STATE OF CALIFORNIA FRANCHISE TAX BOARD MEETING WEDNESDAY, NOVEMBER 28, 2007 FRANCHISE TAX BOARD 9646 BUTTERFIELD WAY TOWN CENTER, GERALD GOLDBERG AUDITORIUM SACRAMENTO, CALIFORNIA 9:30 A.M. REPORTED BY: SANDRA VON HAENEL CSR No. 11407 1 APPEARANCES 2 FRANCHISE TAX BOARD: 3 Hon. John Chiang, Chair Hon. Michael C. Genest 4 Hon. Betty T. Yee Deputy Controller Marcy Jo Mandel 5 6 FRANCHISE TAX BOARD STAFF: 7 Colleen Berwick Lisa Crowe 8 Patrice Gau-Johnson Carl Joseph 9 Patrick Kusiak Bruce Langston 10 Anne Miller Brian Putler 11 Selvi Stanislaus Geoffrey S. Way 12 13 PUBLIC SPEAKERS: 14 Ronald A. Boucher - United Californians for Tax Reform 15 Kyla Christoffersen - California Chamber of Commerce Lenny Goldberg - California Tax Reform 16 Association Eric I. Miethke - Business for Economic Growth 17 in California Maurine C. Padden - California Bankers Association 18 Michele Pielsticker - Cal-Tax Gina Rodriquez - Spidell Publishing, Inc. 19 Barry Weissman - Chevron Corporation 20 21 ---oOo--- 22 23 24 25 2 1 SACRAMENTO, CALIFORNIA 2 WEDNESDAY, NOVEMBER 28, 2007, 9:30 A.M. 3 ---oOo--- 4 CHAIR CHIANG: Good morning. This is the scheduled 5 meeting for the Franchise Tax Board. 6 Would the secretary please call roll to determine 7 whether a quorum is present. 8 MS. BERWICK: Member Yee? 9 MEMBER YEE: Present. 10 MS. BERWICK: Member Genest? 11 MEMBER GENEST: Present. 12 MS. BERWICK: And Chair Chiang? 13 CHAIR CHIANG: Present. 14 A quorum is present. If you will go to -- let me take 15 a moment here. 16 If there are any members of the public wishing to 17 speak on an item, please come forward when that item is 18 called. We have sign-up sheets. So if you have not done 19 so, please remember to sign in. 20 First item, please. 21 MS. BERWICK: Item 1 is approval of minutes. 22 CHAIR CHIANG: Okay. Very good. 23 MEMBER YEE: I'll move to approve the minutes as 24 revised. 25 CHAIR CHIANG: We have a motion by Member Yee. 3 1 Is there a second? 2 MEMBER GENEST: Second. 3 CHAIR CHIANG: Second by Member Genest. 4 Without objection, motion passes. 5 Second item, please. 6 MS. BERWICK: Item 2, legislative matters. 7 MR. PUTLER: Good morning. Brian Putler. I'm the 8 legislative director for the Franchise Tax Board, and I have 9 just a couple of preliminary comments. 10 It's been seven years since we have had this many 11 complex legislative proposals with so much interest from the 12 public. I think partially that's the result of FTB staff 13 work on addressing the tax gap, especially for cash base 14 taxpayers. 15 In order to share the abundance of legislative 16 proposals this year, the assistant legislative director is 17 going to be presenting the proposals -- Patrice 18 Gau-Johnston, sitting to my right. 19 The request today for the first twelve of the 20 proposals is that they be approved by the Board to place 21 with an author as an FTB sponsored bill. And then Number 13 22 is a Taxpayer Bill of Rights proposal that was suggested at 23 least year's meeting, and we can discuss that when we get to 24 that particular item. 25 So I'm not sure how the Chair would like me to 4 1 proceed. I could recommend a couple of different ways that 2 we could proceed through this, unless you have something in 3 mind already. 4 CHAIR CHIANG: For organizational purposes, Brian, 5 let's go item by item because we have individuals signed up 6 for particular items. 7 MR. PUTLER: Okay. Very good. 8 So Item 1, Award of Attorney Fees in Tax Refund 9 Lawsuits. This proposal would conform California law to 10 federal law on the issue of award of attorneys fees in 11 income tax litigation. Revenue and Taxation Code Section 12 19717 would be the exclusive basis for award of attorneys 13 fees so that it is clear that an award cannot be made under 14 the Private Attorney General Act. 15 It was interesting to me that in our research at the 16 state archives, we found that the first committee that was 17 formed for the purposes of putting together a conformity 18 bill intended to conform to the federal law back in 1984, 19 but for a drafting error, the law failed to be made express 20 on that point. 21 The bill as an added feature to it would have what we 22 call "no inference" language and would apply to lawsuits 23 filed after January 1, '09. So that would not impact any 24 present pending litigation. 25 CHAIR CHIANG: Very good. 5 1 We have one individual signed to speak on this item, 2 Michele Pielsticker. 3 MS. PIELSTICKER: Good morning, Mr. Chair, members of 4 the Board. Michele Pielsticker, Cal-Tax. 5 We are opposed to this legislative proposal. By 6 proposing this legislation, the FTB appears to be providing 7 itself an insurance policy against constitutional challenges 8 to tax statutes. Section 19717, the statute, proposes the 9 basis for attorneys fees awards in tax cases, precludes the 10 award of attorneys fees to a prevailing party where the 11 Board's position is substantially justified. And that would 12 effectively preclude the award of attorneys fees in 13 constitutional challenges. 14 The Board is required to enforce unconstitutional 15 statutes absent an appellate court ruling striking the 16 statute as unconstitutional. Therefore, in such cases, the 17 Board's position would always be substantially justified, 18 and prevailing taxpayers would never be awarded attorneys 19 fees. 20 Currently, taxpayers must exhaust administrative 21 remedies by paying the disputed tax and requesting a refund, 22 possibly requiring the taxpayer to continue for months or 23 years through the administrative appeal process before 24 proceeding to court. That requirement, combined with 25 precluding attorneys fees awards when the Board's position 6 1 is substantially justified, would effectively eliminate 2 challenges to unconstitutional taxes where the amount of the 3 tax is too small to justify the cost of challenging it. 4 The law prohibits enjoining the collection of a tax. 5 And, as a practical matter, class-action taxpayer lawsuits, 6 in all but the most limited of circumstances, are 7 effectively impossible to pursue. 8 Continuing to allow Section 1021.5, the private 9 attorney general statute, to be the basis for awarding 10 attorneys fees would allow taxpayers a realistic avenue to 11 challenge unconstitutional taxes while continuing to provide 12 safeguards against frivolous attorneys fees awards. 13 To receive attorneys fees under Section 1021.5, the 14 successful party must have won a case that resulted in the 15 enforcement of an important right affecting the public 16 interest, and the court has discretion to determine what 17 amount is reasonable. 18 It is entirely appropriate for taxpayer lawsuits that 19 challenge unconstitutional taxes to fall under this code 20 section with respect to prevailing parties' attorneys fees. 21 There must continue to be a downside for the state 22 legislature to enact unconstitutional taxes. There is no 23 downside if taxpayers can't afford to challenge them. 24 Thank you. 25 CHAIR CHIANG: Thank you. 7 1 Would staff like to respond? 2 MR. PUTLER: Yes. 3 The staff would disagree with the idea of the concept 4 that there really is no basis then to exist for taxpayers to 5 challenge statutes that are potentially unconstitutional. 6 Certainly, under the current law, under Section 19717, 7 there is provision for attorneys fees, there is provision 8 for attorneys to request fees beyond the standard $150 cap. 9 That is relief that is generally given by the courts when a 10 request for attorneys fees is made. 11 And on the issue of the FTB would be in a position of 12 always being substantially justified for bringing a lawsuit 13 because of Article III, Section 3.5, we believe that that 14 concern is overstated and, in fact, we would say that 15 Article III, 3.5 doesn't make the state bulletproof in 16 opposing awards for attorneys fees. 17 Ever since Article III, Section 3.5 came into 18 existence back in 1983, shortly thereafter, a Court of 19 Appeals case in 1984 came down in which -- on facts not 20 identical to our situation -- it was a case against the 21 Board of Education -- the court found that even a good faith 22 belief about a statute being constitutional or not, being 23 coupled with Article III, Section 3.5, was not an 24 appropriate basis to deny the request for attorneys fees, 25 and in that case attorney fees were given. 8 1 CHAIR CHIANG: Any questions or comments? 2 Okay. Very good. 3 Is there a motion? 4 MEMBER YEE: I will move approval of this legislative 5 proposal. 6 MEMBER GENEST: I will be abstaining on all of these. 7 CHAIR CHIANG: Very good. 8 Motion second. Motion passes. 9 Please note the Director of Finance will not be 10 participating. 11 Next item, please. 12 MS. BERWICK: Item 3, regulation matters. 13 I'm sorry. Legislative Proposal 2. 14 MS. GAU-JOHNSON: This legislative proposal is to 15 propose suspension of an occupational or professional 16 license by Franchise Tax Board for outstanding tax 17 liability. 18 The problem that Franchise Tax Board has is that 19 normal collection tools used, such as wage garnishments and 20 bank levies, are not effective against businesses that 21 operate on a cash basis, so in many instances we don't have 22 income information or bank account information. 23 So what we propose to do is suspend an occupational or 24 professional license when the licensee is delinquent. They 25 receive a 60-day Preliminary Notice to Resolve, and would be 9 1 granted a hardship hearing. 2 CHAIR CHIANG: Okay. 3 We have two speakers. Again, Michele, followed by 4 Lenny Goldberg. 5 MS. PIELSTICKER: Thank you once again. 6 Michele Pielsticker, Cal-Tax. 7 We are opposed to this proposal as well. Revoking a 8 person's ability to make a living to ensure that they will 9 pay their tax debt is both counterintuitive and heavy 10 handed. While staff has indicated that a few other states 11 use this approach to tax collection, I would hope that the 12 state of California would decline. 13 State licenses can include anything from a cosmetology 14 license to a nursing license. These licenses are the bread 15 and butter of the taxpayer. They provide food, shelter, and 16 clothing for their families. They also provide the income 17 that can be applied to a tax debt. And now the department 18 is proposing to take this away for an ongoing tax 19 delinquency. 20 The Board may argue that the mere threat of license 21 revocation is sufficient to force taxpayers to comply with 22 the law, and it may be, but how far is the state willing to 23 go to collect on a debt. Jail is probably a better 24 deterrent than license revocation, and it was used as a 25 threat in the age of Charles Dickens; however, it didn't 10 1 work then and it's unlikely to work now. 2 It's virtually guaranteed, however, that neither a 3 taxpayer without a professional license nor a taxpayer that 4 is in jail is going to pay their tax debt. But the more 5 fundamental question is do we really want to deprive people 6 like hairstylists, barbers, and nurses of their right to 7 make a living. Thanks. 8 CHAIR CHIANG: Thank you. 9 Lenny. 10 MR. GOLDBERG: Lenny Goldberg, California Tax Reform 11 Association. 12 I hadn't actually signed up to talk on this issue, but 13 I did support it in the interested parties meeting that we 14 had, and I supported it on the basis of the experience that 15 we have had with regard to child support in which we've long 16 had the ability to revoke a license. 