1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5910 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JULY 1 2009 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 UNIVERSAL CITY STUDIOS, INC. 14 NO. 373822, 378248 (AC) 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: Scott Lambert Hearing Representative 19 20 Robert Tucker Supervising Tax Counsel 21 22 Kevin Hanks, Chief Headquarters Operations 23 Division 24 For Petitioner: Dawn Mayhew 25 Taxpayer 26 William Vande Wetering Representative 27 Dean Andal 28 Representative 2 1 2 5910 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 JULY 1 2009 5 ---oOo--- 6 MS. YEE: Next case? 7 MS. OLSON: Our next case is C5, Universal City 8 Studios incorporated. 9 MS. YEE: Okay, Mr. Levine? 10 MR. LEVINE: The issues in this administrative 11 protest and claim for refund of Universal City Studios, 12 Inc. are whether adjustments are warranted to the 13 audited measure of tax for catered use tax due on 14 consumption and to the audited use tax due on purchase 15 of fixed assets. 16 MS. YEE: Okay, very well. 17 Good morning. 18 MR. ANDAL: Madam Chairman, Members of the 19 Board, it's nice to be here and thanks for taking the 20 time to hear our appeal. 21 This is a case, it's a lump sum contract. 22 MS. YEE: Mr. Andal, will you do me a favor and 23 introduce yourself for the record? And, if you could 24 also let me know who is joining you this morning? 25 MR. ANDAL: I'm Dean Andal, I'm with Price 26 Waterhouse Coopers. And my client today is Universal 27 Studios, but their owner is NBC Universal. 28 And Dawn Mayhew, who is their state and local 3 1 tax counsel is here today to speak. 2 And also Bill Vande Wetering, who is a long ago 3 District Principal Auditor at the Board and a recently 4 retired partner at PWC. 5 MS. YEE: Thank you. 6 Please proceed. 7 MR. ANDAL: So, issue at stake here is the 8 bifurcating the food services, the taxable food 9 services, from the nontaxable events at Universal 10 Studios Park in regard to corporate events that were 11 sold for exclusive use of the Park. 12 We concentrating our entire presentation on 13 issue 1 today. And I'm going to introduce Dawn, at this 14 point. 15 A large, exhaustive effort was made by 16 Universal Studios to test and retest and, actually, 17 reconcile one more time the taxable reported sales. 18 And Dawn's going to explain both the service 19 that was provided and the effort Universal Studios went 20 through during this audit to justify their taxable, 21 nontaxable split. 22 Dawn? 23 MS. MAYHEW: Good morning, Board Members. 24 You have each visited universal LA. 25 The team responsible for corporate sales of 26 admission tickets decided they could boost sales to the 27 theme park if food and beverage was an added component 28 to the corporate events. 4 1 Thus, in and around 1996, the sales team began 2 marketing a food and beverage component to an event. 3 Prior to November 1999 there were no indoor 4 dining facilities at which to serve this food and 5 beverage. It was served outside, cafeteria-style or in 6 brown picnic bags, interspersed in with Park 7 attractions. For example, tables and chairs were set up 8 at the jungle at the Jurassic Park attraction. 9 In November 1999, the Globe Theater opened. 10 The Globe Theater is our new -- well, then new dining 11 indoor facility. It offers a formal and glitzy menu as 12 your pocketbook permits. 13 A dedicated event chef was hired and menus, 14 with pricing were published for customers to use in 15 designing their corporate events. 16 Prior to 2000 there were no menus or formalized 17 pricing for the food and beverage component of a 18 corporate event. This lack of formalized public pricing 19 is why we are here today. 20 We are here today because the audit before you 21 concludes, first, that guests contract for events at the 22 Park because of the food; second, that in segment 23 auditors asserted that Universal pushed the bulk of the 24 contract value to the nontaxable event and Park 25 admission; third, the audit method ultimately put 26 forward by the District Principal auditor, and before 27 today, actually follows taxpayer approach, except that 28 the audit method uses a menu outside the audit period 5 1 for a venue that is not comparable to the outdoor food 2 events offered during this audit period; and, finally, 3 the audit method treats every contract within this audit 4 period the same. 5 The audit method applies 45 percent to the 6 total contract revenue for every contract and does 7 not -- for the taxable food and beverage. And this one 8 rule fits all approach does not apply to these unique 9 contracts who should stand their own merits. 10 A one rule fits all approach does work here. 11 Each contract is custom tailored. 12 The audit record makes light of the fact that 13 corporate event guests are given access test to the Park 14 in the evening for a few hours. What this actually 15 means is that the Park closes to the general admission 16 public during the day, at 5 p. m., 6 p. m., and reopens 17 from 7 p.m. 'til 1 a. m. for the exclusive use of the 18 corporate event and their guests. 19 This requires a fully functioning Park at 20 night, just as during the day. So, you have all the 21 security guards, the Park attendants, the medical 22 personnel security. It is not an inexpensive item to 23 reopen the Park at night for exclusive use for the 24 guests. 25 The menus vary -- hot dogs, hamburgers, 26 swordfish, garlic shrimp with mango sauce. It all 27 sounds fabulous, but with all due respect to the 28 corporate events group, people do not stand in line at 6 1 universal food. The event is the Park and it's the 2 attraction and it's the additional options that each 3 contract offers customers to -- that they may or may not 4 select. 5 You may or may not have a red carpet rollout, 6 paparazzi, live bands or Broadway musical attractions 7 based on Universal films that follow the corporate 8 guests around the theme park. No two contracts are 9 alike -- neither in food and beverage or the event that 10 is choreographed and the extravaganza that results at 11 the end. 12 During this -- during this audit period, the 13 Director of Events was challenged with pricing the two 14 segments of each lump sum contract -- the taxable food 15 and beverage and the nontaxable Park and admission 16 price. For food and beverage, and prior to the opening 17 of the Globe Theater there was no formalized pricing. 18 So, the Director of Events had to work with the Park 19 venue kitchen chefs and also her expertise and survey of 20 the market, for example, local restaurants, local hotels 21 and other theme parks that also put on food and beverage 22 cafeteria-style, buffet events, to determine what 23 Universal could charge for the food and beverage portion 24 of a lump sum contract. 25 The audit team became entrenched in two issues. 26 First, the costs, as demonstrated on a work paper were 27 not raw food costs. Although the work paper had the 28 word "cost" in the heading, the prices listed were 7 1 actually a mixture of cost and retail. 2 The Director of Events knew, upon receiving 3 this information, what -- what numbers should be marked 4 up at retail and what numbers were presented to her as 5 retail. But the field audit staff was mired in the 6 labels used on the work sheet in the Autodesk contract. 7 Because of this, we conducted an independent test of the 8 1997 Autodesk contract to alleviate confusion created by 9 the supporting work papers and the labels on those work 10 papers. 11 The Director of Events worked directly with the 12 chef at the time, which was the Globe Theater chef, to 13 reprice the 1997 Autodesk contract for the raw food 14 costs. This was done and is part of the audit record. 15 The District Principal Auditor acknowledged 16 that this exercise confirmed that the work papers were a 17 mixture of cost and retail and, as a result, rejected 18 the cost approach for this audit period. He also 19 dismissed the field auditor's markup analysis, which 20 treated all work paper prices as cost and yielded in an 21 unjustifiably high markup. 22 You do not have to take my word for this. If 23 you will please refer to Exhibit A, it's one page from 24 the audit findings. I'll read from the fourth 25 paragraph. 26 This is the District Principal Auditor, 27 "It appears that the auditor's method also has 28 a flaw in that the value used for the cost of 8 1 foot is not the raw food cost but instead a 2 value that the taxpayer felt was the retail 3 value of the food. 4 "I would say, based on looking at this menu, 5 that 7 to $8 per person is more of a reasonable 6 cost than the $23 cost the auditor is using. 7 "All this being said, I still don't believe 8 that the correct figure could be calculated by 9 marking up cost only." 10 The DPA went on to acknowledge that pricing a 11 lump sum contract is challenging and ultimately 12 recommended a method that follows the test that we put 13 forward. 14 The best way to price the contracts at issue 15 here was to test the value of the taxable food and 16 beverage reported against published menu prices and t 17 test the value of the nontaxable event and Park 18 admission against published price for Park admission. 19 We agree -- or I should say, we agree on 20 several key points. We agree that the cost approach is 21 not feasible for this audit and published prices are 22 reasonable. 23 However, we disagree on the menu that the audit 24 method recommends using. And we disagree with a one 25 rule fits all approach. 26 To test the food and beverage reported by 27 universal the audit method used a menu published for 28 indoor dining at the Globe Theater. 9 1 Taxpayer offers that a better comparable are 2 the restaurants at CityWalk, which are not owned by 3 universal and which are -- and which park guests often 4 frequent. The Globe Theater and menu designed for this 5 elegant dining occasion does not equate to the dining 6 that was served during this audit period at the park. 7 Exhibit B. -- if you'll refer to Exhibit B -- 8 summarizes this audit. The first -- the first row is as 9 reported by the taxpayer. The middle row is the 10 independent test of three CityWalk venues that we 11 conducted to test the taxable food and beverage reported 12 at the time. And the third row summarizes the audit 13 approach. 14 This summary of six contracts that we and the 15 audit team agreed should be reflective of the entire 16 audit period demonstrates the uniqueness of each 17 contract. 18 If you look at the far left-hand side, even the 19 number of guests and the value of the contract are very 20 diverse and reflects the options the customers may or 21 may not have chosen. 22 And in the middle of the page, highlighted in 23 blue and red, are the taxable -- the split between 24 taxable food and beverage and nontaxable Park admission, 25 event admission. 26 You will note that the taxpayer, as reported, 27 and the fair retail value are in close proximity. 28 The audit method, on the other hand, went 10 1 across the board and treated all contracts alike based 2 on a menu for a sit down, glitzy event at the Globe 3 TheaterMS. OLSON: Time has expired. 4 MS. YEE: Let me give you time on rebuttal. 5 Okay, and I'm sure we'll have questions. 6 Department? 7 MR. LAMBERT: Good morning, Madam Chairwoman 8 and Members. My name is Scott Lambert and I will be 9 representing the Sales and Use Tax Department today. 10 To my right is Kevin Hanks, also with the Sales 11 and Use Tax Department. And to Mr. Hanks' right is a 12 Robert Tucker, with the Legal Department. 13 The Petitioner, universal Studios Inc., 14 operates a theme park with sales of food and 15 merchandise. The audit in question covers the period 16 July 1996 to April 2002. The Petitioner held catered 17 and convention events after hours at the their Universal 18 Studios Tour Division theme park. For the most part, 19 the Event and Convention Department billed their 20 customers a lump sum per person price. Sometimes 21 additional add-ons for things such as ponchos, outdoor 22 heaters, et cetera, would be added to this lump sum 23 figure. 24 The auditor had to decide how to establish 25 taxable sales since taxable items like food, beverage, 26 miscellaneous tangible personal property and nontaxable 27 charges for using the park were not separately stated. 28 Using the initial -- initially, the auditor 11 1 believed that the markup for taxable items and 2 nontaxable items should be the same. Therefore, the 3 auditor randomly selected eleven events. The variable 4 costs were subtracted from the total event income to 5 arrive at an overall gross profit. 6 The gross profit was divided by the cost to 7 arrive at a markup of approximately 55 percent. It was 8 later determined by the Appeals attorney that the markup 9 should have been 76 percent, but, nevertheless, the 10 markup was essentially used to mark up taxable costs to 11 audited taxable sales. 12 The Petitioner objected to using the markup 13 method of computing taxable sales. And the Department 14 decided to use a different method. Therefore, the 15 District Principal Auditor decided to use one 16 hypothetical contract to establish the taxable 17 percentage to be applied against the total event income. 18 Menus were available for the start of 2006 for 19 both a buffet and bar packages. The lowest buffet price 20 was $38 per person, plus a 19 percent taxable service 21 charge and State sales tax. The buffet consisted of two 22 different types of salads, one entree, either Chicken 23 Marsala or Chicken Osso, two types of pasta, dessert and 24 freshly brewed coffee, decaffeinated coffee and hot tea. 25 The event used for the test appeared to be similar in 26 nature to most of the other meals associated with the 27 six contracts in question. 28 There were three types of bar packages -- 12 1 hosted premium bar, which the Petitioner charges $37 per 2 person for four hours; hosted well bar, $32 for four 3 hours; and hosted beer, wine and soda, $25 for four 4 hours. A 19 percent service charge and State sales tax 5 was added as a separate charge at the -- on the menu at 6 issue. The lowest buffet meal of $38, plus 19 percent 7 mandatory gratuity of $7.22, was added for a total food 8 charge of $45.22. 9 One hour of drinks at the hosted beer, wine and 10 soda price of $12 was used. The meal of 45.22, plus the 11 beverage sales of $12, was added together for a total of 12 $57.22. 13 A one full day general admission pass of $53 14 was added to the meal and beverage total to get a total 15 price of $110.22. 16 This is the hypothetical sales price charged by 17 the Petitioner if each item was billed separately. The 18 taxable meal and beverage of 57.22 was divided by the 19 total of $110.22, to arrive at a taxable percentage of 20 52 percent. 21 The Department reduced the percentage to 22 account for, quote, "total experience," and to be 23 conservative. 24 The taxable 45 percent was applied to event 25 income using the third quarter 1996 and first quarter 26 '97 to third quarter of '99 as a test period to arrive 27 at a percentage of error that was applied to the audit 28 period. 13 1 The Petitioner provided its profit and loss 2 statements for all quarterly periods in the audit except 3 for the third and fourth quarters of 2000, first quarter 4 of 2001, and the first quarter of 2002. 5 Based on the profit and loss statements 6 provided, the reported taxable catered events sales were 7 $8.5 million. 8 The reported cost of food, beverage and other 9 taxable merchandise was $8,584,000. 10 Therefore, overall basis, it appears that the 11 Petitioner reported slightly less than their cost. 12 The eleven contracts initially used in the 13 audit indicated that the reported markup, tax included, 14 was 20 percent. Excluding the tax, the markup would be 15 11 percent. This figure is below Petitioner's customary 16 19 percent mandatory gratuityBased on these figures, it 17 supports the taxable event income reported was 18 understated. Based on a review of the six events used 19 for analysis by Petitioner, their accounting sheets, it 20 shows that taxable sales were understated. 21 All six contracts show that the value of three 22 or four hours of either hosted beer, wine and soda or 23 hosted premium bars reported at a tax included price 24 ranging from zero to $11.50. 