1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 9 REPORTER'S TRANSCRIPT 10 MARCH 30, 2016 11 12 13 14 15 16 BUSINESS TAXES COMMITTEE 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 3 For the Board of Equalization: Diane L. Harkey 4 Chairwoman 5 Fiona Ma, CPA Member 6 Jerome E. Horton 7 Member 8 Sen. George Runner (Ret.) Member 9 Yvette Stowers 10 Appearing for Betty T. Yee, State Controller 11 (per Government Code Section 7.9) 12 13 Joann Richmond Chief 14 Board Proceedings Division 15 For Board of Equalization Staff: Susanne Buehler 16 Chief Tax Policy Division 17 Scott Claremon 18 Tax Counsel III Legal Department 19 Christine Bisauta 20 Tax Counsel III Legal Department 21 Richard Parrott 22 Business Taxes Administrator III 23 Special Taxes Department 24 Stephen Smith Tax Counsel IV 25 Legal Department 26 Randy Ferris Chief Counsel 27 Legal Department 28 ---oOo--- 2 1 INDEX OF SPEAKERS 2 SPEAKER PAGE 3 Randall Cheek Legislative Advocate 4 SEIU Local 1000 8 5 Steven K. Alari Member 6 SEIU Local 1000 9 7 James Dumler Taxpayer Advocate 8 McClellan Davis 14 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 30, 2016 4 ---oOo--- 5 MS. MA: Ms. Richmond, will you please 6 introduce the next committee. 7 MS. RICHMOND: The next committee is the 8 Business Taxes Committee. Ms. Harkey is the Chair 9 of that committee. 10 Ms. Harkey. 11 MS. HARKEY: Thank you, Ms. Richmond. 12 Members, the Business Taxes Committee 13 meeting is called to order. 14 Ms. Buehler, will you please introduce the 15 first item. 16 MS. BUEHLER: Good morning. I am Susanne 17 Buehler with the Business Tax and Fee Department. 18 We have three agenda items for your consideration 19 today. We will take each agenda item and their 20 respective action item separately before moving to 21 the next. 22 With me for Agenda Item 1 is Mr. Scott 23 Claremon from our Legal Department. For this item 24 we have two action items. In Action Item 1, we 25 request your approval and authorization to publish 26 proposed amendments to Sales and Use Tax Regulation 27 1703, Interest and Penalties. 28 The proposed amendments clarify the Board 4 1 of Equalization's longstanding policy of generally 2 not imposing a negligence penalty on a taxpayer's 3 first audit liability. 4 We would be happy to answer any questions 5 you may have on this topic. 6 MS. HARKEY: Thank you. 7 Members? 8 Is there anyone from the public? There is 9 no one from the public. 10 Okay, Members, any discussion? 11 Okay, hearing none, is there a motion? 12 MS. MA: Move. 13 MS. HARKEY: Moved. 14 MR. RUNNER: Second. 15 MS. HARKEY: Second by Mr. Runner. 16 Any objection? No? 17 Such will be the order. Thank you. 18 Next item. 19 MS. BUEHLER: In Action Item 2, we request 20 your approval of the proposed revisions to Audit 21 Manual Chapter 5, Penalties, to explain the 22 circumstances and provide examples of when a 23 negligence penalty may apply to a taxpayer's first 24 audit liability. 25 Again, we would be happy to answer any 26 questions you may have on this topic. 27 MS. HARKEY: Are there any members of the 28 public to speak? 5 1 Seeing none, Members, any discussion? 2 No? Do I have a motion? 3 MR. RUNNER: Move to adopt. 4 MS. HARKEY: Moved by Mr. Runner. Second 5 by Ms. Ma. 6 No objection. Such will be the order. 7 MS. BUEHLER: Joining me for Agenda Item 2 8 is Ms. Christine Bisauta from our Legal Department. 9 Staff requests your approval and 10 authorization to publish proposed amendments to 11 Sales and Use Tax Regulation 1702.5, Responsible 12 Person Liability. The proposed amendments clarify 13 definitions, explain the applicable standard of 14 proof, and add a rebuttable presumption of when 15 there is no personal liability for certain types of 16 persons. 17 We do not have any speakers on this item, 18 so we'd be happy to answer any questions you may 19 have on this topic. 20 MS. HARKEY: Thank you. 21 Members, any questions, comments? 22 MR. RUNNER: Move to adopt. 23 MS. HARKEY: Moved by Senator Runner. 24 MS. STOWERS: Second. 25 MS. HARKEY: Second by Ms. Stowers. 26 No objections? 27 Such will be the order. 28 Thank you. 6 1 MS. BUEHLER: So with me for Agenda Item 3 2 are Mr. Richard Parrott from the Business Tax and 3 Fee Department and Mr. Stephen Smith from the Legal 4 Department. 5 Staff requests your approval and 6 authorization to publish proposed Cigarette and 7 Tobacco Products Tax Regulation 4001, Retail Stock. 8 We ask that the Board approval either 9 Alternative 1, the staff's recommendation, which 10 defines and clarifies the term "retail stock" and 11 explains when inventory is considered held in retail 12 stock. It provides examples to assist taxpayers in 13 the application of tax, and it also provides a 14 presumption of distribution of cigarette and tobacco 15 products no longer in the distributor's possession, 16 and examples of evidence of how distributors can 17 overcome this presumption. 18 MS. HARKEY: Thank you. 19 We have -- 20 MS. BUEHLER: Or -- 21 MS. HARKEY: Oh, go ahead. I'm sorry. 22 MS. BUEHLER: I'm sorry. Or you may 23 approve Alternative 2, language proposed by SEIU. 24 SEIU's proposal requires that untaxed cigarette and 25 tobacco products must be segregated and securely 26 stored away from the area where retail sales are 27 made. "Secure" is defined as behind a locked door. 28 It also includes a provision that a person 7 1 who is both a licensed retailer and a licensed 2 distributor and makes substantially all sales as 3 retail sales holds all inventory for sale in the 4 retail location in retail stock. 5 Finally, with regard to overcoming the 6 presumption of distribution, SEIU's recommendation 7 requires timely filed police reports and product 8 purchase invoices. 9 We do have speakers on this agenda item, 10 and we'd be happy to answer any questions they may 11 have after their presentation. 12 MS. HARKEY: Thank you. 13 Would you have a seat. I believe we have 14 Mr. Randall Cheek, Mr. Steve Alari, and Mr. James 15 Dumler. 16 Are there any other public speakers? 17 Okay. Thank you. 18 ---oOo--- 19 RANDALL CHEEK 20 ---oOo--- 21 MR. CHEEK: Madam Chair, Randy Cheek with 22 SEIU Local 1000. We represent a lot of the 23 employees with the BOE, including the agents who 24 have to do the inspections and make sure that the 25 product is being taxed properly and that there is no 26 illegal operations going on. 27 I brought with me Mr. Steven Alari, who's 28 one of our agents, who can explain why we feel that 8 1 having segregated items is important to our agents 2 who are going into the field doing the job. 3 By the way, we want to thank the Board for 4 having the meeting. We had a previous meeting. Ms. 5 Harkey's people were there and Mr. Runner's were 6 there, Ms. Stowers was there, and we tried to work 7 this all out. We feel that we wanted to go beyond 8 the -- with this extra step, and I'd like Mr. Alari 9 to explain our reasoning. 10 ---oOo--- 11 STEVEN ALARI 12 ---oOo--- 13 MR. ALARI: Madam Chair, Members of the 14 Board, my name is Steven Alari. I am a member of 15 SEIU Local 1000, also President of my DLC down -- my 16 District Labor Council down in southern California. 17 I've been an investigator with the Board for about 18 11 years in the Investigations Division. 19 We went to the interested parties meeting. 20 We heard the concerns. Met with numerous 21 investigators with experience in doing over a -- 22 couple thousand, at least a couple thousand 23 inspections, if not assisting in even more 24 inspections. 25 We had concerns regarding the Alternative 26 1, and I want to thank Ms. Stowers for helping, 27 really do the foundation and really addressed a lot 28 of the issues. But we're your representatives in 9 1 the field. We're the ones doing the actual 2 inspections. 3 And on behalf of Local 1000 and our 4 President Yvonne Walker, we do support Alternative 5 Number 2. It creates a bright line. It asks -- and 6 it lowers the opportunity for tax evasion. It 7 also -- during our inspections, we come in to do the 8 inspection, we believe having the untaxed tobacco 9 product secured separately from the taxable product 10 will make a more efficient inspection, a shorter 11 inspection. 