17 And, secondly, with regard to the issue of the 18 underground economy, we have an awful lot of contractors in 19 construction that are moving underground that are not paying 20 their taxes, have to for various reasons have a license, and 21 yet are avoiding tax payments in the cash and underground 22 economy. 23 So I think this is a good underground economy 24 proposal, and I would just stipulate, as I will on the very 25 next proposal, that we need to be able to collect virtually 11 1 everything that we can, given the revenue shortage that we 2 have. But in this case, we think this is a very practical 3 and workable proposal. Thank you. 4 CHAIR CHIANG: Thank you. 5 Staff? And then if you could also address the 6 Contractors State Licensing Board data sharing issue. 7 MS. GAU-JOHNSON: Okay. First, I'd like to address 8 the counterintuitive point that Michele Pielsticker made. 9 And while it does seem counterintuitive, the success that 10 child support and the revenues estimation that was made 11 based on that does support that this will bring in revenue. 12 And with child support, of those that received a 13 Notice of Intent to Suspend, 42 percent took action to 14 resolve their issue. 15 And they are provided a financial hardship hearing, 16 and it's not limited to financial burden. We take all 17 hardships into consideration, whether they be long term or 18 temporary situations, medical issues, a catastrophic life 19 event, those are all taken into consideration. We work with 20 the taxpayer to get into an installment agreement or some 21 sort of -- make payment arrangements to bring them into 22 compliance with the laws. 23 The privilege of operating a license, it is a 24 privilege, and we would like to level the playing field with 25 those businesses that are operating and paying their taxes 12 1 with those that may be operating on a cash basis and not 2 paying their fair share of taxes. 3 CHAIR CHIANG: And the data sharing? 4 MS. GAU-JOHNSON: The Contractors State Licensing 5 Board, we have that in place right now to begin. We don't 6 have any statistics because it's in the very preliminary 7 stages. So what we'd like to do is, if we move forward with 8 this legislative proposal and, you know, we receive funding 9 to do what we prefer to go about, about suspending in this 10 manner. If we do not receive the funding then, if approved, 11 then we would like to have that Contractors State Licensing 12 Board stay in place. 13 CHAIR CHIANG: I'm sorry. I wasn't quite clear. 14 MS. GAU-JOHNSON: I apologize. 15 CHAIR CHIANG: No, that's okay. 16 MS. GAU-JOHNSON: We have in place a contract -- an 17 agreement with the Contractors State Licensing Board, and we 18 are in the very preliminary stages of working that. This 19 would, this procedure would allow the due process hearing to 20 be with the Contractors State Licensing Board. 21 Many of the boards we've talked with, like the 22 Department of Consumer Affairs, would prefer that the 23 hardship hearing that we would do would be placed with us, 24 because they do not have the expertise to conduct the due 25 process hearing. 13 1 CHAIR CHIANG: And what would be the impact of this 2 legislative proposal on the relationship and the data 3 sharing? 4 MS. GAU-JOHNSON: We would -- this proposal would 5 remove that language and replace it with that. We would 6 conduct the hearing, the hardship hearing, and we would be 7 the ones that would actually do the suspension of the 8 professional license. The language that's in place now with 9 the Contractors State Licensing Board, they are the ones 10 that are suspending the state license. 11 CHAIR CHIANG: Okay. 12 MR. PUTLER: It's easier when you're sitting listening 13 than when you're the one being asked the questions. 14 What the proposal would do is supersede the newly in 15 place agreement to share information with the California 16 State Licensing Board, because the staff believes that the 17 proposal would be even more effective than what was passed 18 for the licensing board. 19 In the event, though, that the proposal is enacted but 20 not funded, the California State Licensing Board agreement 21 would still remain in effect, and we would want to make sure 22 that that was in the proposal, in the language as well. 23 So I believe that that responds to the question that 24 you had. 25 CHAIR CHIANG: Okay. And so is it in the legislative 14 1 proposal now? 2 MR. PUTLER: The language to make it clear that the 3 current law would remain in effect if there is no funding 4 is not, but what we would propose is that if the proposal 5 was moved by the Board, we would alter the language to add 6 that. 7 CHAIR CHIANG: Okay. Is there questions or comments? 8 MEMBER YEE: No comments. 9 I am actually supportive of the proposal, and I'd like 10 to see that amendment to ensure that we still have the 11 ability to maintain the current arrangement. 12 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 13 is not participating. 14 Motion passes without objection. 15 Next item, please. 16 MR. PUTLER: Okay. The next item is what I call 17 better data for orders to withhold, or for what we commonly 18 call levies. 19 The current law already includes a provision that 20 allows orders to withhold. It is one of the most effective 21 tools used for collecting tax debt. 22 Currently, the data that's used as the basis for 23 making OTWs is 1099 language, or 1099 information that comes 24 from the IRS. 1099 information is reporting on interest 25 earned. By the time the FTB gets that information and is 15 1 able to load it into its system, that information is already 2 10 to 18 months old, and it also is for accounts for which 3 interest accrues. So a noninterest-earning account, such as 4 a checking account, typically would not be included in or be 5 the subject of orders to withhold. 6 So what this proposal would do, like the child support 7 law, is to require all financial institutions -- that would 8 be banks, credit unions, brokerages, and insurance companies 9 that have deposit accounts -- to run a quarterly data match 10 of their depositor information against a tape of FTB 11 debtors. This would include noninterest-bearing accounts, 12 it would include such as checking accounts and stock 13 brokerage accounts for which maybe there is no 1099 14 information, and the information that would be used then as 15 the basis for OTWs would be two months old. And that is the 16 proposal. 17 The one thing I would like to let the Board know is 18 that staff did have a total of five meetings with the public 19 in regard to this proposal, and we've had varying degrees of 20 attendance. We did get a lot of valuable information that 21 allowed us to change some of the methods that we would use 22 to actually implement the proposal. 23 CHAIR CHIANG: Thank you, Brian. 24 We have four individuals signed up to speak, in this 25 order: Michele Pielsticker, Kyla Christoffersen, 16 1 Maurine Padden, then Lenny Goldberg. 2 Michele has indicated that she is going to defer. 3 Is Kyla present? Kyla. And, Maurine, you're second 4 in the queue. 5 MS. CHRISTOFFERSEN: Good morning, Honorable Chair and 6 Board members. My name is Kyla Christoffersen. I'm here on 7 behalf of the California Chamber of Commerce, and we're here 8 to express concerns about the impact that this proposal 9 could have on not only the financial services industry but 10 any private sector industry. 11 We think that it is inappropriate for the private 12 sector to have to be put in a position of basically being 13 law enforcement for the State of California. And if this 14 proposal is approved for the financial services industry, we 15 don't see why it won't be easy to justify placing similar 16 kinds of mandates on any industry that collects private 17 consumer information. These would be retailers, online 18 retailers, offline retailers, telephone companies. 19 Any company that collects private consumer information 20 that may pertain to their financial information, we think, 21 could be subject to this kind of mandate once this is put 22 into law on one industry. 23 So we believe it's very important for consumers to be 24 able to transact business with various private sector 25 industries and believe and be confidant that their financial 17 1 information is going to be kept private and confidential 2 with those with whom they're transacting business and that 3 it not be turned over to the government. 4 Thank you. 5 CHAIR CHIANG: Thank you for your comments. 6 Maurine. 7 MS. PADDEN: Thank you, Mr. Chair and members. 8 Maurine Padden with California Bankers Association, 9 representing over 200 financial institutions doing business 10 in California, from the smallest community banks to the 11 largest multinationals. 12 I first want to point out to the Board that, in fact, 13 we have a monumental policy decision here to make. Not only 14 do we have the statutory right to financial privacy, we have 15 Article I, Section 1 of the state constitution where the 16 framers determined that the most important right, 17 fundamental right to protect in order of priority, was 18 privacy. 19 If we are going to propose, as is considered here by 20 Franchise Tax Board staff, that we require financial 21 institutions to turn over personal financial information of 22 their customers on a quarterly basis for a data match for 23 purposes of identifying delinquent state taxpayers, then I 24 believe, and I submit, that there is a very, very important 25 public policy decision that must first be made. 18 1 Let me go back historically to the child support 2 delinquency issue. In fact, in that instance what we had 3 was a determination by the state that law enforcement, in 4 particular, the District Attorney's Office, would have the 5 responsibility for collecting delinquent child support 6 obligations from Californians. 7 There was a public policy determination that was made 8 that the abridgment of the fundamental constitutional right 9 of privacy was justified in this instance, and, hence, law 10 enforcement was brought in to be, if you will, the first 11 resort in terms of a debt collector for those unpaid 12 obligations. 13 In this instance we do not have law enforcement 14 involved, we do not have an initial public policy decision 15 that has been made that this is the least intrusive means of 16 abridging this fundamental constitutional right. 17 I submit to you that before we can consider going 18 forth with this legislation, which the Bankers Association 19 strongly opposes, there must be adequate and deliberate 20 consideration, balancing the right to privacy versus the 21 public policy to be forwarded by identifying and collecting 22 from delinquent state taxpayers and realizing that this is 23 the least intrusive means of doing so. And I submit that 24 that has not occurred yet today. 25 In addition, I want to point out some additional 19 1 concerns that we have with the proposal. Number one, in the 2 instances where a small community bank, for example, does 3 not have the capacity to do a data match on their own terms 4 and within their own institution, then, under this proposal, 5 they would be turning over their information of their 6 customers' accounts to the Franchise Tax Board to have the 7 data match occur. 8 I submit that there are some practical effects that 9 will happen. I know that not only delinquent state 10 taxpayers that may be aware of this but other citizens of 11 the state such as yours truly would find that very 12 objectionable and would perhaps consider moving our accounts 13 out of state. Obviously, this proposal is only going to 14 affect those accounts that are within the state of 15 California and subject to California jurisdiction. 