STATE OF CALIFORNIA FRANCHISE TAX BOARD PUBLIC MEETING WEDNESDAY, SEPTEMBER 20, 2006 STATE BOARD OF EQUALIZATION ROOM 121 450 N STREET SACRAMENTO, CALIFORNIA 1:30 P.M. REPORTED BY: SANDRA VON HAENEL CSR No. 11407 1 APPEARANCES 2 3 FRANCHISE TAX BOARD MEMBERS: 4 Marcy Jo Mandel, Chair Hon. John Chiang 5 Hon. Michael C. Genest 6 7 FRANCHISE TAX BOARD STAFF PARTICIPATING: 8 Colleen Berwick Cathy Cleek 9 John W. Davies Patrick J. Kusiak 10 Anne Miller Benjamin Miller 11 Mark Shijo Selvi Stanislaus 12 13 14 OTHERS PARTICIPATING: 15 Whitney MacDougall- Intuit, Inc. Atilla M. Taluy - FileYourTaxes.com 16 Lenny Goldberg - CRTA Jim Hawley - TechNet 17 C.C. Chen - eSmarttax Scott Baugh - CCIA 18 Alan E. Pasetsky - OFII Barry Weissman - PricewaterhouseCoopers 19 Kerne Matsubara - Pillsbury Winthrop Shaw Pittman Gregory Turner - Nielsen-Merksamer 20 21 22 ---oOo--- 23 24 25 2 1 SACRAMENTO, CALIFORNIA 2 WEDNESDAY, SEPTEMBER 20, 2006, 1:30 P.M. 3 ---oOo--- 4 CHAIR MANDEL: Good afternoon. This is the scheduled 5 time for the meeting of the Franchise Tax Board. 6 Would the secretary please call the roll to determine a 7 quorum is present. 8 THE SECRETARY: Member Chiang. 9 MEMBER CHIANG: Present. 10 THE SECRETARY: Member Genest. 11 MR. GENEST: Present. 12 THE SECRETARY: And Deputy Controller Marcy Jo Mandel 13 for Steve Westly. 14 CHAIR MANDEL: Present. 15 Thank you. 16 At least two members or their designated 17 representatives being personally present, there is a quorum, 18 and the Franchise Tax Board is now in session. 19 The public has a right to comment on each agenda item. 20 If there are any members of the public wishing to speak on an 21 item, please come forward when the item is called. 22 We'll move to Item 1, which is approval of the minutes. 23 These are the minutes of the June 19th, 2006 Board 24 meeting for approval. 25 Any comments by the members, or motion? 3 1 MEMBER CHIANG: I'll move approval. 2 MR. GENEST: Second. 3 CHAIR MANDEL: I'll add to that no objection to 4 approving the minutes. 5 By unanimous consent, the minutes are approved. 6 What we are going to do now, I think, is switch up a 7 little bit, take Item 3 before we take Item 2. 8 Item 3 is Taxpayer Data Access. Anne Miller will 9 present the item, and we have a couple of speakers on that 10 item as well. 11 MS. MILLER: Good afternoon, Member Genest, 12 Member Chiang, Madam Chair Mandel. I'm Anne Miller, chief of 13 the Filing Division for Franchise Tax Board. 14 For this agenda item the Department is requesting 15 approval from the Board for two things. First, to make 16 website application changes to allow taxpayers to view their 17 California wage and withholding information. Second, to 18 study the feasibility of allowing taxpayers to import 19 California wage, withholding, and estimate payment 20 information into their tax preparation software in CalFile. 21 This project addresses an important component of FTB's 22 strategic objectives: providing services to taxpayers that 23 help reduce their filing burden. In addition, this project 24 increases transparency in the way we conduct business by 25 providing taxpayers with increased access to their own data. 4 1 Each year we receive increasing feedback from 2 taxpayers, and practitioners in particular, about the need to 3 see more taxpayer information to assist in their return 4 preparation. Wages, withholding, and estimate payments are 5 routine return preparation elements that together touch 6 virtually every tax return. It is not surprising, therefore, 7 that discrepancies in the accuracy of that information 8 produces some of the highest instances of return errors. 9 In 2006, we saw over 300,000 tax returns that were 10 filed with incorrect withholding, and over 150,000 return 11 information notices were issued by the Department to correct 12 estimate payment discrepancies. Specifically, our first 13 recommendation calls for the Department to modify an existing 14 application to allow taxpayers and their authorized 15 representatives to view California wage and withholding 16 information. 17 Next, the Department would complete a feasibility study 18 report to determine the technical and business feasibility of 19 importing California wage, withholding, and estimate payment 20 information into third-party software preparation products 21 and FTB's own CalFile application. 22 Since the importing of data is new for us, we would 23 like to study the technical and business need before we 24 proceed with an implementation plan. We'd like to engage 25 formally with taxpayers, practitioners, and software 5 1 developers on this subject. 2 Because we feel that importing data has potentially 3 more security issues than just reviewing data, we need to 4 examine methods that will accurately authenticate the 5 taxpayer, their practitioner, and the software developer as 6 transmitter of data. With the Board's approval, the 7 department would like to proceed in providing these services. 8 CHAIR MANDEL: Thank you. 9 Are there questions from the members for staff at this 10 time? 11 Thank you. 12 We have three speakers. If you'd come forward. 13 Whitney MacDougall from Intuit, Atilla Taluy from 14 FileYourTaxes.com, and Lenny Goldberg from the CTRA. 15 If you would all come forward at once. 16 You have three minutes. Whitney, we'll let you go 17 first. 18 MS. MacDOUGALL: Thank you. 19 Hello, members of the Board. My name is 20 Whitney MacDougall, and I'm here representing Intuit. We 21 make software for professional and individual taxpayers to 22 prepare and file their taxes. 23 And I just wanted to say that we would very much 24 encourage this study to go forward, because we have great 25 concerns about security and privacy in this area, and also 6 1 that you have to be very careful when you start downloading 2 data, as you could potentially cross the line into 3 preparation and the inherent conflict of interest between 4 preparing the taxes and collecting and administering the 5 taxes. 6 So we would be very eager to engage with the FTB staff 7 on this issue and to really thoroughly study the concerns I'm 8 raising here today. 9 CHAIR MANDEL: Thank you. 10 Mr. Taluy. 11 MR. TALUY: Yes. I'm Atilla Taluy, FileYourTaxes.com, 12 and we applaud Franchise Tax Board to come up with a good 13 idea. It's innovative. I think it's marvelous. We would 14 like to caution and make certain that this does not become 15 another wasteful operation trying to do tax preparation for 16 taxpayers. 17 I think the acquisition of data, sharing of data is 18 very good, and we would like to add one more point on this 19 request for action that -- No. 3 -- would state that this 20 effort will not result in preparation of tax returns by the 21 State. 22 CHAIR MANDEL: Thank you. 23 Lenny. 24 MR. GOLDBERG: Lenny Goldberg, California Tax Reform 25 Association. 7 1 I think that this proposal is the most important step 2 you could take right now in terms of easing the taxpayer 3 filing burden and reaching the goal which we all share of 4 providing free online filing to taxpayers who wish to do it, 5 and particularly, free filing that is as simple to the 6 taxpayer as possible. 7 I think that this proposal moves somewhat modestly in 8 the direction of a transparent, iterative process which 9 really is ultimately what the taxpayers should see, that is 10 to say, can you populate my field, tell me what information I 11 have, and then add to the use of the taxpayer to use a 12 private preparation service or to directly file their taxes 13 online in the CalFile program. 14 But I think the key step here is access to information. 15 I think that my addendum here would be to look at an 16 iterative process by which information is being shared now. 17 My understanding of this is that the key issue is the ability 18 to hold the file online for the taxpayer. Now, it's my view 19 that ultimately every taxpayer should have their own file. I 20 can't tell you the number of times I've paid estimated taxes 21 and not been aware of how much I had paid in estimated. 22 That a file available to the taxpayer which is 23 accessible obviously raises security, privacy concerns in 24 terms of making sure that works. But in terms of a 25 transparent, iterative process for the taxpayer that eases 8 1 their burden, I would urge -- I'd say this step is modest, 2 but a good one to go ahead. If we can get that taxpayer 3 information easily available to the taxpayer, that will be a 4 big help in burden relief. 5 CHAIR MANDEL: Thank you. 6 Now, the Controller is supportive of this Taxpayer Data 7 Access item and recommendations of staff, but he does have 8 some concerns about our lower income taxpayers. It was with 9 our lower income taxpayers in mind some specific programs 10 were developed. And while he supported the moving forward 11 with the taxpayer -- I can't look at you and look at my notes 12 at the same time, I'm sorry -- supportive of moving forward 13 with the Taxpayer Data Access item that you've presented, 14 certainly it is good customer service, he's concerned about 15 the potential that's inherent in that process for leaving 16 behind people who don't have computer or Internet access. 17 And he absolutely wants to make sure that they don't get left 18 behind, and that we have some programs and means of reaching 19 them. 20 And so I don't know if it's to you, Ms. Miller, or 21 Ms. Stanislaus, if you have some ideas today of how you're 22 going to serve those taxpayers, assuming the Board adopts 23 this staff recommendation, and if you don't have those today, 24 certainly, you know, think about some more. We'd like to see 25 a plan and some recommendations in December. But perhaps you 9 1 have some comments today. 2 MS. STANISLAUS: Yes, I do. At my executive officer's 3 time I will talk to you about the VITA program. And when I 4 do, I will address the issue that you have raised, 5 Madam Chair. 