The Franchise Tax Board

1 2 STATE OF CALIFORNIA 3 4 THE FRANCHISE TAX BOARD 5 6 --oOo-- 7 8 9 10 11 12 13 14 15 --oOo-- 16 17 18 19 Franchise Tax Board Meeting 20 21 22 TRANSCRIPT OF THE OPEN SESSION 23 24 25 --oOo-- 26 27 28 DATE: Tuesday, October 1, 2002 29 30 TIME: 10:13 a.m. 31 32 LOCATION: State Board of Equalization 33 450 N Street, Room 121 34 Sacramento, CA 95814 35 36 37 --oOo-- 38 39 40 41 42 43 44 45 Reported By: DANIEL P. FELDHAUS 46 CSR #6949, RDR, CRR1 2 3 1 1 A P P E A R A N C E S 2 3 THE FRANCHISE TAX BOARD 4 5 CHAIR: 6 7 KATHLEEN CONNELL 8 State Controller 9 10 11 MEMBERS: 12 13 JOHN CHIANG, Chair 14 Board of Equalization 15 16 B. TIMOTHY GAGE, DIRECTOR 17 Department of Finance 18 19 --oOo-- 20 21 22 FRANCHISE TAX BOARD STAFF: 23 24 GERALD H. GOLDBERG 25 Executive Officer 26 27 DONALD L. BUXTON 28 Assistant Chief Counsel 29 Legal Branch 30 31 LISA CROWE 32 Chief 33 Filing Division 34 35 JOHN W. DAVIES 36 Chief Counsel 37 Legal Branch 38 39 WILLIAM C. HILSON, JR. 40 Tax Counsel 41 Legal Branch 42 43 PATRICK J. KUSIAK 44 Tax Counsel IV 45 Legal Branch1 2 3 2 1 A P P E A R A N C E S 2 continued 3 4 5 FRANCHISE TAX BOARD STAFF: 6 7 CARISSA A. LYNCH 8 Tax Counsel 9 Legal Branch 10 11 DEBRA PETERSON 12 13 DOUG POWERS 14 15 CLAUDETTE ROMO 16 Executive Secretary 17 18 EDWIN T. (TIM) SHEA 19 Tax Counsel 20 Legal Branch 21 22 GEOFFREY S. WAY 23 Tax Counsel 24 Legal Branch 25 26 --oOo-- 27 28 29 PUBLIC TESTIMONY: 30 31 SCOTT R. BAUGH 32 Partner 33 Manatt, Phelps & Phillips, LLP 34 representing 35 Computer and Communications Industry Association 36 37 CHIA-CHIEH CHEN 38 President 39 C&S Technologies, Inc. 40 41 CRIS FORSYTH 42 Chief of Staff 43 Assemblymember Rebecca Cohn 44 45 WHITNEY L. MacDOUGALL 46 Director 47 Intuit1 2 3 3 1 A P P E A R A N C E S 2 continued 3 4 5 PUBLIC TESTIMONY: 6 7 ERIC J. MIETHKE 8 Attorney at Law 9 Nielsen, Merksamer, Parrinello, Mueller & Naylor, LLP 10 11 ATILLA M. TALUY 12 FileYourTaxes.com 13 14 GREG TURNER 15 California Taxpayers Association 16 17 --o0o-- 18 191 2 3 4 1 Index for Open Session 2 3 Agenda 4 Item Description Page 5 6 7 Item 1. Approval of Minutes 8 9 a. Approval of 3/6/02 Minutes ...... 7 10 11 b. Approval of 3/25/02 Minutes ...... 7 12 13 14 Item 2. e-Filing ...... 8 15 16 17 Item 3. Regulation Matters 18 19 a. Status Report on Proposed Regulation 20 17053.36-0 through 17053.36-9, and 21 Sections 23636-0 through 23636-9 22 (Joint Strike Fighter Wage Credit) 23 and Sections 17053.37-0 through 24 17053.37-11, and Sections 23637-0 25 through 23637-11 (Joint Strike Fighter 26 Property Credit)...... 79 27 28 b. Status report on Proposed Regulation 29 19032 (Audit Procedures)...... 79 30 31 c. Status report on Proposed Regulation 32 17000.3 (Meetings of the Franchise 33 Tax Board)...... 79 34 35 d. Status report on Proposed Regulation 36 23334 (Tax Clearance Certificate)...... 79 37 38 e. Status report on Proposed Regulation 39 25137 (Property Used to Extract Natural 40 Resources)...... 79 41 42 f. Status report on Proposed Regulation 43 19133 (Notice and Demand Penalty) ...... 79 44 45 46 Item 4. Bank Ownership of Regulated Investment 47 Companies ...... 791 2 3 5 1 Index for Open Session 2 3 Agenda 4 Item Description Page 5 6 7 Item 5. Child Support ...... 71 8 9 10 Item 6. Disclosure of Information about Closed 11 Sessions ...... 81 12 13 14 Item 7. Administrative Matters 15 16 a. FY 2003/04 Budget Change Proposals ...... 82 17 18 b. Contract - Request for Board Approval ...... 82 19 20 c. Department of Finance Directive on 21 20 Percent Budget Reduction ...... 83 22 23 24 Item 8. Executive Officer's Time ...... None 25 26 27 Item 9. Board Members' Time 28 29 a. Employee Recognition Resolutions for 30 Board approval ...... 86 31 32 b. Other matters of interest ...... 86 33 34 35 Adjournment of Open Session...... 90 36 37 38 Reporter's Certificate ...... 91 39 40 --o0o--1 2 3 6 1 BE IT REMEMBERED that on Tuesday, October 1, 2002, 2 commencing at the hour of 10:13 a.m., at the Board of 3 Equalization, 450 N Street, Suite 121, Sacramento, 4 California, before me, DANIEL P. FELDHAUS, CSR #6949, 5 RDR and CRR, the following proceedings were held:6 --oOo--7 CHAIR CONNELL: We're calling this meeting to order. 8 Can we take roll? 9 MS. ROMO: Member Chiang?10 MEMBER CHIANG: Present.11 MS. ROMO: Member Gage?12 MEMBER GAGE: Here.13 MS. ROMO: Chair Connell?14 CHAIR CONNELL: I am here. We now have a quorum.15 If you have any written materials that you want to 16 submit to the Board today, you have to place them in the17 area to the left of where Don Buxton is sitting. He is 18 now pointing with his finger.19 And our staff will bring them to us. This is a new 20 security precaution, so you don't leap upon us, on the 21 stage. We've been, evidently, too informal before, and 22 have been reminded that we must show more decorum and 23 protocol. So we're now using this system, I see.24 Can I have approval of the minutes of the March 6th 25 and March 25th board meetings?1 2 3 7 1 MEMBER CHIANG: I so move.2 MEMBER GAGE: Moved. 3 CHAIR CONNELL: Thank you.4 Now we're on the subject of e-filing, something near 5 and dear to my heart.6 Lisa, could you present this item?7 We've already distributed the materials, I believe. 8 And we are at an historic point here today, in our 9 simplified personal income tax filing system.10 Our most simple tax form, which was the 2EZ, which was11 created two years -- three years ago, in 1999, as 12 I recall, Jerry; isn't that correct --13 MR. GOLDBERG: That's about right, yes.14 CHAIR CONNELL: -- and is now in purple form, at my 15 request -- I hope they keep it purple. It's a legacy to16 me.17 MEMBER CHIANG: I will do nothing to oppose any 18 further publications in purple.19 CHAIR CONNELL: Yes, this is good.20 And last year, 1.9 million taxpayers used the 21 2EZ Form, which is great. We had hoped that we would 22 get to that level; so Lisa and I are thrilled that the 23 child has, indeed, grown up.24 And of that amount, I think about 500,000 e-filed. 25 Isn't that about right?1 2 3 8 1 MS. CROWE: That's correct.2 CHAIR CONNELL: So 200,000 telefiled. So we actually 3 had a large section of that group who are moving forward4 in the direction that we wanted them to.5 Of those who e-filed, I believe slightly over 100,000 6 filed directly, without using a tax preparer, where the 7 rest still used the services of a tax preparer. 8 Isn't that right?9 MS. CROWE: That's correct.10 CHAIR CONNELL: Okay. And we announced the 2EZ tax 11 form online two weeks ago. And we actually had people 12 already calling about the service, and are excited about13 it. It went very well, the announcement, and the 14 opportunity to demonstrate it. And I think that was 15 well received, although there were some concerns that it16 was a bit limited. 17 And, in fact, I think the problems that most people 18 have on the 2EZ form are still there. And we need to 19 talk about them this morning, Lisa; and I'm sure you 20 will, in your staff remarks. But they are the math and 21 the tax look-up problems.22 And as we did, my fellow Board members, focus groups, 23 when we unveiled our 2EZ tax form throughout the state, 24 that was the kind of feedback that we got.25 So I'm going to be moving this morning to put the tax 1 2 3 9 1 calculator and the tax review material online with our 2 2EZ form only, because I do think it's important -- it 3 makes it more practicable as an electronic version, and 4 it will help this targeted group of people.5 Let me remind my fellow Board members that when we 6 created this form, this is a postcard form, as you know,7 and it can be done in less than 20 minutes.8 I actually had a person come up to me and tell me, 9 Lisa, last week that they finished it in 12. So there's10 hope. I didn't want to ask her whether she was a 11 graduate of California schools or not, given the fact 12 that I see our math grades are not responding to our new13 training program. Probably not. She probably wasn't. 14 But nevertheless, she got it done in 12 minutes.15 And I think that if -- she had the same concern, that 16 if there had been a math calculator on board, and the 17 tax information, that would have been helpful -- and 18 many other states, of course, are going that route. And19 so for the small audience, which is really those who are20 earning under 50,000 for a single head of household and 21 100,000 for joint heads of household, I think it's 22 something we should consider. So I'd like you to 23 comment on that, when you make your report.24 MEMBER CHIANG: Lisa, also if you can speak 25 additionally to the line of thought about where 1 2 3 10 1 California is, respective to the other 23 states, in 2 regards to our e-filing program. 3 I had the opportunity to speak to some very bright 4 individuals, including Whitney, who is president of 5 Intuit. And I wanted a comment. You know, I was 6 reading the papers, that they stated -- one newspaper 7 article where California's near the bottom of the 8 services that are available on our e-filing, relative to9 other states. Because of comments made by Intuit, they 10 also pointed out that some of these states are 11 retracting or pulling back on some of these services 12 that are offered. 13 So if I can get to more than what was offered in the 14 article, I just wanted to get an updated comment.15 Additionally, I wanted to get your thoughts on what we16 can do to enhance our models. You know, the controller 17 referred to focus groups on what taxpayers stated needed18 to be done. Do we do customer surveys? And what 19 additionally do you think can be done to enhance our 20 product so that -- and not only e-filing -- especially 21 in this day where there's severe budget cuts and where 22 we need to go forward.23 CHAIR CONNELL: Mr. Gage, did you have anything that 24 you're interested in --25 MEMBER GAGE: No, I just listened to the staff 1 2 3 11 1 presentation. Thank you.2 CHAIR CONNELL: We have actually a number of items 3 that are within this subtext of Item 2. One is the 2EZ 4 form. The second is the MOU. And I'm sure we have all 5 received correspondence from members of the Legislature.6 I have, of course, received phone calls from the senior 7 members of the Senate on this matter, who have been 8 following this issue for years and are very concerned 9 about your issue, John, of why California is lagging 10 other states.11 Lisa, go ahead.12 MS. CROWE: Sure.13 MEMBER CHIANG: Lisa, I'm sorry, wait. Can you please14 approach it from this -- obviously, we're here to serve 15 the best interests of the tax-paying public of the State16 of California. And I wanted your comments as to the 17 application of the various models fitting that to the 18 standard by which I try to apply. I don't know the 19 other models that my two colleagues are trying to move 20 towards; but that's certainly the model that I'm 21 concerned about.22 CHAIR CONNELL: Which is which model?23 MEMBER CHIANG: For the standard by which we offer the24 best practices in tax administration, in the interest of25 the tax-paying public of the State of California.1 2 3 12 1 CHAIR CONNELL: Absolutely.2 A lot of responsibility is now on your shoulders.3 I hope you've slept well and have taken your vitamins. 4 Are you up for this time?5 MS. CROWE: I hope so. If I start losing my voice, 6 you'll have to bear with me.7 CHAIR CONNELL: Well, we have water. 8 MS. CROWE: Yes, I've got a glass here. 9 Lisa Crowe, Franchise Tax Board.10 Let me bring you up to date quickly with regard to the11 recently new application for the 2EZ Direct, which you 12 mentioned was deployed two weeks ago.13 We've received nine returns to date. That was through14 yesterday. They were all refund returns. Of those, 15 seven people previously filed on paper, so that's good 16 news. They are, in fact, converting to electronic 17 filing.18 Three of those returns did have errors on them for tax19 look-up. So, in fact, taxpayers will be receiving the 20 notice from us, indicating that the tax they had looked 21 up was, in fact, wrong.22 MEMBER CHIANG: Lisa, the problem you alluded to is 23 one of the most -- ten most common mistakes that we have24 at the Franchise Tax Board. I forgot where on the list,25 but do you remember where on the list that's --1 2 3 13 1 MS. CROWE: That's correct. It's relatively high; but2 I don't remember exactly where that was on the list, but3 the --4 MEMBER CHIANG: Jerry, John, or Don, do you know where5 that falls? If somebody from the FTB can get that top 6 ten list, I'd like that entered into the record.7 MS. CROWE: I'm fairly certain, we can get that for 8 you, into the record.9 So it appears that taxpayers are, in fact, using this 10 new application; and as October 15th gets a little 11 closer, I would expect to see its continued use. And we12 can keep you informed as to the ability of taxpayers to 13 get through that, without making mistakes.14 With respect to math, obviously, that is also one of 15 the highest errors taxpayers make, is math mistakes. 