1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 9, 2009 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 MAIN STREET CALIFORNIA, INC. 14 NO. 224746 (OH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 / Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Betty Yee of Equalization: Chair 4 Judy Chu 5 Vice-Chair 6 Bill Leonard Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson, 13 Chief Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Staff Counsel 17 18 For Department: Robert Tucker 19 Tax Counsel 20 Kevin Hanks Chief, Headquarters 21 Operations Division 22 23 For Petitioner: Charles Moll Attorney 24 April Fogle 25 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JUNE 9, 2009 4 ---oOo--- 5 MS. YEE: Good afternoon. Let's reconvene this 6 meeting of the Board of Equalization. 7 Ms. Olson, our next case. 8 MS. OLSON: Okay, our first case for this 9 afternoon C1, Main Street California, Incorporated. 10 Board Proceedings have received contribution 11 disclosure forms for this afternoon's hearings from the 12 parties, agents and participants. All forms were 13 properly completed and signed. No disqualifying 14 contributions were disclosed. All parties, agents and 15 participants are on the alpha listing provided to your 16 office. 17 A Legal Appeals Division staff member will 18 introduce the case, stating the issues for the hearing. 19 Each person sitting at the table will then be asked to 20 introduce themselves and, if necessary, their 21 affiliation with the taxpayer for the record. 22 Ten minutes is for the taxpayer's opening 23 presentation, followed by ten minutes for the 24 Department's presentation and five minutes is allocated 25 to the taxpayer for rebuttal. 26 Ms. Yee. 27 MS. YEE: Great, thank you very much. 28 Good afternoon, Mr. Levine. 3 1 MR. LEVINE: Good afternoon, Madam Chair, 2 Members. 3 The issues in this petition of Main Street 4 California, Inc. are whether gratuities Petitioner 5 charged for large parties were mandatory and, thus, 6 subject to tax and whether adjustments to the audited 7 unreportable taxable gratuities are warranted. 8 I note that there is also an amnesty interest 9 penalty that will be applied. And as far as I know, we 10 have not received a request for the relief of that 11 penalty. 12 MS. YEE: Okay. Very well, thank you very 13 much. Good afternoon. 14 MR. MOLL: Good afternoon, Madam Chairwoman. 15 MS. YEE: Please introduce yourselves for the 16 record. You have ten minutes for your presentation. 17 MR. MOLL: Thank you. I'm Charles Moll of the 18 Law Firm of Winston & Strawn, on behalf the taxpayer. 19 And with me is April Fogle, who is an employee 20 of the restaurant group. 21 MS. YEE: Okay. 22 MR. MOLL: And we have submitted a brief, which 23 the Board should have. It has some exhibits attached to 24 it. We stand by the points raised in that brief. 25 But today we're really going to focus on the 26 new regulation, that we all spent some time working on 27 two years ago, and also the facts here for the taxpayer, 28 Main Street. 4 1 When we were drafting the regulation, I 2 think -- the new regulation, I think everyone was 3 involved, both the staff, the taxpayer reps and there 4 were a number of them, and Members of this Board who 5 were involved, I think we all agreed that if a tip 6 amount was left up to the customer, then it was 7 voluntary and, therefore, it's not subject to tax, even 8 under the new regulation. 9 We spent a lot of time discussing the 10 guidelines to help try to establish when was something 11 going to be -- a tip going to be deemed to be voluntary 12 versus when it was going to be deemed to be mandatory. 13 One -- we talked about what kind of evidence 14 might be helpful for both the Board to see, the 15 taxpayers to keep. 16 One type of evidence we discussed was, for 17 example, for taxpayers to keep the check, the original 18 check or a copy of it before it was presented to the 19 customer, that would show whether the tip amount had 20 been filled by the restaurant or whether it was blank 21 and, therefore, to be filled in upon instruction from 22 the customer. That was one example. We all thought of 23 some other things that would be helpful for taxpayers 24 and, you know, this is kind of evidence they could keep 25 to help staff, when they're auditing, and the taxpayer 26 when they're trying to figure out whether they should be 27 collecting tax. 28 But when we were drafting these guidelines and 5 1 examples and we had drafted them specific examples 2 showing when they might be taxable, when they might not, 3 it was recognized that it doesn't -- this doesn't help 4 taxpayers whose years we were looking at, you know, a 5 long time ago. 6 So, for example, you know, the reg was finally 7 adopted in 2007. I think these discussions we were 8 having occurred in the late 2006. But doesn't help a 9 the taxpayer like the taxpayer today where we're looking 10 at an audit period from 1998. 