1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 NOVEMBER 18, 2009 9 LOCAL TAX REALLOCATION HEARING 10 CITY OF LOS ANGELES, CITY OF SAN JOSE 11 AND CITY OF IRVINE 12 CASE NO. 472925 13 14 AFFECTED JURISDICTION 15 CITY OF MERCED 16 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 No. CSR 5214 27 28 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane G. Olson Chief, Board 14 Proceedings Division 15 16 17 ---oOo--- 18 For the Appeals Division: Trecia Nienow Tax Counsel 19 David Levine 20 Tax Counsel 21 For the Legal Department: Carole Ruwart 22 Tax Counsel 23 Robert Tucker Tax Counsel 24 For Sales & Use Tax Kevin Hanks 25 Division: Chief, Operations Division 26 27 28 2 1 2 For Petitioners: Eric Myers Representative 3 Janis Varney 4 Representative 5 Roxanne Miller Representative 6 7 For Affected Jurisdiction: Robin Sturdivant Representative 8 9 10 11 ---o0o--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 18, 2009 4 ---oOo--- 5 MS. OLSON: Our next item is C7, City of Los 6 Angeles, the City of San Jose and City of Irvine. 7 In this next oral hearing, the Petitioner will 8 go first with ten minutes allocated to the Petitioner, 9 next the affected jurisdiction will go next with ten 10 minutes, then the Department, ten minutes, and then back 11 to the Petitioner for five. 12 MS. YEE: Okay. 13 Very well, Ms. Nienow? 14 MS. NIENOW: Madam Chair, Members, good 15 afternoon, Trecia Nienow with the Appeals Division. 16 The issue in this case is whether the local 17 sales tax directly allocated or reallocated to Merced, 18 based on where sales personnel actually worked when 19 negotiations took place, should be reallocated to 20 Petitioners and, if not, whether a portion of the local 21 tax for the periods April 1, 1995 through September 30th 22 of 1995 should be deallocated from the Petitioners 23 Los Angeles and San Jose to Merced. 24 Also as a reminder to the hearing participants, 25 confidential information regarding the taxpayer must not 26 be publicly disclosed. This includes the identity of 27 the taxpayer or any other information that could easily 28 identify the taxpayer. 4 1 Thank you. 2 MS. YEE: Thank you very much, Ms. Nienow. 3 Good afternoon. 4 MR. MYERS: Good afternoon. 5 MS. YEE: Let me start with the petitioning 6 jurisdictions. You have ten minutes for your 7 presentation. 8 If you'll introduce yourself for the record? 9 MR. MYERS: Thank you, Madam Chair, Members of 10 the Board, my name is Eric Myers. I am here 11 representing MuniServices, which is a sales tax 12 consultant for the Petitioner cities of San Jose, Irvine 13 and Los Angeles. 14 Sitting next to me is Janis Varney, the Sales 15 Tax Manager for MuniServices and sitting next to her is 16 Roxanne Miller, representing the City of San Jose. 17 We'd like to first have Ms. Miller address the 18 Board in our brief opening statement. 19 MS. YEE: Thank you. 20 MS. MILLER: Thank you, Madam Chair, Members of 21 the Board, Roxanne Miller representing the Mayor, City 22 Council, City of San Jose today. 23 The City of San Jose urges your Board to 24 support the City's request for reallocation. We 25 strongly believe that the regulations support this 26 reallocation. And we don't want to see, if you will, 27 confusion with regard to the regulations as they 28 currently are in place. This could create difficult for 5 1 future decisions to be made and certainly we are mindful 2 that it could be difficult for other jurisdictions in 3 this area. 4 We support the strong policy of situs 5 allocation to the location of the sales office, which in 6 this case is located in the City of San Jose. We ask 7 you to look at the facts and pronouncement of evidence 8 to make your decision. 9 Thank you. 10 MS. YEE: Thank you very much, Miss Miller. 11 MR. MYERS: In this case there were salespeople 12 who were working out of sales offices in San Jose and 13 Los Angeles at the beginning of this matter. The 14 Los Angeles office eventually moved to Irvine. Excuse 15 me -- from 1993 to approximately 1996, the Department 16 did not allocate to these offices on the mistaken 17 understanding that the offices were support offices and 18 not sales offices. But in 1995 the taxpayer had 19 re-evaluated its own conclusions regarding these offices 20 and voluntarily allocated sales tax to these offices on 21 their tax returns for the second and third quarters of 22 1995. 23 By 1997 the Department had acknowledged that 24 sales were occurring from these offices, but came to 25 different conclusion about how to allocate the taxes 26 based on the 1996 sales figures. The primary dispute is 27 not if sales were being made from the sales offices, but 28 how many and how to attribute the activities of the 6 1 taxpayer's Vice President of Sales who kept his office 2 in and worked out of San Jose, but who also conducted 3 some negotiations in the City of Merced with a major 4 purchaser. 