16 And so the 2EZ, it is simple, straightforward; but we do17 expect to see some of those mistakes made in this new 18 application as well.19 So with respect to additional functionality, if you 20 will, for math and tax look-up, that would be much more 21 convenient for the taxpayer and would eliminate 22 receiving a notice from us on the back end, which, from 23 a 24 taxpayer-service perspective, you know, I think that 25 works quite well.1 2 3 14 1 With respect to California and being in line with 2 other states, the new application put us, you know, 3 "in the pack," let me put it that way. The fact that it4 does not do math or tax look-up, makes us comparable 5 to -- I believe, it's Nebraska, which is the only state 6 that does not do math and tax look-up in their 7 applications.8 MEMBER CHIANG: All the other 22 states provide for 9 math?10 MS. CROWE: They do. That's correct. 23 of the 24 11 provide for math. 12 Most of them also provide for an online experience 13 versus an offline experience. However, several of the 14 states also have an offline and an online experience. 15 So with regard to that, you know, we would be in the 16 middle of the pattern.17 Most all other states support all form types also, not18 just their simplest form type. So in that regard, we 19 would be a bit different as well.20 With regard to your comment about retracting these 21 applications in other states, I'm not aware that any of 22 these states are planning to remove those services from 23 their taxpayers. In fact, you know, they see this as 24 a much more efficient way of doing business. So I'm 25 unaware of any retracting that any state is planning at 1 2 3 15 1 this point.2 With regard to enhancing the model, our current 3 models, we do, in fact, do customer surveys in focus 4 groups about various products that we have -- not just 5 the tax forms, but other applications we have out on the6 Web. We plan to continue to do that, as our budget 7 allows, because, of course, that taxpayer feedback is 8 important to making decisions about what kind of new 9 applications we put out there. So that, in fact, is an 10 ongoing part of our business now, and will continue.11 MEMBER CHIANG: Lisa, taking a step back on your 12 discussion; the services offered by the 23 other states,13 are they offered for comparable forms, such as the 14 EZ form, or are they more expansive, in that they offer 15 them for --16 MS. CROWE: Yes, they're more expansive. Typically, 17 the state offers the service for the whole suite of tax 18 forms, if you will, so it's not just limited to their 19 simplest form. And that varies from state to state.20 With respect to what's in the best interest of the 21 taxpayers, certainly the fact that they can communicate 22 with their government directly and securely, without 23 sharing their information with any third party, I think,24 is in the best interests of taxpayers; and the fact that25 it would be free is an additional bonus. You know, 1 2 3 16 1 I think that's the best practice with other states, as 2 you've seen.3 And so the additional functionality issue, quite 4 frankly, in my opinion, is what the technology allows.5 CHAIR CONNELL: Well, in fact, I'd like to speak to 6 this issue of privacy. 7 I mean, this has been a driving wedge in this whole 8 discussion, Jerry; and I've had numerous conversations 9 with Senator Peace and Senator Dunn on this matter over 10 the course of several years. And the reason that we 11 had to pull back, as you recall, Jerry, last year, 12 Senator Hertzberg -- I'm elevating him -- Assemblyman 13 Hertzberg -- at that time, Speaker Hertzberg -- and 14 Senator Peace were concerned about the privacy issue and15 asked that we make sure that we had resolved their 16 concerns. And I think both of them have now retracted 17 their concerns.18 And in my personal conversations -- and I made a 19 point, John and Tim, of talking to them both -- they 20 feel that their concerns have been resolved in that 21 regard. So I think that's good news.22 I did ask that we preview our 2EZ tax form for Senator23 Peace; and he called back and said to me, 24 "I think it's great. I think it's what we need to do, 25 and I would support you, on putting the calculator on 1 2 3 17 1 it." So this is a big step forward for Senator Peace 2 and his view of some of the problems that we had 3 encountered a year ago with the senator. So I think 4 we've resolved those. 5 And I want to compliment the staff. And, 6 unfortunately, in my view, a much-delayed process -- 7 I'm not faulting you. It's been a very difficult 8 journey. But nevertheless, we now there. 9 And, of course, Senator Dunn intends to do some very 10 strong legislation, pioneering work moving forward next 11 year, I believe, in the session in his new chair, the 12 Budget Committee.13 MEMBER GAGE: Perhaps I could just follow up.14 Lisa, perhaps you could touch on a little bit the way 15 in which the privacy concerns have, in fact, been 16 addressed by the system, as it stands, and how it would 17 be addressed; how those concerns would be addressed, 18 going forward?19 MS. CROWE: The privacy issues have been addressed by20 the fact that this was an offline form that's, in fact, 21 downloaded to the taxpayer's computer. So that was the 22 biggest issue.23 I believe those issues could be overcome in an online 24 environment, either through matter of policy, in that we25 would not track keystrokes, or certainly as a matter of 1 2 3 18 1 legislation.2 MEMBER GAGE: Thank you.3 CHAIR CONNELL: So that takes care of the 2EZ form. 4 If we can stop at that point and deal with the 2EZ form 5 before we get to the MOU, which is a more complicated 6 discussion and obviously one that we needed to spend a 7 little time, because I have some very strong issues and 8 concerns about the MOU, and that it has taken a long 9 period of my personal time to try to get it to where it 10 is.11 But I would like to focus for a minute on the 2EZ tax 12 form and the calculator. And I am willing to make that 13 as a motion: That we put the calculator and the tax 14 forms on the 2EZ tax form. That would be my motion.15 Do I have a second to that motion?16 MEMBER CHIANG: I second the motion.17 As I indicated in the last Board hearing, I thought 18 our system, with all due respect to all the comments, 19 was clunky, inefficient; and I think this is an 20 important step forward for the ease of tax compliance 21 for the taxpayers of the State of California.22 CHAIR CONNELL: Good.23 Well, can we have a vote on that, Mr. --24 MEMBER CHIANG: Without objection?25 CHAIR CONNELL: Yes.1 2 3 19 1 MR. GOLDBERG: Madam Chair, could I just ask you to 2 repeat your motion?3 CHAIR CONNELL: My motion -- let me be clear so 4 there's no failure to follow up here, although I'm 5 always available to you, Jerry -- always.6 My motion is to place on the 2EZ tax form, the tax 7 calculator and the tax forms, so that --8 MR. GOLDBERG: You mean a tax look-up?9 CHAIR CONNELL: -- people can automatically --10 MEMBER CHIANG: Tax tables.11 CHAIR CONNELL: Tax tables -- move to the tax tables, 12 without having to go back to hard copy and flip through 13 that information themselves, as we tried to demo in my 14 office recently. 15 We actually have this form up on a demo version, 16 John.17 MEMBER CHIANG: Very good.18 CHAIR CONNELL: Because I wanted to see how it would 19 work, so I asked them to prepare the demo version for 20 me, so we can actually display it for all of our 21 colleagues later, if they request such a display.22 MR. GOLDBERG: Thank you.23 CHAIR CONNELL: Is that clear, Mr. Goldberg?24 MR. GOLDBERG: Yes, it's clear.25 CHAIR CONNELL: So we have that motion, and it has 1 2 3 20 1 been seconded.2 MEMBER GAGE: That's unanimous.3 CHAIR CONNELL: Okay. That is the unanimous vote of 4 the Board.5 So we can now announce that we have a 2EZ tax form 6 that has the calculator and the forms attached to it. 7 So that is one step we've taken forward.8 And I've got to tell you, I think this is a moment of 9 small victory. Lisa and I are smiling because it has 10 only taken us three and a half years of gestation to get11 to this point, the longest pregnancy, I think, known to 12 any species, other than maybe the flying dinosaur, which13 my son is now studying in school, which evidently is 14 four years.15 Okay, so, now, moving on to the second item, which is 16 the MOU. Let me tell you what I tried to do with the 17 MOU here. I wanted to try to move forward on a bolder 18 version of tax filing in California for all of our 19 forms. See, this is what the MOU was an attempt to do. 20 However, I am not quite satisfied that we are where we 21 need to be on the MOU. It has taken an extraordinary 22 amount of time of our staff and the FTB. And I 23 particularly want to thank Dave Dawson, Marcie, and Rick24 Chivaro of my staff because they have spent a great deal25 of time trying to work through the wording and working 1 2 3 21 1 with the IRS to try to get a complementary version of 2 what the IRS is doing in their MOU. 3 Well, I must tell you, the MOU that the IRS has can't 4 be immediately transplanted to California for a lot of 5 reasons. There are just a lot of discrepancies between 6 what we can do and what they are going to do. And 7 besides which, I'm not really of the opinion that 8 I want to do everything that the IRS would suggest in 9 their MOU. So we have some policy decisions we'd have 10 to make as a board. 11 So I'm not suggesting, as a board, today that we take 12 up a consideration of the MOU; but I wanted you to know 13 that it's out there. That we are continuing to work on 14 it; and that I'm not even sure we need it anymore. But 15 that if we do want to do it, if we do want to do a 16 partnership with the IRS -- I've had two discussions now17 with the Commissioner that we can do that, if we come up18 with some version. And they don't really care. The 19 Commissioner really is indifferent as to how our 20 California version mirrors theirs. I mean, obviously he21 appreciates we're an independent entity. But if we want22 to kind of piggyback on what they're going to be doing 23 at tax-filing time, assuming that we can get some 24 interest of free filing services by these various 25 entities who are going to be signing the IRS agreement, 1 2 3 22 1 should that agreement be signed and they provide those 2 services in California, it would be wonderful if we 3 could get some free filing services and piggyback that 4 on it. 5 That's why I took the initiative, John and Tim, 6 to move that forward, because I would like California 7 to have e-filing -- free e-filing services for our 8 people. So that was my intent.9 Needless to say, the MOU has become quite complicated.10 And I see, in arriving at my office today, that I have 11 several more letters of feedback from people about 12 details on the MOU. So I would not suggest in the 13 agenda item today that we discuss it in detail.14 I would like to do two things, with the agreement of 15 my Board. I would like the Board to hear what staff 16 thinks is going on with the MOU. My staff could also 17 perhaps assist in discussing that. 18 And then secondarily, I would like to call upon the19 industry -- and I see we have quite a number of people 20 here today who would like to articulate their concerns 21 -- I'd like to give them the opportunity to do that on 22 this item, as well.23 So I don't know whether we need to go with the staff 24 response first, or should we go with the industry. 25 Jerry?1 2 3 23 1 MR. GOLDBERG: Industry would be fine.2 CHAIR CONNELL: Okay.3 MEMBER CHIANG: Actually, I'm interested, is there 4 a course of action that we anticipate is going to take 5 place this year --6 CHAIR CONNELL: Well, I want to discuss that. 7 MEMBER CHIANG: -- after the discussion --8 MR. GOLDBERG: I want to see how you feel about it.9 I have had conversations with the Legislature; and 10 I don't think it's a surprise to anyone in this room, 11 that there are those in the Legislature who really feel 12 that we should just go directly forward with complete 13 e-filing, without any MOU in the interim. There are 14 those who think that the MOU is too far -- I mean, too 15 aggressive a step, John. So we have this kind of 16 division that is forming in the Legislature.17 I would say the Senate, from my way of thinking, is 18 definitely for a total free e-filing at this point -- or19 a significant portion of the Senate; whereas the 20 Assembly is less informed or less engaged in this issue,21 having, you know, weathered through a very difficult 22 budget cycle and more concerned about, you know, other 23 issues --24 MEMBER GAGE: Getting their work done.25 CHAIR CONNELL: -- than this issue. 1 2 3 24 1 They've not taken a leadership role at the senior 2 committee levels that we seem to have had in the Senate 3 on this matter.4 MEMBER CHIANG: Let me ask, Lisa, do you distinguish 5 between a public and a private domain, in regards to the6 tax assistance that we offer via the Web sites in 7 e-filing? My understanding was that when TurboTax first8 came into application, that it consisted of the tax 9 form, and calculation in its most rudimentary manner, 10 and then it became -- they offered more services 11 afterwards. We obviously -- and I believe rightfully so12 -- have stepped on that domain because it's all within 13 the public domain. But do you anticipate that, at any 14 near point in time, that we would enter something 15 similar to what they do in regards to, you know, "Look 16 for this; look for certain types of information"?17 MR. GOLDBERG: Perhaps I should speak to that, rather 18 than Lisa.19 We do not anticipate ever providing the type of 20 taxpayer tax prep that a TurboTax, or other products 21 that are out on the Web, do currently offer. For 22 example, 23 they use an interview technique to attempt to get the 24 taxpayer to think through a whole bunch of tax-related 25 issues. I would not anticipate that we would ever offer1 2 3 25 1 that service.2 MEMBER CHIANG: I was just trying to see if there was 3 a line or if -- and what we anticipated what our future 4 direction would be.5 CHAIR CONNELL: Has your question been addressed, 6 John?7 MEMBER CHIANG: Yes.8 CHAIR CONNELL: We are then going to start with our 9 guests. And I don't want to limit you to discussing the10 MOU. You can discuss anything you wish about e-filing. 