11 Obviously, the taxpayer in 1998 didn't have the 12 benefit of those discussions, of those guidelines to 13 know what kind of records should they keep, what was 14 even the standards for deciding what would be kept and, 15 so, they wouldn't have. 16 And, so, these kinds of records that we talked 17 about in the regs project were typically not the kind of 18 records that would be kept in the ordinary course of 19 business. 20 So, now you've got a taxpayer today saying, 21 "Well, that's great. I know how to act from 22 here on out, what records to keep that are 23 important. But, you know, eight years ago this 24 was never told to me. So, I don't know what to 25 maintain." 26 So, that's where -- that's the problem we have 27 to solve today. 28 And in the new regulation, the way we drafted 6 1 it, was to say, 2 "Well, it's voluntary. It will be deemed 3 voluntary if the employee, or whoever goes -- 4 whoever is presenting the check to the customer 5 receives confirmation." 6 That's the terms -- the language of the 7 regulation -- receives confirmation that the -- that the 8 restaurant should be adding a tip or should be -- the 9 customer should tell them what kind of tip to add. 10 And there should be -- when the regulation said 11 there should be both a written policy -- back in the -- 12 you know, during the time frame that said that the 13 employee was supposed to do this and, 2, that we have 14 some evidence that would verify that, in fact, it did 15 occur. 16 So, we have that here in this case. Here we 17 have got Main Street held a franchise for a group of 18 Fridays restaurants, mostly in Southern California, some 19 in Arizona during the years at issue. The audit years 20 at issue in this case are 1998 through 2001. 21 And we have a written policy that was in place 22 during the years at issue. It was provided to the 23 auditor way back when in 2002, during the audit. It was 24 also attached to our brief, I believe, as Exhibit A. 25 And the written policy is very clear that no 26 tip is added, even for large parties, unless and until 27 the manager checks with the party and receives specific 28 instructions as to what tip amount to add; and/or 7 1 whether they -- or whether the customer just wanted to 2 do their own thing. And it was only the manager, in our 3 case, that had the ability to do that. 4 So, we have the verifying evidence that this 5 policy was in place during the years at issue. We 6 submitted an affidavit that was actually presented to 7 the auditor. 8 And I wasn't involved back then, but it was 9 presented to the auditor during the audit back in 2002. 10 And we also submitted three declarations more recently 11 from people who were involved back then to confirm, 12 indeed, this was the policy. 13 And with me, as I introduced at the outset, I 14 have April Fogle, who was with the restaurant group 15 for -- this restaurant group for 17 years. 16 And what I'd like to do is actually turn our 17 few minutes, remaining minutes, over to April to -- to 18 explain the policy. 19 And, so, April, perhaps you could describe for 20 the Board, No. 1, you can confirm whether or not this 21 written policy that was attached as Exhibit A, and you 22 have in front of you, whether that was in effect during 23 the years at issue. 24 If it was, was it enforced? Was it rigorously 25 enforced? Was it lackadaisically enforced? Maybe you 26 can describe those things. 27 And maybe could you also, as part of your 28 discussion, you could just explain to the Board what 8 1 your title and duties were at the time this policy was 2 drafted. 3 If I can turn it over to you and that would be 4 great. 5 MS. FOGLE: Okay. This was the policy at the 6 time -- pretty much still is the policy, but was very 7 regimented. 