BOARD OF DIRECTORS MEETING March 25, 2015

Welcome, Assemblyman Phil Ting! Guest Speaker Welcome, Assemblyman Phil Ting!

Call to order, introductions and organizational issues

Approval of minutes November 13, 2014 Board of Directors Meeting

Approval of Financial Statements For the period ended February 28, 2015

Nominations report Michael Boykin, Grant Thornton Miguel Martinez, Intuit Fran Inman, Majestic Realty Roburt Waldow, Sheppard, Mullin, Richter & Hampton LLP

Annual meeting debriefing & Follow-up Feedback: www.caltax.org/2015annualmeeting.html

Capitol Outlook

Looming threats in budget negotiations Huge Spending Increases Revenue Decreases Prop. 30 Backfill Questionable Reserves

STATE SPENDING HAS INCREASED 23% SINCE PASSAGE OF PROP. 30 Fiscal Year Year-to-Year Increase 2013-14 6.5% 2014-15 13.1% 2015-16 3.4%

COMPETING AGENDAS FOR SPENDING NEW REVENUE Prop. 98 funding for education Paying down debt Program expansion

DECLINING REVENUE GROWTH ON THE HORIZON

PROPOSITION 30 BACKFILL? Tax Extension Targeted Taxes “Tax Reform”

QUESTIONABLE BUDGET RESERVES Danger of bait and switch Experts recommend higher reserves LAO says possible deficit in 2017-18

Looming threats in budget negotiations Lack of Transparency

Major tax threats 2,297 bills introduced before deadline. Approximately 20% of all bills were spot bills. Bill amendments coming in daily. Committees have begun hearing bills.

Senate Governance & Finance committee Hertzberg-D Chair Nguyen-R Vice Chair Lara-D Hernandez-D Pavley-D Bates-R Beall-D

Assembly Revenue & Taxation COMMITTEE Ting-D Chair Vice Chair Brough-R Wagner-R Hernández-D Gipson-D Dababneh -D Mullin-D Patterson-R Quirk-D

Major tax threats Split Roll – Evolve, “a community organization” – More than 100 local elected bodies in California have adopted its resolution calling for Prop. 13 “reform.” List at: www.evolve-ca.org/resolutions. From Evolve’s Homepage:

Major tax threats Split Roll - BIZNOW’s “Battle Over Prop. 13,” a debate held in Los Angeles with Gina Rodriquez, Jon Coupal and Professor Kirk Stark. Where in the world was Lenny Goldberg??

Corporate Tax Increase: SB 684 (Hancock) Major tax threats Corporate Tax Increase: SB 684 (Hancock)

Potential for Higher Local Taxes Major tax threats Potential for Higher Local Taxes 2015 Sales and Use Tax Rates Tax Rate State Sales and Use Tax 6.5% Local Sales and Use Tax 1% Combined Minimum State and Local Sales and Use Tax 7.5% - Highest in the U.S. City and County Transactions and Use Tax 2% Limit Total 9.5%

Potential for Higher Local Taxes Major tax threats Potential for Higher Local Taxes Under AB 464 (Mullin) Tax Rate State Sales and Use Tax 6.5% Local Sales and Use Tax 1% Combined Minimum State and Local Sales and Use Tax 7.5% - Highest in the U.S. City and County Transactions and Use Tax 3% Limit Total 10.5% 10% Sales and Use Tax Rates, April 1: Contra Costa County City of El Cerrito Alameda County City of Albany City of Hayward City of San Leandro City of Union City

Sales Tax on Services: SB 8 (Hertzberg) Major tax threats Sales Tax on Services: SB 8 (Hertzberg)

Tax on Independent Expenditures Major tax threats Targeted Taxes Tax on Independent Expenditures Higher Gas Tax Cigarette Tax

Major tax threats AB 32: 2020 and Beyond Diversion of Cap-and-Trade Money Expansion of Climate Policies

Major tax threats CalChamber/NAM/Morning Star Packing Co. v. California Air Resources Board

TAX ADMINISTRATION Mandatory E-filing and Payment of Employment Taxes: AB 1245 (Cooley) FTB Failure-to-File/Furnish Information Penalty: AB 1450 (Chang)

Good tax policy R&D Credit Conformity School District Reserves Non-resident De Minimis Income Exclusion And …

Good tax policy Automatic Tax Relief for Disaster Victims and Relief For Napa Earthquake Victims

Good tax policy When disaster strikes, California will be ready …

Federal tax conformity January 1, 2015, effective date Intent language reaffirming SB 401 Almost revenue-neutral AB 154 (Ting)

Federal tax conformity Possible addition to governor’s May Revise Public education campaign Coalition building Health Savings Account

Tax reform – is it needed? Political dynamics at the Capitol Tax Reform Concerns Tax reform – is it needed? Political dynamics at the Capitol

Parcel tax issues & Reforms

Parcel tax issues & Reforms Golden Gate Hill Development Company Inc. v. County of Alameda: Non-Uniform Parcel Taxes

Other Property tax issues CalTax meeting with the California Assessors’ Association to discuss CAA’s four legislative proposals. Meeting with Sutter County Assessor’s staff to discuss Prop. 8 implications. Meeting with Imperial County Assessor’s staff to discuss high rate of parcel taxes. Other Proposals to Consider: Limiting or prohibiting appeals fees, limiting and making uniform findings of fact fees, trial de novo for complex properties, and defining who “pays the tax” in the context of legal entities.