6 CHAIR MANDEL: Thank you. 7 Anything from the members on this item? 8 Or may we have a motion. 9 MEMBER CHIANG: Move approval. 10 MR. GENEST: Second. 11 CHAIR MANDEL: The staff recommendation has been moved 12 and seconded, and I'll add on to that. 13 Without objection, the item is approved. 14 And now we're back on Item 2, which is ReadyReturn. 15 And, Anne, you have this item as well. 16 MS. MILLER: Yes, I do. 17 CHAIR MANDEL: And we'll have speakers on this one as 18 well. 19 MS. MILLER: I'm happy to provide the Board with the 20 staff report on the results of the 2006 ReadyReturn pilot 21 program. Overall, the results of the 2006 pilot were very 22 similar to the results of the 2005 pilot program that we 23 conducted. The program was very well received. 24 As you are aware, we conducted the 2006 ReadyReturn 25 pilot in the same manner that we conducted the 2005 program. 10 1 We sent approximately 50,000 letters to taxpayers inviting 2 them to participate in ReadyReturn. 3 Approximately 21 percent, or 10,600, of these 4 individuals filed the ReadyReturn. Of those individuals that 5 filed, they were split approximately 50-50 between those that 6 chose to file a ReadyReturn via paper method and those that 7 filed electronically. 8 We also conducted a survey of ReadyReturn participants, 9 those who were invited into the program but chose not to 10 participate, and those that were in a control group. And we 11 asked their opinions about the program. Again, the survey 12 findings are very similar to the results of the initial pilot 13 program. In general, taxpayers liked the program, they 14 reported that their burden was reduced, the participation 15 rate was good, and the FTB achieved processing efficiences. 16 Nearly all the ReadyReturn participants were satisfied 17 with the program. They thought the program was convenient, 18 saved them time, was secure, and that ReadyReturn was 19 something the government should do. Over half the 20 participants thought ReadyReturn saved them money. 21 In fact, there were only a few differences in the 22 survey results between 2006 and the 2005 pilot programs. One 23 of the differences was that we were slightly less effective 24 than last year at decreasing user anxiety. 81 percent of the 25 participants felt that we decreased their anxiety by using 11 1 ReadyRreturn this year, versus 85 percent in 2005. 2 On the other hand, we received a more positive 3 response from the control group than last year to the 4 question as to whether or not they thought ReadyReturn would 5 decrease their anxiety about filing their taxes. Now I'm 6 talking about the control group here. 56 percent of those in 7 the control group responded they felt it would reduce their 8 anxieties this year, compared to 40 percent last year. 9 We saw a similar increase in the control group response 10 when they were asked if they thought ReadyReturn was the type 11 of service that government should provide. 65 percent of the 12 control group thought ReadyReturn was something the 13 government should provide this year, versus 50 percent that 14 responded that way last year. 15 Taxpayer comments were very positive again this year. 16 And just to give you a brief understanding of some of those 17 comments, one said, "I was surprised when I received my 18 invitation and was delighted that it was so easy." 19 Another person said, "This was great. All of my 20 friends were jealous that I got to do it and they didn't." 21 The report also includes some of the public comments 22 we've received about the ReadyReturn program. And just to 23 briefly describe some of those comments, Robert Boisture, in 24 the CCIA report said, as well as various speakers in the 25 August 2004 and June 2005 Board meetings, "The government 12 1 shouldn't prepare returns as they are already the tax auditor 2 and tax collector, and because private industry provides this 3 service." 4 Mike O'Donnell from the Valley Business Journal said 5 that ReadyReturn adds burden because you're required to 6 double-check the return. 7 Mike O'Donnell and Robert Boisture, as well as others, 8 said that ReadyReturn does nothing for nonfilers, does not 9 simplify the California Tax Code, and does not address the 10 tax gap. 11 Finally, I would like to point out that the report does 12 not include analysis of the participants' adjusted gross 13 income. That analysis hasn't been completed yet because we 14 don't have the federal data to do it, and that data won't be 15 available until January. 16 However, the results of the analysis in the 2005 pilot 17 indicated that the adjusted gross income for California 18 ReadyReturn purposes was nearly identical to the adjusted 19 gross income that was reported on the federal return. 20 That concludes my comments. 21 CHAIR MANDEL: Thank you. 22 We have some speakers. We have six speakers, so I'll 23 call the first three. Atilla Taluy. 24 Excuse me a moment. 25 Did you find out what the siren is? 13 1 UNIDENTIFIED SPEAKER: It's a fire alarm on the 23rd 2 and 24th floors. It's an alarm inside an elevator outside. 3 It's just a drill. 4 CHAIR MANDEL: Okay. Thank you. 5 Atilla Taluy from FileYourTaxes.com, Jim Hawley from 6 TechNet, and C.C. Chen from eSmarttax.com. If you'd come 7 forward. Three minutes, gentlemen. 8 Nice to see you again. 9 MR. TALUY: Nice being here. 10 I'm not going to go into too much detail as to why this 11 program is not beneficial and probably should not be 12 continued. I think a lot of those have been mentioned 13 before. 14 No, the government should not be the auditor and the 15 preparer of the taxes. There is a significant cost of this 16 program to the taxpayers, whereas industry provides something 17 very similar to this free of charge and has done so in the 18 past. 19 And the take-up rate is extremely low. Nothing has 20 changed from the year before. And I think 20 percent take-up 21 is a very, very poor showing. And I think it also sort of 22 attacks the underprivileged and misinformed, and they do not 23 necessarily understand what's being sent to them and respond 24 immediately without really questioning it. 25 And we don't know what the statistical validity is. We 14 1 have seen a lot of numbers, charts, but I don't think we have 2 done any kind of evaluation of these things. And it's not a 3 solution to the tax gap. We are basically overtaxing 4 potentially again this misinformed group. And also people 5 have expressed that they do not want to fund this program 6 anymore. 7 So basically what I would like to propose is that this 8 program is a blatant waste of taxpayers' money. And I think, 9 unlike other technologies that are available in this great 10 state of ours, we are actually regressing, using things that 11 are quite available in third-world countries. 12 And as a taxpayer in this state myself, I think that 13 it's very humiliating that we use a punitive system that was 14 developed in Franchise Tax Board and applied to the 15 underserved population. 16 CHAIR MANDEL: Thank you. 17 And for the record, you're Atilla Taluy, 18 FileYourTaxes.com? 19 MR. TALUY: Correct. 20 CHAIR MANDEL: Okay. And if everyone just remembers to 21 identify themselves for the record, we and our reporter would 22 appreciate that. Thank you. 23 Mr. Hawley. 24 MR. HAWLEY: Jim Hawley. I'm the vice president and 25 general counsel of TechNet. We are an organization of about 15 1 150 technology companies, many of them based in California. 2 We respectfully request that the Board not extend the 3 ReadyReturn program. We had opposed AB 2905, we had opposed 4 AB 1046 during the consideration of that legislation in the 5 Legislature, and our concerns are really threefold. 6 First, we are concerned about the inherent conflict of 7 interest that we see when the tax preparer is also the tax 8 enforcer. We felt that there are better uses for scarce 9 State resources. And I would also say that, notwithstanding 10 the alleged counsel opinion you have -- we don't think it 11 was -- the program was authorized to be extended. Our view 12 is that the Legislature spoke fairly plainly and clearly when 13 they imposed the limitations on the pilot. 14 We share the Board's broad interest. I will say, 15 however, in simplifying the taxpayer burdens and the 16 compliance burdens, and we are very sympathetic with what 17 you're trying to do in that regard, I would say that our 18 approach and request, and further stated in a letter we just 19 submitted to the members this morning, is that we pursue a 20 private-public partnership in lieu of a situation where the 21 government is competing with private-sector services, and 22 that such a partnership could involve the government making 23 available free services and products from the private sector 24 to lower and moderate income taxpayers in return for a pledge 25 not to compete with the private sector. 16 1 We think it has a very good model. We would be very 2 interested in working with the Board and the agency on that, 3 that kind of approach. We think it serves more taxpayers at 4 less cost, and it avoids the conflict of interest that I 5 mentioned earlier. 6 Thank you very much for your consideration. 7 CHAIR MANDEL: Thank you, Mr. Hawley. 8 Mr. Chen. 9 MR. CHEN: Thank you. My name is C.C. Chen. I'm with 10 eSmarttax. I appreciate that I was given the opportunity to 11 express our opinions. 12 I don't know if you had a chance to receive the things 13 I prepared, a few pages. Basically, I'd just like to point 14 out a few things. 