BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle Culver City, California REPORTER'S TRANSCRIPT SEPTEMBER 23, 2009 ITEM C2 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by SELECT OFFICE SOLUTIONS, INC. (Case No. 187460 and 345451 AP) 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 Bill Leonard 6 Member 7 Michelle Steel Member 8 Marcy Jo Mandel 9 Appearing for John Chiang State Controller (per 10 Government Code Section 7.9) 11 Diane Olson 12 Chief, Board Proceedings Division 13 14 For Board of David Levine Equalization Staff: Tax Counsel IV 15 16 Cary Huxsoll Tax Counsel 17 Robert Tucker 18 Legal Department 19 Kevin Hanks Sales and Use Tax 20 Department 21 For Petitioner: Frank J. Mendicina 22 Taxpayer 23 24 ---OOO--- 25 26 27 28 2 1 Culver City, California 2 September 23, 2009 3 ---oOo--- 4 MS. YEE: Good morning. We will call today's 5 Board of Equalization meeting to order. Ms. Olson. 6 Good morning. 7 MS. OLSON: Good morning. Our first oral 8 hearing this morning is C2, Select Office Solutions, 9 Inc. Please come forward. Board Proceedings has 10 received contribution forms from this morning's hearings 11 from the parties, agents and participants. All forms 12 were properly completed and signed. No disqualifying 13 contributions were disclosed. All parties, agents and 14 participants are on the Alpha listing provided to your 15 office. 16 Each person sitting at the table will be asked 17 to introduce themselves and if necessary their 18 affiliation with the taxpayer for the record. 19 Ten minutes is allocated for the taxpayer's 20 opening presentation, followed by ten minutes for the 21 Department's presentation and five minutes is allocated 22 to the taxpayer for rebuttal. Ms. Yee. 23 MS. YEE: Okay. Thank you very much, Ms. 24 Olson. First item is item C2, Select Office Solutions, 25 Incorporated. Mr. Levine, good morning. 26 MR. LEVINE: Good morning, Madam Chair, 27 Members. The issue in these petitions of Select Office 28 Solutions is whether amounts not otherwise taxable 3 1 constitute excess tax reimbursement because they were 2 billed to the purchaser as tax. 3 I note that in the earlier audit period a 4 portion of the disputed amounts were actually reported 5 and paid to the Board as Sales Tax. 6 MS. YEE: Very good. Thank you very much. 7 Good morning, sir. 8 MR. MENDICINA: Good morning. 9 MS. YEE: If you could state your name for the 10 record. You have ten minutes for your -- 11 MR. MENDICINA: My name is Frank Mendicina. 12 I'm the Chairman of Select Office Solutions. 13 MS. YEE: Great. Good morning. 14 MR. MENDICINA: Good morning. 15 MS. YEE: Please proceed. 16 MR. MENDICINA: I presented to the Board -- and 17 by the way, thank you very much for hearing me this 18 morning. 19 I presented to the Board and obviously I erred 20 the way I submitted it, and the reason why I'm not 21 represented by counsel is over nine years we spent 22 hundreds of thousands of dollars trying to resolve this 23 matter from the beginning. 24 So what I tried to do here was basically bring 25 out three issues here. And every time we have tried to 26 meet with the Board over a period of nine years, 27 somewhere along the line someone made a presentation, we 28 challenged it, one -- one part of it was ruled, one was 4 1 overruled. 2 The basic issue here is this, all right, there 3 are three -- three items here. First of all, the Board 4 considered buyouts as income. Buyouts as far as we're 5 concerned, and it was also agreed upon, ultimately is 6 that it should not be -- it should not be taxable. 7 Okay. 8 They -- they considered that gross revenue. 9 That's where -- the first part is coming to. As we 10 proceeded through the process they also said that setup 11 and delivery should also be taxable. That is labor. 12 That was ultimately agreed upon. 13 The third item was connection. That is also a 14 labor intensive item. There is no products involved. 15 It is merely when you buy a piece of equipment, several 16 personnel go out there and make sure that the -- the 17 equipment is in operating condition. 18 We could solve -- you know, we have tried 19 repeatedly to get to this point here. We have tried 20 even as recently as about six months back submitted a 21 proposal to try to negotiate a -- a settlement, you 22 know, waive the penalties and interest because it's not 23 Select Office Solution's fault that all this time has 24 elapsed. It is the decision of the Board of 25 Equalization to continue this matter. 26 We have met with members of the -- of the 27 Board. There have been Commissioners come down. I've 28 had attorneys, consultants and everything. We just need 5 1 to resolve this matter. 2 So, that's why I'm here this morning. 3 MS. YEE: Okay. 4 MR. MENDICINA: And if you'll read this I think 5 it's a brief of basically what I just said. 6 MS. YEE: Okay. Do you want to get into more 7 specifics about the issues that have been raised? 8 MR. MENDICINA: Yes. first of all, I mean the 9 buyout, okay, and -- and according to the -- to the 10 statute, and I'm not that -- I'm not an attorney and I'm 11 certainly not an accountant. Okay. 12 We don't own the buyout. When we -- when we 13 lease a piece of equipment, okay, and then we take and 14 we sell another piece of equipment to a new customer or 15 the existing customer, there is what was called a 16 buyout. What that basically is, it's the balance due on 17 the original amount of the first lease. Okay. It's 18 kind of like buying a car. If you have some remaining 19 balance they -- they add it on. Okay. Same thing. 20 We do not own the equipment. The leasing 21 company owns the equipment. So, it should not be 22 considered taxable, number one. 23 Number two, the installation and delivery, that 24 is a labor intensive and it should not be taxable. 25 What we did is we erred, though. We sell a 26 monthly payment to a customer, okay. The sales people 27 represent a tax on it. So, basically what we did is we 28 classified the difference between the buyout and the 6 1 taxable amount, okay -- we classified it as the buyout 2 income. So therefore we did pay tax on -- on the buyout 3 and the income. Okay. A buyout income, okay. 4 But it was not recorded as such. On one of the 5 occasions the people at the Board says, well, you go 6 back to the leasing companies and -- and let's reimburse 7 the leasing companies. Well, we went to the leasing 8 companies, G. E., Wells Fargo, Citibank, all these. 9 They cannot be responsible or have a vehicle to give 10 back tax that they did not receive. 11 And then it was decided, okay, go back to the 12 individual. Okay, go back to the company. We spent -- 13 I don't know how many hours in -- in going back through 14 years of pulling invoices, putting the schedule together 15 for the Board. Go back to the Board. 16 That was changed. They said, well, we're not 17 sure if it should go back to the leasing company. We 18 again notified them and even presented a letter from the 19 leasing company stating that they cannot give us back 20 that. 21 There's no question about it, there's a 22 difference between what we billed the leasing company, 23 okay, and what we show as our own records. That's 24 partly our fault. 25 So, there -- do believe there's some tax owed, 26 you know, for our error. No question about it. But the 27 amount that we owe is significantly less than what is -- 28 which is registered here in -- in -- in the formal 7 1 complaint. 2 The difference being is this here, okay, is 3 that the State ultimately is getting tax on the buyout, 4 okay, on the connection fee and installation and 5 delivery, okay, which is part of the initial amount 6 of -- of the payment to the leasing company. 