8 There was were things that roll out that, you 9 know they're kind of lackadaisical, but this was like a 10 cardinal sin. I mean, this was something that people 11 were terminated over. 12 Our primary focus is to make sure that every 13 guest leaves happy. And when we, finally -- in the 14 industry it was very prevalent and there were some 15 guests confused about whether or not we added it or we 16 didn't add it. So, I remember there was a huge debate 17 about whether we, as a company, were going to institute 18 this. 19 And the biggest concern was that the guests 20 would be unhappy or feel that it was mandated. So, we 21 were instructed very rigorously, through several 22 meetings and conference calls and whatnot, on how to 23 handle the situation. 24 And, basically, the policy was written that we 25 would go to the table, make sure that everything was 26 okay with their service and their food and if -- and 27 then we would ask them, 28 "For your convenience, would you like to add 9 1 the 15 percent gratuity to your check or not?" 2 And they had the option to do that. Again, 3 we -- if they said yes, we would go and we would swipe 4 our card and we would add it and we would drop the check 5 and again they could put more or they could put less, 6 but that was what was on their bill. 7 If they said no, then we just didn't add a 8 gratuity. 9 MR. MOLL: And one thing -- could you just 10 explain, primarily for the Board, when this policy was 11 announced, what was your title and your duties at that 12 point? 13 MS. FOGLE: I was a manager at that point. So, 14 my primary responsibility was to be on the floor, 15 talking to the guests and making sure that they were 16 having a great time. 17 MR. MOLL: This was policy was in force 18 throughout the years at issue? 19 MS. FOGLE: Oh, yeah. 20 MR. MOLL: So, maybe you could describe to the 21 Board, how would you go about -- when you were a 22 manager, how would go about making sure this policy -- 23 how would you implement this policy with a guest? What 24 would you do? 25 MS. FOGLE: With the staff or -- 26 MR. MOLL: With the guest, when you went and 27 checked with your customers? 28 MS. FOGLE: We would -- we would ask them, you 10 1 know, 2 "Was your service okay? Was your food okay?" 3 If not, we would, obviously, address those 4 issues at the time. 5 If they said yes, everything was great, then we 6 just offered that we could add it. But it was never a 7 mandatory thing. It was more for their convenience. 8 MR. MOLL: Would you -- would it be a rare 9 occasion or a common occasion where someone would not 10 accept your offer to add just the 15 percent, where they 11 wanted to do something different, either adding more, 12 adding less, just taking care of it themselves? 13 How would you describe that? 14 MS. FOGLE: Fairly common that they wanted to 15 do their own thing. 16 MR. MOLL: Okay. I don't know if you could 17 hear her speaking. 18 MS. FOGLE: Sorry. 19 MR. MOLL: Speak into the microphone. 20 MS. FOGLE: It wa fairly common that they would 21 want to do their own thing. 22 MR. MOLL: Okay. It's a long time ago. 23 Do you have any estimate as to what you would 24 think would be, you know, the percentage of customers 25 who, when you would go up and ask, would, you know, just 26 give a different instruction than add the customary 27 15 percent? 28 Do you have any idea? 11 1 MS. FOGLE: Probably 30 to 40 percent of the 2 time. 3 MR. MOLL: They would ask to do something 4 different than just adding the customary 15 percent? 5 MS. FOGLE: I mean, they'd make comments like, 6 "Oh, if that's all." 7 And I would say, "It's whatever you want to do. 8 It's your --" I mean, it was just -- we never are 9 allowed to discuss tips. We're never allowed to mandate 10 or assume that people are going to tip. 11 I mean, if any employee ever confronted a guest 12 about a tip, I mean, it was grounds for termination. 13 So, we were very -- it was a very fine line to walk when 14 we were approaching the guests. 15 MR. MOLL: Okay. And in your -- 16 MS. OLSON: Time has expired. 17 MR. MOLL: Okay, I will save our five minutes 18 for -- 19 MS. YEE: Okay, we'll give you time on 20 rebuttal. 21 Thank you. 22 MR. MOLL: Thank you. 23 MS. YEE: Department? 24 MR. HUXSOLL: Good afternoon, Madam Chair, 25 Members of the Board. 26 I am Cary Huxsoll from the Legal Department, 27 along with Robert Tucker and Kevin Hanks, representing 28 staff. 12 1 The petition for redetermination should be 2 denied because the gratuities Petitioner charged large 3 parties were mandatory and subject to sales tax. 4 Under Section 6012, gross receipts include any 5 charges for services that are part of a sale of tangible 6 personal property. 