16 There will not be any kind of extraordinary authority 17 to go outside of the state to also search other accounts 18 located outside the jurisdictional borders of this state. 19 Therefore, I submit that to the extent that you decide 20 to go forward with this proposal, what you will be doing is 21 encouraging those that value their financial privacy to take 22 their deposits out of this state and, therefore, lack any 23 kind of ability as the commercial banks in this state to 24 reinvest in their community. 25 I submit that this is the wrong proposal at the wrong 20 1 time, and I urge that you not adopt this proposal. 2 Thank you. 3 CHAIR CHIANG: Michele, do you want to speak? 4 MS. PIELSTICKER: Michele Pielsticker, Cal-Tax. 5 I can't say it any more succinctly than Ms. Padden 6 did, so I will just say that I concur with Ms. Padden's 7 comments, and Cal-Tax is also opposed to this measure. 8 CHAIR CHIANG: Thank you. 9 Lenny. 10 MR. GOLDBERG: Lenny Goldberg, California Tax Reform 11 Association. 12 And I speak with a little bit of experience here 13 because I was working on child support issues as well when 14 we negotiated the agreements with the banks very positively 15 and favorably with regard to child support intercepts. And 16 one of the things about that is that it was bound to be more 17 expensive than this with regard to per unit of collection, 18 because the number of child support debtors in the system is 19 less than the number of tax debtors. But we worked that out 20 very favorably with the banks, now, admittedly under a 21 federal mandate in child support that that had to be done. 22 One of the -- and I'm going to start with the 23 practical and get to the philosophical, although I can 24 hardly restrain myself. 25 CHAIR CHIANG: Please do. 21 1 MR. GOLDBERG: On the practical issues the small 2 community banks worked out, in child support, they have 3 third-party data processing. They do, for a variety of 4 reasons, the very small banks had to give over their data 5 and use third-party data processors, as do medium size and 6 some larger banks. That's where the intercept takes place. 7 It does not take place at the Franchise Tax Board. 8 So one of the very specific practical problems that 9 was worked out was the issue of using the third-party data 10 processing that the small community banks use in any case to 11 get the specific data match. 12 I just have to say as a representative of the privacy 13 rates clearing house who spent three years negotiating 14 financial privacy, I find the statement of the banks -- this 15 is where I'm going off a little -- I find the statement of 16 the banks to be laughable with regard to the issue of 17 privacy. They spent three years opposing every effort to 18 keep -- to make sure that individual financial data of great 19 detail of, not just debtors, but of -- not those who have an 20 adjudicated lien, but of every person in the state of 21 California using their financial institution, they fought 22 tooth and nail against prevention, us preventing them from 23 selling and putting their data anywhere out on the water in 24 any way that they can. 25 When we finally, in the Speier bill, SB-1, we won, we 22 1 won that battle against the banks, they went to court to 2 overturn it, they went to Congress to supersede it. So this 3 notion of privacy, from a philosophical perspective, is just 4 the exact opposite of the way the banking community works. 5 They want to take your data and sell it and use it as much 6 as they possibly can. 7 That's not -- and let me get specific here. What 8 we're talking about are adjudicated liens against tax 9 debtors. These are not circumstances where we are putting 10 everybody's information on the water, which is what the 11 banks do with our financial information. This is a case 12 where you have an adjudicated debt. This is not one that -- 13 just like child support, no different from child support. 14 The district attorneys who Ms. Padden referred to are no 15 longer in the child support system. It's a civil system, 16 it's not a criminal system, and they have adjudicated child 17 support debt court ordered. 18 In the case of a Franchise Tax Board lien, that's 19 after all the process you've gone through, you have people 20 who are scofflaws who are not paying their tax and, 21 therefore, you are exchanging data. 22 Now, with regard to that, the privacy issue as well, 23 in the tax system, you have all our Social Security numbers, 24 all our detailed financial information. When you're talking 25 about the requirement of the Franchise Tax Board, you have 23 1 the ability to get everybody's detailed information. 2 Fortunately, in this case and in the IRA's case, the 3 privacy laws and statutes are very strong, so there is no 4 release to the public, there is no release to any private 5 party. This is only adjudicated tax liens. And, as I said, 6 I think given the behavior of the banks over the last five 7 or seven years with regard to privacy, their concerns are 8 laughable. 9 CHAIR CHIANG: Lenny, and to Maurine and to either one 10 of the two other speakers, in regards to the child support 11 program, what was the affiliated cost in regards to the 12 data sharing for the community banks? I am concerned about 13 it. 14 MR. GOLDBERG: Well, yes. And I think that -- I 15 believe in this proposal, and staff can refer to this, and 16 in the child support proposal, that the costs are paid for 17 out of the collections from the program. So this would not 18 be -- the costs to the banks would be covered. But, again, 19 they were using the third-party processing. But you might 20 check with staff, with the staff on that part. 21 CHAIR CHIANG: Okay. 22 MS. PADDEN: Mr. Chair, if I may speak. 23 CHAIR CHIANG: Yes. 24 MS. PADDEN: With regard to the child support data 25 match program, because of the federal mandate, there were no 24 1 additional allocations for any kind of reimbursement of the 2 costs or expenses to the financial institutions. And today 3 the financial institutions on a community bank level, I have 4 numbers that range from anywhere from a thousand to $15,000 5 a year just for the quarterly data match, and that is money 6 that they are either spending internally with staff doing it 7 and/or through a third party or working with the Franchise 8 Tax Board if they don't have a third party. 9 In addition, the orders to withdraw that currently 10 allow for a $125 reimbursement once a match is established, 11 again, does not cover the cost of facilitating that turnover 12 of the amount of money that may be in that account to 13 Franchise Tax Board or to anyone else that may lawfully 14 serve an order to withdraw. And I would have to -- 15 CHAIR CHIANG: Ms. Padden -- excuse me for 16 interjecting -- what are the costs? 17 MS. PADDEN: For an order to withdraw processing, we 18 are still getting those numbers. Unfortunately, we were 19 under the assumption that there were going to be -- there 20 was going to be some provision in this proposal for adequate 21 compensation to the financial institutions as was 22 represented initially by staff when the beginning of this 23 issue came about when the interested parties meetings were 24 held. But as we move forward, we now realize they do not 25 want to put that in the proposal, so we are trying to get 25 1 those numbers. And as soon as I have those numbers, I'll be 2 happy to share those with the Board members. 3 CHAIR CHIANG: Thank you. 4 Staff response? 5 MR. PUTLER: Yes. First off, the whole issue of -- 6 let's keep in mind what the proposal is trying to obtain, 7 and that is assets, not any and all fishing expeditions for 8 information that is a base breach of privacy. 9 Number two is -- 10 CHAIR CHIANG: Brian, for the record, so that 11 everybody in attendance knows, the information that is being 12 communicated, if you would provide the litany. 13 MR. PUTLER: Right. The information that we would 14 obtain is taxpayer name, if there is an identification 15 number, and then what the account number is and the asset, 16 so that we could actually issue an OTW to obtain those 17 assets. 18 The next thing is we agree privacy is an issue, and 19 the FTB is definitely an entity that is in the business of 20 maintaining privacy and confidentiality of very sensitive 21 information regarding taxpayers. So what the exchange does 22 is it would require an exchange of information between two 23 entities for which confidentiality is an essential part of 24 their business already. In that regard, I think it's really 25 hard to argue that this is some major intrusion into 26 1 privacy. 2 The issues, then, having to do with the cost to small 3 banks or to banks in general, we did check, the staff did 4 check with the state of Kentucky, which is one of the states 5 that is rolling out the data match, and we learned from them 6 that as long as the format for the exchanges is the same as 7 the child support format, that the costs are absolutely 8 minimal to the banks. And based on that, that is actually 9 what the FTB staff would propose to do is use the same 10 format that is used for child support. 11 We also learned from a contractor who does work for 12 some of the banks in Kentucky to help them comply -- this 13 would be smaller banks -- that, in fact, essentially the 14 same computer system is used to make those matches and those 15 runs every time that the run is done. 16 So we did look into the issue of fees, and Maurine is 17 correct. A year ago when we first met with the industry on 18 this issue, we did talk with them about the idea of allowing 19 for compensation and fees. And based on what we learned 20 from Kentucky and the contractor during working in Kentucky, 21 the staff felt that we didn't have adequate information from 22 the banks at that point to override what Kentucky had told 23 us, so there was no provision for initial cost to the bank 24 for the new program. 25 And then, as far as what the costs are per OTW or per 27 1 levy, that is a matter, we learned, of contract essentially 2 between the banks and their depositors, and the banks set 3 the fees. 4 One of the things that we also realized is that right 5 now our OTW successful hit rate is about 12, not quite 6 13 percent. And staff would estimate that the number of 7 hits will increase to about 25 percent under the proposal 8 because of the fact that the information is so much more 9 current. The importance of that is the banks would be 10 reaping much more in fees as far as the percentage of OTWs 11 that they handle. 12 CHAIR CHIANG: Thank you. 13 MEMBER YEE: Mr. Chairman? 14 CHAIR CHIANG: Yes. 15 MEMBER YEE: I wanted to just make a suggestion, if I 16 could, on this proposal. And I appreciate the intent of 17 what the proposal is trying to accomplish, and I certainly 18 have looked at it with an eye to help our colleague, 19 Director of Finance Genest, with additional revenue coming 20 to the state. But having said that, I think that this is 21 different from child support. We are talking about a much 22 greater scope in terms of tax debtors, and my suggestion is 23 along the lines of perhaps looking at scaling back the 24 proposal. 