BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT AUGUST 31, 2009 ITEM C1 SALES AND USE TAX APPEALS HEARINGS LOCAL TAX REALLOCATION HEARING PETITION FOR REDETERMINATION filed by CITY OF UNION CITY (Case No. 469296) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Steve Shea 6 Acting Member 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board Proceedings 14 Division 15 For Board of Trecia Nienow 16 Equalization Staff: Tax Counsel 17 David Levine Tax Counsel IV 18 Carole Ruwart 19 Tax Counsel 20 Robert Tucker Legal Department 21 Robert Wils 22 Sales and Use Tax Department 23 For Petitioner: Eric Myers 24 Representative 25 Robert Cendejas Representative 26 Janis Varney 27 Representative 28 ---OOO--- 2 1 Sacramento, California 2 August 31, 2009 3 ---oOo--- 4 MS. OLSON: Our first item is C1, City of Union 5 City. Please come forward. 6 MS. YEE: Okay. Appeals. Good afternoon. 7 MS. NIENOW: Madam Chair, Members, good 8 afternoon. Trish Nienow with the Appeals Division. 9 The issue in this is whether the local tax from 10 sales negotiated outside California and delivered by the 11 Union City location should be reallocated directly to 12 Petitioner. 13 Also, as a reminder to the hearing 14 participants, confidential information regarding the 15 taxpayer must not be publicly disclosed. This includes 16 the identity of the taxpayer or any other information 17 that could easily identify the taxpayer. 18 Thank you. 19 MS. YEE: Thank you very much, Ms. Nienow. 20 Good morning -- good afternoon, gentlemen. 21 MR. CENDEJAS: Good afternoon. 22 MS. YEE: If you'll state your names for the 23 record, you have ten minutes for your presentation. 24 MR. CENDEJAS: My name is Bob Cendejas. I'm 25 here representing Muni Services and with me is Eric 26 Myers, who's also with Muni Services. 27 MS. YEE: Great. Please proceed. 28 MR. CENDEJAS: Well, let me start out with -- 3 1 just briefly the facts. The -- the sales are negotiated 2 orders taken -- pretty much most of the important 3 participation is done in Georgia. And then the -- the 4 goods are shipped sometimes directly to Union City and 5 sometimes to these other cities. 6 It's okay to mention the other cities? La 7 Mirada being one of them. And then at the La Mirada 8 one, there is some cutting of the material and binding 9 it. And then it's shipped intra-company over to Union 10 City where Union City delivers it directly to the 11 customer. 12 And with some of the product though that comes 13 directly from George it goes only to Union City and 14 Union City then is the one to deliver it to -- to the 15 customers. 16 So the first issue really is should Union City 17 have a permit, which it currently does, by the way. So, 18 I'm presuming that they -- maybe it's not so much an 19 issue, but to me it's pretty clear that under the 20 Regulation 1699 it's the only location in the State 21 participating in the sale, which it is for some of the 22 sales; all the product that comes from Georgia. 23 Then it should have a permit and we've been 24 doing that for a while. It also has other things that 25 it does there. I mean, taxpayer has all these 26 18-wheelers and all these employees that do all the 27 deliveries but also they have a will call, which is open 28 the usual business hours -- I think it's about eight 4 1 hours a day, six days a week, and they're closed one day 2 where all the product that comes in is stored or 3 warehoused for a day, and then the following day they 4 start doing what they normally do, separate it at lots 5 to have it delivered to the customers. 6 So, I think a registration of that location 7 is -- for me, anyway, a simple matter that it should be 8 registered as it currently is. 9 The second issue is really, well, now where 10 should the allocation of the tax be. Now, I think -- to 11 me, at least, it's clear that when the product comes 12 from Georgia and there's no other location participating 13 in the sale except Union City, that it should go to 14 Union City. We have been doing that for a while and I 15 don't see this as being really any different. 16 I think the more interesting question is when 17 you have two locations participating in the sale and 18 that being La Mirada, that -- it's all right to talk 19 about what the particular goods are, get a little 20 detail? 21 MR. LEVINE: We're in a situation it's really 22 hard to protect the taxpayer's identity, but I think we 23 have to let him go forward with that. We're in a fine 24 balance of doing the best we can to protect, but I think 25 you can do that. 26 MR. CENDEJAS: Well -- thank you. They -- they 27 take the carpet -- giant carpet rolls, the cut a piece, 28 they bind it and then they intercompany take it over to 5 1 Union City. And Union City is the one that takes out 2 all the carpet, sorts it for where they want to deliver 3 it, puts it on their trucks and -- and takes it out to 4 the customers. 5 So, the question is which -- which location is 6 doing the more significant participation. And to me, 7 you know, because we're subjectively looking at these 8 two things trying to decide taxpayer has the better 9 participation, the more important participation, I think 10 that's really our standard, is what's the most 11 significant participation. What's the principal contact 12 between the customers and the seller. 13 Now, for me I see it obviously as Union City. 14 And the reason I see it as Union City is the way I read 15 the law, 1802, the most important thing is the 16 negotiations. Well, that doesn't occur in California. 17 Then they look to where the sale order is 18 taken. That's not in California. Then they look to 19 these other items, which include delivery, and none of 20 them take place in California. The only thing that 21 takes place in California is the delivery to the 22 customer. 23 So, I think it's the more significant 24 participation than the cutting of the carpet and binding 25 it and taking it over to -- to the distribution center. 26 And I -- I think there's some important reasons 27 why the -- it's in the reg. and we've had case law on 28 it, you know, the -- I can't refer to the retailer that 6 1 everybody knows and refers it to, but it was the appeal 2 of Fremont, Signal Hill and Long Beach dealing with a 3 big office supplier. 4 The reason we had those cases is really because 5 of the importance of delivery. And where the law and 6 the Board developed a law and passed a single 7 negotiations and order taking to say how important 8 delivery is. 9 And delivery is important for a lot of reasons. 10 Besides being in the reg. and the law, it's because 11 that's where the goods are inspected by the customer, 12 accepted, where they pass title and possession of these 13 goods. And in this particular case you really do have 14 probably the only contact in California of where the 15 seller and the customer actually meet and -- and 16 participate in -- in the sale. 17 And, again, I, you know, go back to what's the 18 most significant. We don't generally look to see how 19 long it takes. It's really what's the -- what's the 20 most significant action that occurred in California. 21 Because principal negotiations may only take, you know, 22 a few minutes. Or an order taking. 23 But -- and there -- you know, other 24 participation could take more time. But it's not as 25 significant. Delivery is significant for -- for all 26 those reasons and certainly so much more than merely 27 cutting and binding something. 28 But I still look at this case and say, well, 7 1 it's not -- and well, it shouldn't be precedent. 2 Because if it becomes precedent then I -- I think what 3 we're possibly doing is allowing the kind of 4 participation that occurred by merely cutting rug and 5 binding it to be considered more important than -- than 6 the type of participation that -- and the only kind of 7 participation that occurred in California that's in the 8 law or any of the Court cases. 9 So, in summary, the most -- the only 10 significant participation that's been recognized by the 11 taxpayer has been delivery, and that all occurs in Union 12 City. 100 percent of their efforts are to conduct 13 delivery services to customers. 