7 So the State is not losing out on taxes, but we 8 did err the way we says. But we just feel that this 9 should be resolved a lesser amount, should waive the 10 penalties and interest because it's not our fault that 11 it's taken nine years to get to this meeting today. 12 I have no other -- I don't have anything else 13 to add. 14 MS. YEE: Okay. We'll give you time on 15 rebuttal, Mr. Mendicina. 16 MR. MENDICINA: Please. 17 MS. YEE: Okay. Thank you. Department. 18 MR. HUXSOLL: Good morning, Madam Chair, 19 Members of the Board. I'm Cary Huxsoll from the Legal 20 Department, along with Robert Tucker and Kevin Hanks 21 representing staff. 22 We concur with the recommendation of the 23 Appeals Division. Amounts itemized in Petitioner's 24 internal invoices is buyout income that were included as 25 tax in invoices to purchasers constitute excess tax 26 reimbursement. 27 Additionally, Petitioner collected excess tax 28 reimbursement on amounts itemized on its internal 8 1 invoice as setup and connection charges. 2 Regulation 1700 is explicit. When amounts not 3 taxable or in excess of tax are collected as tax or tax 4 reimbursement, they must be remitted to the State or 5 refunded to purchaser. 6 Petitioner is a retailer of copiers, fax 7 machines and other office equipment, and Petitioner 8 primarily sells new equipment to leasing companies. And 9 this appeal involves two audit periods. 10 Generally Petitioner negotiates an end user of 11 the equipment, who makes the actual sale to a leasing 12 company. Equipment in this area often becomes obsolete 13 before a lease is paid off, and end users do not wish to 14 lease the old equipment and new equipment at the same 15 time. 16 So, Petitioner arranges with the leasing 17 company a method to roll over the existing balance of an 18 old lease into a new lease. 19 Petitioner initially prepares a handwritten 20 invoice for the end user showing the equipment 21 purchased, price, delivery, setup and connection 22 charges, the old lease buyout amount and amount 23 described as buyout income. 24 For the first audit period the buyout income 25 was equal to the buyout amount multiplied by the 26 applicable tax rate. The invoice is then prepared into 27 a printout for Petitioner's internal use. 28 When the Petitioner makes the actual sale to 9 1 the lessing company, only a subtotal and an amount for 2 tax are included on the invoice. The leasing company 3 never sees the internal invoice. 4 During the first audit period the Department 5 asserted and Appeals agreed that the buyout amount was 6 subject to tax. However, it was later determined in the 7 second audit period that no buyout amount was actually 8 collected from the leasing company. 9 Thus, as discussed in the first SD&R for the 10 first audit period the buyout amount is not subject to 11 tax. Even though the buyout amount was not subject to 12 tax, the amount Petitioner itemized in its internal 13 invoice is buyout income which again for the first audit 14 period was the buyout amount multiplied by the 15 applicable tax rate, was included in the calculation of 16 tax on the invoice to the purchaser. 17 The invoice to the purchaser only showed an 18 amount listed for a subtotal tax and balance due. Even 19 though Petitioner never received buyout amounts it 20 collected an amount equal to tax due on such amounts 21 from its purchaser. 22 While the buyout amount was not subject to tax, 23 Petitioner collected tax reimbursement equal to the 24 applicable tax on the buyout amount. Therefore, 25 Petitioner collected excess tax reimbursement. 26 In both audit periods the tax treatment of 27 setup and connection charges were at issue. And in each 28 case Appeals determined that such charges were not 10 1 subject to tax amount. For the first audit period 2 Petitioner collected tax reimbursement on setup and 3 connection charges, and reported and paid these amounts 4 to the State. 5 Petitioner sought offset on these charges for 6 overpayment of tax. Because Petitioner collected tax 7 reimbursement on these amounts not subject to tax, it 8 was collecting excess tax reimbursement. 9 Appeals instructed the Department to perform a 10 reaudit and make adjustments to the extent that such 11 excess tax reimbursement was refunded. No refunds were 12 made by Petitioner. 13 For the second audit period Petitioner did not 14 report tax on setup and connection charges. However, 15 during this audit period, the amount itemized as buyout 16 income was the very same rate as the applicable tax rate 17 multiplied by the buyout amount plus the setup and 18 connection charges. 19 This amount itemized in the internal invoice as 20 buyout income was again included in the calculation of 21 tax on the purchaser's invoice. Petitioner collected 22 tax reimbursement that included the tax that would have 23 been due if the buyout amounts, setup and connection 24 charges were subject to tax. 25 Petitioner collected excess tax reimbursement. 26 Petitioner must refund the excess tax reimbursement to 27 the purchaser or remit it to the State. 28 Thank you. 11 1 MS. YEE: Thank you very much, Mr. Huxsoll. 2 Mr. Mendicina, you have five minutes on 3 rebuttal. 4 MR. MENDICINA: Thank you. Some of what 5 he's -- what he just responded to absolutely is correct. 6 The only thing I would just add there is this here. 7 Okay, they say that ultimately we didn't -- the 8 State did not receive tax on the setup, delivery and so 9 on and so forth. It is part of the initial monthly 10 payment. Therefore, the State is getting tax, okay. 11 They're -- it's sales tax revenue on this 12 amount because it is billed -- being directly to the 13 leasing company. 14 MS. YEE: Mr. Huxsoll, you want to clarify 15 that? 16 MR. HUXSOLL: I -- I didn't quite understand. 17 MS. YEE: I'm not sure that -- 18 MR. MENDICINA: Okay, and -- and you're correct 19 in stating that we -- we made a payment -- you know, 20 we -- we put a tax on the payment. You're saying that 21 Select Office Solutions did not pay tax on that amount 22 to the State. 23 What I'm saying to you is this here, we bill -- 24 we bill the leasing company for a specific dollar 25 amount, monthly payment, okay. Inclusive of that 26 monthly payment is the setup, the delivery, okay, and a 27 connection fee. So, the State ultimately is getting 28 their tax. This is the point that we've tried to make 12 1 consistently with the Board. 2 They are getting paid tax on that amount. Plus 3 the fact, also, on the buyout amount, although 4 fortunately they did agree that the buyout amount would 5 not be taxable, if you understand the tax -- the State 6 is actually getting double tax on -- on that buyout 7 because it's part -- part of the initial lease. We paid 8 the tax 100 percent of the first invoice on the first 9 audit. And when we added it onto the second, when we 10 carried it over or rolled over that amount, that also is 11 part of the new lease, which the State is now getting 12 tax on again. 13 So the State is being compensated. We made a 14 mistake, no question about that, the way we rolled this 15 over -- the way we put them on our books. But the State 16 is getting tax on the setup, the delivery and a 17 connection fee because it is part of the monthly 18 payment. 19 And the only thing that the leasing company 20 wants is a description of what the tangible amount is 21 that has serial numbers and so on and so forth in the 22 equipment. 23 MS. YEE: Keep that thought just one second. 24 Mr. Levine, can you help tease out for -- 25 MR. LEVINE: I thought so, but I was getting 26 more and more confused. If -- I don't want to say if I 27 understand because I don't, but the only way there could 28 be an arguable second tax on this is if the leasing 13 1 company is treating the leases as taxable leases and 2 collecting Use Tax on the payments. 