1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 REPORTER'S TRANSCRIPT 7 AUGUST 30, 2016 8 9 10 11 12 ITEM I 13 TAX PROGRAM NONAPPEARANCE MATTERS 14 I3 15 LOCAL TAX REALLOCATION MATTERS 16 SECTION 40 (AB 2323) MATTER 17 1. CITIES OF ONTARIO, PALM SPRINGS, SAN DIEGO, 18 SANTA BARBARA, AND COUNTIES OF SACRAMENTO AND 19 SAN MATEO 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 Vice Chair 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 Joann Richmond 13 Chief Board Proceedings 14 Division 15 For Staff: David Levine Tax Counsel IV 16 Legal Department 17 Trecia Nienow Tax Counsel IV 18 Legal Department 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 30, 2016 4 ---oOo--- 5 MS. MA: Ms. Richmond, next item? 6 MS. RICHMOND: Our next item is I3 Local 7 Tax Reallocation Matters. This is a Section 40 8 AB 2323 matter. And there's only one subitem. 9 MS. MA: Okay. 10 MS. HARKEY: I would like to -- 11 Madam Chair? 12 MS. MA: Yes, Ms. Harkey. 13 MS. HARKEY: I'd like to move to adopt an 14 Alternative B but make some modifications. And I 15 would have a copy of what I'm modifying. I believe 16 it was sent out to all the Members. 17 MS. MA: Okay. First off, is there any 18 nonparticipation on this item? 19 No? Okay. 20 Then let us discuss the recommendation on 21 the table, I guess, from Ms. Harkey. 22 MS. RICHMOND: We'd like to make a copy of 23 that recommendation; I don't believe staff has it. 24 MS. HARKEY: Sure. 25 MR. HORTON: Madam Chair, with your 26 permission, can we have this read into the record? 27 MS. HARKEY: Okay. What -- what I am -- 28 there is an Alternative B, and I'm -- I'm going to 3 1 tell you exactly. You can follow me. 2 MR. HORTON: Well, I -- I -- 3 MS. HARKEY: Mr. -- Mr. Runner had a 4 footnote on issues that he did not fully support, 5 and I was in total concurrence with him. 6 So I wanted to, number one, delete the 7 entire sentence beginning on line 17. 8 MS. MA: What page? 9 MS. HARKEY: Line 17 of page 3. 10 MS. MA: Okay. 11 MS. HARKEY: You can see it red-lined for 12 you. We thought that it was a bit expansive of what 13 the decision was. And it says, you know: 14 "To support the application of sales 15 tax, participation must have some 16 meaningful effect on the sales process, 17 that is, the participation must serve some 18 real purpose in actual sales process and 19 involve some genuine physical interaction 20 with the sale from that location, such as 21 negotiating sales contracts with the 22 customer, taking orders from the customer, 23 or approving credit, or delivering goods to 24 the customer." 25 I believe Mr. Runner thought it was a 26 little expansive of what we had decided, as well as 27 what the regulation was. And so, instead of 28 footnoting it, I would like to just agree with him 4 1 and remove that phrase. 2 And then on 2, revise footnote 3 to say, 3 "Activities that do not constitute participation in 4 the sales of purpose of 1620. . ." 5 This is the staff's footnote. 6 "Activities that do not constitute 7 participation in the sale for purposes of 8 resolution Regulation 1620 include 9 participation by a California business 10 location of the retailer in that retailer's 11 purchase of resale inventory." 12 So just delete that staff footnote. 13 Because if we're taking out this line that expands 14 what we actually ruled on and actually what the 15 regulation is, I think we need to remove that 16 footnote. 17 And then on page 4, delete the entire 18 sentence and corresponding footnote -- and you can 19 see that red-lined -- that says, beginning on line 20 10: 21 "Furthermore, even if nominations were 22 not regarded as purchase orders for these 23 purposes, we find their receipt by 24 taxpayer's Oakland office nevertheless 25 constitute participation in the sales by 26 that office because the nomination served a 27 real purpose in the actual sales process." 28 I think that, again, for Section 40, is a 5 1 little expansive. 2 And so I believe that's it. You can see 3 the red lines and the changes. 4 MS. MA: Any -- 5 Ms. Stowers? 6 MS. STOWERS: I don't agree with the 7 changes. I was leaning more towards Alternative A 8 or Alternative B -- or let me just back up. 9 Alternative A with Mr. Runner's footnote 10 that he didn't come to a conclusion with respect to 11 participation. 