1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 30, 2016 10 11 12 13 14 15 LEGISLATIVE COMMITTEE 16 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: Fiona Ma, CPA 4 Chairwoman 5 Diane L. Harkey 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: Michele Pielsticker 16 Chief, Legislative and Research Division 17 Randy Ferris 18 Chief Counsel Legal Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 SPEAKER PAGE 3 Heidi Wettstein Legislative Director 4 Office of Senator Patricia Bates 6 5 Bob Wieckowski Senator 16 6 Marilyn Limon 7 Legislative Aide Office of 8 Assemblymember Miguel Santiago 39 9 Gavin McHugh Lobbyist, SCADA 40 10 Ron Dumas 11 Business Owner, SCADA 42 12 Annabel Snider Legislative Director 13 Office of Assemblymember Jimmy Gomez 57 14 Nicole Wordelman 15 Legislative Advocate Habitat for Humanity 59 16 Brady Borcherding 17 Legislative Aide Office of 18 Assemblymember Bill Quirk 64 19 Jason Liles Chief of Staff 20 Office of Senator Mike McGuire 69 21 22 ---oOo--- 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 30, 2016 4 ---oOo--- 5 MS. MA: Good morning. Good morning, 6 Members and guests. The Board committee meeting is 7 hereby called to order. 8 Ms. Richmond, will you please introduce the 9 first committee meeting. 10 MS. RICHMOND: Good morning, Chairwoman Ma 11 and Members. Our first committee meeting on this 12 morning's agenda is the Legislative Committee. Ms. 13 Ma is the Chair of that committee. 14 Ms. Ma. 15 MS. MA: Okay. Thank you very much. 16 So we are going to open up the Leg. 17 Committee meeting. For those who are here for the 18 first time, we like to hear the bills that have some 19 sort of nexus or would -- or members would like to 20 have a support from the BOE, the BOE Members. 21 And so this is an opportunity to talk about 22 the bill. We like to ask questions. If we feel 23 strongly about supporting the bill, we will vote to 24 support it officially for the record. If we don't 25 come to a consensus, then perhaps we will wait to -- 26 to make a decision whether we're going to support or 27 not. Could come back later on in the process, after 28 it passes the second House for example. 4 1 So if you don't get the support today, it 2 doesn't mean that it may not get the support. But 3 this is an opportunity for us to also give feedback 4 in terms of how we feel about the bill, for the 5 authors to also let us know if there are any planned 6 amendments along the way, and just so that we can 7 craft a better bill and then go to the Governor's 8 office. 9 So that is the purpose for today's meeting 10 and all of our Leg. Committee meetings. 11 And, with that, Michele Pielsticker. Ms. 12 Pielsticker, please announce each bill, and then we 13 will have speakers come and talk about their bill. 14 MS. PIELSTICKER: Thank you, Madam Chair, 15 Board Members. Michele Pielsticker, Chief of the 16 Legislative and Research Division of the Board of 17 Equalization. 18 Our first item is Senate Bill 680 by 19 Assembly -- by Senator Wieckowski. It's a sales 20 tax -- 21 MS. MA: Ms. Pielsticker, I think we're 22 going to go out of order. 23 MS. PIELSTICKER: Okay. 24 MS. MA: 1458. 25 MS. PIELSTICKER: Yes. Okay. Senate Bill 26 1458 is by Senator Bates, and it entails a property 27 tax exemption by -- for disabled veterans. The 28 sponsor of the item is Board Member George Runner. 5 1 And I'll start with existing law. Existing 2 law provides that to be eligible for the disabled 3 veteran's property tax exemption, the disabled 4 veteran must have been discharged under honorable 5 conditions. 6 Existing federal law, however, provides 7 that eligibility for disabled veteran's benefits 8 merely requires that the disabled veteran be 9 discharged under other than dishonorable conditions. 10 This law would expand disabled veteran's 11 exemption eligibility by allowing the exemption when 12 the veteran meets all other eligibility standards, 13 as long as the veteran was discharged under other 14 than dishonorable conditions similar to federal law. 15 The revenue impact for this is that for 16 every 100 additional qualifying disabled 17 veteran-owned homes, this bill would result in an 18 annual revenue loss of $126,000. The cost impact is 19 absorbable. 20 And that is SB 1458. 21 MS. MA: Okay. And we have a speaker here 22 today. Ms. Heidi Wettsen. 23 MS. WETTSTEIN: Wettstein, thank you. 24 MS. MA: Wettstein. 25 MS. WETTSTEIN: Is this on? 26 MS. MA: Yeah. 27 ---oOo--- 28 HEIDI WETTSTEIN 6 1 ---oOo--- 2 MS. WETTSTEIN: Good morning, Madam Chair 3 and Members. On behalf of Senator Patricia Bates, 4 thank you for the opportunity to present Senate Bill 5 1458 to you today. 6 SB 1458 is sponsored by BOE Member George 7 Runner and seeks to make California law consistent 8 with federal law, so that any veteran receiving 9 service-connected disability benefits at a hundred 10 percent will be eligible to receive the state's 11 disabled veteran's property tax exemption on their 12 home. 13 There are currently five different types of 14 discharges from active duty that veterans receive: 15 Honorable, general, other than honorable conditions, 16 dishonorable, and bad conduct. 17 The problem with current statute in 18 California is that only veterans who receive an 19 honorable discharge may qualify for the disabled 20 veteran's property tax exemption, whereas, federal 21 statute allows these same veterans to receive 22 benefits if they are discharged under honorable, 23 general, or other than honorable conditions. 24 SB 1458 fixes this problem and gives a 25 hundred percent disabled veterans access to a tax 26 benefit they deserve. Additionally, this bill 27 necessarily helps California veterans returning from 28 war receive a merited property tax exemption as long 7 1 as they meet the appropriate discharge eligibility 2 from the service. 3 Senator Bates and I appreciate your 4 consideration, and I ask for your support. 5 MS. MA: Thank you. 6 Any discussion, Members? 7 MR. RUNNER: Yeah, just real quick. 8 MS. MA: Mr. Runner. 9 MR. RUNNER: I mean some of the specifics 10 in the issue we found, as we heard from some of our 11 constituents, is even those -- even if somebody was 12 discharged like with a Post Traumatic Syndrome 13 discharge, that could be a "general discharge" and 14 so then they -- then, as a result of that, they 15 actually had some harm that they -- that they found 16 in their service and yet, under California law, they 17 weren't able to get this. 18 So, those are the kind of things that we 19 found and we just felt it would be wise to be 20 consistent with federal law here. 21 MS. MA: And what is the property tax 22 exemption? 23 MS. WETTSTEIN: The current value of it? 24 MS. MA: Yeah. Can you explain how that 25 works? 26 MR. RUNNER: We can always have Steve 27 Kinnee come up. 28 MS. MA: Sure. 8 1 MS. PIELSTICKER: So the disabled veteran's 2 exemption applies to the home of a person who, 3 because of an injury incurred in military service, 4 is totally disabled or has lost multiple limbs or is 5 blind. 6 And, in general, the basic exemption amount 7 is $100,000, which is adjusted for inflation on an 8 annual basis. 9 MS. MA: So that's -- 10 MR. RUNNER: We didn't need Steve. 11 MS. MA: So that's a hundred thousand 12 dollars off of their basis. That's their property 13 tax exemption amount. 14 MS. PIELSTICKER: Correct. Mm-hmm. 15 MS. MA: Ms. Harkey? 16 MS. HARKEY: I thought I read somewhere -- 17 and excuse me, I'm ad-libbing here, but -- because I 18 reviewed these last week. But what I thought I read 19 somewhere that we were trying to eliminate the, 20 uh -- the inflation adjustment so that it would just 21 be -- or we -- or we're -- there's -- there's -- 22 It might be another bill. 23 MS. PIELSTICKER: I think it's another 24 bill, yeah. 25 MS. HARKEY: Okay. So excuse that. Thank 26 you. 27 MS. PIELSTICKER: Uh-huh. 28 MR. HORTON: Move to support the bill. 9 1 MS. HARKEY: Second. 2 MS. MA: Okay. Mr. Horton moves to 3 support, have an official support position for 4 SB 1458. Ms. Harkey seconds. 5 Without objection, motion carries. 6 Thank you very much. 7 MS. WETTSTEIN: Thank you. 8 MR. RUNNER: Nice job, Heidi. 9 MS. MA: Okay. And we're taking bills out 10 of order if members come into the chamber, just to 11 be respectful of their time. 12 So Tim? 13 MS. MA: Sixteen -- 1642 is the next one. 14 MS. PIELSTICKER: Okay. AB 1642 is by 15 Assemblymember Obernolte, and it relates to the Fire 16 Prevention Fee due date. 17 Under existing law, annual Fire Fee 18 assessments are due and payable to the BOE 30 days 19 after the assessment. And the amount assessed 20 becomes final at the end of the 30-day period unless 21 a feepayer files a Petition for Redetermination 22 within that period. 23 So under the proposed law we would extend, 24 from 30 to 60 days, the date that the annual Fire 25 Prevention Fee assessment is due and payable and 26 provide a corresponding 60-day period to file a 27 Petition for Redetermination. 28 The revenue impact is an average annual 10 1 revenue loss of foregone penalties and interest only 2 of $548,000. 3 MS. MA: Okay. Do we have any speakers? 4 Okay, seeing none. 5 Any discussion, Members? 6 MS. HARKEY: No. 7 MS. MA: Mr. Runner? 8 MR. RUNNER: Yeah. This is one that, 9 again, I think we've attempted and I think that we 10 made it partially through the Legislature in the 11 past on this particular one. 12 And it just -- part of the challenge that 13 we have with this particular bill is, because it's 14 30 days from when the bill -- date of the letter, 15 the fact is that people might even receive this two 16 weeks after that. Or many of these are mountain 17 communities and they don't -- they may not even get 18 their mail for a month and not -- they may not go to 19 their mailbox for a month. You know, and so that -- 20 so it just makes this more reasonable in terms of 21 the amount. 22 It's interesting that it is a large -- I 23 mean fairly -- what is it, a half a million dollar 24 revenue loss. But, again, the issue is, to me, we 25 shouldn't be trying to make our money on penalties. 26 We should try and be -- trying to make it on the -- 27 on the fee itself. And rarely do we have something 28 that's 30 days. This just makes sense. 11 1 MS. STOWERS: Just one. 2 MS. MA: Ms. Stowers. 3 MS. STOWERS: Actually, I was going to ask 4 for the BOE regular tax and fees determinations, is 5 it a 30-day time period to respond? 6 MS. PIELSTICKER: Yes. For most other BOE 7 determinations, it's 30 days. For the FTB, however, 8 who deals with a significant number of individual 9 taxpayers similar to the Fire Fee, their deadline is 10 60 days. 11 MR. RUNNER: Right. I think the difference 12 is our normal -- our normal clientele, if you will, 13 are folks who already have a relationship with us. 14 We know how to contact them. We contact them 15 regularly. 16 These are oftentimes very difficult 17 addresses, changed address, hard to find these. And 18 I don't know, we have about 800,000, I think, of 19 these -- 20 MS. PIELSTICKER: That's right. 21 MR. RUNNER: -- that we're doing right 22 now. 23 MS. STOWERS: To go with the additional 24 time period, would we incur any cost as far as 25 system changes? 26 MS. PIELSTICKER: No, just -- well, minor 27 one-time costs. But when we say "minor," it's very 28 minor. 12 1 MS. STOWERS: Okay. 2 MS. MA: Ms. Harkey. 3 MS. HARKEY: I would like to see this -- 4 it's very necessary, as Mr. Runner stated. A lot of 5 these times these -- these fire hazard areas are in 6 second home areas, mountain areas, places where 7 people are not -- you know, they might go on a 8 monthly basis or -- and -- and you know. And it 9 just, it's created quite a problem. 10 I mean this Fire Fee, as it is, is hotly 11 contested in many areas. And so I think, you know, 12 the fact that we can allow them a little extra time, 13 because a lot -- in a lot of instances this wasn't 14 well-understood, when the fee first came out. I 15 mean we've had a lot of protests and a lot of people 16 that are upset with it. 17 So I think to the extent that we don't have 18 appeal options here at the Board, we merely bill and 19 collect, I would like to give our staff a little bit 20 of a break when they're trying to collect, at least 21 we're being kind of fair and equitable about the 22 receipt timeframe. Because we really -- we don't 23 have any option on -- on an appeal here. It's 24 directly through CalFire, I believe. 25 So, thank you. 26 MS. MA: Mr. Horton. 27 MR. HORTON: Thank you, Madam Chair. 28 I was supportive of the bill last year for 13 1 the exact reasons as articulated by Member Harkey 2 and Member Runner. 3 I'm just a little concerned that the 4 confusion and the different reporting periods that 5 that creates. And the effectiveness of the 6 education and outreach may be part of the -- part of 7 the issue here. 8 So even currently how many -- what 9 percentage of the feepayers are paying within 30 to 10 60 days? 11 MS. PIELSTICKER: I will have to get back 12 to you on that. 13 MR. HORTON: Okay. I think that's 14 important, as the bill goes forward to the 15 Legislature, to be able to codify the exact problem. 16 Our -- some of the information that I've 17 read somewhere, I can't recall exactly what it is, 18 but it indicated that ten percent of those who are 19 having -- ten percent are not -- are having an issue 20 between the period of 30 to 60 days. And so 90 21 percent are actually complying within the -- within 22 the 30-day period. 23 The other challenge I think happens here is 24 is that there's a high turnover. And so given the 25 high turnover, that gives some credence to necessity 26 for more time in order for them to receive the 27 information and comply. 28 But, you know, my challenge is I just don't 14 1 have the quantitative data to be able to measure 2 this. But I am sort of supportive in concept, would 3 like to have that information before engaging 4 myself. 5 MS. MA: Okay. Perhaps we can move this 6 bill to our next Legislative Committee meeting and 7 get some more data for clarification, and then we 8 can take up another motion to see if we're going to 9 support it. Is that good? 10 Okay. So our next bill, I see Senator 11 Wieckowski is in the room. So let's call up his 12 bill, SB 680. 13 MS. PIELSTICKER: Senate Bill 680 is by 14 Senator Wieckowski, and it is a sales and use tax 15 exemption for out-of-state purchasers of certain 16 passenger vehicles. 17 Under existing law, we have an exemption 18 from sales tax for a California retailer's sale of 19 tangible personal property delivered outside the 20 state. 21 Existing regulation also specifies that tax 22 does not apply to the sale or use in this state of a 23 new non-commercial motor vehicle manufactured in the 24 United States and sold to a resident of a foreign 25 country who arranges for the purchase through an 26 authorized vehicle dealer in the foreign country 27 prior to arriving in the United States under these 28 conditions. 