25 All bar sales were reported at under $7, except 26 for one. 27 Based on the obtained bar package price sheet, 28 those reported sales are substantially underreported. 14 1 The 2006 value of premium bar sales is $37 for four 2 hours and $25 for the beer, wine and soda package for an 3 equal length of time. 4 Based on the incentive dimensions contract, it 5 can be conclusively shown that gratuity charges were not 6 included in the taxable sales reported. 7 An e-mail in the Petitioner's records indicates 8 that the Petitioner valued hors d'oeuvres that were 9 being added to an event at $15 tax and gratuity 10 included. 11 When 19 percent gratuity and the sales tax were 12 subtracted, it matched the figure the Petitioner 13 reported on the event accounting sheet. This supports 14 that gratuity charges were not reported. 15 Regarding the six events analysis used by 16 Petitioner, the Department takes exception to several 17 items. 18 One, we do not believe that comparing the price 19 for meals from restaurants in the local area to the 20 prices charged at the theme park is comparable. It is 21 like comparing apples to oranges. 22 It is well known that establishments with 23 limited competition, such as airports, sporting events 24 and places that charge admission have higher markups, 25 for the most part, than other establishments. 26 The Petitioner's food only markup from the 27 daily operations was 275 percent. 28 Two, the figures used for beverage sales are 15 1 substantially below the figures on Petitioner's own bar 2 price sheet. All six events had bar service of at least 3 three hours. The lowest price should be $24 and the 4 maximum $37. 5 Petitioner uses the price of $14 for two drinks 6 in their comparison. 7 Three, the Petitioner does not include 8 mandatory gratuity of 19 percent in their computation. 9 Four, the Petitioner wants the value of front 10 of the line ticket, instead of a general admission 11 ticket, to compare the entertainment portion. 12 Generally, events of the type we are discussing 13 get use of the park for four or five hours, which is 14 substantially less than general admission customers. 15 For most events, only four or five attractions are 16 operating. Again, this is substantially less when the 17 park is open to the general public. 18 Regarding not waiting in line, if only four or 19 five attractions are open and there are a couple of 20 thousand people attending the event, not everyone can go 21 to the front of the line. 22 Regarding the exhibit provided by the 23 Petitioner, it appears to the Department that total per 24 person and taxable per person figures attributed to the 25 audit is overstated. 26 The food and beverage per person price seems 27 like it should be $35.24, instead of $42. The $35.24 28 figure was obtained by dividing the total food and 16 1 beverage sales of $508,969,000 by the total number of 2 guests, 14,441. 3 If the Department's calculation is correct, 4 adding gratuity to the Petitioner's figures would give 5 the Petitioner a higher per person price, not using any 6 other of the Department's arguments. 7 The Appeals Section has calculated that using 8 the Department's conservative sales price of meals, the 9 inflation-adjusted per person sales price would 10 calculate out to be over $40. 11 Therefore, the Department's approach appears to 12 be reasonable and very conservative. 13 The Petitioner's reporting of a little less 14 than cost is not reasonable. 15 Therefore, the Department recommends the 16 petition and claim for refund be denied. 17 MS. YEE: Thank you very much. 18 You have five minutes on rebuttal. 19 MR. ANDAL: I have a long way to go here, so, 20 I'm going to talk fast. 21 We -- the staff's dissertation that we just 22 heard was the first time in this entire process from the 23 audit level to the Appeals level and anywhere in between 24 where the taxpayer's test was subjected to any criticism 25 whatsoever. 26 So, the first time we've ever heard any 27 criticism of the third party test was just a few minutes 28 ago. And I think that is a burden of the Department 17 1 when somebody presents a test, to review it and 2 criticize it. 3 We don't agree with criticisms offered, but we 4 think it's startling to hear that just today for the 5 first time. 6 I would -- we have presented an appropriate way 7 of doing a third party test -- to find restaurants that 8 are nearby, that actually provide a service that's 9 better than the one provided at the park. 10 In the restaurants in question, you can order 11 off the menu It's not -- it's not out in the open. It's 12 not cafeteria-style. You have china instead of paper 13 plates. And, so, this -- this actually was a level of 14 service higher than the food service that was offered in 15 the Park. 16 The use of the menu is where the -- where 17 Appeals and the Department goes way off track. The menu 18 used was after the audit period, there was a facility -- 19 a very nice facility built called the Globe Theater. 20 Most of you have probably seen it or been to it. The 21 Globe Theater was not available during the audit period. 22 And the food service provided was outside. It was 23 cafeteria-style. It was spoons and paper plates were -- 24 more of a picnic style. 25 The Globe Theater is substantial improvement to 26 that service. Using a menu from the Globe Theater to go 27 back and calculate costs for this other very different 28 service is inappropriate and indefensible, I think. 18 1 Once that number is calculated, everything that 2 we just heard goes off the rails. Because that starts 3 your base point and the numbers are calculated off of 4 that. 5 We also think when you are talking six 6 contracts -- by the way, the six contracts were not 7 reduced at the request of the taxpayer, they were 8 mutually agreed to by the auditor and the taxpayer. 9 There's never been a disagreement over the 10 samples, which contracts were used or the number of 11 them. 12 And those six contracts are very different and 13 that's why you selected six contracts rather than one 14 because they have different characteristics. Therefore, 15 it's totally inappropriate to apply a single percentage 16 across all six contracts without recognizing the vast 17 differences in taxable and nontaxable service within 18 those contracts. Another fatal flaw to the staff's 19 approach. 20 If you're looking for a red flag, when I was in 21 your shoes, I did a lot of restaurant audits and it's 22 not -- I can't say with absolute certainty that I've 23 never seen a markup percentage on a restaurant audit of 24 over 200 percent, but I can say it's extremely rare. 25 Young auditors who have their work reviewed by 26 a supervising tax auditor, if they come in around 100 27 percent on the markup of food, that is considered a 28 reasonable number. And the auditor is not criticized 19 1 for it. 2 In this case, the staff's approach would lead 3 to a food markup percentage well over 200 percent. That 4 should be a red flag for any audit of this type of 5 service. 6 Finally, I wanted to draw your attention back 7 to the Exhibit A that we put forward. And I'm going to 8 read that and I'm going to read the Appeals summary so 9 you can tell why I am so disturbed by the position taken 10 by the Board staff today. 11 In Exhibit A -- this comes from the discussion 12 of audit findings written by the District Principal 13 Auditor and reflects the view of the Department. 14 Okay, so, that's an important point to note. 15 "It appears that the auditor's method also has 16 a flaw in that the value used for the cost of 17 food is not the raw food cost, but instead a 18 value the taxpayer felt was the retail 19 value of the food." 20 This is where the District Principal Auditor 21 recognizes that the prices used in the markup were not 22 suitable for that purpose. 23 Again, towards the end, in the second 24 highlight, it says, 25 "But I would I say, based on looking at the 26 menu, that 7 or $8 per person is a more 27 reasonable cost than the $23 cost the auditor 28 is using." 20 1 So, the very cost method that the -- that is in 2 the Appeals summary, which I'm going to note in a 3 moment, was rejected by the District Principal Auditor. 4 "All this being said, I still don't believe 5 that the correct figure could be calculated by 6 marking up costs only." 7 They emphatically, the District Principal 8 Auditor is disagreeing with what was just said here. 9 If you go to the Appeals summary, and this is 10 the Board's appeal summary for this hearing, page 3, 11 line 21, and I'm going to read just one sentence, 12 "The Department rejects the taxpayer's 13 computations because all six contracts analyzed 14 by the taxpayer, the customers --" 15 He has two points, 16 "The customers only received access to the Park 17 during evening hours." 18 And I think anybody who knows and has taken 19 their kids to Universal Studios, knows exclusive use of 20 the Park in the evening is more valuable than a general 21 admission ticket. So, that's one of their points. 22 The second is, 23 "For the thirteen quarterly periods in the 24 audit reportable, taxable sales from catered 25 events was less than recorded food and 26 beverage costs for those events." 27 The DPA does not say that. The Department's 28 position is not that. It was specifically rejected 21 1 early on. 2 And how this paragraph got in here -- but this 3 is -- these are the two points going into this hearing 4 today that we were led to believe that the Appeals unit 5 was rejecting our claim for. 6 Almost everything -- 7 MS. OLSON: Time has expired. 8 MR. DEAN: -- almost everything that you heard 9 relates not to that paragraph, it appears as though 10 Appeals and the District Principal Auditor don't agree 11 with the Department's -- on the position of the 12 Department. 13 MS. YEE: Okay, thank you. 14 I want to just kind of get a mental picture 15 about your business model. 16 Hypothetically, if I were to come to you and 17 let's say I want to put on kind of an employee event for 18 Board of Equalization, Incorporated, 3,000 people coming 19 to your venue. 20 Kind of walk me through the steps of how you 21 would help me determine what the cost of such an event 22 would be from the catering side. 23 And I want to specifically refer to this 24 catering event cost sheet because I think we've got some 25 -- there is perhaps some misunderstanding in terms of 26 what these numbers represent on this cost sheet. 27 And, more importantly, just trying to get 28 behind what "costs" really means so that we have a clear 22 1 picture with each of these things that are itemized on 2 this cost sheet. 3 MR. ANDAL: Dawn's going to do that. 4 MS. YEE: Okay. 5 MR. ANDAL: But just to make a point linking 6 what we just said, our two comments, that's the -- 7 that's the very cost sheet that the District Principal 8 Auditor rejected, so you know. 9 MS. YEE: Well, yeah, and I think I want to get 10 clear about what these numbers really mean. 11 Are they really raw costs? Or is it costs with 12 markup? 13 MS. MAYHEW: Okay, excellent. 14 So, let's go back to 1996 or 1999. Because if 15 you planned a Board event today, we have formalized 16 pricing and we would not be in such a quandary. 17 But back during this audit period, we did not 18 have -- or universal published pricing for food. 19 So, someone would contract the Director of 20 Events and say, "I want to plan an event." They would 21 determine how -- you know, if you wanted it during the 22 day, because you could have them mix in, or you could 23 have a Park buyout at night. 24 If you have a Park buyout at night, you do have 25 the choice of having exclusive use of the entire Park, 26 which many of these contracts were, or you can limit the 27 access to the Park, but it's still exclusive use. 28 So, then get away from the Park and attractions 23 1 and let's talk food -- food and beverage. 2 During that time, there wasn't a menu for you 3 to choose from. But she would sit down with you and 4 describe, you know, food possibilities and, you know, 5 whether you wanted chicken or fish or shrimp or grilled 6 sirloin. You would describe -- of the 3,000 people, a 7 lot of consideration was taken into account, was it men, 8 was it women, was it children? Who were the drinkers? 9 So, there was a lot of thought put into who would and 10 who would not be drinking alcohol. 11 You would work with the Director of Events to 12 define a menu. And then she, in turn, would work with 13 the chef to price out the menuSo, now let's go to this 14 catering event cost sheet that is in the discussion of 15 audit findings. Again it says "cost" at the top and 16 this is where the auditors were mired down in the fact 17 that it says cost, but when you go through these 18 numbers -- and this was the independent test that we 19 conducted with the chef -- and I will assume everyone's 20 discussion of audit findings is in order. So, I will 21 ask you to flip back three pages, there is a "D" in the 22 bottom right-hand corner. 23 Food cost is $45,000. That is a retail price 24 for food. We worked with the chef to determine what the 25 raw food cost would be because this is not a raw food 26 cost. 27 When you look at the liquor cost, that is a 28 bottle cost. So, that is a cost, that is not a retail 24 1 value for liquor. 2 There was mention that gratuity was not 3 charged. Gratuity is embedded in this labor cost. 4 So, the specific items were taken into account. 5 And you can see from the exhibit marked D that the food 6 cost for the Autodesk event was actually 21,000, not 7 45,000. 8 If you flip to the next page, there is a "B" in 9 the bottom right-hand corner. And this is where we 10 tested Autodesk ourselves now that we had raw food cost 11 for the event, we had the bottle liquor cost -- and if 12 you look at the bottom of the page, you will see that we 13 came up with a cost per person for this event. 14 Knowing what California typically looks for on 15 food markup and liquor markup, we made sure that the 16 food was marked up at least 100 percent. And we were 17 conservative in assuming that every guest at this event 18 had at least two alcohol drinks. We didn't take into 19 account whether they were kids, not kids, who was 20 drinking -- we said everyone had two drinks. 21 And when we went through this analysis, we were 22 within the reasonableness standards for markups that 23 should be reported for food and alcohol. 24 If you will just bear with me and flip to the 25 next page, there is an "E" in the bottom left-hand 26 corner -- bottom right-hand corner, sorry. This is 27 what -- this is -- the studio's -- it says, "Studio 28 Center" at the top. It says "facility fee" and "food 25 1 and beverage" kind of in the middle. 2 This is the statement that feeds the P & L 3 statements. And this statement is, again, driven -- 4 well, the auditor tried to go one from one from the cost 5 sheet to this statement. But this statement does not 6 have a line item for gratuity -- not that gratuity is 7 not in there because the labor is in there. 8 And this facility fee, if you look at the 9 nontaxable event admission portion of it, which is at 10 the top of the page, talks about, you know, the true 11 cost of turning on Water World or Back to the Future at 12 night. But what's not itemized on here is the 13 intangible value of the Park itself. 14 So, you get to a food and beverage component on 15 here. And you will see that tax -- tax is a line item, 16 but gratuity is not. 17 But what you we did in testing how she -- and 18 the Director of Events at the time -- again, she would 19 survey, you know, local hotels that are right near 20 CityWalk and see what -- if you're having your corporate 21 event at Hilton or Sheraton, how much are they charging 22 for the grilled chicken dinner or the, you know, halibut 23 dinner or whatever it is, the food you selected. 24 And then she would make sure that her food was 25 then within that, knowing that she wants to get your 26 business and bring you to the Park. 27 We tested this final amount -- you see the 28 74,000, we tested that against an average of similar 26 1 menus from three venues at CityWalk -- Gladstone's, Tony 2 Roma's and -- I always the forget the third one -- 3 three -- 4 MR. VANDE WETERING: Daily Grill. 