1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 16, 2015 10 11 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 12 APPEAL OF 13 CRAIGSLIST, INC. 14 NO. 725838, 843070 15 AGAINST PROPOSED ASSESSMENT OF 16 ADDITIONAL INCOME TAX 17 18 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 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Sen. George Runner (Ret.) Vice Chairman 5 6 Fiona Ma, CPA Member 7 8 Diane L. Harkey Member 9 10 Yvette Stowers Appearing for Betty T. 11 Yee, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief Board Proceedings 15 Division 16 For Board of 17 Equalization Staff: Grant Thompson Tax Counsel IV 18 19 For Franchise Tax Board: Katie Frank Tax Counsel 20 Norm Scott 21 Tax Counsel 22 For the Appellant: Robert Mahon 23 Attorney 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 16, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what's our next 6 matter? 7 MS. RICHMOND: Our next matter is Item B 8 Corporate Franchise and Personal Income Tax Matters. 9 Our first item is B1, craigslist, Inc. 10 Please come forward. 11 Board Proceedings has received contribution 12 disclosure forms for today's hearings from the 13 parties, participants and agents. All forms were 14 properly completed and signed. All parties, 15 participants and agents are on the alpha listings 16 provided to your office. 17 Each person sitting at the table will be 18 asked to introduce themselves and, if necessary, 19 their affiliation with the taxpayer for the record. 20 Ten minutes is allocated for the taxpayer's 21 opening presentation, followed by ten minutes for 22 the Franchise Tax Board or Department's 23 presentation, and five minutes is allocated to the 24 taxpayer for rebuttal. 25 Chairman Horton. 26 MR. HORTON: Thank you. I'm waiting for 27 the mic. Am I not -- 28 Hello. Testing one, two, three. Testing 3 1 one, two, three. 2 MS. MA: I don't think they're working. 3 Hello. Oh, mine's working. 4 MR. HORTON: Okay. I'll just talk loud 5 enough to pick up. 6 Testing one, two. 7 MR. RUNNER: You should have a green 8 light. 9 MR. HORTON: Okay. We're good to go. 10 MS. HARKEY: Mr. Runner. Mr. Runner still 11 needs assistance. 12 MR. RUNNER: Is there a button to push? 13 Oh, a button over there. There we go. 14 Okay. We're good. Thank you. I just 15 don't get a green light. 16 MR. HORTON: Okay. Ms. Stowers? 17 MR. THOMPSON: I don't think I have audio 18 yet. 19 MR. HORTON: Okay. 20 Quick question. Was the discussions 21 earlier this morning on record? Was there audio 22 earlier this morning? 23 MR. THOMPSON: I think so. 24 MS. RICHMOND: I think so. 25 MR. HORTON: Okay. 26 Mr. Thompson, would you please introduce 27 the issues in this case. 28 MR. THOMPSON: Yes. As the Board knows, 4 1 this case involves a determination letter in which 2 FTB allowed appellant to use an alternative 3 apportionment methodology. 4 And the issue is whether, in determining 5 the percentage of appellant's income that would be 6 taxable by California, sales attributable to certain 7 states and the District of Columbia should be 8 excluded or thrown out of the sales factor 9 calculation. 10 MR. HORTON: Thank you. 11 Welcome to the Board of Equalization. You 12 will have ten minutes to make your presentation. 13 Please be advised that we will return and allow you 14 five minutes on rebuttal. 15 At your convenience, we'd ask that you 16 introduce yourself for the record. 17 MR. MAHON: Thank you. Chairman Horton and 18 Members of the Board, my name is Bob Mahon of 19 Perkins Coie, counsel for craigslist. 20 As many of you know, craigslist is a 21 no-frills -- no-frills website that is -- offers 22 classified advertisement services. And the vast 23 majority of its services are not subject to any 24 charge. One can go on free and post -- and post 25 classified ads. 26 However, in 2007, in several markets for 27 job listings craigslist did charge, and that's a way 28 of reducing clutter and -- and funding the entity. 5 1 The markets in Boston and New York, 2 Seattle, Portland, Chicago and Washington D.C. all 3 resulted in revenues in excess of $500,000 in the 4 year at issue, 2007. 5 Craigslist's only physical presence has 6 been in California, in Ms. Ma's district, San 7 Francisco, where craigslist maintains its only 8 office and employs about 45 employees that run the 9 company's operations. 10 As mentioned, in 2010 the Franchise Tax 11 Board issued a determination allowing craigslist to 12 apportion on the basis of market sourcing of service 13 revenue. So its property and payroll factors were 14 maintained, but the service or receipts portion of 15 the apportionment formula was permitted to be done 16 on a market basis. However, that determination 17 concluded that the throw-out rule would be utilized. 18 And the determination specifically referenced 19 Revenue and Tax Code Section 25122, which is on the 20 board and was distributed as a visual aid to help us 21 focus the discussion. 22 That controlling statute has a disjunctive 23 test; a taxpayer is taxable in another state if 24 either it's subject to a net income tax or, the 25 second part of the test which is at issue in this 26 case, is that if a state has jurisdiction to subject 27 a taxpayer to a net income tax regardless of whether 28 in fact the state does or does not. 6 1 The FTB's longstanding rule, as well as 2 this Board's precedent, make it clear that this is 3 an alternative test. They also make it clear that 4 the standard at issue for jurisdiction is the United 5 States Constitution as well as federal statute. 6 This case is -- is resolved by applying the 7 plain language of 21 -- excuse me -- 25122 to 8 undisputed facts. There is no dispute that 9 craigslist had more than 500,000 receipts in each of 10 the six markets. 11 Nowhere in the FTB's two lengthy briefs, or 12 in any of the administrative proceedings, has the 13 FTB denied that California's sister states had 14 jurisdiction to impose a net income tax on 15 craigslist in 2007 through 2010, the period covered 16 by the determination. 17 The authorities are overwhelmingly clear 18 that California and its sister states could have 19 exercised jurisdiction on the basis of substantial 20 sales prior to 2011, regardless of whether or not 21 they in fact did. 22 First, the Franchise Tax Board concedes 23 that California's economic nexus statute is 24 Constitutional. That statute was adopted in 2009, 25 effective in 2011. I want to stress that that 26 statute was adopted a year in advance of the 27 determination at issue. In other words, the 28 legislature adopted economic nexus, deferred 7 1 implementation until 2011. The determination at 2 issue was issued by the Board in 2010. 3 The California Legislature understood that 4 it had the power to adopt economic nexus in 2009. 5 It -- it adopted the statute in 2009, delayed 6 effectiveness 'til 2011. But tellingly, the bill 7 analysis for this was very clear that the purpose of 8 the amendment was to, quote, clarify and specify 9 that companies that operate in the state and make 10 sales are doing business in California and subject 11 to California tax. 12 The delay in implementing economic nexus 13 was a policy decision, not a jurisdictional 14 decision. The FTB does not contend that the 15 legislature was wrong in its authority to adopt 16 economic nexus in 2009. 17 The MTC, of which California was a member 18 and whose charge is to promote uniformity, urged the 19 adoption of economic nexus. In fact, the statute 20 very much like the one California adopted as a 21 model -- was adopted as a model for the MTC in 2002, 22 years in advance of -- of the years at issue in this 23 appeal, years in advance of California's adoption. 