15 1 The purchaser has to have been issued an 2 in-transit permit by the DMV and prior to or at the 3 end of 30 consecutive days from the first date of 4 operation under that permit, the motor vehicle is 5 delivered or shipped to a point outside the United 6 States by the retailer by their own facilities, a 7 carrier, forwarding agent, export packer, customs 8 broker, other person engaged in the business of 9 preparing property for export or arranging for its 10 export. 11 This law would, until January 1st, 2020, 12 exempt from sales or use tax the sale or use of any 13 qualified new passenger vehicle and qualified 14 accessories sold to a person for permanent use 15 outside the state when all of the following 16 conditions apply: 17 Within 30 days after the purchase, the 18 vehicle is moved to a point outside the state; 19 A one-trip permit is obtained from the DMV; 20 At the time of purchase, the purchase -- 21 purchaser provides the retailer with an exemption 22 certificate; 23 And the purchaser is not a California 24 resident. 25 MS. MA: Okay. Thank you, Ms. Pielsticker. 26 Senator Wieckowski. 27 ---oOo--- 28 SENATOR BOB WIECKOWSKI 16 1 ---oOo--- 2 MR. WIECKOWSKI: Thank you. And thank you, 3 this is my first time before the Board of 4 Equalization. I appreciate your attention and the 5 fine work the staff did, and the amendments to the 6 original staff report that addressed the problems of 7 cheaters or people from California actually trying 8 to take advantage of the law. 9 I think -- I see SB 680 as a job spill. 10 We -- we know folks that have gone to Germany or 11 gone to Sweden to buy a Saab or buy a car, 12 vacationed there, and then have their car shipped 13 over. And essentially that's what's going to allow 14 folks to do here in California. 15 It'll contribute to our tourism economy. 16 We just got recent numbers that show San Francisco 17 has done a fantastic job in -- with the tourist 18 trade. And it's an incentive for an out-of-state 19 purchaser to travel to where Tesla is right now, 20 my -- my district, and visit my district, purchase 21 the vehicle, and then travel to Los Angeles, Diamond 22 Point, maybe even Sacramento, and see California 23 before they put their car on a boat. Or they just 24 drive it out of state. You understand it; hotel, 25 restaurant, opportunities that are here. 26 As the staff report points out, under 27 current law an out of purchaser has an incentive to 28 take the delivery of a Tesla in another state where 17 1 the tax is lower, thereby avoiding the California 2 tax and reducing an associated trip. For this 3 reason, the California Travel Association is in 4 support of it. 5 Currently, right now, Texas does not allow 6 for Texans to purchase a Tesla in Texas. So what 7 they do is they have their point of sales in Nevada. 8 They go to Vegas. They purchase the car. And then 9 they drive it into -- drive it into Texas. So that, 10 we would give them an incentive to come to 11 California to purchase it. 12 I think the electric car industry, and 13 Tesla in particular, is an attractive -- an 14 important attraction for the state and for my 15 district. People want to come and see the cars 16 being produced, understand the economics that -- 17 understanding that the current economics create a 18 deterrent for people to actually do that. It's 19 solution, in a small way, to stimulate our economy 20 and I would appreciate your consideration. 21 MS. MA: Any questions, Members? 22 Ms. Harkey. 23 MS. HARKEY: I think every time we get 24 these bills -- and I do appreciate them, even one at 25 a time, one industry at a time, one dealership at a 26 time, because I think -- I think they all point to 27 that, you know, our tax is a little bit too high and 28 that people would take advantage to move out. And 18 1 so, you know, we try to -- we try to accommodate 2 that somehow. 3 But -- so, you know, I welcome any tax 4 advantage that we can create here in California to 5 stimulate industry. I wish that this were not just 6 Tesla. I think we have a lot of other industries 7 that we might want to look at that are 8 well-deserving of attracting out of state. And -- 9 but I appreciate the first effort and look forward 10 to supporting your bill. 11 MR. WIECKOWSKI: Well, as written -- I mean 12 if Fisker and Aurica were still in business, then 13 this would apply to them. But we know that there's 14 Phoenix Motor Cars, Rezvani Motors, Superformance. 15 There are other small produced manufacturers. And, 16 again, they're on the prototype level that 17 potentially, maybe they -- they will hit it right 18 and create a product that's attractive to people. 19 But it would not exclude them as it's written. 20 MS. HARKEY: Well, I would just look 21 forward to working with you as we examine what else 22 we might be able to pop into something like this 23 that might help stimulate business in southern 24 California, in your district, and all over. 25 MR. WIECKOWSKI: Thank you. 26 MS. HARKEY: Because I think there's 27 options. I know we've got, you know, manufacturing 28 exemptions and other things that we do for our 19 1 companies. We're having trouble accessing those 2 because of different rules and regulations. So 3 maybe if we can just kind of work together to look 4 at what -- what, as whole, we could do for 5 industries that we're trying to keep and encourage 6 here in California, I think it would be good. But 7 thank you. 8 MS. MA: Ms. Stowers? 9 MS. STOWERS: Yes, thank you. Couple of 10 questions, or comments. 11 I'm viewing this as a tax expenditure, so I 12 appreciate that it has a sunset date on it. 13 MR. WIECKOWSKI: Mm-hmm. 14 MS. STOWERS: I do have a concern that the 15 revenue impact is unknown. And I appreciate that 16 the desire is to increase California tourism. 17 I definitely love California vacations 18 starting from your district, going to San Francisco, 19 going down the coast, making my way to San Diego, 20 one of my favorite cities. So I really can 21 appreciate having an out-of-state person coming into 22 the state and visit California. 23 But, "unknown revenue impact," and then for 24 this particular exemption this manufacturer has 25 received a substantial amount of California 26 incentives to stay in this state, going from -- I 27 mean, they qualify for the manufacturer exemption as 28 it is. They also are a recipient of the California 20 1 Compete Credit. 2 So at this time, mainly because the revenue 3 impact is unknown, I will abstain from voting on 4 this. 5 MR. WIECKOWSKI: Yeah. Understand that 6 the -- there has been exactly one Tesla that has 7 been bought by a foreign person or an out-of-stater 8 since Tesla started producing. Now they pay the 9 California tax and then they go back to their home 10 state and they get it -- they get it reimbursed. 11 So it's really the focus is on the 12 consumer, the purchaser, versus the manufacturer. 13 Although there is obviously encouragement for people 14 to come and, you know, touch things as the cars are 15 being built. 16 MS. STOWERS: Okay. 17 MS. MA: Mr. Runner? 18 MR. RUNNER: I have a question just in 19 terms of the process -- in terms of normal process. 20 If I was to go ahead -- if I was to -- I 21 think there's some forms that I have to fill out. 22 If I buy a car -- if I -- if I live in, let's say, 23 Arizona and I want to go ahead and I buy a car in 24 California, but I'm going to take it right back to 25 Arizona, or I'm going to take it back there after a 26 week or two, what's -- what's current process for 27 that right now? Is it -- do I -- I think, do I just 28 sign some forms saying I'm not a resident or I'm not 21 1 going to keep it here? Or what is -- what is the 2 current law in regards to a purchase like that? 3 MS. PIELSTICKER: I would like to 4 request -- 5 MR. RUNNER: I'm sure there's somebody out 6 there. 7 MS. PIELSTICKER: -- Susanne Buehler. 8 MR. RUNNER: Here comes Chief Counsel. He 9 can help. 10 MS. MA: Where's your lifeline? Here he 11 is. 12 MR. RUNNER: Here he is; that's right. 13 That's right. 14 MR. FERRIS: And I have other people in the 15 room who are welcome -- 16 MR. RUNNER: That's right. 17 MR. FERRIS: -- to come correct me if what 18 I'm about to say is wrong. 19 But if you take title and possession in 20 California and make the first functional use in 21 California, even if you're from out of state, you're 22 going to be subject to California sales tax, the 23 retailer will be. And the retailer is going to want 24 to seek reimbursement from the purchaser. 25 So folks -- 26 MR. RUNNER: So there is not a -- there's 27 not an exemption like this if I'm wanting to buy -- 28 MS. HARKEY: No. 22 1 MR. FERRIS: No, not presently. So a lot 2 of times folks from out-of-state that want to 3 purchase from a California car retailer -- 4 MR. RUNNER: Right. 5 MR. FERRIS: -- will arrange for -- 6 MR. RUNNER: A delivery. 7 MR. FERRIS: -- delivery to occur 8 out-of-state. 9 MS. MA: So they can't drive it. 10 MR. FERRIS: Right. They can't make first 11 functional use -- 12 MR. RUNNER: As soon as they drive it, then 13 it's functional use. 14 MR. FERRIS: -- in California. 15 MR. WIECKOWSKI: Right. 16 MS. HARKEY: Same with airplanes. 17 MR. RUNNER: So -- 18 MS. PIELSTICKER: There is an exemption for 19 vehicles that are purchased by -- for export to a 20 foreign country. 21 MR. RUNNER: Right. But that's -- yeah, 22 but I mean we've had some of those in appeals. I 23 mean you've got to -- you basically put them on a 24 boat -- 25 MR. FERRIS: There has to be (inaudible) -- 26 MR. RUNNER: You can you can drive them to 27 the port. 28 MR. FERRIS: -- process. 23 1 MR. RUNNER: You can drive them to a port 2 as they -- as they leave. 3 MR. FERRIS: Right. 4 MR. RUNNER: I guess I'm struggling as to 5 whether or not, does this seem to be advantaging one 6 over another -- 7 MS. HARKEY: Yes. 8 MR. RUNNER: -- in this process? 9 If I -- if I have a Chevy dealership and 10 I can't sell somebody to -- a car to somebody and 11 they're going to get charged California tax, 12 what's -- what's the difference? 13 MR. WIECKOWSKI: Well, it's the 14 manufacturer. It's the manufacturer. 15 MR. RUNNER: Well, that's because that's 16 the way Tesla sells. 17 MR. WIECKOWSKI: Right. Well, but if Chevy 18 were producing cars in California -- 19 MR. RUNNER: Uh-huh. 20 MR. WIECKOWSKI: -- as they used to in 21 Fremont at the -- at that plant, then that may be -- 22 this bill, as it's written right now, would 23 incentivize -- 24 MR. RUNNER: Well, I think because of the 25 way they actually sell their cars, I don't think 26 they sell direct, so -- yeah. 27 MR. WIECKOWSKI: Right. It's still, it's 28 triggered on the first sale, whatever that first 24 1 transaction is. You're right that Tesla has a 2 different model for selling their cars, but those 3 are the -- 4 MR. RUNNER: So currently, right now, if I 5 buy a Tesla in California, I pay the California 6 sales tax on that? 7 MR. WIECKOWSKI: Correct. 8 MR. RUNNER: What's my ability to -- well, 9 okay. And then I don't pay whatever tax is when I 10 go to take it back to my other state. 11 MR. WIECKOWSKI: Right. 12 MR. RUNNER: Other states are lower, so 13 then I'm not going to get hit by the difference, 14 usually, in the sales tax. 15 MR. WIECKOWSKI: Right. There's no -- 16 there's no incentive for somebody to do that. Like 17 I said, there was one person that has done it, and I 18 assume that money was not an issue -- 19 MR. RUNNER: Mm-hmm. 20 MR. WIECKOWSKI: -- with that. 21 MR. RUNNER: I'm struggling with the idea 22 of why have the -- I mean, all the things that you 23 said in regards to touring California, going to 24 Disneyland, going to San Francisco, going to 25 San Diego would all apply to somebody who wanted to 26 go ahead and buy a Chevy. 27 MS. HARKEY: Isn't this connected 28 manufacture? 25 1 MR. WIECKOWSKI: It's the manufacturing. I 2 mean I guess if you went to -- I don't what Michigan 3 does. But if you went to Michigan to purchase a car 4 from the manufacturer right there, I don't -- I have 5 no idea. 6 MR. RUNNER: They don't use that model. 7 They always -- I think the -- the regular cars don't 8 have -- sell through dealers. 9 MR. WIECKOWSKI: Right. 10 MR. RUNNER: You can't buy directly through 11 a manufacturer. 12 MR. WIECKOWSKI: I mean I know that BMW and 13 Saab, when they were made in Sweden, had those 14 offers for people that you could go there and you 15 would have a 30-day -- purchase it, have 30 days to 16 drive it around, and then you could put it on a boat 17 and ship it back here and, you know, folks thought 18 that it was cheaper. 19 MR. RUNNER: Avoid all that stuff. 20 Okay. I -- I'm just trying to -- I get the 21 fact that it's a manufacturer. But I'm still 22 struggling with trying to kind of having the 23 advantage over one or the other, so -- 24 MS. MA: Mr. Horton. 25 MR. HORTON: Thank you, Madam Chair. 26 Thank you, Senator, for bringing the 27 legislation forward. Conceptually the thought of 28 individuals being able to come into California and 26 1 transact business and then leave when the intended 2 purpose is not to use the vehicle in the State of 3 California is a good concept. 4 Any thoughts to expanding it to California 5 residents and to other dealers that are in 6 California, so that they can have the same 7 advantage? A California dealer in California where 8 an individual clearly demonstrates that it's their 9 intent to drive the vehicle straight out of the 10 State of California, no incidental use, similar to 11 what happens with the exportation of a vehicle 12 abroad? Any thoughts about that? 13 MR. WIECKOWSKI: If I understand the 14 question, if somebody was a California resident but 15 they were moving to Alabama, or they were going to 16 relocate -- 17 MR. HORTON: The question is two-fold. 18 MS. HARKEY: Coming on vacation. 19 MR. HORTON: One, some California residents 20 have dual residency, and so they have a resident 21 outside of the State of California and they just 22 want a car there. And so they may purchase a car 23 here, drive it directly outside the State of 24 California immediately, and then use it only outside 25 the State of California. And that case would be the 26 situation that -- where a California resident could 27 benefit. 28 The other is you have, as some of the 27 1 Members have shared, you have dealers that are 2 located in California. I spoke with the California 3 Car Association -- Motor Car Association, and they 4 expressed concerns about it being applicable -- not 5 being applicable to their dealers as well. And so 6 providing them -- providing the California dealers 7 the same opportunity to have that exemption. 