7 Consistent with this, Regulation 1603 states 8 that when a restaurant makes a mandatory charge to a 9 customer, whether classified by the restaurant as a tip, 10 gratuity or service charge, such an amount is part of 11 the restaurant's taxable gross receipts. 12 When a restaurant's menu advises a customer 13 that a gratuity or service charge will or may be added 14 to the cost of a meal and the retailer automatically 15 adds such an amount to the bill, such a charge is 16 mandatory and subject to tax. 17 An amount is automatically added when the 18 retailer adds the amount without first conferring with 19 the customer after service of the meal and receiving 20 approval to add the amount to the bill. 21 Petitioner's menu included a statement that 22 15 percent gratuity would be added to parties of eight 23 or more and that the customer could increase or decrease 24 this amount. 25 Petitioner kept records of this gratuity in its 26 daily sales journal, which referred to the charge as an 27 auto gratuity. 28 Petitioner states that the amount it adds to 13 1 the bill was not automatically added and only included 2 in the bill after conferring with the customer following 3 service of the meal and receiving approval to add such 4 amount to the bill. 5 However, it is presumed that any amount added 6 by a retailer to a customer's bill is mandatory, 7 notwithstanding statements on the bill that such an 8 amount is optional or may be increased or decreased by 9 the customer. 10 This presumption may controverted by 11 documentary evidence showing that the customer 12 specifically authorized the gratuity be added to the 13 bill. 14 Petitioner attempts to overcome this 15 presumption by providing a copy of its written policy, 16 which is found in an undated memo from its operations 17 team to its manager -- managers which states that a 18 manager must visit a table and receive a customer's 19 approval before the gratuity can be added to a large 20 party's check. 21 Petitioner provided a copy of a phone log that 22 contradicts its policy of receiving a customer's 23 approval after service of a meal before adding such an 24 amount to a bill. It demonstrates negotiations taking 25 place at the time the reservation is made and not after 26 the service of the meal. 27 Additionally under the regulation the written 28 policy alone is not enough to establish that a customer 14 1 requested and authorized that the gratuity be added to 2 its bill. There must be additional verifiable evidence 3 that the policy was enforced. 4 There is no record of any large party dining at 5 one of Petitioner's restaurant where such an amount was 6 not charged. There is no record of any large party 7 requesting that Petitioner add some other amount for a 8 gratuity or to its bill. 9 Petitioner has not provided any documentation 10 demonstrating that its policies were followed on any 11 specific transaction. The auditor did request these 12 documents at the time of the original audit. 13 The amnesty interest penalty will apply in this 14 case as Petitioner did not apply for amnesty and has not 15 filed a form requesting relief of the penalty. 16 Petitioner was sent notice of the amnesty 17 penalty -- amnesty program. 18 The petition for redetermination should be 19 denied. 20 Thank you. 21 MS. YEE: Thank you very much, Mr. Huxsoll. 22 You have five minutes on rebuttal. 23 MR. MOLL: Thank you, Madam Chairwoman. 24 Ms. Fogle, perhaps you could explain to the 25 Board, first of all, how did the tip collection process 26 actually work at your restaurants? 27 MS. FOGLE: We don't have a cash register. So, 28 the servers collect all their own money. So, they're 15 1 responsible at the end of the night -- they have a 2 report that says how many much credit cards they owe and 3 how many coupons they owe and what the cash owed is. 4 So, we never collect any of the money from the 5 guests or the tips. They do all of that themselves. 6 MR. MOLL: So, when you say the "we," you are 7 talking about the managers and when you are talking 8 about the "they," you mean the servers. 9 MS. FOGLE: Yeah. 10 MR. MOLL: Okay. So, is it right then, I 11 understand, that the way it works is that the server 12 keeps all of the cash and all of the credit card 13 receipts until the end of the night. And then the 14 manager says, "Well, here's how much food and beverage 15 you sold. So, you give me that amount." 16 Everything sells the server keeps? 17 MS. FOGLE: Right. 