12 When we walk in to do our inspection, of 13 course we identify ourselves. We let the 14 distributor/retailer know what kind of inspection 15 we're going to do, the procedures. When we're able 16 to go into the back rooms, we're going to see if the 17 product is secured as we are suggesting. This 18 product here is untaxed, we know it's untaxed. We 19 can do our inspection invoices, we can verify it. 20 If the tax paid product is separate, it makes it a 21 lot easier to do the inspection. 22 If -- we believe the unintended consequence 23 is, if Alternative 1 is adopted, is that there are 24 stores -- not just cigar stores -- but there are 25 cigarette stores, liquor stores that have issues, 26 that we've had issues with in the past where if they 27 just pay the thousand dollars to get a distributor 28 license, we can go in our inspection and they'll 10 1 walk into the store and we find a bunch of tobacco 2 back there, they say, "Oh, that's just our untaxed 3 product." And if it's not segregated, it's hard for 4 us to be able to inventory it and to provide 5 evidence that taxes were paid on it. 6 We have -- so, it really is important that 7 the product is secured. 8 I want to clarify the door. It could be a 9 locked file cabinet, it could be a locked cabinet 10 that they have the untaxed tobacco stored in. Like 11 our cigarette distributors who apply stamps, they're 12 supposed to keep the unstamped cigarettes separate 13 from where the stamps are, so they have to have it 14 secured there. So we just want to be able to do 15 that for tobacco. Tobacco doesn't have tax stamps 16 on it. So we'll be able to do our job, we believe 17 Alternative 2 is the best. 18 We initially opposed having any tobacco, 19 untaxed tobacco, in the humidor. The discussion 20 with our President and our representatives, we have 21 concurred that it's -- that if retailer/distributor 22 wants to store untaxed product in the humidor, 23 they're behind a secured door. Now it could be a 24 door with holes in it. I mean the full boxes that 25 we're talking about, sealed boxes, can still be 26 behind it. They'll still get the humidor effect. 27 Or you could have mesh -- mesh fencing there, still 28 locked. 11 1 Because it's very tempting. People we've 2 talked to -- our investigators, as well as other 3 people -- you know, you walk into a humidor to buy a 4 cigar you want, you want that Romeo Juliet, whatever 5 brand, it's not there. It's right there on your 6 left on the shelf, as is in Alternative 1, they're 7 just going to take it and sell it. I mean the 8 customer wants the product. The business owner 9 wants to sell the product. It's sitting there, but 10 it's untaxed. It's very tempting. It's harder for 11 them to justify not selling it to their customer. 12 So we believe our compromise is a good compromise. 13 Also, we asked, in our recommendation -- 14 our first recommendation back after our interested 15 parties meeting was in regards to the evidence to 16 overcome presumption about the tax being paid, we 17 wanted to ask that the police reports be timely; we 18 do ask that in our proposal. Because we've had 19 instances where we've had cases where two, three 20 months, if not later, all of a sudden the guy's 21 trying not to pay the tax, he's saying, oh -- and we 22 say you need a police report, then he goes and files 23 a police report. 24 So we think it's important that if someone 25 has a theft of tobacco from their business, that 26 they should have to report it timely to the police 27 department, so they have a timely police report. 28 We had also initially had asked for the 12 1 insurance claim and the insurance reimbursement be 2 required. In talking with staff, they informed us 3 during the first interested party meeting, which we 4 were not at, that issue was addressed and I guess 5 some of the stores self-insure. So we withdrew our 6 request that they be required for insurance claim or 7 insurance reimbursement. 8 But we also think it's important that the 9 cigarette and tobacco invoices be required. I know 10 it's existing regulation that they're supposed to 11 keep them, but a lot of times we hear from these 12 people who supposedly have thefts, "Oh, they took my 13 paperwork, too." 14 I mean I've personally been doing 15 inspections where the guy says, "Oh, they took my 16 stuff." And, "Oh I don't have any paperwork. They 17 took it all. Took all my -- my -- my invoices." 18 I mean, so I believe it's important that 19 you have the invoices to prove what you bought. 20 And Alternative 1, like I say, the concern 21 was the humidor. If it's right there, it's very 22 easy for the customer to want to take it or the 23 clerk to want to sell it. 24 And then, also, I mentioned unintended 25 consequences regarding "any sale." I appreciate the 26 language written that if there's any sale, that if a 27 retailer/distributor is considered that they are 28 retailers and it's all retail stock, you owe the 13 1 tax. But in the provision number 1, it did say it 2 does not make any sales for resale to any other 3 licensees. 4 During our interested parties meeting that 5 issue came up. And one of the Board Member 6 representatives said, "Well, so if they make one 7 sale, then they're exempt from that provision." So 8 we were trying to figure out what is a reasonable 9 number? And that's where we came up with 20 10 percent. It's reasonable for our investigators to 11 use because we wanted to do -- we used the year 12 period because people who file their tax returns, 13 their sales and use tax returns, so we know what 14 number they -- their sales are. So if they reported 15 they sold $30,000 in a 12-month period, we can 16 easily figure out what 80 percent of that is for 17 their number for -- if they're under the requirement 18 that everything is tax-paid or not tax-paid. 19 We thought it was a reasonable number and 20 we ask for your support for Alternative Number 2, 21 and be glad to answer any questions. 22 ---oOo--- 23 JAMES DUMLER 24 ---oOo--- 25 MR. DUMLER: Madam Chair, Members, thank 26 you for this opportunity. I'm going to -- my name 27 is James Dumler, by the way, from McClellan Davis. 28 I'm going to attempt to go off script and -- without 14 1 making a fool out of myself -- and provide you guys 2 with some examples of what we've seen. 3 I can't speak to the inspection side, but 4 what prompted our involvement is a case very similar 5 to the one that was brought before you that prompted 6 this process where you had a distributor/retailer 7 that was maintaining both wholesale and retail stock 8 in the same humidor and we were left working with 9 the staff, with equal confusion on both sides, 10 because there was no guidance provided as to how do 11 we account for this inventory within an audit 12 context. It was ending inventory that we were 13 trying to quantify. 14 Had this language been made available, it 15 would have been -- I don't want to say no questions 16 would have exist, but there would have been far 17 fewer questions and at least some guidance that we 18 could have pointed to and relied upon to answer the 19 questions. 20 The other taxpayer issue that comes to mind 21 has to deal with the unexplained disappearance, 22 which is, I believe, subdivision (2) of the staff's 23 proposed language. Where you have a taxpayer that 24 this was a theft of inventory by an employee and 25 there's a presumption of distribution and 26 taxability, that we were trying to overcome and 27 working with staff and there were no examples that 28 we could rely on or point to and say a police report 15 1 or an insurance claim or a video surveillance. And 2 had this language been available at that time, it 3 really would have been a nonissue. It would have 4 been easily addressed by us and the staff. 5 And because of that, we're here to support 6 staff's current proposed language, which now 7 includes Ms. Stowers' well-placed suggestions, 8 because it will provide beneficial language for both 9 taxpayers and staff when we're dealing with these 10 issues. 11 Thank you. 12 MS. HARKEY: Thank you. 13 Yes, Ms. Stowers. 14 MS. STOWERS: Thank you. Thank you, 15 everyone. I appreciate staff recommendation 16 language which does include a lot of the comments 17 that I made. 18 I'm looking at SEIU's Alternative 2, and 19 I'll probably work backwards. You have a comment 20 regarding the police report having to be a timely 21 report. I -- I do agree with that. That -- because 22 this is just a list of evidence that they can 23 present. It's not -- they don't have to present 24 each and every one of these. But if a taxpayer is 25 going to say, "I'm going to provide you with a 26 police report," one would hope that it was -- a 27 report was filed at the time of the event. 