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 CHIEF COUNSEL MATTERS 16 J RULEMAKING 17 J1 PETITION TO AMEND SALES AND USE TAX REGULATION 18 1569, CONSIGNEES AND LIENORS OF TANGIBLE PERSONAL 19 PROPERTY FOR SALE 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice 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 16 Division 17 For Board of Equalization Staff: Scott Claremon 18 Tax Counsel III Legal Department 19 Lawrence Mendel 20 Tax Counsel III Legal Department 21 ---oOo--- 22 Speaker: Bill Duplissea 23 California Pawnbrokers Association 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 26, 2016 4 ---oOo--- 5 MS. RICHMOND: Our next matter is Chief 6 Counsel Matters. Item J Rulemaking; J1 Petition -- 7 MR. HORTON: J1. 8 MS. RICHMOND: J1 -- 9 MR. HORTON: Members, before you introduce 10 the case, we have a witness here, Mr. Bill 11 Duplissea, with the advocates office, California -- 12 Bill, you got to fix your writing here. 13 But at any rate, welcome to the Board of 14 Equalization. 15 Ms. Richmond, please introduce the -- 16 continue. My apologies. 17 MS. RICHMOND: Item J1 Petition to Amend -- 18 MR. HORTON: Mr. Duplissea. 19 MS. RICHMOND: -- Petition to Amend Sales 20 and Use Tax Regulation 1569, Consignees and Lienors 21 of Tangible Personal Property for Sale. 22 MR. HORTON: I presume Mr. Claremon is -- 23 is here. Please introduce the issues in this 24 matter. 25 MR. CLAREMON: Good evening, Chairman 26 Horton, Members of the Board. I'm Scott Claremon 27 from the Legal Department. With me is Lawrence 28 Mendel. I'll provide the Department's 3 1 recommendation with regard to the petition for -- 2 from the California Pawnbrokers Association to amend 3 Regulation 1569, Consignees and Lienors of Tangible 4 Personal Property for Sale. 5 The petition seeks to add subparagraph (1) 6 to the regulation pertaining to "the taxability of 7 the transfer of personal property between a 8 pawnbroker and the original pledgor." 9 Specifically, the petition would add 10 clarifying language to, quote, "...allow the 11 original pledgor to redeem the personal property 12 from a pawnbroker within six months of the 13 expiration of the grace period as a nontaxable 14 event." 15 We recommend that the Board deny the 16 petition in its entirety because the transactions 17 that the petition seek to make exempt from tax are 18 retail sales under the Sales and Use Tax Law for 19 which there is no exemption or exclusion. To create 20 such an exemption through regulation would not be 21 within the scope of the Board's regulatory 22 authority. 23 As brief background, these are transactions 24 which a person has previously put property up for 25 collateral or pledged property as security for a 26 loan with a pawnbroker. And then the person 27 defaults on the loan and title of the property 28 transfers to the pawnbroker or vests with the 4 1 pawnbroker. 2 These transactions are governed by Division 3 8 of the Financial Code; and as particularly 4 relevant to this discussion, Section 21201 of that 5 division states that when the property vests with 6 the pawnbroker, quote, "the pawnbroker shall become 7 vested with all right, title, and interest of the 8 pledgor, or his or her assigns, to the pledged 9 article, to hold and dispose of as his or her own 10 property." 11 In other words, once the property vests 12 with the pawnbroker, he or she holds it free and 13 clear. And the former pledgor has no more right to 14 it than any other third party under the Financial 15 Codes. 16 We note that the Legislature just passed 17 SB 300, effective January 1st, 2016, which made 18 various changes to this division; one of which, we 19 describe, it relates to entering into a second loan. 20 And without getting into too much detail, 21 essentially they said that second loan has to be 22 entered into prior to it vesting. 23 So the one right, which actually isn't 24 germane to this issue, but the one right that that 25 former pledgor had to the property no longer exists. 26 They literally have no right to it, that a third -- 27 any other third party would have. 28 So turning now to the -- and I'll add that 5 1 in the Senate analysis of that bill, they said the 2 clarification does not deprive borrowers of their 3 ability to regain their pawned item. It merely 4 requires them to purchase the item from the 5 pawnbrokers. 