3 I don't think there's any way that a company 4 like G. E. would make the mistake that's the very reason 5 they want tax collected on the purchase price because 6 it's either taxable up front or taxable on the rentals. 7 If Petitioner is saying it reports tax on 8 rentals, if -- it seemed like Petitioner is saying that 9 it collected payments on a monthly basis rather than up 10 front the way the invoice says, but that doesn't seem to 11 make sense. 12 MS. MANDEL: I don't think that's what I heard. 13 MR. MENDICINA: That's -- that's not -- 14 MS. MANDEL: Let me see if -- 15 MR. MENDICINA: You -- I'm sorry, you -- 16 MS. MANDEL: I don't know. 17 MR. LEVINE: One other thing on the rollover, 18 apparent -- there was one lease which isn't the one 19 that -- at issue here. The Petitioner is saying they 20 paid tax on that and then they paid tax when they sold 21 the new property for the new lease, and they rolled over 22 the other. That's just the -- the way it goes. 23 When you buy property for lease, the lessor can 24 pay tax up front or collect tax on rentals. And if it 25 pays tax up front and the lease is three months and they 26 destroy the property, maybe that was a bad business 27 decision. Maybe they should have paid on rentals. 28 But each transaction is a discrete transaction 14 1 and is taxable as such. 2 MS. YEE: Mr. Mendicina, can you clarify for 3 us -- 4 MR. MENDICINA: Okay. 5 MS. YEE: -- what -- how tax was applied -- 6 MR. MENDICINA: Okay. 7 MS. YEE: -- with respect -- 8 MR. MENDICINA: It is complicated. That's why 9 it's taken us nine years to get here. 10 All right. We sell a monthly payment. Okay. 11 The leasing companies, okay, can only record leases 12 based upon tangible -- right, in other words, if -- if 13 we -- I sold you a piece of equipment, okay, and it's -- 14 it's for a machine -- it's got a serial number. That's 15 a tangible asset. 16 So, when they -- if they -- if they default 17 they can go after that piece of equipment. You cannot 18 go after installation and delivery because that's not a 19 tangible aspect. 20 All -- but the lessing company pays us for this 21 amount. That's why we bill them on a monthly payment. 22 Okay. Therefore, everything that is on an invoice, the 23 installation, the delivery and the setup is part of that 24 monthly payment. So the State is getting their taxes. 25 MR. LEVINE: Could I ask a couple questions 26 just -- 27 MS. YEE: Yes, please. 28 MR. LEVINE: How does the lessor pay you? Up 15 1 front or monthly? 2 MR. MENDICINA: The lessor does not pay me. 3 Okay. Okay, you mean -- you're talking about the 4 leasing company or the customer now? 5 MR. LEVINE: The leasing company. How do you 6 get paid for this? Do you get paid up front as the 7 invoice indicates? 8 MR. MENDICINA: I get paid for the amount of 9 the invoice, less what the buyout is. 10 MR. LEVINE: Okay. 11 MS. YEE: Okay. 12 MR. MENDICINA: I do not get reimbursed for -- 13 MR. LEVINE: So -- so when you say you're 14 selling a monthly payment do you mean that you do all 15 the calculations and you tell, for example G. E., I will 16 sell you this for "x" dollars and this is the monthly 17 payment you should collect? 18 MR. MENDICINA: Basic -- that's correct. You 19 have copies of the invoices to the leasing company. 20 MR. LEVINE: Okay. All right. 21 MR. MENDICINA: We just bill them a monthly 22 payment. Okay. And we stipulate the amount -- the 23 basis of the equipment. This is why it's taken so long, 24 because every time you get into this it's -- it's 25 another question comes out. 26 The State is getting paid taxes. Okay. Only 27 we're not paying that taxes, it's coming from the 28 leasing company as they bill the -- the lessee, okay, 16 1 which -- which reimburses the State on a monthly 2 basis. 3 MS. MANDEL: Okay. So -- so let me -- let me 4 try -- try for a moment. So, a piece of equipment costs 5 a million dollars and -- and there's $10,000 of buyout 6 left on the original lease. And -- and the leasing -- 7 the leasing -- and I'm -- I'm the guy who's going to 8 have the piece of equipment in my office, but I'm going 9 to lease it from the leasing company. 10 MR. MENDICINA: Yes. 11 MS. MANDEL: The lessing company technically is 12 your customer and you're selling it to the leasing 13 company, who leases to me. 14 MR. MENDICINA: That's correct. 15 MS. MANDEL: When the leasing company pays you 16 the million dollars, because you just said that you get 17 paid less the buyout -- 18 MR. MENDICINA: That's correct. 19 MS. MANDEL: -- do they pay you the million 20 dollars on day one up -- you know, the day they 21 complete -- the equipment comes to me, they pay you a 22 million dollars, but you tell them what a monthly 23 payment would be on a million plus the buyout? 24 MR. MENDICINA: Yes, we operate with a -- with 25 what they call rate factors, okay, which vary dependent 26 upon what the interest rates is. So that -- that 27 million dollars -- and I wish we sold a million 28 dollar --- 17 1 MS. MANDEL: Right. 2 MR. MENDICINA: -- equipment. But, anyway, 3 that -- that lease rate is -- there's a formula. Okay. 4 And for that million dollars let's say it costs -- 5 MS. MANDEL: Because it's really a lease 6 financing in a sense. 7 MR. MENDICINA: That's exactly correct. 8 MS. MANDEL: And so -- so -- 9 MR. MENDICINA: But the buyout -- the buyout is 10 included in that amount but we do not receive funds for 11 the buyout -- 12 MS. MANDEL: Okay, but what -- 13 MR. MENDICINA: -- because we don't own that. 14 MS. MANDEL: But -- but -- but are you -- does 15 your company get paid for the equipment that you sold 16 the day you -- you know, when you ship the equipment, or 17 are you still getting -- are you still getting 18 compensated monthly the way the leasing company's 19 getting compensated monthly? 20 MR. MENDICINA: No, ma'am, we get paid in the 21 front. 22 MS. MANDEL: So you get paid your --- in my 23 example, you get paid the million dollars up front -- 24 MR. MENDICINA: That's correct. 25 MS. MANDEL: -- but you tell the leasing 26 company since you know the leasing company -- you're 27 doing the math for the leasing company. 28 MR. MENDICINA: That's correct. 18 1 MS. MANDEL: The leasing company is going to 2 lease the equipment to me, I'm going to pay monthly -- 3 I'm going to pay monthly the million -- off the million 4 dollars off my $10,000 buyout where I rolled my old 5 lease in with an interest factor because I'm really 6 lease financing and they're getting the money back over 7 time. 8 MR. MENDICINA: Plus tax. 9 MS. MANDEL: And then you're saying plus tax. 10 So, you're -- so -- so that's where he's saying that the 11 leasing company is paying the tax -- collecting the Use 12 Tax on the rental stream. 13 MR. LEVINE: Here's the glitch. 14 MS. MANDEL: Okay. 15 MR. LEVINE: The only relevance of this is if 16 the leasing company were reporting tax to the Board on 17 rentals, and I wonder if he thinks they are, but I can 18 almost assure you -- 19 MS. MANDEL: That's what he's -- that's -- 20 MR. LEVINE: -- that G. E. is not doing so. 21 MS. MANDEL: Well, that's -- that seems to be 22 what he just said. 23 MR. MENDICINA: Excuse me just a second, I just 24 want to correct you. When we bill the leasing company, 25 we bill them for the amount of the equipment, $429, one 26 million dollars -- whatever the amount of the monthly 27 payment is, okay, plus tax. It's on the invoice. Plus 28 tax minus the buyout. 19 1 And it's -- it's stipulated. 2 MS. MANDEL: Okay. 3 MR. LEVINE: There's no dispute about that. 4 Everyone now agrees that the buyout amount apparently 5 the leasing company probably paid it directly to the old 6 financial -- or if the leasing company was the old 7 financial they just factored it in. No doubt the buyout 8 amount was not taxable. The only problem is the 9 collection of tax as if the buyout were. 10 So here we're just discussing whether there was 11 any other tax paid to the Board, and I don't think there 12 was. 13 MR. HANKS: If I could -- if I could add, I -- 14 I think I understand what -- what Mr. Mendicina is -- is 15 commenting on. 16 MR. LEONARD: Introduce yourself. 