18 MR. MOLL: So, would you even know necessarily 19 how much the tips were, particularly if they were paid 20 in cash? 21 MS. FOGLE: No. 22 MR. MOLL: Even for large parties? 23 MS. FOGLE: No, we wouldn't know. 24 MR. MOLL: I heard -- we heard -- I thought I 25 heard a comment by staff that mentioned a phone log, 26 which I think was attached to papers, and I think I 27 showed you that phone log. 28 Could you tell me tell or tell the Board about 16 1 that phone log? 2 MS. FOGLE: They came up with -- each store 3 kind of had their own way to take reservations because 4 some the restaurants have patios and some of them 5 upstairs and some of them had banquet rooms. 6 So, we would ask the guest different questions, 7 you know, is it birthday, do you have kids, do you need 8 high chairs? One of the things that we would address in 9 some of the restaurants with large parties is did you 10 want separate checks, did you not? 11 And I don't know when that log was made. I 12 mean, it wasn't standard in every store, but I had heard 13 there were some restaurants that would say, you know, 14 there is an 18 or 15 percent gratuity, would you like 15 that added to your bill, yes or no? 16 I mean that was just kind of one of the 17 questions, but there was nothing standard about that. 18 MR. MOLL: And did that -- and if -- I mean I 19 think you said that you weren't sure that this even 20 occurred during the years at issues. But if it had 21 occurred during the years at issue, would -- how would 22 this policy that we've talked about earlier of the 23 gratuity policy, how would that have been implemented, 24 you know, even if someone has some -- someone who had 25 taken a reservation had asked that question up front? 26 MS. FOGLE: They were adamant about the policy. 27 I mean, we had to go to the table and we had to ask the 28 guests if everything was okay, I mean, regardless if 17 1 they asked on the phone. I mean, it doesn't -- we don't 2 know how the service was going to go. I mean, the whole 3 point of a tip is to insure prompt service and you need 4 to check with the guest to make sure that everything 5 went the way that they wanted it to. You never assumed 6 that just because they said something on the phone that 7 that would be the -- we would do it. 8 MR. MOLL: So, even if someone had made such a 9 question on the phone then it would not have changed 10 your standard policy here? 11 MS. FOGLE: No, the policy had to be followed. 12 MR. MOLL: Okay. I would invite this Board 13 to -- if the Board has questions, I mean, I know this is 14 sort of a factual determination. So, if you have 15 questions you'd like to ask Ms. Fogle, I think this 16 would be a time to do so. 17 MS. YEE: Okay. Questions, Members. 18 MS. STEEL: Question? 19 You just said that the servers are collecting 20 all of the money, but you go to big tables and ask them 21 if it's okay to charge 15 percent or not? 22 MS. FOGLE: We would do it as a convenience. 23 MS. STEEL: Yeah. 24 MS. FOGLE: I mean, sometimes when they have 25 had separate checks it was hard for the guest to figure 26 out, you know, if it was one large bill and who was 27 paying what. So, sometimes, for their convenience, they 28 wanted it on the check. 18 1 It was our job to talk to every table to make 2 sure that they had a good time. 3 MS. STEEL: It's not just over eight people 4 table, but it's every table that you go? 5 MS. FOGLE: Well, it was every table we were 6 supposed to go to. This specific policy was on -- in 7 regards to the large parties and we would do that, 8 especially if we were going to do that for their 9 convenience. 10 But we never collected any of the money. All's 11 we would do is swipe a button and it would say what the 12 15 percent would be. 13 MS. STEEL: Do you have any receipts that over 14 eight people table that you charged less than 15 15 percent? Any receipts from your, you know, your 16 restaurant? 17 MS. FOGLE: I don't have them from that long 18 ago. 19 MS. STEEL: Don't have them. 20 MR. MOLL: We haven't been able to -- when we 21 got involved after the audit, we were not able to get 22 any records. There had been, apparently, a computer 23 system change in 2000. 24 And the auditor who was -- I guess the audit 25 was done in a 2002, when he -- I don't know whether it's 26 a he or she -- when the auditor went through, apparently 27 that person was not able to come up with any records 28 either. 19 1 I don't know that they were looking for, you 2 know, the kinds of records we talked about during the 3 regs project because that was something we happened upon 4 six years later. 