11 This is a subject on e-filing, generally speaking. So 12 if you have other suggestions, other than the MOU, that 13 you think would be something that we need to discuss, 14 I'm not wedded to the MOU. I'm just wedded to a process15 near here and a goal. So even though we've spent 16 countless hours and you've spent countless hours trying 17 to get the MOU in place, if there is some other journey 18 that we can take down the road together, this is fine 19 with me. 20 So we will start with Greg Turner from Cal-Tax, and 21 then we will go to Whitney MacDougall, and then we will 22 go to Scott Baugh, and C.C. Chen, and Cris Forsyth; and 23 I think Atilla Taluy is here as well. Okay, so it will 24 be in that order. 25 MR. TURNER: Madam Chair, Greg Turner with the 1 2 3 26 1 California Taxpayers Association.2 I don't know really where to start. I was kind of 3 interested in hearing from the staff as to where they 4 think the MOU process is. We have been involved with 5 you in that -- and I think as you've said, for a period 6 of time now, we would hope a that the process like that 7 would continue, so that we could have a participation in8 what the State ultimately develops for e-filing.9 We, as an organization, have always supported 10 e-filing. It makes the administration more efficient. 11 We would like to make it cost effective for the taxpayer.12 I think the notion that sometimes gets kicked around, 13 that e-filing is potentially free for the taxpayers, is 14 somewhat of a misnomer. Someone is going to have to 15 build the software.16 And I think, John, as you were saying, the question 17 is: Is there a line between tax calculation and tax 18 preparation? And I think the problem with that is that 19 there isn't a line. It's very gray. And the step 20 between doing the math on a single form, and between 21 carrying numbers between forms, takes you into the realm22 of the State essentially competing with private-sector 23 products.24 And we think that, ultimately, the taxpayers on the 25 whole are better off with a public-private partnership 1 2 3 27 1 -- something which the State can take advantage of in an2 industry that's obviously well-developed, that can 3 provide software to taxpayers, to be able to try to 4 facilitate e-filing, make administration easier, cheaper5 for the agency; but at the same time, not have the 6 agency invest millions of dollars into an I.T. package, 7 to try to provide an essentially competitive product.8 And so, you know, that's sort of just an overview. I 9 don't have any specific to say on the MOU. We certainly10 will continue to work with the Board in trying to 11 develop that.12 CHAIR CONNELL: Are you comfortable with the structure13 of the MOU, the component parts of the MOU at this point?14 MR. TURNER: Based on the last draft -- and 15 I haven't heard anything since we provided comments, 16 I think, about ten days ago now to the last draft, yes, 17 we were. We provided, I think, some fairly minor 18 comments.19 CHAIR CONNELL: Yes, we thought your comments were 20 very --21 MR. TURNER: They were very minor, yes. And so, yes, 22 we are comfortable with it.23 MEMBER CHIANG: Greg, how do you define "tax 24 preparation"? This is where you have a murky line, 25 because I can't see asking any reasonable person 1 2 3 28 1 detached from tax administration, that if you attach a 2 calculator to the tax forms, that they would consider 3 themselves in a business standard, engaged in tax 4 preparation. That is the normal course of what anybody 5 would do in life.6 MR. TURNER: When you say "calculator" -- when you say7 "attach a calculator to a single-page form," does that 8 mean just when the taxpayer essentially -- they enter in9 their data; and at the last, they enter in what their 10 tax -- taxable income is, for example, and then the form11 is to -- just based on that single number, make a 12 calculation as to what the tax liability is; or do you 13 mean going from taking a dummy form, W-2, for example, 14 and entering in all that data, and that form, 15 essentially plugging in that on various other online 16 forms, and then proposing a calculation based upon that?17 MEMBER CHIANG: Well, let me ask you --18 MR. TURNER: Yes, that's a problem. 19 If you go down --20 MEMBER CHIANG: Just so we can move this discussion 21 along, why don't you address both scenarios?22 MR. TURNER: Well, it seems to me -- I guess the 23 problem we see is that it's a slippery slope. If you go24 down, where do you draw the line at the next level? And25 so in the first instance, you might say, "Tax liability 1 2 3 29 1 calculation is strictly a calculation," but then the 2 question then becomes: Do you step back from that? Do 3 we just provide a form to where the tax preparer can 4 enter in their information, and we'll carry that 5 information over; or if you're on the 540, for example, 6 and you are entering in your one-page information, and 7 it carries over your adjusted gross income to the next 8 page, that sort of thing; is that a calculation or 9 preparation? I think it's preparation.10 But that is, I think, the problem. I don't think you 11 can draw that line. Once you go down the road of 12 calculating the tax liability, then the next part will 13 be calculating, doing the math in terms of "this minus 14 that" on one form, or carrying numbers over from one 15 form to another form. And I don't know where you draw 16 that 17 black and white line. It's just such a gray matter; 18 that once the FTB starts to develop the investment and 19 the resources to build that software, then it will just 20 keep going. It'll just keep going.21 MEMBER CHIANG: I disagree there.22 MR. TURNER: Okay.23 MEMBER CHIANG: Obviously, clearly, we're talking 24 about losing people, from a personal status, you know. 25 Later in the discussion today is, you know, we're going 1 2 3 30 1 to reduce the budget at the Franchise Tax Board. You 2 know, we're clearly not engaged in the expansion of 3 tremendous services here that are going to -- or that 4 require additional significant capital costs.5 MR. TURNER: Certainly. I mean, I understand the 6 Board's intent. It's just having been in this business 7 for almost a decade now, it just -- it creeps. It won't8 happen this year, it won't happen next year, but it just9 starts to creep and the expansion just grows. I mean, 10 overall, you know, state services have grown. And it 11 will happen. Programs that start out small, take off. 12 They get a life of their own.13 MEMBER CHIANG: You need to talk to George Bush about 14 that.15 MR. TURNER: I don't have that --16 CHAIR CONNELL: Can we move on, unless you want17 to -- this could be a never-ending discussion here.18 Whitney?19 MS. MacDOUGALL: Whitney MacDougall with Intuit.20 Let me briefly talk about the MOU; and then if 21 I may, I'd like to go back and talk about e-filing and 22 the 2EZ.23 CHAIR CONNELL: Right.24 MS. MacDOUGALL: With regards to the MOU -- I want to 25 first thank the Controller for leadership in bringing 1 2 3 31 1 industry together. I know that this has taken longer 2 than you initially hoped that it would. The only 3 consolation --4 CHAIR CONNELL: I don't have another four years, I 5 hate to point out to you.6 MS. MacDOUGALL: The only consolation I can offer is 7 that, I think, under your leadership and with Dave 8 Dawson, who has done a tremendous job, in my opinion, 9 you have helped move things along in less than two 10 months, which is something that has taken over nine 11 months at the federal level. So I think that's 12 something to be proud of.13 I would encourage the Controller's office to keep the 14 dialogue going with industry and to resume the meetings 15 with industry, to see if there is something, you know, 16 that can be brought to fruition there.17 As to the MOU that was released a few weeks ago, 18 I felt that there was something really close that, you 19 know, we could almost grab it and touch it. And so 20 I think that there is a possibility that that can still 21 happen. 22 Turning to the vote that was just cast, I worry that 23 the vote that was just cast may have implications on 24 that MOU and what industry can do there.25 One of the principles of the federal consortium is 1 2 3 32 1 that it is a public-private partnership; that the 2 private sector brings to bear certain things and the 3 public sector brings to bear certain things. And the 4 public sector doing tax preparation -- let me just get 5 into that discussion that you just had with Greg -- but 6 at the federal level, that was defined as including 7 calculations, which kind of nullifies the basic premise 8 there. 9 So my concern is -- so my bottom line is, I would 10 encourage discussions to continue. My concern is that 11 last vote may fundamentally alter the ability of that 12 agreement to be effective.13 The other comment I would make, going back to your 14 comment, John, there are states that -- out of those 15 23 or 24 that are currently doing it today, that are 16 considering discontinuing their products. And they're 17 doing that vis-a-vis the federal consortium that is 18 moving forward. It has not been signed yet. Nothing is19 signed in concrete yet; but we believe it will happen.20 There are states that are in active dialogue with 21 CERCA and some of the other industry companies about 22 discontinuing their products and taking advantage of 23 that. The reason that they're doing that, is that they 24 found that the cost of these programs isn't really 25 outweighing the benefits. They're not getting as many 1 2 3 33 1 people taking advantage of it. They're facing tight 2 budget crises as well, and they're seriously looking at 3 discontinuing it.4 CHAIR CONNELL: I would appreciate it if you could 5 give that information to Lisa, because we do have a 6 graph here of what all the other states are doing. 7 And if we had to amend it, Lisa, that graph, and 8 update it, that would be appropriate.9 Secondarily, what is the status of the memorandum with10 the federal government? I mean, that was to have been 11 announced in September.12 MS. MacDOUGALL: Yes.13 CHAIR CONNELL: And here we are in October.14 MS. MacDOUGALL: My understanding is that, well, they 15 received over -- well, close to 700 comments in the 16 Federal Register, they were 6 to 1, in favor of it. It 17 is moving forward. However, election politics and 18 things like that are causing the pace to be a little bit19 slower than I think everybody had desired. I'm sure the20 Board members all understand what that means.21 So my understanding is it's moving forward; it's just 22 taking them a little bit longer to do it, than they had 23 initially hoped and planned.24 MEMBER CHIANG: Whitney, could you disclose some of 25 the states that are in the process of reconsideration, 1 2 3 34 1 concerning their process, their participation?2 MS. MacDOUGALL: I'm uncomfortable doing that without 3 talking to them first about that. I'd like to, you 4 know, with the Board's agreement, go back and just ask 5 them if I can do that.6 MEMBER CHIANG: Certainly.7 MS. MacDOUGALL: Because I don't want to violate any 8 confidences. But I will, in good faith, go back and ask9 them to do that, and ask them to even talk to Lisa and 10 Jerry and the staff directly, if they'd be willing to do11 that.12 CHAIR CONNELL: You know, having kind of wrapped my 13 arms around this federal process, to the extent that I 14 can discern where we're at -- and I haven't had a 15 chance, given other priorities in the State -- like 16 trying to find money for us, Tim --17 MR. DAVIES: That's important.18 CHAIR CONNELL: -- an important priority --19 MEMBER GAGE: Absolutely.20 CHAIR CONNELL: -- to spend enough time in the last 21 couple of weeks with the IRS Commissioner, and I need to22 actually circle around and do that again, and see what 23 he thinks the timing is of that effort, and also see 24 what kind of interest he is getting from other states in25 participating in that dialogue. 1 2 3 35 1 Because it is going to be very interesting to see 2 where the industry groups, Whitney, choose to offer 3 their free services. I mean, if you do have this target4 of 5 60 percent free services under the MOU with the IRS -- 6 these are a lot of alphabet letters here, "MOU" with the7 "IRS" -- that I'm not so sure that you're voluntarily 8 putting a lot of that 60 percent even into California, 9 even if we had an MOU. That's the thing that bothers me10 here. Unless we sign a full MOU that's more rigid and 11 more aggressive than what the IRS statute says, that 12 it's not necessarily logical to assume that industry 13 will choose to come into California, for a variety of 14 reasons: It's more expensive, I think, to service the 15 California taxpayer. The customer is more ambitious. 16 Our forms are more, in some ways, complicated. 