17 MR. HANKS: I'm Kevin Hanks with the Sales and 18 Use Tax Department. And I think I understand what it is 19 that -- that you're saying. What happens is, as an 20 example, we have copies of your invoices that -- that 21 would show the sale of the property to the lessor. It's 22 one of our exhibits that -- that shows the balance due 23 that's inclusive of the -- the sales tax that you're 24 charging. 25 I think what you're suggesting is that the 26 lessor, of course, is acquiring this property tax paid 27 and when they subsequently lease it to individuals 28 they're including reimbursement for their -- their 20 1 monthly rentals. They're including in that factor some 2 calculation for sales tax reimbursement. 3 However, that -- that sales tax reimbursement 4 is not a separate charge, so the lessor in this case 5 would not be charging a -- a separate tax amount to -- 6 to Ms. Mandel in -- in the hypothetical we're talking 7 about. 8 MR. MENDICINA: You have two periods here, if I 9 may -- if I may speak. Initially, okay, after the first 10 audit okay, what we used to do, okay, and it was 11 probably to the State's advantage to keep it that way, 12 we charged -- we -- we billed the leasing company plus 13 tax. We paid that tax initially on the full amount of 14 the lease. Initially, on the first audit. 15 After we went through the audit and all this 16 came about with the buyouts and so on and so forth, 17 okay, we went to the Board and -- and asked, well, how 18 do you want to change this? Okay. How -- how can we 19 solve this problem. 20 Nobody could give us an answer. So, finally I 21 went to the leasing company and I said, "Look, we're 22 having a problem here. How do you do that?" 23 He said the simplest way to do that is to just 24 bill us for the amount plus tax. We'll bill -- we'll 25 bill the customer the tax on the original amount of the 26 invoice. 27 So you have two audit periods here where 28 there's differential here. And -- and when the -- when 21 1 I said there was double taxation which he just kind of 2 clarified that it didn't make any difference, okay, 3 whether they paid tax on the full amount of the initial 4 lease, okay, and if they -- if they were dumb enough to 5 go through with it or however he described it, you know, 6 it just added on and you paid tax on it. 7 But there were two tax periods here. In the 8 first audit, we paid the tax on the full amount of the 9 sale from the beginning. When we ran into this 10 confusion we went to the leasing companies and the 11 leasing company said the easiest way to solve this 12 problem is we will bill the tax and pay it to the State 13 of California, which they do. 14 And by the way, they do pay tax on the original 15 amount of the invoice, which is the monthly payment plus 16 tax. 17 MS. YEE: Okay. Are you through, Mr. 18 Mendicina? Okay. 19 MR. MENDICINA: Unless you have more questions. 20 MS. YEE: Okay. 21 MS. YEE: I guess picking up on that point, 22 what do we know about the leasing companies and -- and 23 what they actually do pay or don't pay? 24 MR. HANKS: Ms. Yee, we -- I haven't looked 25 to -- to see what the -- the leasing companies pay with 26 respect to -- to these transactions because of course 27 they're reporting large amounts of money. We -- we're 28 not exactly sure how they're billing but presumably 22 1 the -- the leasing companies are acquiring this property 2 tax paid for the very purpose that they don't charge tax 3 reimbursement on rental receipts. 4 So they would be mindful of that. So, I 5 thought -- I would think it would be very doubtful that 6 the leasing companies were -- were charging tax 7 reimbursement on rental receipts. 8 MR. LEVINE: I'd point out one more thing. 9 MS. YEE: Yes, Mr. Levine. 10 MR. MENDICINA: Can I -- I just want to --- 11 MS. YEE: Let me just have Mr. Levine 12 respond -- 13 MR. MENDICINA: I beg your pardon. 14 MS. YEE: -- then I'll have you respond. 15 MR. LEVINE: If we had that situation, then we 16 would certainly -- 17 MS. MANDEL: Which situation? 18 MR. LEVINE: I'm sorry. If we had -- we know 19 that this taxpayer even in the second -- correct me if 20 I'm wrong, but even in the second period reported and 21 paid tax at least the amount that was due -- didn't pay 22 all the tax that it collected from -- from the leasing 23 company but it reported and paid the tax on the hardware 24 and the delivery, isn't that correct? 25 MR. MENDICINA: Say that again. 26 MR. LEVINE: You reported tax in the second 27 audit period on the amount that you showed in your 28 internal records as taxable. 23 1 MR. MENDICINA: Sure, that's income. 2 MR. LEVINE: Okay. Okay. 3 MR. MENDICINA: We pay tax on our income. 4 That's right. 5 MR. LEVINE: So we have -- 6 MS. MANDEL: Wait, wait, wait. 7 MR. LEVINE: The State has -- 8 MS. MANDEL: He said, "We pay tax on income," 9 yeah. 10 MR. LEVINE: Sales tax. 11 MR. MENDICINA: We pay -- well, excuse me, 12 okay, let's -- let's correct this here. 13 MS. MANDEL: Stick with Sales Tax. 14 MR. MENDICINA: We did not pay tax on setup and 15 delivery and we did not pay tax, okay, on connection 16 fees. 17 MR. LEVINE: But on -- 18 MS. YEE: But on the actual -- 19 MR. MENDICINA: We did not on -- on our invoice 20 because we -- we do not run that through our company as 21 a taxable item. Okay. But when we bill the leasing 22 company, it's all part of it. So, you're getting tax on 23 it, anyway. 24 MR. LEVINE: The question is did you report 25 Sales Tax on the hardware charges during the second 26 audit period? Did you pay some Sales Tax directly to 27 the Board? 28 MR. MENDICINA: No, because the Board -- we 24 1 bill the leasing company for the equipment which 2 includes everything. The leasing companies, and I will 3 tell you, the leasing companies, okay, they're not in 4 business for nothing, and these are large companies -- 5 they are paying the State of California tax on whatever 6 the monthly payment that we submit to them plus tax. 7 MS. YEE: Okay. So you've paid no Sales Tax on 8 any of the equipment, the hardware, anything that 9 you've -- okay. 10 MR. MENDICINA: No, because we bill the leasing 11 company. 12 MS. YEE: Ms. Steel. 13 MS. STEEL: So, you bill them, leasing company, 14 taxes. 15 MR. MENDICINA: That's correct. 16 MS. STEEL: You collect those taxes. 17 MR. MENDICINA: I do not collect the tax. 18 MS. STEEL: You just collect only -- 19 MR. MENDICINA: Only the amount of the 20 equipment that we bill them for on the original 21 monthly -- 22 MS. STEEL: Because of the -- that's a second 23 audit. Because the first audit that you supposed not to 24 put tax -- Sales Tax on the buyout so you changed that 25 procedure and then you start billing leasing company 26 the -- whatever lease amount plus taxes. So that -- 27 that's the way leasing companies paying taxes -- Sales 28 Taxes to -- for the acquisition -- is that what you are 25 1 saying? 2 MR. MENDICINA: Yeah. Well, two -- two audit 3 periods. First audit period, we charged the -- we 4 charged the leasing company sales tax. 5 MS. STEEL: Right. 6 MR. MENDICINA: We paid that amount to the 7 State. 8 MS. STEEL: You pay that amount. Okay. 9 MR. MENDICINA: Okay. Second sales -- second 10 audit, we just -- we paid -- we bill the company for a 11 monthly payment plus tax. 12 MS. STEEL: Right. 13 MR. MENDICINA: Okay. When I say plus tax -- 14 MS. STEEL: But you never collected that tax. 15 MR. MENDICINA: -- we don't get this tax. They 16 bill the customer plus tax. 17 We only get the amount of the -- 18 MS. STEEL: So -- 19 MR. LEVINE: Mr. Mendicina -- 20 MS. STEEL: Can I just make it one clear? 