Ballot Watch Update

Local ballot measures Light activity expected this year. Locals hoping presidential election brings out more pro-tax voters. Proponents waiting to put school bonds on ballot in regularly scheduled election.

Federal Tax Legislative Update

Federal Legislation Addressing State Taxation CalTax Board Meeting March 25, 2015 Arthur R. Rosen McDermott Will & Emery LLP arosen@mwe.com 333 Avenue of the Americas Miami, Florida 33131 (305) 347-6512 340 Madison Avenue New York, New York 10173 (212) 547-5596

Marketplace Fairness Act Agenda Marketplace Fairness Act Remote Transactions Parity Act Online Sales Simplification Act Internet Tax Freedom Act Mobile Workforce State Income Tax Fairness and Simplification Act Digital Goods and Services Tax Fairness Act The Business Activity Tax Simplification Act

Marketplace Fairness Act [S. __] [114th Congress] Introduced: March 10, 2015 This bill provides a state two options for gaining the Congressional authorization to require remote sellers to collect sales tax: SSUTA member states have to provide 90 days notice that they will exercise authority under the Act; Non-SSUTA members must comply with minimum simplification requirements and enact legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority The minimum simplification requirements include: One entity must be in charge of the administration of all state and local sales taxes, including return processing and audits for remote sales; There many only be one audit of the remote seller for all state and local jurisdictions; There must be a uniform sales and use tax base among all state and local jurisdictions; Remote sales must be sourced to the location where the product or service is received by the purchaser; The state must provide information on the taxability of products and services and must provide software, free of charge, capable of calculating sales tax due on remote sales and filing returns; Remote sellers cannot be held liable for taxes if the potential liability is a result of incorrect information from the state or the state’s software. There is a “small seller” exemption for remote sellers with less than $1M in total gross receipts from remote sales during the preceding calendar year. The MFA passed the Senate during the 113th Congress, but failed to pass the House.

Remote Transactions Parity Act of 2014 Representative Chaffetz released a draft of the Remote Transactions Parity Act in December 2014. Similar to the MFA, the RTPA provides a state two options for gaining the Congressional authorization to require remote sellers to collect sales tax: SSUTA member states have to provide 90 days notice that they will exercise authority under the Act; Non-SSUTA members must comply with minimum simplification requirements and enact legislation that (1) specifies the taxes to which the authority applies; and (2) identifies products and services that will be excluded from the authority. The RTPA includes all of the minimum simplification requirements included in the MFA. The RTPA provides minimum simplification requirements beyond those of the MFA, including: If a remote seller uses a certified software provider, audits must go through that provider and not the seller; Remote sellers with less than $5M of gross receipts in the taxable year may not be audited, except in cases of fraud, and there is a mandatory 3 year statute of limitations for assessments. The state must provide a taxability matrix; The state must provide a database showing rates and geographic boundaries for those rates; The state must provide free access to a certified software provider that must be capable of (1) determining the correct tax, (2) generating and filing returns, (3) remitting the tax, (4) reporting all transactions processed to the remote seller, (5) responding to state audit requests, and (6) protecting consumer privacy; Remote sellers and certified software providers must be protected from liability to customers for under- or over-collected taxes, except in certain circumstances; The state must adopt a central registration system allowing a remote seller to register in all states acting under the RTPA.

Remote Transactions Parity Act of 2014 (cont’d) The RTPA strictly defines “remote seller” as a person who makes remote sales in the state without a “physical presence.” A person does not have physical presence in a state when it is in the state for less than 15 days in the year or when it is in the state to conduct limited or transient business activities. The RPTA’s exemptions differ from the MFA: The “small remote seller” exemption applies to remote sellers with less than $10M in total gross receipts during the first year the state acts under the RTPA, less than $5M in the second year, and less than $1M thereafter; There is a “catalog seller” exemption for remote sellers that list items for sale in a tangible catalog and do not engage in internet sales. The RTPA grants exclusive jurisdiction over lawsuits to determine compliance with the RTPA to the federal courts. The RTPA preempts states from enacting any other “law, rule, regulation, standard, or other provision” requiring remote sellers to collect or remit sales tax. The RPTA also preemepts any conflicting power of a state or local jurisdiction.