8 The functional use element of the law sort 9 of is intended when a person is going to use it for 10 purposes that is kind of pleasurable purposes. But 11 when they're using it just to ship it outside the 12 state, even though the law doesn't exempt that, I 13 mean I get that the law says if you're using it on 14 California roads and having the advantage and 15 incurring whatever expenses that may occur here on 16 California roads, then the tax is due. I understand 17 the sales tax element. There's a transaction tax. 18 I get all that. And I understand the possible 19 necessity of modifying all of these laws in order to 20 accomplish the objective. But anything is possible 21 in the Legislature these days. 22 MR. WIECKOWSKI: Yeah. I hadn't thought of 23 the example that you had said. Although my analysis 24 would be if they had a Wyoming license and they were 25 a California resident, I think under the law as 26 written they would be able to get that exemption. 27 If the fact that they had dual residency, I 28 just didn't anticipate it. 28 1 The -- the lucky thing about this bill is 2 that it does have a sunset. So -- so these examples 3 that you just raised and the effect -- I'm going to 4 be able to get some data to see how that is actually 5 affecting it. And we'll look into, you know, the 6 dealers that are selling to out-of-state residents 7 here in California, that transaction. I just 8 didn't -- 9 MR. HORTON: The other -- the other option 10 or other potential solution might be to consider 11 expanding our -- our reciprocity with all of the 50 12 states. When we have reciprocity with the various 13 states, they can actually come in, purchase it, pay 14 the tax in California, take it to the other state 15 and the -- and take an offset against the taxes. So 16 the net effect is zero on them. 17 So I can't recall where we are relative to 18 those relationships. But to expand those 19 relationships would be beneficial to California, 20 beneficial to the consumers as -- as well, so -- 21 MR. WIECKOWSKI: Yeah, right. I mean I 22 think we have the days of having many automobile 23 manufacturers in California have passed us. Maybe 24 that day will come back again. I don't know what 25 the state of the -- 26 MR. HORTON: No, the reciprocity agreement 27 is with other states. So I believe we have one with 28 Texas maybe? Help me out here. 29 1 MR. FERRIS: We have a statute that gives 2 credit to purchasers who purchase in another state, 3 and other states have similar statutes. We don't -- 4 we don't have a compact or anything like that with 5 other states. 6 MR. HORTON: Yeah. So possibly an effort 7 to -- to expand those relationships would be 8 beneficial to California manufacturers, as well as 9 California dealers. 10 MR. WIECKOWSKI: Yeah. We're -- I will 11 take a look at that, because this bill just talks 12 about the first sale. And technically, when that 13 wholesaler buys the car, that's -- that's the first 14 sale. And when they sell it to me, that's the 15 second sale, is the way that the sequencing goes. 16 So that would be an expansion of what the current 17 system is, because they do buy those cars. 18 MR. HORTON: Madam Chair, maybe possibly we 19 can work with the author to assist him in developing 20 a product that addresses all these concerns and 21 something that can accomplish its objectives. 22 MS. MA: Okay, thank you. 23 Ms. Harkey? 24 MS. HARKEY: Yeah, I -- I was under the 25 understanding -- so correct me, I could be wrong -- 26 but this was because we were trying to encourage the 27 manufacturing to stay in California. 28 MR. WIECKOWSKI: Correct. 30 1 MS. HARKEY: That's why it's sunsetted. 2 That's the purpose of it. And that it would apply 3 to any other California vehicle manufacturers who 4 also sell retail. Okay. So I don't know how many 5 of those we've got, or if we've got any. 6 I think this is very limited in its scope. 7 And the reason being is that it's kind of a little 8 pilot program. So it's not just a Tesla program. 9 It could be for -- I mean, I don't know -- whoever 10 would manufacture here and sell to people out of 11 state. 12 So I think it's -- it's a little broader 13 than we think, but it's not -- it's definitely not 14 for if you're just coming in and buying a GM car or 15 a Ford that's not manufactured here or something 16 else. I mean or -- which we'd love to see. I mean 17 I'd love to see people come here and drive around 18 California and take the car home, but that's not 19 what this bill is aimed at. 20 This is a totally just kind of a little 21 pilot program, and that's why I think the, you know, 22 the sunset is good because it will test to see how 23 we do with it, if we can encourage manufacturing in 24 this avenue. And I think that also it would make 25 the revenue loss very minimal initially, just 'til 26 we know where we're going with it. 27 So I think it's a very narrowly focused 28 bill for a -- for a purpose, just merely to try to 31 1 introduce some manufacturing in California in the 2 car area, in the vehicle area. With all the new 3 technologies that are sprouting up, I mean we could 4 have hydrogen cars and everything else. There's 5 just, there's a lot of new technology. 6 And so I -- you know, I think that anyone 7 who would qualify for this, you know, being willing 8 to manufacture and sell retail actually here in 9 California, I think, you know, this is a -- kind of 10 a good first start. 11 So I would like to support it, but I 12 don't -- I don't want to, you know, push the Board 13 if they're not comfortable. 14 MS. MA: Mr. Runner. 15 MR. RUNNER: Yeah, just a quick question in 16 regards to -- I mean what -- I think what happens 17 with this process is somebody would come into 18 California, they'd end up purchasing their car here. 19 They drive it around for a month, and then they'd go 20 ahead and register it, for instance, if they lived 21 in Arizona. 22 MS. HARKEY: Right. 23 MR. WIECKOWSKI: Correct. 24 MR. RUNNER: And at that point they would 25 pay the Arizona sales tax. 26 MR. WIECKOWSKI: Correct. 27 MR. RUNNER: So it's -- 28 MS. MA: They'd have to still pay the tax 32 1 to California first -- 2 MR. RUNNER: No. No. 3 MS. MA: -- when they first bought it. 4 MR. WIECKOWSKI: No, not under this -- 5 currently what happens is that they pay the 6 California tax, then they get reimbursed from -- you 7 know, there's a paper transaction that goes on once 8 they register their car in Arizona. But they only 9 get paid -- only get reimbursed the portion that 10 they paid in Arizona, not -- 11 MR. RUNNER: Right, if it's seven percent, 12 right. 13 MR. WIECKOWSKI: So that's the deterrent is 14 that they say, well, you know -- 15 MS. HARKEY: It's confusing. 16 MR. WIECKOWSKI: Yeah. 17 MS. HARKEY: Time-consuming. 18 MR. WIECKOWSKI: Right. And there's 19 just -- right. There's a double action that goes on 20 in California at the point of sale. 21 So this would just simply say you show the 22 proof that you're out of state, you certify you're 23 going to leave in 30 days, you don't have to pay 24 that initial California sales tax. If there's a 25 cheater, you know, we have -- 26 MR. RUNNER: The difference is, though, 27 that California, when a sale takes place now, keeps 28 that -- that -- that base, that tax. 33 1 MS. HARKEY: Right. 2 MR. WIECKOWSKI: Right. 3 MR. RUNNER: Under this scenario, 4 California wouldn't ever get that tax. 5 MR. WIECKOWSKI: Correct. 6 MR. RUNNER: Only Arizona would get that 7 tax. 8 MR. WIECKOWSKI: Right. And there are -- 9 there's nobody who's doing that in California now. 10 There's been one person that has ever done it. 11 Because the buyer, even though it's a expensive car, 12 is saying, well, I'm not going to pay California 13 taxes to take the delivery in California when I can 14 just have it shipped to Vegas and pick it up in 15 Vegas and spend the weekend in Vegas -- 16 MR. RUNNER: Right. 17 MR. WIECKOWSKI: -- and drive it to 18 Arizona, or have it shipped to Arizona. 19 I mean in the state -- in Texas example, 20 since Texas won't even allow the shipment of the 21 cars there -- 22 MR. RUNNER: Right. 23 MR. WIECKOWSKI: -- then they just go to 24 some other state. 25 MR. RUNNER: Right. 26 MR. WIECKOWSKI: And the other state -- 27 MR. RUNNER: But eventually the state -- I 28 would assume eventually Texas gets that tax when 34 1 they drive that car into Texas. 2 MR. WIECKOWSKI: Correct. Absolutely. 3 MR. RUNNER: And then they register it. 4 MR. WIECKOWSKI: Right. 5 Mr. RUNNER: And then Texas gets that 6 tax. 7 MR. WIECKOWSKI: Right. So my perspective 8 is that we're getting -- we're getting a hundred 9 percent of nothing right now under the current 10 regime. And the idea is that let's do it for three 11 years -- 12 MR. RUNNER: Help me understand that, a 13 hundred percent of nothing. Aren't we getting the 14 sales tax right now? 15 MR. WIECKOWSKI: There's nobody buying it. 16 There's nobody actually coming to California -- 17 MR. RUNNER: Oh, I see. 18 MR. WIECKOWSKI: -- and buying the car. 19 One person has done it in the five years that Tesla, 20 or whatever, when they were -- even when they were 21 doing the model cars -- 22 MR. RUNNER: Mm-hmm. 23 MR. WIECKOWSKI: -- nobody would come in 24 and take -- and do the transaction here. 25 Californians would. Okay, that's a different thing 26 because we live here. But nobody from out of the 27 country or out of the state would come in and do it. 28 So, that's -- the concept here is let's do 35 1 it for three years, or whatever the sunset is, 2 and -- and see if there -- 3 MR. RUNNER: Have any car dealers taken a 4 position on this bill? 5 MR. WIECKOWSKI: No, no position. 6 MR. RUNNER: No position. 7 MR. WIECKOWSKI: Yeah. I don't know if 8 it's that much action for them. 9 MR. RUNNER: Well, sometimes it's the 10 action, sometimes it's the precedent. 11 MR. WIECKOWSKI: Right. Well, no, I mean 12 and that's why we -- 13 MR. RUNNER: Okay. 14 MR. WIECKOWSKI: -- set it up as a sunset, 15 to say, okay, let's see what happens here. 16 MR. RUNNER: Okay. 17 MS. MA: Okay, Mr. Horton. 18 MR. HORTON: The -- the -- the other thing 19 I would encourage staff to sort of take a look at is 20 the Cutler case and the constitutional provisions of 21 providing one, an out-of-state resident, something 22 different than what the California residents has. 23 And we just went through that process where, in the 24 Cutler case, it was deemed to be unconstitutional to 25 do that. 26 And then, of course, the provisions of just 27 shipping -- shipping the vehicle outside the state. 28 I mean we have existing laws that allow them to -- I 36 1 think it's a law. Cindy -- Cindy Montañez, as I 2 recall, passed a bill that allows a dealer or 3 manufacturers to let a person drive a car for a few 4 days, as a test drive, to see if they like it, take 5 it back to the dealer and the dealer could ship it 6 outside the state. Presuming that a sale wasn't 7 consummated in that process. Just another law. 8 MS. MA: So I'm hearing there's a lot of 9 questions and not unanimous support at this moment. 10 So, perhaps we can get a little more data and drill 11 down and see whether this is a real problem. And 12 maybe the statistics are there in terms of how many 13 cars are actually getting shipped out of state. 14 MR. WIECKOWSKI: Yeah. There has been no 15 formal opposition that I know of -- 16 MS. MA: Okay. 17 MR. WIECKOWSKI: -- to the bill. 18 MS. MA: Okay. 19 MR. WIECKOWSKI: But I'll leave it at 20 that. 21 MS. HARKEY: I encourage you to continue. 22 We just get more -- a little more information. 23 MS. MA: Yeah. 24 MR. WIECKOWSKI: Okay. 25 MS. MA: So maybe we'll have you back, or 26 Mr. Greaves will come back at a future meeting. 27 MR. WIECKOWSKI: Thank you very much. 28 MS. MA: Okay. Thank you, Senator. 37 1 Okay. Our next bill will be AB 1858. 2 MS. PIELSTICKER: Okay. AB 1858 is by 3 Assemblymember Santiago. It relates to an 4 Unlicensed Auto Dismantling Task Force, and it is 5 sponsored by Board Member Horton. 6 Under existing law, auto dismantlers must 7 be licensed with the DMV to have an established 8 place of business. And to obtain an auto dismantler 9 license, the applicant must provide a seller's 10 permit number from the BOE, among other things. 11 A licensed auto dismantler is presumed to 12 be making a retail sale unless the seller has a 13 resale certificate from a licensed dealer, 14 dismantler, automotive repair dealer, or scrap 15 dismantling industry. 16 The Revenue Recovery and Collaborative 17 Enforcement Team, which includes the BOE, FTB, EDD, 18 and the Department of Justice, work cooperatively to 19 pursue criminal tax evasion resulting from 20 underground economic activities that evade state 21 taxation. And the Joint Enforcement Strike Force 22 and the Labor Enforcement Task Force focus on 23 non-compliance related to labor in the underground 24 economy. BOE is an active member of these two task 25 forces. 26 Under the proposed law, the DMV would be 27 required to establish the unlicensed automobile 28 dismantling task force, which includes 38 1 representatives from the BOE and CalEPA. The task 2 force would be required to collaborate to 3 investigate underground unlicensed auto dismantling 4 that violates the law, resulting in tax evasion and 5 environmental damage. And this also requires a 6 report to the Legislature regarding the number of 7 leads and complaints generated by the task force and 8 recommendations for statutory and regulatory changes 9 to further enforcement. And it sunsets January 1 of 10 2019. 11 There's no direct revenue impact. But to 12 the extent it addresses tax evasion, there may be 13 some positive state and local revenue impact. 14 MS. MA: Okay. Thank you. 15 The speakers I have is Mr. Gavin McHugh and 16 Mr. Rob Dumas from the State of California Auto 17 Dismantlers Association, as well as Marilyn -- I'm 18 sorry, I can't read it -- Limon? 19 MS. LIMON: Yes. 20 MS. MA: Limon, Leg. Aide for 21 Assemblymember Santiago. 22 So perhaps we'll start with you. 23 ---oOo--- 24 MARILYN LIMON 25 ---oOo--- 26 MS. LIMON: Okay. Okay. Hi. Thank you. 27 And on behalf of the Assemblymember, I'm here to 28 request your support for this important bill that 39 1 really will make a difference and is really close to 2 home for the Assemblymember. 3 So, with that said, I'll pass it over to 4 Gavin. 5 ---oOo--- 6 GAVIN McHUGH 7 ---oOo--- 8 MR. McHUGH: Madam Chair and Members, Gavin 9 McHugh on behalf of the State of California Auto 10 Dismantlers Association. 11 First, we'd really like to thank the Board 12 and staff for all the good work and help you've 13 provided over the years to us and trying to address 14 this ongoing problem of unlicensed and unregulated 15 activity in this area. You've always been receptive 16 and open to help in our suggestions. 17 Unfortunately, the reason we're back today 18 is this problem of unlicensed, unregulated 19 dismantlers is continuing to grow and worsen. We're 20 now losing about 40 licensed auto dismantlers a year 21 in California, which is a very troubling trend. So 22 we've basically decided to approach the Legislature, 23 and Mr. Santiago has agreed to take on this issue of 24 a task force to get sort of the multi-agency 25 attention that we think this issue addresses. 