1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 29, 2016 10 11 12 ITEM P 13 OTHER ADMINISTRATIVE MATTERS 14 ITEM P6 15 ADMINISTRATION DEPUTY DIRECTOR'S REPORT 16 1. 2017/18 BUDGET CHANGE PROPOSALS 17 18 19 20 21 22 23 24 25 REPORTED BY: Kathleen Skidgel 26 CSR NO. 9039 27 Jillian Sumner 28 CSR NO. 13619 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 Board of 16 Equalization Staff: Chris Holtz Chief 17 Business Management Division 18 Randy Silva 19 Chief Investigations and 20 Special Operations Division 21 Susanne Buehler 22 Deputy Director Business Tax and Fee 23 Department 24 Sandra Mayorga Chief 25 Human Resources Division 26 ---oOo--- 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 NOVEMBER 29, 2016 4 ---oOo--- 5 MS. RICHMOND: Our next item is P6, 6 Administration Deputy Director's Report; Item P6.1 7 2017-18 Budget Change Proposals. 8 MS. MA: Okay. There's a change in the 9 agenda. Ms. Murphy is not here. Chris Holtz will 10 be making that presentation; is that correct? 11 MR. HOLTZ: That's correct. 12 MS. MA: And then we also have Mr. Randy 13 Silva. 14 So please introduce yourself for the record 15 and then you may commence. 16 MR. HOLTZ: All right. Thank you. 17 Good afternoon. My name is Chris Holtz. I 18 am the Business Management Division Director for the 19 BOE. And I'm here to present two BCPs in this 20 particular item. I have with me Randy Silva and 21 also Susanne Buehler, and we'll be taking your 22 questions after we give a brief introduction to the 23 two BCPs. 24 On November 5th the voters of the state 25 approved two initiatives: Proposition 56 imposes a 26 $2 per pack increase in the cigarette tax, while 27 Proposition 64 legalizes the recreational use of 28 marijuana beginning January 1, 2018. 3 1 We're submitting two BCPs for your 2 approval, and draft copies of those BCPs were sent 3 to your respective offices last week. 4 Just to clarify some confusion that might 5 be still lingering on the, uh -- on the BCPs 6 themselves, they do look different than they have in 7 past years. In other words, there are -- you see 8 some estimates for positions and dollar figures for 9 years beyond the budget year. This mostly comes 10 about because of the new FI$Cal system. And FI$Cal 11 allows the Department of Finance and departments to 12 take a look at budgeting resources four years beyond 13 the budget year. These are just estimates. And as 14 actual workload is gathered, adjustments are made to 15 those for future budgets. 16 So what you'll be voting on today would be 17 the current year and budget year "asks" for these 18 BCPs and not for out years. As we go and make 19 adjustments for out years, you will see those 20 proposals come before you for approval. 21 I also want to tell you that we're working 22 closely with the Department of Finance on these 23 proposals, and that there is an understanding that 24 the new workload associated with this is for new and 25 expanding programs. 26 As we discuss our update on department 27 vacancies -- and we'll get to that in the next 28 agenda item -- there's an understanding between 4 1 Finance and ourselves that this process will allow 2 us to present our estimated new workload while 3 simultaneously assessing those issues that are 4 hindering our ability to hire and find consensus on 5 solutions in the upcoming budget year to meet all of 6 our goals. 7 So what I'd like to do is just briefly 8 introduce each of these BCPs. The BOE is requesting 9 $6.7 million and 13.9 positions in the current year 10 and $9.6 million and 46 positions in the budget year 11 to implement and administer Proposition 56. 12 With this initiative, California goes from 13 imposing one of the lowest cigarette taxes to one of 14 the highest at 2.87 per pack. This measure also 15 adds electronic cigarettes, e-cigarettes, and 16 nicotine products to the definition of tobacco 17 products for tax purposes. 18 This request also seeks resources to 19 complete the required floor stock tax on all stamped 20 cigarettes and unaffixed cigarette tax stamps in the 21 possession of distributors, wholesalers, and 22 retailers on April 1st of next year. 23 The state may see a decrease in actual 24 cigarette consumption or a decrease in revenue as a 25 result of this. But the state will also see a 26 simultaneous increase in tax evasion as some 27 consumers of retailers seek to avoid payment of 28 these excise taxes. 5 1 BOE staff estimates that current cigarette 2 tax evasion in California runs at a rate of 3 approximately $126 million annually, along with the 4 $88 million in tax on other tobacco products. The 5 exact magnitude of evasion efforts is uncertain 6 since the excise tax increase is significantly 7 greater than prior tax increases. The BOE believes 8 there will be substantial growth in criminal cases 9 that would adversely impact program workload. 10 The second BCP that we have before you asks 11 for $2.7 million in the current year for 3.4 12 positions and $9.7 million and 46.5 positions for 13 the budget year, to implement Proposition 64, the 14 adult use of marijuana act. 15 Prop 64 allows for the legal sale of 16 marijuana for recreational adult use as of 17 January 1st, 2018 and establishes a sales and use 18 tax exemption for the sale of medical marijuana. 19 The LAO estimates that state and local 20 governments could eventually collect additional 21 revenues of over $1 billion annually. 22 Of immediate concern, Proposition 64 23 creates two entirely new, separate tax programs 24 requiring separate returns. The BOE will experience 25 new and unique situations, including product 26 tracking, customer service, return processing, 27 audits and receiving large amounts of cash at our 28 field offices. 6 1 The BOE assumes at this time that the 2 number of retailers selling marijuana on January 1st 3 of 2018 and will be collecting and remitting the 4 retail excise tax would be 1700 retailers. This is 5 based on retail medical dispensaries operating in 6 California currently. 7 Although this proposition expands the buyer 8 and distribution base, the BOE has no data on which 9 to base a reliable estimate on the number of new 10 retailers that may register with the BOE as a 11 marijuana seller. 12 Unlike other industries that typically have 13 a small number of manufacturers and distributors 14 with a larger number of retailers, the marijuana 15 industry in California is unique as it has a large 16 number of cultivators compared to retailers. 17 The BOE is working with California Growers 18 Association to gain a better estimate on what the 19 regulated distributor market will look like. These 20 growers are now required, will be required, to 21 register and comply -- excuse me -- with Proposition 22 64. 23 And with that, I'd be happy to answer 24 questions, and Randy and Susanne are here to answer 25 programmatic questions that you may have. 26 MS. MA: Ms. Harkey. 27 MS. HARKEY: On both of these -- well, in 28 particular with the Prop 64, I am -- I think as we 7 1 go forward, I think the 1700 number is probably 2 going to be smaller -- or going to be larger. I'm 3 already reading reports about things going in in 4 Adelanto and far-out places like that. 5 So I think -- I think we're going to have 6 to maybe even do a six-month look forward on this 7 rather than letting this go. 8 I have also got a lot of concerns with the 9 cash and the staffing for that, and I'll be 10 discussing those with the Chairwoman just to see if 11 we can't come up with something that's reasonable. 12 But that, again, I'd hope we could come back within 13 six months. 14 I'm very concerned for the field office 15 staffing that I see in this going forward. And I 16 think I'd like to see, number one, if there's some 17 duties that can be handled in the district offices 18 as opposed to in headquarters. And I'd also like to 19 be sure that we are staffing the district offices 20 to -- to deal with just the enormity of which I 21 expect this will -- this will be. 22 So I'm hoping that, you know, within six 23 months we'd have a little better picture. And then, 24 again, don't be afraid to come back again and again 25 and give us updates on this, because I think we're 26 going to be hearing about it in our districts and I 27 want to be sure that we're staffing them 28 accordingly. 8 1 Thank you. 2 MS. STOWERS: I have a question. 3 MS. MA: Ms. Stowers. 4 MS. STOWERS: Thank you. 5 In the draft BCP there was an estimate 6 provided for cultivators. You didn't provide that 7 estimate. 8 Can you show me what that number is and how 9 that was determined? 10 MR. HOLTZ: For cultivators, right now the 11 estimate that we are looking at is about 25,000 12 state-wide. 13 MS. STOWERS: And -- 14 MR. HOLTZ: And that is determined through 15 estimates that we are receiving from the California 16 Growers Association. 17 MS. STOWERS: Okay. So they provided you 18 that estimate? 19 MR. HOLTZ: Yes. 20 MS. STOWERS: Okay. 21 So most of the PYs to send the draft 22 appears it's, um, going towards, um, investigation? 23 MS. BUEHLER: That's correct. 24 MS. STOWERS: Yes. Okay, thank you. 25 Why -- why -- I'm getting like 35, 25 to 26 investigation. Why so many into investigation and 27 not within the audit programs? 28 MR. SILVA: I'll take a stab at -- 9 1 MS. STOWERS: Okay. 2 MR. SILVA: -- answering that for you, Ms. 3 Stowers. 4 Randy Silva -- sorry, Madam Chair. Randy 5 Silva, Chief of Investigations, Board of 6 Equalization. 