Online Sales Simplification Act of 2015 House Judiciary Chairman Bob Goodlatte released a discussion draft of the Online Sales Simplification Act on January 13, 2015. The draft proposes a hybrid origin-based imposition. A remote seller would be required to remit a sales tax to the origin state where the sale occurred, not where the customer is located. Creates origin-state commissions and a distribution agreement to track the amount of remote sales made by in-state retailers and the locations where the purchases are made. Using that information, origin states would collect a sales tax on the purchase and then remit a portion of that revenue to the state where the purchaser resides.

Internet Tax Freedom Act (“ITFA”) 47 U.S.C. § 151 note Moratorium on the taxation of internet access Prohibits ‘‘discriminatory taxes on electronic commerce” Applicable when state is not taxing equivalent offline services. Defines “electronic commerce” as any transaction conducted over the Internet or through Internet access … whether or not for consideration On December 16, 2014, ITFA was extended to October 1, 2015 by Sec. 624 of H.R. 84 (Public Law No. 113-235) The Internet Tax Freedom Forever Act [S.431 ] [114th Congress] and the Permanent Internet Tax Freedom Act [H.R.235] [114th Congress] were introduced in February 2015 and would make IFTA permanent.

Mobile Workforce State Income Tax Simplification Act [S. 1645; H. R Mobile Workforce State Income Tax Simplification Act [S. 1645; H.R. 1129] [113th Congress] Introduced: S. 1645: November 5, 2013 H.R. 1129: March 13, 2013 Subsequent Action: S. 1645: Referred to Senate Committee on Finance: November 5, 2013 H.R. 1129: Referred to House Judiciary Committee Subcommittee on Regulatory Reform, Commercial And Antitrust Law: April 15, 2013 Employers required to withhold (and employee only taxable) in those states and localities: Where employee resides; and Where employee is physically present performing duties for more than 30 days during a taxable year (retroactive taxability for year once threshold reached). The bill does not apply to (1) professional athletes; (2) professional entertainers; and (3) certain public figures, defined to mean persons of prominence who perform services for compensation on a per-event basis. Does not address the “Convenience of the Employee” test.

Digital Goods and Services Tax Fairness Act [S. 1364; H. R Digital Goods and Services Tax Fairness Act [S. 1364; H.R. 3724] [113th Congress] Introduced: S. 1364: July 25, 2013 H.R. 3724: December 12, 2013 Subsequent Action: S. 1364: Referred to Senate Finance Committee: July 25, 2013 H.R. 3724: Referred to House Judiciary Committee Subcommittee on Regulatory Reform, Commercial And Antitrust Law: January 27, 2014 The act provides a sourcing regime based on a customer’s “tax address;” No state or local jurisdiction may impose a sales or use tax on digital goods or services unless it gives credit for comparable taxes paid to other states for the same transaction; Digital goods cannot be taxed at a higher rate than the rate for comparable tangible personal property or services that is not delivered electronically.

The Business Activity Tax Simplification Act (“BATSA”) [H. R The Business Activity Tax Simplification Act (“BATSA”) [H.R. 2992] [113th Congress] Introduced: August 2, 2013. Referred to House Judiciary Committee Subcommittee on Regulatory Reform, Commercial And Antitrust Law: September 13, 2013 Would modernize P.L. 86-272. All business activity taxes (not just net income taxes). All sellers (not just sellers of tangible personal property). Other qualitative de minimis activities (not just solicitation). Physical presence. Economic nexus would be outlawed. Tangible property or employees in a jurisdiction for more than 14 days during the tax year.

Gridlock is stalling BATSA’s progress The Business Activity Tax Simplification Act (“BATSA”) [H.R. 2992] [113th Congress] Gridlock is stalling BATSA’s progress

If interested parties do not help, BATSA will go nowhere. The Business Activity Tax Simplification Act (“BATSA”) [H.R. 2992] [113th Congress] If interested parties do not help, BATSA will go nowhere.

The Business Activity Tax Simplification Act (“BATSA”) [H. R The Business Activity Tax Simplification Act (“BATSA”) [H.R. 2992] [113th Congress] Circular reasoning has lead to apathy: “BATSA is not going to pass, so we’re not going to get involved” BUT not getting involved means BATSA is not going to pass!

Questions/Comments

Regulatory Issues

Board of equalization New Faces & New Developments

Board of equalization Manufacturers Exemption – Useful Life Warranty duration Maintenance contract Typical replacement interval

Board of equalization Embedded Software Industry White Paper

Franchise tax board New Faces & New Developments

Key Court Cases

KEY COURT CASES Coblentz, Patch, Duffy & Bass LLP v. City and County of San Francisco Expansion of payroll expense tax to include partnership profit distributions

KEY COURT CASES 926 North Ardmore Ave., LLC. v. County of Los Angeles Documentary Transfer Tax

KEY COURT CASES Citizens for Fair REU Rates v. City of Redding Payment-in-Lieu-of-Taxes (PILOT) Violates Proposition 26

KEY COURT CASES Lucent Technologies v. Board of Equalization Sales Tax Treatment of Technology Transfer Agreements

Upcoming Events: CalTax Board of Directors Meeting June 18, 2015 Morrison & Foerster San Francisco