14 And -- and that is really to me the principal 15 contact between the customer and the seller in 16 California. I'd like to reserve the rest of my time for 17 rebuttal. 18 MS. YEE: Okay. Thank you very much. Mr. 19 Myers, any comments at this point? 20 MR. MYERS: Not at this time. 21 MS. YEE: Okay. 22 MR. MYERS: Thank you, Madam Chair. 23 MS. YEE: Thank you. Department. 24 MS. RUWART: Good afternoon, Madam Chair and 25 the Board. My name is Carole Ruwart, Tax Counsel with 26 the Legal Department. 27 With me is Bob Wils of the Allocation Group of 28 the Sales and Use Tax Department. And Bob Tucker also 8 1 of the Legal Department. 2 The Department believes that the recommendation 3 of the Appeals Division should be adopted by the Board. 4 We agree that the Union City facility of the retailer 5 participates in each of the sales at issue but it 6 participates as a distribution center. 7 The characterization as a distribution center 8 is important to the analysis. Its participation 9 includes delivering to customers but is limited to that, 10 delivering to customers via smaller trucks or pickup at 11 a will call. And what are they delivering? Packages 12 that were not only cut and bound at the Southern 13 California facilities, but they were pre-bundled and 14 pre-addressed to the customers as well as specifically 15 identified to the contract of sale at the retailer's 16 other warehouse locations either out of state or in 17 Southern California. 18 The applicable law is explained in the Appeals 19 Division analysis so I won't go through it chapter and 20 verse. 21 The two relevant points here I'll discuss is in 22 the order that the Petitioners discussed them, is first 23 of all whether registration is required for warehouses 24 and under what circumstances, or distribution centers. 25 Under Regulation 1699(a), which interprets the Board's 26 requirements for issuing sellers permit, registration is 27 only required for warehouses storing inventory, not 28 distribution centers. The distinction is critical. 9 1 What -- why is -- what is the difference? And 2 how does this play out in this case? Allocation to 3 Union City is appropriate for shipments originating at 4 the out-of-state warehouses. The Union City facility 5 performs the same functions for shipments received 6 directly from the out-of-state warehouses. 7 Under Regulation 1699(a) a permit is only 8 required where a retailer or a seller has a stock of 9 merchandise. A stock of merchandise is what we would 10 commonly think of as inventory. It's goods, tangible 11 personal property, that is not specifically identified 12 to a contract. And would not include goods that are 13 already specifically identified to a contract of sale. 14 Pre-identified goods that are coming to rest 15 overnight, as -- as here sometimes, may be arguably 16 stored at the Union City facility but they are not 17 transformed into a stock in merchandise as a result. 18 It is most important to note that the fact that 19 a location is the only in-state location that 20 participates in a sale and that that participation is 21 sufficient to sustain the sales tax and to sustain 22 allocation of that local sales tax to the jurisdiction 23 hosting that facility, is not a qualification for 24 registration. 25 Therefore, it is appropriate that the Union 26 City center does not have a permit and that the 27 allocation is achieved by the County-wide pool. 28 The more -- as Mr. Cendejas refers, the more 10 1 interesting analysis is as between the two locations -- 2 in-state locations that do participate in the sale, the 3 Southern California warehouses or the Union City 4 warehouse. 5 The relevant rules provided in Regulation 6 1802(a)(2)(B), where more than one location of a 7 retailer participates in a sale under circumstances that 8 are not otherwise addressed in Board regulations, the 9 local sales tax is allocated to the location where the 10 participation is more significant. 11 The combined activities of the Southern 12 California warehouses are more significant than the 13 activities of the Union City distribution center. Those 14 activities do not consist merely of cutting and binding 15 product. 16 The Southern California facilities receive 17 order information -- that's information from -- from the 18 customer, developed by the customer -- sent to them by 19 the sales negotiation facility out of state. 20 Southern California warehouses remove orders -- 21 orders and goods from inventory. In doing that 22 processing, they do specifically identify those goods to 23 the contract of sale. They package the orders and they 24 label them for shipment to specific customers. 25 They put them on large trucks and they actually 26 initiate the delivery function. Those packages, 27 pre-packaged and pre-labeled are delivered all the way 28 to the Union City facility. Each of those -- each of 11 1 the Southern California warehouses is, shall we say, 2 slightly less than 400 miles away from Union City. 3 Therefore, we would note that when the Union 4 City delivers those pre-bundled packages to the Northern 5 California counties, which are its delivery territory, 6 it is entirely possible that the Union City facility 7 would be delivering them a far less distance than the 8 distance from those warehouses to Union City. 9 The Union City facility does participate in the sale. 10 It does the following activities. It takes the 11 pre-labeled and pre-bundled orders, off-loads them from 12 the larger trucks, unbundles them and sorts them into 13 smaller truck loads -- some packages do sit overnight, 14 waiting for their smaller trucks to leave the next 15 day -- and delivers them to the Northern California 16 counties. 17 In short, both the warehouses and the Union 18 City facilities with respect to the same orders deliver 19 the goods and we would submit that not only does the 20 Southern California facility do more activities but its 21 activities are of greater significance. 22 Union City is only trans-shipping without 23 processing orders or goods, consolidating loads or even 24 labeling or packaging, all of which are significant 25 activities with respect to contacting the customer. And 26 those activities are all performed in Southern 27 California. 28 At this point I would with all due respect like 12 1 to address the public comment made by the City of Union 2 City. The City of Union City in its support letter to 3 the Board Members cites two local Sales and Use Tax 4 annotations that support -- that allegedly support its 5 contention that the place of sale in similar situations 6 is the place of shipment which completes the sale. 7 However, these annotations do not involve 8 situations that are similar in relevant respects and we 9 would respectfully submit do not support the 10 Petitioner's contentions. 11 Specifically, Annotation number 710.0011.500 12 does not stand for the proposition that as between two 13 non-sales locations the location that completes the sale 14 should be allocated the local sales tax. 15 In the situation upon which that annotation was 16 based, only one warehouse participates in the sale. And 17 as I recall the City of Fremont and Signal Hill case 18 that was also the situation. 19 In that -- in that annotation the sole 20 participating warehouse also assembled and consolidated 21 as well as delivered. In this case, the functions are 22 divided between Union City and Southern California 23 warehouses. 24 And when one reads the annotation's backup 25 letter closely, you realize that it stands for the 26 proposition that participation by an in-state warehouse 27 is sufficient to sustain the -- the State and local 28 Sales Tax as opposed to the Use Tax. That is an issue 13 1 that's not in dispute here. 2 With respect to annotation 710.0016 dealing 3 with catalog telephone orders, this does not suppport 4 allocation to Union City, either. 