7 We're looking at an industry that is 8 largely operated in the underground economy. And 9 there's -- based upon our experience, both in the 10 audit program and the investigative program, there's 11 not -- we can't -- we don't anticipate that there's 12 going to be a lot of people to come into voluntary 13 compliance once licensing takes effect. 14 So we're going to need to do some 15 compliance-related, which is the Investigations 16 Division, inspections looking at these cultivators, 17 looking at these retailers, looking at theses 18 distributors, following the paper trails, following 19 the money to make sure that the taxes are coming in 20 as expected. 21 And as to the audit question, I'll let you 22 answer that, Susanne. 23 MS. BUEHLER: I think that staff attempted 24 to be very conservative, not knowing what the total 25 population is. We're currently working with 26 Department of Finance on language of once we start 27 knowing how many actual retailers that we have 28 registered, being able to then come back with 10 1 another BCP based on the permit count changing. 2 So -- 3 MS. STOWERS: Okay. 4 MS. BUEHLER: At their request, we started 5 out conservatively, but we certainly understand 6 we'll be coming back, as Ms. Harkey had mentioned, 7 and likely having another "ask" once we know better 8 what this population's going to look like. 9 MS. STOWERS: Okay, thank you. 10 MS. MA: So I have some questions. 11 MR. HORTON: Madam -- 12 MS. MA: I have some questions. So, um, 13 how much do you anticipate we're going to generate 14 in e-cigarette revenues? 15 MR. HOLTZ: At this time I don't believe 16 that we have an accurate estimate of that. This is 17 a brand new regulatory and licensing piece that, 18 uh -- that is going to be part of the program. So 19 we -- we don't have particular data for that at this 20 point. 21 MS. MA: Okay. Well, e-cigarettes, you 22 know, have not had any sort of regulations and 23 anybody can sell e-cigarettes, whether you're a -- 24 in a manicure/pedicure, you can -- you know, your 25 hair stylists, I mean your liquor stores, as well as 26 any other stores. 27 Wouldn't it make sense to allocate more 28 resources to SCOP where these folks are actually out 11 1 there, you know, walking door to door, doing, you 2 know, the initial checks and education versus 3 enforcement and investigations? 4 MR. HOLTZ: Yes, as far as the -- the 5 licensing on e-cigarette, that did begin with the 6 special session bills that passed last year. And 7 having more SCOP teams involved is -- is a very good 8 idea, and we do have a new team of SCOP positions 9 that are within this proposal. 10 As to how the SCOP teams work, I'll -- I'll 11 defer to the -- the program folks. 12 MS. MA: Okay. So maybe someone can break 13 down how many positions we're talking about: Legal, 14 Field, Investigations, and SCOP. 15 MR. HOLTZ: Well, on Proposition 64, we 16 have, for the budget year, 22.3 positions that are 17 part of the Business Tax and Fee Department, 9.5 18 that are part of Field Operations. At that point -- 19 within that amount, 5.5 are dedicated to the new 20 SCOP crew. 21 We have five positions that are part of 22 Admin. and Executive support, two and a half 23 positions that are Legal Investigators, two and a 24 half for External Affairs for outreach and 25 publications, and one and a half for the Technology 26 Services Division. 27 MS. MA: Okay. Was that total? What was 28 the total, 22.5 -- 3? 12 1 MR. HOLTZ: 22.3 for Business Tax and Fee 2 Department. 3 MS. MA: Okay. So how many in the SCOP 4 team? Four? 5 MR. HOLTZ: 5.5 positions for SCOP. 6 MS. MA: And where are they going to be 7 located? 8 MS. BUEHLER: That hasn't been determined 9 yet. That will be up to Wayne Mashihara to work 10 with the districts to decide where they go. 11 MS. MA: So this was -- okay. So that's 12 part of Prop 64 or Prop 56? 13 MS. BUEHLER: 64. 14 MR. HOLTZ: That's Prop 64. 15 MS. MA: 64, okay. I thought you had 3.4 16 positions in this fiscal year, and then 46.5 in the 17 budget year. And you just gave us 22.3 positions. 18 MR. HOLTZ: Uh, no. The 22.3 was for the 19 Business Tax and Fee Department. 20 MS. MA: Okay. 21 MR. HOLTZ: In addition to that, 9.5 in 22 Field Operations, 5 in Admin. and Executive, 2.5 for 23 Legal Investigators, 2.5 for External Affairs, 1.5 24 for the Technology Services Division. 25 MS. STOWERS: And that's for the current 26 year or the budget year? 27 MR. HOLTZ: This is for the budget year. 28 MS. MA: So how much is that adding up to? 13 1 Because that doesn't add up, to me. 2 MS. STOWERS: Yeah. 3 MS. MA: I'm missing something. 4 MS. STOWERS: I -- I -- I -- it seems like 5 there'd have been an easier way to present this to 6 us. 7 Where you're saying it flows a little 8 better that way compared to the draft BCP that was 9 sent to us and the breakdown of positions, it was 10 done by divisions or departments. And then you had 11 the personnel service spreadsheet that was sent 12 electronically. I'm trying not to kill any trees, 13 so -- and I could not rotate that document. 14 Just an observation, that had we had -- at 15 least had I had a breakdown the way you're sharing 16 right now, it would've been easier to follow. 17 Right now I'm still not sure on the 18 positions by current year and budget year. 19 MS. MA: I'm not either. 20 MS. HARKEY: Do you have a chart showing 21 that, Mr. Holtz? 22 MR. HOLTZ: This -- this is just taken from 23 the, um -- the positions as they're laid out in the 24 workload estimates within the BCPs. 25 MS. HARKEY: That's what I'm looking at. 26 So what page? Can you -- 27 MR. HOLTZ: For that -- for the positions 28 that I just laid out, I don't have that chart within 14 1 the BCP. This is just -- 2 MS. HARKEY: Okay. That was the 3 question. 4 MR. HOLTZ: -- added from our budget shop 5 as to what we are proposing for 2017-18 -- or, 6 excuse me, for the, uh -- yes, for the budget 7 year. 8 MS. HARKEY: Maybe you could follow up with 9 the Chairwoman and provide a graph for her or a 10 chart for her so she can see what we're adding. 11 MS. MA: Because, I mean -- 12 MR. HOLTZ: I could certainly do that. 13 MS. MA: -- my concern is it's very, um -- 14 like Ms. Stowers, it's very heavy on investigations 15 and enforcement. And for Prop 64 if we're trying to 16 bring a whole new industry aboveground, I think we 17 really need to be doing more in terms of educating 18 them in a positive manner, in a kind of 19 customer-friendly way, which, in my opinion, in my 20 districts the SCOP team is very, very good at. 21 Investigations typically goes in when 22 there's a problem. I don't really know, you know, 23 who's in Investigations, you know, what they're 24 saying, who they're meeting with. It's very, very 25 hard for me to have that accountability. 26 So I'm very concerned that it's very, very 27 heavy in Investigations, this budget, BCP. So I'm 28 not really prepared to vote on this right now. And, 15 1 like Ms. Harkey, I'm more interested in having more 2 people out in the field offices, you know, doing the 3 compliance, you know, being kind of the face of the 4 agency where people can come in and get information, 5 and we're doing this proactive outreach initially 6 before we, you know -- before the market matures and 7 people are actually out there operating. And then 8 we can, you know, send in the investigators if there 9 are really problems with people under-reporting or 10 not reporting. 11 So, that's where I stand on both of these 12 BCPs at this moment. 13 MR. HORTON: Madam Chair, if I may. 14 MS. MA: Sure. Mr. Horton. 15 MR. HORTON: Um, the -- the Board of 16 Equalization currently has a pretty robust outreach 17 effort. And I don't know -- I don't want to -- is 18 it the Department's intent that you would divert 19 those resources in order to address those issues, to 20 make sure that they're -- the individuals who want 21 to comply with the law are actually educated? 22 I mean -- and then, in addition, has there 23 been an assessment to determine the extent of the 24 education. Based on your numbers, it doesn't appear 25 that you're projecting that there're going to be 26 that many more retailers, and I'll address that 27 later. 28 But this system has been in place for 20 16 1 years, and under medical marijuana. And the 2 presumption is many of the folks that are now 3 selling medical marijuana will now begin to sell 4 recreational marijuana. 5 And so the education process has been going 6 on for relatively 20 years here in California as to 7 the -- although I concur with Chairwoman Ma that 8 there needs to be an extensive education as it 9 relates to the changing in the law and with all the 10 different variables out there. But in no means does 11 that minimizes the necessity to address the reality 12 that we're facing, the reality that has been faced 13 in Colorado and every other state that has legalized 14 that, and even here in California. 