26 We believe approximately -- and this is a 27 very conservative estimate -- but we think 28 approximately 360,000 end-of-life vehicles are now 40 1 going into the underground economy every year in 2 California. There's a lot of consequences with that 3 as it relates to environmental damage, unsafe work 4 places. A lot of this is occurring in underserved 5 communities in California, as well as a 6 significant -- and we're going to talk a little bit 7 about this in a second -- the significant 8 uncollected tax in the state that is also creating 9 this growing advantage for these bad actors. 10 The task force is made up of basically 11 three entities. DMV would be the lead because we 12 are licensed through them occupationally. BOE, 13 obviously, has a role because of the tax 14 implications. And them CalEPA is an important part 15 of this as well because under their umbrella there 16 are four departments and boards there that regulate, 17 actively regulate licensed dismantlers: 18 First being the State Water Board where we 19 have our storm water permit. It's a very costly but 20 important regulation that we're required to -- to 21 have through our storm water permit; 22 Then there's the Department of Toxic 23 Substances Control where we have to have our 24 hazardous materials business plan for all the 25 hazardous wastes and materials we process from 26 end-of-life vehicles; 27 And, of course, the Air Resources Board as 28 it relates to catalytic converters and what has to 41 1 be done with them at the end of their life, as well 2 as freon which is a highly volatile greenhouse gas, 3 and the regulation and the requirements we have 4 around that; 5 And then, of course, Cal Recycle that 6 handles tires. 7 The issue here is that all of these 8 requirements have a lot of costs associated with 9 them. And what you'll have is a unlicensed 10 dismantler who's essentially doing the same thing 11 that Ron Dumas does, who's a licensed dismantler, 12 but has none of the cost. So they have a very huge 13 incentive to go to the underground economy. 14 We have a growing coalition of support for 15 this measure that includes local law enforcement, 16 the industry supporting it, local government, and 17 then now we're seeing a lot of support from the 18 environmental community who are recognizing the 19 impacts to the public health and so forth. 20 So, with that, let me pass it over to Ron 21 here who is a licensed dismantler in Roseville and 22 can speak to some of the tax issues and how he sees 23 this impacting his business. 24 Thank you. 25 ---oOo--- 26 RON DUMAS 27 ---oOo--- 28 MR. DUMAS: Hi. Thank you. 42 1 MS. MA: Welcome. 2 MR. DUMAS: Hopefully you can hear me 3 okay. 4 I'm here hopefully explaining anything you 5 may not understand about our industry and what we're 6 going through. But the effects are, right now, as 7 Gavin pointed out, we're losing what was already a 8 small number of dismantlers, we're losing 9 approximately 40 a year. And this has been 10 increasing over the last few years. And it won't be 11 long before the last remaining, especially 12 independent dismantlers, aren't going to be able to 13 afford to operate in this state. 14 And the real -- the issues Gavin was 15 talking about regulations have a significant impact 16 on our ability to compete with the unlicensed who 17 not only have the benefit of not paying the costs of 18 the regulation that we have to pay for, but they get 19 the added advantage of being able to sell their 20 goods and they're not collecting sales tax in many 21 or most cases. For myself, my business, probably 22 average for the independent business, we collected 23 and submitted over a hundred thousand dollars last 24 year in sales tax. 25 And what we're estimating, which is part of 26 the bill, is that we believe that the State of 27 California is losing maybe north of a hundred 28 million a year in lost revenue that could be 43 1 collected, or at least pushed back to the licensed 2 community where it would be collected if some of 3 these enforcement suggestions would be to take 4 place. 5 So, with that, I do thank you for your time 6 today. And I -- if there's any questions, I'd be 7 happy to try to answer them. 8 MS. MA: Yeah. And maybe you can just 9 explain a little bit about your business. Like, who 10 brings in a car? What do you do with it? What kind 11 of fees? How do you pay them? Or how do you 12 register with these agencies? 13 MR. DUMAS: Okay. I guess starting with 14 the registration first, becoming DMV-licensed. It's 15 nearly impossible today to get a dismantler's 16 license, due to the high cost and the fact that most 17 communities, like other businesses sort of like 18 ours, they don't want them in their neighborhood. 19 So it's very difficult and costly. 20 And so to get a license like I have today, 21 I would never get it in the City of Roseville, 22 probably Placer County, and Sacramento County's 23 increasingly difficult. So these auto dismantlers 24 are going to tend to be in low-income areas where 25 there's the least opportunity for the communities to 26 properly enforce what might be going on anyway, even 27 with a licensed community. 28 So, as we're dealing with the regulation 44 1 and what we're -- the way we get our vehicles in is 2 going to be we may buy them from you, as your car 3 just -- it fails on you. There's an opportunity for 4 us to buy that car from you. 5 We'll buy from auctions. We'll buy from 6 dealers, sometimes tow yards. So any of the 7 vehicles -- end-of-life vehicle that we deal with, 8 it can be end-of-life. It could be a brand new car; 9 a lot of times those will go in auction when it's 10 been damaged beyond the point of being able to 11 repair it economically. 12 Did that answer -- 13 MS. MA: Yeah. So then it comes into your 14 yard, and then what do you do? You totally take it 15 apart? 16 MR. DUMAS: Yeah, well -- 17 MS. MA: And then sell certain things, or 18 you have to recycle other parts? 19 MR. DUMAS: We do all of that. The 20 environmental benefit of having licensed regulated 21 auto dismantlers is the fact that one thing right 22 off the top, as you mentioned, we recycle and we 23 reuse. 24 So we allow the reuse of parts that 25 prevents the need for manufacturing and also helps 26 protect the environment the way that resources don't 27 have to be -- we don't have to go and dig more ore 28 up. 45 1 So there's -- the automobile is recycled up 2 to 95 percent of the vehicle's weight is reused 3 again, over and over again. So there's a recycling 4 side of what we do. 5 The other aspect you asked about was parts. 6 So we sell parts to the community, and those parts 7 are removed from the cars. As, in the process of 8 doing that, one of the first steps of removing the 9 parts from the vehicle is for us to de-polute the 10 car. And that's removing all the things that Gavin 11 was talking about: It's oil, tire, freon, brake 12 fluid, all the things that can be a hazard to the 13 environment. We have to document what happens to 14 all these items. We have to manifest it, make sure 15 it's shipped properly, pay for those, pay for the 16 disposal of tires and things like that. So there's 17 all those impacts that we are closely held to do. 18 The purchasing of vehicles, even through 19 the Department of Motor Vehicles, the disadvantage 20 that we have as a licensed entity is we have a 21 waiting period from when we buy a car. So when we 22 buy a car, it can take us up to 10 days to actually 23 begin any process on that vehicle. The unlicensed 24 community can virtually start the minute they get 25 the car, before they get the car, begin making 26 transactions where they -- where they sell their 27 parts on craigslist and eBay. 28 MS. MA: Yeah. Kind of like the 46 1 pawnbrokers. You have to hold it for a certain 2 amount of time, make sure it isn't stolen, right? 3 MR. DUMAS: Right. Exactly. 4 MS. MA: Before you can actually take 5 possession and use it? 6 MR. DUMAS: We actually have to document 7 the arrival, that we have the car, and wait for 8 DMV's process to catch up with the fact that we have 9 that car. 10 MS. MA: So my question is, so this task 11 force is needed to document, figure it out, bring 12 people together? I mean, I know we've been trying 13 to tackle this industry for many years. Why do you 14 think this idea is going to work? 15 MR. McHUGH: Well, you know, we've done a 16 lot of sort of one-offs. We've had a lot of 17 meetings with the different agencies. You folks 18 tried to address this. It helped with the Tax Gap 19 legislation at the insurance auctions, which helped. 20 We've met with the directors of these 21 agencies, chairs of these boards. Everyone agrees 22 it's a problem, and they don't challenge us on our 23 data or the issue. 24 We think, because of the complexity of this 25 problem, the size of the problem, we need to bring 26 sort of a joint effort together where the right 27 folks can get in the room, identify the problem, 28 share information, and then go forward with actual 47 1 enforcement. And through that, learn what needs to 2 be done or changed in the law to make it work. 3 So essentially they're going to spend a 4 year actually doing enforcement -- that's the way we 5 believe the law's crafted -- and then come back with 6 recommendations. I mean, they may determine that 7 it's not a problem. We don't think that'll happen, 8 but I mean they have the ability to do that. But we 9 just think that it's time to get everyone in the 10 room, all the regulatory agencies that regulate, 11 inspect, audit his business, that are responsible 12 for all these materials, this regulatory 13 requirement, to work together. We think it'll be a 14 success. 15 MS. MA: Is there a cost estimate to this, 16 creating this task force? 17 MS. PIELSTICKER: We have identified that 18 the cost is absorbable. 19 MS. MA: I'm just wondering, do we normally 20 pass legislation and create these type of task 21 force? I mean I'm wondering why can't the agencies 22 just decide that this is important and allocate 23 people to work on it, versus going through the 24 legislative process? 25 MR. HORTON: Do you want history on it? 26 MR. RUNNER: I can share -- 27 MS. MA: Sure. I mean without creating, 28 you know -- 48 1 MR. RUNNER: I -- I -- I agree. The 2 problem is that oftentimes getting these agencies to 3 cooperate, they need then to have -- 4 MS. MA: Legislation. 5 MR. RUNNER: -- direction from the -- from 6 the Legislature. And the challenge will be, I would 7 assume, will be getting the Governor to agree -- 8 MR. McHUGH: Yes. 9 MR. RUNNER: -- if this comes to his desk, 10 without saying, well, why can't they do this on 11 their own? When indeed oftentimes it takes a 12 prodding from the Legislature to actually get these 13 agencies. 14 I'd agree. Wish we could all call up 15 together and have a meeting. Unfortunately, it 16 doesn't work. I don't -- sometimes it doesn't work 17 that way. 18 MS. MA: Mr. Horton. 19 MR. HORTON: Yeah, Madam Chair, the 20 unfortunate reality that we face in many cases, in 21 order for agencies to collaborate, it requires 22 legislation. And in some cases it requires 23 Memorandums of Understanding. 24 Historically, this dates back, the 25 formation of these tasks force for the Board of 26 Equalization dates back to almost 30 years when we 27 formed the first Joint Enforcement Task Force to 28 deal with the diesel fuel criminal -- loss of funds 49 1 in the diesel fuel areas, as well as the issue in 2 the underground economy. 3 This is probably one of the most regulated 4 industries in the nation. As a result, it becomes 5 ripe for criminals because criminals can avoid the 6 regulations, they can avoid the taxes, and all of a 7 sudden their profit margin, whereas the legitimate 8 operator will have a small profit margin, if you 9 don't pay your taxes and you don't comply with the 10 regulatory provisions, you don't comply with the 11 environmental provisions, then all of a sudden you 12 quatripled (verbatim) your profit margin. 13 The down-side is -- the down-side to this 14 element of greed, if you will, and manipulation that 15 occurs is that it affects the environment directly 16 because they're not complying with the environmental 17 protection requirements, they're not complying with 18 the tax law. 19 And -- and so, Mr. Runner's absolutely 20 correct. When we did the legislation, I think a 21 couple years ago, to establish the TRaCE program, we 22 went through the same challenge with the Governor 23 about the necessity exists. I think everyone 24 acknowledged that the necessity exists, that the 25 agencies are not collaborating, they're not working 26 together. And so the necessity for such a task 27 force exists, but the thoughts were at the time that 28 we could kind of merge that into the existing task 50 1 force and why create a new task force. 2 We were able to explain to the Governor 3 that the existing task force deals primarily with 4 labor violations, whereas sales tax violations are 5 something unique and you need the authority of the 6 Board of Equalization and the taxing agencies to be 7 involved. 8 The unique -- the uniqueness about this 9 task force is that it has more of an environmental 10 protection component, which TRaCE doesn't deal with. 11 But based on the studies that we've done here at the 12 Board of Equalization, which is another -- which is 13 a concern about the revenue estimates, I believe 14 there should be a revenue increase to the State of 15 California given the estimate by the industry of a 16 loss of a hundred million dollars. Ten percent 17 recapture of that is -- is -- is a revenue increase. 18 And historically, every task force has 19 proven to be successful over the last 30 years. In 20 particularly, RaCE and TRaCE, current task force 21 operated by the Board of Equalization, are extremely 22 successful in generating revenue for the -- for the 23 State of California. 24 So, the other concern, Members, is as 25 the -- as the representatives articulated, many of 26 these dismantlers are located in minority 27 communities. So it's more of an environmental 28 justice issue where it's affecting those 51 1 communities, the contamination that exists by 2 individuals not complying with these laws. So it's 3 a huge issue. 4 So the $9 billion that we estimate we're 5 losing to the underground economy, this is only a 6 fraction of it that I believe this task force, 7 partnering with and working with the other task 8 force, once they get to that level where they've 9 accumulated the information, they've established the 10 ability to collaborate and they've shared 11 information, and then I believe collaborating with 12 TRaCE, the existing Board of Equalization, to have 13 that enforcement component will prove to be 14 extremely valuable to the State of California. 15 Lastly, this may be one of the dying 16 industries, manufacturing industries in California, 17 you know, because -- 18 MS. HARKEY: Dismantling. 