21 MS. YEE: Yes, Ms. Steel then Mr. Levine. 22 MS. STEEL: So when you bill them $100 plus $9 23 taxes, but you got paid from leasing company only $100 24 income but that taxes you never got paid from the 25 leasing company. 26 MR. MENDICINA: That's exactly correct. 27 MS. STEEL: That's -- that's the second audit. 28 MR. MENDICINA: That's the second audit. 26 1 MS. STEEL: The first audit you did, and then 2 you paid -- 3 MR. MENDICINA: And we submitted that to the 4 State. 5 MS. STEEL: -- to the -- so, whatever you 6 collected it's been paid to Board of Equalization for 7 the first period -- 8 MR. MENDICINA: That's correct. 9 MS. STEEL: -- the first audit period? 10 MR. MENDICINA: That's correct. 11 MS. STEEL: Okay. But second one you didn't, 12 even you billed them but you never collected those tax 13 amount? 14 MR. MENDICINA: Yeah, the instructions are 15 there to bill them tax. We just bill them the monthly 16 payment. It's on the -- it's on the -- it's on the 17 lease. 18 MS. YEE: Mr. Levine. 19 MR. LEVINE: I think Mr. Mendicina keeps 20 talking about two different things. The monthly thing 21 is irrelevant to us. Petitioner charged a figure up 22 front and is what the -- the customer paid. What Mr. 23 Mendicina said and what I've -- we've understood is even 24 in the second audit period the total billing was for the 25 total amount of the internal invoice plus an amount for 26 tax, and the total -- and the amount that the leasing 27 company paid was that total less the buyout amount. 28 So that included the amount itemized as tax and 27 1 the amount itemized for everything else. And there's 2 nothing that I'm aware of in the audit that indicates 3 Petitioner paid nothing. 4 But the bottom line is what we have here is we 5 have a billing to the lessor for tax and if we had a 6 situation where the lessor turned around and collected 7 tax from the lessee, also, we would definitely have a 8 case of excess tax reimbursement but it would be the 9 second one, because the payment of tax to the Board or 10 tax or tax reimbursement to the vendor is an irrevocable 11 election to pay tax up front. You can't change it. 12 So by billing the lessor tax, if we had the 13 lessor in front of us who collected tax from the 14 customer, we would say that's excess tax and -- and it 15 can be refunded if you'll refund it to the lessee. And 16 we'd have to -- we'd have to go after the lessor -- or 17 the -- the vendor 18 MS. STEEL: What he's saying is he never 19 collected those taxes. For the second -- 20 MR. LEVINE: That's -- well -- 21 MS. STEEL: -- after the audit. 22 MR. LEVINE: See, that's the dispute. He did 23 collect -- the -- the invoice shows tax but Petitioner 24 is saying they did not regard that as collecting tax. 25 MS. YEE: Okay. Just -- before you answer, Mr. 26 Mendicina, let me -- 27 MR. MENDICINA: It's getting a little confusing 28 here. 28 1 MS. YEE: No, hold on. Hold on, we're trying 2 to get clear here. Department, what did Petitioner 3 collect and pay to the Board of Equalization? 4 MR. HANKS: It's our understanding, as -- as 5 Mr. Levine has -- has phrased it that -- that what the 6 Petitioner has reported to the Board are the amounts 7 that are shown on the internal invoices. The amounts 8 that -- that they bill to the lessor is where the -- the 9 increased amounts -- 10 MS. YEE: Okay. 11 MR. HANKS: -- and those were the amounts that 12 led to the excess tax reimbursement. So it's our 13 understanding that -- that that's the issue but that the 14 reported amounts are just the ones that -- that appear 15 within the internal invoices. 16 MS. YEE: Mr. Mendicina. 17 MR. MENDICINA: Let me just try to explain one 18 more time to Mr. Levine something here. Okay. When we 19 bill the leasing company, the leasing company is not 20 concerned about all the miscellaneous item. They treat 21 whatever we put on this invoice as the cost of the 22 equipment. The machine, you know, if it's a -- if it's 23 printer involved in it or whatever the case may be. 24 The invoice to the leasing company is not 25 broken down, so -- and what Mr. Levine is saying is 26 if -- if the -- if we went to the leasing company and 27 says, well, you -- we -- you're -- you're charging 28 excess tax on buyouts, setup, connection fee or 29 1 whatever, that's a moot point because as far as the 2 leasing is concerned is they are paying "x" amount of 3 dollars on a monthly payment, okay, whatever they pay 4 us, okay, for the machine. 5 They cannot -- they cannot include non -- you 6 know, non-tangible items, which is (inaudible) -- it's 7 included. It's just like that was cost of the 8 equipment. 9 So it's not breaking -- broken down to leasing 10 company and I'm sure they have examples of -- of the 11 lease invoices. So, it is not broken down. It's just 12 a fee. 13 So they are paying, okay -- in their mind they 14 are paying "x" amount of dollars for this equipment. 15 Doesn't include the setup, the delivery or whatever. 16 That is what they are paying. 17 I don't know if that -- that clarifies 18 something for Mr. Levine or whatever. See, there it is 19 right there. 20 MS. YEE: Ms. Steel. 21 MS. STEEL: Leasing company has been paying 22 taxes. I think that's -- 23 MR. MENDICINA: That's the first audit. 24 MS. STEEL: -- important part there. 25 MS. MANDEL: Wait, I -- 26 MR. MENDICINA: That's the first audit. 27 MS. YEE: Wait, wait, wait, wait, wait. 28 MR. MENDICINA: We paid that tax. 30 1 MS. YEE: Hold on. Hold on. Mr. Mendicina -- 2 MR. MENDICINA: I'm sorry. 3 MS. YEE: -- We're really trying to get clear 4 on this, so I'm -- 5 MR. MENDICINA: So am I. 6 MS. YEE: -- going to ask you not to speak 7 until you're recognized. 8 MR. MENDICINA: I beg your pardon. 9 MS. YEE: And let's get all -- 10 MR. LEVINE: It's my fault. 11 MR. MENDICINA: He showed me something, I'm 12 sorry. 13 MS. YEE: That's all right. That's all right. 14 That's all right. 15 Let me get Ms. Steel's questions back on the 16 table again. 17 MS. STEEL: My question is what he's saying is 18 since second audit that he bill the taxes but he never 19 collected it. So, if leasing company were paying taxes, 20 sales taxes on it, then it's going to be clear it, 21 right? 22 So do you have any record of those leasing 23 companies that they are paying taxes or not? 24 MR. HANKS: No, Ms. Steel, we haven't looked 25 to -- to see how the -- the lessors are -- are reporting 26 these amounts. We know that presumably they're 27 acquiring the property tax paid so that they can -- 28 MS. STEEL: We cannot just presume or assume or 31 1 anything here. I think we should have something that 2 clear answer, that -- because if -- we -- we -- our duty 3 here is just collecting same -- you know, right amount 4 of sales taxes for one equipment here. 5 So, if leasing company or taxpayer or whoever 6 paid taxes on that, then that's going to be clear. So I 7 just want to see the documents, that if leasing company 8 was paying for sales taxes on that equipment I think 9 everything is going to be clear. 10 And my another question is, we are looking at 11 two audits here. One is from 1998 to 2001 and second 12 one is 2002 to 2005. I thought first audit was done by 13 2004, and it took more than five years to come up to the 14 Board. I mean, you know, it seems like my -- it's like 15 a -- you know, repeating every time, that why it took so 16 long to come? Usually we come with the first audit and 17 then second audit starts and then coming back. But it 18 seems like 1998 audit, this is almost -- 19 MR. HUXSOLL: Yeah, Ms. Steel, the first audit 20 was completed and the D & R was issued requiring a 21 reaudit, providing Petitioner time to show that it 22 refunded amounts for excess tax reimbursement to its 23 customers. Then it appears the Petitioner went to 24 settlement into the middle of 2005 and sought a Board 25 hearing on this matter for the first audit. 