15 In the City of Los Angeles, for example, we 16 did a quick study in our district where we tracked 17 down all of the dispensaries that are located in Los 18 Angeles. And what we found was is that 132 are 19 actually registered and in business legally under 20 Proposition D in the City of Los Angeles; 400 of 21 them are registered with the City of Los Angeles and 22 registered with us. Some 1600 exist and are just 23 not registered, just here in LA. 24 And the state of Colorado with a population 25 of 5.38 million people, nowhere near the 26 39-40 million here in California, they have 25,000 27 dispensaries. So I think the numbers may be a 28 little bit underestimated as to what the reality is. 17 1 The -- the other issues that I think we 2 have to sort of be realistic about in this regard 3 is, as Randy -- Mr. Silva indicated, this is 4 basically a criminal industry, from federal 5 perspectives. And given the appointment or the 6 changing in the election, which is also going to 7 change the attitude, it appears that the Internal 8 Revenue is going to be a little more aggressive as 9 far as taxation is concerned. And the new Attorney 10 General has already stated his position, so that's 11 going to cause somewhat of a freeze in legitimate 12 activity here in California and throughout the 13 nation. 14 Not to say that based on the numbers that 15 we saw here in Los Angeles, there's quite a bit of 16 criminal activities that exist. We all know that 17 there are three different cartels that are involved 18 in this business. There are a lot of folks that are 19 doing it legitimately, that are really, really 20 trying, and they're really fighting against this 21 criminal activity and they want to comply with the 22 laws. 23 The taxes on this is 15 percent excise tax, 24 10 percent sales tax, 18 percent state income tax, 25 38 percent federal income tax. There's a windfall 26 there or an incentive from just a taxation 27 perspective for you to continue to operate 28 underground in the black market. And it's not the 18 1 same as we experienced with cigarettes where you had 2 a structured environment, both during the 3 federal-state and national level, but yet still we 4 saw criminal tax evasion. 5 If you look at the study done by -- I think 6 the Little Hoover Commission said that here in 7 California we have over $9 billion in unreported 8 taxable sales. And so the criminal element, we 9 don't have to wait to see whether criminals are 10 involved in the sales of marijuana. What we're 11 waiting to see is whether or not the criminals will 12 comply with the law. 13 And if you look at what's happened in 14 Colorado, they estimate about 40 percent 15 noncompliance, and that state is nowhere near as 16 significant as the state of California. 17 Studies also say that it is anticipation 18 that crime will almost double as it relates to 19 individuals driving under the influence, children 20 smoking the product, and so forth. And without some 21 type of structure in place to control that potential 22 criminal element and the incentives that exist for 23 folks to operate in the black market as a result of 24 Proposition 64 passing with relatively little 25 funding for actual police and oversight and criminal 26 prosecution and that structure not being in place, 27 it's easier for the criminals that have less 28 exposure in selling marijuana now than they have 19 1 selling any other drugs. 2 And so without the penalty fitting the 3 crime, the crime has a tendency to increase. And so 4 I personally think these numbers are grossly 5 understated as relates to what's going to be 6 necessary. If we look at our experience with 7 tobacco, we had some -- I think the legislation that 8 I authored set in place 88 investigators, and that 9 was an industry that was heavily regulated on the 10 federal-state level. And the facts proved out that 11 we needed that and more, and more. 12 And so -- and this criminal activity, even 13 though it's legal now from a state level, the 14 federal level it's still criminal activity. We 15 just -- I mean it's just going to be the wild, wild 16 west out there. There are no controls. They won't 17 even go in place in 2018. And we really don't know 18 in 2018 whether the Track and Trace will be in 19 place, whether the funding will be in place, and 20 folks can legally now begin to smoke recreational 21 marijuana. 22 I saw a kid walking down the street 23 smoking. You know, police just drove right by 24 because there's no -- there's no incentive. And 25 I've heard stories, and particularly with my Chief 26 of Staff, where, you know, a child has consumed a 27 candy bar that was, you know -- that had marijuana 28 in it. Had to be rushed off to the hospital. 20 1 We're hearing these stories now, but quite 2 frankly, we don't even have to rely on 20 years of 3 experience here in the state of California to know 4 that this is a criminal operation, that we need to 5 do everything we can to convert it. You can look at 6 the experience in Colorado and every other state 7 that has complied. 8 There is noncompliance. Those who will 9 comply, we need to educate 'em. Those who are not 10 going to comply, we need to assist them in 11 complying. And sometimes assisting them to comply 12 requires a level of investigation, a level of 13 auditing, a level of prosecution, and so forth. And 14 I think that's just the reality that we face. 15 But let me ask a couple questions in this 16 regard. 17 Do we anticipate any of these positions 18 having police authority? 19 MR. SILVA: All of, uh -- Prop 64 20 specifically requires authority under PC 830.11, 21 which is the Board's staff with the Investigations 22 Division, for the purposes of conducting 23 compliance-related inspections and seizures. 24 In the Tobacco Products Tax Program, we 25 also have authority for limited peace office status 26 positions. The positions we're asking for that are 27 nonadministrative are all limited peace officer 28 positions. 21 1 Just to clarify a little bit on the 2 positions themselves, the bulk of the positions 3 being asked in both programs, I'll start with 56 4 which is the tobacco, is really to backfill behind 5 vacancies that have come -- occurred over time 6 within our district offices. 7 So the bulk of these are inspectors, and 8 what inspectors do is they go into a business, they 9 ask to see the invoices, they do what we call a 10 reconciliation between purchases and inventory, they 11 also do some stuff related to tobacco dating, and 12 they scan for legitimate tobacco product -- or 13 legitimate tax stamps with the current tax stamp. 14 When they find violations, they will write 15 either a civil citation, which brings the person to 16 the Board for a civil remedy. Or if it's egregious, 17 they'll write a misdemeanor citation, which takes 18 the person to the judicial system to have to deal 19 with the judicial system. Then they roll back into 20 this civil arena. 21 In the tobacco program, I think, as I 22 mentioned the bulk of positions were, there's 13; 23 those are all in the field. There are some 24 additional investigators we're requesting; those are 25 for doing the felony work. And what they do is 26 basically follow the money, follow the paper, follow 27 the product, and develop felony criminal 28 investigations. And typically in our tobacco cases, 22 1 the average case is a million dollars in tax loss, 2 in the criminal felony cases. 3 With regards to the marijuana program, we 4 don't really -- in the tobacco program we have 5 existing vacancies within some of our offices, 6 within your offices, Members, to put those staff. 7 Within the marijuana program we anticipate 8 looking at the data that comes in from the Consumer 9 Affairs to get a sense of where are all the 10 licensees within the state of California. Again, 11 that's highly based on 27 inspectors out of the 12 total that we're requesting and then some new 13 investigators. And, again, those inspectors would 14 be somewhere in the field based upon what licensing 15 data shows us. 16 MR. HORTON: Let me encourage, Mr. Silva, 17 um -- I mean I think it's important that we educate 18 and I think there needs be to funding in there to do 19 the education for those who are interested in 20 complying. 21 There is -- and I -- as I said, I think 22 there's a transition period between those who just 23 may not comply simply because of their concern about 24 federal prosecution and excess taxation, and that 25 there may be -- they in fact may need some 26 assistance in complying. 27 And there are those that are currently 28 operating in the criminal market, uh, the various 23 1 cartels that are not just going to get out of this 2 business. Uh, this is a very profitable business as 3 everyone's stated. They're just not going to back 4 away from this. And their involvement will increase 5 as it becomes increasingly legal because the 6 brightline test becomes a little, you know, faded 7 and so you really can't tell whether the distributor 8 is legal, not -- not illegal or whatever, and the 9 Board of Equalization simply, even with this BCP, 10 does not have the capacity to deal with this 11 industry, uh, to deal with these problems that we're 12 going to face based on historical data as well as 13 more recent data and everyone else that has passed 14 this, uh -- passed the recreational marijuana. 15 And so I don't think we -- I think we need 16 to be, uh, very communicative and -- and -- and 17 communicate exactly what we anticipate the issues 18 are and what the problems are. How we quantify that 19 as far as positions is another discussion. But to 20 pretend that everyone just needs to be educated is 21 just unrealistic. 