5 Unlike the will call window at the Union City 6 facility, the situation on which this annotation is 7 based is a situation where an order is taken by a call 8 center in one location and at a second location the 9 order was accepted or rejected and payment was made. 10 We opine that the tax should be allocated to 11 that second location. In this case, the will call 12 window at the Union City facility performs only the same 13 delivery functions that its trucks -- that its trucks 14 do, delivering pre-packaged, pre-addressed, 15 pre-negotiated and pre-paid orders to the customers. 16 There is no sales or negotiation or payment at 17 the will call window. Therefore, we believe that both 18 types of sales delivered through the Union facility, the 19 truck-delivered and the will call's delivered, should be 20 treated the same. 21 With all that background again we reiterate 22 that allocation to Union City is appropriate through the 23 mechanism of the County-wide pool. 24 That concludes my comments and discussion. Of 25 course we would be happy to answer any questions that 26 you have. 27 MS. YEE: Thank you very much, Ms. Ruwart. 28 Mr. Wils, do you have any comments at this -- 14 1 MR. WILS: Not at this time, no. 2 MS. YEE: Okay. Thank you. You have five 3 minutes on rebuttal. 4 MR. CENDEJAS: All right. First I want to 5 address the registration. I -- I disagree with her 6 analysis about it not being a warehouse. But regardless 7 of that, there are different ways and reasons to 8 register a location. It doesn't have to be registered 9 because it's a warehouse; it can be registered because 10 it's the only place in the State that is participating 11 in the sales. 12 The goods come from Georgia, go to Union City. 13 From Union City they get delivered by the employees. So 14 it's the only place of business that is participating in 15 the sale and what -- what the regulation says, 1699, it 16 sort of talks in -- in reverse. It says no permits are 17 required for warehouses or other places of business 18 where -- which are maintained in conjunction with 19 another place of business participating in the State. 20 Well, there isn't any other one so that would 21 mean you do need a permit. 22 Or it says if -- if customers do not 23 customarily visit the location, which they do because 24 you have will call. It's open six days a week, which is 25 what the facility's open, six days a week, eight hours a 26 day, I believe, on all six days. 27 So, they do have customers there. They have an 28 office. They have a door. It's all, you know, glass 15 1 door and people go in and -- and take care of their will 2 call business there. 3 So, there's other reasons to register and -- 4 and there's, you know, one or more reasons why that 5 location be registered outside of the discussion of 6 warehouse. 7 The -- the next thing is -- you know, the 8 interesting question of where to put it. And as Carole 9 says, it's where it is the more significant. Where the 10 more significant participation occurs. And she 11 describes what goes on in -- in La Mirada and, yes, 12 there is participation and things are done, but none of 13 those things that are done fit any of the categories 14 that are in the regulation. 15 It's not negotiation. Not order taking. It's 16 not approval of the order. It's not approval of -- of 17 credit. It isn't the delivery to the customer and it 18 isn't a billing function. 19 So, what they're doing there is something 20 that's not in the regs. which is really -- for me, I'm 21 seeing it's we're now broadening participation to 22 include these type of activities that occur at a 23 location. They're not supported by the regs. Is -- is 24 that where the Board wants to go? If it's where the 25 Board wants to go then -- then it's where we're going. 26 But it's not -- it's not in the regs. 27 She mentions the two annotations and that's -- 28 it's the City's letter, mine. But just coming to their 16 1 defense a little bit, I -- I disagree with her a 2 little bit on -- on those annotations, whether those are 3 the properly cited ones or not. 4 But the first one she mentions is -- well, if 5 it comes from out of state to a warehouse delivered to a 6 customer you find it's sales tax participation. I think 7 that goes more to the fact that the location should be 8 registered. That's -- that's already a given in that 9 letter, it's just where does the allocation go. 10 So, I think that's a part of the registration 11 of the location. 12 The other -- the other one she mentions is an 13 interesting one in that my understanding of that 14 annotation is that there was one location where an order 15 was taken but they didn't -- but the attorney working on 16 it didn't feel that was a proper order taking. Then it 17 went over to a warehouse where they took the goods and 18 sent them over to a retail store. And at the retail 19 store that's where it was delivered to the customer. 20 They didn't take it in a truck, but the 21 customer came in and they gave it to the customer. 22 And -- and that's where they allocated it, to that 23 location, not the warehouse. 24 So, I think, you know, these -- none of these 25 annotations are perfect annotations that cover 26 everything, but I think the first one really kind of 27 points to it should be registered, and the second one 28 really points to, well, delivery is -- is the more 17 1 important thing as opposed to the warehouse that the 2 goods came from. 3 Do you have anything, Eric, you want to add? 4 MR. MYERS: Just to reemphasize very quickly 5 that we really see the question here is which is the 6 most significant sales activity. Not the most 7 significant activity overall. 8 And with respect to deciding that, we think 9 that there's Regulation 1628 and other regulations that 10 come just short of saying that delivery is a significant 11 sales activity. 12 Probably the second most significant following 13 the -- or third, as Mr. Cendejas has said, and so the 14 packaging and all those things while necessary are not 15 sales activity. And this is the taxation of the sale of 16 tangible personal property. 17 So, we urge the Board to -- to make that 18 distinction between the -- the amount of activity at the 19 other locations and the actual sales activities that are 20 taking place. 21 MR. CENDEJAS: And perhaps I make a 22 suggestion -- 23 MS. OLSON: Time has expired. 24 MS. MANDEL: Well -- 25 MS. YEE: Why don't you summarize your 26 suggestion. 27 MR. CENDEJAS: That however you rule on this 28 you might -- you might want to specifically state that 18 1 it's not going to be a precedent, is my suggestion. 2 MS. YEE: Okay. Thank you very much. 3 MR. CENDEJAS: Thank you. 4 MS. YEE: Discussion? Questions? 5 MS. MANDEL: Can -- can I ask -- 6 MS. YEE: Ms. Mandel, yes. 7 MS. MANDEL: Just because sometimes I get these 8 local tax cases -- for the -- the sale occurred in 9 California upon delivery by the Union City location, 10 right? Is that correct? 11 MS. RUWART: That would be our understanding 12 because it was delivered to the customer by facilities 13 of the retailer, the trucks. Therefore title passes 14 essentially on their doorstep. 15 MS. MANDEL: Okay. Now -- so, if it's not 16 going direct to Union City, is it going -- where is 17 Union City? What County? 18 MS. RUWART: Alameda County. 19 MS. MANDEL: Alameda. Is it -- is it going to 20 the Alameda pool, all of it? 21 MS. RUWART: For those sales in which -- that 22 are trans-shipped only from the Georgia facility -- 23 MS. MANDEL: Okay. That's where I got confused 24 then. So for the stuff that was -- where you have the 25 Southern California locations come into play somehow, 26 where -- where is the allocation going now? Is that not 27 going to the County-wide pool in Alameda? Is -- 28 MS. RUWART: The actual allocation that's 19 1 occurring now, and the Appeals Division may want to say 2 something about this, is -- is not as -- as clean as it 3 normally is in these cases. The taxpayer has been 4 allocating most of its tax to the counties of 5 delivery. 6 MS. MANDEL: So, in this case -- 7 MS. RUWART: So -- so we -- go ahead. 8 MS. MANDEL: The case -- good, then I had a 9 reason to be confused. 