6 With that in mind, turning now to the Sales 7 and Use Tax Law. As you're aware, the sales tax is 8 imposed on the sale -- the retail sale of tangible 9 personal property in California, unless specifically 10 exempt or excluded by statute. The use tax is 11 imposed on the purchase of tangible personal 12 property from a retailer for a use in California, 13 again, unless specifically exempt or excluded from 14 statute. 15 Here, as I've discussed, there's nothing in 16 Division 8 of the Financial Code that would 17 distinguish a retail sale from a pawnbroker to the 18 former pledgor. And there's also no provision of 19 the Revenue and Taxation Code that would exempt or 20 exclude sales to the former pledgor from tax. 21 So, therefore, this petition is essentially 22 trying to create an exemption for sales that -- for 23 which there is no exemption or exclusion in statute. 24 Pursuant to Revenue and Taxation Code 25 section 7051 and Government Code sections 11342.1 26 and .2, the Board is authorized to adopt rules and 27 regulations consistent with and not in conflict with 28 statute. Notwithstanding any policy interest that 6 1 may exist in seeing pledged property returned to the 2 former pledgor, enactment of such an exemption would 3 simply not be within the scope of the Board's 4 regulatory authority. 5 Accordingly, we recommend that the petition 6 be denied in its entirety. 7 Thank you, and I'd be happy to answer any 8 questions you have. 9 MR. HORTON: Welcome to the Board of 10 Equalization. 11 ---oOo--- 12 BILL DUPLISSEA 13 ---oOo--- 14 MR. DUPLISSEA: Thank you very much, 15 Mr. Chairman and Members. Thank you for the 16 opportunity to come before you. 17 This is a very particular and very tightly 18 crafted exemption that we would be requesting or 19 regulatory change for a relatively short period of 20 time. And the -- certainly the Legal's analysis of 21 the fact that it is a policy is certainly correct. 22 And the policy would be one that I would hope that 23 we could make it through the rulemaking process. 24 Perhaps that can't be done, I'm not sure. 25 But the public policy obviously is to 26 return someone's item that presumably they've 27 already paid sales tax on and -- and return that and 28 be able to vest that property back with the 7 1 consumer. And what they do with it afterwards 2 really is -- is not the subject of our discussion 3 here today. Whether they were to, for instance, 4 enter into a new loan, which is the subject of 5 SB 300. That was actually sponsored by the 6 California Pawnbrokers Association. Or, whether in 7 fact they would walk out of the -- the establishment 8 and have full vested rights in that property. 9 Anyway, I wanted to thank the Board for all 10 their help. Member Harkey's office and Member Ma's 11 office and Member Runner's office has been very 12 helpful, as has the Controller's office, in trying 13 to, I guess, familiarize me with -- with your 14 procedures and how this thing goes. 15 We'd like to get to that public policy. If 16 it's possible to do it this way, we'd certainly want 17 to do it this way. We certainly can seek a -- a 18 legislative solution as well. 19 MR. HORTON: Member Harkey. 20 MS. HARKEY: Hi. We worked on this very, 21 very hard, and -- 22 MR. DUPLISSEA: We did, thank you very 23 much. 24 MS. HARKEY: Sure. Sure. 25 The intent is -- is -- is good, you know, 26 that somebody that comes in and they can't get their 27 property back right away but they come in a little 28 bit later -- and these are not wealthy people. 8 1 MR. DUPLISSEA: Correct. 2 MS. HARKEY: And they just want to get 3 their property back and then they have to pay sales 4 tax on it, which is no small amount in California 5 and many other states. So I really do appreciate 6 the effort. 7 The OAL process, they've pretty much deemed 8 this dead on arrival. Are you -- 9 MR. DUPLISSEA: It appears so. 10 MS. HARKEY: Yeah, it appears so. 11 Are you still wanting the petition granted? 12 And if so, for what purpose? 13 MR. DUPLISSEA: Well, the -- the option 14 that remains to us, I put in a Spot Bill last week 15 at the Leg. Council deadline, of course, to -- and, 16 again, your office was very helpful in helping us 17 craft language which would ostensibly give you 18 the -- 19 MS. HARKEY: The latitude. 