28 So I would suggest that we add that into 16 1 Alternative Number 1. I think that's an easy fix. 2 As far as the purchase invoice, I 3 understand that is a requirement within the statute, 4 that a distributor is required to maintain a 5 purchase invoice for a certain amount of years. So 6 to put it in here again as required, it may be 7 redundant. But I think even in my suggestive 8 language, I have some items in here that are 9 redundant. It's more of a gentle reminder to the 10 taxpayer of their obligation. So I would suggest 11 that we put the required -- have the language in 12 there that the purchase invoices are required. 13 As far as the locked area behind a locked 14 door, I mean that's the language that's in here. 15 And I will admit that I thought that that was a good 16 way of separating the two. But when you consider 17 some of the businesses, they may not have a locked 18 door. 19 I'm imagining a small retailer/distributor 20 and they basically have a one room and they're 21 separating their inventory with file cabinets or 22 partitions, so they don't have that door available 23 to them. And to require them to go out and ask the 24 landlord to build in a door so they can have it in 25 the locked door, that's an excessive burden on a 26 business, on normally a small business that I don't 27 think we should require. 28 I am open to, you know, some cleanup 17 1 language saying a file cabinet. I kind of thought 2 that the Alternative 1 addressed it when it says 3 "storeroom, closets, back office and safes." 4 MS. HARKEY: Safes or file cabinets. 5 MS. STOWERS: Yeah, so -- yeah, safes or 6 file cabinets would kind of address that. 7 So those are my thoughts. I lean towards 8 Alternative 1 with a little cleanup language 9 there. 10 MS. HARKEY: Thank you. Any other 11 comments? 12 MR. RUNNER: Yeah, just a quick question. 13 MS. HARKEY: Yes. 14 MR. RUNNER: The issue of timely police 15 report. I mean that makes sense, but in reality, 16 don't law enforcement already require some kind of 17 timely report? 18 MR. ALARI: Sir, I've talked to some of our 19 felony investigators -- 20 MR. RUNNER: Uh-huh. 21 MR. ALARI: -- and I've had people go back 22 two, three months later and say, "Oh, I need a 23 secondary -- a report." And then they'll do -- 24 they'll create a secondary report for them and 25 they'll give them a report. 26 MR. RUNNER: So they'll actually get 27 sheriff's departments that'll come and do a report 28 that's three months late? 18 1 MR. ALARI: Yes. They have people two, 2 three months later that write a report for them. 3 MR. RUNNER: Must be a sheriff's department 4 with a lot of extra people. 5 MR. ALARI: That's -- they've come to me 6 and told me. I asked around about that. 7 MR. RUNNER: I'm sorry. Did we have a 8 definition for what timely was then? 9 MS. STOWERS: We don't. 10 MR. ALARI: I'm not sure if you want to set 11 a date on there. I'm not sure if we have "timely" 12 in our other documents for sales and use tax, I'm 13 not sure. 14 MS. MA: How does that work that they can 15 call someone in three months later and just -- not 16 doing an investigation or just taking the word of, 17 you know, a retailer saying, "Yeah, just write it up 18 like this. This is what happened," and they come in 19 and they write it? I mean aren't they supposed to 20 do some sort of due diligence? If there's a 21 robbery, they're supposed to come in and, you know, 22 actually look at the evidence and ascertain whether 23 there was a robbery, you know, doors being jammed 24 open, you know, windows being broken, something. 25 Versus coming back three months later and going, 26 "Okay, I'll write you a report." I mean, is that 27 really happening? 28 MR. ALARI: Yes, ma'am. I've been told by 19 1 one of our felony investigators, yes, it does 2 happen. That they go and get a police report after 3 they've been told you need to have a police report. 4 They just go to their police department, say, "Hey, 5 I was broken into this day. I need a report that 6 this happened." And they'll create it. And they've 7 created it in the past for us. 8 MR. HORTON: Thank you, Madam Chair. 9 Because of staffing issues, you can 10 actually -- they don't come out. You can walk into 11 the police department. Many people have accidents 12 and police never show up to take the report, but 13 they're asked by their insurance agent to go into 14 the police department and report it. 15 Police do not ascertain whether or not 16 anything happened. They just say this is what we 17 were told. And when they're there, they will say 18 this is what we observed. But it's difficult to say 19 what they observed in this case. 20 So, it does happen. It's been -- you know, 21 it happens on the audit level as well. When we're 22 going out doing audits, folks come in with police 23 reports in order to increase their percentage 24 allowance for pilferage. Almost two years later 25 they'll go back. And we actually accept it if 26 there's collaborating evidence to support that 27 something actually happened. 28 If I may, Madam Chair, a couple of 20 1 questions. 2 MS. HARKEY: Sure. Thank you. 3 MR. HORTON: What's the -- now that Member 4 Stowers has shared her recommended amendments, what 5 would now be the primary difference between Option 1 6 and Option 2, from your perspective? 7 MR. ALARI: Well, looking at our Option 2, 8 I understand members or representatives, the 9 position. But for the purpose of this regulation, 10 "secured" is defined behind a locked door. I mean, 11 you're correct, it does say secure -- earlier it 12 says secured storeroom and all that. I mean if we 13 strike that line, I think that's amenable. 14 The only other concern we have on Number 2 15 is about the humidor, about having a secured area in 16 the humidor. And like I say, we could have 17 examples, you know. 18 Another regulation that we proposed when we 19 were talking about transfer regulations, they would 20 also have like some examples. So maybe for having 21 the secured in the humidor, have examples; behind a 22 locked door with holes or with mesh, to make sure 23 it's secured from the public's access to it. 24 MR. HORTON: Madam Chair. 25 MS. HARKEY: Yes. 26 MR. HORTON: What's the Department's view 27 of secured facilities or secured somewhere? 28 MR. PARROTT: Well, we believe that in 21 1 our -- in the staff's recommended alternative, with 2 regard to humidors, that we've created a clear 3 distinction that within that humidor, separated and 4 segregated from retail stock. But the tipping point 5 is that it's still in the original manufacturer 6 packaging with the seal unbroken. 7 We felt that created a bright line of being 8 able to differentiate anything that's outside of 9 that original manufacturer packaging and not wrapped 10 would be non retail stock. 11 MR. HORTON: Mr. Cheek. 12 MR. CHEEK: I think that creates the 13 problem of if you've been in some of these humidors 14 you realize that they're unmanned and people can go 15 in -- a customer can go into a humidor, see that his 16 brand of cigar is not there, look over to the side 17 and see that, oh, yeah, there it is. It may be 18 sealed, but he doesn't realize that that's not 19 taxed. He breaks that seal and buys that cigar. 20 You're not -- you're now losing revenue 21 because he's gone over to an area that's supposed to 22 be separate and untaxed, but he sees the cigar he 23 wants because there's nobody in those humidors most 24 of the time. I mean I've seen some of these 25 humidors and they do not put a manned person in that 26 humidor to make sure that a customer cannot buy an 27 untaxed product. And that's -- that's part of our 28 concern. 22 1 MR. HORTON: Okay. 2 MR. ALARI: And the tax is 28 percent on 3 these cigars. 4 MR. HORTON: To the issue of insurance, 5 even when they self-insure, they ought to be able to 6 sort of document the fact that they're self-insured 7 and they ought to be able to support that somehow. 8 And even so, if they can't, maybe an exclusion for 9 those who are self-insured. Being self-insured 10 should not be reduced to, "Well, I decided not to 11 get insurance and pay for it if something went 12 wrong." 