15 Now, this particular program it has proven clearly is 16 very good, beneficial, saved money, reduced burden for the 17 taxpayer who chose to use it. However, if you look at the 18 survey, actually something interesting surfaces, that exactly 19 who is being served. And taken from the table, you can see 20 that of all invitees, the median adjusted gross income is 21 around 33,000 -- that's about the same for the state 22 average -- while the online participant, the median adjusted 23 gross income was actually $37,000. 24 This is actually a significant difference which 25 indicates what we are serving, this program is serving, is 17 1 probably the person who may not necessarily need it most. 2 The ones who need it the most probably are the lower income 3 and needs more help with the preparations. 4 Secondly, if you look at the timing difference data, 5 accurate wage data as of now are not going to be available 6 until after February. 7 The program inherently has limitations on the -- it's a 8 competition between accuracy and participation. If you send 9 out the returns late, you're missing the person who files 10 early. And on the recent annual report by Jackson Hewitt, 11 they listed the statistics, they were saying -- they reported 12 that 75 percent of their customers have completed their 13 return before the end of February. 14 And that, again, points to the fact that the persons 15 who need it the most probably are not the ones the program is 16 serving. 17 And the third thing is, looking at the data, you find 18 an interesting point about the so-called control group and 19 the participation. When a certain question is asked of the 20 control group, meaning the person who qualified but was not 21 invited, 80 percent said they are interested in the program. 22 The reality is every year we have a 20 percent 23 participation, which tells you that in a survey it's very 24 easy to give a positive response because it takes only a few 25 seconds. But when you actually receive the papers and work, 18 1 when you try to decipher what you're getting, exactly what 2 you want to do with it, do you trust it or not, then the 3 participation drops from -- you can almost say it drops from 4 80 to 20 percent, because it's been two years now. 5 And the other thing is there is a question that says, 6 well, is the ReadyReturn the type of service the government 7 should provide. Obviously, the ones that chose to use it, 8 96 percent say it's great, should provide that. When you go 9 to the control group, they are still 65 percent; however, I'm 10 not quite sure. The response from nonparticipants who 11 responded to the survey is not included in the report. I 12 have to wonder, maybe because those people have a fairly low 13 positive response. 14 CHAIR MANDEL: Thank you, Mr. Chen. The rest of your 15 comments are in the paper that you provided us? 16 MR. CHEN: Yes. 17 CHAIR MANDEL: Thank you. 18 MR. GENEST: Actually, I wanted to ask a question of 19 staff, and then see if anybody -- a couple of you mentioned 20 something about significant taxpayer cost. Can you just go 21 over what you think the costs are. And there may be a 22 difference of opinion on that. 23 MS. MILLER: Well, the cost to run the pilot program 24 for the first year was about $220,000. And for the second 25 year, it was $160,000, and that included the startup cost 19 1 because it was a new program. 2 MR. GENEST: But taking out the one-time nature of it 3 being a pilot, on an ongoing basis, what do you think this 4 program would cost or save? 5 MS. MILLER: We have estimated the ongoing cost as far 6 as yearly cost for an online to be in the hundred thousand to 7 $125,000 range. To start up a permanent program, it would be 8 about 175,000 in one-time IT costs. 9 The total cost for starting up a program would be 10 around 445-, $450,000. But we do receive a savings to the 11 department for people that convert from paper filing to 12 e-filing, and we estimated that those savings could be in the 13 range between a hundred thousand to over three hundred 14 thousand a year. It really depends on the participation 15 rate. 16 MR. GENEST: So it would have a net cost going forward, 17 in your opinion? 18 MS. MILLER: It has a net cost, at least for the first 19 three years. After that, I do believe we would receive 20 savings. You know, the savings are, like I said, depending 21 on what the participation rate would be in the future. 22 MR. GENEST: Okay. 23 MR. TALUY: May I respond to that? 24 CHAIR MANDEL: If Mr. Genest had a question. 25 MR. GENEST: Well, I was wondering if they did have a 20 1 different view. Go ahead. 2 MR. TALUY: Basically, from these numbers that I'm 3 seeing, we're looking at somewhere between 15 to $25 per 4 return that's costing the State of California to perform. I 5 haven't done the calculations real well but -- so on the 6 other hand, industry has gone in the past and provided these 7 returns free of charge. And, to me, anything that's between 8 free and cost is a taxpayer burden. 9 CHAIR MANDEL: Thank you. 10 We have three more speakers on this item, unless you 11 had something further on that point from staff. Okay. 12 MS. MILLER: I don't. 13 CHAIR MANDEL: The next three speakers are 14 Lenny Goldberg, Scott Baugh, and Whitney MacDougall. And you 15 have three minutes. And please identify yourself for the 16 record. 17 MR. GOLDBERG: Lenny Goldberg, California Tax Reform 18 Association. 19 Well, let's see. There is a question here: should we 20 believe the industry who has a clear interest at stake in 21 filling out, in making money -- 22 (An announcement is made by the building 23 engineer concluding the fire drill.) 24 MR. GOLDBERG: I hope that doesn't count in my three 25 minutes. 21 1 Shall we believe 99 percent of taxpayers who say this 2 is a great thing and we'd like to do it again, or should we 3 believe the industry that has a vested interest in saying, 4 "We should never do this for taxpayers because it makes tax 5 filing too easy, and we don't have to buy there products"? 6 If 80 percent of the control group that's never even 7 had it say, "Yes, we would like this," how is it that the 8 Franchise Tax Board elected officials can say to taxpayers, 9 "No, no. We don't want to provide it even though you want 10 it, even though 99 percent of you like it." 11 Now, to say that taxpayers are misinformed, as we've 12 just heard, taxpayers -- you have to trust taxpayers well 13 enough to know that they have their own best interests at 14 stake. Nobody loves paying taxes. If you can make it easier 15 and less -- stress-free, that certainly is a positive. 16 With regard to the offer of "We will provide free 17 online filing," now, I went to the IRS, trying to help my 18 daughter do free online filing. (A), you try to do it, you 19 can't -- you don't get their good product, you get a crummy 20 product. They say $15 and we'll give you a good product, 21 then it's only for certain people. Then, if you want to file 22 your state taxes, you've got to pay for that. So the 23 so-called Free File, as the taxpayer advocate of the IRS has 24 noted, is a massive failure with regard to what we're really 25 talking about: direct, free online filing. 22 1 Now, my view of ReadyReturn is that it is a little bit 2 all-or-nothing, and that I would hope that, based on what the 3 Board just approved, that we get to a much more transparent, 4 iterative process: shall we populate your field; shall we 5 tell you what information you have; shall we take that and 6 take it somewhere else; or shall we calculate your taxes? At 7 which point you say "yes," "no"; is the information correct; 8 is it not correct? And then you have a direct relationship, 9 filing directly online with regard to information that's 10 there. 11 Certainly, ReadyReturn is a great experiment. It's a 12 great move to go forward. I'm only saying that because the 13 taxpayers themselves say it overwhelmingly. However, we 14 ought to think about ways to broaden and expand the concept 15 so that filing is free and as stress-free and least 16 burdensome possible. 17 And believe me, and, you know, Mr. Hawley referred to 18 free filing. You were here, Ms. Mandel, when that was going 19 on. The average -- if you're a family of four in California, 20 you're not paying taxes till you have about $45,000 in 21 income, forty to forty-five, given the child credits that we 22 have; that most people, the so-called low income people, were 23 not qualifying, who were ordinary taxpayers, for free filing. 24 There is no way we should say, "You must pay in order to file 25 your taxes online." 23 1 The State saves, the taxpayer saves, the compliance 2 level is higher, the taxpayers like it, and this Board ought 3 to move ahead with it. 4 CHAIR MANDEL: Thank you. 5 Mr. Baugh. 6 MR. BAUGH: Thank you, Madam Chair, honorable members 7 of the Board. 8 I don't want to debate the issue of -- 9 CHAIR MANDEL: Just state your name and affiliation, 10 please. 11 MR. BAUGH: Scott Baugh with CCIA. 12 CHAIR MANDEL: Thank you. CCIA? I forget. 13 MR. BAUGH: Computer & Communications Industry 14 Association. 15 CHAIR MANDEL: Thank you. 16 MR. BAUGH: Thank you, Madam Chair. 17 Without debating the merits of the program, I want to 18 talk about some of the testimony that was given here this 19 morning and the staff report. And my good friend Lenny, who 20 talks about the 99 percent of taxpayers who love this 21 program, that's very misleading -- I don't think 22 intentionally -- but I think we need to true up the data. 23 I have a report here from Baugh Smith that talks about 24 the survey that was done by the Franchise Tax Board. I'll be 25 glad to leave that with staff and the Board. But the issue 24 1 there is we are only surveying people who actually used the 2 program and some control group people. 3 If you look at the -- well, one of its conclusions, no 4 data was captured, and hence no claims can be made about the 5 sizeable number of profiled members who would not use 6 ReadyReturn and who would not likely respond to the survey. 