26 At that point the second audit was taking place 27 and the new information came out about the fact that 28 buyout amounts were not actually being collected, and so 32 1 the cases were consolidated in the first SD&R/ -- for 2 the first audit period and the D & R for the second 3 audit period which were, you know, in one document. 4 Following, that Petitioner explained that it 5 sought to refund excess tax reimbursement to its 6 customers but it was looking for a source of funding. 7 Appeals gave Petitioner time to demonstrate that it had 8 refunded this amount to its customers. 9 Eventually, the Appeals attorney contacted 10 Petitioner's representative who stated that they were 11 still trying to seek funding and the second SD&R for the 12 first audit period or the first SD&R for the second 13 audit period was issued, and then the case was appealed 14 for the Board hearing. 15 So, the -- 16 MS. STEEL: I -- I thought that when we do 17 first audit or second audit, when we go out to audit any 18 taxpayers, I thought we going to educate them right 19 what's taxable and what's not, and give them right 20 direction. So, for a second audit, the -- you know, 21 they supposed to do the right practice. 22 Here it seems like it's totally confused. He 23 was informed -- I'm not sure that it was our fault or 24 it's taxpayer's fault that, you know, what happened. 25 But it was not really clear there. 26 So, second audit, he billed the taxes to the -- 27 so, this -- this one was -- we were not really making 28 clear to the taxpayers, that's the first thing. Second 33 1 thing is, we been dragging since 1998 till what -- this 2 is 2009, more than 11 years. I'd rather help taxpayers 3 to do their business so they can pay more taxes to the 4 State instead of getting just dragged by this tax system 5 years and years and, you know, try to prepare all these 6 paperworks coming here without knowing what's right and 7 what's wrong. 8 That's what I'm looking at right now. You 9 know, from the first audit and second audit, he's still 10 confused what's the right thing to do. You know, for 11 BOE, how to pay taxes. 12 So, this is almost ridiculous I'm listening to 13 these cases here and, you know, it's been 11 years now. 14 And he's been still dragging with all these documents, 15 try to clear about what he is doing is right or wrong. 16 He doesn't even know at this point. 17 So I -- I just want everything to be a little 18 more reduced -- making faster, help taxpayers and making 19 clear the direction so, you know, they know exactly next 20 audit that what -- you know, I'm doing right thing and 21 they can show right so they don't have to go through a 22 second audit and first and, you know, combine it and 23 it's not going to take 11 years. That's what, you know, 24 I'm hoping. 25 MS. YEE: Yeah. I mean, it's -- it's clear 26 there's been some confusion with respect to the 27 Petitioner's practice -- 28 MR. MENDICINA: May I make a comment? 34 1 MS. YEE: No, you may not. 2 MR. MENDICINA: Okay, thank you. Sorry. 3 MS. YEE: We're trying to get clear here. 4 I'm as one member here still a bit confused. But I'm 5 trying to get clarity here. 6 There was a lot of back and forth and certainly 7 the fact that Petitioner went into settlement certainly 8 took up some time during that -- the course of -- over 9 those years, as well. 10 So, I would say that there probably was some 11 reasons on both sides with respect to why this is taking 12 so long to get here. 13 I wanted to see if we could actually go to an 14 actual invoice. You have some in the exhibits. Exhibit 15 1, which is this invoice that was billed to Mark 16 Schaefer and Associates. 17 MR. MENDICINA: I don't know if I have that. 18 MR. LEVINE: This one. 19 MR. MENDICINA: Yeah, that's -- that's the one 20 he was trying to show me. 21 MS. YEE: Okay. 22 Can -- can you -- I'm going to have you, Mr. 23 Mendicina, walk through -- 24 MR. MENDICINA: Excuse me -- 25 MS. YEE: -- that invoice. 26 MR. MENDICINA: You want me to walk through it? 27 MS. YEE: Yes, but listen. Please. Walk 28 through the invoice. I want then the Department to just 35 1 kind of follow Mr. Mendicina's walk-through of this 2 invoice and -- and see if your understanding of how the 3 amounts are displayed here and certainly the application 4 of taxes -- you have the same understanding of what he's 5 trying to do here. 6 So, if you could do that. 7 MR. MENDICINA: This is -- this is in the 8 second audit, okay. And I'm looking for a date on here. 9 MR. LEVINE: It's right here. The date is 10 here. 11 MR. MENDICINA: Okay. Now, this -- this would 12 be -- this would be part, I believe, of the first audit. 13 Or this is the second audit, right. All right. 14 Here it -- here it is. If you'll notice on 15 here, and I'll just walk you through it, okay, we were 16 actually selling equipment to G. E. Capital, in this 17 case. And Mark Schaefer now is their -- is their 18 customer. 19 And we were basic describing the equipment that 20 is sold. The Konica, Minolta, the finisher and the IP 21 controller. All right. If you'll notice on the invoice 22 there -- on this invoice to the leasing company, there's 23 nothing that says installation, delivery, setup or 24 whatever. Okay on that part. 25 It said this -- this is a cost per copy lease, 26 and by that we mean that when we sell a piece of 27 equipment for, let's say, $500, and the customer has 28 10,000 copies at a penny, we will bill them -- the 36 1 leasing company will bill them an additional $100 which 2 is for our service and supply on a monthly basis going 3 forward. All right. 4 Please deduct from this funding $8,728.77. 5 That is the amount of the buyout. So, as you can see 6 here, okay, it is not -- does not come to Select Office 7 Solutions, okay. They are giving us $29,000 less this 8 amount. And if you'll notice in there, it says "plus 9 tax." 10 Now, if you go to the invoice, the customer -- 11 the original lease, and I'm not sure if there's an 12 original lease in here. 13 MR. LEVINE: No. 14 MR. MENDICINA: Okay. But I had one --- I 15 pulled one out, and it would resemble something -- and 16 I'll just show this to Mr. Levine here. If you'll 17 notice on this -- this invoice here to -- who is this 18 to? The customer. I can't make it -- anyway, you'll 19 notice that on the lease agreement, they -- they also 20 sign a lease agreement, by the way, Ms. Yee. 21 All right. And the lease agreement will have, 22 which I'm stipu -- I'm showing to Mr. Levine here, it 23 will show month -- the amount of the monthly payment and 24 underneath it -- would you please read what that says, 25 Mr. Levine. Plus applicable sales tax. 26 MR. LEVINE: There is no sales tax listed. 27 MR. MENDICINA: Yeah, it says "plus applicable 28 sales tax." That is the way the leases are done. 37 1 MR. LEVINE: Use Tax by law must be separately 2 stated. But still this is -- they don't collect tax -- 3 they don't have a specific tax that they've collected 4 and I would not interpret it the same way as Petitioner 5 does, for these purposes. 6 MS. MANDEL: Can I ask -- 7 MS. YEE: Ms. Mandel, please. 8 MS. MANDEL: I mean this is like totally off -- 9 maybe this is like totally off base. 10 MS. YEE: Yes, Mr. Leonard. 11 MS. MANDEL: But -- but a lot of times or 12 usually -- I thought usually when we have an excess tax 13 reimbursement it's because on -- and -- and where the 14 tax has not yet been -- I mean, a lot of times we have 15 these cases where people want stuff back because they, 16 you know, collected tax on something that was not 17 taxable and they paid it to the State, and then we can't 18 give it back unless they give it to their customers. 