13 But the -- the reality is this is just one 14 of many things that they can provide to support 15 their position. So having it listed is not 16 all-inclusive in that it's mandatory that this item 17 be there. 18 But a larger concern for me, though, is is 19 this sort of reminds me of this series The Boss 20 where the executive goes down and works in the 21 warehouse and realized that there was a whole 22 different world when you're actually on the front 23 line trying to enforce these laws. 24 And so I would have a tendency to sort of 25 rely on the folks that are enforcing the laws, that 26 are, to some degree, putting their lives on the line 27 in trying to protect the revenue of the State of 28 California, to ensure that everyone's in compliance 23 1 and level the playing field for all of those who are 2 in compliance. 3 And so having representation from both 4 elements of our agency not in concurrence, is -- or 5 even having SEIU -- even having to come to share 6 what the concerns are, the folks of the front line, 7 if this is occurring in other areas of our 8 organization, it may be part of the inherent 9 challenge of the distinction between Sacramento and 10 the District Office and what actually happens in the 11 District Office and being able to adjust those 12 concerns. 13 So, specifically, we ought to -- maybe we 14 can come up with a way of defining "secured" in a 15 way that the folks who have to enforce the law feel 16 that it is sufficient. 17 And "substantially all," I believe, was 18 another concern. Any views on that? 19 MS. HARKEY: I would like -- I'd like to 20 make a comment. And, Richard, maybe you can follow 21 up with this. 22 Investigations is not here, and I 23 appreciate SEIU and that's why we brought this back 24 and we got a lot of amendments that took care of a 25 lot of their concerns. But one of the things that 26 I'd like to emphasize is that saying that if 27 somebody takes a cigar, then it's lost revenues, 28 isn't that actually reported the month of 24 1 distribution? So it's not lost, it's just then that 2 becomes part of the retail stock. 3 MR. ALARI: Yes, Madam Chair. Yes. 4 MS. HARKEY: Okay. So I -- I just want to 5 clarify. I'm -- we're trying to work with this such 6 that it helps the small guys as well as the large 7 distributors. And that, you know, it resulted from 8 a case that we had, and we have tried to work with 9 this really carefully. And I would very much 10 support the purchase invoice being, you know, 11 delineated one more time in here. 12 And timely police reports? I think that 13 maybe one of the things it says that this "examples 14 of evidence that may overcome the presumption 15 include but are not limited to the following . . ." 16 So it's an example. A police report, you 17 could say it'd probably be timely. But if it wasn't 18 available, then all these other things, insurance 19 claims, reimbursements, other things would -- are 20 these -- these aren't all-inclusive; you have to 21 have all of them, is that correct? 22 MR. PARROTT: Correct. And we have it 23 listed as not all-inclusive. And it would be a 24 preponderance of those items that are submitted in 25 the event of a disappearance. 26 MS. HARKEY: Right. So I would -- I would 27 support that because I do support that. 28 I think that the bigger question is if 25 1 they're sealed in the original packaging, segregated 2 in some fashion, and I would even be able to -- we 3 have "safe" or, you know, examples of these may 4 include but are not limited to. So not limited to, 5 storerooms, closets, back offices and safes. 6 We could add a "cabinet" to that. You 7 know, whatever would make it -- would make it easy 8 for you. But if they're clearly up above, beyond 9 reach of anyone, you know, where you would have to, 10 you know, actually access, then that might be 11 another area that you could store as safe. As long 12 as it's in the original packaging. 13 And I think Ms. Stowers tried to work with 14 this because she was the one that brought it, you 15 know, up to our attention that we needed to take 16 this back. 17 So, do you have any other comments, 18 Mr. Parrott? 19 MR. PARROTT: We could look at the -- Ms. 20 Harkey, what you were just saying, the language that 21 you were talking about. And I believe SEIU's 22 concerns is that we don't have it anywhere in 23 reference to the humidors. So we could look at that 24 as well. I think that's -- 25 MS. HARKEY: What are we looking at though? 26 MR. PARROTT: Well, um -- 27 MS. HARKEY: Because we've examined this 28 thoroughly. 26 1 MR. PARROTT: Yes. 2 MS. HARKEY: What would you like to see? 3 And let's kind of make the decision today -- 4 MR. PARROTT: Okay. 5 MS. HARKEY: -- if we could. 6 MR. PARROTT: In 2, where we talk about 7 secured areas in walk-in humidors and when we get 8 down to a -- correct -- you can correct me if I'm 9 wrong on this -- the secured areas are talking about 10 areas that are -- that are not in the humidor. 11 So I believe their -- SEIU's concerns is 12 that we also add some sort of language about some 13 sort of secure area within the humidor, although we 14 say "segregated and separated from retail stock" 15 and -- 16 MS. HARKEY: "Segregated and separated from 17 retail stock, in the original packaging" -- 18 MR. PARROTT: Right. 19 MS. HARKEY: -- "unbroken." 20 MR. PARROTT: Mm-hmm. 21 MS. HARKEY: And I think that for small 22 area? And if in fact -- if in fact, let's say, in 23 the worse case, somebody would get to that, what 24 I've heard is usually it's up above. 25 MR. PARROTT: Mm-hmm. 26 MS. HARKEY: It's stored up above. 27 MR. PARROTT: Right. 28 MS. HARKEY: You know, because there's not 27 1 a lot of room in these places, so what they're 2 selling is on the shelves. And at that time it 3 becomes retail stock. 4 MR. PARROTT: Right. 5 MS. HARKEY: Once it moves from the up 6 above to the below. 7 If it's, you know, if we could just add 8 something, maybe just out of reach of -- I don't 9 know. I'm trying to work with this here. I think 10 we've got it pretty well sewn up where we are. I 11 would like to go with language Number 1 with those 12 few amendments, unless it's going to present a huge 13 problem. Because I think if we further refine and 14 define, we're going to be back here again trying to 15 figure out what we're doing with these smaller 16 operators. 17 MR. ALARI: Madam Chair, just a question. 18 Are you also including in your recommendation, "The 19 untaxed tobacco must be segregated and secured 20 separately from the tax-paid product, away from the 21 retailer"? And so that the retail product and 22 the -- excuse me, the tax-paid product and the 23 untax-paid product is segregated. Because that's 24 the -- one of the big keys, is that we come to the 25 inspection and, as I mentioned, unintended 26 consequences, some of these cigarette stores they 27 have five lines deep all the time, businesses coming 28 in, and we found cases of Swisher Sweets or Black 28 1 and Mild. Not the fine cigars, you know, in the 2 humidor thing. And that's where -- those are the 3 big items we're trying to track. Those move 4 quickly, and if we come and do inspection and he has 5 a distributor's license and a resale license he can 6 say, "Oh, that's my untaxed product. I have a 7 distributor's license." And there's no way of 8 tracking. 9 MS. HARKEY: We have here it has to be 10 segregated, away from the retail stock, and that it 11 needs to be in original packaging. 12 MR. ALARI: But -- 13 MS. HARKEY: Is that what you're fighting 14 about? 15 MR. ALARI: -- we're also asking that it be 16 separated from tax-paid tobacco products. Because 17 some tobacco -- some of these boxes are little boxes 18 of Swisher Sweets, and then they come in the cases. 19 So it's not just -- 20 MS. HARKEY: I think that, there again, 21 we're getting back to the problem where we've got 22 with the small, small entity. You know, if you're 23 large enough to put things in a locked area and put 24 them away, but what we're trying to do is facilitate 25 the -- you know, the single seller of product that 26 this cash flow is really very important to them to 27 stay in business and to keep, you know, keep their 28 sales going and moving. 29 1 And so, do you have any suggestion, 2 Mr. Parrott? 