1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 26, 2016 10 11 12 13 14 15 16 BUSINESS TAXES COMMITTEE 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Carole W. Browne 28 CSR NO. 7351 1 1 P R E S E N T 2 For the Board of Diane L. Harkey. Equalization: Chair 3 Jerome E. Horton 4 Member 5 Sen. George Runner (Ret.) Member 6 Fiona Ma, CPA 7 Member 8 Yvette Stowers Appearing for Betty T. 9 Yee, State Controller (per Government Code 10 Section 7.9) 11 Joann Richmond Chief 12 Board Proceedings Division 13 For the Board of 14 Equalization Staff: Susanne Buehler Chief 15 Tax Policy Division 16 Scott Claremon Tax Counsel III 17 Legal Department 18 Lawrence Mendel Tax Counsel III 19 Legal Department 20 Robert Tucker Assistant Chief Counsel 21 Legal Department 22 Richard Parrott Business Taxes 23 Administrator III Special Taxes Department 24 Speakers: Jim Ewert 25 General Counsel California Newspaper 26 Publishers Association 27 Randy Cheek SEIU Local 1000 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 26, 2016 4 ---o0o--- 5 MR. RUNNER: We're going to go ahead and begin 6 with the Business Taxes Committee, so I'll turn that 7 over to the Chair of the Business Taxes Committee. 8 MS. HARKEY: Thank you very much. 9 I -- we have several items today, and I would 10 like to first bring up -- I thought I was ready. Okay. 11 First item on the agenda is Regulation 1590, Newspaper 12 and Periodicals. 13 (Mr. Horton entered the hearing room.) 14 MR. RUNNER: Oh, here we are. 15 Mr. Chair, we just started the Business Taxes 16 Committee. 17 MR. HORTON: Thank you. 18 MR. RUNNER: If you want to go back and start 19 over, that would be fine, because we haven't actually 20 started. We just did the pledge. 21 MS. HARKEY: We haven't done anything yet, so 22 would you like to just . . . 23 MR. HORTON: Just continue. 24 MR. RUNNER: We knew you had an interest in the 25 leg., so we were waiting until you got here to do that. 26 MR. HORTON: Appreciate it. Appreciate it. 27 MS. HARKEY: Okay. Staff accompanying Susanne 28 Buehler, Charlotte -- or you want to introduce your 3 1 staff? Have you got any staff, Susanne? 2 MS. BUEHLER: Mr. Larry Mendel and Mr. Scott 3 Claremon are supposed to be joining me, but I'm not sure 4 that they're aware -- 5 MS. HARKEY: I think they're coming up the rear 6 here. 7 MS. BUEHLER: Awesome. Thank you. 8 MR. RUNNER: Backup's on its way. 9 MS. BUEHLER: Good morning. I am Susanne 10 Buehler with the Sales and Use Tax Department. We have 11 two agenda items for your consideration today. We will 12 take each agenda item and their respective action items 13 separately before moving on to the next. 14 With me for Agenda Item 1 are Mr. Larry Mendel 15 and Mr. Scott Claremon from our Legal Department. 16 Staff requests your approval and authorization 17 to publish proposed amendments to Sales and Use Tax 18 Regulation 1590, Newspapers and Periodicals. 19 The proposed amendments clarify the application 20 of tax to newspaper subscriptions that include both 21 paper and access to digital content. 22 Staff recommends that 53 percent of the charge 23 for these subscriptions be presumed to be for the 24 nontaxable sale of the right to access digital content. 25 Taxpayers may rebut this presumption by producing 26 documentation that -- establishing that the nontaxable 27 allocation is greater than 53 percent. 28 We do have speakers on this agenda item, and 4 1 we'd be happy to answer any questions you may have after 2 their presentation. 3 MS. HARKEY: Thank you very much. 4 Are there any -- any questions from the Board? 5 MR. RUNNER: (Inaudible) guest speaker. 6 MS. HARKEY: Oh, okay. I'm sorry. He's not 7 part of staff. I'm sorry. Excuse me. Yes, sir. 8 MR. EWERT: Madam Chair and Members of the 9 Board, my name is Jim Ewert. I'm the general counsel 10 for the California Newspaper Publishers Association. 11 We want to thank you, Madam Chair, for 12 spearheading the effort here and for your staff's work 13 as well as the staff of the BTC. We think this is a 14 good regulation, good amendments to the regulation that 15 we've lived under since about 1991 now, and we urge an 16 aye vote. 17 MS. HARKEY: Thank you. Are there any other 18 speakers? Any member of the public? Board members? 19 Any questions or comments? 20 MR. RUNNER: Move to adopt staff 21 recommendation. 22 MS. STOWERS: Second. 23 MS. HARKEY: Second. But I'd like to just say 24 this was a very, very cooperative effort between the 25 industry and the staff. I really appreciate the staff 26 efforts of trying to move and the industry's efforts of 27 moving so that we've got something that works for 28 everyone. It's a good compromise position, and I -- I 5 1 want to thank you all for working collectively together. 