22 Uh, that -- that's not the industry that 23 we're dealing with. We're dealing with folks that 24 are selling marijuana -- or I guess kids call it 25 "weed" -- uh, for folks who will consume it to some 26 degree. And that's the reality that we sort of 27 face. 28 So -- and the suggestion is, is that our 24 1 current auditors, in conducting these audits, are 2 afraid to -- or concerned about their, you know, 3 their safety in going into these places, uh, because 4 you walk up there, they have an armed guard at the 5 front door, an armed guard in the back door, and an 6 armed guard inside. 7 And so you're walking in as an auditor, 8 you're putting your life at risk to some degree, one 9 would -- I would certainly argue. Uh, so maybe in 10 the audit process we need to either have a police 11 officer or, uh -- uh, we -- at one time we used to 12 put in what we call "keepers" where we would put in 13 a police officer, or a highway patrolman would come 14 in, and allow us to do that one-day observation and 15 so forth under the protection. 16 And so when I ask full police authority, 17 maybe we ought to consider some type of MOU with -- 18 through TRaCE and through Race, some type of 19 relationship that doesn't necessarily deal with the 20 criminal element, but just serves to protect -- 21 protect our staff as they begin to conduct these 22 investigations. 23 With that in mind, does the BCP include any 24 funding for, uh, the current problem of safety at 25 the various districts that are accepting all of this 26 cash? 27 MS. BUEHLER: The BCP does include more 28 cashiering staff at the district offices. But since 25 1 we haven't arrived at our solutions yet for what we 2 might do for a cash acceptance location, we have not 3 included that yet in the BCP. 4 MR. HORTON: But we sort of anticipate -- 5 MS. BUEHLER: That department -- yeah. 6 MR. HORTON: We've had conversations, the 7 door's open. 8 MS. BUEHLER: Yes. 9 MR. HORTON: We will. 10 MS. BUEHLER: We have had discussions with 11 Department of Finance as we've, um, walked through 12 our "ask" in the BCP and let them know that that 13 will be forthcoming as -- as we get closer to a 14 solution. 15 MR. HORTON: Has staff sort of estimated 16 what they think the noncompliance rate will be? 17 MS. BUEHLER: Um, I think from what we have 18 from the Growers Association, they're expecting 19 noncompliance from the grower's perspective to be 20 about 50 percent. 21 MR. HORTON: And -- and how -- how would 22 you define noncompliance? 23 MS. BUEHLER: Not coming forward and being 24 registered with the appropriate agencies. 25 MR. HORTON: And is there anticipated 26 decline over the years? What will it take to make 27 that decline? 28 MS. BUEHLER: They did not comment on that, 26 1 and staff -- 2 MR. HORTON: No, I'm asking for -- 3 MS. BUEHLER: -- has not done that 4 analysis. 5 MR. HORTON: My apologies for interrupting, 6 but what's your professional advice? We've dealt 7 with this before. We've dealt with this with diesel 8 fuel. We've dealt with this with cigarettes. We've 9 dealt with this with, uh, pharmaceutical drugs. 10 We've dealt with this in the electronic industry. 11 We've dealt with this in the motion picture 12 industry. 13 Mr. Silva, what are your thoughts? 14 MR. SILVA: You're asking my opinion? Uh, 15 my opinion is that unless you have some sort of 16 enforcement-related element to the introduction of 17 this industry into the mainstream, you're not going 18 to have very good compliance. 19 When we started, for example, with the 20 cigarette program that you mentioned, we had one in 21 four retailers selling contraband cigarettes. What 22 I mean by that is counterfeit stamped cigarettes. 23 Today it's less than one percent. 24 We've destroyed over 240,000 tons -- no, 25 240,000 pounds of tobacco that have been seized over 26 the last three years. 27 MS. MA: It's less than one percent, yet 28 you're asking for more investigators. 27 1 MR. SILVA: But there's a $2 increase per 2 pack. So I'm anticipating that things going crazy. 3 Actually, right before this increase in the 4 tax, I was looking at working with TSD on how to 5 scale back and identifying the best offices to put 6 people. 7 That $2 tax increase is going to result in 8 significant -- 9 MS. HARKEY: Black market. 10 MR. SILVA: -- evasion. When they did the 11 50 cent, I mean it was -- it was crazy what 12 happened. 13 MR. HORTON: Yeah, I mean, to evade the law 14 is just so simple, you know. At one point during 15 this process a container of cigarettes was worth 16 more in the criminal market than a container of 17 cocaine when you measured in the risk. 18 And adding $2 a pack to it, as you've said, 19 maybe not as much as a criminal element because I 20 think we have a pretty good handle on that, but the 21 diversion, um, wherein I think everyone would agree 22 is that instead of a decline in smoking, you know, 23 the question is, is an individual who smokes 24 cigarettes now, it's $2 dollars more, are they going 25 to stop because they have to pay $2 more when 26 they're addicted to smoking cigarettes? 27 Cigarettes is on a real decline. People 28 ought to stop altogether. An additional $2, I just 28 1 don't know. And particularly when they can purchase 2 it from out of state, they can purchase it from the 3 local, um, Indian reservation, commissary, uh, all 4 these shops that are called "cheap cigarettes" and 5 so forth. 6 So the experience has been, uh, as 7 indicated, that it's just going to -- just going to 8 be an upswing, uh, in that activity. 9 Um, but I mean this is something, Members, 10 you know, I think I've been dealing with this for 11 like 20 some years, so I apologize if I don't look 12 at this through the rosy lens of, you know, an 13 industry just is going to do the right thing. Uh, 14 history just says that, uh -- history, as well as 15 the existing laws, even if they wanted to, makes it 16 a little inherently challenged upon them. I mean 17 they have their legal advisors, their accountants 18 and so forth, are advising them don't report your 19 full amount of taxes. Don't -- don't have records. 20 Don't comply. 21 And the federal government is posturing and 22 so forth. It's saying that, listen, you know, stay 23 in the black market if you want to survive in this 24 business. And the numbers that we see now, I mean 25 as I said in LA County there's 16,000, but only 132 26 are actually registered with the city, 400 27 registered with us. 28 And so that's a huge noncompliance; well 29 1 over 50 percent, you know. And I see no incentive 2 for them to come into compliance, but I do think 3 they ought to be educated. 4 MS. MA: I just have a couple things. Um, 5 I do feel in my district we have done a lot of 6 outreach, uh, to this industry, and compliance has 7 gone up. More and more dispensaries have been 8 registering, have been trying to figure out what 9 type of licenses they need, how they need to pay 10 their taxes. And this is an industry, as you know, 11 um, that hasn't been regulated. It's been kind of 12 self-regulated, trying to do whatever's right. 13 Being a level one schedule drug. 14 You know, anybody who's associated with the 15 industry, um, also can fall under the same, you 16 know, um -- you know, statutes. And therefore a lot 17 of CPAs, accountants, bookkeepers, payroll services, 18 they have not been advising or servicing this 19 industry. 20 So a lot of them have just been trying to 21 do whatever they think is the right thing. Um, and 22 I think, you know, now with the passage of Prop 64 23 there are more professionals that are willing to 24 take the chance and are out there now saying, "Hey, 25 we want to educate and advise folks." 26 Um, I think we want to, you know, bring 27 this industry into the open. We don't want to drive 28 them back into the black market. Um, I think, you 30 1 know, SCOP teams are the appropriate folks who are 2 out there versus investigations, which I think will 3 scare people, um, and not encourage them to apply. 4 So -- or -- or, you know, um, come into compliance. 5 So, that's my opinion. I'm not comfortable 6 also, you know, with our folks having guns. Um, as 7 I have said to Mr. Silva, it makes me uncomfortable. 8 I believe we are tax collectors and we are tax 9 auditors, but we are not law enforcement. Um, and 10 law enforcement should be, you know, left to the 11 CHP, the police, the sheriff. I think those are the 12 appropriate people who are trained in law 13 enforcement. 14 So that's just my opinion. And, um, you 15 know, I'm not ready to vote. If you think, for the 16 tobacco, uh, you need all these extra investigators 17 to go out, uh, because the $2 pack, you know, I 18 can't tell you, but that's a very mature marketplace 19 out there. So I think we're talking, you know, 20 apples and oranges. 21 This industry is not mature. We don't even 22 have any regulations for a state licensing mechanism 23 right now. So, you know, asking for all of these 24 positions for what may or may not happen, you know, 25 I think is -- is premature at this moment. 26 As you know, the local governments have to 27 license these folks before they can come and get a 28 state license. So, you know, trying to get all 31 1 these people employed, sitting around waiting to see 2 how many people are going to actually get, uh, these 3 licenses, I think is very premature. 4 And, again, you know, I -- I'd prefer to 5 put more resources into our SCOP teams who I think 6 are doing a great job -- I know my district -- that 7 are really going out there, educating, gaining the 8 trust for this industry. And we have seen an 9 increase in compliance, a tremendous increase. And 10 they feel like, you know, we're trying to help them 11 comply and not trying to, like, go get them. Which 12 I think is what we have been trying to do in our 13 districts, so -- 14 MR. HORTON: Madam Chair. 