3 MR. PARROTT: I -- 4 MS. HARKEY: I think we beat this around a 5 lot -- 6 MR. PARROTT: Yes. 7 MS. HARKEY: -- and I'm trying to -- 8 MR. PARROTT: I believe we're in a good 9 place with the -- with -- we believe we've created a 10 clear line here to differentiate. 11 And we also are talking about, in these 12 businesses that are not making any sales for resale 13 but they do hold the distributor's and a retailer's 14 license, our language is clear that all of the 15 product there is retail stock. It's intended for 16 retail stock. They are not typically a distributor 17 in the sense of they're selling to other 18 wholesalers. So we've created that clear line in 19 our language as well. 20 MR. HORTON: Madam Chair? 21 MS. HARKEY: Yes. 22 MR. HORTON: The word "secure" itself may 23 be the problem that we're facing here. Home Depot 24 has solved this problem. Let's just put it behind a 25 wire mesh. 26 The problem is a customer having access to 27 it. And the customer having to break the wire mesh 28 and whatever, the little lock they may have on 30 1 there, and it's a nominal cost of securing it. 2 Would that -- would that work? 3 MR. ALARI: Yes. 4 MR. CHEEK: Yes. 5 MR. HORTON: Okay. To the issue of a 6 person -- when a person's both the licensed retailer 7 and a licensed distributor, one of your requests was 8 that the term "substantially all" mean all retail 9 sales? How does the Department differ from that? 10 MR. PARROTT: Ours -- ours says a person 11 who's a distributor and a retailer who only makes 12 retail sales, everything in there is intended for 13 retail stock. 14 MR. HORTON: How do you define 15 "substantially all"? 16 MR. PARROTT: I don't believe we have 17 "substantially all." 18 MR. HORTON: You said "only," which is 19 all. 20 MR. PARROTT: We have they only make retail 21 sales, meaning they don't -- they don't make sales 22 for resale. We felt that adding a -- having a 20 23 percent requirement actually makes it more 24 complicated to differentiate. If they make -- if 25 they only make retail sales at that business 26 location but hold both the distributor's and 27 retailer's license, all of the product at that 28 location is intended for retail stock. 31 1 MR. HORTON: That seems -- seems 2 reasonable. And the burden of distinguishing that 3 or even having to go in and verify that, may be a 4 little complicated. 5 But, SEIU? 6 MR. ALARI: Yeah, the concern, the word 7 "any." For the bad dealers, we're talking about 8 those folks -- 9 MR. HORTON: Yeah. 10 MR. ALARI: Not the, you know, the good 11 retailers/distributors. All they have to do is make 12 one sale to their buddy down the street, say, "Oh, 13 I'm selling you (inaudible) distributor. Okay, I'll 14 sell you, you know, five boxes of this." Now I'm 15 exempt because I've made a sale. And that was 16 brought up by one of the Board Member's staff -- 17 MR. HORTON: Yeah. 18 MR. ALARI: -- at the interested parties 19 meeting. And that's where we're trying to figure 20 out what kind of number could we do that would be 21 reasonable. 22 MS. HARKEY: Yeah. 23 MR. ALARI: So maybe it's 50 percent. 24 Some, you know, make a bigger number. But it's a 25 number we -- that they have to really be a 26 distributor to be able to use that exemption, that's 27 not retail stock. 28 MR. HORTON: Yeah, that's a -- that's a 32 1 problem that would be indicative of someone who's 2 trying to circumvent the law. So -- 3 MS. HARKEY: We always have tax cheats 4 though. But I think we get them usually during the 5 audit proceedings. Or, you know, I mean it's -- I 6 think we have -- we have secure lines in place to, 7 you know, if in fact you go in and you find that 8 something's untoward, then call in audit staff. 9 I don't think -- I don't think all of that 10 needs to have to happen in this -- in this -- in 11 this piece of legislation. What we're trying to do 12 is facilitate something. And I think we've gone a 13 long way to meeting SEIU concerns in the language 14 and, you know, ensuring that we have something 15 that's not -- that's sealed, you know, not 16 available, has an audit trail. 17 I mean, if you're considered, if you're 18 trying to seize product, then that's a different 19 problem. Then you've got an illegal operator. But 20 if you're trying to just verify that, you know, the 21 law is being followed, I think we've got a lot of it 22 in here and we've worked a long time. 23 I appreciate your cooperation with what 24 we've done thus far so that we could move this 25 along. Because I think you've added a lot of good 26 salient points. 27 Yes, Mr. Runner. 28 MR. RUNNER: You know, I think when we get 33 1 to these issues, I'm always trying to -- I'm always 2 trying to weigh the cost versus the benefit. You 3 know, and again, as you said, there are a lot of 4 fine taxpayers out there who are doing it correctly. 5 And then I worry about then what else we put them 6 through in order to catch the ones that aren't doing 7 it right. 8 Because that's what it comes down to; 9 everybody has to comply with this. And so then 10 we've got folks that are having to redo everything 11 or redo some aspect of their storage, whatever 12 they've done, even though they've always done 13 everything correct, their inspections are always 14 right and whatnot. But yet, we're saying, "Hey, 15 because of these other folks over here, we need you 16 to change what you do." And that's -- 17 I'm not -- see, I'm not, right now, 18 convinced of how big of a problem we're trying to 19 solve. And I think that's part of my issue. And I 20 don't know, I assume that that was part of the 21 issues that -- discussions that the staff had at 22 interested parties. Help me get some parameters 23 around this. How big is the problem we're trying to 24 solve? 25 MR. HORTON: We -- 26 MR. RUNNER: I just asked the staff. 27 Yeah, go ahead. 28 MR. PARROTT: You know, I don't know that 34 1 that was made clear during the meetings. I will say 2 that during these meetings in discussing this 3 language, we were discussing the inspectors are 4 checking for compliance with the Cigarette and 5 Tobacco Products Licensing Act, which is if you 6 have -- if you are a retailer, you are only in 7 possession of tax-paid product. And if you are a 8 retailer and a distributor, you are allowed to have 9 untaxed product at that location. 10 The instances that we're talking about 11 today are typically, as Ms. Harkey said, would be 12 picked up in an audit or -- 13 MR. RUNNER: Mm-hmm. 14 MR. PARROTT: -- or addressed in an audit, 15 not during a typical inspection. That is for 16 compliance with the Licensing Act. 17 MR. RUNNER: Yeah. 18 MR. PARROTT: And if they're found out of 19 compliance, that product is seized. But I don't 20 know that we have a handle on what percentage of 21 these bad players we're talking about trying to 22 address with that language. I don't know that that 23 was ever really made clear. 24 MR. RUNNER: Yeah. And just to remind the 25 Board, remember, in fact our committee is working on 26 that project that came out of some of the appeals a 27 couple of months ago where we -- where we ended up 28 with folks that were just unclear in regards to what 35 1 our standards -- what our -- what our expectations 2 were and when we gave them notice, and all of these 3 other kinds of things. When they got a seller's 4 permit, what they were told, what they weren't told. 5 And so we're trying to actually go through the 6 letters right now -- 7 MS. HARKEY: Trying to make it a little 8 easier. 9 MR. RUNNER: -- and trying to figure out 10 how to get them fully informed. 11 And so I'm concerned, again, that now on 12 top of that to create some other burden -- and, 13 again, part of the issue is, again, this idea of -- 14 I get the fact that we don't want stuff commingled, 15 and I get the fact that that's important. But I 16 think that at that point I think the separation, 17 trying to create some of those issues and put that 18 expectation and train those folks in regards to what 19 that is, because I think some important steps that 20 we need to see if we're doing that correctly right 21 now. 22 MR. HORTON: Madam Chair? 