25 I think -- my sense is that when it goes before the 28 1 Legislature, the debate that will take place will be around 2 privacy. And I think that's going to get us away from the 3 ultimate objective that we are trying to achieve here. And 4 I wanted to just at least put out there that perhaps there 5 is a way to scale this so that we can begin to establish a 6 track record and whether we want to set a dollar threshold 7 so that we are not overburdening the financial institutions 8 from the onset. 9 MR. PUTLER: Yes, that is something that we can do. 10 Staff was always concerned about flooding the banks with too 11 many OTWs. And, in fact, the write-up is clear that what we 12 are envisioning is 50,000 the first year and then increasing 13 by 50,000 every year thereafter. 14 But certainly I can go back with our program area and 15 throttle it back based on perhaps the amount of debt or the 16 amount of AGI that the taxpayer has. And there are a number 17 of different ways that we can assure through various filters 18 that we're not overburdening the banks with too many OTWs, 19 and that the ones that we send out are by far the most 20 productive. 21 MEMBER YEE: And I don't want to lose site of this 22 compensation issue. I think when Ms. Padden is able to 23 bring the information forth that she is compiling from the 24 institutions, I would like that issue to be examined with 25 respect to whether they need to make some provision for the 29 1 costs. 2 MR. PUTLER: Okay. So my intent, then, would be to 3 bring this proposal back to the Board at the next Board 4 meeting with revisions in mind for compensation and the 5 scale of the number of OTWs that would be sent out. 6 MEMBER YEE: Yes. 7 Mr. Chairman, that would be my request. 8 CHAIR CHIANG: Very good. Thank you. 9 Next item. 10 MR. PUTLER: Okay. This proposal has to do with a 11 recurring problem having to do with the calculation of a 12 CFC's income and apportionment factors for a California 13 water's-edge taxpayer. The current ratio method that is 14 used is extremely burdensome for taxpayers and also makes 15 for very difficult audits for the department. 16 Over the years there has been a lot of discussion 17 about different ways to come up with an easier way for both 18 the taxpayer and the department to handle this issue. And 19 within the last couple of months, the staff came up with 20 what we believe is a very easy way to -- a much easier way 21 to gain compliance, and it relies on the federal calculation 22 for the CFC, and it puts into place some additional rules. 23 So at this point we've had discussion at our kind of 24 legislative advocates meeting regarding the legislative 25 proposals, and I've had some positive feedback. 30 1 CHAIR CHIANG: Thank you. 2 We have two speakers. I just want to identify I 3 failed to mention at the beginning we have a three-minute 4 limit for public comment. 5 The two individuals are, first, Barry Weissman, 6 followed by Michele Pielsticker. 7 MR. WEISSMAN: Mr. Chairman, members of the Board, I'm 8 Barry Weissman from Chevron. And speaking on this 9 legislative proposal, we understand the staff's desire to 10 make changes recognizing that the rules that have been in 11 place have been in place for 20 years. 12 While we understand the need for them and can 13 certainly sympathize with it, we do have a number of 14 concerns and questions about the proposal as it's currently 15 drafted. And we would suggest to the Board that they 16 request that the staff hold an interested parties meeting 17 first, to try to resolve some of the questions and concerns 18 that we have and others may have. And then, hopefully, if 19 we come to an agreement, then go forward with a revised 20 legislative proposal that reflects the concerns and 21 questions that taxpayers have. 22 Thank you. 23 CHAIR CHIANG: Thank you, Barry. 24 Michele. 25 MS. PIELSTICKER: Michele Pielsticker, Cal-Tax. 31 1 Our members are also very concerned about this 2 proposal, but they feel they need more time to evaluate and 3 consider it as well. It's a very complex area of the law 4 with a long history. And we understand the department's 5 desire to simplify reporting and compliance, and we think 6 that if we can all come to the table, we can accomplish 7 that, but it will be a process, I believe, that will take 8 some time. 9 We would therefore urge the Board to consider an 10 interested parties process before the proposal moves 11 forward. Thanks. 12 CHAIR CHIANG: Thank you. 13 Staff? 14 MR. PUTLER: We're agreeable to those proposals. So 15 what I would propose to do is hold whatever meetings are 16 necessary with the intention of coming back to the Board at 17 the next Board meeting with a proposal and any revisions. 18 CHAIR CHIANG: Thank you. 19 Questions or comments? 20 Item Number 5. 21 MS. GAU-JOHNSON: This issue is for mandatory 22 electronic payments for certain individuals meeting 23 thresholds. The problem that we have at this point is the 24 inefficiency of paper payments versus electronic payments 25 being a more efficient method. Currently we have a low 32 1 usage of electronic payments from individuals. 2 What we propose to do is to establish thresholds for 3 mandatory electronic payments, thresholds for -- excuse me 4 -- estimated tax would be $20,000, and a total balance due 5 liability of greater than $80,000. 6 CHAIR CHIANG: Thank you. 7 Questions or comments? 8 Is there a motion? 9 MEMBER YEE: I'll move to approve the proposal. 10 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 11 abstaining. 12 Without objection, motion passes. 13 Next item, please. 14 MS. GAU-JOHNSON: That is Item Number 6, conformity to 15 federal backup withholding. 16 For this issue we have underreporting or failure to 17 report income to California because of bad or missing Social 18 Security numbers. The 1099 information reporting then 19 becomes ineffective. 20 What we would like to do is conform to federal backup 21 withholding for taxpayers with bad or missing taxpayer 22 identification numbers or previous underreporting of 23 interest or dividends. The federal backup withholding rate 24 is 28 percent. What we propose is 7 percent for California, 25 which is comparable to the federal rate. 33 1 CHAIR CHIANG: Thank you. 2 Questions? Comments? 3 MEMBER YEE: No. 4 CHAIR CHIANG: Motion? 5 MEMBER YEE: Move approval. 6 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 7 abstaining. 8 Without objection, motion passes. 9 MS. GAU-JOHNSON: Item Number 7 is to modify the group 10 return provisions. What we propose to do is add two more 11 groups to those eligible to file group returns. Those would 12 be entities with less than two electing nonresident 13 individuals and also individuals with greater than a million 14 dollars in California taxable income. 15 CHAIR CHIANG: Thank you. 16 Questions? 17 MEMBER YEE: I'll move approval. 18 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 19 abstaining. 20 Motion passes. 21 MR. PUTLER: Okay. Number 8, this proposal would seek 22 to tighten up and close loopholes in the current real estate 23 withholding statutes. And specifically it's after problems 24 having to do with non-California partnerships, 25 non-California S corporations, and then non-California 34 1 residents who have sold real property and have taken back a 2 promissory note. And the changes proposed are relatively 3 simple and straightforward in the materials. 4 CHAIR CHIANG: Okay. Motion? 5 MEMBER YEE: I will move approval. 6 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 7 abstaining. 8 Motion passes. 9 Next item, please. 10 MR. PUTLER: Item Number 9 is what we call taxpayer 11 advocate equity relief. 12 First off, I would like to point out or at least 13 acknowledge that there is an inconsistency between the 14 write-up and the proposed bill language, and that is the 15 dollar threshold for creation of a public record for each 16 instance of relief given. 17 What staff thinks best is for there to be a public 18 record created for each instance of relief, not just those 19 where the amount of relief exceeds $500. 20 So there are a number of errors by the FTB staff each 21 year that can result in penalties or interest or both to the 22 taxpayer that cannot be corrected under current law. This 23 proposal would simply give authority to the advocate and, in 24 some cases, subject to concurrence by the chief counsel. 25 And when the relief given is over $7500, it would be with 35 1 notice to the three-member Board, so that relief could be 2 given in those instances. Staff estimates that there would 3 be less than ten cases of this nature a year. 4 CHAIR CHIANG: Thank you. 5 Motion? 6 MEMBER YEE: Move approval. 7 CHAIR CHIANG: I'm sorry. I apologize. I failed to 8 recognize Gina Rodriquez. 9 Gina, public comment? 10 MS. RODRIQUEZ: Thank you, members. Gina Rodriquez 11 with Spidell Publishing. 12 We brought this to the Board's attention at last 13 year's Bill of Rights hearing. We want to thank staff for 14 moving forward, and we support this proposal. 15 CHAIR CHIANG: Very good. Thank you, Gina. 16 Motion by Yee, second by Chiang, Genest not 17 participating. 18 Motion passes. 19 Next item, please. 20 MR. PUTLER: The next one has to do with what's called 21 the other state tax credit, and the proposal would open the 22 statute of limitations for the other state tax credit in 23 situations where the taxpayer receives a bill from another 24 state after the period for making a claim for refund in 25 California. This would allow the taxpayer in those 36 1 instances to be able to claim the credit. 2 The one thing that had been pointed out to me before 3 is that perhaps the actual proposed bill language should be 4 clear that the current law, Section 18007, where the 5 taxpayer is required, in the flip side happening, that the 6 taxpayer is required to make that report to the FTB so that 7 the FTB could issue a proposed assessment. And what staff 8 would do is propose to make that clarification to the 9 language so that it's clear Section 18007 is unaffected by 10 this language. 11 MEMBER YEE: I'll move approval as amended by staff. 12 CHAIR CHIANG: Motion by Yee, second by Chiang. 13 Let me pause here. Is there a public comment? 14 Gina. 15 MS. RODRIQUEZ: Thank you. Gina Rodriquez with 16 Spidell Publishing. 17 Again, we see this happen all the time in our 18 industry, and taxpayers getting stuck because they can't -- 19 the statute of limitations has simply expired. So we thank 20 staff for proposing this, and we support it. 21 CHAIR CHIANG: With Genest abstaining, motion passes. 22 Next item. 23 MS. GAU-JOHNSON: Item Number 11 is for the child and 24 dependent care expense credit. 25 And we have the issue of fraud with this credit that 37 1 is ongoing. And we have a proposed fix for three different 2 areas, with four different implementation issues. 3 CHAIR CHIANG: Thank you. We have two speakers, first 4 Gina, second by Michele. 5 MS. RODRIQUEZ: Thank you. Gina Rodriquez, again, 6 Spidell Publishing. 7 Again, the Spidell editors would like to express their 8 support for this proposal. 9 CHAIR CHIANG: Thank you, Gina. 10 Michele. 11 MS. PIELSTICKER: Michele Pielsticker, Cal-Tax. 12 We also support this proposal. Cal-Tax has always 13 opposed refundable credits due to the potential for fraud 14 and abuse which takes money away from other vital government 15 functions. So we would support any reasonable efforts by 16 the Board to reduce fraud associated with the child and 17 dependent care credit. The substantiation requirements in 18 this proposal are very reasonable and should be supported. 19 CHAIR CHIANG: Thank you. 20 Motion? 21 MEMBER YEE: Move approval. 22 CHAIR CHIANG: Second by Chiang, Genest abstaining. 23 Motion passes. 