5 MS. STEEL: Mr. Levine, can ask you just one 6 thing? 7 You know when you go to the restaurant with 8 more than eight people and they said it mandatory for 18 9 or, you know, 15 percent tip on, you know, on the menu 10 that they said they are going to charge it and then when 11 you -- when they bring the receipt with your credit 12 card, there is additional tips that if you want to put 13 it in, is that still taxable? 14 MR. LEVINE: The basic presumption is if it 15 says on the menu the tip's going to be added -- 16 MS. STEEL: 15 percent that what restaurant 17 added and then you voluntarily add more, is that 18 taxable? 19 MS. MANDEL: The more that you add? 20 MS. STEEL: The extra you add? 21 MR. LEVINE: I don't know if we've had that 22 specific question. 23 I think if the restaurant could establish -- 24 you could have a mandatory 15 percent and the percent 25 adds more and that part's optional. 26 MS. STEEL: So, that's not taxable then? 27 MR. LEVINE: I believe that wouldn't be 28 taxable. It would be subject to proof, but, yes, if 20 1 they could show that there was excess tip added above 2 the restaurant stated amount -- 3 MS. STEEL: Stated on the menu? 4 MR. LEVINE: -- that would obviously be 5 optional, unless it was negotiated in advance, which I 6 suppose could be possible. 7 But knowing nothing else, if the menu said 8 15 percent and they showed that 20 percent was given, we 9 conclude the 5 percent was an optional tip. 10 MS. STEEL: Thank you. 11 MS. YEE: Okay. Thank you, Ms. Steel. 12 Other questions at this point, Members? 13 Yes, Dr. Chu? 14 DR. CHU: Well, the 2007 regulations pertaining 15 to the mandatory gratuity, were these new regulations or 16 were they a reaffirmation of policy? 17 MR. HUXSOLL: They were clarifying existing 18 law. They would apply retroactively. 19 DR. CHU: But these practices were -- were 20 already in place? That's what you're saying? 21 MR. HUXSOLL: If staff saw the type of 22 documentation prior to the amendments of the regulation, 23 such as variation payment by customers, something 24 confirming that the amount truly is optional, prior to 25 these amendments staff would have accepted such 26 documentation. 27 MR. TUCKER: Yes, they were confirmation of 28 existing policy by staff is my understanding, so -- 21 1 DR. CHU: There was nothing that was new that 2 came out of the -- out of the interested parties 3 meeting? 4 MR. HANKS: I think, Dr. Chu, what came out of 5 the interested parties meeting was more clarification 6 and more description of what the differences and 7 distinction is between the mandatory and optional. 8 But we've always, consistently had that 9 differentiation between the mandatory tips and the 10 optional tips. 11 Because occasionally this, of course, this does 12 become an issue, as it is today. This was intending to 13 try and clarify those issues and give us more of a 14 bright line as to whether or not charges represent 15 mandatory charges or optional. 16 DR. CHU: The part I'm interested in is that 17 you have a place in the 2007 regulation that talks about 18 if the gratuity is placed on the menu then it's 19 considered mandatory, even if says that the gratuity is 20 suggested or voluntary. Is that true? 21 So, it could actually say, "This is suggested," 22 but if it's printed on the menu, then it's considered 23 mandatory? -- 24 MR. TUCKER: In general, yes. And that's been 25 the longstanding position of the Board's Legal 26 Department. 27 MS. MANDEL: That was picked up, I think, from 28 a -- that phrasing was picked up from an annotation, 22 1 that particular phrasing that you are referring to -- 2 MR. TUCKER: Correct. 3 MS. MANDEL: -- was picked up from an 4 annotation. 5 But I think the discussion that Mr. Moll is 6 talking about is that reg came about because we had had 7 a -- there had been a case where a restaurant owner -- 8 and it may be easier where there is single restaurant 9 than 44 restaurants -- but a restaurant owner came in 10 and testified about how things happened in her 11 restaurant. And it sort of became an issue of, well, 12 what if people come and testify? 13 And there was some discussion -- and that's, I 14 think, where we wound up with, well, if you have 15 these -- these other types of documents that could give 16 a presumption and there was a question about people who 17 said they had a policy and then staff was like, well, 18 how do we know did the policy? 