23 MS. HARKEY: Yes. 24 MR. HORTON: I mean I can share with the 25 Board that this started out as a $214 million 26 problem. And it's through the efforts of the 27 investigation team and the experiences that we've 28 been able to significantly reduce it. 36 1 It's also a condition from the federal 2 level in compliance with the -- you know, with the 3 federal laws. And so the more -- and the -- as we 4 went through the process some years ago, one of the 5 greatest challenges we had was actually, as 6 Mr. Runner articulated, was with the industry saying 7 "Well, you're putting this extra burden on us." But 8 as soon as they start to look at the numbers, they 9 realize the value of leveling the playing field for 10 many of these small operators, they can't compete. 11 They can't compete with folks that are not paying 12 their taxes. They can't compete with folks that are 13 shipping the product in and out of the State. It is 14 a huge challenge for them. 15 So, for them to put up a wire mesh door and 16 separate it, or for them to have substantially all 17 their retail sales when they have both the license 18 and so forth, I would venture to say, at least from 19 my experience with interacting with them, that's a 20 small price to pay to make sure that it's a level 21 playing field. 22 We're talking about intrusive criminal 23 activity that is putting a lot of these small 24 operators out of business. And to have the 25 enforcement and the investigating unit able to 26 protect them, you know, maybe we should ask -- do an 27 analysis. But from the -- I don't know. I think 28 I've probably spoken to at least two or three 37 1 thousand of them, and they're all glad to see the 2 investigations going on. It's being brought under 3 control. 4 But I agree, it shouldn't be -- the door, 5 whole door? Well, you know. A wire mesh like Home 6 Depot has for paint, well, that's kind of 7 reasonable. 8 Substantially all? Well, that's kind of 9 consistent with the law. And so one might question 10 whether we're varying from the existing law or the 11 intent of the law. And as the author of the bill, I 12 can tell you that the intent was to make sure that 13 we had an element of control where you couldn't have 14 those situations where they could sell to one person 15 and then all of a sudden they qualify, which creates 16 an investigation nightmare. 17 So, I mean I think those are nominal 18 requests and would suggest we incorporate that into 19 the -- as recommended. 20 MS. HARKEY: Ms. Stowers? 21 MS. STOWERS: Yes. Just on the 22 "substantially all." I was at that IP meeting and I 23 did have the language "substantially all." And the 24 question was asked, "How would you define it?" And 25 I think I quickly came up with 80 percent, just 26 based on prior -- or existing statutes. 27 And someone did comment that that would be 28 too hard and that if you just say "any," that one 38 1 sale would do and they wouldn't be -- if they make 2 one sale, then they get the benefit of this 3 regulation. 4 And, for me, to make one sale and get the 5 benefit of this regulation is not what we're trying 6 to do. 7 MR. HORTON: Yeah. So let's say "all." 8 MS. STOWERS: So -- so I -- I -- I would 9 say we need to put SEIU's language in here regarding 10 "substantially all." I mean they -- we don't want 11 to -- 12 MS. HARKEY: Which section? 13 MS. STOWERS: -- basically set up a 14 loophole. 15 I'm at -- 16 MR. PARROTT: Subdivision (b). 17 MS. STOWERS: -- little "b," subdivision 18 (b). 19 MS. HARKEY: Okay. "A person who's both a 20 licensed retailer and a licensed distributor and 21 makes substantially all sales as retail sales . . ." 22 MS. STOWERS: Mm-hmm. 23 MR. RUNNER: Substantially. 24 MS. HARKEY: Makes -- okay. So 25 substantially all sales is retail sales. 26 MS. STOWERS: Mm-hmm. Meaning basically 27 they got to have 80 percent -- that 80 percent 28 threshold. Is that what you guys are saying? 39 1 MR. ALARI: Yes. I mean they have to make 2 more than 20 percent -- 3 MS. STOWERS: More than 20 percent -- 4 MR. ALARI: -- of their sales for 5 wholesale -- 6 MS. STOWERS: -- of their sales for retail. 7 MR. ALARI: -- for distributor -- 8 distribution, as a distributor. 9 MS. STOWERS: As a distributor, excuse 10 me. 11 MR. ALARI: Correct. 12 MR. HORTON: Same thing. 13 MR. ALARI: And so you -- yes. 14 MS. HARKEY: Doesn't that -- doesn't that 15 create a problem for the guy that really -- 16 Explain that. What's -- what's the pitfall 17 with that, as far as the distribution for the small 18 guy that doesn't -- that actually has inventory 19 that's not for sale, but when it moves down and then 20 becomes part of the retail stock? 21 MR. PARROTT: Yeah, the -- the language 22 that SEIU is proposing really is -- is focused more 23 on for the small guy who doesn't make any sales for 24 resale, we've said everything -- it's clear, 25 everything in there is intended for retail stock. 26 So, the language that they're talking about 27 is where someone wants to have the benefit of 28 holding -- it really comes down to being able to say 40 1 that's not retail stock. And I believe it really 2 becomes a matter in the case of a disappearance of 3 the product, because it's no longer there and they 4 can claim that that portion was nonretail stock and, 5 therefore, not subject to the tax in the matter of a 6 disappearance. 7 I believe that's really where it would come 8 into play in here. In a typical everyday setting, 9 like I had said, the inspectors are really looking 10 for compliance with, "Is it tax-paid product or not? 11 Do you have a distributor's license that allows you 12 to be in possession of untaxed product?" 13 So that "substantially all" -- 14 MR. SMITH: Maybe I can provide some 15 perspective. When a distributor/retailer buys 16 tobacco products, they owe -- they are going to owe 17 tax on everything they purchase. The question is, 18 When does the incidence of tax trigger? 19 MS. HARKEY: Right. 20 MR. SMITH: It triggers the moment they 21 take ownership of it with one exception; and that 22 exception is if they're holding it for sale to 23 another licensed seller of tobacco. 24 So, what we were saying is, if all your 25 sales are to consumers, everything you hold is in 26 retail stock. 27 MS. HARKEY: Right. 28 MR. SMITH: A question came up, so you 41 1 really owe tax on it immediately. The only delay 2 for paying taxes if you're holding it for sale to 3 another licensed seller of tobacco. 4 Someone said, "Well, you know, someone 5 who's trying to evade the laws might make one sale 6 to their friend next-door and then they can sell 7 stuff. And when they get caught, they could say, 8 'Well, it was stolen,' and this rule -- this like 9 rule about it being retail stock doesn't kick in 10 because I made this one sale to someone else." 11 So the idea was, well, maybe we could say 12 that if substantially all of your sales are retail 13 sales, then the rule's going to be that we're 14 presuming everything you sell is in retail stock. 15 And, remember, what staff considered the 16 rule to be from 1997 until the last Board hearing 17 was that if it's in a retail store, it's retail 18 stock. So this is -- 19 MS. HARKEY: Right. And we were trying to 20 accommodate the small distributors and that, you 21 know -- the gentleman that we had here at the Board 22 hearing that had his inventory gone, you know, 23 stolen, whatever, and we're trying to assess what 24 amount of that was taxable. And so that's what -- 25 that's what generated this is it generated it really 26 is kind of an industry-wide concern. 27 And I think Ms. Stowers has done a fabulous 28 job and also explaining that, you know, this further 42 1 locking and whatnot wouldn't be a problem. 2 Now, the "substantially all," so our 3 language says, "a person who is both a licensed 4 retailer and a licensed distributor but who only 5 makes retail sales to consumers and does not make 6 any sales for resale to other licensees holds all 7 inventory intended for sale in retail stock." 8 So what we're trying to get at is that one 9 person that cheats. And there again I go to -- I 10 mean the crooks are not going to follow our law 11 anyway. The honest guys are going to have more 12 implementation to further qualify and quantify in an 13 audit situation or an inspection situation as to 14 what they have. 15 And so, I think -- I think our -- actually, 16 it's more clear, "does not make any sales for resale 17 to other licensees," rather than "substantially 18 all." 19 I don't -- I don't know. I'm -- I'm -- I'm 20 trying to figure out what I am actually doing by 21 amending it, who I am hurting in amending. 