24 Next item. 25 MR. PUTLER: Item 12. This proposal has to do with a 38 1 problem that presents itself about 20 times a year, and that 2 is where a taxpayer is entitled to a refund and they opt to 3 use the direct deposit method for the refund, but 4 unfortunately write down either the wrong account number or 5 the wrong routing number, and it results in the money going 6 into a third party's account. 7 In most cases, the third party can be contacted by the 8 bank, and the bank will cooperate to get the transaction 9 reversed, or the third party is contacted by the bank and 10 they acknowledge that it's an error and they'll give the 11 money back. But in about 20 cases a year, the third party 12 will not give the money back and, under current law, the 13 taxpayer is left on their own to try to get the money back, 14 meaning that the FTB has no legal basis to take action to 15 assist the taxpayer. 16 So what this proposal would do is would create a 17 narrow exception in the Financial Privacy Act that would 18 require the bank in these situations to give the name of the 19 depositor to the FTB so the FTB then can issue a Notice of 20 Proposed Assessment as an erroneous refund, to obtain the 21 money back. 22 As soon as that happens, the FTB -- as soon as the 23 erroneous refund Notice of Proposed Assessment goes out, the 24 FTB would be able to make the refund to the taxpayer, and 25 then the FTB would collect against the third party until the 39 1 amount of the assessment is returned. 2 CHAIR CHIANG: We have one speaker. Maurine. 3 MS. PADDEN: Mr. Chair and members, Maurine Padden, 4 California Bankers Association. 5 This particular proposal is one that's come up fairly 6 recently, and we have not adopted a formal position on it. 7 Notwithstanding that, I would point out it is 8 different than the prior data match proposal in that it does 9 not seek to have access to other customers' financial 10 information other than the person to whom the account 11 deposit was misdirected. 12 With that being said, I do want to point out to the 13 Board that, again, this is a privacy exception, and there is 14 currently a less intrusive alternative available to the 15 taxpayer who made the mistake of writing the wrong account 16 number or the wrong routing number on the information they 17 provided to the Franchise Tax Board, and that alternative is 18 for the innocent party who created the error to report the 19 incident to local law enforcement and then to use that 20 information to go to their institution or to the institution 21 to which the deposit was directed and get the information 22 that is needed. 23 The current proposal, we believe, does not provide 24 complete and adequate protection for financial institutions, 25 particularly in the specific area of elder financial abuse 40 1 law. And we would submit that if the Board determines that 2 they want to go forward with this proposal, that staff be 3 directed to work with us to make sure that all of the 4 protections needed by financial institutions are contained 5 in this particular Government Code section. 6 Thank you. 7 CHAIR CHIANG: Thank you. 8 MR. PUTLER: Let me point out that the alternative 9 method of obtaining the refund back that Ms. Padden pointed 10 out would not only be to go to law enforcement, and that 11 would get the name of the bank -- or, rather, the name of 12 the third party, but the FTB would still have no authority 13 to issue an erroneous refund NPA, and the taxpayer would 14 still be left on their own. And with a noncompliant third 15 party, their alternative would be to have to initiate their 16 own lawsuit. 17 And then on the issue of elder abuse law, that is an 18 issue that is something I have never heard about before. 19 So, of course, we would be happy to work with the banks. I 20 would suggest that that may be the kind of important detail 21 that the legislative process is well suited to handle, and 22 that the Board still go ahead and approve the proposal 23 because of the importance of it, and then we can work with 24 the banks as the proposal moves through the Legislature. 25 CHAIR CHIANG: Thank you. 41 1 Comments? Motion? 2 MEMBER YEE: Move approval, with the understanding 3 that we'll continue working with the banking industry. 4 CHAIR CHIANG: Motion by Yee, second by Chiang, Genest 5 abstaining. 6 Motion approved. 7 Next item. 8 MR. PUTLER: And that brings us to the last but not 9 least proposal. And this is one that came from Ron Boucher 10 at the Taxpayer Bill of Rights hearing last year. He may, 11 of course, be -- I believe he's here today and probably can 12 speak much more eloquently on the subject than I can, but 13 the underlying purpose of the proposal is to simplify the 14 tax burden for California taxpayers by eliminating the 15 personal exemption credit and then raising the standard 16 deduction so that fewer taxpayers would need to itemize, 17 they would simply take the standard deduction. And by not 18 itemizing, the theory would be that their California burden 19 would he reduced. 20 The one thing we would point out is that it would 21 result in about -- so what we did, we took his idea and then 22 adjusted the standard deduction so that it would not result 23 in a tax increase, but would result in a minor, the least 24 possible decrease, so that it would not create a two-thirds 25 vote bill. So, as you can see, it does have some modest 42 1 revenue loss associated with it. 2 But in addition it would mean that about 1.2 million 3 California taxpayers, the vast majority of whom presently 4 itemize and also itemize for their federal return, but now 5 would be filing with the standard deduction for California. 6 So for those taxpayers, it would actually end up 7 making a major difference for them between their California 8 return and their federal return, and we don't know that that 9 is going to actually reduce the burden. It may create 10 confusion and actually end up increasing the filing burden. 11 CHAIR CHIANG: Thank you. 12 Mr. Boucher. 13 MR. BOUCHER: Good morning, Board members. I wanted 14 to thank the staff for bringing this proposal forward. And 15 as I mentioned last year -- 16 CHAIR CHIANG: Excuse me. Roland, for my benefit, 17 could you speak into the microphone. I'm having difficulty 18 hearing. 19 MR. BOUCHER: Can you hear me okay now? 20 CHAIR CHIANG: Better. Thank you. 21 MR. BOUCHER: Last year -- I particularly want to 22 thank the staff for bringing this forward, and I hope we can 23 get approval to move forward here. 24 Last year when I brought this forward, I mentioned 25 that this was a proposal that we had been working on at 43 1 United Californians for Tax Reform for many years, and we 2 took it forward to the President's Panel on Tax Reform and I 3 presented it personally in Washington, D.C. And our proposal 4 which included this provision was one of the two proposals 5 that went forward to the Treasury Secretary to be given to 6 the President, so it has legs as far as the feds go. 7 I hope that we can use this example to prod the feds 8 to do the same thing, because it's long overdue. There is 9 no reason to force people to file complex tax returns when 10 there is no financial gain to do it, and because of the good 11 work that this Board has done on the 540 2EZ, which is 12 probably the best simple tax form in the country. 13 And the work that's going on this year to let the 14 electronic version of it add, subtract, multiply, divide, 15 and calculate the tax, I think we have a real winner here, 16 because we'll have a lot more people using a simple form 17 because it's easy, they'll be using it because it's free, 18 and they'll be using it because it will save them money. 19 So we hope you move forward with it. 20 I thank you very much. 21 CHAIR CHIANG: Thank you. 22 Questions or comments? 23 Lenny. 24 MR. GOLDBERG: Lenny Goldberg, California Tax Reform 25 Association. 44 1 We have one request on this. While we obviously 2 support simplification in concept, there may be a 3 distributional difference with regard to tax burden when you 4 have a credit of a certain dollar that comes off the bottom 5 versus a standard deduction, which is more valuable to those 6 in the higher bracket than the lower bracket, the credit is 7 the same dollar amount. For children, child exemption 8 credit, for example, it has a very, very progressive effect. 9 And we would ask, before going ahead with this proposal, 10 that you analyze whether there is a distributional impact on 11 different taxpayers at different levels. 12 MEMBER YEE: Mr. Chairman, question of the staff. 13 Has that analysis been done? 14 MR. PUTLER: No, we have not gone to the extent of 15 focusing on what the change in regressivity or progressivity 16 of the tax would be. Mainly we were focused, of course, on 17 the tax burden, the filing burden issue. 18 MEMBER YEE: Okay. 19 CHAIR CHIANG: Mr. Boucher, would you like to make an 20 additional comment? 21 MR. BOUCHER: Yes. Last year, as some of you may 22 remember, I did provide that information. It's probably 23 slightly different than what the department is going to come 24 up with, but it was essentially very minor changes. I mean, 25 we're talking about less than a tenth of a percent. So we 45 1 managed to keep the -- this proposal manages to keep each of 2 the -- in quintiles. In quintiles, it's a negligible 3 effect. Closer than that, I'm not sure. But we did 4 quintiles for the feds and we did quintiles last year when 5 we presented at this hearing, and they have a copy of it. 6 So it's essentially no change. 7 CHAIR CHIANG: Very good. Would you please submit 8 that to the FTB for them to review it and get us that 9 information. 10 MR. BOUCHER: Sure. 11 MR. PUTLER: And then bring it back to the next Board 12 meeting. 13 MR. BOUCHER: Yes. 14 CHAIR CHIANG: That concludes the legislative 15 calendar. 16 Next item, please. 17 MS. BERWICK: Item 3, regulation matters, 2008 18 rulemaking calendar. 19 MR. KUSIAK: Chair and members of the Board, I'm 20 Patrick Kusiak with the Legal Division of Franchise Tax 21 Board. 22 You have in your binders as well as we distributed to 23 the public a summary of the rulemaking calendar and what is 24 described as a new approach to the rulemaking calendar this 25 year. 46 1 In the past we have simply had a calendar with a list 2 of possible regulatory actions, and no action was based off 3 of that until the Board gave approval to pursue individually 4 individual projects. 5 This time we have identified a number of new projects 6 and, contrary to prior practice, we are seeking Board 7 approval to have interested parties meetings for each of the 8 new regulations on the calendar in addition to approving the 9 calendar itself as a submission for us to make to OAL. 10 CHAIR CHIANG: Very good. 11 Questions? Comments? 12 MEMBER YEE: No. 13 I will move approval of the calendar, including 14 directing staff to hold interested parties meetings on each 15 of the items. 16 MEMBER GENEST: Second. 17 CHAIR CHIANG: Thank you. 18 Motion by Yee, second by Genest. 19 Without objection, motion passes. 20 Next item. 21 MS. BERWICK: Item 3-b, Draft Proposed Regulations 22 18662-0 through 18662-8, Withholding at Source; and 19002, 23 Withheld Tax to be Used as Credit Against Tax Owed. 24 MR. LANGSTON: Good morning. I'm Bruce Langston. 