17 So I'm a little bit concerned about the equity and 18 fairness between, if we went forward with the MOU at the19 federal level; but those will issues that we still have 20 to work out.21 MS. MacDOUGALL: I certainly can't speak to what my 22 competitors may or that may not offer; but I can tell 23 you that I don't -- that from just purely an offering 24 point of view -- you know, from an Intuit point of view,25 we don't view California as being more difficult to 1 2 3 36 1 offer in today than we do another state. It doesn't 2 cost us more, quote, unquote, to offer to California 3 than it does to New York or Texas or, you know, Nebraska.4 One other comment, if I may. There was discussion of 5 focus groups, and the fact that nine people had filed, 6 which -- and I think it's tremendous that the pilot's up7 now and running; and that three of those were with 8 errors. Just a caution: Somebody who has had to deal 9 with statistics most of my life, that's not a strong 10 statistical sampling. Focus groups are known for being 11 qualitative, not quantitative, to your question about 12 research. And so making a policy decision, based upon 13 those kinds of numbers and qualitative information, is 14 something that, you know, gives me pause and something 15 that I would, you know, strongly urge the Board to 16 consider as they think about that, because that's -- 17 it's just not statistically --18 CHAIR CONNELL: Well, we obviously will have 19 better-formed and more logically thought-out focus 20 groups. I mean, this is just a -- I think that was a 21 snapshot of what happened in five days of time, since 22 the press conference. I mean, I think that's the only 23 information. No one is representing that it's a 24 statistical sample here this morning. Having a Ph.D. in25 the field myself, I would laugh if somebody suggested 1 2 3 37 1 that was a statistical sample. It is clearly not. 2 But on the other hand, I do think the decision we 3 rendered this morning was sound, I think it was 4 appropriate, and I don't think we need any sample to 5 back it up. I think it was just the right decision to 6 do, I mean, regardless of what any sample out there may 7 suggest.8 Scott?9 MEMBER CHIANG: Actually, I wanted to say something.10 I think it's clear we need additional public 11 discussion on this matter. The federal consortium 12 provided for, I guess, 60 percent free filing.13 One of the things I don't think has been made clear, 14 and what needs to be made clear is who we're going to 15 put the onus on. Obviously, it needs to be 16 cost-effective; and they need to generate profits in the17 public sector. And so we need a further delineation as 18 to who we expect in the State of California, if they're 19 going to use these services, to pay in, you know, 20 whether it's small businesses, whether it's the 21 wealthiest taxpayers, or 22 if it's poor taxpayers. You know, if we're going to 23 articulate public policy fairly to people, we ought to 24 -- they ought to understand who government is asking to 25 shoulder an additional burden and accessing some of the 1 2 3 38 1 services.2 CHAIR CONNELL: Well, in fact, you know, the real 3 question here is -- there are two questions in that 4 regard, John. One is, "Is it a goal, or is it a 5 mandate?" In other words, do they, when they sign that 6 agreement, have to get to 60 percent as an individual 7 company, or does the consortium have to get the 8 60 percent? Or is it a goal?9 The way the IRS policy is written, it is a goal for 10 the consortium. That's quite different than an Intuit 11 or an H & R Block to have to sign an agreement that 12 says, 13 "I will deliver 60 percent free services; and at the end14 of the year, I will be audited and 60 percent will be in15 place." 16 Do you see the difference?17 MEMBER CHIANG: I understand clearly the difference, 18 yes.19 CHAIR CONNELL: And so when you get into these kinds 20 of internal details to the IRS MOU, it becomes a much 21 more complex document, particularly when you try to 22 supplant it to the demographics of California. And 23 that's where I've been struggling, John.24 You know, if we take that 60 percent and people say, 25 "Well, it's only a goal," and at the end of the year, we1 2 3 39 1 find that we have reached 30 percent, and the 30 percent2 we reached are people who were, in my view, capable of 3 paying -- now, that's obviously a judgment call on my 4 part -- but who are necessarily capable of paying for 5 that service, I don't know really what we have gained in6 that process. Whereas, if we have seen that the goal 7 has come approximate to the 60 percent and it is, 8 indeed, appearing to go to people who are our lower- and9 middle-income taxpayers -- of course, lower are now 10 taken care of through the 2EZ tax form, quite honestly, 11 so it would be the middle -- then that gives me a 12 different response and I would feel very differently 13 about that.14 So those are the complexities of this MOU that we're 15 trying to work out now. And industry, I must may say, 16 has been very supportive in looking through this. But 17 this is not an easy recipe to put together. And it 18 becomes particularly conflicted when you realize that 19 not everybody may want to participate in the MOU. So if20 you only have one or two companies who want to 21 participate, then they can't be really the consortium; 22 they have to be themselves. And then the question is: 23 Are we locking out other people from free e-filing 24 because we only have a couple of companies who can sign 25 an MOU, and can they really serve enough people in 1 2 3 40 1 California? These are some of the esoteric, but very 2 practice considerations that come out of that 3 discussion. 4 And you're smiling, Jerry, because we've had these 5 discussions, you know, ad infinitum about how we draft 6 this language.7 MEMBER CHIANG: My question is: What's the incentive 8 for reaching the goal, at the federal level?9 CHAIR CONNELL: Well, the incentive at the federal 10 level, is that this is a -- it gets renewed after three 11 years. But, actually, there is no clout there because 12 the federal government -- the Commissioner has stated on13 record, as well as in his meetings with me and his calls14 with me and then, of course, publicly, that they have no15 intent of moving forward and setting up their own 16 system, so there is no leverage. 17 I mean, the leverage here, I think, would be 18 legislation or the threat of setting up our own system. 19 I mean, those would be the two sizable hammers that we 20 would have here in California, I'm just assuming. And 21 I'm speaking out loud, you know, without having asked 22 the FTB staff.23 What do you think, Jerry?24 MR. GOLDBERG: I concur.25 MEMBER CHIANG: It sounds like a lot of talk out of 1 2 3 41 1 Washington, D.C.2 MS. MacDOUGALL: Well, if I may offer; I think 3 the lever in the federal level is that it is put in 4 writing -- I mean, Commissioner Rossotti says today he 5 has no intent but, when he is termed out, there will be 6 a new commissioner going in. This is going to Greg 7 Turner's point. It kind of becomes a slippery slope, in8 that as people change, you know, you can't be certain 9 that the policy remains the same. So the value of this 10 agreement is that there's something in writing that 11 says, "This is what the IRS intends to do and not do. 12 And if there's going to be any change to that, the IRS 13 will come to industry and dialogue with them before they14 make that change," so that industry -- so it has an 15 opportunity to have full and public debate on the issue 16 itself; and that if the IRS decides they want to get 17 into the calculation and preparation business, then 18 industry can choose, "Do we want to continue the 19 consortium, or do we want to change into something else?"20 So that's where the partnership aspect of it comes in;21 and that's where the real value is, that there is 22 something in writing that the IRS does not intend to do 23 this for a period of three years and then they have 24 options to renew if they choose; but also there's that 25 dialogue and the full and open debate, as opposed to, 1 2 3 42 1 "We're just doing it," for example,2 CHAIR CONNELL: We've been trying to have that 3 dialogue. I've spent countless hours in dialoguing.4 Thank you, Whitney.5 Let's move to Scott Baugh.6 And you are representing, Scott, this morning?7 MR. BAUGH: Computer and Communications Industry 8 Association.9 Scott Baugh from --10 CHAIR CONNELL: Tell us a little bit about who they 11 are, for the public listening to this dialogue who may 12 not know who CCIA is.13 MR. BAUGH: Well, basically it's a whole bunch of 14 companies involved in the association, like any 15 association works. Intuit's a member. Other computer 16 and communication companies are members as well.17 And I want to thank the Chair for your leadership 18 here.19 And the process -- my comments will go more to the 20 process here.21 On the MOU, you note that it is very complex, and 22 there's a lot of factors going all over the place. And 23 that's quite a balancing act you have to pull off there.24 My concern, though, with that process -- and I want to25 encourage the process, encourage the participation -- 1 2 3 43 1 but at the end of the day, with respect to the vote that2 just took place with e-filing, I don't know what has 3 changed. I may have missed a meeting, but we're going 4 down one path of not doing the calculations, and then 5 all of a sudden, we have the calculation.6 Now, if we take a sampling of a hundred, perhaps, and 7 there are no errors, is that indicative of needing 8 calculations, or is that irrelevant? I'm trying to 9 figure out --10 CHAIR CONNELL: Well, let me --11 MR. BAUGH: -- what process went into that change.12 CHAIR CONNELL: Let me respond to what we're doing 13 here, because I've given this a lot of thought, and I'm 14 probably the most intrinsically vetted in this issue, 15 having come up with the 2EZ tax form -- on a morning 16 jog, I might add, John, in L.A. See what happens when 17 you exercise?18 MEMBER CHIANG: Inspiration in Los Angeles.19 CHAIR CONNELL: Yes, it's rare in the smog.20 MEMBER CHIANG: No, no. We're often inspired.21 CHAIR CONNELL: Yes, I really debated, myself, Scott, 22 about the calculator for many, many hours. 23 As Jerry knows, we had many heart-rendering discussions 24 about it. But I really feel very strongly that we -- 25 this, to me, is about customer service. And when I came1 2 3 44 1 in as Chair of the Franchise Tax Board, I said I wanted 2 my legacy to be one of customer service; and I wanted my3 legacy to be one of, you know, equal access to the 4 services that we had at the FTB. And I think we've 5 accomplished that.6 I mean, I think we are much more customer 7 service-oriented in our call centers and the time that 8 it takes, thanks to all of you and your support. And I 9 do think we have approached an openness here, equality 10 of the services that we have. You know, I've started 11 these Taxpayer Bill of Rights hearings. We've had much 12 more disclosure. 13 And in that regard, I think of the calculator as 14 really a customer service enhancement and the tax form 15 is a customer service enhancement. And it's just there.16 It's available. So why not put it on our 2EZ tax form?17 The whole point of coming up with the 2EZ tax form, 18 from my viewpoint, was to help people file their taxes, 19 simply. Because short of going to the dentist, I don't 20 think there's anything worse than filling out your 21 taxes. And, you know, you have an annual dentist 22 appointment; you have your annual time to file your 23 taxes. And I don't know which is worse, you know, 24 depending on whether you have cavities that are 25 discovered, or you have a tax audit that you have to 1 2 3 45 1 endure. So I wanted to resolve that problem, in favor 2 of the taxpayer.3 MR. BAUGH: Madam Chair, I don't --4 CHAIR CONNELL: These are people who have very limited5 ability to pay for tax services. So from my viewpoint, 6 that was really what we needed to do.7 MR. BAUGH: Yes, and I don't dispute any of that; 8 in fact, I can agree with virtually all of it.9 The only question is, on the process where we talked 10 about the Franchise Tax Board being your partner in 11 calculation and also your enforcer -- and then this 12 brings us back to all the issues that Greg and Whitney 13 have talked about -- with respect to the slippery slope,14 or that what Jerry said about "We don't anticipate going15 here." Well, if you don't anticipate going there, the 16 premise of that statement is, "We can go there. It is 17 an option." 