24 California's sister states have adopted 25 economic nexus statutes prior to 2011. The FTB does 26 not contend that those sister states didn't have 27 authority to adopt those statutes prior to 2011. 28 There is no United States Supreme Court 8 1 authority that suggests that physical presence is 2 required for -- for state income taxes. In fact, 3 the authorities cited by the Franchise Tax Board 4 point the opposite direction. 5 The Quill case specifically concluded that 6 the -- it was deciding physical presence as a 7 requirement of sales and use tax collection only. 8 It in fact telegraphed that it wasn't too happy 9 about that decision but was -- was adhering to it on 10 the basis of stare decisis. 11 The overwhelming majority of states, and we 12 cite in our brief more than a dozen state court 13 decisions in other jurisdictions that have reached 14 the similar conclusion; that is, that there is no 15 physical presence requirement for commerce clause 16 nexus for state income tax purposes. 17 Craigslist, I want to be clear, is not 18 asking that this Board declare any statute 19 unconstitutional. On the contrary, we're asking for 20 the plain meaning of California Revenue and Tax Code 21 Section 25122 be applied here. 22 Craigslist does not contend that the tax -- 23 the State of California's taxing statutes are 24 unconstitutional. On the contrary, the Franchise 25 Tax Board's position calls into question and is at 26 odds with the legislature's decision in 2009 to 27 adopt legis- -- economic nexus. It made a clear 28 policy statement in 2009, a year before the 9 1 determination, that the Constitution did not require 2 physical presence. 3 I also want to address the Board's concern 4 about uniformity. The MTC is the organization 5 charged with -- one organization charged with 6 advancing uniformity, and they were calling on 7 states to adopt the very statute, the very economic 8 nexus position at issue in this case, in 2002. The 9 adoption of economic nexus does not harm uniformity, 10 it advances uniformity. 11 Indeed, the article on which the Board 12 significantly relies, the 1957 William Pierce 13 article, is quite clear that -- that at the outset 14 it should be made clear -- I'm quoting from the 15 article -- the uniform act makes two significant 16 basic assumptions that should not be overlooked: 17 First, it is assumed that the state has jurisdiction 18 to levy the particular tax. 19 In other words, the notion of uniformity is 20 advanced by the assumption of jurisdiction of 21 California and its sister states. 22 Finally, I want to address briefly the 23 State's reliance on Grace and Dresser Industries as 24 precedent of this Board that is suggested should 25 control the outcome of this case. Both of those 26 cases were decided in the early 1980s and they're 27 both due process nexus cases. And in the Quill 28 decision, the U.S. Supreme Court was quite clear the 10 1 due process clause did not require physical 2 presence. 3 Excuse me. I'll quote from -- from Quill: 4 To the extent that our decisions have 5 indicated that Due Process Clause requires physical 6 presence in a State for the imposition of a duty to 7 collect a use tax, we overrule those hearings -- 8 holdings as superseded by developments in our law of 9 due process. 10 The cases -- first of all, Grace involved a 11 situation where the taxpayer did not have any 12 customers in California. Its presence was 13 transitory rail cars. That case wouldn't be decided 14 any differently today under economic nexus. There 15 were no California sales. There was only transitory 16 presence of property. 17 The Dresser Industries case, which was 18 mentioned in the determination, was a case about the 19 application of 86272. It wasn't about nexus. Nexus 20 was conceded in the -- in the -- by both parties, 21 and the sole question was whether the application of 22 86 -- Public Law 86272 was appropriate in the 23 foreign international commerce context. 24 And most importantly, the Legislature of 25 California has made a policy decision here. That 26 policy decision was that in 2009 it concluded that 27 it had the authority under the Constitution to 28 impose a net income tax on the basis of economic 11 1 nexus. 2 All of California sister states have that 3 same authority, whether they chose to exercise it or 4 not. That ultimately is the question before this 5 Board, the application -- the plain application of 6 Revenue Code Section 25122 to undisputed facts. 7 Happy to answer your questions. 8 MR. HORTON: Thank you. 9 Members, we'll now go to the Department. 10 The Department has ten minutes to make their 11 presentation. We'd ask that you commence with your 12 introductions for the record. 13 MS. FRANK: Good morning, Chairman Horton, 14 Members of the Board. My name is Katie Frank and 15 sitting next to me is Norm Scott; we will be 16 representing FTB in this matter. 17 Now, currently at issue is whether 18 appellant is considered taxable in certain other 19 states during the 2007 tax year. If appellant is 20 found not taxable in the states at issue, it's 21 required to throw out its sales from its California 22 sales factor denominator. 23 Now, the sole reason why we're here before 24 your Board is because appellant asked for an 25 exception from the standard apportionment rules. 26 FTB granted that exception. And now appellant's 27 asking to change the landscape even further by 28 trying to apply a law that didn't become effective 12 1 until four years after the year at issue. And it's 2 trying to apply that law backwards in order to argue 3 that it's taxable in the states at issue and that 4 it's not required to throw out its sales from its 5 California sales factor denominator. 6 Now, appellant petitioned to FTB arguing 7 that the standard apportionment formula did not 8 fairly reflect its business activities. It argued 9 it wanted to be treated similarly to Print Media, 10 and Print Media, by regulation, has an alternative 11 apportionment formula. 12 Appellant argued that Print Media is its 13 competitor and it wanted to level the playing field. 14 FTB reviewed appellant's activities and determined 15 the activities are similar to Print Media except 16 appellant operates in electronic form. As a result, 17 FTB granted this new formula, allowing appellant to 18 assign its sales to its customers, similar to Print 19 Media. 20 And also similar to Print Media, appellant 21 is required to determine whether it's taxable in 22 other states. And if it's not taxable, it's 23 required to throw out its sales from its California 24 sales factor denominator. 25 Now, the California law in effect during 26 the year at issue, 2007, required a taxpayer to have 27 activities that created a physical presence in the 28 state in order for the state to be able to assert 13 1 jurisdiction and, thus, make the taxpayer taxable. 2 Four years later, California law recognized 3 that a taxpayer -- that a state could assert 4 jurisdiction over a taxpayer that had a purely 5 economic presence in the state; we call this the 6 economic presence or economic nexus standard. Now, 7 when California law recognized this, it did so on a 8 prospective basis alone. 