5 MS. MAYHEW: -- Daily Grill, three venues at 6 CityWalk. We selected a comparable menu. 7 But again, this was a sit down, you know, 8 probably tablecloths, glasses, silverware, and averaged 9 those prices and tested it and came within a 10 reasonableness of what it would cost for a sit down 11 dinner versus what you were served at the Park. 12 MR. VANDE WETERING: If I my add one thing? 13 I think the staff mentioned that this is a 14 captive crowd and prices should be higher. It should be 15 noted that the Park was actually in competition with the 16 venues on CityWalk because they also catered events. 17 So, a group could get Daily Grill or one of the 18 restaurants there to cater the events on the lot. 19 So, they were really competing with each other 20 in terms of pricing. So, for that reason, we believe 21 that the prices on the menus at the CityWalk are very 22 comparable to the prices that should be charged for the 23 event. 24 MS. MAYHEW: That was the method to their 25 madness back when this food and beverage business line 26 was forming. 27 And it was. It was in its infancy stages and 28 then universal business here and that's when they 27 1 contracted for and constructed the Globe Theater. 2 There was more formality put around the food 3 and beverage component once the Globe Theater opened. 4 But before it truly was based on the Director of Events 5 expertise and that's why universal plan these events and 6 her survey of what other food retailers are getting for 7 similar, you know, food and beverage components. 8 MS. YEE: So, the markup could vary depending 9 on what the -- 10 MS. MAYHEW: Absolutely. 11 MS. YEE: -- okay. I guess I was perplexed by 12 this cost sheet because it originates, it sounds like, 13 from the kitchen folks, your food folks. And then it 14 goes over to the marketing area? 15 And, so, I -- I think the fact that the food 16 cost already included a markup, starting at that point 17 kind of didn't make sense to me. 18 MS. MAYHEW: Well, there's also -- and pardon 19 me for interrupting. 20 There's also the, you know, interdivisional 21 transfers and markup between -- you know, the division 22 responsible for food wants to show how much money 23 they're marking, the true Marketing Department wants to 24 show how much they're making. So, even within -- within 25 our company, there's markups and P & L targets to hit. 26 But at the end of the day, and as was 27 acknowledged in the discussion of audit findings, we 28 could not use raw cost to price the taxable food and 28 1 beverage components of these contracts during this audit 2 period. 3 So, we took a step back. We looked at the 4 total revenues collected for the contracts -- 5 MR. ANDAL: Excuse me, and the reason was you 6 didn't have that information available? 7 MS. MAYHEW: -- right, right, right. 8 So, that's when -- that's when we and the DPA 9 ultimately agreed with us, we took step back, looked at 10 total revenue collected for a contract, looked at the 11 number of participants for the contract, and then tested 12 the reasonableness of the value reported for taxable 13 food and beverage. 14 MS. YEE: Okay. 15 MS. MAYHEW: And we did take into consideration 16 gratuity. And we put tax on top of the gratuity. 17 MS. YEE: So, this type of cost sheet and kind 18 of how you ran through, I guess, going back and doing 19 your test could be applied to the other contracts as 20 well? Similar? 21 MS. MAYHEW: We could do independent tests of 22 both contracts. 23 We focused on Autodesk because that seemed be 24 to the focus of the auditors because of this cost sheet 25 and we wanted to alleviate the confusion that these were 26 not all raw costs and these -- it was a mixture of cost 27 and retail, which is why we did this contract. 28 MS. YEE: So, you -- 29 1 MS. MAYHEW: Could we do the other contracts? 2 We could. We did because the question before 3 us at that time was just proving that this was a mix of 4 cost and retail. 5 MS. YEE: Okay. But you'd have the same mix of 6 cost and retail for the other contracts as well, if you 7 were to run those other contracts through this process? 8 MS. MAYHEW: I could -- I will -- having not 9 looked at each cost sheet in each contract, I will say 10 yes, just because that's been our experience with this. 11 It's like likely. 12 MS. YEE: I mean, in terms of which of these 13 items actually are -- 14 MS. MAYHEW: Cost -- 15 MS. YEE: -- cost versus retail? 16 MS. MAYHEW: -- versus retail, yes. 17 MS. YEE: Okay. 18 MS. MAYHEW: To be honest -- I mean, back 19 then -- good fact or bad fact -- some of the notes are 20 like -- I mean, they are on -- it's just notes from the 21 chef to the Director of Events, who had to sort it out. 22 So, she really was relying on what the market 23 also commanded and not just on, you know, the notes 24 transferred from different departments. 25 Because at the end of the day, she had to price 26 the contract and determine the breakout. 27 MR. VANDE WETERING: To further -- your 28 question, yes, every contract will have a cost sheet 30 1 which reflects something similar to the 45,000, 2 depending on the number of guests. 3 But that every contract can be costed out to 4 its raw food cost, using a chef and using current 5 pricing or pricing of the, you know, produce and chicken 6 and all that. 7 We can get down to the raw food cost, but it 8 will be an exercise similar to what we did for Autodesk. 9 MS. YEE: Okay. 10 MS. MAYHEW: And just one more comment on this 11 cost sheet to also just reflect that it is a mixture of 12 cost and retail. 13 We're not in the flower market. We're not in 14 the rental market. Those are true -- that was a retail 15 cost when we purchased from a third party vendor and we 16 paid sales tax on that. 17 These are costs -- this is the retail value of 18 what ultimately ended up being flower arrangements 19 interspersed, you know, on the food stations. 20 MS. YEE: Okay, very well. 21 Thank you, I appreciate you walking us through 22 that. 23 Questions, Members? 24 Dr. Chu? 25 DR. CHU: Well, first you were saying that 26 people come to these corporate events for the 27 entertainment, not the food and, therefore, the -- the 28 estimate of the cost of the entertainment, of course, is 31 1 very critical to this. 2 But it seems that the corporations had varying 3 access to the Park. It wasn't always exclusively closed 4 down just for the corporate clients, correct? 5 MS. MAYHEW: That is a true statement. 6 DR. CHU: And do you know what portion of 7 them -- of these events were exclusively for the 8 corporate clients versus which ones, for example, I 9 noticed for one of your catered events the customers 10 received one tram tour of the back lot and access to 11 certain rides for three hours -- Back to the Future, 12 Jurassic Park and Backdraft. 13 So, if there's this great variation in terms of 14 what access they had, wouldn't that have -- 15 MR. ANDAL: That's a good question. 16 DR. CHU: -- a determination of the -- some 17 factor in the determination in the analysis? 18 MS. MAYHEW: Oh, absolutely. 19 And that's why we say that one rule does not 20 fit all. Each contract must stand on its own. 21 All of the events before you were evening 22 events. The Oracle 1999 was a full Park buyout. The 23 Park completely shut down and reopened from 7 p.m. to 24 1 a.m., in total, for Oracle. 25 The other events were -- instead of the five 26 attractions that the Park had, they may have had access 27 to four. But it was still exclusive use. It was still 28 at night. And -- 32 1 MR. ANDAL: And, importantly, in all those 2 cases, even though, you're absolutely right, Dr. Chu, 3 that they differed dramatically from contract to 4 contract, in every case it was more valuable than a 5 general admission ticket because you were receiving 6 something of an exclusive nature in every contract. 7 Although, obviously, if you have 8,000 people 8 you can buy out the whole park, but that's -- that's 9 where I think this got off the rails early on was the 10 idea that exclusive use, even it's for a short time, is 11 less valuable than a general admission ticket where 12 you're sharing with the Park with the rest of the 13 public. 14 DR. CHU: Department, does your analysis take 15 into account the varying levels of access to the -- to 16 the rides at the universal Studios? 17 MR. LAMBERT: In some ways, it does. 18 Basically, we just allowed a general price 19 admission ticket as part of the cost basis for doing our 20 percentage. So, in effect, even though the entire Park 21 or all the rides wouldn't be open, there is some main 22 rides, but there is a lot of other rides that were not 23 open. It was like, as you say, four or five rides, 24 there was the back lot and there was generally three or 25 four other ones, other than the Oracle one that the Park 26 was -- it was pretty much open as it would be during the 27 day. But the other events were -- were substantially 28 reduced from that. 33 1 And, so, when you say the value of a front of 2 the line ticket, that means -- and they only -- and 3 during a given day, they only give so many of those 4 tickets out. And I'm not sure exactly what percentage 5 it is, but -- but there is only a certain percentage 6 that they'll allow to go to the front of the line. 7 But if you have so many people there, not 8 everybody's going to the front of the line. You are -- 9 I mean, you can have a carpool line and if everybody 10 gets in that lane, you're not going to go faster. 11 So, basically, what we thought is we'd give 12 them the benefit of the doubt and we'll give them a 13 general price admission ticket and the value of that 14 instead of a front of the line. 15 And I'm not quite sure -- they have an asterisk 16 by a front of the line ticket in 1996. And I'm not sure 17 if they had front of the line tickets available at that 18 time. 19 The price looks like it's double what the 20 general admission price is. And if you look at the 21 2000 -- I don't know, I'm just doing it off the top of 22 my head, it looks like 2006, 2007, the price is only one 23 and a half times that. 24 So, it appears that they've used some type of 25 inflated figure for the front of the line in their 26 comparison as well. 27 DR. CHU: And how do you respond to that, 28 Universal Studios? 34 1 MS. MAYHEW: For the -- two points. 2 One is when we looked at the nontaxable Park 3 admission component of a contract, that analysis was to 4 show that we take a greater discount on the Park 5 admission than the food. Because we're not pushing all 6 of the value of the contract to the nontaxable part. 7 As far as what price we used, the -- and we did 8 describe our admission akin to front of the line because 9 we think exclusive use of the Park at night, just for 10 you and your friends or you colleagues, is more valuable 11 than a general Park admission. 12 But that $68 is actually an average of the 13 general Park admission for '96 through 2002. Front of 14 the line did come into being in 2000. And VIP came into 15 being in 2000. 16 So, it's actually an average of the general 17 admission from '96 through 2002 and then the prices for 18 front of the line and VIP access during the audit period 19 when it existed. 20 And it was an amalgamation of all those to come 21 into a price at what we would value the Park at. 22 DR. CHU: See, then I find the analysis 23 unsatisfactory on both sides -- for both the Department 24 and for universal there clearly is varying access to 25 these rides. And it seems like it is different from 26 event to event. 27 And yet that seems not to have been taken into 28 consideration. It's the one price that you've picked 35 1 for the general admission, the one price that you picked 2 for the front of the line. 3 I also think that on the food cost the analysis 4 is unsatisfactory for both Department and for the 5 taxpayer. 6 For the Department it's because the calculation 7 is based on the current Globe Theater menu of 2006, when 8 the audit period covers 1996 to 2002. And also the 9 Globe Theater is a sit down menu not a buffet or a brown 10 bag menu which is -- is that what all of the corporate 11 events were like, buffet and brown bag, or were some of 12 them sit down? 13 MS. MAYHEW: These -- the contracts that we've 14 selected for audit review were all outdoor events. 15 DR. CHU: So, they were buffet or -- 16 MS. MAYHEW: Yes, they were all outdoor events. 17 MR. ANDAL: Let me clarify, because the 18 language is a little different. 19 They were all -- during the audit period, they 20 were all outside. And they were all cafeteria-style. 21 There's seating all over the park. And, so, I 22 would -- I wouldn't assert that there was no seating 23 available, but when the Globe Theater was built, which 24 was not available during the audit period, then there 25 was a place to have these events. It was inside all of 26 the time. It was a much different service provided. 27 DR. CHU: So, it was cafeteria-style, but was 28 that like a buffet? 36 1 MR. ANDAL: Oh, yeah. And I'm sorry, that's 2 what I wanted to clarify that too. 3 Sometimes it was brown bag, sometimes it was 4 more elaborate, buffet-style. 5 DR. CHU: Okay. 6 MR. ANDAL: It varied. 7 DR. CHU: And, yet, I also find your analysis 8 of the -- of the tax liability based on these six 9 restaurants not satisfactory as well because these are 10 stand alone restaurants on the outside of universalAnd I 11 would have to think that a catered event with a captive 12 audience could command a higher price. Yet I 13 see that you do have a price breakdown in this Autodesk 14 catering event cost sheet and you have been able to 15 calculate out actual costs of food. 16 Why wouldn't that be a way to go about finding 17 what the actual tax liability is? 18 Now, the only problem with this is that it's 19 just one -- it's just one company and one catering 20 contract. 21 I mean, couldn't we find out what the -- what 22 the actual food costs were for the other contracts in 23 question? 24 MR. VANDE WETERING: Yeah, although taking the 25 retail down to cost and using a chef to do that, we can 26 ask certainly do that for a number of contracts and 27 probably get to a similar result, demonstrating that the 28 amount of cost on that cost sheet is the -- the events 37 1 group cost, but it's the kitchen's retail, basically. 2 We could -- we can bring that down. It's 3 just -- just depends on how many we want to go through 4 to demonstrate that the reported markup on food and 5 beverages are within the line of standards that auditors 6 use on a daily basis. 7 We can do that. We did that with Autodesk. We 8 can do it with some others as well. 9 DR. CHU: I would find that more satisfactory 10 with -- but with more than -- more than one of these 11 contracts. 12 Department? 13 MR. LAMBERT: The problem with doing that 14 and -- first of all, we weren't able to identify what 15 the costs were. So, when you read the office discussion 16 that's written by the DPA, he's basically using his 17 knowledge to say that, you know, that $45,000 doesn't 18 look right to me. It looks like it's too high. 19 I talked to him on Monday afternoon in regards 20 to this and he wrote that before he did the -- before 21 the audit on the studios was performed. 22 And he said during that particular audit they 23 also provide catering and that they had sheets there 24 that showed that the cost of a catered event that was 25 separately itemized, because the studios separately 26 itemized there, they billed out at $54 and that the cost 27 of the meals were $22. 28 And -- which I questioned him on that because 38 1 the figure appeared high to me just as the cost figure 2 in this appears high. It appears to be more than cost, 3 but we never were able to track down what it was. 4 That -- that's an issue is that they were reporting over 5 200 percent markup in the catering on the studio side. 6 Now, the other problem is that if we do by the 7 cost, say we identify what the cost is, your second 8 problem is what you are going to -- what is going to be 9 the value of that meal? In other words, what are you 10 going to mark that up? 11 That's -- that's a huge problem. That's -- 12 that is -- I guess you could use an estimate, but, I 13 mean, we know in the Park they sell for 275 and 14 generally we don't question a restaurant if they have 15 over a 100 percent markup, but, you know, you are 16 falling somewhere in that range. 