19 And that's where this taxpayer is talking 20 about, how do we know that they actually did the policy, 21 which may or may not involve documents. It involves 22 evidence. 23 And I think -- I think we went back and looked 24 at some the transcripts that Mr. McGuire had said, well, 25 if we go in and we talk to the people and we find out 26 that's really how they did it. 27 But that may have been in the context of you go 28 into one restaurant on an audit and you get to talk to 23 1 the managers and the waitresses and observe how they're 2 handling it. I mean -- and that may have been something 3 that people thought they were doing on audit or not. 4 But it's -- my recollection is it's something 5 that the restaurant industry was happy to see get put in 6 regulatory form so that they would have some recognition 7 that there would be verifiable evidence, not necessarily 8 documentation. 9 That's my recollection. 10 MR. TUCKER: I understand that may be -- I 11 believe -- that's my understanding of it as well, 12 Ms. Mandel. 13 One of the complications we have here, though, 14 we have this phone log which was presented by -- pardon 15 me just one moment -- at the initial Appeals conference 16 by the general counsel for Main Street, as well as their 17 Director of Operations. 18 And it directly contradicts their policy which 19 they are presenting today. It shows that they're 20 negotiating these tips in advance of the meals, not 21 after the meals. 22 MS. MANDEL: I was interested in Director of 23 Operations because we had the Director of Operations, I 24 guess whoever was at the Appeals conference, and then we 25 had three declarations from people who were Director of 26 Operations. 27 And I was kind of wondering what that was 28 because at first I thought it was a headquarters-type 24 1 position, but maybe it's -- you were one, I think, 2 because -- 3 MS. FOGLE: Well, we -- 4 MS. MANDEL: -- what is a Director of 5 Operations really -- 6 MS. FOGLE: -- we changed. I mean, sometimes 7 they're the Regional Managers or Directors of Operations 8 have been over a number of restaurants. It's the same 9 position, it just been -- it means sometimes a Director 10 of Operations is over 26 locations and sometimes they're 11 over 9. 12 But originally with Main Street the title of 13 that position was a Regional Manager. Now we're called 14 Directors of Operation. 15 MS. MANDEL: The Regional Manager? 16 MS. FOGLE: Yeah, they had Directors of 17 Operations back then in Nevada and Arizona -- 18 California, I don't know. 19 DR. CHU: So, just to follow up, one of the 20 indications of whether a tip is mandatory or not is 21 whether that tip is negotiated in advance. 22 So, Mr. Moll, how do you explain the 23 reservation log? 24 MR. MOLL: Well, first, there isn't -- I mean, 25 we don't know for sure that that log that we have is 26 from the years at issue, but let's assume that it is, 27 even though it's not dated. No one has been able to 28 confirm it. 25 1 Ms. Fogle said that she didn't -- she wasn't 2 aware of such a thing occurring during the years at 3 issue. 4 Each restaurant may have had their own, you 5 know, person who's taking a reservation may or may not 6 say different things. I find it difficult to believe 7 that that constitutes a negotiation, when someone -- 8 when if you call a restaurant and say I want to have a 9 party of 10 and the person who is taking your 10 reservation asks you some questions, that alone can't 11 really be a negotiation as a negotiation is normally 12 thought of, where you are actually reaching agreement 13 and bargaining back and forth over a particular point. 14 But, regardless, Ms. Fogle has, I think, 15 clearly stated, regardless of what a receptionist or 16 whomever took the reservation in, no -- no tip was added 17 until the manager went to that large party and said, 18 "What would you like us to do?" 19 And that's what the regulation says, as long as 20 you go and confirm with the customer that they want you 21 to add this amount before you add it, then it's 22 determined to be voluntary. 