19 MR. HORTON: Yeah. In fact, I mean it's 20 kind of sad that we say this. This is one of 21 California's manufacturing industries because you're 22 actually recycling used parts, and you're assembling 23 them, and you're distributing them, and you're 24 selling them. So we need to preserve that 25 industry. 26 MS. MA: Ms. Stowers. 27 MS. STOWERS: Just one question. I 28 appreciate you explaining the difference between 52 1 TRaCE and RaCE because I was wondering why not go 2 right to them. 3 If the task force is established, would 4 they be going after criminal charges or just regular 5 unpaid tax penalties or violations of the 6 regulations? 7 MR. HORTON: All of these. The greed that 8 exists and the manipulation that exists is an 9 unfortunate part about tax evasion at this level. 10 They don't stop at sales tax. They violate, 11 criminally violate the environmental laws. They 12 criminally violate the tire assessment fees. 13 There's a loss of tire fees, a loss of sales tax, 14 loss of property taxes. So when you begin to add 15 these all up, it begins to approach, very rapidly, 16 the criminal component requirements. And so these 17 would be criminals that the agency would be going 18 after. 19 The initial step, though, is to -- is to 20 establish the collaboration and to begin to gather 21 the information. The thought is to approach this 22 from an intellectual perspective so that we 23 intellectually can deal with and identify what the 24 problem is. And then you're able to articulate to 25 the Legislature what the exact needs are. 26 There's quantitative data that exists that 27 supports that this is a huge problem. And there's 28 empirical data as well. But I think the, uh -- the 53 1 appropriate step that the industry is taking is to 2 form the task force and then to begin to go after 3 the criminals afterwards. 4 But as I shared earlier, I believe the 5 criminal investigation would probably be elevated to 6 TRaCE and probably be elevated to another component 7 within the Board of Equalization, Internal Revenue, 8 Franchise Tax Board, Environmental Justice and the 9 other 30 agencies that are impacted by this. 10 MS. MA: So I appreciate your explanation. 11 You know, I think another big issue that 12 I've heard is the used car dealers. Not the used 13 car dealers that are connected with the new car 14 dealers in terms of licensing and getting the taxes, 15 but the independent ones that are in the community, 16 not actually registering. 17 And so, from what I'm hearing from you, in 18 order to get people to work together, we kind of 19 need a task force -- 20 MR. HORTON: Unfortunately. 21 MS. MA: -- to bring people together, 22 similar to this, to tackle this problem. Because I 23 think it is an issue and, you know, the agencies 24 aren't working together necessarily to actually put 25 resources and priorities to this. 26 MR. HORTON: Yes. 27 MS. MA: So I appreciate this explanation 28 because I didn't -- I've been trying to work with it 54 1 on the outside, but it hasn't gone anywhere. So 2 maybe the task force is where I need to look into. 3 Ms. Harkey. 4 MS. HARKEY: I'll make a motion to support 5 the bill. 6 MR. RUNNER: Second. 7 MS. MA: I guess there -- there's support 8 and there's sponsor. 9 MR. HORTON: Sponsor. 10 MS. MA: Sponsor is a little stronger. 11 MS. HARKEY: Sponsor. 12 MR. RUNNER: I will sponsor. 13 MS. HARKEY: We can say sponsor. 14 MS. MA: Everyone sponsor? Okay. 15 Ms. Harkey made a motion to sponsor. Mr. 16 Horton seconded -- 17 Ms. Stowers seconded. 18 MS. STOWERS: I'll second. 19 MS. MA: Okay. Without objection, our 20 Board will actually sponsor this bill. 21 MR. McHUGH: Thank you very much. 22 MS. MA: So let us know how we can be 23 helpful. 24 MS. LIMON: Thank you. 25 MS. MA: Thank you. 26 MR. DUMAS: Thank you very much. 27 MS. MA: Okay. Our next bill is AB 2518. 28 MS. PIELSTICKER: AB 2518 is by 55 1 Assemblymember Gomez, and it involves a sales tax 2 exemption for low-income housing charities. 3 Existing law imposes a sales tax on all 4 retailers for the privilege of selling tangible 5 personal property at retail in the state, or the use 6 tax on the storage, use, or other consumption in the 7 state of tangible personal property purchased from a 8 retailer. It does not provide an exemption or 9 exclusion for the sales and purchases of building 10 materials, supplies, equipment, or machinery to be 11 used for the construction of homes sold to 12 low-income households. 13 Under this proposed law, we would exempt 14 from the state sales and use tax of the sale to or 15 purchase by a qualified nonprofit of building and 16 construction supplies, materials, equipment, and 17 machinery, including parts purchased for use by a 18 nonprofit corporation or construction of properties 19 that are sold to low-income families. 20 To be eligible, a nonprofit corporation 21 must be exempt from paying federal income tax under 22 section 501(c)(3) of the Internal Revenue Code. And 23 additionally, the nonprofit must qualify under 24 section 214.5 of the Revenue and Taxation Code as a 25 corporation organized and operated for the specific 26 and primary purpose of building and rehabilitating 27 single- or multi-family residences for sale at cost 28 to low-income families with financing in the form of 56 1 a zero-interest-rate loan and without regard to 2 religion, race, national origin, or gender, the head 3 of the household. 4 The revenue impact of this proposal would 5 be an annual General Fund revenue loss of $87,000. 6 And a cost estimate is pending. 7 MS. MA: Thank you. 8 We'd like to welcome Annabel Snider, 9 Legislative Director for Assemblymember Jimmy Gomez, 10 as well as Nicole Wordelman, representing Habitat 11 for Humanity. 12 ---oOo--- 13 ANNABEL SNIDER 14 ---oOo--- 15 MS. SNIDER: Thank you. 16 Is this on? 17 MS. MA: Yes. 18 MS. SNIDER: So, thank you for allowing me 19 to speak today on behalf of Assemblymember Gomez. 20 We are asking for your support of AB 2518 21 which would provide a state sales and use tax 22 exemption for building and construction supplies, 23 materials, equipment, and machinery purchased by a 24 nonprofit corporation for construction of property 25 sold to low-income families. 26 As you already know, California is one of 27 the most expensive places to live. Approximately 28 95 million American families suffer from housing 57 1 problems, including high cost burdens, overcrowding, 2 and homelessness. One in three households spends 3 more than 30 percent of their income on housing, and 4 one in seven spends more than 50 percent. 5 Local governments deal with overcrowding 6 and congestion. Employers struggle to attract and 7 retain the labor force that is so vital to their 8 bottom line. Low- to moderate-income working 9 families work longer hours, endure longer commutes, 10 or cut back on basic necessities in order to pay for 11 housing. 12 Affordable home ownership helps families, 13 builds wealth, and strengthens communities by 14 providing substantial economic benefits to the home 15 owner, family, their neighborhood, and the economy. 16 Several studies have shown potential 17 benefits of home ownership to be better education 18 outcomes for children, lower community crime rates, 19 less welfare dependency among households, more 20 household participation in civic affairs and, 21 finally, better household health. 22 This is the Assemblymember's goal to 23 increase construction of affordable housing in 24 California. AB 2518 is a modest step toward this 25 goal. 26 Thank you for this opportunity. We look 27 forward to this discussion today. 28 And here with me today is Nicole Wordelman 58 1 who is a Legislative advocate for Habitat for 2 Humanity, who is in support of the bill. 3 Thank you. 4 MS. MA: Thank you, Nicole. 5 ---oOo--- 6 NICOLE WORDELMAN 7 ---oOo--- 8 MS. WORDELMAN: Nicole Wordelman on behalf 9 of Habitat for Humanity. 10 First, I wanted to thank very much the 11 staff for the analysis. I know they had to work 12 hard on it with all the numbers. 13 Habitat for Humanity of California has 45 14 affiliates, more than 50,000 volunteers that build, 15 renovate, and repair more than 600 housing units 16 every year. 17 One of Habitat's biggest challenges right 18 now is that we don't have a dedicated funding source 19 in California for home ownership for low-income 20 people. And AB 2518 will help Habitat to be able to 21 build, renovate, and increase the number of houses 22 and home ownership for long-term housing stability 23 for low-income people. 24 MS. MA: Thank you, Members. 25 Mr. Runner. 26 MR. RUNNER: Yeah. Just a quick question. 27 Is this a partial tax exemption? 28 MS. PIELSTICKER: Correct. 59 1 MR. RUNNER: So this is does not include 2 the local portion? Is that what this -- 3 MS. WORDELMAN: That's correct. 4 MS. PIELSTICKER: That's correct. 5 MR. RUNNER: I just find it interesting 6 that, again, the local folks are the ones that 7 actually help make these projects successful and -- 8 and -- and actually have the greatest benefit by 9 having these homes, and whether it's Habitat for 10 Humanity or whatever, come in. I know, at least in 11 my communities where they're engaged that 12 communities are very engaged. 13 You know, I just find it kind of 14 interesting that they're not willing -- at least the 15 bill isn't willing to have them use their portion of 16 the sales tax to help support that. So I don't know 17 if you've had discussions with local governments? 18 MS. SNIDER: Not -- not yet. But we can 19 definitely. 20 MR. RUNNER: You could do that? 21 I would -- I mean, again, I think it's -- 22 and I think the project's right. I think it's a 23 good thing. And I would hope that the local 24 governments would be as supportive of this 25 process. 26 MS. SNIDER: Right. 27 MR. RUNNER: Because they are the -- they 28 really are directly benefited. And these projects 60 1 only happen successfully when the local governments 2 are engaged with other kinds of waivers and fees and 3 things like that that are part of it. 4 MS. SNIDER: Thank you. 5 MR. RUNNER: Thanks. 6 MS. MA: Ms. Harkey. 7 MS. HARKEY: I think the reason the local 8 government isn't part of this bill is that's a whole 9 separate administration, trying to get all of them 10 on board, either through League or their separate 11 organizations. 12 MR. RUNNER: Yeah. 13 MS. HARKEY: So, I, you know -- or 14 county-by-county. 15 MS. SNIDER: Sure. 16 MS. HARKEY: You know. So I think this is 17 like a first step. And maybe the next bill could be 18 conformity with state law regarding -- you know, I 19 mean a conformity bill for locals that might be a 20 little bit easier for them to, uh -- to accept. But 21 I think that it's a good effort, and I appreciate 22 what you're doing. 23 Thank you. 24 MS. MA: Ms. Stowers. 25 MS. STOWERS: Yes, thank you. 26 I also agree. I think it's the right step 27 in the right direction. 28 Does it have a sunset date? 61 1 MS. SNIDER: No, it does not. 2 MS. STOWERS: This, too, is a tax 3 expenditure. And I think it's a great one, but I 4 would like to see some type of look-back measurement 5 to see how effective it was. 6 MS. HARKEY: Yeah, I would, too. 7 MS. SNIDER: Okay. We can definitely 8 discuss that with the Assemblymember, too, yes. 9 MS. MA: Mr. Horton. 10 MR. HORTON: Thank you, Madam Chair. 11 This is an exceptional bill. I'm glad to 12 see it come forward. The challenge California has 13 is the price of homes are rising rather rapidly. We 14 are approaching the recession level prices of homes. 15 In Los Angeles the average median home is around 16 $473,000. San Francisco, $1.2 million. And the 17 reality that we face in California is 70 percent of 18 our residents can't afford to buy the average home. 19 And so I think all the economists are 20 projecting that in order for California to -- one of 21 the steps that California has to take in order to 22 avoid a recession is to be able to create at least a 23 million new affordable homes for -- for those who 24 can't afford it. 25 And the face of poverty, poverty has 26 changed. It's not the seniors and uneducated. 27 These are college graduates that can't afford to 28 purchase a home. Arguably, everyone in this room 62 1 wouldn't be able to buy their home at the current 2 purchase price, selling price of their home. 3 And so it's a challenge that we face. It's 4 an inexpensive way to -- to begin to meet those 5 challenges, and I would move that we support the 6 bill. 7 MS. MA: Okay. Mr. Horton moves. 8 MS. STOWERS: Second. 9 MS. MA: Ms. Stowers seconds. 10 Without objection. 11 MR. HORTON: Given -- given the caveat -- 12 my apologies, but given the caveat -- 13 MS. STOWERS: Sunset. 14 MR. HORTON: -- sunset date and that they 15 entertain the local tax as requested by Member 16 Runner. 17 MS. MA: Okay. 18 MS. SNIDER: And we made a note of both of 19 those. 20 MS. MA: Okay, great. 21 MS. SNIDER: Yes. 22 MS. MA: Thank you so much. 23 MS. SNIDER: Thank you. 24 MS. MA: Okay, so motion carries. 25 Next, Ms. Pielsticker, is AB 2570. 26 MS. PIELSTICKER: AB 2570 is by 27 Assemblymember Quirk. It is cleanup to the property 28 tax requirement that the Public Utilities Commission 63 1 send their audit reports to the BOE. 2 Under existing law, the PUC is required to 3 inspect and audit the books and records of public 4 utilities for regulatory and tax purposes. And 5 existing law specifies that audits conducted in 6 connection with rate proceedings fulfill the audit 7 requirement. 8 Existing law requires the PUC to furnish 9 these audit reports to the BOE for use in the 10 assessment of public utilities. 11 The proposed law would, until January 2nd, 12 2017, delete the requirement that the PUC furnish 13 its audit reports to the BOE. 14 The BOE has actually not accepted these 15 audit reports for many years and finds them to have 16 no value in the assessment of public utilities. And 17 the State Auditor also recommended that this 18 provision be deleted as, by not furnishing the 19 reports, the PUC is out of compliance with the 20 statute. 21 MS. MA: Okay. Thank you. 22 Mr. Brady Borcherding, Legislative Aide for 23 Assemblymember Bill Quirk. Welcome. 24 ---oOo--- 25 BRADY BORCHERDING 26 ---oOo--- 27 MR. BORCHERDING: Thank you. Good morning, 28 Madam Chair and Board Members. I'm here this 64 1 morning on behalf of Assemblymember Quirk to present 2 AB 2570 for your consideration to support. 3 Existing law requires -- well, first, 4 AB 2570 responds to a 2013 report by the California 5 State Auditor, the recommended repealing the CPUC's 6 requirement to transmit audit reports to the Board 7 of Equalization. 8 Existing law requires the CPUC to inspect 9 and audit the books and records for regulatory or 10 tax purposes of a utility serving over 1,000 11 customers at least once every three years and to 12 provide the inspections and audits to the BOE for 13 the BOE's use in the assessment of public utilities. 