15 MR. RUNNER: A couple questions I have. 16 Um, one is let -- first of all, let me talk about 17 the tobacco issue. 18 One of the things I think I heard was that 19 we were -- we were -- we were asking for positions 20 to backfill our vacancies. Did I hear that 21 correctly? 22 MR. SILVA: They're not va- -- they're not 23 actually vacant positions. They're -- they're -- we 24 staff each office with five inspectors. 25 MR. RUNNER: Right. 26 MR. SILVA: One lead. And so we have 27 offices, because we don't have the positions, 28 over time what happened was -- I don't even remember 32 1 how far back -- SCOP used to be part of the 2 Investigations Division and we transitioned that to 3 the districts. And when that happened, it created 4 some of these offices now, instead of having full 5 compliment of five, have three, have two. 6 MR. RUNNER: Well, what happened to those 7 positions? 8 MR. SILVA: They went to Sales and Use Tax. 9 They're in the SCOP program. 10 MR. RUNNER: So we actually transferred, in 11 the midst of SCOP, that was a -- that was a budget 12 drill. So the budget actually changed positions 13 from -- in moving people from Investigations to -- 14 to SCOP? 15 MR. SILVA: That's correct. 16 MR. RUNNER: Um, and -- and so now what 17 you're doing is you're not backfilling vacancies 18 then. What you're doing is you're just adding the 19 additional, um, positions -- 20 MR. SILVA: To staff the offices. 21 MR. RUNNER: -- to staff them up to where 22 they were in the past. 23 MR. SILVA: Right. 24 MR. HOLTZ: That's right. And this is -- 25 this is completely -- 26 MR. RUNNER: What part of the 27 legislation -- 28 MR. HOLTZ: -- a completely different issue 33 1 from the vacancy issue. 2 MR. RUNNER: I -- I'm -- I guess I'm a 3 little baffled. I'm -- I'm surprised right now, I 4 guess, I'm thinking through. The legislation and 5 the Legislature changed our positions to go from -- 6 from -- from, uh, Investigations to, uh -- to -- to 7 SCOP? 8 MS. HARKEY: I think that was internal. 9 MR. SILVA: It was done through a BCP 10 process. It's been a number of years ago. I don't 11 remember exactly when. 12 MR. RUNNER: Okay. Okay. Okay. 13 Um, let me -- let me just -- okay. So I am 14 actually -- I agree. I think -- I think the fact is 15 the new dollar -- the amounts are going to put 16 tremendous amount of incentive out there for -- for 17 illegal activity. So I -- I do believe that we're 18 going to have to have a much -- we're going to have 19 to be prepared for it in a robust way for us to deal 20 with that. 21 So I think that's the nature. It 22 certainly -- I mean all's we need to do is look at 23 New York and see the high-end noncompliance rate in 24 New York, which I think now, has a -- I think we're 25 very close right now, I think, in tax. They're 26 probably still a little bit higher. But, again, 27 they're experiencing large, large noncompliance, uh, 28 and black market. So I think that makes sense to 34 1 me. 2 I'm a little more concerned and interested 3 in the issue of investigations on the -- on the 4 recreational marijuana. How many positions do we 5 have in the -- in this BCP for the investigations 6 on -- in the marijuana? 7 MR. HOLTZ: Within the Legal Department for 8 the budget year, we have 2.5 position that'll be 9 starting in budget year. 10 MR. RUNNER: And then how -- what does it 11 go up to? What are you projecting? 12 The budget year would be '17-'18, right? 13 MR. HOLTZ: That's right. 14 MR. RUNNER: Okay. 15 MS. STOWERS: That's investigators or 16 inspectors? 17 MS. HARKEY: Investigation. 18 MR. HOLTZ: That would be investigators. 19 MR. RUNNER: Those are investigators. 20 MS. STOWERS: And how many inspectors? 21 MR. HOLTZ: Within the BCP itself, 22 projecting out to 2018-'19 and 2019-'20 -- 23 MR. RUNNER: Uh-huh. 24 MR. HOLTZ: -- we anticipate a total 23 25 Business Tax Compliance Specialist Inspectors, four 26 Business Tax Specialist I Lead Inspectors, four 27 Business Tax Specialist II Senior Investigators. 28 MR. RUNNER: Help me -- help me understand. 35 1 So, again -- okay. Let me go back a little bit in 2 terms of the budget year. 3 Um, so in -- in -- what is the role of an 4 inspector versus an investigator? 5 MR. SILVA: Inspector does inspections of 6 the -- 7 MR. RUNNER: And is an investigator -- let 8 me you real -- to clarify before you go through 9 that -- that, Mr. Silva. 10 Is it -- are both of those in the Legal 11 Department? 12 MR. SILVA: Yes, Mr. Runner. 13 MR. RUNNER: Okay. So the inspectors and 14 the investigators are -- reside in the Legal 15 Department. 16 MR. SILVA: They operate under the Legal 17 Department. 18 MR. RUNNER: And how many -- so let me -- 19 before you go ahead and answer your question, how 20 many investigators then are there in the budget 21 year? 22 MR. HOLTZ: Investigators in the budget 23 year would be 2.5 positions. 24 MR. RUNNER: Oh, I'm sorry, I thought that 25 was investigators. Both of them? 26 First I asked investigators. 27 MR. HOLTZ: Investigators is 2.5 28 positions. 36 1 MR. RUNNER: And inspectors? 2 MR. HOLTZ: Inspectors would not be coming 3 on until the '18-'19 fiscal year. 4 MR. RUNNER: '18-'19, okay. Okay. 5 So -- okay, so quickly tell me real quick 6 in terms of how the -- what's the difference in 7 terms of that process between an investigator and 8 a -- 9 MR. SILVA: Inspector. 10 MR. RUNNER: -- inspector. 11 MR. SILVA: Okay. An inspector goes out 12 into the field and inspects all the different 13 licensees currently within the Tobacco Products 14 Program. And they look at their invoices, they -- 15 they look at their purchase invoices. If it's a 16 distributor, their sales invoices. There's a thing 17 called tobacco data. 18 MR. RUNNER: Okay. 19 MR. SILVA: -- and they do reconciliations 20 of the tax stamp in terms of scanning it to verify 21 the product's all legitimate. And they also will 22 assist the taxpayer with any information that they 23 want when we're out there. 24 MR. RUNNER: Okay. 25 MR. SILVA: They issue, uh, civil citations 26 which are handled internally by the Department. 27 Those are usually for violations, small seizure 28 amounts. They don't have documentation to support 37 1 the product that's tax paid. They also issue 2 criminal citations for larger seizure amounts but 3 not astronomical. Um, and, um, they conduct 4 seizures -- 5 MR. RUNNER: Okay. 6 MR. SILVA: -- of contraband products. 7 MR. RUNNER: Okay. 8 MR. SILVA: The investigators work the 9 felony level cases. They're the ones that are -- I 10 mean they all work with other law enforcement 11 agencies in a collaborative fashion. But the 12 criminal, the felony level solely do, um, criminal 13 investigations that result in incarcerations for 14 large amounts of tax evasion. 15 MR. RUNNER: How many investigators do we 16 have right now assigned that are doing medical 17 marijuana? 18 MR. SILVA: None. 19 MR. RUNNER: Okay. So -- 20 MR. SILVA: Let me -- can I correct that? 21 We have done some sales-tax-related cases on medical 22 marijuana. 23 MR. RUNNER: Right, okay. 24 MR. SILVA: But there are no -- 25 MR. RUNNER: Right. They've been doing it 26 on the sales tax side, yeah, right. 27 MR. SILVA: There are no specific. 28 MR. RUNNER: Okay. So help me understand 38 1 then, what is the role of the investigators, 2 particularly in that -- in that first -- in the 3 budget year? Uh, what are they -- what are they 4 investigating? Uhm, especially since we've -- we 5 apparently did not have a need for investigators for 6 the medical marijuana. What -- what has created the 7 need and the opportunity there that we feel like we 8 need to do for recreational, especially when it's 9 not even sold the first half of the budget year? 10 MR. HOLTZ: And -- and I misspoke and 11 confused the issue there a bit. Looking back over 12 the BCP -- 13 MR. RUNNER: Uh-huh. 14 MR. HOLTZ: -- the -- the 2.5 positions 15 would be associated with inspectors and not with 16 investigators. 17 MR. RUNNER: Okay. So those are 18 inspectors. 19 MR. HOLTZ: Yes. And they start in the 20 '17-'18 fiscal year. 21 MR. RUNNER: So what is the difference 22 between an inspector then if that -- again, I'm 23 thinking about marijuana, not so much -- I get -- I 24 get what we do with cigarettes because, I mean, 25 there's stamps, there's counterfeit, there's all 26 this other stuff. 27 I don't see -- right now I'm trying to get 28 my head around the fact that you've got -- you got 39 1 cannabis out there that, um -- I'm trying to figure 2 out what they're actually inspecting as opposed to 3 auditors who are just saying, are you auditing or 4 are you, you know, um -- or we're auditing to see if 5 they're collecting tax. 6 I -- I'm trying to figure out -- I guess we 7 don't even have a system for them to actually to 8 invest -- to -- to -- to inspect right now, do we? 9 MS. HARKEY: We have medical. 10 MR. SILVA: No. 11 MR. RUNNER: No. 12 MR. SILVA: It's still under -- it's still 13 under development. 14 Um, as I recall, and I'll have to look at 15 this more closely, what we were trying to do was 16 bring some folks in, a small number, to start 17 learning and getting more information on the 18 industry. 19 MR. RUNNER: Okay. 20 MR. SILVA: And developing policies and 21 procedures. We're -- we don't start to bring the 22 bulk of the staff in until later in '18 and then in 23 '19, to start doing some of the work. Now, at some 24 point there's going to be Track and Trace. 