19 And so, usually those are in a kind of refund 20 position. And then the other ones are where the -- that 21 I've seen are where the person has put a charge for tax, 22 denominated something as tax on what they send their 23 customer, it happens to be in the same dollar figure 24 that tax would be on something, but they -- they try to 25 claim it's like a service charge or something like that. 26 And it's like, no, that's -- you called it tax to your 27 customer, it happens to be the same amount. Even if the 28 item wasn't a taxable item, you have to pay that to the 38 1 Board or you have to refund it. 2 And I'm -- and than I'm just not sure now after 3 this discussion what category this case is in, if 4 what -- he seems to -- the taxpayer seems to be saying 5 is that his -- that -- that the tax amount shown on his 6 invoices to his customer don't include -- I thought they 7 had included the measure of buyout income or setup and 8 connect, but that he didn't pay that portion over to the 9 Board. 10 So I'm -- now I'm completely confused about 11 what category of making this excess tax reimbursement 12 this case is in. Can you help? 13 MR. LEVINE: What you said is exactly the way 14 we understand it without regard to what he's explained, 15 the invoice that we're looking at right here which 16 Petitioner has conceded, the payment is the balance due, 17 $31,585.98, less the buyout amount. So, what we have is 18 a subtotal plus tax and the balance due. MS. MANDEL: 19 And -- and is this tax amount, because I can't do the 20 math in my head -- 21 MR. LEVINE: That's the -- it's about eight and 22 a quarter percent. But -- 23 MS. MANDEL: On -- on -- on the total invoice 24 before subtracting out buyout? 25 MR. LEVINE: Actually, I think I did it on the 26 balance due. 27 MR. MENDICINA: Excuse me. 28 MR. LEVINE: Actually -- 39 1 MR. HANKS: It's -- it's the combined total of 2 the $1605 from the internal invoice plus the tax 3 reimbursement of eight and a quarter percent on the 4 buyout charge -- 5 MS. MANDEL: What -- what -- 6 MR. HANKS: -- which totals 802.21. 7 MR. TUCKER: It's the bottom line. 8 MS. MANDEL: Okay. Maybe I'm looking at the 9 wrong thing. I see a -- I see at the bottom of that 10 invoice, sales total 19,000; miscellaneous charges 11 10,000. 12 MR. LEVINE: You're looking at the internal 13 invoice. 14 MS. MANDEL: Oh, that's the internal invoice. 15 MR. LEVINE: We're looking -- the problem 16 isn't -- the problem is the invoice to the lessor. The 17 internal invoice lets us figure out what Petitioner did, 18 but it really doesn't matter how Petitioner got from 19 Point A to Point B, because all -- at least from 20 Appeals' point of view is all we're looking at -- 21 MS. MANDEL: Okay. Okay. 22 MR. LEVINE: -- is the amount -- 23 MS. MANDEL: Okay. 24 MR. LEVINE: -- collected as tax. 25 MS. MANDEL: So if I don't look at the bottom 26 piece is the rest of it the -- the regular invoice? So 27 you're saying the 802.21 happens to be the sales -- 28 happens to be equivalent to a sales tax amount on the 40 1 8,700 -- whatever? 2 MR. HANKS: That's correct. 3 MR. LEVINE: Plus -- plus the connect and setup 4 charges. 5 MS. MANDEL: Okay. And -- and that that -- and 6 so that when you look at the -- the -- so that the 7 sales -- so that something that happens to be the 8 equivalent of the sales tax amount is folded into what's 9 charged the leasing company? 10 MR. TUCKER: That is correct. 11 MS. MANDEL: But not necessarily denominated as 12 tax on an invoice to the leasing company. 13 MR. TUCKER: Actually, it is. 14 MS. MANDEL: It is. 15 MR. TUCKER: On -- 16 MR. HUXSOLL: It is. 17 MR. TUCKER: On Exhibit 2, one of one, which 18 is -- if you're looking in the D & R, it would be on the 19 right-hand side. 20 MS. MANDEL: It's built into the two thousand 21 figure? 22 MR. TUCKER: It's the total -- 23 MS. MANDEL: Yeah, yeah, yeah -- 24 MR. LEVINE: -- 07. 25 MS. MANDEL: So that math I can do in my head. 26 Okay. 27 MR. TUCKER: Yes. 28 MS. MANDEL: All right. Now I'm back on track. 41 1 Sorry. 2 MS. YEE: Okay. Mr. Leonard. 3 MR. LEONARD: We seem to be here on excess tax 4 reimbursement. I thought I heard you and Mr. Mendicina 5 describe that you were -- had looked for ways to refund 6 that excess collection to your customers and had been 7 unable to do so. Is -- so, I guess I need to have it 8 restated, are -- are you objecting that it's excess tax 9 collection and therefore it's your money, or are you 10 objecting that -- that there -- you need the 11 Department -- you need our help in making sure your 12 customers are refunded excess taxes that were 13 inadvertently collected? 14 MR. MENDICINA: Two -- two parts of 15 conversation here in -- in trying to respond to your -- 16 your question. 17 Number one, we did try to do this, and we put 18 stacks of -- of customers lists together and so on and 19 so forth. 20 When we got back to the Board, okay -- all 21 right, they said we -- they still did not come up -- 22 they were supposed to supply us with a -- a letter to 23 the customer, and there were two parts to this. Okay. 24 Number one, they said, okay, if you 25 reimburse -- if you re -- if you go back and give the 26 customers, okay, money, which we did -- and you're 27 right, we did not have, you know, $700,000, whatever to 28 give it back to the customer. They wanted us to pay it 42 1 out in full -- in cash. 2 We said, well, we're unable to do this, I said 3 but we can contact the customers, let them know that 4 this is -- they waffled over that a little bit. 5 The second part of it was, they said, well, 6 what happens to the customers that we cannot find 7 because, as you say, this went back 11 years. 8 Well -- and we could reimburse the customer 9 with no penalties or interest. But then they said, but 10 if you -- if you can't find that customer, okay, you 11 could pay the State back, but we want the penalties and 12 interest. 13 We thought that that was kind of -- you know, I 14 mean why is it if I could pay the -- if I could pay the 15 customer back with -- with no penalties and interest, 16 I've got to pay the State -- 17 MR. LEONARD: So you're here objecting to the 18 penalties and interest? 19 MR. MENDICINA: I'm -- yes, because I think 20 this should have done -- been done a long time ago. And 21 the reason why we -- we could not resolve this matter is 22 it took till the second audit, okay, for them to realize 23 that the buyout should not have been taxable. We have 24 had different decisions all along here. 25 And, by the way, I just want to make one 26 correction to Ms. Mandel over here a minute. That 27 invoice that states $29,000, that does include the 28 buyout. Okay. We -- just to make -- just to clear that 43 1 up. 2 MR. LEVINE: I don't think there are any -- 3 MR. LEONARD: Can I follow up with a 4 question -- 5 MR. LEVINE: -- penalties -- 6 MR. LEONARD: -- to Mr. Levine. If what 7 we're arguing about in both audit periods is excess tax 8 reimbursement and our policy is that if the retailer, 9 the permit-holder returns the money to the customer, 10 that -- that everything is back to squared even, but if 11 they don't that we get the money, what's our flexibility 12 as it relates to interest on that money, since it was 13 never really due us, it's excess that has to -- can't 14 stay with the retailer, it has to go somewhere, do -- 15 is -- can -- how -- may this Board hear the request to 16 waive interest on that? 17 MR. LEVINE: If you find -- the only basis for 18 relief of interest would be undue delay by Board staff. 