22 Can you offer some -- some insight, Mr. 23 Dumler? 24 MR. DUMLER: Our only concern would be for 25 the retailer/distributor that falls within the less 26 than 20 percent, that actually is making valid 27 distributions, 10 percent of them, I think the case 28 I was speaking of we had 10 percent of them. 43 1 So he is -- he or she would not be allowed 2 to keep their wholesale inventory in the retail 3 location if "substantially all" were to move 4 forward. Right? They would have to keep it -- as 5 it -- as it reads now, a consumer holds all 6 inventory intended for sale at the retail location 7 if they don't meet this 80 percent. 8 So if you have a taxpayer that's making 9 legitimate distributions less than 20 percent, 10 they're going to have to keep that wholesale 11 inventory at a different location. Otherwise, when 12 the inspector comes in and sees that it's less than 13 20 percent, it's going to be picked up as retail 14 inventory. 15 MR. SMITH: No. No, the difference is that 16 if their inventory is stolen, we're going to find 17 that it was all retail stock and it was all 18 subject -- all product that had been subject to tax 19 but for the theft. But they can keep it in the 20 store, but they have to pay tax on their 21 purchases. 22 MR. DUMLER: I'm reading SEIU's version. 23 It says, "sales to customers holds all inventory 24 intended for sale in the retail location in retail 25 stock." 26 MR. SMITH: "In retail stock" is in the 27 store so -- 28 MR. DUMLER: Sure. 44 1 MR. SMITH: So why would you say you can't 2 keep it in the store if it's retail stock? 3 MR. DUMLER: I guess I'm talking about the 4 wholesale inventory. 5 MR. HORTON: Madam Chair. 6 MS. HARKEY: Yes. Mr. Horton. 7 MR. HORTON: I just noticed we had a 8 colloquy. 9 MS. HARKEY: Yeah, we did. We did. But, 10 quite honestly, I was enjoying the back and forth 11 because I was getting some information and we were 12 able to hear each other. And, I'm sorry, it didn't 13 seem to get out of hand. 14 But what he's saying is that the smaller 15 guy that has like an issue will have -- and this is 16 what we're trying to fix. I mean that's the intent 17 of this. We don't have a problem with the large 18 distributor. 19 And I'm just wondering, Ms. Stowers, do you 20 have any input? Because you were here. You were 21 there. What -- what is your -- what is your 22 impression of the effect of this on the smaller -- 23 on the smaller business owner? 24 MS. STOWERS: You know, I don't have a 25 problem with this 20 percent/80 percent that SEIU is 26 recommending because it does help the small guy. I 27 understand your typical client was more at a lower 28 threshold. 45 1 During that second IP meeting a gentleman, 2 a distributor/retailer, he described his business 3 practice. And he was at a higher percentage of what 4 he was doing as far as whether he was selling it for 5 retail or if he was distributing it. 6 And based on how his -- he described what 7 he was doing, when I was at 80 percent, I thought 8 that that particular business would have the benefit 9 of this proposed regulation. 10 MS. HARKEY: Okay. Let me -- can we -- can 11 I offer a solution? Can we pass Alternative Number 12 1, with the purchase invoice required, timely police 13 report, insert the cabinets, safe or cabinet, and 14 then come back at the next hearing and address this 15 "substantially all" issue? Because I think it's 16 going to take a little more time for me to totally 17 comprehend what impact that has on what we're doing 18 here. Because it seems to be the only major bone of 19 contention. 20 The locked or inventory, I think we've kind 21 of established is a problem. But I would like to 22 see us move forward with what we have and then come 23 back with staff to discuss this item number B, you 24 know, one more time, use what we have, and then 25 maybe offer an amendment to that at the next 26 hearing. But go with what we have in 1, with those 27 few exceptions. Because I need to understand 28 exactly what we're doing here, how it -- how it 46 1 impacts the whole picture. And I'm not so sure that 2 I've got that. 3 MR. RUNNER: For the sake of getting us 4 trying to get to conclusion, I will second that. 5 MS. HARKEY: Okay. 6 MS. STOWERS: So are we -- are we taking it 7 and adopting -- 8 MS. HARKEY: We'll take it and then -- 9 MS. STOWERS: -- the regulation? Or move 10 it through the process, and then if we make more 11 changes, we would have to go back and amend the 12 original? 13 MR. HORTON: Yeah. 14 MS. HARKEY: My intent is to adopt the -- 15 adopt it, as is, and then to come back at the next 16 hearing and address, in separate form, with more 17 information, item (b). But to adopt it as is. 18 MR. HORTON: Yeah, I would oppose that, 19 Members. 20 The concern is, I would be very supportive 21 of Madam Chair dealing with this in its entirety; 22 and in order to establish an understanding of the 23 significance of the term and the language, to 24 bifurcate this creates two separate processes, and 25 that would be somewhat concerning unless general 26 counsel can figure out a way to do that. 27 I mean we adopt this measure and then begin 28 to move it forward in our normal process and then 47 1 come back and open up another process, I guess. 2 MS. HARKEY: No, just -- 3 MR. RUNNER: We -- we -- I think what we 4 could do is we could actually adopt this portion of 5 it, hold on the rest of it before we go ahead and 6 send it out to -- to -- 7 MR. HORTON: Well, that's the same thing. 8 MR. RUNNER: Well, except we've at least 9 accomplished part of it. We've taken a lot of it 10 off the table and we're down to some specifics that 11 we want to come back and talk to. That's -- that's 12 the only thing I can think is advantageous to move 13 forward. 14 MS. HARKEY: Because we're down to one item 15 then, Chair -- Mr. Horton. 16 MR. HORTON: No, I mean I agree with what 17 you want to accomplish. It's just, I just think 18 that if that's the case, then we just hold the whole 19 thing over and keep it concurrent, together. And I 20 think all the Members seem -- we all seem to be in 21 agreement, with the exception of that one item. 22 Separating it is -- I don't think that's going to 23 change that. 24 MR. RUNNER: Well, I guess I'm talking 25 about not holding it over as much as I am just 26 completing that portion of it. And then, you know, 27 before we submit to OAL, we just -- we'd go ahead 28 and then wait until we fin- -- finalize that last 48 1 part, that is all. 2 MR. HORTON: That's the same thing. 3 MR. RUNNER: Well, except that we would 4 have accomplished -- 5 MS. HARKEY: Well, it's not because then 6 the whole thing is back up for another negotiation. 7 And I see the language that keeps getting added and 8 added, and pretty soon it's very not simple and it's 9 getting away from what we're trying to accomplish. 10 Yes, Chief Counsel. 11 MR. FERRIS: There's always two parts to 12 these types of motions. There's the adopt and 13 publish. So I think what you're talking about is 14 you're contemplating adopting but not publishing for 15 purpose of a public hearing. And that you would -- 16 you would -- you would make a later motion with 17 respect to publishing any language that you would 18 adopt today. 19 MR. HORTON: So let me make sure that I'm 20 clear. So we would adopt this measure and then 21 subsequently amend the motion or amend the action 22 taken to adopt it or basically rescind, add 23 amended -- 24 MS. HARKEY: No. 25 MR. HORTON: -- and then adopt it again, 26 and then move it to publication. Is that -- 27 MS. HARKEY: No, let me clarify. 28 MR. HORTON: -- the process as you see it? 49 1 MS. HARKEY: Let me clarify the motion for 2 you, Mr. Horton. What we do -- 3 MR. HORTON: Well, I get the motion. I'm 4 just asking for the legal opinion of how do we do 5 it? I'm for it. I mean I want to -- 6 MS. HARKEY: Okay. Well, we would -- we 7 would adopt it and then we would -- before we 8 implement, we would review item (b) and bring that 9 back to the Board at the next Board hearing. 10 We're adopting, but we're not publishing. 11 I just don't want the whole thing back on the table 12 again. 13 MR. HORTON: I -- 14 MS. HARKEY: This has been a very long 15 process. 