10 So, in this case as it came forward the 11 original way it was allocated was all to the County 12 pool? And then -- because I'm hearing about maybe some 13 of it is supposed to go to these other cities and now 14 I'm confused. 15 MS. YEE: Yeah. Appeals. 16 MS. MANDEL: Can you help me? Where is the 17 money? 18 MS. NIENOW: Just to clarify what Carole -- 19 Ms. Ruwart said, it's the place of destination, meaning 20 where the customer received the goods. 21 MS. MANDEL: Okay. 22 MS. NIENOW: That's where it is currently being 23 allocated. 24 MS. MANDEL: On a County-wide basis? 25 MS. NIENOW: On a County-wide basis. 26 MS. MANDEL: Wherever that -- so if they lived 27 over the Alameda line and so whatever is next door, it's 28 going to that -- 20 1 MS. NIENOW: The County-wide pool. 2 MS. MANDEL: -- that County-wide pool, right. 3 MR. LEVINE: Which we can all agree is wrong 4 unless there happens to be a coincidence that Union City 5 delivers it to Alameda County because that would be if 6 it's Use Tax, and all of these are Sales Tax. 7 MS. MANDEL: Okay. 8 MR. LEVINE: There's no prior title passed 9 provision -- 10 MS. MANDEL: Okay. 11 MR. LEVINE: -- so title all passes in 12 California. 13 MS. MANDEL: Okay. 14 MR. LEVINE: There's a California location 15 participating in every sale. It is Sales Tax. 16 MS. MANDEL: Okay. 17 MR. LEVINE: It's either going to go -- it's 18 going to go to the place of sale. 19 MS. MANDEL: Okay. 20 MR. LEVINE: And when you have the -- our 21 rec -- our finding was that where the two Southern 22 California locations touch it, those are the places of 23 sale. They each have a permit and you should have a 24 permit. 25 MS. MANDEL: Okay. 26 MR. LEVINE: So it would be directly allocated. 27 And when it's shipped directly from out of state to 28 Union City, the only -- 21 1 MS. MANDEL: Oh, so, this should never have 2 been County-wide pool -- 3 MR. LEVINE: Well, in -- on the Union City, 4 we're all in agreement that it should be allocated based 5 on the place of sale being the Union City location where 6 it's shipped directly -- 7 MS. MANDEL: Okay. 8 MR. LEVINE: -- from out of state. 9 But our recommendation is that -- our finding 10 is that the Union City location doesn't require a 11 permit, so it should go to the County-wide pool. 12 MS. MANDEL: In Alameda, because that's where 13 Union City is. 14 MR. LEVINE: Right. And Petitioner concludes 15 that there should be a permit. 16 MS. MANDEL: Okay. 17 MR. LEVINE: And if -- if we agreed there was a 18 permit we would -- 19 MS. MANDEL: I now understand why I was 20 confused because we're usually talking County-wide pool 21 versus not. But this is a Sales Tax case and then when 22 you bring in the Southern California ones, the money 23 would go to Southern California unless we agreed that -- 24 that this is a registerable place and had the more -- 25 whatever. 26 MR. LEVINE: No, there's two -- on -- on the 27 Southern California ones you have two questions to 28 decide. If you find the place of sale was Southern 22 1 California, those two locations, which was our finding, 2 you're done. It will be directly allocated to the 3 jurisdictions of those locations. 4 If you find on the deliveries that came through 5 Southern California that the Union City location was 6 more -- had the more substantial participation then the 7 place of sale would be Union City and then you have the 8 same issue that you have with the direct deliveries from 9 out of state, is should it be directly allocated because 10 they should have held a permit or should it go to a pool 11 because they don't need a permit. 12 MS. MANDEL: Okay. Thank you. 13 MS. YEE: Okay. Yes, Mr. Shea. 14 MR. SHEA: For the Petitioner, did the Union 15 City facility ever apply for a permit? 16 MR. CENDEJAS: Do you know the background, 17 Eric? 18 I think -- I understand they have a permit 19 now. 20 MR. SHEA: They have one now. 21 MR CENDEJAS: That's what I was told this 22 morning. So, but -- what do you -- what do you know 23 about the facts, Eric? 24 MR. MYERS: I'm sorry, sir. 25 Okay, I -- I'm not entirely certain whether 26 they had a permit. So I'll have to stay with 27 Mr. Cendejas's answer. I could get an answer for you, 28 but I -- I'm not entirely certain if they had a permit 23 1 earlier in -- in the process. 2 Now do they have one? 3 MR. CENDEJAS: That -- that's what I learned 4 today, that they have a permit currently. 5 And my -- I don't know because of course, you 6 know, back then and, you know, I don't follow the 7 history, but I think in all likelihood they had applied 8 for a permit or wanted a permit. That would be my -- my 9 educated guess. 10 But I don't know for a fact one way or another. 11 MR. SHEA: Well -- 12 MR. CENDEJAS: But it would be likely that 13 they'd do that. 14 MR. SHEA: Well, given that the allocation 15 period actually goes through 9-30-09, it would be 16 relevant because it would -- it would raise a different 17 question that I don't know the answer to. 18 I could ask Appeals. What if the Department 19 has granted a permit, but it's Appeals' opinion that 20 they shouldn't -- that the Petitioner shouldn't have a 21 permit? What -- how does that get resolved? 22 MS. NIENOW: Then the Department would revoke 23 that permit. There is -- in this particular case there 24 is a master permit. And so, there are sub-permits that 25 are added because of the various locations. And I don't 26 recall off the top of my head whether Union City was 27 ever added to it as a sub-location. 28 But my understanding is that any retailer can 24 1 add a sub-location. It's whether or not it's accurate, 2 and once it's investigated and -- and that's discovered 3 then they -- they would actually remove it. 4 MR. CENDEJAS: I think we have somebody that 5 knows the answer. 6 MR. SHEA: Oh. 7 MR. CENDEJAS: Do you know the answer? 8 MS. VARNEY: I do. 9 MR. CENDEJAS: Great. 10 MR. SHEA: All aboard. 11 MS. YEE: Okay. 12 MS. VARNEY: As far as -- 13 MS. YEE: And could you introduce yourself. 14 MS. VARNEY: I'm sorry, Janis Varney, Muni 15 Services. As far as the Petitioner's specifically 16 requesting a permit I can't respond to that. Obviously 17 our inquiry when it was filed was to request that 18 permit. But it's just been recently, within the past 19 three to four months -- I would say six months, I'm 20 sorry, that a sub-location for the first time was added 21 for Union City. 22 So up until this point they have never had a 23 registered sub. 24 MR. CENDEJAS: Thank you. 25 MS. YEE: Thank you. Other questions? Ms. 26 Steel. 27 MS. STEEL: I thought they asked a permit and 28 it was not granted by BOE. That's what I -- my 25 1 understanding was. But let me go to BOE, that, you 2 know, you said that there is much more activity going on 3 in Southern California so that's why that, you know, we 4 cannot give them their portion and it has to go into the 5 County pool. 6 But the finalized sales was done because they 7 delivered the last -- they send the merchandise out of 8 their door for Union City means that finalized sales was 9 done by Union City, so -- then that's supposed to go to 10 Union City because by the law that there's not -- no 11 such thing that you do more work down in -- they are 12 repackaging and everything in Southern California 13 doesn't mean that they are the one, you know, get more 14 and Union City is not doing the finalizing work. 15 So, for me I thought sales -- sales was done in 16 Union City because that's to the finalized sales was 17 done because it went out from the Union City. 18 So I thought that's why they have to get it. 19 Another thing is that 1.6 million was actually 20 allocated to Alameda County because of the -- the 21 specific that sales was done in that facility. 