9 Now here, in the 2007 tax year at issue, 10 appellant only has sales activities in the states at 11 issue. As a result, it only has an economic 12 presence. And its argument's economic presence is 13 sufficient for the states at issue to assert 14 jurisdiction over it and thus make it taxable. And 15 the crux of the issue in this appeal is whether this 16 economic presence standard can be applied backwards. 17 Now, for the reasons which I'll discuss later and 18 contrary to appellant's arguments, a physical 19 presence is required during the year at issue. 20 Now, before I go on further, I'd like to 21 give you a little bit of background as to why we're 22 even concerned with whether the taxpayer is taxable 23 in another state and requiring a throw-out if it 24 is -- if it's not taxable. And it has to do with 25 apportionment laws which are collectively referred 26 to as UDITPA. And a goal of UDITPA is that if each 27 state were to adopt the same tax scheme, it would 28 result in a hundred percent of income being subject 14 1 to taxation. And this provides parity with the 2 wholly in-state taxpayer that reports all of its 3 income to the state that it operates in and pays tax 4 on all of that income, a hundred percent of income 5 is subject to taxation. 6 And the throw-out rule achieves its 7 purpose by first asking the question, "Is the 8 taxpayer taxable in the other state?" And if the 9 answer is no, then the throw-out rule ensures that 10 no income is apportioned to that state to again 11 ensure a hundred percent of income is subject to 12 taxation. 13 Now, the law that governs whether a 14 taxpayer is considered taxable in another state is 15 Revenue and Taxation Code 25122. And this law has 16 two tests and either can be met. 17 The first test asks whether the taxpayer's 18 actually been subject to a net income tax or several 19 other enumerated taxes which are essentially revenue 20 raising substitutes for an income tax. Here, all 21 the states at issue had a net income tax or a 22 revenue raising substitute, none of which appellant 23 paid. 24 Rather, appellant's arguing it's taxable 25 under the second test. And under the second test we 26 don't actually require the state to actually subject 27 the taxpayer to a net income tax. Rather, we deem 28 the taxpayer taxable if that state has jurisdiction 15 1 to subject the taxpayer to a net income tax. 2 And the purpose of this test is the 3 drafters of UDITPA, the apportionment laws, 4 recognized that some states may opt to have no form 5 of corporate tax. So, for example, today we have 6 Nevada and it doesn't have a corporate net income 7 tax or a revenue raising substitute. And it may do 8 this for many reasons, maybe for tax incentive 9 reasons. And the drafters of UDITPA didn't want to 10 compel these states to adopt a net income tax, so we 11 recognize these states but only upon meeting the 12 second test. 13 So we ask, hypothetically speaking, if 14 theses states had a net income tax, could they 15 assert jurisdiction under U.S. Constitutional 16 principles and subject the taxpayer to that net 17 income tax? If the answer is yes, then we deem the 18 taxpayer taxable. 19 Now here, appellant argues that all the 20 states at issue had jurisdiction over its purely 21 economic presence under U.S. Constitutional 22 standards and all these states merely opted not to 23 exercise that jurisdiction. 24 Now, despite appellant's arguments that 25 economic presence is sufficient for juris- -- to 26 make it taxable during the year at issue, there's 27 four main reasons why a physical presence is 28 required. 16 1 First, there's absolutely no California 2 legal authority that has recognized that a state 3 could assert jurisdiction under U.S. Constitutional 4 principles based on economic presence alone for 5 years prior to 2011, so including the year at issue. 6 Instead, we have authority requiring a 7 physical presence. And this can be seen by 8 California case law. Now, California case law 9 interprets its tax and jurisdictional statutes to 10 the extent of the Constitution. So whatever 11 jurisdictional statute has been interpreted to allow 12 has essentially been interpreted to be limited by 13 the Constitution, and they're coextensive. 14 And your Board, in Appeal of Grace, 15 interpreted California's jurisdictional statute 16 which allows a state to assert a net income tax and 17 found it was limited by U.S. Constitution principles 18 and that required physical presence. 19 Specifically, your Board said that it 20 declined to follow the lead of another court by 21 accepting mere economic presence and, instead, 22 required a substantial connection within, which 23 included a physical presence within the state. 24 So while there's no California authority 25 recognizing economic presence prior to 2011, there's 26 clear authority requiring a physical presence. 27 Second, the terms of the determination 28 letter which granted appellant this alternative 17 1 apportionment formula are also consistent with the 2 this physical presence requirement. 3 Now, the determination letter directs 4 appellant to determine taxability based on Revenue 5 and Taxation Code 25122. And 25122 directs 6 appellant to use U.S. Constitutional standards to 7 determine taxability. 8 Then the determination letter provides 9 further guidance as to what interpretation of U.S. 10 Constitutional standards to use. It specifically 11 directs appellant to use the existing California 12 interpretation in effect during the year at issue. 13 It says, "Based on appeal of Dresser, U.S. 14 Constitutional standards will be used to determine 15 jurisdiction." 16 Appeal of Dresser applied a physical 17 presence standard. As a result, it's clear the 18 determination letter is consistent with the physical 19 presence standard in effect during the year at 20 issue. And this is another reason why physical 21 presence is required of appellant. 22 Now third, apportioning principles also 23 compel application of this physical presence 24 principle. Longstanding apportionment principles 25 require the same standard of determining taxability 26 in California be applied under the second test under 27 25122. 28 Now, the standard to determine taxability 18 1 in California is governed by Revenue and Taxation 2 Code 23101, and this governs the taxability of what 3 we call inbound sales because they are sales coming 4 into California. In turn, 25122 governs the 5 taxability of what we call outbound sales. Those 6 are our sales that originate in California and go 7 out to another state. 8 And your Board, in Appeal of Huffy, said 9 the standard to determine taxability for inbound 10 sales must meet the same standard for outbound sales 11 under the second test. 12 Now, physical presence is a standard during 13 the year at issue for inbound sales, so it likewise 14 must be the standard for outbound sales. This is 15 another reason why physical presence is required. 16 Now fourth, reliance interests also compel 17 application of this physical presence standard. 18 Now, the only way your Board can rule for the 19 taxpayer is by holding that economic presence is 20 sufficient prior to 2011. This will create an 21 entirely new rule as there's no California legal 22 authority holding this as permissible. And it will 23 cut both ways. It will apply to outbound purposes, 24 so the sales at issue, and it will apply to inbound 25 purposes, so in California nexus purposes. And this 26 will come as a surprise to many entities that filed 27 no returns in California prior to 2011 due to 28 believing they had no filing requirement due to 19 1 lacking physical presence. And this will create a 2 great amount of uncertainty. 