25 MR. RUNNER: Right. 26 MR. SILVA: I don't know when that is. 27 MR. RUNNER: Right. 28 MR. SILVA: I mean there was a requirement 40 1 to be out there. When that comes into play, we'll 2 be looking at that. 3 One of the things we'll be looking at, 4 though, that does take effect sort of immediately 5 when the licensing kicks in is a requirement for 6 documentation. And all I can do is give an example 7 as what's happening in tobacco. 8 In tobacco the taxes went down to about 9 40 million a year before the inspection program was 10 implemented. And tobacco -- I'm talking other 11 tobacco products -- don't bear a stamp. 12 That amount now, even with a 19 percent 13 decline in the taxes, is $89 million. So there is 14 some value in having people out there looking at the 15 invoices, working with the taxpayers. And if 16 they're in possession of untaxed, which at this time 17 it'll start to be in possession of untaxed 18 marijuana, then take an appropriate administrative 19 action. 20 MR. RUNNER: Okay. I -- I -- I guess I'm a 21 little perplexed in trying to get my way through 22 exactly what inspectors are doing that early. 23 Now, actually, Mr. Silva, the thing that 24 actually resonated a bit with me was the fact that 25 we probably need to bring some people on early in 26 order to be -- start figuring out what the game plan 27 is, uhm, in order to prepared when it is that -- 28 that the regulation is -- is in place. 41 1 But I'm also -- I'm also interested and -- 2 and -- and feeling the same as the Chair in that it 3 seems to me that I think we have to have at least as 4 an aggressive outreach program to these -- to -- to 5 these folks in regards to what they need to be 6 doing, how they need to be doing their work, what 7 they need to be -- you know, to me, which is not 8 necessarily as much as a threat to the -- to the 9 industry as much as it is, "Hey, we want to help 10 guide you to compliance." 11 Uhm, and I -- and I -- and I'm not -- I 12 guess I'm not seeing right now in the BCP that 13 there's as much emphasis on that aspect as there is 14 on the other side. So that -- I guess that's the 15 balance that I'm concerned about. 16 Tell me about where we are with the timing 17 of this BCP right now. Um, if indeed, you know -- 18 particularly the marijuana one. I'm fine with 19 the -- with the -- with the tobacco one. 20 The marijuana one, what is our timing 21 issue? If we were going to spend another -- come 22 back and deal with this at the next meeting, try 23 to -- try to get a better understanding of outreach 24 versus inspection and all that, where -- where -- 25 where does that put us in the timing? 26 MR. HOLTZ: Timing on this is -- is very 27 tight since this was a late submittal due to the 28 fact that it was passed through initiative. 42 1 MR. RUNNER: Right. 2 MR. HOLTZ: Once the initiative passed, we 3 had 10 days in order to give a draft to Department 4 of Finance. And we've been working with them back 5 and forth on the level of staffing and funding. 6 If this were not to pass at this hearing 7 and wait until the December hearing, the December 8 hearing is right about the time frame when Finance 9 and the administration would be closing down their 10 budget and making final decisions. Now, that 11 doesn't mean that we can't revisit this in the 12 spring. 13 MR. RUNNER: We certainly can engage during 14 the budget process. 15 MR. HOLTZ: Right. But it would be 16 extremely tight to wait until another hearing. 17 MR. RUNNER: Basically what we don't do is 18 we have -- we have a challenge with getting it then 19 integrated into the governor's budget proposal. 20 MR. HOLTZ: That's right, plus the current 21 year needs that we would have. We have 3.4 22 positions in here for current year, uh, registration 23 needs and programmatic needs; that wouldn't be 24 happening without the BCP going forward in the Jan. 25 10 budget. 26 MR. RUNNER: Okay. 27 MS. MA: Ms. Harkey. 28 ---oOo--- 43 1 ---oOo--- 2 MS. HARKEY: Hi. I wannna thank you for 3 bringing this forward. And I'm -- I'm -- I am quite 4 honestly very pleased with the robust discussion of 5 all this. 6 But I do think that there is a different 7 approach. And I actually know there's a different 8 approach between Northern California where the 9 industry is established in a cottage fashion; and 10 Southern California where it's supposed to go big. 11 And I heard that from the Treasurer and 12 others, that Southern California is supposed to have 13 the big permitting, and the big issues, and -- and 14 the big -- we have the huge population center. 15 So I do feel that, um, I understand the 16 Chairwoman's concern, and -- and what were probably 17 Ms. Yee's concerns; however, I don't think they 18 focus on the really big issues we're gonna have in 19 Southern California where we have the cartels. 20 I do believe that -- that, uh, LA, 21 Orange County, San Diego, Riverside, those areas are 22 going to be hugely impacted. And, you know, they 23 are already. And the land is being bought up, the 24 facilities are being permitted, that's where the 25 large grows will be, indoor/outdoor. 26 I do thi -- I -- I -- and we already have 27 heavy cartel influence down there now. And I don't 28 believe this is just going to go away, and they're 44 1 going to come forward. 2 I think there's gonna be -- and -- and to 3 be -- and -- and to quote in the legislation, there 4 really are no public safety funding options in 5 the -- in the initiative that was passed. It was 6 envisioned that we would need -- was it Fish and 7 Wildlife, or -- Fish and -- yeah, Fish and 8 Wildlife -- because of the forests in Northern 9 California, and the poaching, and the stuff that's 10 going on that the -- the degradation of the 11 environment for the -- from the poachers. 12 And, um, some of the local sheriffs need to 13 be reimbursed. And so there's some small amounts of 14 public safety funding, but mostly focused when I was 15 tracking that legislation that went through on the 16 medical, as well -- as I as well examined the 17 initiative, it's mostly based on a cottage industry. 18 There's not gonna be cottage in Southern California. 19 And since there is no public safety 20 funding, I really think we need to go forward with 21 this. It will be brought back in six months. I 22 think we need to get on -- you know, boots kind of 23 on the ground to figure out what we're gonna have to 24 be doing. 25 I think there's gonna be a lot of 26 enforcement in Southern California, uh, as well as 27 education. But you've gotta be sure that you can 28 handle the existing cartel activity down there. And 45 1 you're not gonna get a SCOP or an auditor to go in 2 the middle of that. It's just not gonna happen. It 3 requires a little bit more of an underground, kind 4 of surveillance type of thing. And -- and I, quite 5 honestly, think we need to be very aware of that. 6 Our staff right now don't feel comfortable 7 just walking in, as Mr. Horton said, because of what 8 the industry -- the existing industry has. And 9 that's not to say we can't get our hands -- or our 10 arms around this. But I do believe as long as there 11 is still federal restrictions, and it's still a 12 Schedule I drug, and there's still going to be 13 issues with potential federal seizures of property, 14 bank accounts, whatnot. And we're gonna be facing 15 this for a long time. 16 So I don't really want us to go off into, 17 you know, staffing such that we're staffing for the 18 cottage industry that exists that is coming to the 19 fore and being legalized, versus what we're going to 20 be dealing with in -- in the huge -- the huge 21 providers of this, and what we are currently dealing 22 with. 23 So I would like to see us go ahead with 24 these BCPs, and have them come back in six months. 25 We're only approving the current year and the next 26 year. We are not approving forever. But I think 27 this gives us a guidepost of where staff thinks we 28 may need to be. And I think there will be a look 46 1 back. 2 I do believe we need to have education. 3 And so I would like to see that come into play. But 4 since this all doesn't go into place until 2018 on 5 the recreational, I think we probably have enough 6 education, and we're trying to do on the medical 7 right now. 8 And as a matter of fact, you see it in the 9 report in the papers that medical's exempt. Well, 10 that's medical if you've got a permit, according to 11 the BOE. But that's not what's coming out in the 12 papers. So it just -- oh, tax holiday. 13 So I think there's a lot of misinformation 14 right now that we can work educating in our own 15 offices, and getting out with, you know, however it 16 is we're gonna track who should be permitted and 17 who's not. And that's probably Weed Maps and -- and 18 other public publications, or public, uh, sites. 19 But, um, Chairwoman, I hate to see this 20 just stop in its tracks. I think we're gonna need a 21 few people on the ground now, you know, while we get 22 ready for this to try to prepare. And then we're 23 going to need to have a look back to see what we 24 really need and in what areas we need it. And it 25 may be that there'll be less, uh, impact in certain 26 areas of the state, and there'll be more in -- in 27 other areas of the state. 