2 Thank you. It'll -- it'll benefit the state of 3 California. Thanks so much. 4 MS. BUEHLER: Thank you. 5 MS. HARKEY: Okay. We have a motion and a 6 second. Any opposition? No? Okay. So moved. 7 MS. BUEHLER: Thank you. 8 Joining me for Agenda Item 2 will be 9 Mr. Richard Parrott from Special Taxes and Fees 10 Department, and Mr. Robert Tucker from the Legal 11 Department. 12 Staff requests your approval and authorization 13 to publish Proposed Cigarette and Tobacco Products Tax 14 Regulation 4076, Wholesale Cost of Other Tobacco 15 Products, and Regulation 4001, Retail Stock. 16 The proposed regulations define and clarify the 17 terms "wholesale cost" and "retail stock" as they relate 18 to the cigarette and tobacco products tax. 19 In addition to the definitions, both 20 regulations provide examples to assist taxpayers in the 21 application of tax. 22 Regulation 4076 also includes a rebuttable 23 presumption for showing a transaction was at arm's 24 length. 25 We do have speakers on this agenda item, and 26 we'd be happy to answer any questions you may have after 27 their presentation. 28 MS. HARKEY: Okay. Thank you. 6 1 Any speakers from the public? Come forward and 2 state your name and affiliation for the record, please. 3 MR. CHEEK: Thank you, Madam Harkey. Randy 4 Cheek with SEIU Local 1000. 5 We do have some concerns about the regulation 6 that deals with humidors in that you have regular retail 7 product that will be mixed in with product that is not 8 taxed yet; and therefore, that gives our inspectors, 9 whom we represent, a problem when they go into a section 10 and they don't know which one has been pretaxed and 11 which one hasn't been taxed. 12 That also provides -- if you go into some of 13 these humidors, you'll notice that they may not have 14 personnel in there, and someone can go in and take a 15 nontaxed item off the shelf and go to the clerk and pay 16 for it; and therefore, that gives the -- that will cause 17 a loss of revenue for the BOE. 18 And we feel that this particular item -- and I 19 believe it's under No. 2A that talks about the walk-in 20 humidors -- we believe that that could be a problem for 21 our members, and we also believe that that could be a 22 loss of tax revenue. 23 So therefore, we would like you to take that 24 into consideration. We -- we do have a -- oppose on 25 that particular position. 26 MS. HARKEY: I believe -- just for the record, 27 we did take that into consideration. 28 Ms. Buehler, could you define the differences 7 1 between the two items and when something is moved from 2 overstock, in essence, to retail stock? 3 MS. BUEHLER: I will defer to Mr. Parrott. 4 That is his area of expertise. 5 MR. PARROTT: Yes. Richard Parrott with 6 Special Taxes and Fees. 7 We have in the regulation where the product 8 must be segregated, separated, and clearly labeled. 9 The -- the wholesale -- or the nonretail stock will 10 still be sealed in the original manufacturer packaging, 11 and that's the distinction in the regulation to cause 12 the -- the difference. 13 So we felt it was very clear, even in the 14 walk-in humidors, that that product would be separately 15 set aside from the retail stock and still sealed in the 16 original manufacturer packaging. 17 MS. HARKEY: Thank you. I know we worked on 18 this for several months to try to get it right so that 19 we couldn't have a fudge factor in it or could decrease. 20 MR. PARROTT: Yes. 21 MS. HARKEY: This resulted, you know, Members, 22 as a -- a case we heard I think our first or second 23 month where there was an issue as to what was taxable, 24 what was not. So I appreciate the SEIU's concern. I 25 think we tried to address that over the several months. 26 It's been probably nine months, I think, in the works. 27 So with that, are there any other speakers? 28 Board members? 8 1 MR. HORTON: Madam Chair. 2 MS. HARKEY: Yes, Chairman. 3 MR. HORTON: Only because I wasn't really a 4 party to the -- to the process, I just want to make sure 5 that SEIU and the Department have reconciled their 6 differences and they're in agreement that this works for 7 the individuals who are on the front line trying to -- 8 that are required to enforce the law. These are the 9 individuals that are out there in the field. 10 As much as I, you know, appreciate the 11 administrative oversight, I have a tendency to -- to -- 12 to give credence to those individuals who have to -- 13 actually have to enforce the law itself. So the 14 questions of both of you have -- and I'll first go to 15 SEIU. Have you had an opportunity to reconcile your 16 concerns in this regard? 