25 We held an interested parties meeting in August about 47 1 these regulations. It was very well attended. We got a 2 number of comments from the outside staff. We got comments 3 from industry. We have made -- in your materials you have a 4 report on the changes we have made in response to those 5 comments. We have worked with the -- people who came to the 6 meeting had a lot of good comments. Some of them 7 specifically, they wanted us to clarify who was subject to 8 withholding, what payments are not subject to withholding, 9 how withholding works for pass-through entities to avoid 10 double withholding on things that pass through. 11 A particular one that was of interest was the ability 12 for people to file amended forms, if they make a mistake in 13 their withholding, to be able to correct that during the 14 year, rather than wait until the end of the year. 15 We think we have done a good job in taking care of 16 these. The next step would be we will do our initial 17 Statement of Reasons and the Notice of Public Hearing for 18 OAL. There will be an additional hearing and a chance for 19 people to provide more comments at that time. 20 So today we are requesting permission from your Board 21 to proceed to the OAL hearing process. 22 CHAIR CHIANG: Questions, comments, motion? 23 MEMBER YEE: I will move approval to proceed to the 24 formal hearing process. 25 CHAIR CHIANG: Motion by Yee, second by Genest. 48 1 Without objection, motion passes. 2 Next item, please. 3 MS. BERWICK: Item 3-c, Proposed Regulation 4 25137(c)(1)(D), Special Rules - Sales Factor. 5 MR. JOSEPH: Good morning. I'm Carl Joseph. I served 6 as the hearing officer in this matter. I have a bit of a 7 cold today, so if I sound a little funny, I apologize. 8 This project was initiated back at the beginning of 9 the year as staff was looking for public input regarding 10 what we should do in response to the two California Supreme 11 Court cases in this area, the General Motors case and the 12 Microsoft case. So on January 31st of 2007, we held an 13 interested parties meeting that was very well attended both 14 by in-state and out-of-state representatives and companies, 15 and at that time we discussed whether or not we should 16 address this through legislation or whether we should do a 17 regulation. 18 We came back with a second interested parties meeting 19 at the end of March. At that meeting we brought forth two 20 legislative proposals to discuss and two regulatory 21 proposals to discuss, got input from folks again at that 22 meeting. In-state taxpayers were concerned that a 23 legislative proposal would either not take a lot more time 24 or was unrealistic given the past history of legislative 25 proposals in this area never really going anywhere. 49 1 So we came back to the Board at the Board's April 4 2 meeting and asked the Board what the Board's pleasure was, 3 would you like us to work on a regulation or a legislative 4 proposal. And at that time you directed staff to go forward 5 on one of the regulatory proposals. We've done that. 6 We had a formal hearing on August 17th of 2007. We 7 had some attendance there, a few comments were made. We 8 also had quite a few responses in writing during the formal 9 comment period. It sort of broke down along the lines of 10 "Thank you very much. This area is very unclear, and it 11 would be lovely to have a fix here," and some taxpayers, 12 mostly out-of-state taxpayers, who were concerned that what 13 we were doing was overriding what was the court's decision 14 in the case, or that what we were doing could only be done 15 through legislation. 16 In the binder, we've provided the comments and our 17 responses to those comments. And we are back at the Board 18 today asking the Board to approve the regulation to go 19 forward to the Office of Administrative Law. 20 CHAIR CHIANG: Thank you. 21 We have two individuals signed to make public comment. 22 First, Eric Miethke; second, Barry Weissman. 23 MR. MIETHKE: Thank you very much. Mr. Chairman and 24 members, my name is Eric Miethke, representing Business for 25 Economic Growth in California, a coalition of several 50 1 California based companies. 2 Much has been said about this regulation. 3 CHAIR CHIANG: Eric, we'd like to hear you. We'd like 4 to hear you. 5 MR. MIETHKE: Okay. Is that better? 6 CHAIR CHIANG: Yes. 7 MR. MIETHKE: Much has been said about this 8 regulation. We'd like to compliment the staff. We think 9 the responses that they've made have been thorough. There 10 has been a thorough vetting of this through the interested 11 parties process. We ask the Board to adopt this today. It 12 will bring clarity to an area where there has been a great 13 deal of uncertainty. 14 We also do think that it will help the problem that 15 has been identified for years and that is the ability of 16 taxpayers to utilize this uncertainty to manipulate a tax 17 plan. 18 So for all those reasons we think this is a good 19 proposal, we think it should go forward today. We do note 20 that it is within the Board's authority to do this. We 21 think that issues has been laid to rest, and hope the Board 22 does exercise that authority today. Thank you. 23 CHAIR CHIANG: Thank you. 24 Barry, if you could speak into the microphone. You're 25 competing against the air conditioning. 51 1 MR. WEISSMAN: Yes. 2 Thank you, Mr. Chairman, members of the Board. 3 Barry Weissman for Chevron. 4 I, too, on behalf of Chevron want to just thank the 5 staff for the outstanding effort they've made on this 6 regulation. The process that was followed was very 7 informative and very helpful. It allowed for all parties 8 and their positions to be aired out. The product of the 9 regulation process is the reg that's in front of you, and 10 Chevron supports it and asks that you approve this 11 regulation. Thank you. 12 CHAIR CHIANG: Thank you. 13 Questions or comments? 14 MEMBER YEE: Mr. Chairman, I just want to thank the 15 staff for an outstanding effort. And certainly there's been 16 participation on both sides of this issue. I think the 17 proposed outcome really upholds the spirit of this Board's 18 authority under 25137. 19 And with that, I move approval. 20 CHAIR CHIANG: Thank you. 21 Is there a second? 22 MEMBER GENEST: Could I comment first? 23 CHAIR CHIANG: Yes, please. 24 MEMBER GENEST: Well, not comment. Actually, a 25 question. And that is, as I understand this, there is -- or 52 1 as I'm envisioning this there are sort of two elements to 2 it. There is the principal that is put into sort of an 3 account or some sort of investment, and then there is the 4 earnings or the interest that comes from that principal. 5 And from a purely common sense perspective, I think it makes 6 all the sense in the world, it's less distortive, not to 7 count the principal, because obviously the principal is 8 already owned by the entity, so why would we count it as 9 additional revenue even for the purposes of the sales 10 factor. That's clear to me. 11 I'm less clear on why we don't count the interest. 12 MR. JOSEPH: Certainly. I believe that you will 13 find -- there is a couple of things that we pointed out in 14 our responses that are on that point. The first one is 15 there's issues of uniformity here. There are numerous 16 states that do not include these receipts at all. So there 17 were concerns raised in the interested parties process about 18 having to calculate this amount when a lot of states don't 19 require it to be calculated. So there is that. 20 There is also the issue which has been raised in some 21 of the discussions with interested parties that one of the 22 concerns or one of the big problems in this area arose in 23 part because of the way that the court in General Motors and 24 Microsoft dealt with the issues of what, in fact, was the 25 receipt from various types of investments. So when you talk 53 1 about the income as a receipt, in some cases, the court 2 held, that would be the case under 25120 of the Code, not 3 under a special regulation or under 137, while in other 4 cases whether the receipt reducing it to net income would 5 require an analysis of distortion. 6 So sort of conflating those two sections together can 7 read to some problems in the way that you would have a case 8 come forward from a taxpayer wanting to request relief even 9 under this proposal if it was at net, because we'd still 10 have the question of, well, what does net mean, what is the 11 amount that you're adding that you're asking to put in that 12 wasn't already addressed by the standard formula. 13 So there is some problem in what that number is and 14 how you get there, whether you would be getting there under 15 25120 of the Code or under 25137. Even if you go past that, 16 there is also the bottom line here is, for most taxpayers 17 with treasury function, it's our belief that the reduction 18 to net income results in the amount that's included as the 19 factor being almost immaterial if not de minimus. 20 For instance, in the case of the Microsoft decision 21 itself, it was like a little over $10 million worth of 22 income, I believe. And when you add that into the 23 denominator of over $2 billion, it was moving such a small 24 amount of income to include the net that really the 25 difference between the net and the throwout in most of these 54 1 cases is going to be immaterial anyway. The receipts are 2 going to be assigned on the basis of the main line of 3 business in either case, which is what should be done. In 4 the case of Microsoft, of course, that's software sales, and 5 those are already in the formula. So all three of those 6 things sort of cut against us going with net. 7 Certainly, though, there are states that have done net 8 so, you know, that is something that is not out of the 9 question. It certainly has been done. 10 MEMBER GENEST: One more question. 11 MR. JOSEPH: Certainly. 12 MEMBER GENEST: And it relates to something that one 13 of the commenters said, which is that this regulation would 14 bring greater clarity. 15 MR. JOSEPH: Uh-huh. 16 MEMBER GENEST: Are we trying to bring -- I mean, it 17 seems to me that the Supreme Court decisions bring some sort 18 of clarity. Is it really about bringing greater clarity, or 19 is it about bringing less distortion? 20 MR. JOSEPH: Well, it can be both. And I guess my 21 response would be the Supreme Court case is sort of a point 22 on a continuum, and at that point of income and activity and 23 the facts that the court had in front of it, it found 24 distortion. 25 Taxpayers fall along all of that continuum, and some 55 1 taxpayers feel that they can distinguish themselves in 2 material ways from that case, and continue to argue that 3 even though the case says net, they, in fact, should still 4 receive gross because their facts are different. So there 5 is confusion there. 6 There certainly is going to be some distinctions made, 7 if we don't get a fix, between what happened in Microsoft 8 and what other taxpayers do for their business. They'll 9 say, "This is very important to us." We have already seen 10 that in The Limited. The Limited said, "Well, this isn't 11 some little thing. This is very important to us." And so a 12 court of appeal had to say, "No, you're really the same as 13 Microsoft. This should be thrown out as net." 14 So bottom line is the clarity comes from not having to 15 do this on a case-by-case basis with each case being an 16 additional point on the board where a court has held that 17 this is distorted and should be reduced or removed from the 18 sales factor. So avoiding all of that is what brings 19 clarity. 20 There's also issues with financial reporting. 