3 Now, due to these reliance interests alone, 4 FTB is recommending your Board continue to apply the 5 physical presence standard for years prior to 2011, 6 and based on this find that appellant is not taxable 7 in the states at issue and is thus required to throw 8 out its sales from its California sales factor 9 denominator. 10 Thank you. 11 MR. HORTON: On rebuttal, please. 12 MR. MAHON: Sure. Briefly. First, I want 13 to respond to the reliance interest issue. 14 The 2009 legislation that resulted in the 15 adoption of economic nexus in California was clearly 16 legislative policy decision that first recognized 17 the Constitutional power of the legislature to adopt 18 economic nexus, which it did in 2009. It also made 19 a legislative decision to defer the implementation 20 until 2011. 21 That is a policy decision that California, 22 like its sister states, had the Constitutional power 23 to make. But it clearly is also a legislative 24 recognition that there is a disconnect between the 25 Constitutional jurisdiction to tax which existed in 26 2009, existed in 2007, and the decision to actually 27 implement it. 28 The FTB will not, under the legislative 20 1 guidance that the legislature adopted in 2009, will 2 not have the power to retroactively go back and tax 3 out-of-state companies. It is clear that the 4 legislature made a policy decision that physical 5 presence -- or that economic presence is going to 6 apply for 2011 onward. 7 That's different than its separate decision 8 to maintain the existence of 21 -- excuse me, 25122, 9 which speaks to its sister states' jurisdiction to 10 impose a net income tax in terms of applying the 11 throw-out or throw-back rule in this case -- or 12 throw-out rule in this case, throw-back rule in 13 other cases. 14 In -- in those circumstances, the Franchise 15 Tax Board does not dispute that Washington had the 16 authority to impose its business and occupation tax 17 on craigslist. It in fact did in 2010, before 18 California's effective date. That's not disputed by 19 the Franchise Tax Board. It's also not disputed 20 that Washington could have done it earlier. 21 Washington case law permitted the state to impose 22 its business and occupation tax on economic activity 23 alone as early as 2001. 24 It's the Legislature of Washington that 25 made the decision not to impose tax. That 26 jurisdiction has been there as the California 27 Legislature in fact has recognized. 28 The Grace and Dresser decisions are both 21 1 due process nexus cases. They -- neither -- neither 2 of which squarely addresses the physical presence 3 issue. The Grace case, again, was a due process 4 case that rejected an Oregon due process case, 5 and -- and the United States Supreme Court in Quill 6 overruled its prior authority on due process. Those 7 cases are, at best, interesting background. 8 But California made a legislative decision 9 that those cases were not binding in 2009. Those 10 cases weren't binding in 2007 either. And keep in 11 mind this determination letter was issued in 2010; 12 that was after California's legislative decision to 13 adopt economic nexus. 14 For those reasons we think it's entirely 15 appropriate, both under 25122 and the Franchise Tax 16 Board's determination letter, to permit craigslist 17 to apportion on a market basis using the 18 Constitutional standard for nexus. 19 Thank you. 20 MR. HORTON: Thank you very much. 21 Discussion, Members? 22 Member Harkey. 23 MS. HARKEY: I'll start and may come back. 24 This is for the taxpayer. So what you were 25 saying is the reason that the 2011 -- the 2009 26 legislation specified 2011 is because you -- they -- 27 the legislature did not want retroactive assessment 28 of out-of-state? 22 1 MR. MAHON: I'd say that's the effect. The 2 legislative decision making, you know, is 3 something -- it's not clear to me. What is clear in 4 the bill analysis is the legislature was recognizing 5 that it had the Constitutional power to extend the 6 income tax over economic activity. It's also quite 7 clear they picked a starting point for which to 8 exercise that jurisdiction, which was January 1, 9 2011. 10 That was a legislative decision, but the 11 legislative process clearly indicates a recognition 12 that it had the Constitutional authority to make 13 that call at 2009 and previously. And I don't think 14 there's any doubt that the Franchise Tax Board will 15 be back before this Board or courts arguing that 16 it's quite clear that they have Constitutional 17 authority to impose an income tax on the basis of 18 economic nexus. 19 MS. HARKEY: Okay. The apportionment 20 principles that the FTB discussed, the Revenue and 21 Taxation Code 23101 for inbound -- 22 MR. MAHON: Mm-hmm. 23 MS. HARKEY: -- versus 25122 for outbound, 24 how do you respond to their argument? 25 MR. MAHON: Their argument is really a 26 complaint about federalism. It's each state making 27 its different sovereign decisions on how to tax. 28 And let's take two examples: Washington and Oregon. 23 1 So, Washington has no income tax, it's made 2 the sovereign decision not to impose an income tax. 3 It, instead, imposes a gross receipts tax, much as 4 San Francisco's or Los Angeles', but on a state-wide 5 basis. 6 It has chosen to adopt a physical presence 7 standard for periods prior to 2010. That was, 8 again, a legislative choice. It's not a matter of 9 lack of uniformity. It's the Calif- -- Washington 10 is making a conscious legislative decision that they 11 don't want to tax certain activity. That's their 12 right as a sovereign. 13 Oregon, the second example of a market 14 state at issue here. They've long -- long before, 15 in fact the Franchise Tax Board notes that an early 16 case in Oregon is the foundation, in many ways, of 17 the economic nexus theory even for due process. And 18 Oregon has had economic nexus for some time. They 19 don't have a quantitative statutory regime like 20 California and Washington now do. Instead, it's a 21 substantial economic presence concept, which is sort 22 of amorphous thing. It's difficult to apply. 23 So that was in play for all the years at 24 issue. What's different is that Oregon made a 25 separate statutory legislative sovereign decision to 26 have a different apportionment system that results 27 in craigslist having no Oregon source income. In 28 other words, it's subject to the jurisdiction of 24 1 Oregon, and Oregon clearly was exercising 2 economic -- jurisdiction on an economic basis. But 3 when you go through the calculations, it produces 4 zero taxable income in Oregon by virtue of Oregon's 5 apportionment formula, which again is its sovereign 6 right. 7 So what the FTB is complaining about is not 8 the lack of uniformity; it's that other states are 9 exercising their sovereign rights differently than 10 California. And, of course, that's a problem that 11 has been inherent in the federal system since its 12 foundation. And it's one that organizations like 13 the MTC and UDITPA are aimed at trying to reduce. 14 But each of these -- each of these sister 15 states had jurisdiction; some of them were 16 exercising it, some of them weren't. And again, the 17 statute that California legislature adopted for 18 taxability not only contemplates it, it's there 19 because states have that right to exercise its 20 jurisdiction differently than California. 