19 If you find there's an undue delay, then you could 20 relieve interest on that basis, but not just because 21 it's excess tax reimbursement. The theory for that is 22 once you collect it you have to pay it to the Board, if 23 you don't return it to your customer. 24 So by keeping it -- 25 MR. LEONARD: But you see the disconnect here, 26 because we don't require the retailer to pay interest to 27 the customer when they're refunding the money, but we're 28 saying if we get the money, we -- you -- if you give us 44 1 the money we'll still bill you for the interest on top 2 of that. That's -- I -- 3 MR. LEVINE: That's correct. Of course we 4 would never stop a retailer from giving its customers 5 interest since it had the benefit of the money -- 6 MR. LEONARD: Sure. 7 MR. LEVINE: -- and customers. 8 MR. LEONARD: Sure. And they -- they may do 9 choose there. 10 MR. LEVINE: I think some -- some customers 11 might complain to us that we don't, but we don't have 12 the authority to because under the statute it just 13 requires return of the money. But the statute also 14 requires that if -- if they don't return it to the 15 customer, it's treated as if it's tax on which interest 16 accrues from the due date. And it was due the moment 17 the sale occurred and they collected the excess tax 18 reimbursement. 19 So, as I say, if you find that there's an undue 20 delay, that would be the vehicle for relief of interest. 21 MR. LEONARD: Okay. 22 MR. LEVINE: I'm not aware of any other 23 basis. 24 MR. LEONARD: Am I correct to summarize that -- 25 that you start -- stated, sir, that taxes -- that -- 26 that some tax money is owed? 27 MR. MENDICINA: That's correct. 28 MR. LEONARD: And am I -- am I correct to 45 1 further assume that it's all the tax money listed here, 2 but you're protesting the interest owed? 3 MR. MENDICINA: No, I'm -- I'm -- I'm 4 protesting two parts. First of all, I'm -- I'm 5 protesting the penalties and interest because of the 6 delays -- 7 MR. LEONARD: Right. 8 MR. MENDICINA: -- not necessarily -- 9 MR. LEONARD: Right. Okay. 10 MS. YEE: Are -- are there penalties? 11 MR. LEONARD: That's the estimate further. 12 MS. YEE: Mr. Levine. 13 MR. LEVINE: There was a negligence penalty on 14 the -- 15 MS. YEE: It was -- 16 MR. LEONARD: It was -- the penalty was 17 removed. 18 MR. LEVINE: And the penalty -- 19 MR. LEONARD: So it's only the interest left. 20 MS. MANDEL: And there's no amnesty penalty. 21 MS. YEE: Right. 22 MS. MANDEL: From what I read. 23 MR. MENDICINA: But I would like to make one -- 24 and one other point. All right. Since it was 25 determined down the line, okay, during all this process, 26 that we -- that we should not pay tax on the setup and 27 the delivery -- and I -- and I still question the fact 28 that they do not accept the fact that the connection 46 1 fee, okay, should be taxable because it is a -- it is a 2 service -- it is a service factor. 3 We are not picking -- you know, we're not 4 selling -- 5 MR. LEONARD: So you're also protesting the tax 6 charged on the portion of your bill that's the service 7 fee? 8 MR. MENDICINA: That's correct. So what I'd 9 like to do here, if it's possible -- 10 MR. LEONARD: Has that been broken out? I 11 mean, excuse me, let me get my -- I can see -- 12 MR. LEVINE: We have already concluded that the 13 setup and connect were installation charges and 14 therefore not taxable. So the only problem here is the 15 collection of tax on such amounts. 16 MR. LEONARD: So the dollar numbers here on 17 tax, it does not include a tax on connection fees? 18 MR. LEVINE: It does. Excess tax 19 reimbursement -- 20 MR. LEONARD: Okay. 21 MR. LEVINE: -- on -- for the second -- 22 MR. LEONARD: Except for the excess. 23 MR. LEVINE: -- audit period. 24 MR. LEONARD: All of this is excess. 25 MR. LEVINE: That's correct. 26 MR. LEONARD: There's no -- you -- you -- your 27 dispute on the tax, itself, has been resolved in your 28 favor? 47 1 MR. LEVINE: That's correct. There's no 2 portion -- 3 MR. LEONARD: There's no tax on the connection 4 fee? 5 MR. MENDICINA: That is not correct on the 6 first audit. 7 MR. LEVINE: There's no portion of the 8 assessment that is for pure tax. It's only for excess 9 tax reimbursement. 10 MR. LEONARD: You've been credited in the first 11 audit for that, is that true, gentlemen? Both sides. 12 MR. LEVINE: No, because it was excess tax 13 reimbursement. Had Petitioner -- had Petitioner not -- 14 MR. LEONARD: Okay. It's not taxable but you 15 collected the tax, anyway, and now you owe it to 16 somebody. 17 MS. YEE: Right. 18 MR. HANKS: Correct. 19 MR. LEONARD: Okay. 20 MR. LEVINE: And it was paid to the Board, so 21 we -- 22 MR. LEONARD: It takes me a while, but I'm 23 getting it. Okay. Thank you, Madam Chair, I'm clearer 24 than I was. 25 MS. YEE: Okay. Mr. Mendicina. 26 MR. MENDICINA: Well, I still -- okay. And, 27 you know, I got enough power here on both sides of me, 28 okay. They know a little bit more than I do but what 48 1 I'm saying to you is this here, okay, we keep going back 2 and going back and going back. The reason I'm here 3 today is to ask you this, we do owe some tax. I agree. 4 Okay. We're prepared to start paying the State some 5 tax. I cannot pay it at -- at one lump sum. 6 Our business is suffering just like a lot of 7 other businesses in Southern California. I employ a lot 8 of people. I want to continue to pay them that. I put 9 up real estate for sale to help compensate them. 10 I think the amount should be reduced that we -- 11 that's showed here on the taxes, at least by 10 to 15 12 percent because there is still fees that were involved 13 in here, okay, that I do not feel -- that should be 14 reduced -- that should be reduced. 15 So what I'm asking for is -- is some 16 consideration on the amount, okay. The waiving of the 17 interest. And then maybe we can get back to doing 18 business because this has been -- this has been long and 19 drawn out for years. 20 MS. YEE: Okay. Okay, we -- we know the 21 parameters around interest relief. I guess for 22 Mr. Levine or the Department, are -- is there any other 23 room for looking at some adjustments with respect to 24 what's embedded in the -- 25 MR. HUXSOLL: Not that I'm aware of. 26 MS. YEE: Okay. 27 MR. HANKS: Not that we're aware of -- 28 MS. YEE: Okay. 49 1 MR. HANKS: -- no. 2 MS. YEE: All right. 3 MR. MENDICINA: I'm also interested in one 4 other thing, okay. If we make arrangements with the 5 State to pay, if they levy a lien on -- on the company 6 you will certainly -- you know, make it very, very 7 difficult for the company to survive. That's all I'm 8 asking. 9 MS. MANDEL: I mean, if -- if this goes final, 10 can companies get on payment plans just like people? 11 MR. HANKS: Absolutely. 12 MS. YEE: Absolutely, yeah. 13 MR. HANKS: Absolutely. 14 MS. YEE: Yeah, as long as -- if we can 15 certainly set up a payment plan for you and one that's 16 hopefully workable where you can stay current with your 17 payments. 18 MR. MENDICINA: Thank you. I certainly would 19 appreciate it. 20 MS. YEE: Yeah. Okay. Other questions, 21 Members, on this matter? 22 Okay. Hearing none, is there a motion? 23 MS. MANDEL: Take it under submission. 24 MS. YEE: Motion by Ms. Mandel to take the 25 matter under submission. 26 Is there a second? 27 MS. STEEL: Second. 28 MS. YEE: Second by Ms. Steel. 50 1 Without objection, that motion carries. 2 Mr. Mendicina, thank you very much for your 3 patience and your clarifications. 4 MR. MENDICINA: Thank you, gentlemen. 5 MS. YEE: We'll discuss your matter later today 6 and send you written notice of our decision. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 51 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 September 23, 2009 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 51 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: October 13, 2009. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 52