17 And that's why the DPA decided that he didn't 18 want to go with the way he was and they really -- 19 although they were marking up costs, what they were 20 using for the markup figure was the total markup on 21 these events. 22 In other words, they took the total event 23 income, they subtracted out the variable costs and they 24 came up with the gross profit. 25 MS. MANDEL: Who is "they"? 26 MR. LAMBERT: And they just took the -- 27 MS. MANDEL: Who is "they"? 28 MR. LAMBERT: We, the Department. 39 1 MS. MANDEL: Okay, thank you. 2 MR. LAMBERT: I was -- 3 MS. MANDEL: I was having trouble following. 4 MR. LEONARD: The other "they." 5 MR. LAMBERT: The Department. 6 MR. ANDAL: Who's on first? 7 MR. LAMBERT: The Department. 8 That's how we attempted to do this -- the 9 Department attempted to do this at the beginning. 10 And, so, the argument came back is, you know 11 what, the markup -- you can't use an overall markup 12 because the markup on the nontaxable is higher than the 13 markup on the taxable. 14 The DPA agreed with that. And that's why we 15 ended up with this approach. Because the problem with 16 taking -- finding out what the cost is -- and they're 17 absolutely right -- each event is different. I think 18 it's somewhat -- somewhat the same, a lot of them are 19 somewhat the same, but there is components of it that 20 are different. And, you know, so, no two will be alike, 21 but I think they're similar in nature. 22 The -- you just have a problem with going back 23 and figuring out what the markup is and then trying to 24 figure out what the cost is and then applying that. 25 What we tried -- what the Department tried to 26 do was to just take a conservative approach to this and 27 that's why it's -- it's not -- I was going to say it's 28 not satisfactory -- I guess, given the other 40 1 alternatives, it's probably one of the reasonable 2 approach to this method and that's why the DPA decided 3 to do it. 4 Now, I -- in my opinion, obviously it's 5 different than the Petitioner's, I think if we actually 6 went in there and figured out what the -- what the 7 markup should be and what they were actually getting, I 8 think we gave them a substantial discount on what they 9 owe. 10 And that's my -- or my position, anyway, just 11 my thought as, you know, as an accountant CPA. 12 MS. YEE: Mr. Andal? 13 MR. ANDAL: Yeah, I just want to correct two 14 things. 15 And I am just trying to square what -- with 16 what we're hearing here with the Appeals summary of the 17 Department's position. 18 I totally agree with you that the costs are 19 really not available. And they're not substantive and 20 they're not usable for a markup audit. 21 But then I read on page 3, line 21, in the 22 middle of the sentence, 23 "The Department rejects the taxpayer's 24 computations," 25 and then skipping to the end, 26 "Reportable, taxable sales from cater events 27 was less than recorded food and beverage costs 28 for those events." 41 1 So, how can there not be information available, 2 and yet the Department takes the position that the costs 3 were greater than the taxable reportable sales? 4 I mean, those statements cannot be read in -- 5 concurrently with each other and that's part of our 6 problem. 7 The other thing is I totally agree with his 8 statement -- and I think, you know, sounds like we're in 9 agreement on the individual characteristics of these 10 contracts. So, then how can the Department apply a 11 uniform percentage across all six contracts? 12 MS. YEE: And then that's what I think is 13 difficult to really get comfortable with and probably 14 difficult to even derive at this point. 15 But I guess following up on Dr. Chu's direction 16 in terms of, you know, how do we get to a more kind of 17 satisfactory, defensible position in terms of just kind 18 of getting to the right -- 19 MR. ANDAL: I know. 20 MS. YEE: -- but my question to you, on the 21 issue of markup, what are the factors and considerations 22 that do come into play in terms of how much you markup? 23 MR. ANDAL: Well, I think it would -- we're 24 using different numbers to describe different things. 25 But I think that using the word conservative 26 with respect -- which, normally, by the way, I like, 27 using the word conservative in the case of this markup, 28 I just don't think it can be justified. 42 1 When you have a markup percentage for a food 2 related service that's over 200 percent, that's at the 3 far upper end of what you would expect on a restaurant. 4 It's not conservative. And it may -- you may be able to 5 find one where that's justified, but it certainly 6 presents a red flag. 7 MR. VANDE WETERING: The one thing when we did 8 cost out the Autodesk contract, it resulted in a food 9 markup of 100 percent and a beverage markup from around 10 200 percent, we're close to 200 percent. 11 So, that -- we approach it from all different 12 angles, from -- from whether we were overpricing the 13 exempt portion, which we were not; whether we were 14 underpricing the food. 15 And we also -- and having dealt with may of 16 these markup audits in my former career, I also applied 17 the SBE standard in terms of markup approach using the 18 Autodesk contract. 19 MS. YEE: The six contracts that are at issue 20 here, one of which is Autodesk, those were selected 21 because you felt they really represented kind of the 22 variation of the types of events that -- 23 MS. MAYHEW: To be honest with you, I inherited 24 this audit. So, my predecessor and the auditor agreed 25 that these were reflective. And I have agreed to be 26 bound by that. 27 MR. ANDAL: I learned a little bit about that 28 because I was asked so many times why it got down to 43 1 six. 2 Apparently, we have almost 200 contracts. 3 MS. MAYHEW: More. 4 MR. ANDAL: More, okay. So, there is a lot of 5 contracts, but they are all in the general realm of a 6 corporation buying certain services that are exclusive 7 in nature. 8 The eleven selected, five of them were reduced 9 from the sample. And one some of them -- some of them 10 -- some of them are relevant to our discussion here 11 today. 12 Some of them were rejected because they were 13 actually catered events from outside caterers. And one 14 of the -- one of the restaurants that was used in the 15 third party test, Gladstone's, was both a testee and was 16 one of those third party contracts. And the result came 17 out very -- you know, the result reconciled. 18 So, some of those -- and then I think was a 19 prom in there and, so, they were -- 20 MS. MAYHEW: The ones without alcohol were 21 excluded. 22 These six had food -- food and beverage. There 23 were initially eleven, right, the five that were -- that 24 are not here, three of them did not have alcohol, they 25 were prom events or just very immaterial contracts and 26 then the two that Dean described were catered by a third 27 party. 28 MR. ANDAL: I think we're all relieved that 44 1 there was no alcohol at the prom. 2 MS. YEE: So, Dr. Chu, I think I'm concurring 3 with, I think, where you're suggesting that we go and, 4 that is, a broader look, kind of just trying to get to a 5 place where we have a little bit more comfort about what 6 may be reasonable. 7 And I would agree that kind of with respect to 8 what the Department has come up with and certainly 9 limited information that we have gotten from the 10 taxpayer doesn't give me the comfort, right now anyway. 11 But then the question is what is it that we do 12 want to look at? Is it the remaining six? Is it a 13 larger universe? 14 I mean that's kind of the question. 15 Ms. Mandel? 16 MS. MANDEL: It was my understanding that there 17 was not a dispute about the six contracts being 18 representative for the period. 19 MR. ANDAL: That's right. 20 MS. MAYHEW: That's correct. 21 MR. LAMBERT: Okay. And the Department's 22 nodding correct. 23 And the Department, in its analysis, tried to 24 just use the general admission. And when you talk -- 25 when the Department talked about other things that came 26 with, I didn't hear the Department mention the types of 27 other things that came with that the taxpayer mentioned, 28 like -- 45 1 MS. MAYHEW: Red carpet. 2 MS. MANDEL: -- characters, well, I don't know 3 what you call them at Universal -- at Disney we call 4 them characters, I guess, but, you know, the dressed up 5 people and the paparazzi and the red carpet and the 6 other things that make it a fabulous corporate event. 7 That those -- that type of thing seems like it 8 would pump up -- I'm not sure that they have those 9 things every day at if you were go to Universal Studios 10 on a general admission ticket. 11 So, do they? It's not an everyday thing? The 12 dressed up -- 13 MS. MAYHEW: The red carpet, the paparazzi and 14 the Broadway events are not. 15 MS. MANDEL: Yeah. So, it seems that on the 16 Department's analysis if you just were taking into 17 account a general admission ticket that -- that you are 18 not accounting for these other elements of what goes on 19 at these events, which wouldn't be part of the, you 20 know, which would -- which would weigh more toward a 21 higher nontaxable percentage if you were putting things 22 together, seems like. 23 Did you have a -- 24 MR. LAMBERT: Well, that's true. 25 Basically, we're trying do this a simple way. 26 We also didn't include on the top line the things that 27 are given to -- tangible personal property that's given 28 to the event goers. 46 1 MS. MANDEL: Well, but you -- you didn't -- 2 also there might be some dispute whether they, perhaps, 3 paid tax up front on those. So -- 4 MR. VANDE WETERING: There's no -- 5 MS. MANDEL: I don't know, I don't think 6 there's information. 7 MR. VANDE WETERING: -- there's no dispute on 8 that, we did pay tax up front on all of the peripherals 9 given away. 10 MR. LAMBERT: Well, we -- they don't have any 11 dispute, but the Department does, so -- 12 MS. MANDEL: Well, is that -- is that a new 13 dispute? 14 Because it seems that if you had -- if that -- 15 that that would have been an audit issue because -- 16 because gifts would be a pretty -- I'm just sort of 17 surprised to hear that now that all of a sudden that 18 there's a dispute about whether they -- 19 MR. LAMBERT: Because of the way they -- 20 because of the way that the audit was done, they did 21 give them a tax paid purchases resold deduction for 22 certain items that they were, but -- well, those were 23 basically the purchases of meals from Gladstone's. 24 There wasn't any credit given in the audit for 25 ponchos or picture frames or things of that nature that 26 was given. So, I can only assume that tax was not paid 27 on them. 28 You would think that -- 47 1 MS. MANDEL: Well, it sounds like we're -- 2 MR. HANKS: Ms. Mandel, I think -- I think 3 what's important in this analysis is -- and I think 4 everyone's in agreement with this -- that really we're 5 trying to calculate an estimate of what that -- what 6 that measure might have been. We recognize that that 7 probably varied by event. 8 So, I think it was -- it was appropriate for 9 the Appeals Division to look at the audit from the 10 standpoint of reasonable and whether or not the 11 auditor's calculations were reasonable in terms of the 12 overall markup. 13 And, so, I'm just looking at the Exhibits 1 and 14 2 that is attached to the decision and recommendation. 15 And in that, Mr. Zelmer is looking at the categories of 16 nontaxable services provided, as well as the value of 17 the taxable services that were provided, analyzing those 18 elements, analyzing the charges associated with those 19 elements and the related cost to calculate markups in 20 those two respective categories. 21 What he calculates for the 11 contracts that 22 he's listed and that we've examined is an overall markup 23 on taxable costs of 39 percent. And in the same 24 calculation he calculates a markup on nontaxable costs 25 of 204 percent. 26 So, I think the Department is very much in 27 agreement that the value associated with those 28 nontaxable costs and nontaxable sales elements was 48 1 significant and higher than the markup that is charged 2 on the associated sales of tangible personal property. 3 But I think just from the standpoint of looking 4 at the case in terms of it being reasonable, he's 5 looking at the 39 percent markup on the sale of tangible 6 personal property and trying to conclude whether or not 7 that overall markup is reasonable, given other like 8 audits that we're calculating. And -- 9 MS. MANDEL: Except that the whole markup -- I 10 thought markup was just thrown out the window. 11 I mean maybe he did bunch of numbers, but I 12 thought it was thrown out the window and there was a -- 13 MR. LAMBERT: It was. He was just trying to 14 see whether the numbers that we came up with -- when he 15 goes back and takes a look at it -- whether they're 16 reasonable or not. 17 That's the -- 18 MS. MANDEL: Well, they're reasonable then 19 because the method that was thrown out because it wasn't 20 any good, the DPA threw out the method. 21 So, you're saying the Appeals Officer went back 22 to a method that the DPA rejected to validate that, oh, 23 well, because a rejected method was no good, but came up 24 with a number that -- that made what the ultimate method 25 look good, therefore, the ultimate method was good. 26 Because -- I mean, that sounds like a big 27 circle. 28 MR. LAMBERT: Not really. The 39 -- all he was 49 1 trying to do is say was the 45 percent, which the 2 Department came up with, was reasonable based on the 3 fact that when you run the numbers it shows a 39 percent 4 markup for -- and he's not applying it -- the 39 percent 5 for tangible personal property and a 200 percent for 6 non -- for the nontaxable. 7 MS. MANDEL: But the 45 percent wasn't a markup 8 percent. 9 MR. LAMBERT: It was not -- 10 MS. MANDEL: The 45 percent -- 11 MR. LAMBERT: -- Right. 12 MS. MANDEL: -- was -- 13 MR. LEONARD: A ratio. 14 MR. LAMBERT: It was a taxable percentage. 15 MS. YEE: It's an allocation. 16 MS. MANDEL: -- it -- I mean it's -- 17 I don't know. 18 It sounds to me like that argument is relying 19 on the -- 20 MS. YEE: Hang on. Mr. Levine? 21 MR. LEVINE: Had Petitioner filed an RFR -- I 22 understand their point and it's just not -- 23 MS. MANDEL: Whose point? 24 MR. LEVINE: This is not in the summary, this 25 is -- 26 MS. MANDEL: I'm getting confused with the -- 27 MR. LEVINE: -- in the D & R about the cost 28 being a retail value versus -- versus a true cost in the 50 1 auditor's statement. 2 But there was no RFR filed, so -- 3 MS. MANDEL: A request for reconsideration? 4 MR. LEVINE: -- we did not -- if that's an 5 error -- and it does sound like it's an error -- and it 6 does sound like what you're saying, that it was kind of 7 circular, we would not have come to a different 8 conclusion because ultimately we concluded that the 9 Department's ultimate method was reasonable, though it 10 is true it appears that we partially validated it by the 11 circular argument. 12 But we would have still concluded that it was 13 reasonable and we would have probably corrected that had 14 we had an RFR pointing out this statement that that 15 wasn't a true cost. 16 MR. ANDAL: Have you considered -- considered 17 your audit method unreasonable? 18 MR. LEVINE: I think you know that's true 19 because when you were up there we used to reject them. 20 MS. YEE: Okay, Ms. Mandel, do you have other 21 questions? 22 I want to move to Mr. Leonard's questions next. 23 MS. MANDEL: No, go to Mr. Leonard, that's 24 okay. 25 MS. YEE: Thank you. 26 MR. LEONARD: Thank you, Madam Chair. 27 Dr. Chu has raised some excellent points and 28 some of the same troubles I am having. I -- the absence 51 1 of contemporaneous material is just troublesome for all 2 sides here. It's hard to conclude that any procedure's 3 reasonable when you start out with work papers and 4 company notes that neither side can make total sense of. 5 I do also agree with Mr. Lambert. I think if 6 we actually tried to study this more, we'd be back here 7 having this same debate and discussion because the -- 8 unless we direct the staff in some particular way, the 9 issue doesn't change. 