14 However, the State Auditor found that the CPUC has 15 not always complied with the requirement to audit 16 utility's books and records according to the 17 schedule prescribed by state law or on a schedule 18 that is at all beneficial to the Board of 19 Equalization. And for over three decades it has not 20 provided the results of these audits to the 21 California State Board of Equalization for tax 22 assessment purposes as required by law. 23 As such, the audit recommended eliminating 24 the CPUC's requirement to produce and transmit these 25 reports to the BOE. 26 MS. HARKEY: Nobody's doing it. 27 MR. BORCHERDING: Assemblymember Quirk 28 agrees with the Auditor in repealing these 65 1 requirements. 2 By repealing the requirement for these 3 inspections -- 4 MS. MA: Thank you. 5 So we have a motion -- 6 MR. BORCHERDING: Thank you. 7 MS. MA: -- by Ms. Harkey, a second by Mr. 8 Runner, to move this bill, support by the BOE. 9 Thank you very much for coming -- 10 MR. BORCHERDING: Thank you so much. 11 MS. MA: -- and your time today. 12 MS. HARKEY: It is an embarrassing 13 disclosure, 30 years nobody's been doing it. We're 14 just catching up. 15 MS. MA: The next bill will -- for 16 discussion only, will be AB -- sorry, SB 987, by 17 Senator McGuire. 18 I see that Mr. McGuire's Leg. Chief of 19 Staff just showed up, Mr. Jason Liles. 20 MR. LILES: Thank you. 21 MS. MA: So we're going to have Ms. 22 Pielsticker read the bill first and then have you 23 present. 24 MR. LILES: Thank you, Chairwoman. 25 MS. MA: Thank you. 26 MS. PIELSTICKER: Thank you. SB 987 by 27 Senator McGuire relates to a marijuana value tax. 28 Existing law imposes the sales tax on all 66 1 retailers for the privilege of selling tangible 2 personal property at retail or the use tax on the 3 storage, use, or consumption -- pardon me -- in the 4 state of tangible personal property purchased from a 5 retailer. 6 Because medical marijuana is tangible 7 personal property that is not otherwise exempt, it 8 is subject to the sales and use tax. Under the 9 proposed law, commencing January 1, 2018, we would 10 impose -- pardon me -- a 15 percent tax on medical 11 marijuana purchased from a retailer of medical 12 marijuana. 13 Revenues are allocated as follows: 14 Thirty percent to the General Fund; 15 Thirty percent to the Bureau of Medical 16 Marijuana Regulation for Grant Program 17 Administration to distribute grants to local 18 agencies that oversee the regulation of cultivating, 19 processing, manufacturing, distributing, and selling 20 medical marijuana upon appropriation; 21 Twenty percent to the Department of Parks 22 and Rec. for base state park operations upon 23 appropriation by the Legislature; 24 Ten percent to County and City Human 25 Service Departments for drug and alcohol treatment 26 programs, which are distributed based on population 27 upon appropriation by the Legislature; 28 And ten percent to the California National 67 1 Resources Agency for restoration or remediation of 2 public and private lands and watersheds damaged by 3 medical marijuana cultivation, including lands 4 affected by medical marijuana cultivation before the 5 operative date of the section, upon appropriation. 6 The revenue impact of this proposal, 7 assuming 100 percent compliance, is annual revenue 8 of $251 million. And, of course, that would need to 9 be adjusted based on actual compliance. 10 The cost impact to the BOE would be 11 $3.1 million for fiscal year 2016-'17, 5.4 million 12 for fiscal year '17-'18, 5.1 million for fiscal year 13 '18-'19 and 4.8 million for 2019 to '20 and 14 ongoing. 15 MS. MA: I'm sorry. This was the cost of 16 the BOE? 17 MS. PIELSTICKER: Yes. 18 MS. MA: And for what? 19 MS. PIELSTICKER: To administer the new 20 tax. It would be a new tax program. 21 MS. MA: And, also, with the different 22 agencies not able to, you know, the agenc- -- I 23 guess the industry's not able to bank yet. So, 24 therefore, the agencies would all have to accept 25 cash, presumably, or the BOE or some other agency 26 would accept the cash; is that also incorporated in 27 the numbers? 28 MS. PIELSTICKER: Yes. 68 1 MS. MA: Okay, thank you. 2 Mr. Liles. 3 ---oOo--- 4 JASON LILES 5 ---oOo--- 6 MR. LILES: We're counting on the 7 Chairwoman to solve the banking problem for us. No, 8 I understand what a huge issue that is. 9 First of all, I apologize for the Senator 10 not being here. He's presenting in committee today 11 and, unless he's behind me, you're stuck with me 12 today. Thank you very much. 13 I also want to do a quick thank you to the 14 technical staff at the BOE. We've been working with 15 your staff for the last three or four months, kind 16 of going back and forth on some of these issues. 17 And Mr. Richard Parrott, Cindy Wilson, and of course 18 Michele has done an amazing job of helping us kind 19 of guide through the technical aspects. 20 You have a real good breakdown from what 21 Ms. Pielsticker talked about. I think the only 22 change in the expenditure of the revenues is that 23 we've taken out the ten percent that goes to natural 24 resources, because we're trying to compliment 25 Assemblyman Wood's bill who has a provision in there 26 for a very similar item. And we're taking that ten 27 percent and putting it into the drug and alcohol 28 treatment programs. 69 1 So for now it's 30 percent local law 2 enforcement, public safety and local governments; 20 3 percent drug and alcohol treatment; 20 percent state 4 parks; and 30 percent to the General Fund. 5 I understand that the BOE has some concerns 6 about the upfront implementation costs, and makes 7 complete sense to us, and also the ongoing costs to 8 make sure that they get reimbursed, and I think we 9 can take care of that in Appropriations. 10 Appropriations staff is already very well aware of 11 that and working with us to create language. 12 The other concern I know is where in the 13 supply chain this tax is implemented? And staff has 14 been pretty clear about where the BOE would like to 15 see it as far as sort of making things easier and 16 less expensive on the industry and on the state. 17 And I think we understand that. 18 I think right now, given the way the 19 industry is, and kind of going through the motions 20 and meeting with most of the industry and with the 21 regulators, that the folks that are soon to be 22 regulating this under our legislation from last 23 year, it seems like that's not quite ready yet. And 24 we may be a few years away from actually being able 25 to do that. 26 So our goal is to -- is to have this tax at 27 the point of sale. Once everything is set under the 28 regulatory framework that we established last year 70 1 that goes into effect in January of 2018 and that's 2 working, I think we'd be willing to revisit. Our 3 goal is to kind of make it as easy as possible. 4 My boss represents the four counties that 5 supply maybe 60 percent, along with the Chairwoman, 6 the marijuana for the entire country and nobody is 7 more eager to make sure that this industry goes into 8 the light than my boss and his constituents. 9 This is just really, really -- it's been a 10 long road, 40, 50 years of a lot of problems -- some 11 good things -- and a lot of issues in our district, 12 and creating regulatory framework is something that 13 we worked very hard on last year and it's very 14 important to us. The last thing in the world we 15 want to do is try to keep people in the dark. 16 There's some folks that have said -- and 17 please stop me, Chairwoman, if I'm going too far -- 18 a couple of the issues that have come up are that 19 the total accumulated tax is too much; 15 percent 20 from the MVT that's in front of you today, 21 Assemblyman Wood has a cultivation tax, you've got 22 sales tax of course, and then local taxes. 23 We've done our homework pretty well on 24 this, and I think that what we've seen in trying to 25 learn our lessons from other states is that two 26 things: 27 Number one is, you put the tax too high, 28 like Washington State did and like even what 71 1 Colorado did originally, you create a big problem 2 and people stay in the black market. Our goal is to 3 make sure that people come into the light. The 4 sweet spot for that is somewhere between 30 and 35 5 percent from what we've been able to tell and in 6 talking to other folks in other states. So our goal 7 is to make sure the total accumulated tax stays 8 under that. 9 The other aspect is, is that looking at the 10 evidence from other -- from the other states that 11 have created a regulatory environment, the other 22 12 states, the price drops between 10 and 40 percent, 13 depending on which state you're talking about and 14 what regulatory process they have once it becomes 15 regulated. And we're talking about just medical 16 marijuana right now. 17 So you combine those two things, I think 18 we're safely under. We're trying to keep it under 19 30 percent. I think 35 is, you know, an outside 20 number. We're trying to keep it under 30 percent, 21 so it's a big concern of ours. And the last 22 thing -- I want to reiterate, the last thing we want 23 to do is keep people in the black market. 24 So, if -- if our percentage, we can be -- 25 if somebody shows us that our percentage is too high 26 and it keeps people in the black market, we're 27 certainly willing to talk about it. 28 One other concern is that if the leading 72 1 initiative that's out there that we've all heard 2 about actually passes and our bill passes, then 3 you've got double taxation. You've got a huge 4 amount. Again, not our goal. We like the marijuana 5 industry. We want to make sure that it succeeds and 6 stays in the light. We've put an amendment into our 7 bill to make sure that if that initiative passes, 8 our bill becomes void. 9 The last issue that we're working in right 10 now, major issue that I think that we still need 11 some work on is the patient protection provision. 12 Right now everybody is forced into the patient's 13 of -- to be a patient basically in California, based 14 on the way the system is. Some folks want to use it 15 recreationally, they're forced into the medical 16 system. 17 Our goal is not to tax people that are 18 truly needy from a medical standpoint. Our goal is 19 not to tax people who are financially needy and need 20 this medicine. 21 If we could find a way to make sure that 22 those who have a true medical need, who are exempt 23 from this tax, and even sales tax, we would be okay 24 with that. It's a very difficult thing, as you know 25 better than anybody, from a taxing perspective to 26 kind of find that spot. 27 It's easier to find financial need, of 28 course, by using CalFresh or using a Medi-Cal card 73 1 and exempting those folks who have those. But it 2 does create some other issues and some stigma 3 attached to the Medicare card. And we're, in talks 4 with those folks and the administration and with 5 people in the community to try to make sure that 6 there's a way for us to exempt them in this bill, 7 we're willing to do it. But we don't have any 8 agreement on how that works right now. 9 Lastly, I'll just sum up and say that, 10 again, very, very important that people come into 11 the light on this thing. Nobody has more 12 constituents dealing with this than us, except for 13 maybe the Chairwoman. And we will -- willing to 14 work with the Board on each of the items that they 15 have an issue with as it goes through the committee 16 process, and we'll be in front of the Government 17 Finance Committee next Wednesday. 18 MS. MA: Thank you very much. 19 Okay, Members? 20 Mr. Runner. 21 MR. RUNNER: Yeah, a couple of -- couple of 22 observations. Obviously these -- these -- these 23 particular bills, because they're tax-related, 24 obviously need a broad support over in the 25 Legislature. 26 MR. LILES: They do. 27 MR. RUNNER: And I know there have been 28 concerns about some of the -- some of the issues in 74 1 this particular bill in regards to that. 2 Let me just tell you kind of where I think 3 I would be, and I think where I think some of my 4 colleagues would be over there that I've heard 5 from. 6 MR. LILES: Thank you. 7 MR. RUNNER: One is that -- well, actually, 8 before I go there, let me talk about the challenges 9 of point of sale. 10 MR. LILES: Okay. 11 MR. RUNNER: You know, the difference for 12 the BOE to collect from -- I don't know, let's pick 13 a number -- distributors, let's say there's 50 of 14 them, who knows what the number's going to be, 50 of 15 them is a lot easier than thousands and thousands of 16 retailers. 17 MR. LILES: Understood. 18 MR. RUNNER: So that becomes a bigger chore 19 for us in a -- in a -- in a challenging way. And on 20 top of that, we already struggle with the amount of 21 cash coming in and the safety, public safety of that 22 aspect. 23 I recently went on a -- on a trip where I 24 went to, you know, to a -- to a retailer, to a 25 dispensary, you know, watched them do their business 26 and then took that money on over to the BOE for 27 deposit. And this basically takes -- and, again, 28 any given day -- not any given day -- on a day it's 75 1 not -- we have seen things like, you know, 400, 2 $500,000 come in, you know, in duffel bags. Just by 3 sheer numbers, this would crank that up to a million 4 and a half dollars. 5 So I think that's a big concern I have with 6 just the point of sale issue, both in regards to our 7 ability to actually manage that, in terms of trying 8 to collect that in that way. And then also in 9 regards to then just the increased amount of cash 10 that's out there. 11 And, again, you got to remember where these 12 are. These dispensaries are in -- you know, are in 13 the middle of, you know, rows of businesses. These 14 are not secured locations. You know, so we're 15 struggling with that right now. And I can't imagine 16 trying to make these -- these numbers even larger to 17 create that. 18 So that's on -- that's on the BOE, kind of 19 my opinion, in regards to the BOE side of this 20 discussion. 21 The other side of this discussion then is 22 what to do with the money. I -- I have a great deal 23 of problem with trying to then create a tax that 24 then goes into the General Fund. I think that I 25 look -- I'm an unusual -- again, there -- I'm one of 26 the unusual Republicans that actually supports an 27 excise tax on medical marijuana. 28 MR. LILES: Yeah. 76 1 MR. RUNNER: However, I look at the excise 2 tax as a user tax, and that it is there's a cost 3 then to folks who want to use this product or need 4 this product. And as a result then, they need to 5 then help cover the cost of those things. 6 I don't look at the tax as a fundraising 7 effort for the state. And there's two items in 8 here, which is more than 50 percent of the cost, 9 because I'm not sure what you do with that final ten 10 percent anymore, and both the General Fund and going 11 to Parks and Rec., you know, are basically just 12 General Fund ob- -- General Fund issues. They 13 become then fundraising for state funds -- state 14 programs that have nothing to do with the issue of 15 the -- of the -- of the cannabis. 