12 And the reason why I say that is because a 13 great deal of the conversation during that hearing 14 was about participation and whether or not it came 15 to the point that we had a sales tax versus a use 16 tax. And the language that we were having issues 17 with is the same language that was discussed in 18 detail in the Supplemental D&R. 19 So for that reason, I don't think that we 20 should take it out. We're not issuing a formal 21 decision here, so we're not creating law. 22 Clearly there is some dispute on what is 23 participation. And I think, based on all the public 24 comments that we received, it's definitely something 25 that should be taken to the interested parties 26 process and see if we can come to an agreement 27 amongst all of our stakeholders. 28 MS. HARKEY: I would be very happy to take 6 1 this into the BTC if you wanted to add that 2 expansive -- the language that I believe is 3 expansive and that Mr. Runner objected to as well. 4 The regulation is pretty flexible, shall we 5 say, at this point. And I'm just concerned that if 6 we add this language, that we further -- we further 7 define beyond the regulation and if other cases come 8 forward, we might have an issue. 9 MS. STOWERS: I -- I -- I hear what you're 10 saying. That's -- when I looked at it and I 11 thought, you know, I can see where the parties 12 can -- the parties be a little confused because we 13 have that language on page 3 that you have in red. 14 We have that underneath the law section. 15 So my thought really was more like an 16 analysis of how the law was applied in the D&R and 17 not the regulation itself. So I would be willing to 18 move it somewhere. But I think that if we're -- 19 when we're doing the Section 40 case and the whole 20 reason why we have Section 40 is to let the public 21 know how we're coming to our decisions. And when 22 that was such a key part of the decision, it needs 23 to remain in there. Otherwise, we're defeating the 24 purpose of a Section 40 decision. 25 MS. HARKEY: Well, not to go out of line, 26 but I -- I -- I do -- 27 MS. MA: Ms. Harkey. 28 MS. HARKEY: I do disagree because I 7 1 believe we don't want it -- we -- we decided based 2 on the regulation. And I don't really want to 3 expand or further restrict, so to speak, the 4 interpretation of that regulation. 5 And I think that if we say specifically 6 everything that happened in this case, that we are 7 adding strength to perhaps further restrictions for 8 the next case or the next case after that. 9 So I want to support what we did, but I 10 don't want to further -- and I believe Mr. Runner 11 can speak for himself, but he did not -- it says he 12 doesn't reach any conclusion on the issue stated in 13 the sentence, which is the one that I'm trying to 14 remove, because I did not reach any conclusion on 15 that as well. I think we decided this on a case 16 specific. 17 And -- and then, again, when I go on to 18 section -- page 4, it says, you know, where the 19 "furthermore" -- because, you know, "we find that 20 receipts by the taxpayers nevertheless constitute 21 participation," I think we're further -- we're 22 adding a lot of verbiage that we don't need to have 23 in a Section 40 on this case. This was a very 24 specific issue, a very narrowly, in my opinion, 25 decided. 26 So, hence the reason. But I'll be happy to 27 take it -- take it off agenda and take it onto BTC 28 and work it. 8 1 MS. MA: Mr. Runner. 2 MR. RUNNER: Yeah, just real quick. 3 My concern, and I just wanted to clarify, 4 is just what my thought was, you know, and why I 5 footnoted my issues. In terms of the broader 6 discussion in regards to narrowing it, I certainly 7 am -- I -- I -- I would -- I would also be a bit 8 concerned, I'm not too sure to how -- to what point 9 yet -- in regards to whether or not we started to 10 try to define things in here that really were not in 11 question, um, in order to try to -- I want to be 12 careful here -- in order to clarify for future 13 discussions and issues as opposed to just acting on 14 the case that was before us. But that's why I 15 wanted to make it clear that my conclusion was 16 simply that the -- that the nominations were -- were 17 purchase orders. 18 Um, I'm trying to -- Member Harkey, are you 19 saying that -- I'm trying to interpret what it is 20 that you want -- you said you would take into the 21 BTC. 22 MS. HARKEY: Well, if we wanted to expand 23 on this -- on this regulation. What I'm -- what 24 that case was about, if I recall, and if my staff 25 recalls correctly, was the decision was about the 26 nominations and what the person taking the 27 nominations actually did. And that was it. And it 28 was very specific to that case. 9 1 MR. RUNNER: So in your -- so I think -- 2 see if I understand this right. So what you're -- 3 what you're saying is that we would adopt one of the 4 other alternatives, not the one that you have here. 5 But then you would take the section and use that -- 6 and go into a further discussion in regards to BTC, 7 to clarify that. 8 MS. HARKEY: Right. I'd rather not adopt 9 it because I think it expands -- 10 MR. RUNNER: Well, let me -- let me ask 11 what we have to do. What did we have before -- I 12 mean, this is -- I'm not sure if -- is this a proper 13 item to be put into BTC? Is that a fair -- is that 14 a fair -- 15 MR. LEVINE: Certainly. Certainly. 