10 And I'm -- to the Department, I think your 11 methodology was attempted in terms of a typical audit in 12 itself was reasonable, but the underlying theory itself 13 was fallacious in that -- you made the point, 14 Mr. Lambert, which is entirely true, I buy a ticket to 15 an amusement park, I'm captured. I can't -- I can't 16 effectively leave. It takes me hours to get to my car, 17 let alone. 18 So, they can mark up the food prices on my day 19 ticket and I got to pay. But I have actually the 20 opposite point of view when I go to a buyout event at 21 one of these parks. That is, the food's either free to 22 me, I mean, I don't fork out money, I've already paid or 23 the company's paid. It's a group rate. 24 And it's -- the markup in terms of a retail 25 markup is no longer a consideration. I mean -- and the 26 difficulty I think we always have with these mixtures of 27 tangible or taxable sales and nontaxable sales is how to 28 allocate which. 52 1 We have one perspective as a government, I 2 suppose, in trying to match maximize the taxable side, 3 but from the corporate side they may be either 4 indifferent or they may have rivalries between their 5 DivisionYou know, the Entertainment Division wants to 6 show a bigger profit this quarter. Who cars about the 7 Food Division because we've got to give them some food 8 or all of our customers will faint before they get on 9 the ride. 10 And I don't know how figure out that right 11 number, no matter how much research we do unless we 12 direct the staff and say that the -- either what the 13 ratio should be or what the underlying consideration. 14 You -- Miss Mayhew went through this, answered 15 the question asked about how the company developed the 16 contract. But I'm thinking the other side, I'm coming 17 to you san saying I want do a buyout. I'm concerned 18 about total price and I'll -- and I may want more food 19 and drink and am willing to pay more and that would be a 20 higher ration on that because my people that I am having 21 there, you know, they've done all of the rides or they 22 don't care about that. 23 On the other hand, for most of that, for these 24 entertainment parks, it's the other way around. I'm 25 arguing. "Open another ride. You know, make sure 26 nobody else is allowed in the park. Make sure my people 27 get front in line and I'll pay for more that." 28 And -- but I don't want to pay more than 50 53 1 bucks or 60 bucks a head. So, you know, cut out the 2 food or downgrade it in some way. Or, if you're going 3 to throw it in, it's -- I am not paying for it. 4 I mean, it also strikes me -- and this is not a 5 suggestion for an audit -- but I'm going to board 6 Southwest Airlines sometime today and I'm going to buy a 7 plane ticket and they're going to offer me unlimited 8 peanuts. What portion of that plane ticket is taxable 9 sale of peanuts to me? I don't know. I don't encourage 10 you to go find out, but it's the same kind of thing. 11 I'm buying a plane ticket. There's some food 12 and drink involved with that. And I don't know how to 13 tell you what the right ratio is, because, obviously, 14 there is, I know it's going to happen and I may even 15 count on it, get a refreshment on the plane. 16 The same thing for the same thing for the park. 17 I'm going there for the rides or to take pictures of my 18 kids on the rides. And that's the value of it. 19 Now, whether it's -- it's certainly not 100 20 percent if I am almost getting food. What it is -- I 21 don't know how -- I don't know what the wisdom is to 22 pick that number other than that's why we're here is to 23 do so. 24 But I don't know if more research can get us a 25 more refined number or debate than has been adequately 26 brought before us today. So, I'm -- I guess I'm not 27 against learning more because I always like to learn 28 more, but at the same time, my prediction is if we study 54 1 it a lot more, we'll be back here with the same question 2 of if I'm paying 50, 60 bucks a head, how much of that's 3 for the park and how much for the food? 4 MS. YEE: Other questions? 5 Ms. Mandel? 6 MS. MANDEL: Well, it also appears from the 7 audit discussion that the only reason the DPA only did 8 his -- did a calculation on Autodesk was because that 9 was the only contract that he had in front of him when 10 he needed to get this audit off his desk and processed 11 because of administrative concerns. That's what it 12 says. 13 I mean, that's a little more -- you know, it's 14 my irrelevant "needed to get it off his desk." But it's 15 -- it is that the auditor to prepare the revised audit 16 and, "Administrative concerns that the late date require 17 me to process with these adjustments and allow the 18 taxpayer to go forward on appeal." 19 And he only uses Autodesk because that was the 20 one that they had, because you were fussing -- they were 21 fussing parties were fussing at audit about whether that 22 was where the cost sheet and was it really retail or 23 not. So, that's how come you wind up with only one 24 thing and 45 percent. 25 And the taxpayer's gone back now on the six 26 contracts where apparently there's no dispute about 27 whether these are representative and maybe we don't have 28 all of the background detail on how they got their 55 1 numbers. The Department today, for the first time, is 2 making comments about the numbers. One was they didn't 3 think that the gratuity was in there. The taxpayer says 4 gratuity is in there. I don't know how, you know, 5 without looking at the backup for the one page or -- to 6 see that, but -- I mean, just -- to me, just because 7 what the auditor did at audit -- and in this case when 8 we say "auditor," we're really meaning what he did 9 because the DPA told him to do it this way. 10 And they did it under the constraints that they 11 had at the time, which was they only had the one 12 contract in front of them, they had to get the audit 13 processed. I mean, if they had this information for all 14 of the six contracts, then, presumably, they would have 15 used all of the six contracts because that was the 16 sample that they wanted -- that they had originally 17 picked and agreed to. 18 So, whether what -- whether Appeals said, "We 19 think what came out on audit was reasonable, based on 20 everything," doesn't necessarily mean through the whole 21 process that that's the only possible answer. 22 If -- if a broader look at that same kind of 23 test -- am I missing something? 24 MS. MANDEL: Am I missing something. 25 MR. LEVINE: That's true. 26 More could lead to the same result, could lead 27 to a lower, could lead to a higher. 28 MS. MANDEL: And taxpayer seems to think it 56 1 will lead to -- to validating or coming right around 2 where they had reported. 3 So, they -- they presumably have some 4 confidence. 5 MR. LEVINE: I think they used a different 6 method than the DPA did, though. 7 MS. MANDEL: Well, because -- 8 MR. LEVINE: So, if you were suggesting just 9 that the DPA's method be used with six rather than the 10 one, I'm just suggesting that it could go up or it could 11 go down using that, which is not -- unless I 12 misunderstand the method that Petitioner proposes be 13 used -- 14 MS. MANDEL: Yeah, the -- 15 MR. LEVINE: -- that the taxpayer proposes. 16 MS. MANDEL: -- understanding is the DPA used a 17 menu that wasn't -- wasn't contemporaneous, maybe was 18 different items, I don't know, but wasn't 19 contemporaneous or was less contemporaneous than the 20 menu prices from the other facilities that the taxpayer 21 used. 22 I don't have the impression that there has been 23 an analysis of -- because until today there was -- there 24 was apparently not a dispute about the taxpayer's 25 analysis. 26 And now they're has been some monkey wrench 27 throw in with assertions made about the taxpayer's 28 analysis, it makes you sort of want to understand, like 57 1 the gratuity, how is it in here and that all kind of 2 thing. 3 I don't want to -- I'm not hung up on what the 4 DPA did at 45 percent because it seemed like he had -- 5 it was just because those were the circumstances he was 6 faced with and needed to finish off the audit. 7 MR. HANKS: Correct, correct. 8 That's what we feel as well. You know, 9 actually, in thinking about this case further, I think 10 that there is a potential for an alternative solution 11 and that would be to look at some of the more 12 contemporary agreements that the Petitioner has put 13 together for some other -- some other type contracts 14 where they have segregated these charges. 15 I understand the Petitioner, following this 16 audit, started to segregate their taxable meal and 17 beverage sales and have separate pricing for these 18 various elements. 19 We'd be happy to look at that, those ratios. 20 In fact, we are involved in communications regarding the 21 following audit. So, that is, most definitely, going to 22 be a consideration for us. 23 MR. ANDAL: That would have the same flaw that 24 we believe that you had to this markup percentage, which 25 is the Globe Theater, which is currently used, is a much 26 more substantial service than was provided during the 27 audit period. 28 And, so, using that service to calculate again 58 1 today would have the same fatal error to it that the 2 process that you undertook here, which is it doesn't 3 describe the same service. 4 The Globe Theater service after the audit 5 period is substantially different and substantially 6 better than the service provided during the audit 7 period. 8 So, having a more contemporaneous menu the 9 Globe Theater would have the same problem that you 10 experienced here today, I think. 11 MS. YEE: Okay, Miss Mayhew? 12 MS. MAYHEW: We also have now added Wolfgang 13 Puck to our park. 14 And, so, the menus -- if you looked at the 15 current menus today, it is Wolfgang Puck, celebrity 16 chef, the menus used for Wolfgang Puck catered events 17 mirror his restaurant price. 18 So, thinking back, if you looked to the audit 19 period when, again, we were just developing, we did not 20 have this inside dining Globe Theater to serve these, 21 you know, glamorous events, it was outdoor, 22 cafeteria-style. And that's why we went to comparable 23 restaurants venues that we felt like were more 24 equivalent than either using the Globe Theater menu or a 25 Wolfgang Puck current menu or -- and there was also 26 reference made to the catering done on the lower lot. 27 The lower lot was, again, inside dining -- you 28 know, linen tablecloths, china, glass. They were glitzy 59 1 events put on at a staged indoor dining facility, not 2 what we had during '96 through '99. 3 MS. YEE: Okay. I want to get back to the 4 criticism we heard from the Department with respect to 5 the Petitioner's test. 6 Can you summarize what they are again? Because 7 I'm -- I really want to try -- if we're going to go back 8 and have broader review of contracts, I want to be sure 9 we're in agreement about what it is that we're kind 10 of -- 11 MR. LAMBERT: Disagreeing about? 12 MS. YEE: Right. 13 MR. LAMBERT: Yeah. Well, first we didn't 14 think the menu prices were -- you know, because they 15 took outside restaurants and they weren't comparable, 16 but -- two, well, the bar price sheet that they have, if 17 you take a look at the six contracts -- and I'll just go 18 over them briefly, Oracle '99, they reported $3.25 -- I 19 am sorry, that was a $3.25 per person figure -- 20 MS. MANDEL: $3. 21 MR. LAMBERT: -- and 25 cents. 22 And that's for four hours of -- 23 MS. MAYHEW: That's a cost number. 24 MS. YEE: Let's -- 25 MS. MANDEL: I'm not sure what you're looking 26 at. 27 MR. LAMBERT: That's a cost? 28 No, I think that's the selling price, I 60 1 believe. 2 MS. YEE: Okay, let me do this, run down your 3 list and then I want to kind of hear what the 4 disagreements are. 5 MR. LAMBERT: All right. 6 Because -- for the hosted -- for the hosted bar 7 on each one of these contracts, the minimum was three 8 hours, the maximum was four hours. 9 Four of them four hours bar service, one had 10 three and a half hours, one had three hours. The prices 11 that were reported was 3.25, 0, 4.50, 11.50, 6.50 and $2 12 per person. 13 So -- 14 MR. HANKS: So, these are reported amounts that 15 were reported to the Board for the open bar for premium 16 bar and, in many cases, for four hours. 17 MR. LAMBERT: If you took a look at the sheet 18 that they have, on the bottom they'll have a price for 19 the meal per person and then there'll be a price below 20 that for the beverage. 21 The Petitioner -- if you take a look at the 22 contract -- or the analysis that they did, they don't 23 include the 19 percent gratuity in their analysis. 24 So, in other words, when they take all of those 25 different restaurants and they get the prices, they add 26 the drinks, they don't add the gratuity on to there and 27 they come up with $$30. If you -- $30 and, I believe, 28 73 cents. 61 1 If you add 19 percent gratuity to that, you're 2 coming up over -- I believe it's $36 and something 3 cents. 4 MR. HANKS: Because this is a mandatory 5 gratuity -- 6 MS. YEE: Mandatory, correct. 7 MR. HANKS: -- that's also taxable. 8 MS. YEE: -- should be included, right. 9 Okay. 10 MR. LAMBERT: And then based on here, I just 11 did the analysis on the bottom -- and maybe they can 12 explain to me if I did something wrong. 13 I just took the -- where it says, "audit staff" 14 on their submission, I took the food and beverage, which 15 is 45 percent of the total contract, I came up with that 16 number. And I divided it by the number of guests. And 17 I came up with a per person price that the food and 18 beverage was reported, which is $35.24. 19 On their schedule they show that we say it's 20 $42. So, I don't understand how they came up with the 21 $42. I understand how I came up with the 35. 22 And, so, basically, my argument is we can -- 23 even if you want to use their numbers, add the 19 24 percent gratuity, don't say anything about the bar, that 25 it's okay that it's okay -- their figures still come 26 above what we're -- what we're arriving at. 27 MS. YEE: Okay, let me have you stop there and 28 then let me hear your rebuttal to that. 62 1 MS. MAYHEW: The first item's the menu. We 2 continued to believe that it's not a comparable menu 3 that they are using. What they're using, it is outside 4 of the audit period. It is for a sit down glitzy event 5 and you know our position on that. 6 MR. ANDAL: I think his point was that the -- 7 in the test you are using the third party restaurant 8 menus. And he views that as a less desirable service. 9 But you might explain why we -- 10 MS. MANDEL: He thinks that those menus -- the 11 menus that you used -- the Department thinks the menus 12 that the taxpayer used are not comparable. 13 MR. ANDAL: Right. 14 MS. MAYHEW: Correct. And he -- 15 MS. YEE: Right. 16 MS. MANDEL: And he -- 17 MR. ANDAL: Let me -- 18 MS. MANDEL: -- and the Department referred to 19 them as outside. So -- 20 MR. ANDAL: We believe -- 21 MS. MANDEL: -- that's the -- they don't think 22 you are -- what you used was comparable, just like you 23 don't think what they used was comparable. 24 MR. ANDAL: Right. I think common sense tells 25 you that the third party test menus and the numbers used 26 in it are a higher level service than that was -- than 27 that that was provided in the Park. 28 And I can list those off, if you want. It was 63 1 inside. You had a waiter. You have -- you have normal 2 silverware -- that kind of an experience. 3 Whereas in the Park it was outside, 4 cafeteria-style. You didn't get to choose what you 5 ordered, you know, it was just laying there. It was, I 6 think, an inferior service, not a -- not a better 7 service than the test. 8 MS. MANDEL. Well -- and there are other 9 comparability point -- the Department's other 10 comparability point was they referred to -- the 11 Department referred to these as "outside restaurants" 12 the Department made the reference earlier about if you 13 had to buy foot at the airport that you would pay more 14 than if you were buying at an outside restaurant. 15 And I think -- I thought that the menus that 16 you used from so-called outside people were not -- were 17 they truly outside? Where I'd have to hoof it somewhere 18 else, you know, I'm not stuck on the airport or they 19 were on the CityWalk. 20 You know, I've been there, you know, maybe once 21 or twice, but -- 22 MR. ANDAL: That's correct. 23 MS. MANDEL: -- so, that was -- that was the 24 other side of the Department's comparability pitch was 25 that these were somehow outside. 