7 So I'll leave that with you. 8 And then also we have a survey done here by 9 David Binder. And if you actually want to survey all the 10 taxpayers, the 14 million taxpayers in California, and we'll 11 leave the survey with you, read it for yourself, but on the 12 initial ask, you know, you ask the survey, you do the initial 13 ask, 25 percent support -- or 36 percent support and 49 14 oppose. And when you educate that group of people that 15 they're surveying about the pros and cons of the program, it 16 goes to 25 percent support. In other words, the support 17 drops and the opposed goes up to 67 percent. 18 Now, again, you can do your own surveys. You can look 19 at this survey, but there's simply no credibility to the fact 20 that or the claim that 99 percent of the taxpayers like this 21 program. It's not true, and the survey would indicate quite 22 the contrary. 23 One other point I just wanted to leave. There is this 24 discussion about legislative authority. The Legislature was 25 pretty clear, I think, that this was a one-time program. 25 1 I've got the control language here. Mr. Genest, you're an 2 expert at control language. And it talks about this being 3 limited to a pilot program this year. 4 You should know I've been made aware of a legislative 5 counsel opinion that indicates that the Franchise Tax Board 6 may have broader authority on this. I'm not sure they saw 7 all this data here. And particularly the legislative intent, 8 if I can just read, said it "limits ReadyReturn taxpayer 9 filing to the same level, same manner as operating in 04/05. 10 The ReadyReturn program will expire at the close of 05/06 11 fiscal year unless subsequent legislation authorizes its 12 continuation." 13 So that is a legal opinion. There may be other legal 14 opinions. But I would suggest, under the doctrine of 15 ejusdem generis, that the specific controls the general, and 16 the Legislature was very specific on what they wanted to do 17 with the ReadyReturn program. 18 Thank you. 19 CHAIR MANDEL: Thank you, Mr. Baugh. 20 Ms. MacDougall. 21 MS. MacDOUGALL: Hello. Whitney MacDougall, Intuit, 22 Inc. 23 I wanted to share just some recent goings on with the 24 members of the Board here and then also offer a 25 recommendation. The first is that earlier in the year, at 26 1 the federal level, hearings were held where the Secretary of 2 the Treasury, the Commissioner of the IRS, and the Director 3 of ETA at the IRS, all publicly stated their opposition to a 4 program similar to ReadyReturn where the taxing agency 5 prepared the returns for the taxpayers. 6 In addition, there is a bipartisan committee at the 7 national level on tax reform where they actually evaluated, 8 among many things, the California ReadyReturn program, and 9 they came to the conclusion that that was not something that 10 they recommended for at the national level. 11 There is a Free File Alliance at the national level, 12 and 21 states are participating in that. And we would like 13 to renew our recommendation for the State of California to 14 engage with industry in public-private partnership to provide 15 services to those who truly need it: the poor, the 16 underserved, military, National Guard, the low income and 17 disadvantaged. 18 But, in particular, we recommend that California take 19 the lead and to be the shining beacon to really implement 20 this program based on the original Free File Alliance policy 21 agreement that then Commissioner Charles Rossotti negotiated 22 with the industry. 23 Intuit is currently working at the federal level to try 24 and enact some reforms to the current implementation of the 25 Free File Alliance, and we think it would be absolutely 27 1 wonderful for California to work with industry, to step up, 2 and to be a leader, as you have in so many other areas, with 3 other states on the federal level to implement a consumer 4 free safety zone, where free is really free, there is no 5 marketing, there is no selling or advertising of any kind, 6 and then taxpayers could get their federal and state taxes 7 prepared for free by the software preparation industry. 8 MEMBER CHIANG: I'm interested. Can you expand on 9 that. 10 MS. MacDOUGALL: Which part of that? 11 MEMBER CHIANG: All of that. 12 How do you define poor? You know, who would be the 13 beneficiaries? Who would be the recipients of getting free 14 tax filing? You know, because I'm always willing to engage 15 in discussion. 16 MS. MacDOUGALL: So -- 17 MEMBER CHIANG: But yet -- go ahead. 18 MS. MacDOUGALL: Go ahead. 19 MEMBER CHIANG: So I'm interested in who would be the 20 beneficiaries of that program and what discussions you have 21 had. 22 And then subsequent question to Scott. I wanted to 23 see -- we all know we can jimmy numbers; right? I want to 24 know what the pros and cons are of the program you described 25 earlier, and I'd like to see the set of questions. 28 1 MS. MacDOUGALL: So I think that defining the poor and 2 the underserved would be something that we would have to talk 3 about together. I don't think that any one company or 4 anybody should say "this is what it is." There are different 5 guidelines for it. Some of the different levels have been 6 under 35,000, under 45,000, under 50,000. Right now, the 7 current implementation, people are doing different variations 8 of the program as it's defined in the current federal 9 implementation. I think it would be very important to look 10 at the poverty guidelines at the federal and state level to 11 try to come up with a number that makes sense, both for 12 individuals, but also for working families. 13 As Lenny said, a lot of people are working families 14 with children. Even though their income may be greater, that 15 still doesn't mean that they are not impoverished or 16 struggling to make ends meet. 17 So I think that we would have to -- again, going back 18 to the original principals that were negotiated under the 19 policy agreement, we would have to really look at those 20 guidelines, take into account, you know, if you have 21 children, you know, working single mothers, if you're in the 22 military, things like that, and come up with what that number 23 is. 24 We think that doing that and creating a zone where 25 there is no marketing and selling, so it is a -- consumer 29 1 safety zone is what we're calling it -- where any company who 2 wanted to participate would follow those rules and offer 3 these services to people whereby, you know, they would be 4 able to take advantage of it for free, federal and state. We 5 think that's the ideal, and that's what we are working for 6 right now back in Washington and with the current Free File 7 Alliance. 8 MEMBER CHIANG: Thank you, Ms. MacDougall. 9 Scott. 10 MR. BAUGH: Thank you, Mr. Chiang. 11 I will leave this report from David Binder Research, 12 and retrieve the entire poll. But suffice to note up front, 13 that without any input, pro or con, it was 36 support, 49 14 oppose. Then, of course, after the pro and con was 15 introduced, those numbers became further part. 16 MEMBER CHIANG: And that, the pro and con percentages 17 that you shared with us, was in response to what question and 18 phrase exactly? 19 MR. BAUGH: Well, I don't have the list of questions in 20 front of me. I'd be glad to provide those to you as part of 21 the entire research here. But the second round was 25-67. 22 So I'll get you those questions. 23 MEMBER CHIANG: Yes, because I think it would be very 24 instructive. At this point, numbers mean nothing to me 25 unless I know what the question is. And, you know -- 30 1 MR. BAUGH: I would agree, which is my point about 2 surveying just the people who participated. Nobody is wrong 3 or nobody is misinterpreting these numbers, but we have to 4 ask what questions are being asked and to what group they're 5 being asked. 6 MR. GOLDBERG: But if I may, the 99 percent that I 7 referred to were people who say, "We want to do this again 8 next year. We've done it once. We want to do it again next 9 year." For those, "Was it more convenient than you filed 10 last year?" 98 percent say yes. 11 So it's like -- this may not -- it may be a small 12 sample, but it is the people who actually had experience of 13 ReadyReturn, 99 percent of whom said, "Yeah, I like it, and I 14 want to do it again." 15 So it would be hard to look taxpayers in the eye and 16 say, "Oh, well, we did this. 98 -- you all thought it was 17 more convenient, you want it again. But, sorry, the industry 18 doesn't want to see it happen. Therefore, we won't make it 19 easy for you to file your taxes." 20 That just seems to me unsustainable when everybody who 21 has used it says yes. Which is to say, that if you can work 22 out a way -- and this is my criticism of the program, that it 23 is narrow -- of broadening the way the program is used, to 24 make it an iterative process so that, when you can correct 25 your data -- one reason that many people don't use it is if 31 1 the data is not correct, you can't use it. It's an 2 all-or-nothing program. 3 So I think we should all be moving towards a more 4 transparent and iterative process by which people can file 5 easily. When people say, "Yeah, we want to do it again," who 6 are we to say -- who is the industry in particular to say, 7 "No, no, no, you can't do it anymore." I mean, that's 8 really -- when I'm looking at data that says the people who 9 have used it have loved it. 10 So, really, the question for the Board, as a matter of 11 public policy, is how do we get it so that everybody can say, 12 so 98 percent of all filers can say, "Hey, this is more 13 convenient than it has been ever in the past." 14 Thank you. 15 CHAIR MANDEL: Thank you. And thank you all. 16 Comments from staff? 17 I think Mr. Genest has some questions for staff. 18 Do you have questions as well? 19 MR. DAVIES: John Davies, chief counsel. 