier program. But, 14 as a practical matter, we really do need to work 15 with all of the agencies because we can all benefit 16 from the type of information that's going to come 17 out of a track and trace program. 18 So we need to -- to coordinate with those 19 other agencies as -- as we move forward. 20 MS. MA: I know that we already designated 21 two people to the Cannabis Compliance Project, and I 22 don't know whether those two folks are going to 23 continue working on the implementation for these 24 bills or not. 25 MS. PIELSTICKER: It is my understanding 26 that our program people are best equipped to develop 27 the track and trace system. They have some 28 experience in developing track and trace with our 9 1 Cigarette and Tobacco Products Licensing Program. 2 And of course our technology expert is also 3 necessary. 4 So this proposal does not contemplate 5 including the Cannabis Compliance Project 6 individuals in -- in this implementation. 7 MR. RUNNER: I have a question. 8 MR. HORTON: Member Runner. 9 MR. RUNNER: Yeah, just in regards to 10 obviously when these bills were -- when these bills 11 were passed, we had some fiscal recommendations on 12 them or -- and so my question is, are the staffing 13 levels that we're proposing in the BCPs consistent 14 with what either our recommendations were and/or 15 what it is that were actually then provided for in 16 the legislature, in the bills as they passed? 17 MS. MURPHY: Well, I think initially when 18 we looked at this there were four separate bills 19 that was being proposed, and we did do analysis on 20 each and every one of them. 21 As they started to kind of morph, we were 22 still weighing in. But it wasn't until the final 23 bill was signed that we knew what our role was going 24 to be. And so when they came back -- and actually I 25 think that is still kind of under discussion as to 26 what does it mean that we're doing this 27 collaboration in conjunction with CDF as our -- what 28 do we have to actually be responsible for? 10 1 And I think some of those logistics are 2 still working out. And so one of the discussions 3 that we're having with Department of Finance is just 4 making sure that if our role and our responsibility 5 morph, that we have an opportunity to put in or make 6 a request for the resources that we feel are 7 necessary to be able to do the task -- 8 MR. RUNNER: Do the bills -- 9 MS. MURPHY: -- that we're being asked. 10 MR. RUNNER: Do the bills contain any -- 11 any? 12 MS. HARKEY: I have read the bills. 13 MS. MURPHY: It's very, very -- 14 MS. HARKEY: There's no real role for 15 BOE -- 16 MS. MURPHY: Right. 17 MS. HARKEY: -- other than establishing, 18 track and trace. There's no -- 19 MR. RUNNER: Well, that was not my question 20 though. 21 MS. HARKEY: There's no considering -- 22 MR. RUNNER: My question is -- 23 MS. HARKEY: -- audit. There's no -- 24 there's no consid- -- we don't have any ability to 25 share information in them. We're going to need an 26 MOU for that. 27 They have -- they have severe issues, and 28 I've been going through 'em line-by-line to figure 11 1 out where we fit in and how we collect, how we 2 audit, and who pays. 3 MR. RUNNER: Again, my question is more 4 specific. And that is, did the bills themselves 5 have any kind of fiscal dollars attached to them? 6 MS. PIELSTICKER: Yes, the enrolled bill 7 report -- 8 MR. RUNNER: Mm-hmm. 9 MS. PIELSTICKER: -- that goes to the 10 Governor, once -- once the Legislature passes the 11 final version -- 12 MR. RUNNER: Mm-hmm. 13 MS. PIELSTICKER: -- that did indeed have 14 costs in it, and that matches fairly closely -- 15 MR. RUNNER: Okay. 16 MS. PIELSTICKER: -- the costs that are 17 included in the BCP. 18 MR. RUNNER: Okay. And I think, to -- to 19 Ms. Harkey's issue, I think that there's no doubt in 20 my mind -- and this is I think an issue that Member 21 Ma's committee will end up dealing with, is I assume 22 there'll be a whole host of cleanup issues that will 23 naturally come out of a significant piece of 24 legislation in concept that we will need to be 25 adding to, and I'm sure you guys are already working 26 through. 27 MS. HARKEY: Some of these will need to be 28 more than cleanup. I think you're going to need 12 1 pieces of legislation. And, like I said, an MOU is 2 going to take quite a while to negotiate. And so if 3 we're inclined to be able to share information with 4 the Bureau, we need to kind of get going on that. 5 Otherwise, our auditors will not be -- not have 6 access. 7 MR. HORTON: Maybe a discussion on the 8 implementation dates and times when it's anticipated 9 that somebody will actually get a license and start 10 doing something? 11 MS. PIELSTICKER: Excuse me. 12 Yes, I believe that licensing is supposed 13 to be up and running in 2018. The regulations are 14 all supposed to be finished by then. 15 MR. HORTON: And the reason -- the reason I 16 share that is because that may give us a level of 17 comfort that we have until 2018. I believe the 18 Governor's office is anticipating a variety of work 19 groups to begin to sort of work out these issues. 