28 I think the experience in Colorado and in 47 1 other areas has shown that the cartel activity does 2 not go away; it merely becomes the breeding point to 3 get it out across the rest of the nation. And, um, 4 that's what we want to kind of control. And I think 5 we can do it in California. I really do think we 6 can do it. But this banking issue will continue to 7 be a problem. 8 And, uh, so until we get all these things 9 kind of lined up and knowing that we have really no 10 public safety funding, I think it's very important 11 that we at least have some kind of street-smart 12 investigation process that can at least, you know, 13 give a heads up to -- to where the issues are, who 14 we might be needing to assist, versus who we might 15 be needing to encourage to come to the fore. 16 I think it's gonna be twofold here. I 17 think the medical marijuana, we can start bringing 18 those people in now. I think, you know, they -- 19 that -- that will -- probably in most cases, that 20 will convert to recreational, or could convert to 21 recreational. 22 And I think it's important to get those 23 people up and running and registered now. And then 24 to go, you know -- to be sure that we're prepared 25 for '18. And that we know what's actually on the 26 ground. 27 And so I would like to see these go forward 28 for the first -- it's only this year and next year, 48 1 or the next budget year that we're staffing for. 2 It's not a lot of people. But I think it's 3 necessary for us to at least understand and get -- 4 get a little idea what we're dealing with, and then 5 come back to this Board within six months and say, 6 "Hey, this is what we're seeing. Maybe we don't 7 need this. Maybe we need a little more of that." 8 And I'm more than willing to do that. But 9 I do not want to say no to these right now, because 10 time is of the essence. And we won't get another -- 11 I think if we're just working with Department of 12 Finance and trying to get them used to what we're 13 doing in our -- in our regular staffing, let alone 14 adding this, I think the credibility of the Board's 15 at stake. And we need to be sure we're at least -- 16 or we're gonna be blamed for not enforcing the 17 program. 18 I mean, you know, you have to kind of know 19 what you're doing first. And everybody's kinda got 20 their sea legs now. Nobody really knows how this is 21 really going to work. 22 I think there are a lot -- like I said, 23 there's a lot of places that are trying to do it 24 right, coming -- coming into the fore, as -- as 25 Chairwoman Ma has said. But there are a lot that 26 won't be. And I just don't see my auditors or -- or 27 my SCOP Teams going out into those areas and being 28 any kind of, you know, super sleuth. They've got 49 1 other industries they probably feel a little bit 2 safer doing that with. 3 So I, you know -- I -- we see some of the 4 people that come before the Board, they don't have 5 books and records. They've got -- what -- what are 6 those dogs -- dogs in the backyard, and -- and, you 7 know, they're not -- you know, they're -- they're 8 underground now. So I think there's a lot that we 9 need to -- need to be dealing with here. 10 This is an interesting foray into trying to 11 legalize what has been, or what is still by the 12 federal, but what has been in California, illegal 13 and black market. 14 And I don't think we can be naive and say 15 they're just gonna come forward. I -- I don't want 16 to be there. I -- I want to be sure that we're at 17 least covering ourselves and know what we're getting 18 into. And we can always pull back. But we're not 19 asking for much here. This is not much. And if 20 they've been working with Department of Finance, I'd 21 like to see it go forward. 22 So I am going to make a motion to support 23 these, and hopefully I'll get support to support 24 these BCPs, and request a -- the staff to come back 25 in three months and in six months, and let us know 26 where they think they are. 27 MR. HORTON: Um, Madam Chair, I would 28 second that motion. But I will say there may be a 50 1 solution. And Member Harkey may have sort of framed 2 up that solution if staff can maybe articulate on 3 this suggestion. 4 And that is, is that if the Members are of 5 a mind that -- and I think all of us seem to be of a 6 mind that education is necessary. And if you look 7 at the numbers, 50/50 ratio, 50 percent compliance, 8 50 percent noncompliance. That means you have a 9 significant number of folks out there with the 10 appropriate education, with the appropriate 11 structure in place, who will come into compliance as 12 been experienced throughout California. 13 Not only in Northern California, but in 14 Southern California we have seen an increased number 15 of people who want to comply. They simply can't, 16 because prior the law didn't allow for that, you 17 know. In LA, for example, only 132 licenses were 18 issued. So you had to go out there and violate the 19 law, you know. And only so many folks could comply 20 because of their concerns about the federal 21 prosecution. And so to the extent that that 22 education can occur and bring those into compliance, 23 along with the reality of the 50 percent. 24 So a commitment from staff to come up with 25 a plan that -- another BCP, or -- or incorporate 26 something in this BCP that addresses that education, 27 but not necessarily minimizes the need to have the 28 enforcement in place. 51 1 Because January 1st, 2018, you're not gonna 2 put in -- you're not gonna put two investigators to 3 work January 1st, 2018 and expect them to do 4 anything for a good year-and-a-half. So you might 5 as well get them up and ready to go. 6 I think the -- the -- the -- the -- the 7 growers and the cultivators, we had similar issues, 8 as you may recall, when we were addressing tobacco 9 tax evasion in that the industry was concerned. 10 They were concerned about the Board of Equalization 11 overly aggressively coming after them, until they 12 realized that the Board of Equalization is only 13 going after the tax evaders, and not the folks who 14 make mistakes. You know, folks who make mistakes in 15 taxation ought to be given a second chance to some 16 degree. But those -- but there is a group out there 17 that will be evading the tax. 18 Even the cottage industry, they're going to 19 face the Mexican Mafia, and they're going to face in 20 Canada imports and export, the products coming from 21 all over the world. Folks traveling to Europe 22 and -- and bringing the product back and so forth. 23 Currently Mexico grows a significant amount 24 of this product. And as soon as the gates are open, 25 you're gonna see the trucks flowing into the state 26 of California if the regulatory system isn't there 27 in place, as we've experienced over the last 30 28 years with so many other industries. 52 1 Despite the education that has occurred, I 2 think over the last 40 years, we still see 3 $9 billion in unreported taxation, according to the 4 UCLA study. We've done an enormous amount of 5 education. 6 I think what that tells us is, is that the 7 industry itself, the legitimate operators, if they 8 don't have the Board of Equalization protecting them 9 from the illegal operators and leveling the playing 10 field, they're going to be put out of business. You 11 know, the criminals will force them out of business, 12 because they have a competitive advantage. They 13 have a competitive advantage from a tax perspective, 14 competitive advantage from a distribution 15 perspective. Their distribution system is already 16 in place, you know. 17 You can go on the Internet, and -- and 18 locations -- thousands of locations will come up 19 where you can actually go and purchase this product, 20 walk down Venice Boulevard, and you can purchase. 21 So their distribution is in place. And the only 22 thing that can protect the legitimate operate -- 23 operators is enforcement from those who are going to 24 violate the law. Whether that's 10 percent, 30 25 percent, or as you have estimated, 50 percent of the 26 individuals who have just anticipated they're not 27 going to comply with the law based on what's 28 happening in New York and Canada. 53 1 So I think a conversation, if you will, 2 with the cottage industry and with other folks to 3 get them to understand that our job is not to put 4 people out of business, our job is to level the 5 playing field and make sure everybody pays their 6 fair share. 7 And so in -- in that environment is where 8 legitimate operators thrive. Those who want to 9 comply with the law, they thrive. Because the store 10 a block away, the Board of Equalization is 11 investigating them. And they're no longer 12 undercutting them and selling it. Or shall I say 13 the corner across the way, as the case may be, or 14 whatever the case may be. 15 So I -- I think there's a real upside to 16 the legitimate operators who want to comply, to 17 educate them. And I think it's in the legitimate 18 operator's best interest to level the playing field. 19 And when I said policing, everyone knows 20 I've -- to -- to -- to my detriment, I've sort of 21 fought this whole policing thing, having guns. And 22 I agree with Chairwoman in that regard. 23 But I do believe there needs to be a -- a 24 Memorandum of Understanding with the police 25 department or someone else. We've got to fund a -- 26 a -- a collaborative working relationship to protect 27 our staff. Otherwise we just can't ask them to -- 28 to be on the front line with a pencil and pen and -- 54 1 and, you know, expect to -- to dodge the bullet. 