21 Taxpayers in -- there are gap financials now under -- what's 22 the name of that one -- 1048 -- under 1048, have to do an 23 analysis of whether or not the tax positions they've taken 24 on their return are more likely than not to be sustained. 25 This area is a problem in 1048, because there are only 56 1 points on a continuum. There is not a more likely than not 2 result that taxpayers can feel comfortable with their 3 position. This regulation clarifies the area and basically 4 says, you know, for all except those who can prove that 5 there is a problem with the way the reg works -- which we 6 believe will be very few people -- here's the rule, and you 7 can apply this for financial accounting purposes as well as 8 your tax return. So there is simplicity there too. 9 MEMBER GENEST: Those were both very helpful answers. 10 I'm prepared to second the motion on this particular 11 item. 12 CHAIR CHIANG: We have a motion by Yee, second by 13 Genest. 14 Without objection, motion passes. Thank you. 15 MR. JOSEPH: Thank you. 16 CHAIR CHIANG: Next item. 17 MS. BERWICK: Next item, Item 4, Taxpayer Data Access 18 Project. 19 This item will require a PowerPoint presentation, so 20 if the Board members would remove to the table to your left, 21 you'd be able to see the screen. 22 MS. MILLER: Good morning, Chair, members. I'm 23 Anne Miller, chief of the Filing Division for Franchise Tax 24 Board. And I'm excited this morning to provide you an 25 update on our taxpayer data access project. 57 1 As you may recall, at the September 20th, 2006 Board 2 meeting, the Board approved implementation of this project 3 which will allow for the first time California taxpayers to 4 view their California wage and withholding data on the FTB's 5 secure Internet website. My presentation this morning will 6 provide the Board with a snapshot, a preview of the taxpayer 7 experience in this new Web application. So let's talk about 8 how FTB plans to implement this project. 9 What we will do is we're expanding our current view 10 payment and balance due Web application. We're renaming it, 11 and now it will be called "My FTB Account." We'll add the 12 California wage and withholding information to our existing 13 information, and we'll also add FTB issued 1099Gs, which are 14 for state income tax refunds and 1099INTs, which we issue 15 when we pay interest to taxpayers. 16 So we've added this data to our existing application 17 and made a lot of data available for all California 18 taxpayers. So if you think about it, taxpayers now, not 19 just taxpayers that have estimate payments, but also wage 20 earners will be able to use this online service. The online 21 service will be available starting January 2nd of 2008. 22 So let's take a look at what the new application will 23 be like. Once a taxpayer comes to our website and they 24 authenticate, which means they come in and use their Social 25 Security number as well as the customer service number to 58 1 authenticate, this will be the first page they see. And as 2 you can see, we have our existing items, the estimated tax 3 payments, which are available today, additional payment 4 information and current balance due. Those are all options 5 the taxpayers can choose to get information. And then we've 6 added the wage and withholding tab as well as the FTB issued 7 1099G and 1099 interest tab. 8 So if you were to look under the new system for 9 estimate payments, which is a really highly requested 10 information, especially in our call center, all this 11 information is available on our website, this is how it will 12 be changed in the new application. 13 And then this is what it will look like as far as the 14 wage and withholding data. So you can see that we'll put 15 out there not just the current tax year information for 16 2007, but we'll also be including three previous tax years' 17 worth of data. So there is a lot of data out there 18 available for taxpayers that may have misplaced information. 19 If the taxpayers are interested in more detail, they 20 can click on the hyperlink for the tax year that they're 21 interested in. And so if I were to do this in this example 22 for 2007, this is the additional detail that they'll be able 23 to view. 24 We can list up to 30 employers if an individual has 25 that many employers. We'll also list the state employer 59 1 identification number, the specific wages and withholding 2 from each of the employers as well as up to two dba's, or 3 doing business as, because not everybody is familiar with 4 the corporate name that their employer may be using. So, as 5 you can see, there'll be a lot of information there that 6 people can look at and view for their California wage and 7 withholding data. 8 This next slide shows an example of what the 1099 9 information will provide. We have the current tax year as 10 well as two previous tax years available. It will list out 11 the 1099G information as well as the INT, and just like in 12 the wage and withholding example, they can click on the 13 specific tax year and get additional information. 14 In the slide show today, one of the things I've 15 included is one of the things that taxpayers can look at is 16 actually a replica of the paper 1099G, and this includes the 17 same data that we would mail out to taxpayers. So if 18 they've misplaced it, they can print another one out for 19 their records. And we think it will be very user friendly, 20 and it provides all the same data that we provide in paper, 21 so very helpful to individuals. 22 I've previewed this information with CPA groups, 23 enrolled agents, and registered tax preparers. Everyone is 24 very excited about the new "My FTB Account" application. 25 We've received an overwhelmingly positive response to it. 60 1 No other state currently allows taxpayers to view their wage 2 and withholding data electronically, so we feel California 3 is really being cutting edge by providing this as an 4 additional online service to taxpayers. 5 It really sets the foundation for future services that 6 we can provide as well. As you may recall, we are in the 7 feasibility study stages of looking at the ability to 8 download this information in the future into tax preparation 9 software, for example, so it really lays the foundation for 10 those type of transactions. 11 The IRS is implementing a "My IRS Account" later in 12 the fall of 2008, but it will be somewhat different as it's 13 more of a transcript delivery service. So we look forward 14 to having that information of federal data available as 15 well. 16 And I may not have mentioned, this information is 17 available to all taxpayers, as well as their authorized 18 representatives can view the data as well. 19 So in addition to "My FTB Account," I'd also like to 20 preview with you the new look and feel on FTB's website. 21 The department implemented the new look in late October. It 22 was based on direction that we received from the state CIO 23 along with all other departments in their e-Services office 24 that we, as well as all state departments, need to have a 25 common look and feel. 61 1 We selected the new website colors based on how well 2 most people can see them, and the design was developed by 3 our multimedia group. It incorporates our new corporate 4 look, which we're using not just for the new website, but 5 for all our FTB publications, even including our business 6 cards. 7 So let's take a look first at here's our old website, 8 and here is a copy of our new home page. The new home page 9 is organized a bit differently based on feedback that we 10 received from our stakeholders. We use that to identify 11 areas for improving content and placement of information in 12 the new design. The top center is reserved for promoting 13 new services and features. The bottom center is for news 14 and announcements, and information such as public meetings 15 are now more prominently displayed on our website. 16 The left navigation bar includes About Us, the 17 Taxpayer Advocate, and Careers, and we also have links to 18 our most popular Web pages based on data that we receive 19 from our Web statistics, as well as on the bottom on the 20 left you'll see a link to all our online tools and services. 21 But the most notable changes, I think, are to the tabs 22 at the top. We've changed those tabs, and we now have tabs 23 for Bills & Notices, for Individuals, for Businesses, for 24 Tax Professionals, and we also have a tab for contact we 25 provide for other languages. 62 1 We have kept the tabs that we previously had for forms 2 and for contacting Franchise Tax Board. So those were on 3 the previous website, but we've really expanded and changed, 4 based on the feedback we have received, the way that 5 people -- the way our information is organized. 6 And on a similar note, we worked with an outside 7 vendor, Human Factors International, as well as a team from 8 EDD and BOE to modernize the California Tax Service Center 9 website consistent with the now look and feel. 10 Again, in this situation, because we had a vendor, 11 they provided us with an expert review as well as usability 12 testing, and we've changed the home page to reflect 13 information and placement of data based on what people were 14 most interested in. We included a tab for Other Taxes and 15 Fees, that's new, and we've changed the Tax Calendar to 16 important dates based on feedback, and we've organized those 17 important dates by tax type. 18 I would encourage anybody that hasn't visited the new 19 ftb.ca.gov website as well as the taxes.ca.gov website to go 20 out and take a look at it. We feel that they're both much 21 more user friendly. We have received, again, a lot of 22 positive feedback about the changes. And if members of the 23 public have comments, they can click on a link and provide 24 us comments about the changes that we've made. 25 So that concludes my presentation this morning. 63 1 If you have any questions? 2 Thank you. 3 CHAIR CHIANG: Next item. 4 MS. BERWICK: Item 5, Taxpayer Bill of Rights hearing. 5 CHAIR CHIANG: This is the time set for the Board's 6 annual Taxpayers Bill of Rights hearing as required by 7 Section 21006 of the Revenue and Taxation Code. 8 The purpose of this hearing is to allow taxpayers and 9 tax practitioners the opportunity to present directly to the 10 Board any proposals they may have for changes in existing 11 state income tax law, for improvements in FTB publications 12 or services to the public. 13 FTB staff is available to respond to questions which 14 may be raised as a result of taxpayer proposals. Present 15 are Selvi Stanislaus, executive officer; and Geoff Way, 16 chief counsel; Lisa Crowe, chief of the Administrative 17 Services Division. Staff will analyze the fiscal and 18 administrative consequences of the proposals. 19 I will now call the names of those individuals that 20 have indicated they wish to make a presentation. Please 21 come forward when your name is called and present your 22 proposal. 23 Okay. We have three individuals who have signed up. 24 Michele Pielsticker is number one, Gina Rodriquez is number 25 two, and Roland Boucher is number three. 64 1 MS. PIELSTICKER: Thank you. Michele Pielsticker, 2 Cal-Tax. 3 (Presenters were requested to speak from the 4 stage because of air conditioner noise.) 5 MS. PIELSTICKER: To start off, I want to talk about 6 some problems that our members have been experiencing with 7 auditors. Mostly this is in the sales tax area, but it can 8 carry over into income tax when auditors are looking at 9 purchasing agreements and things of that sort, for example, 10 determining entitlement to the research and development 11 credit. 