20 The initial legislation, from our 21 perspective, I think we had a pretty good idea and a 22 pretty good handle on what needed to happen. And 23 particularly if there was an excise tax issue, and 24 then relative to the control, track and trace. And 25 we provided the language to all of the various 26 entities. 27 It was not -- did not become a part of the 28 bill. The bill did allocate $10 million. And, 13 1 quite frankly, we weren't included in that 2 allocation of $10 million. And so the BCP process 3 is a process by which we seek financial cover of the 4 requirements that are in the bill to begin to 5 formulate a track and trace strategy, if you will. 6 And then I guess the strategy gets submitted to 7 someone and someone ultimately says that this is the 8 direction that they're going to do because the bill 9 didn't really provide that authorization either. 10 The bill's a good start. It's a good 11 beginning. It will initiate the discussion. And I 12 think the Legislature and the Governor should be 13 commended for that, but it's clear that there's a 14 lot of work to be done before -- before 2018. 15 And one of my concerns is that -- 16 articulated by Member Harkey, as well as Member 17 Ma -- is that as we sort of anticipate our role in 18 this process, whenever you begin to license 19 individuals, you also send messages to the 20 underground economy, you send messages to folks who 21 will violate those laws. And this is somewhat 22 unique in that it's not -- it's not tobacco. 23 Tobacco is grown all over the world. Cannabis is 24 grown right here and it can actually go from a 25 grower directly to the consumer. 26 So the tax stamp strategy is not 27 necessarily going to work in its totality. There's 28 going to be modifications to that, which in and of 14 1 itself would be relatively expensive to monitor. 2 And I think once we begin to culminate all these 3 different expenses, you're probably going to see 4 some revenue in the form of excise tax or something 5 else, if they're going to get there. 6 The other dilemma -- and I think we would 7 encourage some sort of process on our -- is to 8 monitor these initiatives that are out there and 9 formulate our thoughts as an organization as to what 10 it's going to cost us to implement these initiatives 11 and whether or not there is enough within them to be 12 able to position the Board of Equalization for 13 maximum success, even to the extent that we may very 14 well want to conduct a hearing and kind of go 15 through that process which we have the authority to 16 do. 17 Member Ma. 18 MS. MA: So, like I'm comfortable with the 19 two employees or full-time positions, knowing what 20 they're going to do, kind of knowing what they're 21 going to do. I don't know what the other four 22 full-time people are going to do right now given 23 that we still don't know what the rules are, don't 24 know what we're going to be doing. 25 MS. HARKEY: Track and trace. 26 MS. MA: And I think we should put in the 27 BCPs for the additional folks once we get a better 28 sense of what our role is and how much we're going 15 1 to take on. I just don't want people sitting there 2 trying to stay busy when we don't know what our role 3 is -- is going to be. 4 So I don't know how long it takes to fill a 5 BCP, and I'm sure the Governor's office has to 6 approve it. And I don't know whether the Governor's 7 office automatically approves all of these positions 8 or not. 9 But, you know, for the first year I think 10 we do need, you know, maybe two people dedicated to 11 working with the different agencies, trying to 12 figure out, you know, the appropriate technology 13 platforms that's going to be most user friendly. 14 Hopefully it'll enable other folks, not just us, 15 perhaps to be able to, you know, on a daily basis be 16 able to know what the sales are. 17 And, you know, my hope, seeing Colorado's 18 technologies, that we're actually able to collect 19 the sales tax every day, at the end of every day, 20 instead of waiting for each quarter and having 21 the -- you know, the retailers submit it. Because 22 it's possible to do with the new systems that are 23 out there, is that, you know, every day the sales 24 taxes that they collect can go right into their 25 account at the BOE. And then at the end of the 26 quarter all the money is in, they just have to file 27 the taxes to reconcile it and we're guaranteed the 28 money. 16 1 And, you know, I think that is an important 2 person that can go out there and really evaluate all 3 the different software programs out there and make 4 the best recommendation to the State, instead of 5 having like a static system that really doesn't work 6 for anybody. Which is what Colorado did, is most 7 dispensaries or retailers have two systems because 8 the one adopted for Colorado doesn't work for them 9 in terms of the best tracking, usability. They just 10 have it because they're required to have it because 11 Colorado wanted them to do it, but it really wasn't 12 the best system out there. 