17 MR. CHEEK: No, sir, we have not. I -- I last 18 spoke with one of the inspectors, and their concern was 19 that a customer can come into a walk-in humidor, see 20 that the product was on the retail side, no longer 21 available, look around the humidor, and see that, oh, 22 there's an El Presidente over there, go over to that 23 box, open it up, even though it may be sealed, and 24 purchase the product. And they felt that it wasn't 25 clearly delineated as to what was taxed and not taxed 26 inside the humidors, and that -- that gave them some 27 pause. 28 And, you know, as you know, probably don't have 9 1 enough inspectors out there right now, so that's 2 probably part of the issue. It causes them to have some 3 confusion, and therefore, they felt that this was an 4 issue with them. 5 MR. HORTON: Okay. Have -- have they put forth 6 a recommended solution or are they contemplating and 7 would like an opportunity to do so? 8 MR. CHEEK: They would like an opportunity to 9 do so. 10 MS. HARKEY: Thank you. 11 MS. STOWERS: Chairman -- Chairwoman, can I 12 make a comment? 13 Thank you for your comments, Mr. Cheek. I'm 14 also concerned with the -- with the definition of retail 15 stock as well. 16 First, can you clarify the reg -- the portion 17 of the regulation that deals with an individual that 18 holds the distributor's license and a retail license and 19 basically saying -- and I'll paraphrase -- that if 20 you're in that situation where you hold both licenses, 21 you can have stock on the distributor's side, store it 22 on the location but separate from the inventory that 23 you're going to sell? Is that kind of a good paraphrase 24 of that? 25 MR. PARROTT: That's correct. Yes. 26 MS. STOWERS: So at what point will this 27 distributor -- and is the distributor mainly 28 distributing the -- the product to himself on the retail 10 1 side? 2 MR. PARROTT: Correct. 3 MS. STOWERS: So at what point will the 4 distributor self-assess the excise tax and remit to the 5 Board and then how do we verify this? 6 MR. PARROTT: The distributor would do that 7 when they take the product from the sealed original 8 manufacturer packaging, break that seal, and put it on 9 the shelf that's intended for retail. Then at that 10 point that would trigger a taxable event that would be 11 reported on their distributor's tax return for that 12 period, and then that would be verified also through 13 audit -- our audit program. 14 MS. STOWERS: My concern is that -- that 15 process, taking it from the back room to the front room 16 and now reporting it is going to increase the cost of 17 our licensing act and that distribution when our 18 inspectors get out there and try to verify if this 19 product is taxable or not taxable. I'm also concerned 20 that it's going to raise the cost, it's going to provide 21 more administration variable to the BOE. 22 And considering that we're talking about 23 distributors, retailers that are just basically selling 24 to themselves, it seems to me a more bright-line test 25 would be that when they acquire the product from the 26 wholesaler or the -- whoever they're acquiring it from, 27 that they know that they're going to sell it to 28 themselves at some point in time, that they might as 11 1 well go ahead and pay the excise tax up front. 2 So I do not support 4001. I also believe that 3 it's going to encourage the underground economy and it's 4 just opening the door for noncompliance. 5 MR. HORTON: Okay. 6 MS. HARKEY: Other Board member comments? 7 Mr. Runner. 8 MR. RUNNER: Yeah. Just a quick question in 9 regards to my understanding of the process. 10 I assume SEIU brought this up in the IP 11 process? 12 MR. CHEEK: I'm not sure they have, no. 13 MR. RUNNER: Well, then it's -- okay. It's 14 difficult for me, when we have an IP process, which then 15 includes these kind of discussions, then to come to the 16 Board if they didn't engage during the time when this 17 was supposed to be talked about, because I think we 18 can -- it seems to me this is a solvable problem, I 19 think, I mean, unless you expect a store to have two 20 different -- two separate humidors, and in order to do 21 this, you know, move stock from one place to the other, 22 I just don't think that's reasonable for business. But 23 I guess I'm a little kind of concerned that -- at the 24 process. I assume SEIU is aware of the IP process. 25 MR. CHEEK: I am not sure that we were, no. 26 MR. RUNNER: Well, let me ask -- 27 MR. CHEEK: I wasn't part of that. 28 MR. RUNNER: Okay. Let me ask, what's -- 12 1 what's our normal process in regards to invitation to 2 the -- to the Interested Parties' meetings? 3 MS. BUEHLER: Generally we have a stock list 4 that we go from and then also pull in the industry that 5 is specific to the topic and do searches for industry 6 organizations as well as large retailers that we look 7 at. 8 MR. RUNNER: Would we normally then include 9 then representing then staff who would be enforcing of 10 that, and would -- would SEIU be notified or would -- or 11 would staff be identified -- invited and be -- be aware 12 of the IP process? 