16 MR. RUNNER: Okay. 17 MR. LEVINE: Amend Local Tax, I guess, 18 1802. 19 MR. RUNNER: And then not -- and then defer 20 a decision on, um -- or adopting our summary 21 decision then? 22 MR. LEVINE: No. 23 MR. RUNNER: No. 24 MR. LEVINE: You have no choice on that. 25 MR. RUNNER: Okay. 26 MR. LEVINE: You have to adopt the 27 decision. 28 MR. RUNNER: So we've got to adopt the 10 1 decision. 2 MR. LEVINE: This meeting. 3 MR. RUNNER: This meeting. 4 So -- but the -- but the subject matter 5 that is being discussed to clarify it for a future 6 discussion and brought to the Board to make sure 7 that it would be, I guess, in one sense more 8 narrowly defined, I guess would be at least how I 9 would say that, would be a proper thing to put into 10 the BTC. 11 MR. LEVINE: Sure. 12 MR. RUNNER: But we need to adopt a summary 13 decision today. 14 MR. LEVINE: Something. 15 MR. RUNNER: Something. 16 MR. LEVINE: Yeah. 17 MR. RUNNER: Is that clear? 18 MS. HARKEY: I -- I understand, and that's 19 why I'm suggesting we omit the language that you 20 have a problem with, that I have a problem with, 21 that expands on the regulation without a process, 22 because I do believe it does. 23 I mean it says -- what we were deciding was 24 a lady that sat in an office and she took 25 nominations, and did she actually participate in the 26 sale. 27 And what this says is, "In support of the 28 application of sales tax, that participation must 11 1 have some meaningful effect." We didn't say that. 2 MS. MA: I don't think we talked about it. 3 MS. HARKEY: "And that is the participation 4 must serve some real purpose in the actual sales 5 process and involve some genuine physical 6 interaction with sales from the location." 7 We didn't say that. We decided on this one 8 case. 9 MR. RUNNER: Right. 10 MS. HARKEY: We didn't get that specific. 11 So there may have been different Board 12 Member's reasons for accepting the decision, but we 13 did not get this specific. And I am very concerned 14 with including this language in this Section 40. 15 And then the other thing is, we did not say 16 that, "Even if nominations were not regarded as 17 purchase orders for the purposes, we find that their 18 receipt by taxpayer's Oakland office nevertheless 19 constituted participation in the sales." 20 That's a little less offensive to me 21 because I think maybe that's kind of what we did. 22 But I don't think we -- we qualified all of this 23 here. 24 MR. RUNNER: Can we -- we -- we can put 25 this over until tomorrow? 26 MR. LEVINE: Yes. 27 MR. RUNNER: So that we can -- so that this 28 can -- so that offices can review this and have 12 1 some -- 2 MS. HARKEY: Sure. 3 MR. RUNNER: I -- I -- maybe that's the 4 way -- 5 MS. HARKEY: I thought that it went out 6 prior to the agenda, and so I do apologize if it's 7 holding us up. 8 MS. MA: Okay. We can move this or defer 9 this to tomorrow's discussion and decision. 10 MR. LEVINE: Yes. 11 MS. MA: That would be helpful. Give us a 12 little time to digest all the different options. 13 MR. LEVINE: Is there anything you want us 14 to do, or just be ready? 15 MS. HARKEY: Be ready. 16 MR. LEVINE: Okay. 17 MR. RUNNER: You might get some calls. 18 MS. MA: I -- I -- I think what you're 19 hearing from Member Harkey, and I would agree, is 20 that nobody specifically said this. 21 MR. RUNNER: Right. 22 MS. MA: And so someone interpreted and put 23 it in this language. And so, unless you found it in 24 the -- the recordings that someone actually said 25 this, that's where I think we're having problems 26 with the language in here. 27 MR. LEVINE: However you want the summary 28 decision to read. 13 1 MS. MA: Okay. Okay. So we'll defer 2 it and come back to this item tomorrow. Okay. 3 MS. HARKEY: Thank you. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 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 August 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 14 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: September 9, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 15