21 MS. HARKEY: Thank you. 22 Okay. FTB, as I understand it, your case 23 is that you had -- you had negotiated earlier on an 24 earlier tax situation and allowed a certain 25 procedure and -- but part of your negotiations were 26 that you would have -- you would be able to exercise 27 the throw-out rule. 28 MS. FRANK: Right. 25 1 MS. HARKEY: Okay. Then the legislature 2 acted in 2009. And so what you're saying is that 3 in 2000 -- if -- if -- if that had been in place in 4 2007, you wouldn't have had the throw-out rule. But 5 it -- it wasn't in place in 2007, and so you're 6 believing that the taxpayer wants a retroactive 7 treatment. 8 MS. FRANK: Right. And so not necessarily 9 a throw-out rule, but this economic presence rule. 10 They are asking for retroactive -- 11 MS. HARKEY: Right. Throw-out would have 12 been there anyway. 13 MS. FRANK: Mm-hmm, yes. 14 MS. HARKEY: So it's a nexus issue. 15 MS. FRANK: Right, mm-hmm. Yes. Yeah. 16 Yeah. 17 And so and there's -- I was hoping I could 18 respond to a couple of things that he had mentioned 19 in regards to Grace being a due process case. And 20 actually when Grace was rendered, at that time Due 21 Process Clause analysis and Commerce Clause 22 analysis -- those are the two clauses under the 23 Constitution that state taxes are limited by -- 24 those are really one in the same. 25 So, it's really not, I think, accurate to 26 say that this Grace doesn't apply because it's 27 purely a Due Process Clause case. Because at that 28 time Due Process Clause and Commerce Clause 26 1 analysis, again, they were just essentially one 2 test. 3 So, anyways, I wanted to respond to that, 4 that comment there. 5 And then another thing -- sorry. 6 MS. HARKEY: Go on. 7 MS. FRANK: Oh. He had mentioned about how 8 we were not respecting other states. And if 9 taxpayer -- we do respect other states. And, again, 10 taxpayer can be found taxable under either section 11 under 25122. 12 If taxpayer had actually filed taxes in 13 another state, filed a return, if that state had 14 economic presence standard, even though it's not our 15 rule in 2007, we would have recognized that if the 16 taxpayer actually filed and paid taxes there, but 17 they didn't. Rather, they're asking under the 18 second test. And really, based on apportioning 19 principles, the only way for this apportioning, the 20 second test, to work properly is you have to apply 21 the same standard for taxability for inbound and 22 outbound. That was as stated by your Board in 23 Appeal of Huffy. 24 MS. HARKEY: Okay. I understand that. 25 That's -- that's your contention. 26 So, representative for the taxpayer, what 27 do you say about applying the same test inbound and 28 outbound? 27 1 MR. MAHON: I think there -- there is a 2 fundamental distinction between Huffy and similar 3 cases and this case. And that's because the 4 legislature recognized that there was a distinction 5 between the two tests. 6 The legislature, in 2009 -- which, again, I 7 want to make sure we're clear on the timing. The 8 determination of the FTB happened in 2010. So it's 9 after the legislature has adopted an economic nexus 10 statute, after it has made a legislative decision 11 that it had Constitutional authority. At that point 12 the California Legislature has -- has made a 13 decision that it has jurisdiction that it's not 14 going to exercise. 15 It is inappropriate for -- and in fact 16 Franchise Tax Board doesn't suggest that 17 California's decision has any impact on its sister 18 states' authority under the second prong of 25122 to 19 exercise jurisdiction over craigslist. 20 And as to the complaint that craigslist 21 didn't pay tax, well, a taxpayer isn't obliged to 22 pay tax that isn't due. Washington made a decision 23 that it was not going to impose physical presence. 24 We had no taxable income in Oregon or 25 Washington. We have no return to file. That's -- 26 that's because California -- excuse me, Oregon and 27 Washington aren't exercising jurisdiction. It's not 28 because they couldn't. In fact, it's quite clear 28 1 they could and both of them have, or at least 2 Washington has, I should say. 3 MS. HARKEY: Okay. For the Franchise Tax 4 Board, do you agree that in 2007 states at issue had 5 jurisdiction under the U.S. Constitution to impose a 6 net income tax on craigslist? 7 MS. FRANK: We have no authority in 8 California recognizing that. Rather, the authority 9 we have, which we're bound to follow, Appeal of 10 Grace says that a physical presence is required. 11 MR. SCOTT: Member Harkey -- 12 MS. HARKEY: Do you -- 13 MR. SCOTT: -- I think it is fair to say 14 that we acknowledge that the decision -- some 15 decisions of other states did exercise jurisdiction 16 on the basis of economic presence. But the 17 distinction that we'd like to draw in response to 18 your question is that that -- that recognition had 19 not taken place in California law as of 2007. And I 20 think that's -- that's where the real crux of the 21 issue before the Board is. 22 MS. HARKEY: Isn't it just because there 23 were no -- there were no cases in California, but 24 there were other cases that had been settled across 25 the nation; is that not true? 26 MR. SCOTT: Well, every authority in 27 California, up until the legislature took action on 28 revising section 23101, said the Constitutional 29 1 standard as we apply it in California is physical 2 presence. 3 And so it was really settled law. We 4 didn't see many cases on it because it was settled 5 law and taxpayers filed or didn't file their returns 6 based upon that interpretation. 7 So when the legislature took action here 8 and made its decision to essentially change the -- 9 change the Constitutional standard that California 10 would apply in interpreting its laws, it did so 11 effective in 2011 and said -- and we think the 12 legislative intent was clear that the intent was not 13 to disturb the law before that time. 14 And craigslist has made a couple of 15 comments about the legislature made a policy 16 determination, and I think we should -- we do agree 17 with that. But I think we would respond by saying 18 that we're here before the Board today because we 19 believe that Franchise Tax Board and this Board 20 should respect that policy determination to apply 21 only the economic presence standard in -- in the 22 time frames prescribed by the legislature. 23 MS. HARKEY: Well, as I -- as I read the 24 legislative analysis, I -- I felt, or I read it as 25 though they had always kind of recognized economic 26 presence and they just merely wanted to establish a 27 bright line on this. And so what, your 28 interpretation is different? 30 1 MS. FRANK: Right. So, yeah, the appellant 2 had made the argument that the legislative history 3 said it was clarifying existing law. So I have a 4 couple of points in regards to that. 5 One, I think if you look at the statute and 6 then the legislative history as a whole, that 7 doesn't seem to be the case. One, because the 8 statute applied the change on a prospective basis. 9 If it was the existing standard, there would be no 10 need to apply in a prospective manner. 11 Also, if you read the legislative history, 12 you'll see that there are several instances in which 13 the legislature says that it's clarifying something. 14 It says it's clarifying gross receipts and also 15 clarifying the treatment of unitary groups. And 16 there's also another instance of it. 17 Now, the treatment of unitary groups and 18 the treatment of the gross receipts term, those were 19 clear changes in law. 20 In regards to the gross receipts issue, 21 that said that certain treasury receipts are no 22 longer considered gross receipts. 