12 The concern is that auditors seem to be unclear as to 13 their rights to take data off-site for further analysis. 14 Our members typically provide a workspace and a computer as 15 well as complete access to their records during an audit, 16 but there have been some problems with auditors wanting to 17 take off-site the equivalent of the entire general ledger in 18 electronic format. 19 This wasn't a problem before when the general ledger 20 was paper, but it seems to be a little bit murky now that we 21 have things in electronic format. While our members are 22 happy to supply auditors with data samples, we don't believe 23 it is appropriate for auditors to take this information 24 off-site. And this is especially true for technology firms 25 who rely on trade secrets for their competitive advantage. 65 1 Just as an example of how important privacy and 2 confidentiality is, one company revived a dormant subsidiary 3 just to purchase necessary materials for the development of 4 a new technology, and they did so so that their vendors 5 would not recognize their name and disclose that the company 6 was in the development phase of the technology. 7 So it's very, very important that that information 8 stay on-site. So for these types of taxpayers, absolute 9 secrecy is crucial to their bottom line. So when an auditor 10 seeks to take critical purchasing information off-site, it's 11 of grave concern to the taxpayer. So we would like to see a 12 clear rule established that would prohibit this type of 13 audit practice. 14 The next thing is I would just like to first of all 15 thank the Board for sponsoring federal conformity 16 legislation last year. It was fantastic that we were able 17 to come together and get your support for that. Tax 18 conformity, as you know, eases taxpayer compliance, it 19 reduces "gotcha" assessments, and in so doing, it reduces 20 overall costs for taxpayers. 21 Unfortunately, last year's conformity bill was caught 22 in a political battle due to the fact that it was a net 23 revenue raiser and required a two-thirds vote. The bill was 24 stalled in Senate Appropriations committees, and that means 25 that over two years of federal tax law changes are not 66 1 reflected anywhere in the state-run tax code. 2 We would very much like to see renewed efforts again 3 this winter to obtain federal conformity, and we hope that 4 the Board will join with us once again to successfully pass 5 a conformity bill this year. 6 Thank you so much. 7 CHAIR CHIANG: Thank you. 8 Gina. 9 MS. RODRIQUEZ: Thank you, Mr. Chair, members. 10 I provided Mr. Kusiak a copy of my testimony. 11 Gina Rodriquez with Spidell Publishing. 12 The editors at Spidell, as well, support conformity, 13 and Michele said it pretty succinctly. But because we have 14 some difficulty in getting conforming legislation passed, 15 especially omnibus bills, even though Mr. Putler and his 16 staff did a wonderful job this year, we've come up with 17 three specific conformity provisions that we'd like you to 18 consider. 19 The first one deals with dependency exemption rules 20 for noncustodial parents. This is the issue I bought forth 21 to you last year. It's still a problem. We still have not 22 conformed to the federal GO Zone Act of '05 change to the 23 definition of child. 24 This means that if divorced parents cannot agree on 25 who will claim a child, and the divorce decree grants 67 1 exemption to the noncustodial parent, here's what happens. 2 The custodial parent then claims the child as a dependent 3 exemption for federal purposes, because federal law gives 4 first choice to the custodial parent, but for California 5 purposes, the noncustodial parent claims the child, because 6 California law looks to the divorce decree. 7 And this is one of those "gotcha" assessments that 8 Michele referred to. Because California does not follow 9 federal law, and taxpayers will follow federal law on their 10 state return, they will be in an audit trap. So we would 11 like specific conforming legislation for that provision. 12 The next item deals with the waiver of the penalty tax 13 on premature distributions for certain reservists and public 14 safety officers. 15 Again, California is in general conformity with this 16 law. Federal imposes a 10 percent penalty tax, and the 17 state imposes a 2 percent penalty tax; however, there are a 18 number of exceptions to the penalty which California does 19 follow, except for two very important ones: one dealing with 20 qualified distributions to reservists called to active duty 21 for at least 180 days after September 11, and the other one 22 dealing with qualified distributions made after August 17th, 23 2006, to public safety employees who separated from service 24 in a year after they reached the age of 50. We impose the 25 penalty at age 55. And, again, we impose a 2 percent 68 1 penalty. 2 We don't believe that -- if the feds are not imposing 3 a penalty on these particular taxpayers, we shouldn't be 4 imposing the penalty either. So we would urge the Board to 5 sponsor stand-alone conforming legislation to ensure the 6 enactment. 7 MS. BERWICK: Time. 8 MS. RODRIQUEZ: I will quickly go through the other 9 two issues. 10 The last conformity issue strictly deals with a 11 policy by FTB staff. This is the number one complaint we 12 get year after year. It deals with e-filed returns. I 13 e-file my return in late April, I send a check in late 14 April, that check sometimes takes up to 20 days to process 15 and post. In the meantime, the FTB's computer systems are 16 so fast, they're sending out penalty notices not reflecting 17 all the payments that the taxpayer has made. 18 So year after year we have this problem with the 19 disconnect. And last year the FTB staff did agree, they did 20 work with us a bit more last year, and they agreed to hold 21 the penalty notices until they processed all the April 5th 22 through April 17th payments. That helped a little. It has 23 not alleviated the problem in its entirety. 24 We would strongly suggest that the Board adopt the IRS 25 policy. They wait until they post all those payments until 69 1 they release penalty notices, and we think that would help 2 your workload from a correspondence and telephone workload 3 because you're releasing those notices. So those were our 4 three conformity issues. 5 My last suggestion deals with the estimated tax 6 penalty. We have not looked at this issue in many years, 7 but we do follow federal. Federal law requires the penalty 8 only if the taxpayer's tax is a thousand or less. The state 9 rule says it's 200 or less, and you have to look at prior 10 year as well. 11 We have a very low threshold for the penalty to kick 12 in, which means the FTB issued thousands and thousands of 13 penalty notices for insignificant amounts in some cases, and 14 practitioners really don't like dealing with these small 15 penalty notices, and often ask why can't the FTB raise the 16 threshold, and the answer is it's a statutory change. 17 And we would request that the FTB take a look at their 18 costs for releasing those penalty notices along with the 19 workload associated with it. And maybe we can sponsor 20 legislation that would increase the penalty from 200 to some 21 other amount. 22 And I thank you very much for your time. 23 CHAIR CHIANG: Thank you, Gina. 24 Roland. 25 MR. BOUCHER: Since this is my second time up here, 70 1 I'll be brief. 2 Okay. First, I'd like to thank the Board and all the 3 members of the Franchise Tax Board on the wonderful work 4 that's been done since Kathleen Connell introduced the 5 540 2EZ almost ten years ago. And right now I think that in 6 the 2007 tax year, that is in January or something, whenever 7 the forms come out, we are going to have something I can 8 take to the White House, to Congress, and to the Treasury 9 Department and tell them, "Here's how you do it. Why don't 10 you try it, why doesn't the IRS try copying what California 11 is doing," because we have the best form and simplest form 12 in the United States. 13 The second thing is there is still a little bit of 14 work to be done, and this is old stuff and I just wanted to 15 bring it up really briefly. Number one is we would like to 16 have a tax code where nobody would have to file or almost 17 nobody would have to file taxes on April 15th. The 18 withholding would be exact. 19 And there is one little thing that I hope the banking 20 industry can help us out with. If you try to get your 21 withholding done by a broker, it's not a problem. If you 22 have an IRA or Keogh and so forth, it's not a problem. If 23 you have a CD, forget it. They won't do it. They claim 24 they don't have the proper paperwork from either the 25 Franchise Tax Board or the IRS to withhold any of your money 71 1 or interest account from a CD and so forth. So that doesn't 2 make any sense. 3 Most of us would just rather have our taxes withheld 4 exactly and be done with it. Why file quarterly returns 5 just because you have a bank account. I'm talking about 6 mostly people who are retired. 7 Okay. So that's something that I think the banking 8 industry and the FTB ought to be able to figure out how to 9 do this. 10 The second thing is, Milton Friedman, who we all know, 11 and Nobel Prize laureate, once told Congress, "You know, if 12 you do nothing else, index capital gains." 13 Well, they haven't done it. This has been 14 20-something years since he said that, '83. Well, we 15 proposed a bill over ten years ago which was killed in the 16 Appropriations Committee -- passed unanimously in the Policy 17 Committee -- to index capital gains in California. And if 18 the Franchise Tax Board would support such a bill, we'd be 19 happy to come up, pick up the language that went through the 20 legislative counsel -- it was very simple language -- and 21 California can figure out how to do this even though the 22 feds don't seem to be able to do it. 23 So that's my wish list for the next year. 24 Thank you very much. 25 CHAIR CHIANG: Thank you very much. 72 1 Any questions or comments? 2 Next item, please. 3 MS. BERWICK: Item 6, executive officer's time. 4 CHAIR CHIANG: Very good. 5 MS. STANISLAUS: At this time I have nothing to 6 report. 7 CHAIR CHIANG: Thank you. 8 Next item. 9 MS. BERWICK: Item 7, Board members' time. 10 CHAIR CHIANG: Questions or comments? 11 MEMBER YEE: Mr. Chairman? 12 CHAIR CHIANG: Yes, Betty. 13 MEMBER YEE: I just want to take this brief 14 opportunity if I could to -- this may be my last Franchise 15 Tax Board meeting for a while as the Board of Equalization 16 returns to a rotational policy for its chairship. 17 But I just want to express it has been an extreme 18 honor and pleasure to serve under your leadership, 19 Mr. Chairman, and also with my colleague, Director of 20 Finance, Mr. Genest. 21 But more importantly I think it's been just a 22 privilege to be associated with the Franchise Tax Board, the 23 extremely high caliber and quality of the work that's done 24 by the staff here. 25 I just want to express my appreciation, and look 73 1 forward to returning. 2 CHAIR CHIANG: Betty, thank you for your extraordinary 3 service. I'm sure we'll see you back shortly. 4 MEMBER YEE: Thanks. 5 CHAIR CHIANG: At this time the Board is going into 6 closed session to discuss the items listed on the closed 7 public agenda. 8 (Closed session.) 9 CHAIR CHIANG: Let's reopen Board member time. 10 MEMBER YEE: Thank you, Mr. Chairman.