2 I mean, this is -- we can certainly make 3 policy based on the exception. But in this case, 4 both the exception and the rule can result in the 5 loss of life. And I certainly wouldn't want to err 6 in that regard. We -- we know what we're facing 7 here with this industry. 8 Anyway, Madam Chair, I think she has 9 some -- 10 MS. MA: Ms. Stowers. 11 MS. STOWERS: I just have one quick 12 question. 13 Looking at the BCP, you guys also -- for 14 Prop 64, there's a couple of BTS, Business Tax 15 Specialist, positions down for civil audit within 16 Legal Specialized Operation Branch. 17 Are these individuals going out to the 18 field to conduct audits, or are they just looking at 19 the documentation that the inspectors or the 20 investigators receive during their investigation? 21 MR. SILVA: They -- they look at what has 22 been obtained through search warrants and subpoenas 23 for criminal investigations. 24 MS. STOWERS: So they're safe; they're not 25 out there -- 26 MR. SILVA: They're not out -- that's 27 correct. They're not out in the field. 28 We also get cases brought into us by other 55 1 law enforcement agencies that have audits. And so 2 we do those audits as well. 3 But the records are all coming in for those 4 staff. 5 MS. STOWERS: Because I'm -- I'm like 6 everyone else; I'm concerned about anyone out there 7 trying to look at the records. 8 And I respect that at least the 9 investigators and the inspectors are trained and 10 would have the limited peace officer status. 11 Um, for the -- if this was approved for the 12 inspectors, it's 2.5 for the current budget year, 13 and you guys will come back to us in six months to 14 talk about the other 21.5 inspectors? Is that what 15 we're saying? 16 MR. HOLTZ: The -- the way that I 17 understood that is that we'd be coming back in -- in 18 three and six months to discuss additional pieces 19 having to do with educational outreach, having to do 20 with other issues that you all are pointing out are 21 not part of this proposal. 22 But as we move forward in the process, not 23 just with Finance, but then also with the other 24 departments that are involved in this, Consumer 25 Affairs, Food and Ag, Fish and Game, DOJ, um, as all 26 those pieces fit together, then we would come back 27 to you and, um, discuss with you those types of 28 things that we are suggesting move forward in 56 1 conjunction with the entire administration's 2 viewpoint of how this program, how this initiative 3 is going to, uh -- to move. 4 MS. STOWERS: Would that include revising 5 the number of inspectors and investigators if it 6 indicates that you don't need that many? 7 MR. HOLTZ: If the data that we're looking 8 at says that we don't need that many, or that we 9 need more, we would come back with that information 10 to you in -- in the spring. 11 MS. STOWERS: I can -- I can appreciate 12 that. But when you come back, I think we should 13 talk about the format and how you present it to us. 14 The way it's presented right now is impossible to 15 follow. 16 MR. HORTON: Now, as a policy, could the 17 Board direct the Department to only -- for the 18 investigators -- to serve in a capacity of 19 educating, observing, analyzing, and only engage 20 in -- in the, uh, more aggressive activity when 21 there is clear evidence of criminal or -- or -- or 22 evidence of a need without quantifying or defining 23 that need. Which I think is what they do anyway. 24 But it -- it appears to be a consensus from 25 the Board that there needs to be a level of 26 education before there's the aggressive enforcement. 27 And -- and from my recollection, the inspectors 28 actually do that. They actually -- unless they see 57 1 something terribly wrong, they're not issuing 2 citations, they're not, you know, setting people up 3 for criminal investigation or something like that. 4 And much of that work is done behind the scene as 5 well. 6 But to the question, as a policy is there a 7 way to -- to assure the Board that, um, these 8 investigators are not being overly aggressive, and 9 they have some instructions to, um, participate in a 10 level of education until there is evidence to the 11 contrary? 12 MR. SILVA: Mr. Horton, we currently do 13 about 10,000 inspections a year in the cigarette and 14 tobacco products arena. 15 MR. HORTON: I'm asking a leading question, 16 so go ahead. 17 MR. SILVA: Of those, a very small number 18 result in a violation. But they also -- I mean, the 19 inspectors provide insights into where some of the 20 more felony criminal activity is occurring because 21 of their presence within the, um -- the particular 22 industry with -- with a (inaudible) -- 23 MR. HORTON: Of -- of the 10,000 that -- 24 that you -- of the 10,000 that you mentioned, what 25 percentage of that actually leads or results in some 26 type of -- 27 MR. SILVA: I was afraid you were going to 28 ask me that question. 58 1 MR. HORTON: You can guess. 2 MR. SILVA: I don't -- it's a small 3 percent. I'll have to get back to you. I don't 4 know it off the top of my head. 5 MS. HARKEY: Under ten? 6 MR. SILVA: Pardon? 7 MS. HARKEY: Under ten? 8 MR. SILVA: It's under ten percent, I 9 believe. 10 MS. HARKEY: Under five? 11 MR. SILVA: I want to say somewhere between 12 10 and 5 -- 13 MS. HARKEY: Okay. 14 MR. SILVA: -- but I really need to check 15 to give you an accurate answer. 16 MS. HARKEY: That's a ballpark. 17 MR. HORTON: So the greater percentage of 18 their activity is education and -- and assisting in 19 complying with awareness? 20 MR. SILVA: That's correct. 21 MR. HORTON: All right. Thank you. 22 MS. MA: Um, I'd -- I -- I -- I'd like to 23 split the two votes. Again, I'm just not 24 comfortable having so many investigators out there. 25 I mean, I like the SCOP Team, because those 26 folks in SCOP actually work with the different 27 groups within an office. And they sometimes, you 28 know, move out and become, you know, an auditor. 59 1 They don't stay. 2 Investigators stay as investigators. I 3 think investigators look at cases differently than 4 the SCOP Team members. 5 I'm just not comfortable at this time until 6 we get a better handle of how many people are out 7 there; how many people are really complying. And 8 that's how I'm -- I feel. So -- 9 MR. RUNNER: I -- I'm gonna be fine 10 supporting both of these; however, I think my 11 concern is when we come back in three months. The 12 three months allows us, then, time to adjust 13 whatever we're doing. It will be in mid -- it will 14 be in the very beginning time of -- of budget 15 hearings and -- and committee hearings over there. 16 So if we find that we can make an adjustment, we can 17 certainly make adjustments from our -- from our 18 point of view at that -- at that time. 19 But what I'd like to see us do when we come 20 back, is I'd like to make sure that what is 21 presented then to us at that time is a field-based 22 Outreach Program. 23 What's the plan? I think right now I hear 24 about Outreach, and -- but it sounds like it's a -- 25 like a Sacramento-based Outreach Program. 26 For instance, when you talked about 27 Outreach and SCOP, and all those things, and 28 compliance, I don't know if you had much 60 1 conversation with the field offices about it. And 2 so I'm interested to know that we have an 3 involvement in the field offices in regards to what 4 they believe. Since they're out there -- they're 5 out there auditing these folks right, you know -- a 6 lot of them right now. What do -- what do they see, 7 then, as what we need to be able to do to have a 8 field-based Outreach Program and integrate it into 9 this? 10 So, anyhow, just if that can be part of it, 11 that'd be great for me. 12 MS. HARKEY: I just -- I just got told that 13 there were 800, I guess, citations or whatever, out 14 of 10,000 investigations. So that's less than one 15 percent. I don't know if that's right or not, 16 but -- 17 MS. MA: Is that tobacco? Is that under 18 tobacco? 19 MS. HARKEY: Must be. Yes. 20 MR. HORTON: Move adoption of BC change 21 relative to Proposition 56. 22 MS. MA: Okay. Mr. -- 23 MR. RUNNER: Second. 24 MS. MA: -- Horton moves. Ms. -- 25 MS. HARKEY: No. 26 MS. MA: Mr. Runner seconds on the BCP 27 related to Prop 56. I think without objection, 28 motion carries. 61 1 And on Item No. P6b. 2 MS. HARKEY: Move support of the BCP with a 3 three-month review and a six-month review. 4 MR. HORTON: I -- I second that. But, you 5 know, I think it's grossly understated, if you ask 6 me. But I second it. 7 MS. MA: Okay. Mr. -- Ms. Harkey moves, 8 Mr. Horton seconds with a three- and six- month 9 review. 10 Um, could you take a roll-call vote? 11 MS. RICHMOND: Chairwoman Ma. 12 MS. MA: No. 13 MS. RICHMOND: Ms. Harkey. 14 MS. HARKEY: Aye. 15 MS. RICHMOND: Mr. Horton. 16 MR. HORTON: Aye. 17 MS. RICHMOND: Mr. Runner. 18 MR. RUNNER: Aye. 19 MS. RICHMOND: Ms. Stowers. 20 MS. STOWERS: No. 21 MS. RICHMOND: Motion carries. 22 ---oOo--- 23 24 25 26 27 28 62 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 November 29, 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 43 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: December 12, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 63 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on November 29, 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 44 through 62 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: January 6, 2017 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 64