20 MR. DUPLISSEA: -- the latitude to do it. 21 If that's certainly the only option we're left with, 22 then that's what we'll do. We were hoping, 23 obviously, to have -- to have the support of the 24 Board in doing so. 25 MS. HARKEY: Well, if we grant the 26 petition, knowing that it's going to be dead on 27 arrival, does that help you? 28 MR. DUPLISSEA: Yes. 9 1 MS. HARKEY: Oh, okay. Now you answered my 2 question. Thank you. 3 So, not to fly in the face of any analysis 4 or staff, we kind of know where this is going. But 5 I would move to grant the petition. I think it's a 6 well-deserved understanding that it probably will 7 need some legislative action, but I would like to at 8 least get the ball rolling or show support for 9 this. 10 MS. MA: Second. 11 MR. DUPLISSEA: Thank you. 12 MS. MA: I'll second it. 13 MR. HORTON: It's been moved by Member 14 Harkey, second by Member Ma, to grant the petition. 15 Discussion. 16 Member Runner. 17 MR. RUNNER: Yeah, you know, I'm perplexed, 18 and I think I understand the process here. And I 19 think what we're trying to do is change -- you know, 20 identify the fact that there is a specific concern 21 out there where you have individuals who feel like 22 they're trying to get their property back, but yet 23 they're having to pay a sales tax on it because 24 of -- because of some timing issues. And probably, 25 I think we all would agree it needs a legislative 26 fix. 27 I guess I'll be supportive, only because I 28 think if this is the path for a legislative fix, 10 1 that's the way we need to go. And if moving it 2 forward, I would want us to expedite then the issue 3 with OAL to get that -- and I think we pretty much 4 have all identified that it's not -- it's not within 5 our realm in terms of what they believe and our 6 ability to regulate. 7 But we need to expedite it so that you can 8 indeed do that. 9 MR. DUPLISSEA: Thank you. 10 MR. RUNNER: I'm a little nervous, quite 11 frankly, about moving forward an item to OAL that we 12 know probably is going to get declined. I'm not 13 sure that's the best issue. 14 MS. HARKEY: It's been done before. 15 MR. RUNNER: But I think -- but I think -- 16 you know, I understand the purpose, and I think we 17 just need to expedite it in order for us to get a 18 piece of legislation moving. 19 MR. DUPLISSEA: Thank you. 20 MS. STOWERS: Chairman. 21 MR. HORTON: Yeah, Ms. Stowers. 22 MS. STOWERS: I -- I do understand the 23 concern of wanting to return the property back to 24 the original owner at the lowest cost possible. But 25 I do not support accepting the petition at this time 26 because there's -- it requires a statute change 27 instead. 28 MR. HORTON: Here's my concern as well, is 11 1 that I share a similar concern is that at some point 2 you fly in the face of adversity; adversity 3 eventually begins to ignore you, you know. 4 And so by going to the Office of 5 Administrative Law, asking for a regulatory change 6 that we all know is a legislative change and that 7 the entire Board sort of supports this, we might be 8 able to serve as a catalyst by initiating a 9 legislative process or rulemaking process that needs 10 to kind of look at it, which says that we're doing 11 the analytical work in order to establish the law, 12 we're doing the -- the interested parties work so 13 that whoever authors this bill, and we're building 14 the momentum under the leadership of those 15 committees, we're building the momentum necessary to 16 move the bill forward. 17 I think that's a much more effective way, 18 and I don't think we accomplish that by just sending 19 it to the Office of Administrative Law because 20 they're the only ones that are going to look at it 21 and they're the only ones that are going to say yes. 22 And, at best, you're able to say -- tell the public 23 that the Board decided to send it to the Office of 24 Administrative Law and that doesn't communicate 25 anything. 26 But if the Board decided to take the matter 27 up and meticulously look at it and make some 28 assessments, evaluation, come to a conclusion, file 12 1 a report, we become effective, in my mind. And I'd 2 be more supportive of those types of actions as 3 opposed to flying in the face of Office of 4 Administrative Law. 5 But that's -- I think -- and I think that 6 works. I think that gets us where we need to be. 7 Member Harkey. 