22 So that's -- I was -- it was totally confusing 23 that what -- you know, how many repackaging and cutting 24 and those activities were done in Southern California 25 that we have to looking at what was done the last, and 26 it went out to the customers. Then that was done in 27 Union City. So I thought Union City supposed to get it. 28 That's the way I -- my understanding was. 26 1 MS. RUWART: Can I explain and maybe clarify -- 2 MS. YEE: Sure. 3 MS. RUWART: -- because -- just one thing, you 4 did mention in the very beginning about tax going to the 5 County-wide pools. In the -- for the sales where the 6 Southern California warehouses participate as well as 7 Union City, if you find that the most significant 8 activity happens in the Southern California warehouses, 9 that tax will be allocated directly to the jurisdictions 10 hosting those warehouses. Those warehouses qualify 11 under Regulation 1699(a) as stocks in merchandise from 12 which orders are fulfilled, orders negotiated out of 13 state are fulfilled. 14 They qualify for permits. So there's no tax to 15 the County-wide pool should you find that. In fact it 16 will go directly. 17 The second comment I would make is that with 18 respect to these annotations and the previous situations 19 that the Board generally encounters, the -- the local 20 tax is generally -- needs to be allocated either to a 21 sales office or a single warehouse delivery fulfillment 22 location. This is a rather uncommon situation where you 23 have the fulfillment and delivery function split between 24 two different facilities located in two different 25 places. 26 Normally a warehouse that is eligible -- that 27 is required to have a permit under 1699(a) does 28 everything that both the Southern California warehouses 27 1 do and the Union City facility does. In other words, 2 they receive an order, information, from the 3 headquarters. They determine what -- tangible personal 4 property that's on their undifferentiated stocked 5 shelves is required to fulfill the order. 6 They take it down from the shelves, they 7 process it, where it needs to be shipped to the 8 customer. They package it, they label it, they address 9 it and then they put it in a truck and they deliver it 10 to the customer. 11 The Southern California warehouses do all of 12 that. It's just that they stop at Union City. And then 13 the Union City trucks take it from there. 14 So, it -- it is not the usual situation where 15 you would have a warehouse doing all of those. And 16 because of the way the retailers set up its operations 17 the Union City warehouse does not qualify for a permit 18 because it's not a warehouse. It is a flow-through 19 trans-shipment center. And it's not that it's 20 participation -- it isn't participating. It definitely 21 is. And it definitely is making the final delivery to 22 the customer. 23 But in the previous cases and in the normal 24 scenario you can think of the place that makes the final 25 delivery to the customer as the place of most 26 significant activity because in fact they do all those 27 other things also that the Southern California 28 warehouses do in this case. 28 1 MS. STEEL: But I think it's very thin line 2 there because use of stock means that there's no -- no 3 addresses and, you know, made out to and it's not being 4 cutting. But they are even going through Union City 5 that they are claiming that you said those are not 6 stock, it just going through it. But finalized sales 7 that goes out to the customer was done in the Union 8 City. 9 MS. RUWART: That's -- that's -- that's true. 10 MS. STEEL: Even you are not calling that 11 stock, it's a stock going through in the center. 12 MS. RUWART: It is -- it is tangible personal 13 property going through, but at the time that it passes 14 through the Union City facility it is not definitionally 15 inventory or stock of merchandize. A stock of 16 merchandise is something that doesn't belong to a 17 specific customer, but is -- 18 MS. STEEL: But they're loading there, though. 19 MS. RUWART: Yes, they are. 20 MS. STEEL: Because we had one case that they 21 reloaded in one of the storage room so they had to pay 22 sales tax there, the Sales Tax or Use Tax. 23 That we had one case here that you went through 24 so I remember that they went through the distribution 25 center and then they stopped it there so they have to 26 pay taxes. So, I remember that case exactly. I don't 27 remember exact case name but that's exactly same as this 28 one, that they going through the distribution center and 29 1 that was the finalizing sales happened there. Then I 2 think Union City is their -- their tax instead of going 3 to the County pool. But they are the one supposed to 4 get that back. 5 MS. RUWART: The other thing I might just 6 mention, I was just going to say in clarification of the 7 Union City's activities is, again to respond to 8 Mr. Cendejas, I can't say it more clearly, he -- he says 9 reasons -- one of the reasons to register a location is 10 because it's the only in-state location that 11 participates in a sale. That's not in 1699(a). And it 12 never has been. 13 And what I would call the Board's attention to 14 is that the 2006 amendments to the warehouse rule, 15 Regulation 1802, were concurrently accompanied by 16 Reg. -- amendments to Regulation 1699(a) to ensure that 17 direct allocation would occur with respect to all 18 warehouses that perform the activities. 19 Without the amendments to 1699(a) requiring 20 those warehouses to be registered if they fulfilled 21 orders from out of state, you would have the -- the old 22 scenario which the Board decided was not appropriate, 23 which was that if you had a permit you got direct 24 allocation. If you didn't, you didn't. 25 This made sure that all warehouses had a 26 permit. But you had to do that through 1699. 27 Therefore you need to look at 1699's criteria and not 28 just the local tax. The local tax tail does not wag the 30 1 1699 permit dog. 2 MS. YEE: Okay. Mr. Cendejas. 3 MR. CENDEJAS: Well, I disagree with -- with 4 Carole on that 1699. I mean, I read it as very clear. 5 I've been dealing with -- with permits and local 6 allocation for like 16 years and there isn't -- and for 7 us to find that we have participation here, we have 8 sales here, it's the only location, but somehow that 9 doesn't get a permit and so instead of allocating sales 10 tax to there we're going to have to be forced to give it 11 to a -- use a pool because we're not going to register 12 at that location. 13 It is -- it is -- it is participating in making 14 retail sales. It's an important -- extremely important 15 function getting the goods to the customer, and getting 16 it accepted. And -- and so, to find that they're not, 17 you know, following even the general rule that they're 18 engaged in business, that they're -- they're self -- 19 engaged in selling and should -- and but at the same 20 time they're participating and it's a Sales Tax, I -- 21 I'm trying to choose my words, but let's say 22 inconsistent in -- in that argument. 23 The second thing I want to say, too, is, yes. 24 there's a lot of activities that go on and the 25 delivery's at the end, but it's not -- the allocation is 26 not because if these other things that have been done 27 first. And everything that we've been dealing with, 28 it's always because of the -- the delivery at the end. 31 1 That significant participation with customer and seller 2 to pass title possession and that it's in the reg. 3 So, it's not because of the stuff before, it's 4 because of the delivery and the delivery all by itself 5 would have been more than sufficient to get the local 6 allocation under 1802. 7 MS. STEEL: One more. You know, those are will 8 calls and customers coming into the Union City, the 9 place and -- but Regulation 1699, relating to the sales. 10 So how you going to explain that then? 11 MS. RUWART: Yes, I'd be happy to. 12 1699(a) reads, "No additional permits are 13 required for warehouses or other places at which 14 merchandise is merely stored," and then we've discussed 15 that merchandise means an inventory and undifferentiated 16 unidentified -- unidentified inventory, "and which 17 customers did not customarily visit for the purpose of 18 making its purchases." 