16 I think that's a -- I think that's a, for 17 me, a hurdle that I think I would have and I think 18 many of my colleagues would have, or my colleagues 19 who are willing to at least look at this would have, 20 you know, in regards to -- to -- to those issues. 21 I am concerned about the total amount. I'm 22 interested to see which -- how did you guys 23 establish what the sweet spot was? 24 MR. LILES: Mostly just conversations with 25 folks in other states. And during the last year 26 while we were going through regulation, we've always 27 made it clear that the taxation is our next step in 28 this process if we got regulation and asking folks 77 1 where do you see it? Mostly the retailers, some of 2 the cultivators, people in the industry. 3 MR. RUNNER: I can tell you I've never 4 talked to a cultivator out there or who would have 5 said 30 percent is a reasonable issue. 6 MR. LILES: Well, I will say that they -- 7 MR. RUNNER: And I've talked to them. 8 MS. HARKEY: They don't want any tax at 9 all. 10 MR. RUNNER: That's the number -- that's 11 not the number in their head. 12 MR. LILES: Before they were regulated, 13 they were more willing to talk about that because it 14 sort of was part of the system. Now that the 15 regulation is there and there's a lot more -- 16 there's a lot of -- 17 MR. RUNNER: No, I've been talking to them 18 since then. I've been talking to them through the 19 regulation. 20 MR. LILES: Understood. 21 MR. RUNNER: And that's way beyond what 22 they -- 23 MR. LILES: Okay. Understood. 24 MR. RUNNER: So, anyhow, that -- those 25 would be my observations. And I'm doubly concerned 26 that actually we would actually see -- and I don't 27 know where we would do this, where we actually 28 create two excise programs or costs on the same 78 1 product. 2 MR. LILES: Mm-hmm. 3 MR. RUNNER: Because at least what I'm 4 hearing you say is you're okay with the Wood bill 5 and you're okay with this bill. And now you've got 6 excise tax being applied in the Wood bill in regards 7 to the distributor, and now you've got -- and now 8 you've got it at the retailer. 9 I don't know what else and where else we do 10 that, and that sounds like a really expensive 11 process when you're collecting an excise tax in two 12 different places. 13 MR. LILES: I guess tobacco would be -- 14 MR. RUNNER: I think we do -- no, we only. 15 MR. LILES: Retail side? 16 MR. RUNNER: Excise taxes -- 17 MR. LILES: It's not exactly an excise tax, 18 I guess. 19 MR. RUNNER: We do an excise tax and then 20 we do a sales tax. 21 MR. LILES: Sales tax, yeah. 22 MR. RUNNER: But we don't do two 23 different -- we don't do two different excises 24 tax. 25 MR. LILES: Understood. 26 Do you mind if I just quickly address -- 27 MR. RUNNER: Yeah, sure. 28 MR. LILES: -- two points? 79 1 So, with regard to the amount of cash 2 coming into the BOE -- 3 MR. RUNNER: Mm-hmm. 4 MR. LILES: -- completely, it's a huge 5 issue. And honestly, it probably accounts for a 6 huge percentage for the crime in our district, and 7 we would love to find a solution to that. 8 Whether you -- 9 MR. RUNNER: You're not -- you do agree 10 that this could create a bigger problem? 11 MR. LILES: Well, my next comment was that 12 if -- no matter where you collect this tax and it's 13 going to be a problem for the BOE to take it. 14 Whether you collect it, you know, bringing the cash 15 to the BOE, the cash is going to come to the BOE 16 from the distributor or from the retailer. 17 I do understand the added advan- -- the 18 added disadvantage from the numerous retailers doing 19 it and where they are. But unfortunately for the 20 BOE, the cash is the same; it's still coming to you 21 guys, whether it's from the distributor or from the 22 retailer. 23 MR. RUNNER: Let me just clarify, though. 24 MR. LILES: Yes. 25 MR. RUNNER: You're right in term of the 26 cash coming in. But if it's a few -- it's fewer 27 places, it's easier for us to make arrangements. 28 MR. LILES: Yes. I totally -- 80 1 MR. RUNNER: So if it's a, you know -- and, 2 my understanding, I don't think you'll find these 3 distributors in -- in strip malls. 4 MR. LILES: Mm-hmm. 5 MR. RUNNER: You know. And so they would 6 be in more -- by their nature, more secured ability 7 to deal with issue. So I think that's where the 8 difference would be. 9 MR. LILES: I take your points very 10 seriously. 11 The last thing is that, in answer to you, 12 my boss comes from a city council member. I was a 13 mayor and city council member for eight years and 14 worked on -- he was a member of the board of 15 supervisor. We would love to a hundred percent of 16 this money going back to local communities. 17 The extra ten percent that you talked about 18 that's going to drug and alcohol is now going 19 directly to cities and counties, doesn't pass 20 through the state, doesn't have any money going 21 through to the state portion of it. 22 The 30 percent is not our preference, but I 23 believe the administration has made it relatively 24 clear to my boss that there's going to have to be a 25 part of it that goes to the General Fund. But it 26 definitely is -- but I certainly take your point 27 that that's not where we would necessarily like it. 28 Going back to the local -- 81 1 MR. RUNNER: The administration has asked 2 for a portion to go to the General Fund? 3 MR. LILES: Well, in our discussions last 4 year during the regulatory -- regulation -- 5 MR. RUNNER: Uh-huh. 6 MR. LILES: -- aspect of this, they made it 7 clear that a tax -- that they would be, at that 8 point in our room, supportive of a tax but would 9 want to see it coming to the General Fund. And I 10 certainly would want -- and we made it very clear 11 that we wouldn't support a tax that goes, a hundred 12 percent goes to the General Fund. 13 We like the way this lays out. Money is 14 going back to the local communities better than the 15 leading initiative, certainly, and maybe we can 16 still improve upon it. 17 MR. RUNNER: Remind me under the current 18 regulation, too, what the local abilities and the 19 local communities are to impose their own? 20 MR. LILES: They are able -- under the 21 Regulation Act and Senator McGuire's bill, they are 22 able to put a cultivation tax by a vote of their -- 23 the voters in the district. 24 MR. RUNNER: Right. 25 MR. LILES: Or a sales tax if they want 26 to. 27 MR. RUNNER: So, again, if the -- if the 28 sweet spot is 30 percent, that doesn't count what a 82 1 local would do. 2 MR. LILES: Oh, no, it does. I'm saying if 3 you take 15 percent, you take Jim Wood's tax, you 4 take the sales tax and then a local tax, I mean 5 we're counting that as hitting 35 percent, but also 6 counting on a price reduction. 7 And, again, if that -- if the price 8 reduction doesn't happen or if it doesn't -- that's 9 where we're willing to be certainly lowering -- 10 MR. RUNNER: Okay. 11 MR. LILES: -- our 15 percent, if that's 12 the case. 13 MR. RUNNER: Thank you. 14 MR. LILES: Thank you, sir. I really 15 appreciate the comments. 16 MS. MA: Ms. Harkey. 17 MS. HARKEY: Okay. I'll take kind of the 18 reverse here. 19 People in my district, you know, are not 20 really hot on this but they want legalization. They 21 think it's great. They're not really happy with the 22 cultivation, manufacturing aspect. We're having -- 23 we're kind of being flooded by large participants 24 buying up space in communities that have basically 25 ordinances prohibiting. 26 But so we'll see what will happen with that 27 because, you know, my concern is that there'll be 28 initiatives run to oust the current city council and 83 1 put in who -- who they want, you know. 2 MR. LILES: Understood. 3 MS. HARKEY: I mean I think that's where 4 this is going. 5 So my big concern, quite honestly, is that 6 people think there's going to be money to the 7 General Fund. That's why they're voting for this; 8 it's going to be cash coming to the State of 9 California. And so if there's not money going to 10 the General Fund, people are going to be very 11 dismayed. Because when I tell them it's not going 12 to the General Fund -- the initiative, Parker 13 initiative is not, I don't see General Fund funding 14 there -- they're very, they're, "What? We didn't 15 know that." Nobody seems to know that. 16 MR. LILES: Yeah. 17 MS. HARKEY: So I'm trying to educate. 18 And so I would be supportive of a General 19 Fund component because I think we're going to need 20 it. We have -- our General Fund is primarily health 21 and human services, education, and there's some 22 public safety funding that I know we're going to 23 need. 24 I would like to see more public safety 25 funding, specifically whether you have the industry 26 or you don't so that you can protect your locals 27 from cross -- cross-border trade. I mean in 28 suburban areas there's no big delineation between 84 1 what constitutes Lake Forest, El Toro, Irvine, you 2 know. And so if one city wants the trade, the other 3 city doesn't want the trade, they need just as much 4 public safety enforcement as those who don't have. 5 So I'm very concerned that we -- I want to 6 see public safety funding. Because I think it's 7 going to be really important. We're also southern 8 California. I have Orange, Riverside, San Diego, 9 Imperial Counties. 10 MR. LILES: Mm-hmm. 11 MS. HARKEY: Bottom portion of San 12 Bernardino. We are the border state. 13 MR. LILES: Yeah. 14 MS. HARKEY: So whatever comes across the 15 border, whatever we have to deal with, we have the 16 cartels, we are going to need some public safety 17 funding or we're going to have things really blow up 18 down there. And I can't seem to get anyone to 19 quantify exactly what we'll need. 20 I think there's so many agencies kind of 21 involved. And there's pressure, of course, from the 22 administration and others, you know, and it's just 23 like they're not really good at quantifying exactly 24 what we'll need. 25 But we just had -- we had three inmates 26 escape from -- escape from jail in Santa Ana in 27 Orange County and they took a dispensary owner who 28 was not willing to buy their illegal, that was 85 1 trying to run a legal operation in Santa Ana -- 2 MR. LILES: Yeah. 3 MS. HARKEY: -- and they took him out to 4 the desert and provided him with a blow torch and 5 then cut off parts of his body and left him to die. 6 That's their calling card. 7 This is not unusual, okay. This happens. 8 MR. LILES: Yeah. 9 MS. HARKEY: And everybody that's getting 10 involved in trying to do their little legitimate 11 business is running into a huge issue with public 12 safety. 13 If I talk to my sheriffs, I talk to my 14 local police, talk to -- I mean border patrol, 15 anybody, they all will acknowledge this is a huge 16 problem but there's no coordinated effort to really 17 try to deal with it from a southern California 18 perspective. 19 So I think that what all of these bills 20 address and what I've said a long time is that they 21 all address northern California where it's a little 22 more rural. You've got the national forest and 23 other things that are being, you know, poached upon. 24 And so we're correcting those issues. 25 But in the huge population centers, LA, 26 Orange County, you know, San Diego, Riverside, 27 San Bernardino, we really are going to need, you 28 know, some public safety assistance down there to be 86 1 sure that we can keep our people safe. And that if 2 we get flooded by cartels buying up cities and 3 whatnot, that we have some way of some kind of task 4 force to deal with that. 5 The other thing I would add is that I am 6 hearing -- and this only makes sense, it makes 7 sense -- that cash payments are coming in as 8 overpayments. So then they would be applying for a 9 refund, which in essence means the Board of 10 Equalization is laundering money for them. Okay. 11 Just bring in all our cash, overpay your taxes, 12 apply for a refund. Then you have a BOE check to 13 take to the bank to use. 14 So I think we have a lot of issues here 15 until we get the banking situation. But I have been 16 working on it. I am working on it. And I'm trying 17 to find a way that we can do kiosks, off-site 18 locations in secured areas, where people can 19 actually bring it, not into my BOE facility where I 20 have 200 staff members in the middle of a -- of a -- 21 you know, a -- a -- an office and light industrial 22 area and a lot of food courts and whatnot. But 23 actually have it, maybe, off-site. 24 I've talked, you know, where do the 25 casinos, the tribes, do they have secure? Is there 26 availability to bring the cash there and, you know, 27 there's just a lot of issues with this. 28 Something that has a security component 87 1 that's not with staff, that's not on a location 2 where, you know, you're going to have to think to 3 call and have armed guards and whatnot. Because 4 eventually, if this becomes a regular practice, we 5 are going to have people scoping out the BOE 6 facilities to figure out when the cash drops are, 7 and we're going to have some real public safety 8 issues. 9 So I don't want to be in those buildings, 10 and I'm sure nobody in here really wants to be, when 11 that stuff is going on. So, I think for the heavily 12 populated areas, we have to be very, very careful 13 how we handle this. And so I'd appreciate whatever 14 help you could provide. 15 I think the train's rolling. But I'm very 16 concerned with public safety. And right now my 17 district does not like taking cash. 18 MR. LILES: Two -- two quick answers real 19 quickly? 20 MS. HARKEY: Sure. 21 MR. LILES: Thirty percent of this -- of 22 everything that comes in on the MVT tax goes to 23 public safety, fire districts, local zoning 24 agencies, communities, goes directly back in the 25 form of grants. 26 MS. HARKEY: Okay. Does it go to the 27 counties or does it go to the fund and then 28 allocated by grant? 88 1 MR. LILES: It's allocated by grant, and 2 I'll tell you why, is because the police chiefs and 3 the deputy sheriffs have said they don't want a 4 direct allocation to the cities and counties because 5 they don't want -- there's a large portion of them 6 that do not want to have marijuana money coming into 7 their -- into their departments. 8 MS. HARKEY: See, I -- this is what I'm 9 dealing with. 10 MR. LILES: Yeah. 11 MS. HARKEY: They don't want it. 12 MR. LILES: Maybe you and Mr. Runner can 13 work out the whole General Fund thing. 14 MS. HARKEY: And that's why I can't seem to 15 get a quantification -- 16 MR. LILES: Yeah. 17 MS. HARKEY: -- because they're going to 18 need the backup support. And I understand they 19 don't want it, because they really aren't supportive 20 of the legislation or the bill. 21 So, but the issue that I have is that if 22 it's only by grant, it's only by grant if you allow 23 the trade. 24 MR. LILES: No. No. Absolutely not. 25 MS. HARKEY: And -- so it's not? 26 MR. LILES: Absolutely not. We don't have 27 anything in our bill that precludes an agency whose 28 agent -- whose jurisdiction has banned marijuana. 89 1 They can still apply for the grant, absolutely. 