23 And whether or not someone on the phone had 24 said, you know, "We've got this policy," or not, it did 25 not actually countermand the written policy that you 26 have in evidence before you. 27 In fact, the written evidence trumps that 28 because they always followed the written evidence, even 26 1 if someone had made such a phone call or responded to 2 such a phone call. 3 So, I don't think that it really -- I don't 4 think it should change -- I mean, the equation is not 5 what it says in the menu, not what it said in the phone 6 call, it's what -- was the tip added? Was the bill 7 given to the customer with a tip added? In which case, 8 you know, you might say the customer had to pay it or 9 was it -- was it -- was the bill presented to the 10 customer with the tip blank and then he said, 11 "What customer would you like to do with this? 12 You want us to add 15 percent? You want more? 13 You want less? You want to do your own thing? 14 Tell us what to do and we'll do it." 15 To me, that's voluntary. And that's what the 16 regulation says. 17 DR. CHU: Okay. Well, how about this, if this 18 tip was truly voluntary, then why would you have the 19 need to print on the menu that a gratuity of 15 percent 20 would be added for parties of eight or more? 21 MR. MOLL: Maybe -- do you want me to answer 22 that or do you want -- do you want to explain how that 23 policy came about in the first place? What was the 24 concern for the 15 percent or why it was added -- that 25 statement was added in the first place? 26 MS. FOGLE: Yeah. Several of the surrounding 27 restaurants, the competition, had these things stated on 28 their menu. So, a lot of times when we'd have large 27 1 parties come in, they wouldn't leave any tip for the 2 server. And most of the parties thought that the tip 3 was already added, you know, because that's what the 4 other restaurants did. 5 And that's why it was such a big deal when we 6 were considering rolling it out as a company because we 7 didn't want it to be assumed like every other restaurant 8 out there that it was just going to be done. 9 We wanted to make sure that the managers 10 were -- were on top of the service and that it was a 11 voluntary thing and not a mandated thing. Because we 12 never wanted our guests to leave unhappy and they had 13 poor service and then they got this mandatory charge. 14 It was -- it was a big deal. 15 MS. STEEL: I have just -- 16 MS. YEE: Yes, Ms. Steel? 17 MS. STEEL: -- one more question. 18 I think it seems like I've been asking all the 19 times the same question every Board hearing that I see 20 here the delays of five years and the audit and Appeals 21 process, you know. 22 I guess because of that Regulation 1603 came 23 in, but I don't think it took that long, why we been 24 delaying all these cases coming up here? 25 MR. HUXSOLL: Well, there was initially the 26 first decision and recommendation following the audit 27 and there was a request for reconsideration having to do 28 with the average mandatory tips per day at each 28 1 location. 2 And, so, a re-audit was done based on the 3 recommendation -- the supplemental decision and 4 recommendation. Following this, the taxpayer went into 5 settlement negotiations prior to coming to the Board 6 hearing. And the amendments to Regulation 1603 were 7 ongoing at that time. 8 MS. STEEL: So, it took five years? 9 MR. HANKS: Thereafter I note too, Petitioner 10 requested that the hearing, that was previously 11 scheduled be reschedule and moved to Sacramento. 12 And then it appears that there was a further -- 13 further delay when the Petitioner requested an 14 additional postponement because Petitioner was going to 15 be in court that day. 16 So, I think all of these cumulative 17 postponements have lead to this being heard today 18 eventually. 19 MS. STEEL: Taxpayers knows that interest has 20 been growing for that years? 21 MR. HANKS: Definitely, definitely. 22 MS. YEE: Okay, thank you, Ms. Steel. 23 Other questions, Members? 24 Hearing none, is there a motion? 25 DR. CHU: Move to take the matter under 26 submission. 27 MS. YEE: Motion by Dr. Chu to take this matter 28 under submission. 29 1 Is there a second? 2 MS. MANDEL: Second. 3 MS. YEE: Second by Ms. Mandel. 4 Without objection, that motion carries. 5 Thank you, Mr. Moll, Ms. Fogle. We will 6 discuss your matter later today and send you a written 7 notice of our decision. 8 MR. MOLL: Thank you Madam Chairwoman, Members 9 of the Board. 10 MS. YEE: Thank you. 11 ---o0o--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 30 1 REPORTER'SCERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON Hearing Reporter for the 8 California State Board of Equalization certify that on 9 JUNE 9, 2009 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 30 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: August 16, 2009 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 31