23 And then in regards to the treatment of 24 unitary groups, after 2011 we used the Finnigan 25 standard, whereas before we used the Joyce standard. 26 So you see in the legislative history it 27 actually says there -- similarly says that it's 28 clarifying certain terms that were clear changes. 31 1 So what it appears as if the legislature was saying 2 is we're clarifying what this amendment is supposed 3 to do. 4 And then also, case law has discussed other 5 cases where the legislature has said we're 6 clarifying existing law. And case law has said, 7 okay, when you look at that language and legislative 8 history, you have to look at it in context and 9 obviously make sure that it doesn't result in absurd 10 results. And if a law is truly clarifying existing 11 law, then it will be clarifying the law as it was 12 the day that it was put into existence. 13 So here the law in question is Revenue and 14 Taxation Code 23101; that's California's 15 jurisdictional statute. It was first put in 16 existence in 1951. And I don't think anybody would 17 say that economic presence was sufficient in 1951. 18 Again, in -- in order to have jurisdiction, 19 you need to have substantial contacts. And in order 20 for a taxpayer to have substantial contacts, that 21 taxpayer would have to be physically present in the 22 state in 1951. There's no way the taxpayer could 23 meet that standard. 24 Whereas, you know, 2011 obviously the 25 structure of the economy has changed. Now we have 26 Internet, we have all these other technological 27 advances. So now it's permissible. But if we read 28 this to say it was clarifying existing law all the 32 1 way back to 1951, that would actually -- that would 2 lead to an off result. 3 So I think taking into consideration the 4 language of the statute, the legislative history, 5 and then also how case law says we should interpret 6 this, I think all points to the direction that this 7 is not a clarification of existing law. 8 MS. HARKEY: Well, 1951 there wasn't any of 9 this. So we know that, you know -- I mean I 10 don't -- I guess that argument doesn't have -- carry 11 as much weight with me as where we were in 2007 and 12 the reason for the change in 2009. 13 So there was a case, I believe it was an 14 opinion written by the California Court of Appeal, 15 the Fourth District, Harley Davidson. And I'll just 16 read a quote from that. It says, indeed the 17 majority of state courts have considered that the 18 issue -- considered the issue have concluded that 19 economic presence is sufficient to satisfy the 20 Commerce Clause for taxes other than sales and use 21 taxes. 22 Doesn't that kind of apply here? And this 23 is just a recent decision. 24 MS. FRANK: Right. Well, Harley Davidson 25 actually found a nexus in California on a physical 26 presence argument. It was an agency nexus issue. 27 So, while they might have acknowledged that other 28 states have gone in that direction -- and we don't 33 1 dispute that, they have. That court said, no, we're 2 still going to apply the physical presence 3 standard. 4 MS. HARKEY: Well, I -- my biggest -- my 5 biggest issue here is that there's a Constitutional 6 issue. There's recent legislation. The 7 legislation, "clarifying" is the term that's used, 8 that's to clarify existing law. And I think that 9 was almost a nod to the constitutionality of it. 10 I do understand the 2011, but I thought 11 that you had said that, or somebody said, that the 12 2011, the prospective move was to preserve Revenue 13 and Tax Code 23101 on the inbound so that there 14 wouldn't be penalties for inbound revenues. Is that 15 not what I heard here? 16 So, you know, we're kind of -- 17 Anyway, this is a very interesting case. 18 And -- 19 MS. FRANK: We think so too. 20 MS. HARKEY: -- I got into the weeds really 21 deep, and I wish I were an attorney to argue it. 22 But I think we -- I think it's a pretty simple, 23 straightforward case when you start breaking it 24 down. 25 The state has the jurisdiction to impose an 26 income tax. The taxpayer should be considered as 27 taxable whether or not the state actually taxed. 28 And the legislature concurred with that in 2009, 34 1 established the economic presence, established a 2 bright line of a half a million dollars or a half -- 3 yeah. And then also wanted to prevent regressive 4 inbound, inbound issues. 5 So, I'll just leave this. I'm through now. 6 Thank you. 7 MR. HORTON: Member Ma. 8 MS. MA: So, it is an interesting case. I 9 believe I was on the Revenue and Taxation Committee 10 in 2009 and many of these bills came up because of 11 the great recession in 2008. You know, the Amazon 12 tax was floating around, whether Internet sales was 13 or wasn't going to be taxable, you know, trying to 14 figure out nexus to California. 15 And I recall when we passed these bills, 16 whether they're clarifying or not, setting that date 17 as the start date was really kind of an indication 18 to taxpayers that, you know, normally we pass a bill 19 in 2009 and we say it's going to be effective 20 January 1st of the following year, which is the 21 normal course of bills. And the fact that we said 22 it's going to start effective 2011 was really to 23 give the taxpayer some time to adjust their 24 accounting, you know, systems, the way they are 25 recording and reporting, and to allow them the 26 opportunity to, you know, report differently so that 27 when the effective start date starts, that they have 28 adequate time to prepare and adjust. 35 1 And so we did that a lot in the Revenue and 2 Taxation Committee as, you know. Give 'em two 3 years, give 'em three years, give 'em four years 4 sometimes just because corporations, you know, are 5 doing business in many states and they have computer 6 systems that they have to -- have to adjust to 7 accommodate the new laws that we establish. 8 I also believe that establishing that 9 $500,000 limit was not a clarifying statute, but it 10 was an indication that this is the number that 11 California felt we wanted to use. And every other 12 state was using different numbers to determine 13 nexus, but we felt $500,000 was the correct nexus. 14 So I understand that, you know, 15 "clarifying," you know, may have been used in the 16 language. I really feel that when we pass laws in 17 the legislature on a certain date and create 18 effective dates to move forward, that that's where 19 we want all of the tax agencies to adhere to, is 20 that effective start date. 21 So, you know, in this case I feel that 22 they -- Franchise Tax Board allowed craigslist to 23 use this alternative method for that particular 24 year. And even though the legislature passed the 25 law in 2009, it wasn't effective until 2011 that 26 corporations were on notice to be allowed to use 27 this new methodology moving forward. And that was 28 the legislature's intent, is to start using the 36 1 economic nexus laws at the $500,000 level moving 2 forward. 3 And it was not a prospective decision 4 because I think, you know, if we started down 5 that -- that path then every law is going to have 6 that same opportunity. So, you know, we just 7 passed, you know, cannabis laws that are going to be 8 effective 2018. So, you know, in that sense then 9 we're going to say that, well, everybody who's here 10 now in 2015 should be allowed to apply the 2018 11 standard even though it's not effective until 2018. 