19 We don't believe that this -- that what 20 customers are doing here is making purchases. All the 21 elements of the sale are negotiated out of Georgia. We 22 understand that there is -- unlike the annotation cited 23 by Union City, there is no acceptance or rejection of 24 the order that occurs at the warehouse. There's no 25 payment made. There's no negotiation of sales terms. 26 The -- the situation in that annotation 27 appears, if you read the backup letter, to be rather 28 different, conferring more discretion on the customer 32 1 than appears to be the case here. 2 And so we believe that the will call window is 3 best viewed as the equivalent of delivery by retailer's 4 truck. In other words, when the retailer's truck comes 5 to the door, the customer doesn't look at the goods, 6 open them up, inspect them and accept them or reject 7 them and say, "You know , I really don't like this. 8 Please take it back on your truck." And our 9 understanding is they don't pay the driver for it, 10 either. 11 MS. STEEL: Then how can you say -- 12 MS. RUWART: It's the same as will call. 13 MS. STEEL: -- it's the same thing, will call 14 is the same as -- 15 MS. RUWART: Because under -- 16 MS. STEEL: -- delivery by the truck? 17 MS. RUWART: I understand it -- our 18 understanding of how the will call window operates is 19 exactly that. You come, you take what they give you, 20 you don't pay there. You've already made arrangements 21 to pay through Georgia. You've probably already prepaid 22 it. We don't have any indication that there's anything 23 different. 24 MS. STEEL: But if you don't pick it up and you 25 don't deliver it, that sales is not done. 26 MS. RUWART: Then it's not in this -- then it's 27 not a sale that's at issue here. 28 MS. STEEL: No, that's exactly it, because the 33 1 sales is done because people come pick it up or you 2 deliver it by the truck. That's done in the Union City. 3 MS. RUWART: We think they should be treated 4 the same. 5 So, in other words, however you treat the truck 6 delivered sales you should treat the will call sales the 7 same. 8 MS. STEEL: That's the finalizing sales. 9 MS. RUWART: Yes. 10 MS. STEEL: That's what I'm saying. 11 MS. RUWART: Yes, that is -- that is true. 12 MS. STEEL: So, that's done in the Union City. 13 MS. RUWART: That's right. And -- and we 14 agree. All I was saying is -- is that there's nothing 15 different or special about the will call window. 16 MS. STEEL: That all is done in the Union City, 17 then they supposed to get that $1.6 million because it's 18 supposed not going to the County pool, but they are the 19 one deserve that. That's my -- 20 MS. RUWART: I see your point. We disagree, 21 respectfully but we -- I understand what you're saying. 22 You're saying that the act of final delivery is more 23 significant -- 24 MS. STEEL: Right. 25 MS. RUWART: -- than all the other delivery 26 activities that have occurred prior to that point. 27 MS. YEE: Mr. Shea. 28 MR. SHEA: On that point, even if one were to 34 1 make -- make that determination, it's a subjective 2 judgment, I suppose, as to what constitutes the most 3 significant sales activity within the State, vis-a-vis 4 the Southern California locations versus Union City. 5 But getting back to the point you made earlier, 6 you would still need to establish that Union City needs 7 a permit under 1699(a) in order to allocate to Union 8 City. Because otherwise, even if you determine that 9 Union City's participation was more significant than, 10 say, La Mirada, you would only be allocating it to the 11 pool in Alameda County. Is that -- am I correct in 12 saying that? 13 MS. RUWART: Yes, the -- the actual most 14 accurate way to say it is that Union City will get 15 the -- will get some funds but it will not get all the 16 entire amount in dispute. 17 If it is directly allocated they will get the 18 entire amount in dispute. If it's allocated to the 19 County-wide pool they will get a fractional share of 20 that, which happens to be a certain smaller percentage. 21 MR. SHEA: Yeah, well, a much smaller 22 percentage. It's a very significant issue. 23 MS. RUWART: It is -- it is a large 24 difference. 25 MR. SHEA: Because I think in terms of -- 26 MS. RUWART: Union City's share of the 27 County-wide pool is not very large. 28 MR. SHEA: Yeah. Well, I just think for our 35 1 own purposes we have to look at it as a -- as two issue 2 issues the Board needs to address. One, whether Union 3 City needs a -- a permit under 1699, which appears to 4 turn on whether or not they have a stock of goods. 5 MS. RUWART: Yes. 6 MR. SHEA: Whether it is a true warehouse 7 within the meaning of 1699(a). And then secondly, the 8 Board needs to determine what sales activity is the most 9 significant with respect to the Southern California 10 versus the Union City facilities. 11 MS. RUWART: Clearly, that's the -- that's the 12 statement of the issues, yes. 13 MS. MANDEL: Question. 14 MS. YEE: Ms. Mandel, yes. 15 MS. MANDEL: I keep hearing that to be a true 16 warehouse you have to maintain a stock of goods. But 17 1699(a) talks about warehouses or other places at which 18 merchandise is merely stored. And talks about how any 19 person who has -- maintains a stock of merchandise in 20 California has to have a permit somewhere. If they had 21 a stock of goods they got to have a permit somewhere. 22 But permits are required for warehouses or 23 other places at which merchandise is stored, and from 24 which the sales negotiated out of state are -- are 25 delivered or fulfilled. 26 And I think what Union City must be focusing on 27 is that -- that they're saying their Union -- the Union 28 City location is a place where merchandise is stored 36 1 because it's got to hang out, I guess, till the next 2 truck is going wherever it's going, and that, you know, 3 a stock of -- stock of goods -- maintaining a stock of 4 goods is something that happens really in a warehouse, 5 called warehouse, what you always think of the -- 6 someone has a total stock of goods there and they 7 maintain it. 8 But this 1699 seems to kind of talk about both 9 kinds of places. 10 MS. RUWART: One -- a couple comments. One is 11 we use the term "warehouse" but I'm sure the Department 12 has many more examples than I -- I can supply, is that 13 the actual permit requirement was -- was for stock of 14 goods. A stock of goods is often housed in a warehouse, 15 but it can be housed in other places, other ways, other 16 locations. 17 And so we use warehouse as a shorthand term for 18 where is your stock of merchandise. But it's not 19 necessarily true, which is why it's so -- I submit that 20 that is why the language is in there. It doesn't 21 necessarily need to be a warehouse, per se. It has to 22 be where your stock of goods is located. 23 The second comment I would make is as explained 24 in the Department's reply brief in the Appeals Division 25 analysis, when you read 1699(a) in its totality and 26 interpret it accordingly, we believe that all references 27 to merchandise are to stocks of merchandise. 28 In other words, the way that the term is used 37 1 in 1699(a), every bit of tangible personal property that 2 it is referring to with respect to the permit is the 3 kind of -- the -- of a character that exists in the 4 Southern California warehouses, but is not of the 5 character that exists at Union City. 6 Even though it is stored at Union City, even 7 though there are -- it's tangible personal property that 8 comes to rest in Union City and so is arguably stored, 9 that is not -- the use of the term "merchandise" doesn't 10 apply to that because it's not a stock of merchandise. 11 Why? Because it's already identified to a specific 12 contract. It's addressed and labeled and sent and al -- 13 I don't want to use the word allocated -- assigned to a 14 specific customer at all times when it's in the Union 15 City facility. 16 Therefore, that tangible personal property is 17 not a stock of merchandise. 18 MS. MANDEL: Well, I -- to get that narrow I 19 might almost have to go back and see what was before the 20 Board in all the issue papers when they made this 21 change, because you could almost see there might be 22 somebody who has, if you want to call this Union City a 23 distribution center rather than a warehouse, because you 24 think it doesn't have a stock of goods maintained there. 