16 MR. HORTON: I get it. And maybe -- 17 MS. HARKEY: And I think we're down to one 18 issue, which is still confusing, I think at least 19 for many of us, at least for myself, as to what 20 the -- I need to see it -- I need to physically see 21 this. I need to know what I'm talking about. And I 22 don't know why we have to add this. I need to see 23 why we have to add this. 24 I will be going to Investigations to see 25 why we have to add this. 26 MR. HORTON: Another solution, Madam Chair, 27 might be for the Board to direct both parties that 28 the Board will not consider any additional items 50 1 when it returns, with the exception of that one 2 item. 3 And I'm also okay with if you want to adopt 4 it and then rescind it and then adopt something new 5 and then publish it. Both seem to accomplish. 6 The easiest thing is just direct the 7 parties that the only items we will take under 8 consideration in the future is the "substantial all" 9 item. And when it returns, the other items from the 10 perspective of the Board is resolved and not up for 11 further discussion. 12 MR. FERRIS: Yeah. And I think it would be 13 important to make sure staff, if you do go with 14 adopting something today, that staff is really clear 15 on what the interpolations to the current text 16 are. 17 MS. HARKEY: Well, I'm clear on what we're 18 adopting. We are adopting Alternative Number 1, 19 adding "purchase invoice required, timely police 20 reports" -- we've already got "police reports" -- 21 "timely." 22 And then the language in Item 2, it says a 23 "safe," or we could have "file cabinet." We can add 24 "file cabinet" to that. 25 And we're adopting everything, excepting 26 Item (b), which we will bring back to the Board for 27 further consideration. 28 MS. STOWERS: One comment -- 51 1 MS. HARKEY: Yes. 2 MS. STOWERS: -- Madam Chair, is the, um -- 3 the wire mesh? 4 MS. HARKEY: I'm not a fan of the wire 5 mesh. I think that -- you made a very good point, 6 that it adds expense, it adds complexity for what is 7 already a, you know, not -- not exactly a really 8 high income arena. 9 We're talking about the smaller 10 distributor. And I think the fact that we've got it 11 segregated somewhere in one of these areas, or up 12 above high where it's out of reach, kind of 13 accomplishes what we were trying to do. 14 So I would -- I know Mr. Horton feels 15 differently, but I would like to refer you back to 16 what we were thinking was that it was a -- it was an 17 added expense, an added layer of complexity. 18 MR. HORTON: Madam Chair. The -- I think 19 the term was "secure" and we were trying to 20 determine "secure." 21 And just to try to put this in perspective, 22 legitimate operators, we're not really talking about 23 them. You know, you're talking about the folks who 24 are, you know, who are trying to evade the law or 25 manipulate the law in such a way to be able not to 26 comply with the law. 27 And it's not one, it's not two, even if 28 only three or four of 'em attend the -- three or 52 1 four individuals attend the interested parties 2 meeting, they're not representative of this entire 3 universe. 4 This is trying to correct a redundant, 5 recurring problem that exists. The ones that come 6 before us are not really reflective of the universe 7 as well. It's the ones that the Investigation Unit 8 is prosecuting, which is significant, you know, if 9 my recollection of the numbers and the activity that 10 never come before us. And the underlying purpose 11 here is to actually protect the legitimate operator 12 who is just having a huge challenge trying to 13 compete with the -- with the criminals. 14 And -- and -- and I still would object to 15 this adoption all. Just doesn't -- need to kind of 16 review the process and the law on that. 17 MR. RUNNER: Let me just -- procedurally, 18 let me just clarify. Real quick? 19 MS. HARKEY: Go ahead. 20 MR. RUNNER: So -- so if indeed we adopted 21 this portion, and then we came back and addressed 22 the other portion, would then -- can we combine 23 those then both together as we would then go and 24 publish? 25 MR. FERRIS: Correct. 26 MR. RUNNER: Okay. So we don't have to 27 undo anything else. We could just go ahead and then 28 add that to what is being published. 53 1 MR. FERRIS: Correct. 2 MR. RUNNER: Okay. That, to me, is a very 3 simple -- 4 MS. HARKEY: Okay. We have a motion and we 5 have a second. I'm just going to call. Thank you. 6 Ms. Richmond, will you call the roll? 7 MS. RICHMOND: Ms. Harkey. 8 MS. HARKEY: Aye. 9 MS. RICHMOND: Mr. Runner. 10 MR. RUNNER: Aye. 11 MS. RICHMOND: Ms. Ma. 12 MS. MA: No. 13 MS. RICHMOND: Mr. Horton. 14 MR. HORTON: No. 15 MS. RICHMOND: Ms. Stowers. 16 MS. STOWERS: No. 17 MS. RICHMOND: Motion fails. 18 MS. HARKEY: Okay. Motion fails. I'm 19 waiting for another. 20 MS. STOWERS: I would like to hold it over 21 and go back, get the language with all the 22 suggestions that we currently have, give you an 23 opportunity to look at the "substantially all." 24 MS. HARKEY: Okay. Will you make a motion? 25 MS. STOWERS: Bring it back to the next 26 meeting in April. 27 MR. RUNNER: Just to clarify -- 28 MS. HARKEY: Okay. 54 1 MR. RUNNER: -- one of the issues that I'm 2 concerned about, that is we continue this 3 discussion, if we're going to hold it over to April, 4 which I think is actually not -- that's in -- 5 that's -- 6 MS. BUEHLER: It will need to be May. 7 MR. RUNNER: That'll probably be May, 8 right, because we're in -- I think we're in Culver 9 City. 10 MS. BUEHLER: Mm-hmm. 11 MR. RUNNER: I am concerned about all these 12 discussions. And the interested parties kind of 13 were engaged in there, in terms of business folks. 14 I'm concerned that we're having a discussion here 15 that impacts them that they have not been truly a 16 part of at that point -- 17 MS. HARKEY: Just drags on. 18 MR. RUNNER: -- and the impact. And so we 19 may be making some choices about, you know, 20 screening and all these other things to which they 21 were never engaged in during the -- during the 22 interested parties discussion. 23 And I'm concerned about then that, again, 24 putting on that burden when they weren't even, they 25 thought this was just moving along. 26 So, I guess I'm concerned about that, and I 27 would hope that maybe the industry then, if we're 28 going to bring this up at that point, is prepared to 55 1 then also then present at that time the concerns 2 that they would have. Is that a fair? 3 MR. DUMLER: Fair. 4 MR. RUNNER: Okay. 5 MS. HARKEY: So, we'll be putting this over 6 'til the next Board hearing. 7 MR. RUNNER: May. 8 MS. BUEHLER: May. 9 MS. HARKEY: May. 10 MS. MA: Why May? 11 MS. HARKEY: Why can't we do this in Culver 12 City? Is it against the law, we can't do it? What? 13 MS. BUEHLER: No, it's not against the law. 14 But I think we need time to be able to bring those 15 other interested parties in for their feedback to 16 make this language solid. 17 MS. HARKEY: Okay. So May. 18 MS. STOWERS: Okay, put it over to May. 19 MR. HORTON: Madam Chair, just as another 20 suggestion. Maybe staff -- I mean I commend the 21 Chairwoman for going out and visiting the 22 investigators and so forth. But maybe staff ought 23 to have some conversations with the investigators. 24 I mean I believe -- 25 MS. HARKEY: I think that we have, Chairman 26 Horton. They were there. 27 MR. HORTON: No, I mean -- 28 MS. HARKEY: We have -- 56 1 MR. HORTON: -- over, over these specific 2 issues. And not necessarily "substantial all," just 3 kind of codify the problem as it's sort of 4 articulated and what a solution might be. 5 I mean, SEIU is not here representing SEIU. 6 They're here representing the investigators who 7 they're engaging with on a regular basis. Mr. Alari 8 himself is an investigator, so I mean this is what 9 they do. Daily. 10 MS. HARKEY: Okay. We have our 11 instruction. Bring it back when we can. I'll be 12 talking with you extensively throughout this. And 13 let's be sure that we focus on the item (b), okay? 14 Thank you so much. 15 MS. BUEHLER: Thank you. 16 MS. HARKEY: I think that concludes the 17 Business Tax Committee. And thank you for everyone 18 for appearing. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 57 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 March 30, 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 57 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: April 13, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 58