12 I mean, you know, we kind of keep going 13 down that -- that pathway. And so I think in the 14 legislature, you know, we all served in the 15 legislature and I'd love to hear Members' opinions 16 on it, but that is usually my understanding, is that 17 we are setting the law, we set an effective date, 18 and we want everyone to kind of abide by it and play 19 by the same rules, that we want consistency moving 20 forward. And that's why we, you know, either 21 clarify laws or, you know, create new laws is so 22 that everybody is on the same page. 23 So that's kind of my interpretation of the 24 law. 25 MR. HORTON: Member Stowers. 26 MS. STOWERS: Thank you. 27 Not that I was in the legislature, but 28 that's how I was looking at it, too, is that it had 37 1 a 2011 effective date providing businesses with the 2 opportunity to change their business practices, 3 change their accounting systems, so that everyone 4 would have an opportunity to apply the laws starting 5 1/1/2011. 6 I think it would be an injustice had they 7 not had that opportunity to change their practices. 8 It would also be an injustice if we were to allow 9 the change for the 2007 year and open a door -- and 10 open the door for potential audits or claims for 11 other taxpayers when that was not the law of the 12 land in 2007. 13 I see the Appeal of Grace and the Appeal of 14 Dresser to be controlling for 2007 and 2009. 15 And one more thing. I also feel that when 16 the appellant went to the Franchise Tax Board and 17 asked for this special relief, the petition, they 18 were provided with relief. And in that Notice of 19 Determination, the Franchise Tax Board was clear on 20 their concern about "nowhere" income and that's why 21 they put in a throw-back rule. If the appellant or 22 the taxpayer at that time did not agree with that 23 rule, they had the option to file a petition before 24 the three-member Board and ask for additional relief 25 and they chose not to do so. 26 MR. HORTON: Member Runner. 27 MR. RUNNER: Yeah. I guess to the 28 taxpayer, and I'm kind of following on the same kind 38 1 of concern in regards to when the legislature puts 2 a -- you know, does indeed extend a date of 3 implementation, it's with purpose. It's not 4 arbitrary. 5 So I guess I'd like to hear from your 6 perspective why you believe then, if it was -- if it 7 was not -- if it was to -- to be applied prior to 8 implementation, why did the legislature, in your 9 mind, decide to create that other -- that 2011 date? 10 MR. MAHON: Yeah. I think I agree with 11 each of the Members' comments about the legislative 12 intent. I think the legislature intended, for 13 California jurisdictional purposes, to exercise that 14 jurisdiction effective only 1/1/2011. 15 I think there's a different question which 16 is here: Did California sister states have 17 jurisdiction to impose a tax under 25122? Did it 18 have jurisdiction prior to California's decision to 19 exercise that jurisdiction effective 1/1/2011? 20 Those are two different questions. And I 21 think the legislature's decision in 2009, its 22 recognition that it had the power under the 23 Constitution to make this decision, tells us that 24 the sister states, likewise, had the same power. 25 How they exercised the power is a different 26 question. 27 Washington did it in 2010. Oregon had done 28 it way previously. That -- that, to me, is the 39 1 distinction, the effective date. And that is the 2 reason why this case has very limited impact. 3 Inbound taxpayers, taxpayers who haven't 4 filed because they didn't have physical presence, 5 aren't going to be subjected to tax and it's because 6 the legislature was clear about a prospective 7 effective date. 8 We aren't asking for the statute to be 9 retroactively applied. We're asking for the 10 application of the plain language of 25122, which is 11 that we're entitled to apportion to any jurisdiction 12 that had the Constitutional authority to impose a 13 net income tax on craigslist. 14 The FTB agrees that it could have been 15 sooner, okay. It didn't -- there's nothing magic, 16 from a Constitutional perspective, about 2011. The 17 legislature recognized that in 2009. 18 MR. RUNNER: Let me ask in terms of your 19 comment in regards to the limited impact. FTB, I 20 think in your comment, was concerned about a 21 decision that might be for the taxpayer in regards 22 to unintended consequence on other taxpayers. Can 23 you expand on that? 24 MS. FRANK: Right. So, if your Board were 25 to rule for the taxpayer, essentially what you would 26 be ruling is that the Constitution permits economic 27 nexus prior to 2011. So you would be overruling the 28 only precedent we have that says physical presence 40 1 is the requirement for inbound. And the standard 2 for inbound, again, has to be the same standard for 3 outbound. So that would be then the law in effect 4 that FTB would then have to follow. 5 MR. RUNNER: And -- and -- and as a result 6 of that, what would happen? 7 MR. SCOTT: Well, Senator Runner, I think 8 the answer is that's probably above our pay grade, 9 but -- 10 MR. RUNNER: What could happen? 11 MR. SCOTT: What could happen is -- 12 MR. RUNNER: How's that? I'll clean it up 13 for you. Get it down to your pay grade. What could 14 happen? 15 MR. SCOTT: At above -- at a very minimum, 16 as -- as Katie indicated in her argument, taxpayers 17 that did not file returns in the state because they 18 had no physical presence here before -- did not file 19 returns in the state before 2011, and we agree and 20 they agree that they were not taxable here, will 21 suddenly be faced with a potential ruling from this 22 Board that says that if you have economic nexus, 23 even before the legislature said that was going to 24 be the rule, that you -- you could be subject to 25 tax. 26 Now, how the Board -- how the Franchise Tax 27 Board would react to that, I think would be a policy 28 decision. It's our job to administer the laws, you 41 1 know, not to -- to make the laws. So with a 2 decision like that from your Board, I think we would 3 have to have the internal discussions about what 4 application, if any, your Board decision might have 5 for taxpayers that did not file returns. Should -- 6 should we contend that they do have a filing 7 obligation? 8 And then to address craigslist's other 9 point that it would also generate -- we believe it 10 would generate, and actually we've already seen 11 this, claims for a refund where taxpayers, not in 12 craigslist's situation where there's an alternative 13 formula, but filed using an economic nexus standard 14 for their outbound sales -- I'm sorry, filed using a 15 physical presence standard for their outbound sales 16 now would come in and say, okay, well, we're like 17 craigslist, so we want -- we want a claim for -- we 18 want a refund on the basis of using the economic 19 nexus. 20 So, our point is that we don't have a 21 crystal ball and aren't able to predict actually how 22 events would go because I think that would be a 23 matter for the administration and the executives of 24 the Franchise Tax Board to decide. But it would 25 create a tremendous amount of uncertainty for -- for 26 staff in dealing with those claims for a refund, as 27 well as the -- you know, we have whole divisions 28 whose job it is to pursue people who have a filing 42 1 obligation that haven't filed. So it would create 2 uncertainty both for taxpayers and the Franchise Tax 3 Board in terms of what would be the proper method to 4 proceed. 