18 And so we have some serious concerns about not just 19 the vote today, but where we do go from here? So we 20 have to be sure that, as the dialogue continues, that we21 don't go down one path, only to be -- you know, we've 22 spent hundreds of hours on this, thinking we're going to23 go this way; and all of a sudden -- boom -- with one 24 vote, we come right back to where we started. So those 25 are our concerns. And as we move forward from here, we 1 2 3 46 1 hope that we could keep on the same page in the dialogue2 with the MOU.3 MEMBER CHIANG: Scott, I think people really 4 respect -- at least I do -- the private sector's 5 innovative economic efforts and what the public sector's6 responsibilities are. And, you know, we've tried to 7 support public-private partnerships.8 I, philosophically, view this, truthfully, 9 as private-sector intrusion on government 10 responsibilities -- in one sense. And I'm not trying to11 be mean about it; but, you know, we have a fundamental 12 responsibility just to help people live their lives 13 easily, to meet the responsibilities that we impose upon14 them for living in our free society; and there's costs 15 associated with that. 16 And so when you just say, you know -- and I understand17 it started as a private-sector effort -- 18 but when you say, "We want to make it a little bit 19 easier so you have access to a computer and that you can20 look up tax forms," you know, I don't view that as 21 stepping on private-sector opportunity. I just view 22 that as a fundamental responsibility. I think we 23 abdicate our responsibility if we don't give people the 24 opportunity to fulfill their obligations.25 MR. BAUGH: The question is: Where does it go from 1 2 3 47 1 here? For example, on the -- I don't know -- she said 2 you go offline and then --3 MEMBER CHIANG: But that's not part of the discussion,4 because they said we're not going there.5 I understand your -- the slippery slope and where you're6 going, but this is -- we're drawing the line.7 MR. BAUGH: But a point of clarification, if I could, 8 are the tables downloaded and are they calculated that 9 way? Or is it just -- how does that work?10 MS. CROWE: On the current application, the tables 11 are, in fact, part of the download that the taxpayer has12 to scroll through to look up their tax.13 MR. BAUGH: So whereas perhaps a private-sector model 14 would prompt you with questions, the public-sector model15 won't let you go forward, unless you answer certain 16 questions, whether they're prompted or not. It doesn't 17 let you go forward.18 But I understand that decision has been made. And 19 I don't disagree with what you're saying at this stage, 20 per se. But I think there are some inherent dangers in 21 where we go from here.22 MEMBER CHIANG: And I think we're all observant of 23 those concerns.24 MR. BAUGH: Thank you.25 CHAIR CONNELL: Well, that's why we're having this 1 2 3 48 1 discussion. I am particularly sensitive to the fact 2 that we're hitting threshold sensitivities here today; 3 that in the mind of industry, we have gone way too far 4 in putting the calculator and tax forms -- in my view, 5 we have done exactly what we needed to do for the 6 easiest tax form, and that we've enhanced it. And that 7 when I leave office, that we will have a very 8 user-friendly postcard tax form; that we may not have 9 achieved, John, the same level of e-filing success as 10 some of these other states; but we will have, I think, 11 the state-of-the-art form for a short form for filing, 12 on a postcard, taxes for now four million Californians.13 MEMBER CHIANG: Yes.14 CHAIR CONNELL: And I think that's a good step 15 forward. You know, at least it's what we've 16 accomplished today.17 And I see what you're saying about the sensitivities;18 and I'm aware of that, Scott, moving forward.19 MR. BAUGH: Thank you.20 CHAIR CONNELL: C.C. Chen?21 MEMBER CHIANG: Scott, you have incredibly bright 22 minds. So part of this is -- we talked about with 23 Whitney, and they offered some approaches. But, you 24 know, you can't put the taxpayers of the State of 25 California and those of us in tax administration in a 1 2 3 49 1 position where we look -- we just don't offer equivalent2 services provided by other states; even, you know, 3 separating the public-private domain. So, you know, 4 our challenges in our discussions to come up with new 5 creative proposals that meet those criteria.6 MR. CHEN: Yes, thank you.7 C.C. Chen with C&S Technologies. We're a small 8 company, and we're taxpayers ourselves. So I do agree 9 that the taxpayer wants a better product and free and 10 competition. That's correct. And that's why I attended11 the meeting back in March, regarding the memorandum of 12 agreement. We have actually went ahead and developed a 13 viewing form that can be e-filed. It's actually -- in 14 some ways, if we compare technically, it's a slightly 15 different approach from what has been announced two 16 weeks ago. We had it about two or three months ago. We17 brought it up; and I don't think there was much 18 interest. And we didn't think that it was a great idea 19 because it doesn't have computing.20 Okay, beyond that, we actually have gone further. 21 We've developed computing 540 2EZ today -- 540A and 540.22 We published it at our Web site. We passed all the 23 tests. We published it at our Web site for free, as of 24 now, and people can download and use it as up to date. 25 And just in comparison, we published it back in probably1 2 3 50 1 early August, maybe about 20, 30 tax returns going in, 2 accepted. And so we do believe that the taxpayer wants 3 a better product and it should be computing. But we 4 think for the Franchise Tax Board to take on the 5 responsibility, it may be not the best choice.6 What we're trying to suggest is that let's look at the7 Oklahoma model. Don't look at just C&S alone, but open 8 it up to all the companies, whether it's online, whether9 it's direct filing; but any can company that can offer a10 good tool for people to prepare their tax returns. 11 CHAIR CONNELL: The Oklahoma model --12 MR. CHEN: And the state should foot the bill.13 CHAIR CONNELL: -- if I may interrupt you, is the 14 model where there is electronic filing of both federal 15 and state returns available through a contract with 16 Intuit via TurboTax online. The fees are paid for by 17 the State of Oklahoma.18 MR. CHEN: Yes, expanded model --19 CHAIR CONNELL: Is that what you were referring to?20 MR. CHEN: An expanded model beyond just one company 21 alone, that's the first thing.22 Secondly, to be truly free -- "free" is a good word; 23 but the reality is nothing -- there is no free lunch. 24 CHAIR CONNELL: But it's not free. 25 MR. CHEN: Somebody will pay.1 2 3 51 1 CHAIR CONNELL: The state is paying.2 MR. CHEN: That's right. In this case the state will 3 pay. But it will -- because one way or the other, the 4 state will pay. The state will either pay to develop 5 its own software or pay a contractor to develop the 6 software to use, or in some other way, would pay.7 And for the private company like ourselves, we're in 8 the business to make a profitable business and we have 9 to be able to sustain. So if we offer free somewhere, 10 somewhere else we have to make it up. And so the 11 consortium, regardless how much we put in 60 percent, 12 30 percent, there's always been doubts. But ultimately,13 it will not be truly free to all the people, all the 14 taxpayers.15 And by proposing this model, it allows and still 16 enables the flexibility of choices for the taxpayer. 17 Because let's say today the Franchise Tax Board 540 2EZ 18 is successful, then we will be driven out of business 19 instantly, even though we felt we have probably a good 20 product, but we can't compete because we're not free. 21 Even though our product is much smaller, better, we'll 22 use with Microsoft Word, it's much easier to use. 23 And, on the other hand, if it goes a step further, if 24 it's really successful, why don't the Franchise Tax 25 Board just mail out CDs to every taxpayer and tax 1 2 3 52 1 professionals? That can drive everybody out of 2 business. Beyond the 540 2EZ, 540A, 540, it could be 3 done easily, actually.4 But if that's really successful, then the Franchise 5 Tax Board becomes what we call the "judge, jury and 6 executioner," all the issues relating to resources and 7 the U.S. government, to a certain degree, there's 8 certain things that they can do, maybe there's certain 9 things that are better done by other parties.10 MEMBER CHIANG: But is your product better than what 11 the Franchise Tax Board will offer?12 MR. CHEN: Pardon me?13 MEMBER CHIANG: You said your product is better than 14 what the Franchise Tax Board would offer.15 MEMBER CHIANG: In our view, much better, only because16 we've been doing this for about four or five years. We 17 have federal forms in same way. Each form is a mirror 18 image of the government form, and they do compute.19 CHAIR CONNELL: In what way is it better?20 MR. CHEN: Pardon me?21 CHAIR CONNELL: Why is it better?22 MR. CHEN: Better than Franchise Tax Board?23 CHAIR CONNELL: Yes.24 MR. CHEN: We have -- in technical terms, in some 25 simple form -- other than computing, our forms compute 1 2 3 53 1 by themselves and they interface with each other. You 2 click one button, it picks up data from all the other 3 forms. And you can use any form at any given time. And4 they use Microsoft Word. Pretty much everybody has 5 Microsoft Word. You can save the data, if you choose to.6 MEMBER CHIANG: So you have value added to your 7 product?8 MR. CHEN And also, the software is much smaller. I 9 mean, There are many, many reasons that we think it's a 10 better product that is up to date. But probably we 11 can't compete with the resources -- enormous resources 12 of the Franchise Tax Board. They can make it much 13 better as well.14 MEMBER CHIANG: Okay, so your last comment I 15 understand. But I was trying to say, don't people pay 16 for value added? I mean, if your product is better than17 what the Franchise Tax Board offered, I certainly would 18 pay, you know, if it's competitively-priced for a better19 product.20 MR. CHEN: Correct.21 MEMBER CHIANG: I don't want junk.22 MR. CHEN: Correct. We feel this way too. So when 23 the Franchise Tax Board went ahead with the form 24 development, we actually supported it. That's why I 25 say, we had it ready about two or three months ago. And1 2 3 54 1 I don't think anybody wants to pick it up, either the 2 Franchise Tax Board or Controller's office, nobody 3 really has the interest. But we went ahead and added 4 all the computation.5 However, if the Franchise Tax Board started to have 6 the computation, then, of course, if they can both 7 achieve the goal. That's why I say, if the Franchise 8 Tax Board is successful, it will drive us out of 9 business. If it doesn't, then why don't we leave the 10 option open to bring better products to all the 11 taxpayers?12 MEMBER CHIANG: C.C., let me revisit your comment, and13 if you don't know the answer, let me ask Whitney. 14 You cited the Oklahoma model as perhaps the model that15 California might want to examine further or perhaps 16 replicate. And the cost is borne by the taxpayers of 17 the State of California -- I mean, Oklahoma.18 MR. CHEN: Oklahoma.19 CHAIR CONNELL: Actually, it's borne by the 20 government.21 MEMBER CHIANG: Right, but the taxpayers of Oklahoma 22 pay --23 CHAIR CONNELL: Yes, right.24 MEMBER CHIANG: -- the government and they use those 25 services.1 2 3 55 1 Now, does each -- I mean, if we're going to do that in2 the State of California, we're going to have to seek 3 additional revenues, perhaps increase taxes or -- I'm 4 not clear --5 CHAIR CONNELL: Increase the debt offering.6 MEMBER CHIANG: Right. I'm not sure how that works, 7 so you tell me how they actually -- 8 MR. CHEN: Okay, the -- 9 MEMBER CHIANG: -- is it the person who uses the 10 services who pays an additional fee to the Oklahoma 11 government, or is it already built into the costs of --12 MR. CHEN: Currently, as far as I know, I've tried it 13 myself. The Oklahoma State, you click it -- you click a14 button, it takes you to a particular page -- I'm sorry, 15 to explain, to Intuit -- it takes you to an Intuit page 16 that's specifically designed for Oklahoma residents, and17 then it is free preparation and e-file.18 With the California model, what I thought is the 19 ultimate goal of e-file is to improve efficiency and 20 with productivity gained, there will be money saved by 21 increased e-file. Otherwise, we wouldn't be doing this 22 in the first place. Improve the accuracy and the number23 of processes, and all of these -- all those benefits are24 going to contribute to cost savings. That cost savings 25 could potentially be used to pay for the additional cost.1 2 3 56 1 And we have actually proposed a model as well.2 CHAIR CONNELL: I hate to bring the bad news here. 3 Tim and I have been amusing ourselves here on the side 4 because I can't even conceive of going to the Governor 5 at this point, as Controller, and asking for any more --6 MEMBER CHIANG: There's no way.7 CHAIR CONNELL: -- expenses.8 We are without the dollars to operate basic operating 9 units of State government. We are making major cutbacks10 beginning in January of our operating agencies in state 11 government. C.C., we are not in a position to finance 12 any new activities that would require us to expend money13 or, on the other hand, pay for those services from the 14 private sector. We just can't do it. So, I mean, we 15 cannot adopt an Oklahoma model. I can't even conceive 16 that my successor, as the head of the Franchise Tax 17 Board, could ask for a budget change proposal to finance18 free tax filing for the State of California. I can't 19 even imagine that that would be credible with the 20 Governor.21 I certainly do not intend to do it in my remaining 90 22 days, as I am seeking the support of Wall Street for the23 largest grant offering upon, even at this very moment. 24 So we cannot add anything to the expenditures of the 25 State at this point. We really can't. I mean, we are 1 2 3 57 1 really limited in what we can do.2 And those of us who have already submitted our budgets3 to Mr. Gage are well aware of the kind of severity of 4 the cutbacks that are going to occur. 