20 In response to Mr. Baugh's comment with respect to the 21 control language, just so it doesn't stand without our view 22 being expressed, you have or available to you the legislative 23 counsel's opinion, and that's one lawyer's opinion that the 24 language does not prohibit the Board from proceeding with a 25 program like ReadyReturn on a permanent basis. 32 1 And the staff legal opinion is that you're not 2 restricted legally from doing that if that's your policy 3 choice. 4 CHAIR MANDEL: Thank you. 5 Any questions? 6 MR. GENEST: Well, is the staff recommending -- we have 7 on the agenda staff report - possible Board action. 8 Is there a recommendation from the staff as to that 9 point, continuing it? 10 MS. MILLER: Staff's recommendation at this time is to 11 move forward with Agenda Item No. 3, and that's to do more 12 taxpayer data access. 13 There are some concerns about not having the 14 legislative support and legal counsel opinion, and we feel we 15 could move forward with a permanent program if that's what 16 the Board wishes us to do. But at this time, we're proposing 17 that we move forward with Taxpayer Data Access. 18 CHAIR MANDEL: Right, which is what we just did on the 19 last item. There is no need for action on this item in 20 particular. 21 MR. GENEST: Well, I would like to suggest an action. 22 I'd like to preface it by a couple of things. First, I don't 23 know what the right legal answer is either, but, in general, 24 I would rather respect the Legislature's apparent will than 25 just flaunt it. And it sounds like it's pretty clear that 33 1 the Legislature had before it and the opportunity to tell us 2 to make it a statewide program or extend the pilot, and they 3 didn't do that. So I'm reluctant, unless somebody can show 4 me something compelling, to go against what I think was the 5 general sense of the Legislature. 6 However, the program has many merits, and there were 7 some questions raised about its cost. Obviously, I'd be the 8 last one to ignore the issue of cost. So I think what we 9 might be able to do is ask the staff to come back at our next 10 meeting with a legislative proposal on ReadyReturn or 11 something of the sort, and I would suggest that we give them 12 a little direction. I would like to see them look at the 13 possibility that Mr. Hawley and others raised of some sort of 14 a public-private partnership. 15 I'm not quite sure I understand what a noncompetition 16 pledge is or whether I would necessarily support that, but 17 that's something I think should be fleshed out a little, and 18 perhaps the staff could work with the industry to see if 19 there is something there that makes sense from your 20 perspective that we could look at. But also just expanding 21 ReadyReturn, and I think we should. I would like the staff 22 to take a look at Mr. Goldberg's suggestion of expanding it 23 and making it more iterative. 24 I don't have an opinion as to which way we ought to go, 25 but I do think the pilot was a success. I disagree with 34 1 those who say that it was somehow not a success. So I think 2 we ought to try to learn from it and move forward. And I 3 don't want to make an action today, because I don't think -- 4 I don't feel like I -- number one, I don't want to flaunt the 5 Legislature. I'm not sure I know enough. But to have it 6 come back in December, I think that would be useful. 7 So that's my motion. 8 MEMBER CHIANG: Okay. A courtesy second so that we can 9 have discussion. 10 If we were going to continue ReadyReturn next year, 11 what form would it take? Would it continue in it's current 12 form, even though the -- I share the same concern articulated 13 by my colleagues about stepping over the dominion of the 14 Legislature in terms of a pilot program, even though I 15 recognize the legislative counsel's opinion that we are 16 entitled to enact some type of program of a permanent nature 17 similar to ReadyReturn. 18 So I was looking at the technical and technological 19 capacity of the Franchise Tax Board to get a sense of what 20 the program, if we continued it, would look like next year. 21 CHAIR MANDEL: Well, before you answer that, and right 22 now my understanding is the motion is for a legislative 23 proposal which would come in December. 24 So, depending on what the Board's action is at that 25 time, next filing season may or may not be impacted by the 35 1 legislative proposal that -- assuming it goes forward in 2 legislative proposal form. 3 MEMBER CHIANG: Well, I was just going to -- I was 4 going to say, I mean, that question gives you a lot of -- 5 provides a great opportunity for your response. For 6 instance, do we have the technical capacity at this very 7 moment to enact a permanent program of a nature similar to 8 ReadyReturn, and is the Franchise Tax Board, you know, at 9 this point, you know, ready to roll that out or not? 10 MS. MILLER: As far as doing a permanent program for 11 next filing season, no, we are not prepared to do that at 12 this time. There are significant differences in rolling out 13 a permanent program versus the pilot program that we've done 14 so far. And at this late date, there is just not a lot of 15 time between now and when filing season begins in January. 16 MEMBER CHIANG: Okay. For the record, can you 17 articulate the reason why we couldn't. 18 MS. MILLER: Yes. Some of the concerns that we have 19 are changes that we would need to make between today and 20 rolling out a permanent ReadyReturn program would be, first, 21 the main vehicle that we've offered up is, as far as 22 marketing ReadyReturn, would be in the tax filing booklet. 23 Those tax filing booklets are just about ready to go to print 24 today, so we would have to scramble and try to make those 25 changes. 36 1 Secondly, there is a significant difference between 2 identifying a pilot population of 50,000 individuals that 3 meet ReadyReturn criteria and having a permanent program 4 where any taxpayer that's interested in checking to see if 5 they're eligible for ReadyReturn we'd have to have some kind 6 of online interaction with. Those could possibly be millions 7 of requests coming into the Franchise Tax Board. 8 In order to develop that type of application, we'd be 9 starting from scratch. It's much different than a pilot 10 program, and we just don't have the capacity or time, really, 11 to get that done for next filing season. 12 Even if we could get it -- which I think would be very 13 unrealistic -- up and running late in the filing season, you 14 would have the controversy of the tax return booklet that 15 says, you know, come see us about our ReadyReturn program, 16 and it wouldn't be available until later in the year. So 17 they'd be calling us wondering where the application is, and 18 we wouldn't have it up and developed. That would be another 19 concern. 20 Also, we wanted to build an interactive voice response 21 system so those taxpayers who don't have access to the 22 Internet or aren't able to go to the library and use Internet 23 services there would have the ability to call us and request 24 a paper ReadyReturn type product. We don't have that today. 25 So all those things we'd be developing from this point 37 1 on. We don't have the ability to do that, really, in the 2 short order that we would need to for next filing season. 3 MEMBER CHIANG: But the subsequent filing season, you 4 have sufficient time to ramp up? 5 MS. MILLER: Yes, we feel like we would have time to do 6 it by next filing season, a permanent program. 7 MEMBER CHIANG: And the total cost again would be? 8 MS. MILLER: The total costs are around 450-, $500,000 9 is what we estimated to do a permanent program for a tax 10 filing season. And that, like I said, that's the initial 11 first-year cost based on about a 30,000 taxpayer 12 participation rate. The net cost would be somewhat lower. 13 We would receive some savings. So there would probably be 14 somewhere in the neighborhood of between fifty and a hundred 15 thousand dollars of savings, so the net cost would be more in 16 the $350,000 range. 17 MEMBER CHIANG: And the cost to ramp up would be? 18 MS. MILLER: The initial IT costs, I believe I 19 mentioned earlier, were about $170,000. Let me find that. 20 Yeah, the initial one-time IT costs were $170,000. 21 Yearly online costs range from about 110-, to $125,000 per 22 year. We estimate there is a one-time IVR cost of $70,000. 23 There would be some cost to answer the calls, and then yearly 24 mailing costs for a total of about $450,000. 25 MEMBER CHIANG: Let me share my thinking on this. 38 1 I think the service ought to be for free, generally. I 2 think it's an obligation that the State imposes upon the 3 taxpayers of the state. I think it is the responsibility of 4 the taxing agency to assist taxpayers fully. 5 Now, having that said, I, like any others who are the 6 guardian of the public tax dollar, I would like love to see 7 the private sector take this. So I'm strongly interested in 8 a dialogue that would take place between public and private 9 partnerships. 10 My great concern is I'm a supporter of the marketplace, 11 right, and I frankly don't think those negotiations that take 12 place at the federal or state level move very quickly in the 13 absence of competition. But the competition, frankly, 14 shouldn't be the State, even though I think we have an 15 obligation to provide it quickly. 16 So I wish this discussion had already taken place. I 17 wish we had a response to the questions I asked earlier -- 18 who would be provided the free service? And then the members 19 especially -- well, I don't know if the other members are 20 concerned. I'll speak for myself -- can make a sense of 21 whether somebody who is making $55,000 or not ought to be 22 entitled to a free tax return, or how much it costs versus 23 the $25 or $30 that a California taxpayer would pay on 24 average for that return, so the policy decisions are winnowed 25 to those types of financial and economic costs between the 39 1 public sector and private sector. 