13 MS. BUEHLER: The Investigations Division was 14 represented in the meetings, yes. 15 MR. RUNNER: So they were in the meetings? 16 MS. BUEHLER: Yes. 17 MR. RUNNER: And -- okay. Again, it's hard -- 18 it seems to me, again, just processwise, we have IP 19 processes so that we can kind of iron out these issues. 20 That's the whole purpose for why we do it. And so it's 21 hard then when we come to a Board meeting if all of a 22 sudden we have objections that were never even raised in 23 the IP process, and we have the investigators there that 24 are the ones that are helping to craft the -- the 25 solution. 26 You know, I -- again, what I'm hearing, I 27 think, is that there just -- that right now at least 28 what I'm hearing is that you don't believe that there is 13 1 a way to separate retail sale if it's all from stock -- 2 from stock that isn't for retail if it's all in the same 3 big humidor, walk-in humidor. 4 MR. CHEEK: I wouldn't say that. I would say 5 that our inspectors were concerned about delineating 6 those products. 7 MR. RUNNER: Were your inspectors different 8 than the ones that were in the IP process? 9 MR. CHEEK: I do not know who was in the IP 10 process. 11 MR. RUNNER: Well, we've got -- we've got to 12 fix that. We've got to fix this so that -- so that when 13 we have an IP process that we have the right labor folks 14 that are in the IP process so we don't end up with these 15 kind of issues, you know. 16 So I guess I'm -- I'm personally satisfied the 17 IP process was there; the inspectors were there. I 18 think, you know, again, the guidelines to separate 19 retail sales from -- from stock made sense. 20 Remember, we got in this problem because of the 21 fact that there was a robbery, people couldn't keep 22 track of what was in, what was out, and so we're trying 23 to solve that problem. 24 And I would just encourage everybody who's out 25 there when we have an IP process to participate so we 26 can solve these problems in the be -- end, not when we 27 get in front of the Board. 28 MS. HARKEY: Mr. Horton. 14 1 MR. HORTON: Madam Chair, just from a 2 historical perspective, Members, the IP process and this 3 process is a -- is a continuous process. Individuals 4 participate at that level if they -- if they're not or 5 for whatever reason don't have an opportunity to 6 participate at that level or if the information that is 7 developed and consummated at that level, upon review of 8 that, their only alternative is to come before the Board 9 and then express their concerns if for -- for whatever 10 reason. 11 The IP process itself is not guaranteed to -- 12 to dictate or delineate what the suggestions that are 13 made in the hearing. For example, staff is not required 14 to accept all suggestions and to incorporate that in 15 their ultimate recommendation. And when that doesn't 16 occur, the public's only position is to come before the 17 body and then express their concerns about the final 18 results. 19 The other inherent difference from SEIU's 20 perspective and the employees that work, that may be 21 there in an advisory capacity to provide advice to 22 staff, the investigators, they have a different 23 perspective oftentimes than from a labor perspective. 24 And so you've got two situations, often up to 25 five different situations, where individuals are -- 26 ultimately will come before the Board, which is part of 27 the process and part of the duties that we have in order 28 to take that under consideration. 15 1 We cannot summarily dismiss concerns because 2 they didn't participate in the initial process. This is 3 a part of that process. Their participation at this 4 point is welcome. 5 And Members, I suggest we just put it over, 6 allow the parties an opportunity to work out their 7 differences and bring it back to us. 8 MS. HARKEY: Ms. Ma. 9 MS. MA: Yeah, I would second that motion just 10 because I still don't think it's going to be clear, like 11 in the case that we had, what is taxable and what's not 12 taxable. I mean, if it's in a wrapper or not in a 13 wrapper, they open the box, they don't open the box. 14 So, you know, I think we should either have it one or 15 the other instead of having someone decipher whether it 16 really was wrapped or not wrapped. 17 MS. HARKEY: Okay. There's a motion and 18 second. 