5 So you're not going to find that that is going to be a 6 proposal that will wing its way to the Governor in the 7 next couple of years, is my view.8 MS. MacDOUGALL: If I may offer a brief point of 9 clarification, just so everybody -- completely 10 understanding and respecting the fiscal constraints of 11 the State right now.12 What Oklahoma has originally done -- and Intuit 13 acquired the Oklahoma contract through an acquisition, 14 so we didn't initially bid on it -- instead of spending 15 the dollars on, you know, funding the resources to 16 develop it and maintain it and buy the servers, et 17 cetera, they took an estimate of what it would cost them18 to do that, and they chose to pay the private sector 19 directly to do it.20 The Oklahoma has just let out a request for proposal 21 right now -- earlier in the month. They're changing 22 their model, at our request and the request of others in23 the industry, so that it will be multi-vendor, and so 24 that it will be -- multiple vendors will be able to bid 25 their offering.1 2 3 58 1 The state still has a fixed-dollar amount. Now, what 2 they're looking at doing, going forward, now is offering3 multiple choices to the taxpayer and they will be either4 -- they will be able to either subsidize the full 5 amount, depending upon the bids, or it may be that they 6 say, "This is what we will subsidize, and you, the 7 taxpayer, can pay this, on top of it." So they're 8 looking at it as a fixed-line item amount and going 9 about it that way.10 MEMBER CHIANG: Thank you.11 MR. CHEN: Just to conclude, I really agree, and 12 I do understand the budget crisis, the shortfall, you 13 know, almost 400 percent, that's a lot. But the only 14 thing is, I do want to point out: To be truly free and 15 fair to all taxpayers, ultimately somebody has to pay 16 for the cost, either through the Franchise Tax Board or 17 through the taxpayer.18 And the second point I want to find out is that 19 I want that we can continue working with the Franchise 20 Tax Board by bringing new ideas and different products 21 over because right now --22 CHAIR CONNELL: I think that's what we've established,23 is that openness, at least under my tenure with the 24 industry. And I've really attempted to do that. And I 25 appreciate your organization and the personal commitment1 2 3 59 1 of time. I realize it's harder in a small company to be2 at meetings, and I want to thank you for your personal 3 attendance because you've been at every one of them.4 We're going to have to move. We've got a very 5 aggressive agenda today and so we're going to have to 6 try to conclude this discussion.7 Atilla, if you want to speak?8 MR. TALUY: I'll speak briefly.9 I want to thank your office, especially Dave Dawson, 10 for the diligence he has shown in regards to the 11 memorandum of agreement.12 Just to give you a little brief on the time line of 13 the federal that you were asking, I think one of the 14 main things that the consortium is looking for right now15 is a business review letter from the Department of 16 Justice on competitive -- on the antitrust issues. So 17 that is supposed to be due on the 4th of this month, 18 which is Friday, so we presume that things will go 19 further, unless there are some other obstacles.20 And I just wanted to also point out that going to a 21 consortium-type organization or a model will not 22 prohibit the state or the federal government from doing 23 any other types of agreements on the outside. 24 As a matter of fact, the federal government 25 specifically stated in their Federal Register notice, 1 2 3 60 1 that the IRS, itself, can participate in other 2 partnerships outside of this consortium, and the state 3 very well can also do that.4 And, again, speaking to the issue of the percentages, 5 I think we've been doing free California returns now for6 the last three years, I think; and we probably are doing7 in the neighborhood of 50 percent -- or we appeal to 50 8 percent of the population of California. So achieving a9 60 percent is not going to be a difficult task at all in10 the State of California for general consideration. And 11 --12 CHAIR CONNELL: Are you signing the federal agreement,13 Atilla?14 MR. TALUY: Yes.15 CHAIR CONNELL: Now, how many people will be signing 16 that? I've got mixed responses back. As I understand, 17 there's the IRS agreement, and then there's a separate 18 agreement of the consortium, which itself is its own 19 lengthy document, I understand, and fairly technical, 20 that really kind of encompasses all the aspects of the 21 agreement. How many people have agreed to sign the 22 consortium agreement and participate in this at the 23 federal level?24 MR. TALUY: That has not been disclosed. I asked that25 statement. To the best of my knowledge, I know of six 1 2 3 61 1 entities that have signed in. But I think the number is2 going to be larger. But for some reason, they would not3 disclose that until the consortium meeting is going to 4 be held. Possibly within the next two weeks.5 CHAIR CONNELL: Well, if it's really limited to just 6 the few firms, how do you get to the 60 percent?7 MR. TALUY: Well, for instance, one model -- I think 8 Intuit's right now is actually appealing to about 9 50 percent of the population. It may be a little bit 10 over 50 percent. And all others are going to be 11 providing, not the same parameters in their offerings --12 for instance, one may offer -- in the case of the 13 existing model, there is an AGI basis as the parameter; 14 in others, it may be occupational; in others, it may be 15 the total income figure; it may be the number of 16 children.17 So all these different parameters, when put together, 18 will constitute the total offering.19 For instance, when we made our offering -- which 20 I'm not supposed to disclose for antitrust reasons until21 everything goes into effect -- is going to be different 22 than theirs. So the IRS is taking that now -- they're 23 running a statistical --24 CHAIR CONNELL: So there won't be overlap?25 MR. TALUY: There will be -- some will overlap. 1 2 3 62 1 However, there will be contributions, one on top of the 2 other.3 CHAIR CONNELL: Okay, I think I understand that.4 We have one -- thank you, Atilla.5 We have one other speaker, Cris Forsyth.6 MR. FORSYTH: Hi, Cris Forsyth, Assemblywoman Rebecca 7 Cohn's Chief of Staff.8 I do have some handouts. I wasn't sure if you all had9 gotten those. There's a letter from Ed Chavez, the 10 Chair of the Assembly Rev. and Tax., relative to this 11 issue, as well as some letters from some members of our 12 California congressional delegation.13 CHAIR CONNELL: No, we haven't gotten that yet.14 Do we have letters from the California congressional 15 delegation?16 MR. FORSYTH: I know you have a busy agenda, so 17 I'll --18 CHAIR CONNELL: No, no, I haven't gotten the one -- we19 got the one from Mr. Chavez, but we haven't gotten the 20 one from -- are there some --21 MEMBER CHIANG: Which members of Congress?22 MR. FORSYTH: Mr. Stone --23 MEMBER CHIANG: Mr. Stone?24 MR. FORSYTH: Yes.25 I'm sorry, they're in there. I don't have them off 1 2 3 63 1 the top of my head.2 MEMBER CHIANG: Charlie Rangle signed one.3 MR. FORSYTH: Excuse me?4 MEMBER CHIANG: Charlie Rangle.5 MR. FORSYTH: I believe so, yes.6 MEMBER CHIANG: On some issue. I recall one letter 7 from Charlie Rangle.8 CHAIR CONNELL: I haven't gotten any letter from 9 Charlie Rangle.10 MR. FORSYTH: Yes, I apologize for not getting these 11 to you sooner. The turn-around time, from the time it 12 was noticed and when --13 CHAIR CONNELL: We have them now. I think these are 14 them, although I'm not sure because they're not on the 15 letterhead of congressional people. They should have 16 their -- oh, here we go. Here's one that's on 17 letterhead. This is from Steven Horn, I guess.18 MR. FORSYTH: Yes, I just wanted to make sure that you19 had those.20 CHAIR CONNELL: Did you want to say anything as you 21 speak to the discussion we've been having, Cris?22 MR. FORSYTH: I just wanted to speak based, not to the23 MOU so much, as to the motion that was carried earlier.24 We appreciate the large amount of time that you've 25 invested in this matter and certainly your work with 1 2 3 64 1 changing Senator Peace's mind is always an 2 accomplishment to be treasured, as well as your work 3 with Speaker Emeritus Mr. Hertzberg. 4 The Assembly, you are correct, it does have a 5 difference in opinion on addressing this. They all 6 support making this easier for the taxpayers of 7 California. There are concerns relative to the privacy 8 issue, as I'm sure you're aware of Ms. Cohn's engagement9 on this issue as well.10 Having assurances that the privacy matter is addressed11 adequately and appropriately would go a long way towards12 getting a number of legislators in the Assembly, at 13 least, taking care of their concerns.14 The vote has been taken to make the changes different 15 from the MOU that we've had in effect for the last seven16 months.17 I guess all I would add is a hope that there would be 18 further engagement relative to that. We have an 19 election coming up. There will be over 30 new assembly 20 members coming in that have not invested what you have 21 invested and the other Board members have invested in 22 this issue. They want to be engaged, unfortunately. 23 In the last twelve years I've been in the Legislature,24 most of it has been under a term-limited era and the 25 education curve for new members is pretty steep. 1 2 3 65 1 Appreciate the alacrity with which you feel the move, 2 having 90 days left in your tenure and invested so much.3 But I would hope that there would be opportunity for 4 members of the legislative branch and the Assembly, 5 in particular, to have further engagement in this 6 because it's something they are very concerned about, 7 and would --8 CHAIR CONNELL: On which issue? 9 MR. FORSYTH: -- want to promote.10 CHAIR CONNELL: What issue do they want to get engaged11 in?12 MR. FORSYTH: The protecting of privacy, relative to 13 doing the calculations online, specifically. And I 14 don't necessarily want to discuss the individual 15 technicalities of how we do that. I understand the 16 rudiments of protecting and downloading, having those 17 offline --18 CHAIR CONNELL: Well, again, let me just state this. 19 I think privacy is a camouflage at this point. I think 20 we have addressed the privacy issue. I feel very 21 strongly about that. I want to state that on the record22 today, lest there be any confusion as this story gets 23 out to the press. We do not have a privacy issue. And 24 I want to state that, as Chair of the Franchise Tax 25 Board, I'm tired of debating privacy. Privacy has been 1 2 3 66 1 a camouflage for not moving forward on this.2 We have resolved the privacy issues. We always have 3 privacy issues within the context of the Franchise Tax 4 Board or BOE. And having been involved as the only one 5 involved for eight years in these matters and having 6 studied them rather intensely, as I take my 7 responsibility seriously on these boards, I think we 8 have resolved the privacy issue. And I think that what 9 we move forward today with on the 240 EZ -- 540 EZ 10 form -- I'm making it less of a significant form -- 11 540 EZ form, was the appropriate action. I think the 12 calculator and the tax form have nothing to do with 13 privacy. They have everything to do with customer 14 service; and that is why it was necessary to take those 15 steps today.16 So to confuse it, Cris, with privacy, I think fails to17 send the right message to the public. 18 Now, as we move forward and we talk about my MOU or 19 the efforts to do an MOU or to just try to allow the FTB20 to come up with some other solution, although the FTB is21 comfortable with our MOU that we now have and helped 22 draft it, that is another series of discussions that 23 we're going to have. We will never do anything that 24 violates the privacy of the taxpayer. That has always 25 been an intent here. And I think that while that may 1 2 3 67 1 have been an issue that was represented initially by 2 Senator Peace and Speaker Hertzberg, it is no longer a 3 fair issue to wave as the flag of concern.4 The 2EZ tax form will be implemented, it will be 5 executed, and it will be in effect for the next tax 6 season with the calculator and with the tax forms 7 accessible. That's a done deal. The action today of 8 this Board does that.9 Now, I appreciate that new assembly members wish to 10 come up to speed on this subject; and they have the 11 right to do that. They unfortunately are going to be 12 facing the rather senior members of the senate who have 13 very, very strong feelings on just the opposite side of 14 this subject, and having spent many long hours debating 15 this matter with Senator Dunn and Senator Burton, among 16 others in the Senate, their very strong leadership 17 issues in the Senate that are going to propel this issue18 forward as well, and legislation that Senator Dunn is 19 going to move forward with in this regard.20 So I think the Assembly is going to have to do some 21 catch-up, if the new members want to get involved, 22 because this issue is on a fast track. This is not 23 going to be something that takes two to three years to 24 move its way through the Legislature again.25 You're going to see a bill in this new session that is1 2 3 68 1 going to move with some alacrity, is my opinion, in the 2 Senate. What happens when it hits the Assembly is 3 another matter. But I do think that you are going to 4 see legislation in this regard.5 Now, what we choose to do in my remaining 90 days, is 6 yet to be known on the MOU.7 I'm glad to hear that the industry today is generally 8 in favor of the efforts that we have made. I'm pleased 9 to hear that the FTB staff is totally supportive of the 10 MOU. But I want to give my colleagues on this Board an 11 opportunity to understand the MOU, to engage 12 in discussions as we must, with our outreach groups that13 I've asked staff to arrange for us, to really understand14 what the impact of this MOU would be, and then to circle15 back to the IRS and see, really, what we're 16 accomplishing at the IRS level on the MOU.17 I do not feel in the least bit constrained to wait 18 until your new Legislature gets in. This is the Board 19 that is responsible for tax matters, and it is not my 20 obligation to wait for legislators who are not yet 21 elected to meet, confer, and become informed on an issue22 which is moving forward in the State of California. 