26 MR. ANDAL: So, just dealing with that -- 27 MS. MANDEL: Right. 28 MR. ANDAL: -- you know, this is -- 64 1 MR. HANKS: That's correct. 2 MS. MANDEL: That was -- 3 MR. LAMBERT: I said outside, yeah. 4 But I think that the -- what they're providing 5 is not a brown bag lunch. I can read through the -- 6 what they're serving at the meals, but -- and that's 7 what I am basically saying, is it doesn't really matter, 8 I did use the term "outside," but I don't think it 9 matters if it's inside or not, they're giving a nice 10 meal that's being served to them. 11 It's not -- it's not just hamburgers and hot 12 dogs, it's -- 13 MS. MANDEL: Okay. So, that's -- then 14 Mr. Andal's comments do address your comparability? 15 MR. ANDAL: And then the other comparability 16 question, you know, which is a fair thing to consider, I 17 think, which is, you know, the exclusive nature of the 18 Park. You are in the Park and that's the food. 19 We've not comparing -- we're not comparing 20 Denny's on I-5 to the Park. These are on CityWalk and 21 they're in a certain place and they have a certain value 22 because they're -- no doubt those restaurants would 23 charge more because of where they're located than if 24 they were located somewhere else in Los Angeles. 25 And, so, we -- we -- you know, we think it's 26 a fair test. And we think in many ways the service is 27 of a higher quality than what was offered in the Park 28 during that time period. 65 1 MS. YEE: Okay. Then let's move on to the bar 2 price. 3 MS. MAYHEW: For the bar price, first of all, 4 I'd be glad to review the work papers because I don't 5 know where those numbers are coming from. 6 The only thing I'll go back to is that we've 7 already agreed and approved -- and the DPA agreed with 8 us -- that a lot of work paper detail is a mixture of 9 cost and retail. So, I'll be happy to prove out the 10 alcohol, but again you're assuming that based on what 11 the State is recommending or the Department is 12 recommending is that every contract, you know, has 13 alcohol and that everyone is drinking vast amounts from 14 the premium bar. Each contract is unique and should 15 stand on its own. 16 Saying back to the food comment, I've never 17 said that we only served hot dogs and hamburgers, I have 18 also mentioned, you know, halibut or steak. Each 19 contract should stand on its own. 20 And as far as the gratuity, again on the 21 Autodesk sheet, labor is identified. I know that it's 22 not identified on the P & L statement that feeds -- you 23 know, has created some of the confusion. Labor was 24 included. 25 And on the independent test that we did for 26 each of these six contracts, that you can see and-you 27 have in your binder, you will also see that we took into 28 account both sales tax on gratuity and the 19 percent 66 1 gratuity from the price to arrive at a per person food 2 price that is comparable to what you would receive in a 3 sit down venue in a restaurant compared to the outdoor 4 venue that was served during this audit period. 5 MS. YEE: So, you're -- okay. 6 So, there's a little bit of disconnect here. 7 So that the gratuity is included in your labor 8 cost on the cost sheet, but -- -- 9 MS. MAYHEW: Gratuity is. 10 MS. YEE: -- it does get picked up when -- 11 MS. MAYHEW: Yes. 12 MS. YEE: -- Mr. Levine? 13 MR. LEVINE: I have something that seems so 14 simple that I'm sure it's wrong, but I would just like 15 to throw it out there. 16 The Department mentioned something about the 17 later periods and that the Petitioner has segregated 18 out. 19 The problem we have here -- and there's going 20 to be no really satisfactory answer -- never any way to 21 know that the Board's got the right answer -- but what 22 we're trying to do is pull out the nontaxable from the 23 taxable or pull out the taxable from the nontaxable. 24 Apparently Petitioner -- taxpayer has started 25 segregating. If the Department agreed to the 26 segregation for the later periods, then that's a method 27 to price the value of the Park. 28 Because even if the Globe is more is expensive, 67 1 so they're charging $40 per person when they would have 2 only charged 30 before, presumably the value of the 3 Park, if it's the same conditions for rides, would be in 4 the same ballpark as it should have been earlier, maybe 5 corrected for inflation. 6 So, if the Department accepted that that was a 7 valid method, we could just go to that segregation for 8 after this period, figure out the value of the Park for 9 a comparable contract and subtract it off. And then 10 we're done. Everything else is taxable. The Park is 11 not taxable. 12 MR. HANKS: We'd be very comfortable with that 13 type of arrangement. 14 MS. YEE: Okay. Thoughts or comments on that 15 suggestion? 16 MR. LEONARD: Is the data available? 17 MR. LEVINE: Apparently it is and I have no 18 idea whether that would eliminate the deficiency or 19 confirm it or what. 20 But it's a method. 21 MS. MAYHEW: I would also like to offer, as we 22 all know, contracts are negotiated items. The easiest 23 portion of a contract to negotiate down are the 24 admission tickets. 25 So, what's being suggested is that we pinpoint 26 how much the admission is valued for each contract, that 27 the residual of that contract value is always going to 28 be taxable food and beverage. 68 1 More -- the negotiating point is how, you know, 2 food and beverage is what you charge food and beverage 3 or what you're going to have to pay food and beverage at 4 a third party source. So, backing into it by 5 subtracting out the event admission is going to -- may 6 be tainted by how much negotiation was done by the 7 customer because the greater discount is always on the 8 admission ticket. 9 MS. YEE: But that hasn't changed from how the 10 Park contracts were negotiated, though, have they? 11 MS. MAYHEW: I would -- 12 MS. YEE: I mean, that's always been an element 13 in terms of how you would determine -- 14 MR. LEVINE: And I think -- 15 MR. HANKS: It's still an issue. 16 MR. LEVINE: -- that's why the Department would 17 accept this theory is you allow the market dynamics to 18 raise or lower if -- if the price of the food and 19 beverage is less flexible and the value of the Park is 20 more flexible, then you can't adjust out the tax of the 21 taxable portion, just as if the food and beverage was 22 the area they could reduce. 23 It's just what the market will bear. If you -- 24 if you suggest -- if you have a lump price of $100 per 25 person and the customer is happy with it and then later 26 you decide to segregate out and you show 60 for food and 27 40 for the Park and the customer says, "I'm not paying 28 60 for food, I didn't realize that," then maybe next 69 1 time you will price it 50-50. 2 But however you price it, that's what the 3 parties have agreed to. And I think that's consistent 4 with what you are saying. 5 If the Park is the flexible area, then it's the 6 flexible area. If it's the food, then that's -- that's 7 the area that there's give. 8 MS. YEE: So, it seems to me the only challenge 9 then to your suggestion, Mr. Levine, is finding 10 comparable contracts from this current -- current 11 comparable contracts -- 12 MR. LEVINE: Correct. 13 MS. YEE: -- to deal with the variability of, 14 you know, kind of how -- 15 MR. LEVINE: Correct. 16 MS. MAYHEW: Doesn't the residual in that case 17 that goes to the food take into account a more expensive 18 menu a glitzier event for the menu? 19 Because the residual's always going to be the 20 food. And that food menu is higher than what we were 21 serving in '96 through '99, which is why we spent the 22 time to go through each menu price it individually and 23 compare to sit down restaurants at CityWalk, which was a 24 local venue. 25 MS. YEE: But that's speaks to kind of the 26 variability among contracts and not kind of the 27 allocation, ultimately. 28 So -- 70 1 MR. LEVINE: I would expect that if the Globe 2 is like $20 more per person in value that the price per 3 person now is $20 more than it was before. 4 MS. YEE: Sure. 5 MR. LEVINE: And the value of the Park, not 6 counting inflation, is presumably about the same, unless 7 the Park is more valuable because they have more rides 8 and et cetera. 9 MR. ANDAL: I think what's being proposed is an 10 entirely new audit, which, of course, the Board staff is 11 going to have the opportunity to do in the audit period 12 at present. 13 But I think this -- this is why some of these 14 appeals take so long. So much of what we've heard today 15 from staff was never offered before today. And I think, 16 you know, there has been a lot of time and effort made 17 by the taxpayer to justify their reported sales, an 18 extraordinary amount of effort. 19 There's been effort to prepare for this 20 hearing. There has been many other hearings and the 21 target keeps moving. And I think that's one of the -- 22 you know, one of the reasons these take so long is 23 because, you know, the -- we don't -- we didn't find out 24 today -- and we had some good answers. 25 If the auditor or the District Principal 26 Auditor or even the Appeals Hearing Officer had asked us 27 some of these questions today, we obviously had answers 28 to them. But at this late date, starting all over again 71 1 with an entirely new audit is basically what's being 2 suggested. They have different characteristics. We 3 would, no doubt, get into other arguments over those 4 contracts and those percentages. 5 And it just seems like the taxpayer has met 6 their burden, not only of third party tests, but also of 7 showing exactly why the staff's audit technique is 8 flawed. 9 And the staff's response is okay, well, let's 10 try again with something else. 11 MS. YEE: Well, I think we've made a little bit 12 more progress since we started this and, that is, I 13 think we have a better understanding certainly about the 14 variability that could occur from contract to contract. 15 I think we have a better sense of how you cost 16 out these events. I think, but for the fact that we 17 don't have contemporaneous information, makes it very, 18 very difficult. And we have -- I mean, we're in this 19 unenviable position of where we have to determine what's 20 fair and reasonable and there's probably not a right 21 answer. 22 But I think certainly Mr. Levine's suggestion, 23 at least, I mean, for me, it's suggests that what we're 24 trying arrive at is a fair and reasonable allocation 25 between taxable and nontaxable. And I think we can do 26 that in a way where we know what those allocations are. 27 And certainly within your current contracts if 28 we can find comparable contracts to those that were in 72 1 place during the audit period to at least recognize the 2 variability among contracts and then begin to see 3 whether we can, you know, get to, you know, kind of the 4 fair allocation between taxable and nontaxable. 5 It's -- it's -- this is a -- this is a business 6 model that is difficult and certainly difficult when you 7 don't have contemporaneous information. 8 So, I am open to the suggestion but I am -- I'd 9 like to hear from the other Members on -- about this 10 suggestion. 11 DR. CHU: Well, I would be interested in 12 pursuing it because it certainly is the cleanest way to 13 determine this, considering all of the difficulties that 14 have been raised. 15 Sounds like it's longer than a 30-30-30, 16 though. 17 MR. LEVINE: Could be. 18 MS. YEE: Well -- 19 MS. STEEL: But it took -- 20 MS. YEE: We'll see. 21 Mr. Leonard? 22 MR. LEONARD: I think it's an audit of a 12 23 year period. 24 MS. STEEL: Yeah, 1996 to 2002, we going to 25 give them another 30-30-30. 26 Do you think you can bring more documents? 27 And then you going to, you know, both going to 28 meet in some place? 73 1 I mean, it just took forever. And at the same 2 time right now that, you know, they are -- I agree with 3 Mr. Leonard that, you know, I just took my staff to 4 Catalina for parasailing and we really never thinking 5 about food itself but they're more excited by 6 parasailing So, you know, they got sandwiches and they 7 were very happy about it. 8 I think it's exactly same thing in universal 9 school kids go, they really don't care much about the 10 food here. 11 So, write down that, the first that, you know, 12 that Mr. Lambert said that it was conservative approach, 13 but I was looking at the number for $28 to $38 to $37 14 for four hours period for drinking, that was not 15 conservative approach. Because I was looking at the 16 price tag here for wine and beer or even premium -- some 17 drinks that I don't drink, those hard liquor, so, I 18 don't know what kind of names they are stating here -- 19 there was much higher than I thought during the four 20 years -- the four hours period that, you know, people 21 drink. 22 And at the same time food, same thing too, 23 there you were comparing with the food that, you know, 24 you are -- those restaurants on the CityWalk that, you 25 know, that's mostly expensive restaurants that you are 26 comparing with that. 27 And we were not counting those box lunches 28 that, you know, they boxed dinners that, you know, they 74 1 were doing on 1996, that's before Globe they were 2 serving with the silverwares and crystal glasses. 3 So, write down that even we going to give them 4 more time to bring more paper works, I don't think it's 5 going to -- you going to find much more informations 6 than what you have right now. 7 So, what I want to suggest is, you know, they 8 can just talk out because they -- seems like I heard so 9 many new approach from the Department too, so, we have 10 two more cases. 11 They can go out and talk out and then come back 12 and then, you know, we going to make our decision this 13 afternoon -- I mean this morning after two more cases 14 that, you know, we're hearing. 15 MS. YEE: Are you suggesting that the parties 16 confer and you're looking for the Department essentially 17 to get a better grasp of what the -- 18 MS. STEEL: Come down with a reasonable 19 presentation because right now 45 percent it was totally 20 not acceptable because, you know, you -- just looking at 21 one figure and then, you know, just came out with it. 22 So, if we can do that, I think it's going to be 23 really helpful for us. 24 MS. YEE: Well, I'm always up for having 25 parties confer, I just don't know that there's a basis 26 for arriving at something -- 27 MS. MANDEL: Well -- 28 MS. YEE: -- without looking at more 75 1 information. 2 Ms. Mandel? 3 MS. MANDEL: Well, of the concerns that the 4 Department mentioned, one seemed like a big -- that sort 5 of perked up my ears was the gratuity. 6 And I think that the taxpayer may have other 7 sheets, that if they showed them to the Department, the 8 Department might see that they included the gratuity. 9 I haven' had a chance to study the sheets, but, 10 you know, they might have that backup. 11 I -- the Department may also want to understand 12 how the -- how this Exhibit B from this morning -- 13 because I did the same math, but, you know, it's been a 14 long time since I took math. 15 I did the same math Mr. Lambert did and if I 16 entered everything correctly on my calculator, I got the 17 same answer he did. 18 But then I did each line separately and I got 19 the same answer that's on the sheet. And if I averaged 20 the three -- the six figures, I got the same answer 21 that's on the sheet. 22 So, there is something here that, you know, 23 either our math is -- I don't understand it, but it's 24 their sheet so they ought to be able to explain to 25 you -- 26 MR. LAMBERT: They might have taken -- 27 MS. MANDEL. -- how they did it. 28 MR. LAMBERT: And I don't know exactly. 76 1 MS. MANDEL: Yeah, yeah, they might have -- 2 MR. LAMBERT: I'm thinking they might have 3 taken averages and then divided it by six. 4 MS. MANDEL: Yeah, well -- yeah, because that's 5 what worked out on that far column. 6 MR. LAMBERT: Instead of taking a weighted 7 average they took the averages and divided it by six. 8 MS. MANDEL: Right. That's how you got 9 42.53 -- at least in my math on my computer. 10 But the gratuity seemed like a -- like a sort 11 of big issue and I didn't understand really totally 12 about the -- the dispute about the bar numbers. 