8 MS. HARKEY: How -- how would that play 9 out? How would you be handling that, through a 10 separate -- 11 MR. HORTON: If we -- if we considered the 12 legislative proposal in the Legislative Committee, 13 Member Ma would have the option of conducting 14 interested parties meetings; and during that process 15 we would develop a viewpoint. 16 We could develop a report that the Board 17 would issue a report that has an analytical analysis 18 of the benefit and so forth. So -- and that it be 19 concurrent with the legislative process, so -- and 20 then the Board would take a support in concept 21 position, and now you have a public discussion, 22 public debate, full with transparency. And I think 23 that will accomplish your objective as opposed to 24 the silent discussion with the Office of 25 Administrative Law. 26 MR. RUNNER: So, Mr. Chair. 27 MR. HORTON: Mm-hmm. 28 MR. RUNNER: So the -- so the -- at least 13 1 what you're -- what you're talking through there is 2 the issue of identifying the fact that we are 3 questionable if we -- in regards to our ability to 4 regulate. But then create then a legislative 5 solution that we would sponsor that would help 6 accomplish that objective. 7 MR. HORTON: Yes. 8 MR. RUNNER: Can I -- can we -- does 9 that -- 10 MR. DUPLISSEA: That's very generous. I 11 appreciate that. 12 MR. RUNNER: I mean I think we're all 13 hesitant about what we're trying to do -- 14 MR. DUPLISSEA: I understand. 15 MR. RUNNER: -- in regards to moving 16 forward. And I think we're all sensitive to the 17 issue. 18 And I would, again, I'd -- like I said, I'm 19 hesitant in regards to trying to -- trying to deal 20 with the regulation process. So I'm certainly 21 satisfied -- I would say if it's something that we 22 can expedite. 23 I think the other issue you may run into, 24 and that is I think you will be such a truncated 25 timing on running us -- having us run through 26 AOL (verbatim); by the time you get it, I'm not sure 27 you'll be able to accomplish what you want to do in 28 this legislative year anyhow. And this may be a way 14 1 to actually accomplish that within -- within the 2 current legislative year. 3 So, I'm -- I'm -- I -- I tend to agree with 4 the Chair in that that might be a better solution. 5 MS. HARKEY: I'd like to withdraw my 6 motion. And can I make another motion that we 7 refer -- that we refer this to the Legislative 8 Committee, under Ms. Ma, and that we try to 9 facilitate legislation that accomplishes the goal. 10 MR. DUPLISSEA: Excellent. 11 MS. HARKEY: Do I have a second? 12 MS. STOWERS: Second. 13 MR. HORTON: It's been moved by Member 14 Harkey -- strike that. 15 Member Harkey withdraws her motion; maker 16 of the second also withdraws the motion. Motion's 17 no longer up for discussion. 18 There's been a motion by Member Harkey to 19 submit this under concept to the Legislative 20 Committee -- second by Member Stowers -- to bring it 21 back to the Board expeditiously considering the 22 legislative process, even if it comes back in the 23 form as a report from staff. 24 I would imagine that the Board would direct 25 staff to begin the process of deliberating on this 26 and -- and developing a report that provides the 27 Board with an analysis of the benefit of this given 28 the view of the Board that it is beneficial. 15 1 And we might even call it the Claude 2 Parrish bill because this has always been his issue. 3 Let's call it that. We'll call it the Parrish bill. 4 Oh no, I'm just kidding. I'm not kidding. 5 I would love to be able to call it that, but I don't 6 think I'd get away with it. 7 MS. HARKEY: He'll be calling you tonight. 8 You made him famous. 9 MR. HORTON: Okay. Without objection, such 10 will be the order. 11 Thank you very much. Appreciate it. 12 MR. DUPLISSEA: Thank you very much. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 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 January 26, 2016 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 16 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: January 29, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 17