2 That's my thinking on this. 3 So the question is, you know, if it took a long time to 4 establish it at the federal level, I'm not sure, in the 5 absence of, you know, our responsibility and our action, how 6 it's going to take place on the other side. 7 MS. MILLER: We do have a Memorandum Of Understanding 8 with fifteen different organizations currently. We are not 9 part of the Free File Alliance, but we do have a Memorandum 10 Of Understanding with different companies today that offer 11 free or low cost filing products, and those are advertised on 12 FTB's website today. 13 MEMBER CHIANG: Yes, because I think the median income 14 in the state between -- you know, the national had 15 forty-nine, but if you look at household income between 53- 16 and 58,000, whether they have very little disposable income 17 at the end of the day. And so our discussions about people 18 making $30,000 is way below the threshold, you know, that I 19 would be, you know -- just without being able to provide 20 alternative service to working class families. 21 CHAIR MANDEL: Anything else? Mr. Genest. 22 MR. GENEST: I share those interests. I think we can 23 try to have the staff flesh out all of those questions. And 24 there is enough time, I hope, between now and next meeting. 25 MEMBER CHIANG: I'd like to hear your motion again, 40 1 everything that's encompassed, because I know I was 2 supportive of some of this stuff, but I didn't know -- that 3 wasn't to the exclusion of other things I would be supportive 4 of in this item. 5 So I don't know if I've got to second, but, you know, 6 there are certainly a lot of issues I would want to advance. 7 MR. GENEST: Well, essentially, I'm moving that the 8 staff be directed to come back in December with a legislative 9 proposal that focuses on ReadyReturn, whether it's the exact 10 model that we have or whether, looking at some of these other 11 issues, that model should be modified. 12 Everything that was said here today, I think the staff 13 should evaluate and take into consideration, because there 14 were a lot of good points raised, and you've raised some 15 points with the threshold. I hadn't really given much 16 thought to that, but that's a very important thing for them 17 to look at. 18 I guess what the basis of my motion is, I think we are 19 doing a good thing for the taxpayer here. I think it's 20 important, as you said, for Board members to support better 21 services and easier services for the taxpayer. I'm not sure 22 exactly how to proceed, and that's why I thought the staff 23 could try to flesh some options out and bring them back to us 24 in December. 25 But the general idea would be a legislative proposal to 41 1 move forward. Exactly how we would move forward would be the 2 question. 3 MEMBER CHIANG: I'm with you, Mike. I'll be supportive 4 of a legislative proposal, but I'm trying to get staff to 5 move forward independently for preparation for the 2007 6 return. And hopefully, frankly, we won't have to go very far 7 if there is movement in the private sector. But I'm trying 8 to do so without much cost incurred by the taxpayers of this 9 state. 10 MS. MILLER: Okay. 11 CHAIR MANDEL: Sounds like perhaps that could be almost 12 in conjunction with, even alternative, with a legislative 13 proposal as part of the whole looking at the -- 14 MR. GENEST: Are you saying not just a legislative 15 proposal but a specific proposal BCP, or what have you, to 16 actually start where that legislative proposal would be? 17 MEMBER CHIANG: That's one forum. 18 CHAIR MANDEL: Are you interested in having them come 19 back in December with the array of options under which -- I'm 20 not sure. 21 MEMBER CHIANG: That's a good idea. 22 CHAIR MANDEL: But a legislative proposal that is -- 23 MEMBER CHIANG: We have a few months; right? And 24 frankly, the record is established, you know -- the record 25 doesn't establish where everybody is to get two votes on this 42 1 issue, but the record is established where I am. 2 CHAIR MANDEL: We're supportive of the legislative 3 proposal concept. And I know we've had quite some 4 discussions in the past over the MOUs and Free File Alliance 5 since I've been with the Controller's Office. But definitely 6 we're supportive of the legislative proposal. 7 MEMBER CHIANG: I don't see people in the income 8 brackets in the upper strata doing ReadyReturn. I think 9 there is just a lot of those things they'll just leave off. 10 So, basically, you know, if we are grinding to the middle, 11 and at what point do you start to lose people, you know, 12 looking at their returns, that they have stuff, that are not 13 going to participate, and then looking at people's incomes as 14 to who is going to participate. So I want to make sure that 15 we protect the middle income families who would be the 16 beneficiary of this program. So, I mean, that's an aside. 17 So, I mean, I would support the legislative proposal. 18 But I think -- what Marcy just said -- because we can take 19 any immediate action for the next tax year or the upcoming 20 tax year, I'd like to see an array of options and procedures 21 by which, in the event that we choose to do so, we could go 22 forward with this for the 2007 fiscal tax year. 23 CHAIR MANDEL: Okay. 24 MR. DAVIES: If I might. John Davies, chief counsel. 25 I'd like to clarify one thing. My understanding was 43 1 that the issue related to ReadyReturn and the fact that it 2 was subject to control language, and there is now a legal -- 3 there are varying legal interpretations as to what's 4 allowable and what's not allowable under the law, that 5 Director Genest's comment was toward the issue of ReadyReturn 6 servicing the low income group and that the proposal would be 7 to come back with a draft, a draft of legislation that would 8 lift the legal cloud with respect to the ReadyReturn or a 9 similar, like program that services the low income 10 population. 11 CHAIR MANDEL: Well -- sorry. 12 MR. DAVIES: As to other programs, there is no need for 13 legislation. I'd just like to clarify that. The Board has 14 the authority now to do a wide range of things without 15 legislation, but I wanted to -- 16 CHAIR MANDEL: Let me be clear. I often sort of fill 17 this role of trying to understand what people are saying. 18 And I was tying to understand what Mr. Chiang was saying when 19 I asked him if he was talking about an array of options. 20 We are supportive of the legislative proposal as 21 Mr. Genest articulated it. And if you're not prepared to 22 second that, you know, we're supportive of that. 23 All the other types of things, I'm not -- and we have 24 looked at them in the past, and I'm not sure if it's exactly 25 all married together, but definitely the legislative 44 1 proposal. 2 MEMBER CHIANG: I'm already prepared to take a vote. 3 As an individual, as a Board member, I wanted to pursue the 4 other routes also. 5 CHAIR MANDEL: I'm sorry. I missed your last point. 6 But it makes sense to bring it all back as one giant thing, 7 and we can see where we are and move forward from there. 8 MEMBER CHIANG: I'm okay taking the vote on the 9 legislative proposal. I'm ready. And then we can take up 10 the other stuff later and decide what we want to do. 11 CHAIR MANDEL: Well, it makes -- at some level it 12 makes -- if we are going to be looking at a legislative 13 proposal and this is related to it -- I'm trying to move the 14 related things all together if there is an array of things. 15 Certainly, legislative proposals are a separate agenda item. 16 It's your motion, Member Genest. 17 MR. GENEST: Well, you know, I would say -- I tried to 18 make it broad. What I'm essentially saying is have the staff 19 come back with their own analysis, looking at all the options 20 and the concerns that were raised, and make a proposal. 21 If it turns out that they say no legislation is 22 necessary and here's what we think you should do, and we all 23 agree with that, that's fine. If they say there is 24 legislation necessary, we can agree with that, and that's 25 fine as well. 45 1 MEMBER CHIANG: Okay. 2 CHAIR MANDEL: Okay. 3 So that's your second to that motion? 4 MEMBER CHIANG: Yes. 5 CHAIR MANDEL: And that would be -- I'll add on to 6 that. So that's 3-0. 7 Did you understand all of that? 8 MS. STANISLAUS: I think so. 9 CHAIR MANDEL: Thank you. Okay. 10 Now we're on Item 4, Regulation Matters. 11 We have two sub items. Item a. is the Draft Proposed 12 Regulation 25110(d)(2)(f), and it has two little sub parts. 13 Mr. Miller. 14 MR. MILLER: Yes. Benjamin F. Miller, legal staff, 15 Franchise Tax Board. 16 Madam Chair, members of the Board, there are two 17 elements to this proposal which are before the Board now. 18 There is a staff proposed amendment to regulation that we've 19 held symposiums on over the past year or two. There is also 20 a petition that's been filed by -- on behalf of a group 21 called OFII, requesting an amendment to the regulation going 22 in a slightly different direction. 23 In preparation for this meeting, staff has been 24 reviewing the legislative history of this bill looking back 25 to the original bill back in 1985/86, SB 85. And when we 46 1 look at that history, we discovered that, first, with respect 2 to foreign corporations that had less than 20 percent of 3 their activities within the U.S., that is, originally 4 established legislation that would provide that those 5 corporations would have filed a separate return, not on a 6 combined basis, but would file a separate return, and would 7 have reported their income from U.S. sources, assuming there 8 was a constitutional nexus, and, of course, that income based 9 upon an apportioned formula looking only at their activities 10 and, presumably, in order for California tax, they would have 11 had to have factors within the United States. 