19 And I would just like to comment, we went 20 through a very long process with this. I believe 21 Mr. Silva was involved, staff was involved, we had 22 members of the industry, I believe we had labor -- 23 should have -- and I appreciate your concerns, because 24 this is a public hearing, but I would like to suggest, 25 if we're going to hold this over, that we bring it back 26 next month, and that we encourage everyone to get really 27 involved if we could. What -- excuse me. You have a 28 problem with doing that? 16 1 MS. BUEHLER: Next month, because of the 2 timeline for putting things on the Public Agenda Notice 3 I don't think would be quite feasible, so I would ask 4 that you give us a little bit more time. 5 MS. HARKEY: March? 6 MS. BUEHLER: And I would also like to suggest 7 that perhaps we bifurcate the two regulations, and 8 perhaps, since we're only having issues on the 4001, 9 Retail Stock, that we have a separate vote on 4076. 10 MS. HARKEY: Okay. That's fine. Okay. So is 11 that agreeable to everybody? Is your motion for -- 12 MR. HORTON: Yes, mm-hmm. 13 MS. HARKEY: Okay. So the Retail Stock is the 14 one we have an issue with; correct? So there's a motion 15 to put that over, 4001, Retail Stock, to put that over 16 until March. And there was a second from Ms. Ma? 17 MS. MA: Mm-hmm. 18 MS. HARKEY: Okay. Any opposition? Okay. So 19 it will be. 20 MR. HORTON: Madam Chair, if you will, I do 21 believe Mr. Runner's point does have significance to 22 these, too. And this is to the general public, to the 23 extent possible, we -- it is helpful to have all of the 24 insight in each phase of the process but it's also 25 understanding and respectful to allow this process to -- 26 to take its course as well. 27 And I thank you everybody for their 28 participation, particularly the Chair. She has been, 17 1 you know, conscious of this and working diligently 2 trying to work it out, and so . . . 3 MS. HARKEY: That has been a very -- 4 MR. HORTON: Long process. 5 MS. HARKEY: -- long and difficult process 6 establishing what's what. And I would encourage the 7 members of SEIU to look at the recent case, over the 8 last year, and find out why -- how this came -- how this 9 came to be and review the tapes of the Board hearing. 10 It was -- it's quite a process for a small store that 11 has one humidor. And, you know, it's quite an expense 12 to pay the taxes on all of it up front versus as you 13 bring it into the inventory, which I think -- 14 MR. HORTON: Democracy at its best. 15 MR. RUNNER: And one quick item, too. If -- if 16 we could ensure that in the IP process -- because, 17 again, I -- I get the fact that -- that investigators 18 that may have been in this process were not the same 19 folks that maybe deal with the issue in regards to the 20 SEIU, so I guess I'd like to know that when we do an IP 21 process that affects staff that we actually go the extra 22 effort to include the fact that we know that whatever 23 staff is in that discussion is also then, at least, I 24 guess, using the same eyes as -- as SEIU would be, as 25 their union would, so again, we don't end up with this 26 bifurcated issue and assume that, you know, there's 27 staff that was participating, but that staff didn't 28 necessarily hold the views or concerns of the -- of the 18 1 union itself. So I think -- I think that's an important 2 discussion to have at the front end so that we don't get 3 here at the back end. 4 MS. HARKEY: It's okay to bring this back. I'm 5 happy to have the discussion, and we'll go over it 6 again, but it is a -- it's a very, very difficult 7 process, and I really encourage your members to get 8 involved so that we can -- we can fine-tune this. I 9 think we did, but I respect that, you know, this is a 10 public hearing, and so more time is not a problem. 11 Thank you. 12 So then do we have a motion on Regulation 4076, 13 Wholesale Cost of Tobacco Products? Move that item? 14 MR. RUNNER: I'll move the -- okay. So the -- 15 MS. HARKEY: We're bifurcating. 16 MR. RUNNER: Right. And 4001 is the one we put 17 over, and I'll move -- I'll move the -- or the 18 recommendation of adoption of Regulation 4076. 19 MS. HARKEY: Do I have a second? I will 20 second. 21 MR. RUNNER: I thought we were okay. 22 MS. HARKEY: I thought we were okay, too. 23 MS. STOWERS: Oh, I'm sorry. Second. 24 MS. HARKEY: Okay. We can't blame SEIU for not 25 showing up. Okay. Here we go. 26 Okay. We have a motion and a second to adopt 27 Regulation 4076. Any objection? Such will be the 28 order. Thank you very, very much. 19 1 MS. BUEHLER: Thank you. 2 MS. HARKEY: That ends the Business Taxes 3 Committee, I believe. 4 ---o0o--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, CAROLE W. BROWNE, Hearing Reporter for the 8 California State Board of Equalization, certify that on 9 January 26, 2016, I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the above- 11 entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 20 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 31, 2016 17 18 19 _________________________________ 20 CAROLE W. BROWNE, CSR #7351 21 Hearing Reporter 22 23 24 25 26 27 28 21