5 MR. RUNNER: I guess one of my concerns 6 here is that I believe one of the important parts of 7 what we do do and what we should be doing and 8 what -- is creating clarity. And I guess that's 9 kind of what I'm concerned about. I'm concerned 10 about if we go down this path, that we are creating 11 uncertainty and some -- and some issues of potential 12 exposure to which taxpayers didn't have -- wouldn't 13 believe they would have. 14 I appreciate the fact that we don't know 15 what FTB would do. I guess it scares me enough to 16 know that they could do. And I guess that's where I 17 have my concern. 18 MS. HARKEY: Can I just -- 19 MR. HORTON: Member Harkey. 20 MS. HARKEY: I'd just like to clarify. 21 Refunds, you have a four-year statute of 22 limitations, do they not? 23 MR. SCOTT: Correct. 24 MS. HARKEY: So we wouldn't be facing 25 refunds because 2011 forward the law, in your mind, 26 is -- is clear. 27 MS. FRANK: Well -- oh, sorry. 28 MR. SCOTT: Member Harkey, many, many 43 1 corporations have statutes of limitation -- statutes 2 can be open for several reasons. Four-year statute 3 is correct. But typically corporate audits take 4 quite a long time. As you know, cases come before 5 you. 6 MS. HARKEY: Okay. So there's extenuating 7 circumstances. 8 MR. SCOTT: Yes. 9 MS. HARKEY: So what we're really talking 10 about here -- I mean if we break this all down, 11 we're talking about, what, seven states, or 12 Washington D.C. and six states. And in 2007 -- I 13 mean, negating what California did. But in 2007 did 14 they have the right -- did they have jurisdiction to 15 tax? And craigslist is saying, yes, they did. And 16 you're saying because they didn't -- because they 17 didn't tax, they didn't have jurisdiction. 18 MS. FRANK: No. So we're saying that -- so 19 in 25122 there's two tests. One is you actually pay 20 tax. And then the second test, that's the test 21 we're talking about. And we're saying, no, under 22 our authority, California authority, requires the 23 physical presence to do -- to be considered taxable 24 under U.S. Constitutional standards. 25 MR. SCOTT: If I could take a quick summary 26 on that. I think what our position is, is that 27 California authorities that interpreted the state's 28 jurisdiction to tax before 2011 required a physical 44 1 presence. That's what our position is. And other 2 states, we acknowledge, we have to acknowledge, 3 implemented a different decision. But the courts 4 and this Board, when that issue came before it prior 5 to the legislature's action in 2009, effective 2011, 6 have uniformly held, without exception, physical 7 presence. 8 And California case law is clear that 9 California interprets its jurisdiction to the tax to 10 the full extent permitted by the Constitution. 11 So our argument is that the extent of the 12 Constitution as interpreted in binding California 13 authorities required physical presence until the 14 legislature changed the Constitutional principle in 15 2011. 16 MS. HARKEY: Okay. And if these seven 17 municipalities had taxed, would we be -- would be 18 here? 19 MS. FRANK: No. We would recognize -- 20 MS. HARKEY: That would be the hundred 21 percent you were talking about. 22 MS. FRANK: Right. 23 MS. HARKEY: But see, this is where I've 24 got a problem with the analysis. 25 MS. FRANK: Mm-hmm. 26 MS. HARKEY: But I can also count. 27 Thank you. 28 MR. HORTON: In addition to what Member Ma 45 1 has articulated relative to the concerns of the 2 legislature, and Member Runner, there's always a 3 concern about making -- determining whether or not 4 something should be retroactive because the 5 activities of the legislature, as well as the Board 6 of Equalization, has a double-edged sword and it 7 sort of cuts both ways. 8 The other thing that was under 9 consideration, as my understanding during 2009, was 10 to attempt to give Congress some time to take 11 action. And so there was legislation before 12 Congress to determine, and so the legislature said, 13 well, okay, as part of the negotiation with folks 14 like Amazon, let's see what happens in Congress. 15 And if nothing happens, we're going to take action. 16 The challenge that we have before us is, is 17 that there is no -- well, there is a Constitutional 18 determination and the Constitutional determination 19 is that it requires physical presence. The 20 determination by various different -- and California 21 Supreme Court has not taken a position on this 22 legislation, yet. So we're yet to know whether or 23 not there is -- you know, this is Constitutional, 24 the action of the legislature. Which is another, 25 whole 'nother debate, but it certainly fits in here. 26 So the determination is on the actions of 27 the legislature and the effective date of their 28 decision. The legislature contemplates many things 46 1 over a period of time. But when they establish a 2 date, that's the date in which it is enacted. 3 That's the date in which their determination or 4 their thought process or their intention is meant to 5 go into play. If you take a look at the 6 Quaill (verbatim) case, which is always up for a 7 debate -- 8 MR. THOMPSON: Quill. 9 MR. HORTON: Quill case, my apologies. The 10 debate there was, is that -- which came down to say 11 that it requires physical presence. But the debate 12 there was, my understanding at least, is that at 13 some point economic presence becomes physical 14 presence, by virtue of their activity, by virtue of 15 their accounting, by virtue of their engagement in 16 that city. So when you look at the greater purpose, 17 the greater intent, the larger goal, at some point 18 your activity in that state becomes economic 19 presence. 20 And so therein comes into question have we 21 evolved to that point? I believe the legislature 22 just simply said we've evolved. In 2007 we weren't 23 there. In 2008 we weren't there. In 2009 we 24 weren't there. And we believe by 2011 we should be 25 there such that the -- that the economic presence in 26 California's so substantial that it does create 27 physical presence. 28 And so the inherent challenge here, which 47 1 we can't take up because we can't determine the 2 Constitution, what we can only look at, in my view, 3 is the date in which the legislation was enacted and 4 the intent it established. Legislation said in 2011 5 there is physical presence in California. And let 6 us define physical presence. That physical presence 7 is defined by your economic activity and a number of 8 other activities. I don't see a deviation from the 9 Constitution as it relates to physical presence. 10 So it's difficult for me to really, as far 11 as case law and as far as the U.S. Supreme Court and 12 so forth, it's just a challenge to get the argument 13 that we can -- we can interpret the Constitution and 14 we can make that interpretation retroactive. 15 There's an inherent challenge with that argument. 16 But, that be it as it may. 17 Further discussion, Members? 18 Hearing none, is there a motion? 19 MS. STOWERS: Move to take the matter under 20 submission. 21 MR. HORTON: Member Stowers moves to take 22 the matter under submission. Second by Member 23 Harkey. 24 Without objection, Members, such will be 25 the order. 26 MR. SCOTT: Thank you, Mr. Chairman and 27 happy holidays to all of you. 28 MR. RUNNER: Thank you. 48 1 MR. HORTON: Same to you. Thank you. 2 ---oOo--- 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 49 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 December 16, 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 49 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: December 30, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 50