25 And you'd have sales orders negotiat -- 26 negotiated out of state and the stuff -- you know, like 27 you had the -- you had exactly what's going on here 28 without the Southern California; they didn't exist. So 38 1 everything is negotiated from Florida. Whatever is done 2 to it is done in Florida or Georgia, wherever it was, 3 southeast, and comes through Union City, and is -- you 4 know, comes in there and then it's distributed out from 5 there. 6 It could have been that what they were looking 7 at was any place we -- we want to look at direct 8 allocation -- or we want to -- we want to be able 9 because this was tied in with the allocation that if the 10 place is delivering the property in California, that we 11 want to count that because all these fights were about, 12 you know, who's participating in -- are they 13 participating in the sale? Does it go to that place 14 that's doing the business? 15 So I'm -- I guess I can see why you want to 16 read it as only being stocks of merchandise -- 17 maintaining a stock of merchandise and that each other 18 reference to merchandise means stock of merchandise 19 rather than just merchandise. 20 But I'm not -- I mean, I can sort of see that 21 in reading, too, and I'm just not so -- and I can see 22 why they might have been going that way when these regs. 23 were redone. 24 MS. RUWART: I don't recall any specific 25 discussion that the amendments to Regulation 1802 and 26 1699 were intended to change the definition of what is a 27 warehouse or what is a stock of merchandise in order to 28 fulfill the permitting and registration requirements. 39 1 That the -- there was no -- whether there was discussion 2 of a warehouse versus distribution center or whatever, 3 the whole discussion involved the previous result under 4 Regulation 1802, which is that everybody agreed that an 5 in-state stock of merchandises or stock of goods as it 6 was said in 1802 participated in the sale. 7 MS. MANDEL: Right. 8 MS. RUWART: And sales tax did apply and it was 9 properly allocated to the jurisdiction hosting that 10 warehouse or that stock of goods. 11 MS. MANDEL: Uh-huh. 12 MS. RUWART: The problem was, as I said before, 13 you had a differential result based solely on the 14 unrelated fact of whether the owner of the warehouse had 15 a separate permitted sales location in the State. 16 And so, the regulations amendments were 17 intended to achieve, not -- to clarify, not just direct 18 allocation in every instance where a warehouse or stock 19 of goods fulfilled an order that was negotiated out of 20 State, but ensure that direct allocation was 21 accomplished. 22 That was the -- the discussion around 1802 and 23 1699. I don't recall any specific discussion of -- of 24 extending the definition of what is a warehouse, what is 25 a stock of goods to mean something other than what the 26 Department and the interested parties had presumably 27 always understood it to be. 28 MS. YEE: Okay. Mr. Cendejas. 40 1 MR. CENDEJAS: Two quick points. But the way I 2 recall that we -- we used distribution centers and 3 warehouses interchangeably. And oftentimes both of them 4 in the same sentence. So, we were looking at them 5 together. 6 The other thing I would mention is Carole said, 7 well, it's no longer inventory because they shipped it 8 out -- out of the warehouse. 9 Well, if they had shipped it directly to the 10 customer FOB, you know, destination or -- or something, 11 but they didn't do that. They didn't transfer the 12 title. They were just shipping it over to their 13 location, who would then -- could have sent it FOB 14 destination or -- or, you know, to -- to the customer. 15 So, it was still there, still controlled. They 16 hadn't transferred title possession to a common carrier 17 and it's out -- out of their hands. It's still in their 18 hands. They still had control over it. They still 19 could or -- transfer title or not. 20 So it is a different scenario, the fact that 21 the delivery was in -- intra-company and not, you know, 22 by common carrier directly to the customer. They still 23 had it. It was still their -- in their possession and 24 they still had title to it. It's still their 25 inventory. 26 MS. YEE: Ms. Steel. 27 MS. STEEL: Now BOE gave them a permit. So 28 what changed? 41 1 MS. RUWART: We don't understand that they did. 2 This is news to us. We don't understand that and we 3 think it would have been inappropriate for that to be 4 issued. That said, things like that can happen. 5 MR. WILS: Very often a taxpayer will add a 6 location to its permit. On it's Schedule C it will 7 write this -- write an address and Board staff 8 automatically adds that location to the permit, with no 9 questions asked. Or a taxpayer will call its local 10 district offices, I opened a second location, I opened a 11 third location, and we usually accept them with that 12 location without really verifying the facts. 13 Once it goes under audit or review by -- now 14 the case in group, whether it needs a permit or not, 15 then those facts are determined. And if -- if we find 16 that the permit is not needed, we do close out that 17 sub-permit. 18 MS. YEE: Okay. Let me just kind of weigh in 19 here. I -- since the Petitioner happens to be in my 20 district, but I'm having a really hard time 21 distinguishing or at least making the point that the 22 activity occurring in Union City is something that would 23 constitute greater participation. I mean, I really do 24 see this as kind of a pass-through of inventory, that's 25 inventory that's tied to a particular purchase contract. 26 And so, in my mind it really and -- particularly since 27 you have the involvement of the two jurisdictions in 28 Southern California where the shipments -- some of the 42 1 shipments initiate from. 2 So, I'm kind of having a hard time really 3 looking at Union City as being either analogous to what 4 happens down in Cypress-La Mirada or -- or certainly 5 rises to a level of greater participation in those 6 jurisdictions. And the fact that in both those two 7 jurisdictions there are permits in place for those two 8 particular facilities and not the one in Union City 9 until very recently if in fact that's the case. 10 So -- 11 MS. MANDEL: Well -- 12 MS. YEE: I mean, I guess it's still under 13 the -- I guess the -- the purpose of the Union City 14 location is to effect the receipt of this merchandise to 15 the customer. And I think -- I'm kind of looking at -- 16 well, actually for the out-of-state purchases the -- the 17 issue about whether -- where the stock of inventory 18 initiates from is, I think, still kind of an issue for 19 me. 20 MS. RUWART: For the out of state originating 21 sales, the out-of-state warehouses, it is our 22 understanding, perform essentially the same functions as 23 Southern California warehouses. In other words, the 24 customer information is downloaded at the out-of-state 25 warehouses. They take the inventory, the cut and 26 process, they package it, they label it, they make it 27 all individually ready for delivery to each individual 28 customer. 43 1 The packages -- the large loads are delivered 2 to Union City from the out-of-state warehouses and the 3 Union City does the same thing. They look through 4 each -- at each individual package with the address that 5 was placed on it by the out-of-state warehouse and they 6 load it into trucks for delivery. 7 They don't even apparently consolidate loads. 8 If a particular customer has three -- three different 9 packages they -- they just put them in as if they 10 were -- process them as if they were completely 11 different shipments. 12 They don't do anything other than mere 13 trans-shipment at Union City regardless of where the 14 shipments originate. 15 MS. YEE: Okay. Mr. Myers, Mr. Cendejas, can 16 you convince me otherwise? 