2 MS. HARKEY: Okay. That wasn't -- 3 MR. LILES: They still have a marijuana 4 problem. I mean everybody has a marijuana issue. 5 All 58 counties and all the cities have a marijuana 6 issue, and we want to make sure we take care of it. 7 In this provision we're not trying to just 8 take care of the rural community or the cultivator 9 community. I think there's a lot from the local law 10 enforcement, local government perspective around the 11 state that there will be 50 to $75 million available 12 on a grant basis. 13 We did have a direct allocation at first, 14 based on population. But, again, the sheriffs and 15 the police departments asked us to change that to a 16 grant. And I think you'll find that even agencies 17 that are reluctant to apply for the grant at first, 18 a year or two down the road will realize. 19 MR. RUNNER: Their neighbor gets a check. 20 MS. HARKEY: Yeah. 21 MR. RUNNER: Your neighbor gets a check. 22 MS. HARKEY: Well, it's -- it's -- I think 23 it's because they don't want to really be supportive 24 of the effort, and I understand that. 25 MR. LILES: I totally understand. 26 MS. HARKEY: And so to the extent that, you 27 know, we actually give people what they're -- what 28 they think they're getting, which is General Fund 90 1 funding, they believe this is going to help the 2 State of California, so I -- what I'm seeing in -- 3 in a lot of the planning is really just funds of 4 bureaucracy that's going to oversee the trade. And 5 I would like to be sure that we do have some General 6 Fund funding out of this and that we have sufficient 7 amounts to go to public safety because we're going 8 to need it statewide and for a lot of agencies. 9 MR. LILES: Agree with you. I think we've 10 taken care of that. We're open to other language. 11 But the other thing I would offer is that 12 if there's a way in this legislation that we can 13 help the BOE create these collection points with 14 extra funding or specific allocation, I think my 15 boss would be okay with that, too. Obviously we 16 have a lot of BOE offices in our district, and if 17 there's a way to make sure that there's extra 18 protection until the banking situation is solved, we 19 would be open to that. 20 MS. HARKEY: Well, I'm just saying I think 21 geographically there's different needs in different 22 communities. I've got four counties that are 23 heavily populated. 24 MR. LILES: Yeah, so -- 25 MS. HARKEY: It's a lot different than the 26 golden triangle or the emerald triangle and then all 27 of the rural counties. Like Mr. Runner has 30 28 counties, but we both got nine and a half million 91 1 people. 2 So what I'm saying is that, you know, 3 geographically -- and I would love to have you down, 4 come visit my cities, visit my BOE offices, 5 understand the issues we're dealing with, go to the 6 border with me, review what we've got as public 7 safety issues. And then I would just like, you 8 know -- because I want to stay engaged on this 9 issue, because otherwise they have no voice in 10 southern California. 11 MR. LILES: If we can allocate some dollars 12 specifically for taking care of the security 13 concerns around the cash in this bill, it seems like 14 a good idea. And I apologize, I hadn't thought 15 about that in the past. But coming here, bringing 16 it up, it does seem like it makes a lot of sense. 17 MS. HARKEY: It's huge. 18 MR. LILES: Yeah. 19 MS. HARKEY: It will be. So thank you. 20 MR. LILES: Thank you very much. 21 MS. MA: Thank you, Ms. Harkey. 22 And I just want to put it out there what 23 you said about the offices overcollecting and then 24 sending refunds. As I understood, that is not the 25 case. They're going to refund maybe if the -- you 26 know, if the difference is small. But one of the 27 issues I think we should look at is if people want 28 to prepay their sales taxes and keep it in the 92 1 account to get the cash off the street but, you 2 know, be able to use it for future sales taxes, I 3 would be very open to that. But not, you know, 4 obviously -- 5 MS. HARKEY: Not the refund. 6 MS. MA: -- prepaying and refunding and 7 getting a check from the State of California so they 8 can put it in the bank. That is, I don't think, you 9 know, what we should be doing. 10 And I see Mr. Gau is here, and I'm sure 11 we're going to take a look at that in all the 12 offices to see whether this is happening or not. 13 But we are looking at other ways to make 14 this process safer in the offices. I know that we 15 either have an RFP out right now, trying to figure 16 out whether there are, you know, cash counters, cash 17 kiosks, something that will make, you know, the cash 18 collection safer in our offices. And stay tuned, I 19 guess, for a future update, and maybe he can do it 20 in the -- in his update later on if he cares to 21 share with -- with the public, you know, what we're 22 doing around this area. 23 But I'd like to keep moving. Everyone's 24 time is valuable and, you know, Mr. Horton does have 25 some comments. 26 Mr. Horton. 27 MR. HORTON: Thank you, Madam Chair. 28 Historically, a marginal increase in sales 93 1 tax caused a corresponding significant increase in 2 the activity in the underground economy. And so a 3 30 percent increase is a windfall to the criminals 4 that are out there operating in the underground 5 economy. 6 And so that's going to be a huge concern 7 for my community, such that we have many of these 8 dispensaries are actually located in southern 9 California from a numerical perspective. And so 10 therein is where that sort of challenge is created. 11 I agree with Member Harkey that possibly a 12 thought process that takes a look at backfilling the 13 General Fund for the mitigation of the negative 14 impact on the various different communities and 15 trying to compute what that might be. 16 The other challenge that we've experienced 17 is with the tobacco industry when we first began to 18 deal with just the counterfeiting in the tobacco 19 industry, which is a far more regulated industry. 20 It's regulated on the federal level, the state 21 level, and to some degree internationally as well. 22 And the uniqueness about tobacco is, is the fact 23 that the product is not manufactured here in 24 California. 25 So with cannabis we are one of the main 26 distributors of cannabis throughout the world. And 27 so it creates an inherent challenge for us because 28 the growers can actually sell it directly to the 94 1 consumers. Unless there is some regulatory 2 oversight by the taxing agencies, we have no legal 3 authority to deal with that if they're selling it to 4 a -- someone who is subsequently going to resell it. 5 And so it's an exempt sale from our perspective, 6 which doesn't give us the authority to -- to 7 regulate it and to enforce the law. 8 So even though we have a projection of 9 $251 million, without the staffing and the authority 10 to enforce the law, you're not going to get all that 11 money. 12 Based on our experiences in the tobacco 13 industry, we had a significant noncompliance. The 14 estimates, as I've heard them, in this industry will 15 be somewhere around 60 to 70 percent noncompliance. 16 If you use the numbers in Los Angeles 17 County alone, we have 135 dispensaries who are 18 licensed, but yet still, over 2,000 folks that are 19 operating without a license. So that's a 200 20 percent noncompliance that you start out with, with 21 no real incentive for them to come into compliance. 22 Because coming into compliance simply means that 23 you're now tracked by the federal government, you're 24 now tracked by local government, you're tracked by 25 state government. And, on top of that, you're 26 paying an additional sales -- additional tax, 27 excise, sales tax, local tax, and property taxes and 28 so forth. 95 1 So all of a sudden your margin of profit, 2 your cost of operating is somewhere around 50, 60 3 percent when you add up all the taxes and 4 regulations associated with that, which creates that 5 windfall for the -- for the black market or the 6 underground economy. 7 So, I would encourage us to take a look at, 8 one, establishing an enforcement task force that can 9 enforce this law and allocating -- I don't know what 10 the percentage was, but if I was being greedy, I'd 11 ask for 30, 40 percent to the Board of Equalization, 12 so that we can hire the staff necessary to enforce 13 the law. 14 Certainly under a voluntary system, the 15 numbers that we projected as far as our costs, if 16 everyone voluntarily complies, we probably can get 17 there. But our experience in criminal activity -- 18 which this is, this is, for the most part, criminal 19 activities that we are trying to evolve into a 20 legitimate business. And if you look at the history 21 of alcohol, gambling, and so forth, you see that 22 that evolution is almost a 30-year process before 23 you even get to a significant level of 24 self-compliance. 25 So you've got a number of years where you 26 have no compliance at all. You have no regulatory 27 oversight by the entity that is responsible for 28 collecting the tax. And we don't have the staffing 96 1 necessary to do the job. 2 So our options would be to shift our staff 3 from another industry that we are generating revenue 4 for the State of California into this industry, and 5 we just can't -- we can't afford to do that. 6 So unless the funding comes from somewhere 7 in order to address that concern -- this is a nice 8 number, $251 million. And all these numbers are 9 nice numbers, but they're not reality if they 10 can't -- if we can't enforce the law. 11 MR. LILES: Understood, Mr. Horton. I 12 think that that -- I think that the regulation that 13 was put in place last year that comes into 2018 will 14 help this significantly. But I completely agree and 15 I don't think anybody in this room would disagree 16 that it's going to take a number of years for 17 everything to kind of work out from a regulatory 18 standpoint. 19 And I do like the idea of providing 20 additional dollars to the BOE to take care of 21 especially the security concerns. 22 MR. HORTON: Well, the -- mine is not -- 23 mine is the security concern, but mine is more the 24 enforcement. 25 MR. LILES: Yeah. 26 MR. HORTON: This would be investigators, 27 they're investigating. This would be prosecutors on 28 the AG side. This would be auditors, that are 97 1 additional auditors that are conducting these audits 2 and so forth. 3 Without all of those staffing components in 4 place, we're just not going to be able to collect 5 the funds. We -- we just can't do it. 6 We currently audit somewhere around one 7 percent of our entire universe, of our entire 8 universe. And so this is going to add a significant 9 level of issues for the Board of Equalization just 10 by adding this criminal component to our operation. 11 And so if we only have capacity audit 12 one -- less than one percent of the existing 13 universe, you add this element to it, we just don't 14 have the capacity in order to be able to address 15 those issues. 16 MR. LILES: I'd be very happy to work with 17 your staff on that. Thank you, sir. 18 MS. MA: Okay. So, thank you, Mr. Liles. 19 I think you've heard from the Board Members, and we 20 look forward to following the progress of your bill 21 as -- or Senator McGuire's bill as it moves through 22 the process. 23 MR. LILES: Okay. 24 MS. MA: So thank you very much for coming 25 down today. 26 MR. LILES: I appreciate the constructive 27 criticism and the comments. 28 MS. MA: Thank you. Thank you. 98 1 And we have one last discussion only bill, 2 and that's Assemblymember Wood's bill, which was 3 mentioned. We don't have any public speakers or 4 staff members. 5 So perhaps, you can just read us the 6 analysis and then we can just maybe close this 7 session and move on to the next committee. 8 So, Ms. Pielsticker. 9 MS. PIELSTICKER: Yes. AB 2243 by 10 Assemblymember Wood relates to a medical cannabis 11 tax. 12 Existing law imposes this -- well, I've 13 already identified the sales tax a number of 14 times. 15 MS. MA: Yeah. Skip that part. 16 MS. PIELSTICKER: Because medical marijuana 17 is tangible personal property that's not otherwise 18 exempt, it is subject to the sales and use tax. 19 The proposed law would impose upon 20 cultivators a per-ounce medical cannabis tax to be 21 collected by a distributor on the sale of all 22 distributed medical cannabis flowers at $9.25 per 23 ounce, medical cannabis leaves at $2.75 per ounce, 24 and immature medical cannabis plants at $1.25 per 25 ounce. 26 Revenues are allocated as follows: 27 Thirty percent to an unspecified agency for 28 disbursement to local law enforcement related 99 1 activities pertaining to illegal cannabis 2 cultivation; 3 Thirty percent to the Natural Resources 4 Agency to fund a competitive grant program for 5 environmental cleanup, restoration and protection of 6 public and private lands that have been damaged from 7 illegal cannabis cultivation; 8 Thirty percent to the multi-agency task 9 force, the Department of Fish and Wildlife, and the 10 State Water Resources Control Board to address the 11 environmental impacts of cannabis cultivation on 12 public and private lands in California and on other 13 state enforcement related activities from illegal 14 cannabis cultivation; 15 And ten percent to the Bureau of Medical 16 Marijuana Regulation and other state agencies or 17 departments that the Bureau determines appropriate 18 to conduct ongoing studies of areas that may create 19 challenges to compliance with the Medical Marijuana 20 Regulation Safety Act. 21 Assuming 100 percent compliance, annual 22 revenues are estimated to be about $77 million. And 23 I just issue another qualifier that 100 percent 24 compliance is not the likely compliance rate. 25 The cost impact is pending. However, 26 similar measure AB 243 from last year, as amended in 27 August, had the following estimates: 28 So $705,000 for fiscal year '15-'16; 100 1 3.9 million for fiscal year '16-'17; 2 3.6 million for '17-'18; 3 And 3.7 million for 2018-'19 and ongoing. 4 MS. MA: So I think we have similar 5 concerns and we look forward to also the progress of 6 this bill. 7 Both bills will require two-thirds vote of 8 the Legislature, and I know there's probably going 9 to be many amendments as it goes through the 10 process. So perhaps we can have Assemblymember Wood 11 and Senator McGuire come back at a later time as the 12 bill is moving down the process. 13 So I really want to thank Ms. Pielsticker 14 for your good work. It's not easy following all 15 these bills. And I also want to thank Tim Morland, 16 my legislative staff, for also working hard on this 17 committee and working with Members of the 18 Legislature and their committee consultants. So 19 thank you very much. 20 This concludes the meeting of the 21 Legislative Committee. 22 ---oOo--- 23 24 25 26 27 28 101 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 101 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: May 9, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 102