12 As the legislation developed, there was a group of 13 corporations and/or banks, in fact, banks, which had concerns 14 because they operate through the U.S. through branch offices. 15 As such, there was a chance that they might run afoul of the 16 20 percent test, and so the whole activities of the foreign 17 bank would be included in the combined report. 18 So there was an amendment made to the bill which cut 19 out banks and put them in a separate provision. Instead, 20 with respect to those banks, they would report only the 21 income from their U.S. activities, using their U.S. 22 apportionment factors based upon books and records maintained 23 here, which was consistent with the idea that these banks 24 were a separate branch and so they had their own separate 25 books and records maintained. 47 1 The separate treatment of foreign corporations 2 continued forward, however, until we got to the Conference 3 Committee Report. And in the Conference Committee, two 4 things were done. First, the provision with respect to the 5 taxation of foreign corporations was eliminated from the 6 bill. And, second, on the portion of the bill which dealt 7 with banks, the term "and corporations" was added to it. 8 So when we looked at that legislative history 9 consistent with the way foreign corporations were originally 10 taxed in the proposed bill and then also paralleling their 11 treatment with how banks were taxed, we reached the 12 conclusion that, properly interpreted, that legislative 13 history did not support the inclusion of the NECI. 14 While staff remains of the view that might be a good 15 policy choice, there is nothing we could find in legislative 16 history from 1985 which supported that choice. 17 So, in light of that, our recommendation to the Board 18 is that we go forward with the proposed amendment authored by 19 the OFII people, that we set that for hearing, that we 20 attempt to work with the OFII people and see if we can come 21 up with some agreement on language. But, in essence, the 22 concept they have offered is one that we should go forward 23 with. So that's what the staff is prepared to recommend to 24 the Board at this time. 25 CHAIR MANDEL: Let me just clarify that before we have 48 1 some speakers. 2 My understanding now, your suggestion is to move 3 forward with the OFII proposal. 4 MR. MILLER: That's correct. 5 CHAIR MANDEL: Which is O-F-I-I, for the reporter. 6 And I understand that you think there might be some 7 language tweaks. 8 Can you meet with everybody in the next week and see 9 whether you can resolve all the language tweaking that you 10 think might be necessary to that proposal before it's put 11 into the formal rulemaking process. 12 MR. MILLER: Yes. Every effort will be made to do 13 that. I've already taken the language, some of the proposed 14 changes, provided them to the representatives of OFII. 15 They've indicated they'll get back to me in the next day or 16 so with respect to those. 17 There obviously will be other people who will be 18 interested in it. We'll need to get a selection of those 19 people. We have a number of people who have submitted 20 comments with respect to this. We certainly can provide that 21 language to them. 22 The first thing that we've provided at this point is 23 basically taking the OFII proposal and just formatting it 24 slightly differently. And I think there was one area where I 25 didn't think the language accomplished the result they wanted 49 1 to get. 2 We may have some additional thoughts with respect to 3 that, but we are prepared to work with them over the course 4 of the next week or ten days to get that together, yes. 5 CHAIR MANDEL: Okay. And then if there is not 6 agreement -- 7 MR. MILLER: We would go forward with the OFII language 8 that's their petition, their proposal. 9 CHAIR MANDEL: Okay. And how about if that goes 10 forward that way, assuming that goes forward that way, 11 getting it back in December, that would be -- 12 MR. MILLER: It's difficult, but we will work on it. 13 We will have to submit the proposal to the Office of 14 Administrative Law. They set the hearing date. Typically, 15 when we submit it to them, it takes about 60 days from the 16 day it's submitted to when a hearing can be set. In other 17 words, it takes them a week or ten days to establish the 18 hearing date. So we are generally running on about a 60-day 19 process from submitting a package to them. 20 That takes us to somewhere around November 20, for want 21 of a better term, almost Thanksgiving. We also, because we 22 are under the Consumer Services Agency, we have to take 23 regulatory proposals through the Consumer Services Agency as 24 well. OFII has suggested that they may have some people 25 there who can help us through that process. Hopefully, our 50 1 executive officer can and, hopefully, the Department of 2 Finance may be able to provide some assistance in that area. 3 So we have already, you know, directed people to start 4 the process of putting together what we need for a rulemaking 5 package, so we are already commenced on that process. We 6 will do our best to reach that result. If we wind up with a 7 situation where we basically have agreed language, the 8 hearing process itself may be fairly pro forma if it's done 9 before staff. Or, alternatively, it could be set in 10 conjunction with an FTB meeting, have the hearing there, as 11 well, which would give us another couple of weeks. So there 12 are a couple of ways it can be done. It's going to be tight, 13 but we'll certainly do our best. 14 CHAIR MANDEL: Thank you. 15 I have four speakers signed up for this item. 16 Allen Pasetsky from OFII; Greg Turner, Nielsen-Merksamer; 17 Barry Weissman, PricewaterhouseCoopers; and Kern Matsubara 18 from Pillsbury. If you would come forward, please. 19 And gentlemen, three minutes. And identify yourselves 20 for the record. Thank you. 21 MR. PASETSKY: Madam Chair, Board members, my name is 22 Alan Pasetsky, and I am here on behalf of OFII, the 23 Organization for International Investment. 24 Based on Mr. Miller's comments that we just heard, we 25 sincerely appreciate the staff's second look at this issue 51 1 which is very important to us, and the meetings and 2 discussions that both the staff and the Board members have 3 had with us over the past two years. 4 We look forward to working with the staff in the coming 5 few days to tweak the language of our proposed regulation so 6 it can be moved through the formal regulation process as soon 7 as possible. 8 And I want to thank you all again for your time and 9 effort that you and staff have put into this very important 10 issue to us. 11 Thanks again. 12 CHAIR MANDEL: Mr. Turner. 13 MR. TURNER: Madam Chair, members, Greg Turner of 14 Nielsen-Merksamer. I represent the Organization for 15 International Investment. 16 I just wanted to thank everybody as well. And we will 17 commit to working with staff to get, hopefully, agreed upon 18 language in the coming week. We'll do it as soon as we can, 19 just to try to expedite the process. 20 Thank you. 21 MR. GENEST: I have a question of this panel. 22 When you came and briefed me about this issue, I got 23 the impression that you were saying that, under federal law, 24 noneffectively connected income -- if I got the term right -- 25 is not taxed. That must have been a misunderstanding. Do 52 1 you want to -- 2 MR. PASETSKY: Yes. And I believe in all of our 3 written submissions and in our meeting we discussed that 4 there was not an income tax, a federal income tax on that 5 income. That NECI is subject to a withholding tax regime 6 under the federal rules. 7 Also you should note that, under the withholding tax 8 regime, often there are no withholding taxes at all imposed 9 because of a treaty or other statute or exclusions, such as 10 bank interest is excluded statutorily. 11 But that may be a misunderstanding. We apologize if 12 that's what happened. But we were focusing on the income tax 13 aspects of it. 14 MR. TURNER: And that goes to the nature of the scope. 15 The intended scope of the water's edge statute was on the 16 income tax side of things. 17 MR. GENEST: Well, as I told you at the time, this 18 administration is definitely committed to water's edge in 19 concept. And I just had a little trouble getting to what was 20 going on here, because I thought you had said that the income 21 was excluded from taxation at the federal level. But 22 apparently, and, of course, in effect, it is under many 23 treaties, but it's not under every treaty. 24 That was where it took a little while for me to get 25 that clear. 53 1 MR. MILLER: If I might comment, Mr. Genest. 2 Yes, I think they've accurately stated what is, in 3 fact, the practice. It is a withholding tax that's asserted 4 under Section 881 of the Internal Revenue Code. It's 5 withholding tax the treaties, in particular, the treaties of 6 the European countries, typically exempt royalty and interest 7 income which is the basic areas they're looking at. There 8 are treaties with respect to other countries which have 9 reduced that 30 percent rate down to a 10 percent or 5 10 percent rate, so it varies. 11 I talked to someone here who advised me that it seems 12 that the tenor of treaty negotiations now is to extend these 13 extensions to everybody. But it's a bargaining chip for the 14 U.S. government, and they're using it as such. 15 Is the "income" included under the Internal Revenue 16 Code as U.S. source income? Yes, we think it is under 881, 17 but there is no question that the treaties do override that 18 section in a number of situations, particularly with respect 19 to the European community, which I suspect are most of the 20 OFII members. 