23 So if we get the work done by the end of the year, 24 that's the timetable that will have been accomplished.25 If, on the other hand, it hasn't, then we will, of 1 2 3 69 1 course, with due diligence and due respect, include all 2 members of the Legislature in our discussions, as we 3 always have.4 But I don't feel hesitant to have to delay any 5 decision of this board until new members of the 6 Legislature hear. I mean, if we had that attitude -- 7 if we had that attitude on all of the boards that 8 operate at the state level, we would defer all decisions9 that are going to be made until a new Legislature takes 10 place, and we don't do business like that. It just 11 isn't the way government operates. 12 So I appreciate that. But I do think that you're 13 going to find a more intense discussion of this at the 14 legislative level. And I do think you may see two 15 entirely different perspectives moving through the 16 legislative process, from what I can see.17 And I think that the one in the Senate is probably a 18 perspective that is educated from great awareness of 19 this issue, and some involvement in this issue, over a 20 period of years, and we'll have to see if there's an 21 alternative bill that comes out of the Assembly, you 22 know, what bill that might be and who would be the 23 author of that bill.24 I would like to move on, on this issue.25 Is there something of real value we need to add, Greg?1 2 3 70 1 MR. TURNER: Yes, it has to do with the nature of how 2 the tax calculation works. Is it -- I wasn't sure, 3 based on the explanation, if it was code that's embedded4 in the downloadable form or if it requires online access5 on the part of the taxpayer, in order to be able to 6 complete the tax calculation.7 CHAIR CONNELL: Would you like to respond to this, 8 Lisa?9 MS. CROWE: Are you talking about the new 10 functionality that they've --11 MR. TURNER: Yes, we've talked about being able to do 12 the --13 MS. CROWE: It will be downloaded in this, in the 14 packet. 15 MR. TURNER: So it will be embedded in the PDF file?16 MS. CROWE: It will all be part of the download, yes. 17 MR. TURNER: Okay. So there won't be any --18 MS. CROWE: No online.19 MR. TURNER: Thanks.20 CHAIR CONNELL: We have now spent almost an hour and a21 half on this issue; and again let me recap for those of 22 you who have joined us late. We have taken action 23 today, upon my motion, to include both a calculator and 24 the tax forms -- in our 2EZ tax form.25 MR. GOLDBERG: By "tax forms," you're talking the tax 1 2 3 71 1 look-up capability?2 CHAIR CONNELL: Yes.3 Okay. Let's move on to the next issue on the agenda, 4 of which I have great passionate concern as well, which 5 is the subject of Child Support.6 I'd like to take that item next, Jerry, and then move 7 back to the regulations.8 We always seem to leave very little time to talk about9 child support. So with the support of my colleagues, I 10 would like to move Item 5 forward because it always ends11 up getting short-shifted at the end. And since it is a 12 responsibility of this board to deal with child support,13 I would like to know what we are doing in child support.14 MR. GOLDBERG: Thank you, Madam Chair.15 I am very pleased to report to the Board that, as a 16 consequence of our contract negotiations, which are 17 still continuing but as a consequence of the meetings 18 that we have had with the vendor --19 CHAIR CONNELL: No, nobody cares about child support. 20 The entire room emptied. That's a statement that the 21 private sector is not going to be competitive in 22 offering child support services.23 MEMBER CHIANG: There's no -- yes, they don't find 24 money in it.25 CHAIR CONNELL: But it's the future of our country, 1 2 3 72 1 John.2 MEMBER CHIANG: Oh, I agree.3 CHAIR CONNELL: I have two young children.4 MEMBER CHIANG: Kathleen, I'm as appalled as you are.5 MR. GOLDBERG: And I have very significant news, 6 because the initial proposal price was 1.195 billion 7 dollars. And as a consequence of negotiations with 8 the alliance, which is comprised of IBM, American 9 Management Systems and Excenture, we have lowered that 10 cap from 1.195 billion to 900 million dollars, which is 11 a 25 percent reduction.12 MEMBER GAGE: Excellent.13 CHAIR CONNELL: Of course, I may want to ask the 14 question now, being the Chair now, the corporate 15 governance efforts at my retirement agency, PERS; the 16 question I would ask is, why do we see such an 17 incredible statement of greed at the beginning in this 18 proposal? 19 I mean, I want to thank you for negotiating it down. 20 One might say, the second half of the coin is, why did 21 they come in with this unbelievably inflated bid? Do 22 you think that's a fair question?23 MR. GOLDBERG: I would prefer not to respond to that. 24 I would, however, point out that at this new cap, we are25 receiving the same scope as was proposed at the higher 1 2 3 73 1 price. Again, negotiations continue. I am very pleased2 with the progress that we are making. I am optimistic 3 that we will actually have an agreement in principle 4 very, very shortly.5 We need to continue to develop the feasibility study, 6 which the federal government has required. It appears 7 now that the critical path for federal approval is not 8 actually the contract with the vendors, but, rather, the9 development and acceptance of a feasibility study. And 10 that requires that we, in fact, identify another state 11 system and compare that with what is being offered by 12 the alliance.13 MEMBER CHIANG: Jerry, when do you anticipate that 14 comparison will be completed?15 MR. GOLDBERG: I'm hoping over the next several 16 months, all of this will be concluded. We are looking 17 now, perhaps a little optimistically, that we can 18 conclude all of this roughly by February or March, at 19 the latest. And so we may have an award at that time, 20 and then proceed to development, which is all that we 21 really are -- we are all longing to get into that stage.22 CHAIR CONNELL: Will we be on time then, Jerry, with 23 our scheduling? 24 Remember, I don't think, John, you were sitting on the25 Board -- in fact, I know you couldn't have because it 1 2 3 74 1 started a couple of years ago, this whole discussion. 2 But we had a schedule at the time that we had imposed on3 ourselves of trying to move rather efficiently through 4 this new obligation that we have. 5 How are we doing with that schedule?6 MR. GOLDBERG: We have lost several months, for a 7 variety of reasons, not the least of which is at one 8 point we thought we were going to have more than one 9 vendor actually submit a proposal. And that rival 10 vendor indicated that they could only do so if they had11 -- if 12 we gave them additional time to propose. We gave them 13 that additional time. They, nonetheless, chose not to 14 propose. 15 There have also been several questions on the part of 16 the federal government that have delayed the process as 17 well.18 So we have probably had some several months of 19 slippage. I don't think we can make up that slippage. 20 But it has only been, as I said, several months. So 21 hopefully, we can get this moving rather quickly.22 CHAIR CONNELL: How are we doing on the federal 23 penalties?24 MR. GOLDBERG: Federal penalties remain. And I know 25 Representative Thomas very, very recently indicated that1 2 3 75 1 he is not -- would not be accepting of an idea to limit 2 or eliminate the penalties at this time. Hopefully, 3 it's more election-year politics; and we can revisit 4 that issue after the election. But, obviously, there's 5 no assurance of that fact.6 If the penalties remain, then we will be paying 7 penalties until the single statewide system is certified8 by the federal government, and that is obviously, 9 several years away.10 CHAIR CONNELL: I still have two issues. And the 11 reason I wanted to raise this and bring it up earlier, 12 you know, my two concerns at the time, and they still 13 remain today, is that the FTB does not get held 14 responsible for those penalties; and that anything we do15 on the technical side is not viewed as the rationale for16 delaying -- getting the system implemented. That was my17 first concern, that we not become the abused child, so 18 to speak, here in this process, because we've stepped 19 forward to take, you know, an egregious amount of the 20 work, and have dealt with its complexities.21 And second, I am concerned that at the end of the day,22 that we actually end up finding more deadbeat parents 23 and getting more support to these parents. Because if 24 we don't -- I mean, to the custody parent. Because if 25 we don't, it's just all another scheme, as seen by -- 1 2 3 76 1 and I have met with all of these child support groups, 2 Jerry. As you know, I have been very engaged with them.3 It's just viewed as another failure of government to 4 support kids, and that's what really concerns me.5 So are we going to actually have a system that locates6 these deadbeat parents, brings them to justice, wrings 7 this money out of them, and gets a better quality of 8 life for the kids of California? I mean, that's what I 9 keep asking myself. How far away are we from 10 improving, you know, the really tragic and, at some 11 times, endangered lives of these children?12 MR. GOLDBERG: I certainly join you in that wish.13 I am hopeful that if we can proceed with the contract 14 and proceed with the proposal that was submitted to us, 15 we will, in fact, have a much better child support 16 collection system than this state has ever had in the 17 past. And an obvious consequence of that is going to be18 that we will, in fact, be better able to locate 19 delinquent parents; we will ultimately collect more 20 money; and, obviously, that will result in better things21 for the kids of -- the needy kids of the State of 22 California.23 CHAIR CONNELL: Well, it just really frustrates me 24 that its taken this long.25 Are there other states that are doing a better job? 1 2 3 77 1 Massachusetts was doing a really, fairly good job at one2 point. Are they still ahead of the curve? Can't we 3 learn from them and expedite this process here?4 MR. GOLDBERG: What we're really talking about here is5 only the development of the automated system. DCSS, the6 department responsible for child support, continues to 7 make significant improvements in the ways in which they 8 are going about utilizing the current systems to collect9 child support. And, in fact, the experience 10 over the last year or two has been very positive. How 11 we compare with Massachusetts specifically, I really 12 couldn't say.13 CHAIR CONNELL: They were the state-of-the-art program14 at the time.15 MR. GOLDBERG: But if we are able, in fact, to deploy 16 the system that was proposed by the alliance, I'm 17 convinced that we will become the state of the art. 18 And, in fact, we will become the state that other states19 choose to emulate. 20 CHAIR CONNELL: But it is an absolute --21 MR. GOLDBERG: But it is several years down the road.22 CHAIR CONNELL: -- and critical role for us to play in23 terms of supporting DSS. 24 They weren't getting a penalty this morning for that; 25 were they? What was that article in the paper that I 1 2 3 78 1 read, quickly, the federal government was imposing?2 MEMBER GAGE: I don't know that I saw that.3 CHAIR CONNELL: Yes, there's another fine that is 4 being imposed on Grantland Johnson's agency.5 MR. GOLDBERG: I scanned that article. It was --6 CHAIR CONNELL: Are there other questions by Board 7 members on this matter?8 MEMBER CHIANG: No.9 CHAIR CONNELL: I would just say, with due speed, and 10 thank you for the graciousness of my fellow Board 11 members letting me move that item forward. I didn't 12 want to wait until the twelve o'clock hour and not ever 13 get to answer questions.14 Okay, we're back on Item 3, which is regulatory 15 matters.16 And can we go through this quickly? Do we have -- can17 I have motions on some of this stuff?18 Let's see, Item a., b., c. -- do we have people who 19 want to speak on this? Just a second, I don't mean to 20 be abrupt.21 No, we have no one who moves to speak.22 MEMBER CHIANG: So moved, all matters.23 CHAIR CONNELL: Okay, seconded?24 Tim, you're going to second that?25 MEMBER GAGE: Seconded.1 2 3 79 1 CHAIR CONNELL: Excellent. It's moved and seconded. 