13 But -- it just seemed that if the -- if the -- 14 if the menus are -- if you can resolve the dispute about 15 the comparabilty of the menus, because it was my 16 understanding that the taxpayer looked to those menus to 17 select food items that were what was provided under the 18 contracts. So that they were trying to match, measure 19 for measure, oh -- because you said the Old Globe 20 Theater, measure for measure the food that was served 21 under the contracts with menu items from these 22 restaurants that were the same type of food item and 23 then how they did that. 24 I mean, it's very hard for me because it 25 sounded reasonable to look at the six contracts because 26 that was doing what the DPA tried to do, but doing it 27 more precisely with -- with an agreed sample that the 28 Department had agreed to. 77 1 And for the Department to walk in and have 2 particular criticisms when you guys haven't joined on 3 the particular criticisms and maybe the Department came 4 up with those criticisms because they were coming to 5 hearing and, you know, you can come up with criticisms 6 without benefit of discussion with the taxpayer. 7 So, maybe they need to see whether they really 8 have -- whether those criticisms really were just for 9 now or whatever. 10 MS. YEE: Well, let me suggest this, and 11 maybe -- Mr. Tucker, I'm looking to you because I 12 believe Mr. Lambert has another case coming up. 13 MR. LAMBERT: No, I do not. 14 MS. YEE: Are you done? 15 Okay. Why don't we have the parties go and 16 confer. Let's see if we can get to some better 17 understanding about how the gratuity was treated. Let's 18 look at this issue about the restaurant comparability, 19 just so there's a common understanding about what 20 exactly was being pursued as these restaurants were 21 selected by the taxpayer for this test. 22 And I also then want you to also explore the 23 question if we were follow Mr. Levine's suggestion for 24 the Petitioner to -- let's say we wanted to find six 25 current contracts that were comparable to the six that 26 were selected as -- or that remain as a part of the 27 sample, is that doable? 28 And if we were just to limit it to the six 78 1 and -- but I would like to hear on both of those options 2 back at the end of the day. 3 MR. ANDAL: There's three issues there? 4 MS. YEE: Yes. 5 Okay, all right, why don't we put this matter 6 over? 7 And we'll come back to this at the end of the 8 calendar, which won't be -- 9 MR. ANDAL: We'll find a small, windowless 10 room. 11 MS. YEE: Okay, all right. 12 MS. MAYHEW: Thank you. 13 MS. YEE: And the calendar's not very long 14 remaining. 15 Thank you. 16 (Whereupon other proceedings were had.) 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 79 1 MS. YEE: Okay. Let me, at this time, bring 2 back the parties on item C5, Universal City Studios. 3 David? 4 MR. LEVINE: Got a settlement. 5 MR. ANDAL: I wish. 6 MR. LEVINE: Well, that didn't work. 7 MR. ANDAL: You all look very hungry to me. 8 MS. YEE: Okay. Department, you want to give 9 us an update on your discussions? 10 MR. HANKS: Yes. Ms. Yee -- 11 MR. LEONARD: It's those sack lunches you guys 12 have been talking about. 13 MR. HANKS: -- Ms. Yee, we did look at the 14 taxpayer's submission. We did propose the alternative 15 audit methodology that was recommended by Mr. Levine. 16 Petitioner doesn't believe that that type of 17 analysis would be appropriate for this audit period. 18 We continue to believe that would be a good 19 methodology. At the same time, however, we believe, 20 after looking at the Petitioner's submission from today, 21 that it's even more conclusive and, in our minds, that 22 this is supportive of the audit understatement that's 23 been calculated. 24 I think if one were to look at the middle 25 columns of the numbers Petitioner has shown in their 26 schedule, we know definitively that these amounts do not 27 include the mandatory gratuity charge. 28 If that mandatory gratuity charge were added to 80 1 the average selling price of these meals and beverages, 2 we calculated a $36, approximately, price for meals and 3 beverages for these six contracts. 4 MR. ANDAL: Did you say we agreed on that? 5 MR. HANKS: No, no, I'm saying -- 6 MR. ANDAL: We didn't -- 7 MS. YEE: No, no. 8 He's just -- he's stated his understanding of 9 what these numbers represent. 10 MR. ANDAL: Okay. 11 MR. HANKS: But inclusive -- if we were to 12 include the gratuity in this average selling price for 13 food and beverages, we calculate a per ticket taxable 14 price of $36.71. 15 Now, that -- that compares then to the average 16 price that we compute from our audit of $35.24. 17 The schedules in front of us would actually 18 increase the audit assessment. And we've looked at the 19 taxpayer's breakdown for the separate charges for the 20 meal items and we do not see any accounting for the 21 gratuity charge. 22 So, if one were to only look at the gratuity 23 charge with respect to these contracts, we believe the 24 Petitioner's submission today supports our audit 25 findings. 26 MS. YEE: Okay. Mr. -- 27 MR. LAMBERT: And we do have the paperwork that 28 supports what we said. 81 1 So, if you're -- and this came from the 2 Petitioner. 3 MR. ANDAL: And we disagree with what it says. 4 MS. YEE: Okay. 5 MR. LAMBERT: But I can -- that's true. 6 MS. MAYHEW: We disagree with the 7 interpretation. We don't disagree with what it says. 8 MR. ANDAL: That's right. 9 MS. MAYHEW: We disagree with the 10 interpretation. 11 MS. YEE: Okay. 12 MR. ANDAL: So, I think the short answer is, in 13 spite of your generosity in giving us the time to do 14 this, it's leading to the same place that led to today's 15 hearing, which is -- you know, imperfect information is 16 being interpreted in different ways. 17 I think if we went past -- if we took your 18 suggestion we would -- it's basically going to be a new 19 audit. 20 There would be arguments over the sample size, 21 the types of contracts. And it would lead us to exactly 22 the same place we are here today -- 23 MS. YEE: Can you -- 24 MR. ANDAL: -- with no real benefit. 25 Now, as I was listening to the Board Members 26 carefully before we left and, you know, there -- there 27 are reasonable ranges of value. 28 There is no doubt markup audits are an art, not 82 1 a science. And there are reasonable ranges of value on 2 these things. 3 And, you know, there is no -- there is no 4 perfection to our number. And -- but we believe the -- 5 the number is here unreasonably high based upon all 6 kinds of the strategic -- 7 MS. YEE: I'm going to have you hone in on the 8 gratuity issue -- 9 MS. MANDEL: Yes. 10 MS. YEE: -- on the treatment of the gratuity. 11 MR. VANDE WETERING: If you look at this bigger 12 schedule -- 13 MS. YEE: Yes. 14 MR. VANDE WETERING: -- we do agree that the 15 bottom includes gratuity, but the top one, the important 16 comparison between fair retail and what the taxpayer 17 recorded are both without gratuity. 18 They reported a higher amount than what's 19 reflected here. What's taken out before it's shown on 20 the schedule -- I'm putting it on the wrong side. 21 What's taken out here is gratuity, that 22 19 percent, when 19 percent wasn't even mandatory at 23 that time, and also the sales tax. 24 So, we're -- the top two are ex tax. The 25 bottom -- 26 MS. MAYHEW: And ex gratuity. 27 MR. VANDE WETERING: -- and ex gratuity and the 28 bottom is -- includes gratuity. 83 1 MR. ANDAL: Yeah. And this is an important 2 point. I don't think it was clear before. 3 The 19 percent gratuity number comes from the 4 same Globe Theater menu that we disparage for other 5 reasons. And if it was -- 6 MS. YEE: Well, but -- 7 MS. MANDEL: I was so hooked on this gratuity 8 thing. 9 So, the 19 percent came from the Globe Theater? 10 MR. VANDE WETERING: Yes. 11 MS. MANDEL: These contracts -- did these 12 contracts have -- I mean, their point is that when you 13 have events, and events generally -- that there's 14 mandatory gratuity. Because we know that you have more 15 than five or eight people sitting at these things. 16 And earlier you said gratuity was built in your 17 labor costs on your little cost sheets. And -- I mean, 18 it would seem that under the way that these events 19 happened that some part -- I mean, I haven't heard an 20 argument that some part of the taxable percentage -- 21 that gratuity should not be included at some level. 22 MS. MAYHEW: We agree. We agree that gratuity 23 should be included and that it's taxable. 24 And we agree that it's embedded in the work 25 sheets that are confusing, which is why we -- 26 MS. MANDEL: Okay, but -- but you presented 27 this -- this three segmented thing to show that your 28 original reporting was correct. 84 1 And you're now saying the top segment, which is 2 your original reporting -- 3 MR. ANDAL: The main -- the main purpose of 4 this chart was to show how the -- how the contracts 5 differ individually and to show that the 45 percent -- 6 the 45 percent number is ran cross evenly in spite of 7 the vast differences in the individual. 8 MS. MANDEL: What I think -- 9 MR. VANDE WETERING: Ms. Mandel, what was 10 actually reported, for example, on the Autodesk 11 contract, I believe, is 27.50. 12 If you take out the gratuity and the sales tax, 13 it brings it down to this. 14 We wanted to show an ex tax figure because -- 15 for comparison purposes we use that for -- 16 MS. MANDEL: Okay. So, you're saying the top 17 two -- so that if you were going to make the audit 18 staff's segment, for comparison purposes, if audit staff 19 used 19 percent, somehow these food items -- the 42.53, 20 which I understand now is not a weighted average -- but 21 the number for each one would have to come down by 22 19 percent to equate to the numbers that are shown 23 above? 24 MS. MAYHEW: Yes. 25 MS. MANDEL: I mean -- 26 MR. VANDE WETERING: If you want to compare -- 27 MS. MANDEL: The gratuity concerns me. 28 I mean, I kind of understand the methodology, 85 1 but it doesn't seem -- 2 MR. VANDE WETERING: We wanted to apologize for 3 making one line tax included, we wanted to show that the 4 45 percent was applied to all our contracts. 5 And that 45 percent is -- 6 MR. ANDAL: That's why the chart was generated. 7 MR. VANDE WETERING: Yeah, it was generated 8 that way. 9 But what we did is out of the retail prices for 10 reported, we took -- we took tax and gratuity out of the 11 retail -- fair retail values. 12 We took tax and gratuity out. So, we're not -- 13 MS. MANDEL: So, under the food and beverage 14 column, there's -- nowhere on the first two columns is 15 there a gratuity number? 16 MR. VANDE WETERING: No, there's -- but we know 17 what that number is. 18 MS. YEE: Okay. 19 MR. ANDAL: Correct. 20 MS. YEE: Okay. 21 MR. VANDE WETERING: It's in each one of the 22 tests. 23 MS. MANDEL: Can we -- 24 MS. YEE: Can we get an apples to apples? 25 MS. MANDEL: Yeah, because it's making it hard. 26 MR. LAMBERT: You can. 27 MS. MANDEL: Maybe distracting. 28 I mean, I guess what the taxpayer is saying is, 86 1 Marcy, that's a distraction and don't focus on it. 2 But it's making it distracting. 3 MR. LAMBERT: I think -- 4 MS. YEE: Well, it's a point of focus to the 5 extent that if what we are looking at here -- I mean, 6 still for the purposes of how you are using this chart, 7 we're not looking at apples to apples because the inputs 8 are all different. And the top two don't have -- 9 include tax, don't include gratuity. 10 We're trying to get to a fair and reasonable 11 allocation between taxable and nontaxable. 12 Taxable has to include the mandatory gratuity. 13 So, we've got to see that number in terms of adding that 14 back in. 15 MR. ANDAL: Again, though, the 19 percent 16 number that -- 17 MS. YEE: Well, whatever the gratuity 18 percentage was. 19 MR. ANDAL: Fair enough. 20 MS. YEE: Okay. 21 MR. VANDE WETERING: We used 19 in the test and 22 in each one of the tests you can add the 19 percent in 23 there and come up with the higher numbers 24 (indicating). 25 So -- 26 MS. MANDEL: And what the Department is saying 27 is if you put 19 percent in your test of fair retail 28 value, you're going to come up with a dollar figure per 87 1 person for food which is basically equivalent -- 2 actually, you know, a few pennies more, a dollar and a 3 half more, so, therefore, the audit number's good. 4 That's why the gratuity, which someone might 5 say is distracting, sounds not so distracting. 6 MR. VANDE WETERING: Well, if you add 7 19 percent to the taxpayer and to the test of fair 8 retail value, you're still going to come up with a very, 9 very small difference. 10 So, it's really comparing what we reported, 11 which is 19 percent higher in each of these, or -- and 12 the test of fair value, if you add 19 percent to that, 13 you're still in the same place. 14 MS. MANDEL: Maybe I just needed it written 15 down and explained why it matters. 16 MS. YEE: I think what might be helpful is 17 if -- yeah, I need to see the visual to use what you've 18 provided here. 19 And let's just kind have each of these three 20 scenarios -- taxpayer, fair market value test and the 21 audit staff -- just have the same inputs. 22 MS. MAYHEW: Okay. 23 MS. YEE: Okay. 24 MS. MAYHEW: Okay. 25 MS. YEE: That would be very helpful. 26 But I think that -- we're not going to be able 27 to get to that today. You probably need to go and look 28 at what those are. 88 1 Or do you have that? 2 MS. MAYHEW: We have it. 3 MR. HANKS: We calculated those amounts. 4 MS. MAYHEW: It would take us a few minutes. 5 MS. YEE: Do you have it? 6 MS. MAYHEW: Yes. 7 MR. HANKS: We did. 8 MS. YEE: Okay. 9 MR. HANKS: So, we calculated a $36.71 charge 10 that's inclusive of the 19 percent gratuity, that even 11 assuming that the Petitioner's level of gratuity charge 12 was less than the 19 percent, which appears happened on 13 certain occasions, even assuming if it was as low as 14 15 percent, we'd calculate a per ticket price of $35.53, 15 which is still higher than the average ticket price 16 we've scheduled in our audit. 17 So, we believe regardless of whether you use a 18 19 percent gratuity factor or a 15 percent gratuity 19 factor, still, in both cases, you're going to validate 20 our audit results. 21 MR. ANDAL: So, what I just heard, which is 22 hard to get my hands around, is an actual price? 23 MR. HANKS: Using the prices yes, that you had 24 scheduled -- 25 MR. ANDAL: Okay, I thought -- 26 MR. HANKS: -- just increasing for the -- for a 27 mandatory gratuity charge. 28 MR. ANDAL: I thought what we were asked to 89 1 do -- what we were being asked to do was to stick to 2 this chart and figure out the math on the percentages. 3 MR. LAMBERT: That's what we did. 4 MS. YEE: That's what they did. 5 MR. LAMBERT: That's what we did. 6 MS. YEE: That's what it sounds like. 7 MR. LAMBERT: What they used -- when they came 8 up with all of the different restaurants, they came up 9 with a -- with a value of $30.73. That's what they came 10 up with. 11 And basically it was $40 and they took out 12 25 percent for inflation and it comes down to $30.73. 13 We can definitively tell that that price does 14 not include gratuity. If you add 15 percent gratuity, 15 it equals the price that's in the audit, which is $35 16 for these six contracts. 17 So -- 18 MR. HANKS: Which is the equivalent of the 19 45 percent taxable sales ratio, those are equivalent. 20 MR. ANDAL: Do you want to -- 21 MR. VANDE WETERING: Well, I mean I agree with 22 you. We can add. We can take 19 percent out of the 23 bottom or we can add 19 percent to the top two. You are 24 still going to have the similar comparison. 25 You're still going to get to the point where 26 what they reported for -- for, you know, including 27 gratuity -- because these are not reported amounts -- 28 and if you add it to what -- add the gratuity to the 90 1 fair retail value test, they're still going to be 2 comparable, they're going to be the same. 3 So, our point has always been that we reported 4 an amount that -- that's fairly close to fair retail 5 value. 6 So, we can put the mandatory gratuity back in 7 there. And we can put it in at 19 percent or 8 15 percent, it really doesn't matter that much. 9 But we're still going to come to this small 10 difference between what we tested and what we reported. 11 MR. LAMBERT: Which is the 4.5 million, yeah. 12 MS. MAYHEW: Well, but the -- but, again, 13 assuming we make it apples to apples to the far right, 14 our test was based on menus that we still think -- 15 MS. YEE: Right. 