21 So I don't think there was -- certainly, we would not 22 claim there was any intent on their part to misrepresent 23 things to you. 24 MR. GENEST: Thank you. 25 CHAIR MANDEL: Thank you. 54 1 Barry is here, I think. 2 MR. WEISSMAN: I'm going to pass. 3 CHAIR MANDEL: Okay. Thanks. 4 MR. MATSUBARA: Kerne Matsubara on behalf of Pillsbury, 5 Whitman, Shaw and Pittman. 6 And we submitted comments earlier today to the Board. 7 But in light of Mr. Miller's comments, we have nothing 8 further to add. 9 CHAIR MANDEL: Thank you. 10 MR. MILLER: Could we get a particular kudos from the 11 Board for rendering Mr. Weissman speechless. 12 MR. WEISSMAN: In that case, I'm going to come up. 13 CHAIR MANDEL: Barry, you've already waived. 14 Okay. May I have a motion. 15 MR. GENEST: I'll move the staff's recommendation. 16 CHAIR MANDEL: The revised one we heard today; right? 17 MR. GENEST: Correct. As they just presented it. 18 CHAIR MANDEL: And I'll second that. And that will be 19 our action on the two of them. 20 MR. MILLER: The second item that we have before the 21 Board is a question with respect to developing a special 22 industry regulation for the telecommunications industry. 23 We have brought this matter to the Board because, I 24 guess, eight years ago, the Board directed us to stop looking 25 at this issue, and so we have. But we think there are 55 1 problems involved. We are involved in a bankruptcy 2 proceeding with respect to one member of the industry. We 3 are seeing changes in filing positions with respect to other 4 members of the industry. And so what we're looking for, 5 consistent with the action of the Board back 1998, is 6 permission to again engage on this issue. 7 We have no specific proposals to come forward with at 8 this time. Anything that comes into a specific situation, 9 even to actually holding an informal symposium, we will bring 10 back to this Board. But we just wanted to clear the decks, 11 as it were, in terms of that prior Board motion. 12 CHAIR MANDEL: Okay. We don't have any speakers on 13 this item. Any questions from the members? 14 Motion? 15 MEMBER CHIANG: I move to grant staff permission to go 16 forward. 17 MR. GENEST: Second. 18 CHAIR MANDEL: And I'll add on. 19 So 3-0 on that one -- 20 MR. MILLER: Thank you very much. 21 CHAIR MANDEL: -- on staff recommendation. 22 Now we are on Item 5, which is California Child Support 23 Automation System. This is a staff report by Cathy Cleek. 24 MS. CLEEK: Madam Chair, Member Chiang, and 25 Member Genest, good afternoon. My name is Cathy Cleek, and 56 1 I'm FTB's CIO and sponsor for the California Child Support 2 Automation System. 3 I'm very happy today to report to you that FTB, DCSS, 4 the Department of Child Support Services, and the vendors 5 have successfully implemented a statewide child support 6 system. This system is operational in all 58 counties and 7 being used by nearly 10,000 child support workers in 8 California. 9 This is a major milestone for the State and families 10 here in California. 11 Today, the letter was sent to the federal government, 12 stating that California now has a statewide child support 13 system. That stopped, this letter stopped the $200 million 14 in penalties that have been assessed against the State of 15 California for the last few years. 16 I thought I'd give you a quick production update. In a 17 typical day, the State is receiving between nine and 18 ten million dollars in child support payments for 50,000 19 parents. These payments are made via check, direct deposit, 20 and electronic payment cards. 21 On a typical day, there is 8,000 accounts where we 22 don't have all the information, and additional research needs 23 to be done to determine who the payment goes to, a correct 24 address, or to gather some information that was not provided. 25 This system is up and operational and working very 57 1 smoothly for the last month. 2 We have a statewide system in place, but we have 3 additional enhancements that are planned for Version 2, and 4 we are working on those. We have implementation dates in 5 November of this year, February of 2007, and about another 6 fifteen implementations and deployments until September 2008. 7 So just very happy things are going well. And that 8 concludes my report. 9 CHAIR MANDEL: Thank you. Any questions? 10 MR. GENEST: Congratulations. 11 CHAIR MANDEL: Great job. 12 MEMBER CHIANG: Yes. Thank you very much. 13 CHAIR MANDEL: Thank you. 14 The next item is Item 6, administrative matters. These 15 are the BCPs for fiscal year 07/08. We've got eight of them. 16 And Mr. Shijo is here in case there are any questions. 17 Any questions? 18 We don't have any questions. 19 MEMBER CHIANG: Move approval. 20 CHAIR MANDEL: Motion to approve the BCPs. 21 I'll second that. 22 And Mr. Genest is not participating. A 2-0 vote. 23 MR. SHIJO: Excellent. 24 CHAIR MANDEL: Thank you. Great presentation, 25 Mr. Shijo. 58 1 MR. SHIJO: Thank you very much. 2 CHAIR MANDEL: Okay. The next item is Item 7. That is 3 Executive Officer's time. 4 Ms. Stanislaus, did you have anything to report to us 5 today? 6 MS. STANISLAUS: Yes, I do. I have two items of 7 interest. 8 The first one is the Volunteer Income Tax Assistance 9 program, or the VITA program. I wanted to give you a staff 10 update on where we are and our plans for next year. I know 11 all the Board members have interest in this program, and we 12 have great plans to increase our usage of this plan. 13 During this past year, our program accomplished the 14 following: we've staffed 1100 sites statewide, assisted more 15 than 262,000 taxpayers, completed nearly 165,000 tax returns. 16 The volunteer program is designed to assist low income, 17 seniors, non-English speaking, and disabled individuals with 18 filing their simple federal and state income tax returns. We 19 also support the many military bases that also provide the 20 service for the U.S. armed forces. 21 Nearly 5,000 volunteers gave freely of their time to 22 attend 40 hours of required tax preparation training, and 23 then volunteered another 235,000 hours at these different 24 sites. Put another way, our volunteer program staffed 58,000 25 site days statewide during the 2006 tax season. 59 1 This equates to each volunteer, on average, helping 2 more than 50 taxpayers with tax return preparation, form 3 questions, and tax account assistance. 4 This is a great service to our underserved citizens who 5 grapple with their annual tax filing requirements; however, 6 we believe that more can be done. Millions of taxpayers file 7 the simplest of tax returns and can benefit from this 8 service. To better serve these and other California 9 taxpayers in need, we are proposing to increase the 10 availability of this valuable program by the next filing 11 season by doing these three things. 12 First, is recruiting more volunteers statewide to 13 increase the program's availability at existing sites. We 14 are hoping to recruit more volunteers from the ranks of tax 15 professionals, bilingual speaking members of our community, 16 college students, and government employees. 17 Second, working with the CIRS and the practitioners to 18 increase the number of volunteer sites to better reach 19 individuals in their own neighborhoods. 20 And, third, is to publicize this program throughout the 21 state to ensure that the people most in need of this service 22 know of its existence and availability. 23 The second item of interest is the protest process 24 re-engineering need for shorter time lines. Recognizing all 25 docketed tax protests are not the same, and some can be 60 1 completed earlier than others, FTB's legal staff -- and, 2 again, kudos to John Davies and his staff -- has established 3 a three-track system for handling different types of 4 protests. The three-track system of 12, 18, and 24 months 5 applies prospectively to all docketed cases received after 6 July 1, 2006. And this has already been implemented and it's 7 working very successfully. 8 CHAIR MANDEL: That's great. Our prior M.O. was a 9 maximum time line of 33 months, I believe. 10 MR. DAVIES: 33 months, that's right. 11 CHAIR MANDEL: You know, barring any oddities. 12 And so moving to this tiered system and shorter time 13 frame will be a great boon for taxpayers to get things 14 through the system, and I'm sure they'll consider it a more 15 reasonable period of time. I saw some eyebrows go up in 16 excitement when they heard this news. 17 MEMBER CHIANG: Thank you, John. 18 MS. STANISLAUS: Thank you. 19 CHAIR MANDEL: Thank you. 20 The next item is Item 8, Board member time. Do any of 21 the Board members have anything at this time? No. 22 At this time the Board is going into closed session to 23 discuss the items listed on the public agenda. 24 (Closed session.) 25 CHAIR MANDEL: The Board met in closed session and 61 1 discussed litigation matters. 2 We are now adjourned. 3 Thank you. 4 (At 4:03 p.m. the meeting was adjourned.) 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 62 1 REPORTER'S CERTIFICATE 2 3 4 STATE OF CALIFORNIA ) ) ss. 5 COUNTY OF SACRAMENTO ) 6 7 8 I, SANDRA VON HAENEL, certify that I was the 9 official Court Reporter for the proceedings named herein, and 10 that as such reporter, I reported in verbatim shorthand 11 writing the named proceedings; 12 That I thereafter caused my shorthand writing to 13 be reduced to typewriting, and the pages numbered 1 through 14 62, inclusive, constitute a complete, true, and correct 15 record of said proceedings: 16 17 IN WITNESS WHEREOF, I have subscribed this 18 certificate at Sacramento, California, on the 2nd day of 19 October, 2006. 20 21 ___________________________ SANDRA VON HAENEL 22 CSR No. 11407 23 24 25 63