2 And we will now authorize the publication of the draft 3 regulations.4 Moving to Item 4, this is Bank Ownership of Regulated 5 Investment Companies.6 MR. GOLDBERG: I'm sorry, Madam Chair, so you're 7 approving proceeding with regard to all items, A 8 through F?9 MEMBER CHIANG: That would be correct. 10 MR. GOLDBERG: Actually, we didn't include the others 11 in the motion. That's where we are. 12 MEMBER CHIANG: I said "all matters."13 MR. GOLDBERG: All matters, I'm sorry.14 MEMBER CHIANG: Right. 15 CHAIR CONNELL: Okay, we are on Item 4.16 Mr. Miethke, do you wish to address the Board on this 17 matter? And this is the Bank Ownership of Regulated 18 Investment Companies. 19 Please, go right ahead.20 MS. PETERSEN: I'm Debra Petersen [phonetic] with the 21 Franchise Tax Board. At our last meeting, March 6th, we22 had discussed LP O2-34, that contained language about 23 banks owning regulated investment companies. 24 I wanted to inform your Board that on April 3rd, 25 Senate Bill 1660 was amended to remove all language with1 2 3 80 1 respect to that issue; and that staff, to date, has been2 reviewing tax returns for the year 2000. We noticed tax3 returns for banks with RICs with about 45.6 million 4 dollars tax effect.5 CHAIR CONNELL: Okay, Mr. Miethke?6 MR. MIETHKE: I'll pass, Madam Chair.7 CHAIR CONNELL: Okay. Do I have a motion by my fellow8 Board members on this?9 MEMBER GAGE: So moved.10 CHAIR CONNELL: Okay, John?11 MEMBER CHIANG: Second.12 CHAIR CONNELL: That's unanimous.13 We're now on Item 6, which is Disclosure of 14 Information about Closed Sessions.15 Pat, you were going to discuss this. Could you 16 abbreviate this matter? I think we've all read your 17 report.18 MR. KUSIAK: Essentially --19 CHAIR CONNELL: We have no speakers on this item.20 MR. KUSIAK: -- we've conducted a survey of other 21 agencies with regard to the disclosure of closed-session22 information and agendas, as well as minutes and 23 subsequent disclosures to compare the practices of the 24 Franchise Tax Board with other agencies. Those other 25 agencies were the Board of Equalization, the California 1 2 3 81 1 Public Employees Retirement System, the California State2 Teachers Retirement System and the State Lands 3 Commission, I believe all of which the Chair sits on.4 In summary, I would say that the practices of the 5 Franchise Tax Board are consistent with these other 6 agencies. And, in fact, none go more than we do.7 CHAIR CONNELL: Okay, I think I requested that. 8 So that's very helpful; and I appreciated your report.9 MR. KUSIAK: Thank you.10 CHAIR CONNELL: Thank you.11 We're on Item 7, which is now Administrative Matters; 12 and these are the budget change proposals. 13 And you cannot vote on them.14 MEMBER GAGE: I'll be abstaining on all three of these15 items.16 CHAIR CONNELL: Okay, and you're going to be 17 abstaining.18 Then I have a problem with some of them, so we're not 19 going to be getting a vote, I don't think, of this Board20 on all of them.21 I'll tell you the ones, John, that I am comfortable 22 with.23 MEMBER CHIANG: Okay. 24 CHAIR CONNELL: Phase 1 -- the Phase III Building, 25 Move In/Occupancy Costs, as you know, Jerry I did not 1 2 3 82 1 support Phase III, so, obviously, I'm not going to be 2 supporting the costs of the move-in.3 On the matter of 2, which is the Integrated Nonfiler 4 Compliance system, yes, I have no problem with 5 increasing the BCP to recognize the additional savings 6 that would not be directed to BCP 1 for the Phase III 7 move-in. 8 I don't want to have my vote on anything related to 9 Phase III since I'm against it.10 I have no problem with 3. 11 I have no problem with 4. 12 I have no problem with 5. But I want an update on 13 what's going on with that project, Jerry.14 So 6, I want to discuss.15 7, placeholders, I have no problem with 1, I have no 16 problem with 2, and no problem with 3, the Campus 17 Renovations, I had no problem with that.18 And the Department of Finance reductions, that was no 19 action really required.20 I think it's premature, Jerry, to take a position on 21 this proprietary request, so I'd like to hold that off, 22 because there are some proposals in there that I find 23 objectionable. So if we could just wait on that.24 MR. GOLDBERG: Sure.25 CHAIR CONNELL: And that's where I am, John.1 2 3 83 1 Do you agree with the ones that I agree with, so that 2 we can get some things moved through this Board with a 3 vote, or are you in disagreement with those?4 MEMBER CHIANG: Other than the first two? Or are you 5 talking about the rest of them?6 CHAIR CONNELL: Well, I'm --7 MEMBER CHIANG: I'm in agreement with the rest of 8 them.9 CHAIR CONNELL: -- in disagreement with 1.10 MEMBER CHIANG: Yes, I'm not in agreement -- I don't 11 share your assessment.12 CHAIR CONNELL: Okay. So that's going to go nowhere. 13 But you are supportive of 2?14 MEMBER CHIANG: Yes.15 CHAIR CONNELL: 3? 16 So, 2, 3 and 4 go out, Jerry.17 5 is the Economy project. And really, all I wanted to18 know about this, what are we actually doing here? I 19 mean, we've been doing this for eight years now.20 MR. GOLDBERG: We could actually, at our next Board 21 meeting, give you an update on what we are doing in this22 whole area. I think you might find it very interesting.23 CHAIR CONNELL: Well, I hope we've made some progress,24 you know.25 Okay, then we are on Child Support.1 2 3 84 1 MR. GOLDBERG: This is a project that has a very 2 short-term horizon, again. We're in the stages of 3 completion at this point. And essentially, this is a 4 negative BCP, giving back money because -- that we do 5 not -- that we will not expend for this project.6 MEMBER GAGE: We like those.7 CHAIR CONNELL: I appreciate that. However, I'd like 8 to give it directly, Tim, to the parents who have been 9 cheated out of their child support by the deadbeat 10 parents that are swamping California.11 So if I could take that money and directly give it 12 back only to that purpose, then I would be supportive of13 it.14 If you're going to just spend it --15 MEMBER GAGE: We'll spend it on good things, though.16 CHAIR CONNELL: -- helter-skelter, here --17 MEMBER GAGE: I know, we spend it on good things.18 CHAIR CONNELL: -- and just drop it wherever within 19 the budget, I would not be supportive of it.20 Okay, on the placeholders, that would be an approval, 21 Jerry, despite my comments. Placeholder 1 and 2, I have22 no problem with.23 I think I stand corrected. I've been pointed -- it's 24 been pointed out to me that 3 may have some --25 MR. GOLDBERG: 3 is --1 2 3 85 1 CHAIR CONNELL: -- transference of money back up to 2 the first Phase 3, which, of course, I do not support at3 all.4 Have we named that the "Pete Wilson Building"? 5 I asked that you would name that the "Pete Wilson 6 Campus."7 MR. GOLDBERG: I know you have, and we have that 8 actually in the minutes, and I'm sure we will consider 9 that.10 CHAIR CONNELL: I'm sure Gray would not mind that, you11 know, speaking for the Governor, with all due respect, 12 Tim.13 MEMBER CHIANG: Then I don't want that project to go 14 forward.15 CHAIR CONNELL: No, I wanted the building referred to 16 as the "Pete Wilson Tax Collection Agency." That's what17 I thought it should be noted as. And I think even Gray 18 might be supportive of that. I don't know that Gray 19 needs his name on that building, particularly not an 20 election year.21 And then I had no problem with the software contract. 22 So we can move forward on that.23 And we're holding on the Department of Finance 24 directives.25 And that takes us to the Executive Officer's Time.1 2 3 86 1 MR. GOLDBERG: And I have nothing to report under that2 item, Madam Chair.3 CHAIR CONNELL: Okay, and then we have Board Members' 4 Time. And we have to approve resolutions. 5 We don't have to read them all, just have a vote to 6 approve the resolutions, please.7 MEMBER CHIANG: So moved.8 CHAIR CONNELL: Now, I would like to raise one other 9 matter of interest here. I would like to have the staff10 report back, Jerry, at our next meeting on how we define11 "hardship." And as we look at people who file taxes, I 12 have been deeply aggrieved, as many of you know -- 13 certainly Tim knows -- by the process that we conduct 14 annually. 15 John, you have not gone through this.16 It always happens at Christmas, curiously, kind of 17 ironic, of where we forgive people's taxes that -- or we18 make settlement offers. And I am increasingly 19 conflicted by why we're just not forgiving these taxes 20 entirely.21 See, I carried a bill which went nowhere, which said 22 that people below a certain level should have no tax 23 obligation at all.24 MEMBER CHIANG: Is that asset level, or is that income25 level?1 2 3 87 1 CHAIR CONNELL: It was income and asset; it was a 2 blended. And I really do believe that people who have 3 very limited monetary values that we can assign to them,4 either income streams or assets, should not be forced to5 make payments for taxes that are overdue, particularly 6 if their situation is complicated by illness, age, old 7 age, in this case, or some other tragedy that has 8 befallen them, as we know in many cases has occurred.9 However, I am just of the opposite opinion, that if 10 somebody is able-bodied and is able to hold a job, they 11 should hold a job, and they should make their payments 12 on their taxes in a timely fashion. And if they can't 13 make it in a timely fashion, it is their obligation to 14 make a settlement arrangement or schedule for payment 15 with us.16 I am not happy to see that we are allowing people to 17 achieve a six percent interest rate when they delay 18 paying their taxes. This has recently come to my 19 attention. This is not acceptable. Even in today's 20 interest rate environment, six percent is still 21 extraordinarily cheap.22 If you were to look at credit-card rates, for carrying23 a credit card, it is now 17, 18, 19 percent on many 24 credit cards. And I see no reason why we should offer 25 what is basically an unsecured loan, in many cases, to 1 2 3 88 1 these people to pay off their debt, because then we are 2 just encouraging people to not pay their taxes; to spend3 their money on something else; and to use us as a line 4 of credit. This is not healthy.5 So I want us to have a full staff report on this 6 entire complexity issue: What is a hardship? 7 Are we legally able to just eliminate tax obligations 8 of certain categories of people? Can we just write them9 off, rather than mediating and forcing people to 10 settlements that they really can't afford?11 Third, do we need to continue to charge people only 12 six percent; or should we charge them a more onerous 13 rate, which would encourage certain classes of people 14 who have the ability to pay their taxes but have chosen 15 not to, to pay their taxes in a faster fashion?16 MEMBER CHIANG: But what about the people who are 17 truly in hardship?18 CHAIR CONNELL: Well, that's a different category. 19 But many of these people are working, John; and they've 20 chosen to, you know, rent cars; take vacations; spend 21 their money in other ways; and then they come in and 22 they claim a, quote, "hardship." Well, they are not 23 exactly the same as -- using our child support situation24 -- a single mother who's in the work force, who has 25 obligations and a very limited income stream and she 1 2 3 89 1 can't pay her full taxes.2 MEMBER CHIANG: I understand. I'm concerned about 3 that mother you're referring to.4 CHAIR CONNELL: Yes, that's the mother I want to 5 perhaps even get a lower rate of interest to. And 6 maybe, you know, skew it in favor of those people who do7 need lower interest rates and make the people who are 8 using us as a cheap line of credit, pay through the 9 teeth.10 So I'd like some consideration of that. And I'd like 11 that in a staff report back, because it's very troubling12 to think that people are scamming the system here, 13 people who have assets that are choosing to use us as a 14 bank of last resort, rather than their credit cards.15 My view is, they ought to just put it on their credit 16 card and pay their tax bill. And if their credit card 17 comes due at 15 percent interest, so be it. Why should 18 we be allowing them to borrow from us, as a credit card,19 at 6 percent, especially when the State is broke? This 20 is not acceptable. So I'd like to have that back as a 21 staff report at our next meeting and see where we come 22 in with information on that, Jerry.23 Now, at this time, the Board is going to be going into24 closed session to discuss the items listed on the public25 agenda. So I close the public session and we will move 1 2 3 90 1 into closed session, albeit briefly.2 Thank you.3 (The open session concluded at 11:53 a.m.)4 --oOo--567891011121 2 3 91 1 REPORTER'S CERTIFICATE2 I hereby certify that the foregoing proceedings were 3 reported by me at the time and place therein named; that4 the proceedings were reported by me, a duly certified 5 shorthand reporter and a disinterested person, and was 6 thereafter transcribed into typewriting by computer.7 I further certify that I am not of counsel or attorney8 for any of the parties to said proceedings, 9 nor in any way interested in the outcome of the cause 10 named in said matter.11 In witness whereof, I have hereunto set my hand 12 this 4th day of October 2002.13 14 15 ______16 DANIEL P. FELDHAUS 17 CSR #6949, RDR, CRR1 2 3 92

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