16 MS. MAYHEW: -- are more comparable and -- 17 MS. YEE: I don't want to reargue that. 18 MS. MAYHEW: I know, I understand. 19 And we still -- 20 MS. YEE: Okay. I understand. 21 MS. MAYHEW: -- and we still disagree on that. 22 MS. YEE: I hear you. 23 No, I understand there's still differences. 24 Other observations, Members? 25 MS. STEEL: I think there's a simple way to 26 calculate here. 27 If we going to stick with the Petitioner here 28 for test for fair retail value, came out with 91 1 34 percent. We put 19 percent tips added on the top of 2 it, that's what Department's saying, right? 3 MR. HANKS: What the Department is stating is 4 that the middle fair retail value that the Petitioner's 5 calculated on this sheet -- 6 MS. STEEL: Right. 7 MR. HANKS: -- is not inclusive of the 8 mandatory -- 9 MS. STEEL: So, we add -- 10 MR. HANKS: -- gratuity. So, if we add 11 that gratuity, either 15 percent or 19 percent, to these 12 figures, what you're going to find is that that is 13 equivalent to what the auditors have scheduled in their 14 audit. 15 MS. STEEL: But what I came up with 16 39.1 percent instead of 45 percent, so, it's going to be 17 much less than that. 18 Because you have to -- 19 MR. HANKS: These are the dollars (indicating). 20 These are the dollars per -- per ticket and so -- 21 MS. STEEL: I understand that. 22 But you can look at those percentage of the 23 average there (indicating). 24 MR. HANKS: But this is -- what this is saying 25 is that that's an equivalent to saying that 45 percent 26 of the taxpayer's total receipts were subject to tax. 27 That's equivalent to saying that the average 28 food and beverage ticket price was $36.71. 92 1 Those two statements are equivalent. 2 MS. STEEL: That doesn't come out that way, 3 though. 4 I'll just let it go. 5 MS. YEE: Okay. With that, Mr. Levine, any 6 observations? 7 MR. LEVINE: No. 8 MS. YEE: Okay, all right. 9 Desire of the Members? Is there a motion? 10 MS. STEEL: I grant -- grant the petition 11 because still 45 percent, it's not fair. 12 So, just grant the petition. 13 MR. LEONARD: Second. 14 MS. YEE: Okay, motion by Ms. Steel to grant 15 the petition. Second by Mr. Leonard. 16 Discussion? 17 Hearing none, please call the roll. 18 MS. OLSON: Madam Chair? 19 MS. YEE: No. 20 MS. OLSON: Mr. Leonard? 21 MR. LEONARD: Aye. 22 MS. OLSON: Ms. Steel? 23 MS. STEEL: Aye. 24 MS. OLSON: Dr. Chu? 25 DR. CHU: No. 26 MS. OLSON: Ms. Mandel? 27 MS. MANDEL: No. I'm still confused about the 28 gratuity. 93 1 MS. OLSON: Motion fails. 2 MS. MANDEL: Is there any way to get a sense of 3 what the gratuities would have been for these contracts? 4 Is there any way to figure out? 5 Because I can see the math that if it's 6 19 percent, you know, it's at the Department. 7 Taxpayer's saying they reported including 8 something for gratuity somehow. And the taxpayer's test 9 of the six contracts was supposed to validate. And I 10 understand that no matter what percentage you add to the 11 first two sheets, it'll show the same ratio between the 12 first two sheets because you're just adding the same 13 percentage to each column. So, why would the difference 14 between Row 1 and Row 2, you know, be any different? 15 I understand the Department point that if it's 16 19 percent or even 15 percent, it kicks the right hand 17 food per person numbers above where the Department is, 18 which validates the Department. 19 But the focus on the 19 percent or 15 percent 20 may or may not be relevant to the audit period. So -- 21 MR. ANDAL: And the type of food service. 22 MS. MANDEL: -- so, I don't know if I have a 23 question for you, Mr. Levine. 24 MR. LEVINE: I'm more confused than you are 25 because I don't understand this add it to both columns. 26 My understanding was that they did a test of 27 fair retail value and they come up, for example, with 28 30.73, that wouldn't include a tip. 94 1 The -- 2 MS. MANDEL: Right. 3 MR. LEVINE: So, you have to add the tip -- 4 MS. MANDEL: So, you'd have to add -- 5 MR. LEVINE: -- you don't add it up to the 6 column in 1 because that's -- again if I understand 7 correctly -- how they actually reported. 8 MS. MANDEL: -- but what Mr. Vande Wetering 9 said was that for purposes of making this chart, they 10 backed out a tip. I don't know at what level. 11 MS. YEE: Right. 12 MS. MANDEL: That's why I'm focusing on the 13 tip. If they've backed it out at the same level that it 14 was supposedly in for the reporting, I don't know how 15 that was done. 16 I mean, I -- 17 MR. LEVINE: I'm sorry, that makes no sense to 18 me at all. 19 MS. MANDEL: Well, that's what he's -- 20 MR. LEVINE: Why would you back the tip out of 21 this (indicating) and then it's not in -- if these two 22 numbers do not equal the price per person (indicating), 23 then this chart is useless, to be blunt. 24 It's useless if it's -- 25 MS. MANDEL: Well, it -- 26 MR. VANDE WETERING: We didn't want to schedule 27 comparing retail with tip and reported without tip. 28 So, we took -- we took the tip out of the 95 1 retail and also out of reported to make them comparable, 2 to show that -- 3 MS. MANDEL: Okay, so -- but the reported, 4 that's -- I mean, the reported -- whatever -- whoever 5 did the reporting for fair -- I am sorry, I am getting, 6 as we discussed, hungry and that means I'm cranky -- 7 plus I'm confused. 8 The reported amount, fair retail value, 9 somebody tried to figure that out and put it on the 10 return. That had to include something for gratuity? 11 MR. VANDE WETERING: Correct. 12 MS. MANDEL: Did include something for 13 gratuity? 14 MR. VANDE WETERING: Correct. 15 MS. MANDEL: That isn't -- and what you said, 16 Mr. Vande Wetering, is that that number, as to any 17 particular one of these six contracts on a per person 18 basis or in the food and beverage column -- whatever was 19 in there for gratuity is not in the numbers on this 20 chart? 21 MR. VANDE WETERING: That's correct. 22 MS. MANDEL: Okay. 23 MR. VANDE WETERING: We backed out 19 percent 24 of the reported amount for gratuity. 25 MS. MANDEL: And why did you back out 26 19 percent? 27 MR. VANDE WETERING: Because when we're talking 28 about fair retail, it did not have gratuity in it. So, 96 1 we wanted to -- 2 MS. MANDEL: No, but why did you pick 3 19 percent? 4 MR. VANDE WETERING: Because that was used by 5 the audit staff. 6 MS. MANDEL: Just because that's what was used 7 by the audit staff, not because that was what was 8 used -- 9 MR. VANDE WETERING: Correct. 10 MS. MANDEL: -- by the person who did the 11 original reporting? 12 MR. ANDAL: Right. 13 MR. VANDE WETERING: Correct. 14 MS. MANDEL: So, we don't even know, then -- 15 MR. VANDE WETERING: It could have been 15, it 16 could have been 10 percent tip. 17 MR. LEONARD: Or if it was a no service deal, 18 it could have been none? 19 MR. VANDE WETERING: Could have been none. 20 MS. YEE: Could it really have been just a -- 21 MS. MANDEL: Well, then -- then -- 22 MR. LEVINE: If it was nothing -- 23 MR. LAMBERT: Can I add -- could I add 24 something maybe that would help? It probably won't, but 25 I will try anyway. 26 If you take a look at the figure at the 27 taxpayer column, if that -- I don't know if you've done 28 this yet, but if you could -- 97 1 MS. MANDEL: Yeah, I did some of it. 2 MR. LAMBERT: -- if you come out with the per 3 person, you come out to $24.38. 4 Did you do that? 5 MS. MANDEL: I did the bottom by 19 percent. 6 Anyway, just tell me what you're -- 7 MR. LAMBERT: Yeah, if you -- okay. 8 If you take -- if you add up all of the food 9 and beverages under the taxpayer -- 10 MS. MANDEL: I didn't do that one. 11 MR. LAMBERT: -- okay, if you do that, what 12 you're going to come up with is $24.38. 13 MS. MANDEL: That's like your 35.24 down below, 14 right? 15 MR. LAMBERT: So, if you're saying -- if the 16 argument is is that the first two columns should be 17 similar, they were calculated similar, then you have to 18 compare the 24.38 that's on the first column, or the 19 first set of numbers, with the $30.90. And, in effect, 20 what you're saying is that -- is that there's 5 -- 21 MS. MANDEL: And the 39 -- 22 MR. LAMBERT: -- there's $5.50 that -- 23 difference per person. 24 MS. MANDEL: Where is the $30? Tell me what 25 that was. 26 MR. LAMBERT: Okay. If you add up the food and 27 beverages for the second column -- 28 MS. MANDEL: The second -- the test fair retail 98 1 value. 2 MS. YEE: Yeah. 3 MR. LAMBERT: -- you'll come to 446,000. 4 MS. MANDEL: Divide that by the number of 5 people? 6 MR. LAMBERT: Yes. 7 MR. HANKS: Correct. 8 MR. LAMBERT: And then you'll come up with 9 $30.90. 10 And, so, you have is you have a $5 difference. 11 And what's -- what's interesting about that is when you 12 calculate a percentage of error, based on this it comes 13 up to around 44 -- 44 and a half percent. And in the 14 audit was used 41 percent, which was even a lower 15 figure. 16 So, in effect, what we're saying is that the 17 taxpayer's information shows that what they reported was 18 off, between two, by $5 and something cents, and that 19 taking that into account with what the staff did, it 20 verifies our numbers. 21 MS. YEE: Okay, let me -- let me propose 22 something. 23 I think I would like to propose a 30-30-30 24 because this is -- I'm not going to do this on the fly. 25 I would like to see some comparable numbers 26 that are inclusive of gratuity from your perspective, 27 from the Department's perspective. 28 We understand where the underlying 99 1 disagreements are relative to the food prices and, 2 potentially, the bar prices -- although less so there. 3 And the -- let me ask you, the range of 4 gratuity that could have been charged to a customer was 5 what? 6 MS. MAYHEW: I would say the max was 7 19 percent, I don't -- 8 MS. YEE: Okay, you said -- at one point 9 somebody mentioned 10 percent, which I find hard to 10 believe. 11 MS. MAYHEW: 10 percent? I haven't seen that. 12 MR. VANDE WETERING: We just threw that out, 13 but it wasn't the percentage -- 14 MS. YEE: I find that very hard to believe on a 15 mandatory gratuity. 16 MS. MAYHEW: Bill's been involved with 17 Universal longer than I have. 18 MR. VANDE WETERING: I reviewed every one of 19 the -- 20 MS. MAYHEW: But I haven't seen that. 21 MR. VANDE WETERING: -- I reviewed every one of 22 the contracts and none of them had a mandatory 23 percentage. It said, "plus gratuity." 24 So, if -- if standard gratuity is 15 percent, 25 so be it. 26 It could have been 15 percent. 27 MS. YEE: Okay. 28 MR. VANDE WETERING: But certainly it wasn't a 100 1 stated percentage in the contract. 2 MS. YEE: Okay. Then let's run all of these 3 with both a 15 and a 19 percent. 4 We understand the underlying disagreements with 5 respect to the food price. 6 MR. ANDAL: The gratuity could be zero, 7 correct? 8 MS. MANDEL: If you have a way of knowing what 9 the gratuity -- 10 MR. ANDAL: Not on all contracts, but it could 11 be on some. 12 MS. MANDEL: -- if these are supposedly 13 representative contracts -- 14 MS. YEE: Right. 15 MS. MANDEL: -- if you have some way of knowing 16 about gratuity -- 17 MR. ANDAL: Sure. 18 MS. MANDEL: -- or how gratuity was done -- 19 MS. MAYHEW: Right. Understood. Understood. 20 MR. ANDAL: In other words -- 21 MS. MAYHEW: Understood. 22 MR. ANDAL: -- in other words, a straight 15 or 23 19 percent, similar issues? 24 MS. MANDEL: Yeah, but if you have -- if you 25 have factual information that shows us what it -- 26 MR. ANDAL: Sure. 27 MS. MANDEL: -- it should have been -- 28 MS. YEE: What it really is, right. 101 1 MR. LAMBERT: Yes. 2 MS. MAYHEW: Understood. 3 MR. ANDAL: We'd like to do that. 4 MS. YEE: Okay. And then let's see that back. 5 MR. LAMBERT: Okay. 6 MS. YEE: Okay. Members, does that sound 7 reasonable? 8 MR. LEVINE: Do you want them to run the 9 number -- and I don't know how much work this is, to me 10 it seems like it would be simple, but I'm not an 11 auditor -- of my suggestion, it seems like you just look 12 at the contract and see the difference. 13 If they've segregated and if the contracts are 14 similar, you've got your number. 15 MR. ANDAL: We disagree with that. 16 MS. MAYHEW: I'm willing to look at it, but I 17 still think the later periods aren't reflective of these 18 early periods when the food and beverage line was just 19 developing, that's my only problem -- 20 MR. ANDAL: They're both -- 21 MS. MAYHEW: -- with that suggestion. 22 MS. MANDEL: You are talking about different 23 things, I think. 24 MR. VANDE WETERING: Yeah. 25 MS. MANDEL: A little bit. 26 MR. LEVINE: We may or may not be, I'm not 27 sure. 28 MS. YEE: Mr. Levine state -- 102 1 MR. LEVINE: They don't like my suggestion. 2 MS. MANDEL: All right. 3 MR. LEVINE: But they may know something we 4 don't. 5 Because I don't think the Department has any -- 6 I would have guessed that it's the food that's more 7 flexible in pricing. 8 Obviously, I'm mistaken because they know 9 better than I do. But it didn't occur to me it would be 10 the Park. It seems like if that's the draw, that would 11 be the inflexible one. 12 They'd say, "That's how much it costs." 13 MR. ANDAL: We discussed this when we met. 14 And, David, the answer to that is is that not only has 15 the food service changed dramatically since the audit 16 period, but the Park has as well. There are rides -- 17 there are rides differences. 18 And, so, neither side of that equation is fixed 19 like you thought. 20 MS. YEE: Just to satisfy our curiosity, 21 certainly mine, I'd love to see what some of the current 22 contracts look like relative to the allocation. 23 MR. LEVINE: Or at least we could include a 24 couple of representative contracts -- 25 MS. YEE: Right. 26 MR. LEVINE: -- even if they don't run the 27 numbers. 28 MS. YEE: Right. And I mean, just -- I'd just 103 1 like to kind of flesh that -- that suggestion out a 2 little bit. 3 But I think we're focused here now on just 4 trying to be sure that everything that should be 5 included relative to the taxable amount is reflected 6 under all three of the scenarios -- that's the 15 and 7 19 percent gratuity rate. 8 Okay. And then some additional reflective 9 contracts that are current contracts that show the 10 allocation would be helpful. 11 So, I'll make that motion as a 30-30-30. 12 Yes, Mr. Leonard? 13 MR. LEONARD: I am -- just so I'm clear what 14 our direction is, your request that you're about to do 15 as a motion is for everybody to go back, look at those 16 sample contracts during the audit period and develop a 17 per person food and beverage price? Is that -- 18 MS. YEE: Including -- 19 MR. LEONARD: -- I'm restating what your motion 20 is? 21 MS. YEE: -- including the gratuity amount, 22 yes. 23 MR. LEONARD: For a while we were focusing on 24 the ratio between taxable and nontaxable, that -- which 25 I kind of prefer, but that's off the table, apparently? 26 MS. YEE: Well, no, not really. 27 I'd like to kind of keep that on the table by 28 having Petitioner provide us with some current contracts 104 1 that speak to the ratio. That may help us inform -- may 2 inform us with respect to what to do relative to the 3 allocation. 4 MR. LEONARD: Very good. 5 MS. YEE: Okay. So, it's a two-prong 6 request -- which is my motion. 7 MS. MANDEL: Yeah, because the ratio can be a 8 little deceiving if it winds up, you know, if you're 9 focused on -- the ratios may be similar and show that 10 they're better, but then if the dollar prices don't 11 translate out -- 12 MS. YEE: Exactly. 13 MS. MANDEL -- then maybe the dollar prices 14 don't validate. 15 It's just something to consider. 16 DR. CHU: I will second that. 17 MS. YEE: Okay. Motion for a 30-30-30 as 18 stated by Yee, second by Chu. 19 Without objection? 20 That motion carries. 21 Thank you very much for your patience. We will 22 see you at the next Board meeting. 23 MR. ANDAL: By the way -- 24 MS. MAYHEW: Thank you. 25 MR. ANDAL: -- by the way, this long hearing 26 wasn't designed to extend Dr. Chu's time on the Board. 27 MS. YEE: Thank you. 28 ---o0o--- 105 1 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON Hearing Reporter for the 9 California State Board of Equalization certify that on 10 JULY 1 2009 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 105 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: August 2, 2009 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 106