13 So I would encourage that we do try to find 14 that technology person, someone who's tech savvy, 15 who's going to be, you know, looking at the best -- 16 best models available so that we can hopefully move 17 into, you know, the next tax collection, you know, 18 system, using the best technology. 19 So I'm okay with two people, but I'm not 20 ready for the four unless you have designated what 21 the four people for the following year are going to 22 do. 23 MS. MURPHY: Right. Well, I want to just 24 give a point of clarification. Because in the first 25 year we're asking for two people, and then in the 26 section -- second year we're asking for four. So 27 that's two more additional people, so it won't be an 28 additional four. So it will be a total of four in 17 1 '16-'17 and ongoing. 2 And it does appear that we have three of 3 the staff are going to be the program side, and then 4 one on the technology side. And they're going to 5 work on the RFP, and they're going to be kind of the 6 technical experts working with and in collaboration 7 with the other agencies as we try to get this track 8 and trace up. 9 MS. MA: Okay. 10 MR. HORTON: Member Runner. 11 MR. RUNNER: Yeah, just to clarify. Are 12 these BCPs for the -- for the -- what would that be, 13 the '15 -- the '16-'17 budget year? Or are these 14 BCPs related to the specific pieces of legislation? 15 MS. MURPHY: They're related to the 16 specific piece of the legislation. Most of these 17 are for '16-'17. We only ask for -- 18 MR. RUNNER: So they're -- okay. But 19 they're for the budget, right? 20 MS. MURPHY: Right. 21 MR. RUNNER: These are -- these are -- 22 these are budget, submissions for the budget. 23 MS. MURPHY: Yes. 24 MR. RUNNER: Okay. So these aren't 25 positions, for instance, that sometimes we have to 26 go back and get after a bill has passed, for 27 instance? Right? 28 MS. MURPHY: Right. I mean -- 18 1 MR. RUNNER: These are actual BCPs that 2 we're submitting into the budget process. 3 MS. MURPHY: Well, they're being submitted 4 into the budget process, but these are Leg. BCPs -- 5 MR. RUNNER: Okay. 6 MS. MURPHY: -- so they kind of operate a 7 little bit outside of -- 8 MR. RUNNER: Okay, these are Leg. 9 MS. MURPHY: -- the normal. Yes. 10 MR. RUNNER: These are Leg. BCPs. 11 MS. MURPHY: Yes. 12 MR. RUNNER: Okay. 13 MS. MURPHY: Mm-hmm. 14 MR. RUNNER: How will they handle that at 15 the same time -- will they handle those in parallel 16 to the budget conf- -- or committees? Or how will 17 they handle that right now? 18 MS. MURPHY: They actually handle them 19 slightly after. So a lot of these will get 20 addressed at the same time we're doing our spring 21 finance stuff. 22 So, first, what they'll do is address all 23 of our November estimates, our BCP in the fall. 24 MR. RUNNER: Right. 25 MS. MURPHY: So as January, after the 26 Governor's budget, we'll start the hearing for that. 27 Towards the end of that when we get into the May 28 revise, that's when we'll take up the Leg. BCPs as 19 1 well as the spring finance letters. 2 Okay. My point, I guess, going back to 3 some of the concerns that Member Ma had, is that 4 we -- we still have time to help iron out some of 5 these roles as these -- as these move forward. And 6 as Leg. Chair she would be in the middle of all of 7 that discussion, I would assume. 8 MS. MURPHY: Yes. 9 MR. HORTON: Yeah. Okay. 10 MS. HARKEY: Thank you. 11 MR. HORTON: Further discussion, Members? 12 On AB 681, let me just thank Assemblyman 13 Ting for his engagement in this process. It made a 14 huge difference, I think, in getting us where we are 15 today. 16 With that, the Board will receive and file. 17 Let me also encourage staff to reach out to 18 each Member on this subject matter -- 19 MR. RUNNER: Yeah. 20 MR. HORTON: -- and have those discussions. 21 Or, at a minimum, the clarification, and 22 particularly with this BCP. Funds were allotted for 23 in the legislation. We weren't included in that. 24 And so we've got to get this as soon as possible, or 25 get the Department of Consumer Affairs, or someone, 26 to say that -- or stand down, let them figure -- 27 MS. HARKEY: Let them figure it out. 28 MR. HORTON: I think this is a good 20 1 solution to that problem. 2 So, without further, we will receive and 3 file. 4 MS. MURPHY: Thank you. 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 21 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization state 9 that I transcribed from recorded audio, to the best 10 of my ability, the proceedings in the above-entitled 11 hearing; and that the preceding pages 1 through 21 12 constitute my transcription of the proceedings. 13 14 Dated: January 5, 2016 15 16 17 ____________________________ 18 Kathleen Skidgel 19 Hearing Reporter 20 21 22 23 24 25 26 27 28 22