17 MR. MYERS: We'll do our best. A point of 18 clarification, Ms. -- Ms. Ruwart with respect is 19 referring to the delivery activities as mere 20 trans-shipment. We don't see any support for that in 21 the law. Again, if you look at where title passes as 22 we're owner, the place of sale under 1628 -- Regulation 23 1628, what you're looking at is the law has a preference 24 for the beginning of the sales chain of activity, taking 25 the order, negotiating the terms, than for the end, 26 the -- the delivery of the end product to the customer. 27 And the delivery of the end product to the 28 customer comes from Union City. So, with respect to 44 1 that it's not mere trans-shipment. Delivery is not 2 treated as some mere afterthought in the law of, you 3 know, taxing sales of tangible personal property. It's 4 an extremely important piece of taxing tangible personal 5 property. 6 Mr. Cendejas. 7 MR. CENDEJAS: Well, I won't be presumptuous 8 that I'll change the Chair's mind, but I'll try, anyway. 9 Honestly, the -- we don't have anything in the 10 law that supports those activities as being significant 11 participation. There isn't anything anywhere that 12 says -- 13 MS. YEE: Which -- which -- 14 MR. CENDEJAS: The cutting, you know, that type 15 of participation. Cutting the fabric, rolling it, 16 putting twine on it and throwing it on the truck. 17 MS. YEE: That's not filling an order? 18 MR. CENDEJAS: Pardon me? 19 MS. YEE: That's not fulfilling? 20 MR. CENDEJAS: There's -- there's -- in 1802 21 there's nothing about fulfilling the order as being 22 participation in the sale for local allocation. All 23 it -- all it says in the paragraph is negotiation, 24 order-taking and then it lists four other items; 25 approval of the sale, credit check, the shipping part 26 and the billing part. 27 But -- and all of which takes place in Georgia 28 except for -- for the delivery. 45 1 So there's nothing that supports those type of 2 activities as falling into these categories. 3 So, what I'm saying is we're creating something 4 new here, I think. That that's -- that's more 5 significant than something in the reg. that -- that is 6 identified as a significant part of participation -- 7 MS. YEE: I don't -- I don't -- 8 MR. CENDEJAS: -- which is delivery. 9 MS. YEE: Yeah, but I don't think you could 10 ignore everything that happens prior to what -- to the 11 involvement of the Union City. 12 MR. CENDEJAS: No -- well, I agree you can't 13 ignore it. I guess for me it's -- I guess I'd say -- 14 and this is, you know, pretty common within there, is 15 where was the principal contact between the customer and 16 the seller. And there is really only, to me, one 17 principal contact between the customer and the seller, 18 and that's really with the delivery. And that being a 19 major significant function, and that's why it's listed 20 in -- in the reg. whereas these other activities which, 21 you know, there's -- there's, you know, a lot of little 22 things they do over there, but they're not as -- they 23 don't have the same significance. 24 And it's -- it's -- the test is really about 25 quality instead of quantity. What -- what is the most 26 important thing? Where does it occur? 27 What's the most important thing that happened 28 in the State? Where does it occur? Not where the -- 46 1 the bigger quantity of things occur. 2 MS. YEE: Yeah. 3 MR. CENDEJAS: It's where the more important 4 things occurred. 5 MS. YEE: And I'm not looking at it 6 quantitatively. 7 MR. CENDEJAS: Okay. 8 MS. YEE: I'm looking at it in terms of what 9 all happens at the Union City location. You've got 10 goods en route to customers. The small might be the 11 Union City location actually is drawing off of those 12 stock in inventory to deliver to its customers. There 13 are goods en route to the customer tied to a particular 14 purchase contract. And that just happens to be the last 15 step before the goods get to the customer. So -- 16 MR. WILS: Madam Chair, may I address -- 17 MS. YEE: Yes. 18 MR. WILS: -- a couple points? 19 Two things. First, if there's something wrong 20 with the order, the customer is not going to call Union 21 City. They're going to call the taxpayer in Georgia. 22 That's where the principal contact between the customer 23 and the taxpayer is occurring. 24 Second, to continue your point you were making, 25 as Ms. Ruwart stated before, the delivery really starts 26 when that property leaves one of the -- one of the 27 warehouse locations, either Southern California or in 28 Georgia. That's when delivery starts. 47 1 They -- the fact that it's finished going 2 through Union City doesn't make it a stock of goods or 3 require a permit. 4 MS. YEE: Mr. Shea. 5 MR. SHEA: Well -- and stock of goods, we keep 6 coming back to that because it's -- I don't think it's 7 correct to say that even if you feel the delivery is the 8 most significant part of the participation of the 9 in-state locations that establishes the need for a 10 permit. It doesn't. You need to have a stock of goods. 11 The subjective determination as to the most 12 significant participation really has to do with an 13 allocation decision if -- if both locations have 14 permits. 15 Alternatively, if you did decide that Union 16 City was more significant but didn't need a permit then 17 it would go to the County-wide pool in Alameda. So you 18 do have to again begin with the establishment of a -- of 19 a requirement for a permit in Union City in order to get 20 this allocation there, and then it becomes a question 21 of -- of what is most significant participation, and 22 we've -- we've been discussing that for some time now. 23 I'm not sure that we're going to convince each other 24 what was more significant and we do have some 25 understanding of the different steps involved beginning 26 in Georgia. 27 MS. RUWART: May I make one more comment 28 regarding the significance, because Petitioners have 48 1 been talking about the passage of title and where it 2 occurs and how important it is. 3 Under Regulation 1802(a)(3) the -- it specifies 4 that for purposes of Bradley-Burns and allocating the 5 place of sale -- determining the place of sale, the 6 place of passage of title is, quote, immaterial. 7 If title to the tangible personal property 8 passes to the purchaser in California, as it does here, 9 it is immaterial that title passes to the purchaser 10 outside the place of the local taxing jurisdiction in 11 which the place of business is located, or even that the 12 property sold is never within the local taxing 13 jurisdiction in which the place of business is located. 14 So, you may weigh it on another -- for other -- 15 for other reasons, but in terms of the law of allocation 16 it is -- it is not significant. You can have a place of 17 sale where -- in a -- in a location where the goods 18 never even were. And that is allowed under -- and 19 contemplated under Bradley-Burns. 20 MR. CENDEJAS: However -- I'm sorry. 21 MS. YEE: Please. 22 MR. CENDEJAS: However, it does say the place. 23 It doesn't say the act of passage of title is 24 immaterial. It says it's the place. And so I submit 25 that the act is important. Without the act of passing 26 you don't have a sales tax. You don't complete the -- 27 the sale. You don't have a Sales Tax for it to be 28 allocated. It would be a Use Tax. 49 1 MS. YEE: Other questions, Members? 2 Okay. Hearing none, is there a motion? 3 MR. SHEA: I'll move to hold the matter under 4 submission. 5 MS. YEE: Okay. I have a motion by Mr. Shea to 6 take this matter under submission. 7 Is there a second? 8 MS. MANDEL: Second. 9 MS. YEE: Second by Ms. Mandel. 10 Without objection that motion carries. 11 Thank you all very much. 12 MR. CENDEJAS: Thank you. 13 MS. YEE: We'll discuss your matter later today 14 and send you written notice of our decision. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 50 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 August 31, 2008 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 50 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: September 21, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 51