5 Excuse me, the Petitioners ask the Board to do 6 two things: First, to follow the plain language of 7 Regulation 1802 (a)(2)(B), which already recognizes that 8 people and not places negotiate contracts and contains a 9 specific rule for dealing with situations like this one; 10 and, secondly, to give due consideration to the full 11 weight of the evidence, not just the last statement 12 made, but the full weight of the evidence presented. 13 We'd like to address each of these two items 14 briefly. Regulation 1802 contains the rules for 15 determining which locality will receive the sales tax 16 monies from which sales. The place of principal 17 negotiation gets the monies. Staff stops their analysis 18 there. But if we read 1802 (a)(2)(B), we can't ignore 19 the key sentence it contains, which tells you which 20 place it must go for purposes of this regulation. An 21 employee's activities are to be attributed to the place 22 of business out of which he or she customarily works. 23 In this case this was San Jose. 24 Negotiations, again, are conducted by people at 25 places, but they are not conducted by the places 26 themselves. Places don't negotiate sales, people do. 27 And their activities are assigned to their permanent 28 offices, the offices out of which they work. 7 1 Because there are conflicts regarding certain 2 facts in this case, we'd like to now have Janis Varney, 3 the MuniServices Sales Tax Manager, make a statement 4 regarding her investigations in the matter and the 5 weight of the evidence. 6 Miss Varney is the person who investigated the 7 basis for the requested reallocation a behalf of the 8 Petitioners and had person-to-person meetings or 9 conversations, excuse me, with the individuals who 10 negotiated the large 1996 contract that's at the center 11 of this controversy. 12 Miss Varney? 13 MS. VARNEY: Madam Chair and Board Members. 14 Thank you, Eric. 15 On approximately May 2nd of 1995 I visited this 16 taxpayer's San Jose office and personally met with the 17 Vice President of Sales. At that time he gave me an 18 overview of his activities, also described for me the 19 salespeople and the other employees who officed at that 20 location and their activities. In addition I met two of 21 the Sales Administrative Assistants who worked there. 22 This was more fully discussed in a memorandum 23 that was submitted to you as part of this file as 24 documentary evidence. And this office ultimately moved 25 to the City of Pleasanton. And then this particular 26 Vice President of Sales retired from there. 27 The memorandum that was provided -- 28 additionally, I did make a second personal visit to the 8 1 office, although this gentleman wasn't there at the 2 time, the administrative assistant, was, but in further 3 follow-up with him he did provide a letter to me in 4 1996, which further documented his position, his 5 activities at that office and also the activities of his 6 counterpart in the Los Angeles office. This documentary 7 evidence included his business card, demonstrating the 8 San Jose address as his place of business, as well as 9 the stationary on which the letter was written. 10 In 1996 -- in 1998 I also was involved in 11 having conversations with the major customer that was 12 involved in this case. He advised me that he had been 13 having conversations with regards to their contract with 14 this Vice President of Sales for this taxpayer. 15 At that time he advised me that some of the 16 conversations may have occurred on the phone. They also 17 did meet in the Merced facility because that's where the 18 products were going to be produced. And, additionally, 19 there were conversations that included personnel from 20 both of their corporate out-of-state headquarters. 21 In a second conversation with this same 22 gentleman, the customer, he did alter that story ever so 23 slightly to, at that point, state that the majority of 24 their conversations did occur in the Merced facility. 25 However, again, it was all still including this 26 gentleman, the Vice President of Sales from his San Jose 27 office. 28 All of these were also included in an affidavit 9 1 that we provided in 2001 providing this documentary 2 evidence. 3 Subsequent to my previous conversations with 4 the customer, he made statements to the Board auditor 5 that were contrary to that, then changing the position 6 that the negotiation were done out of state, which I -- 7 I don't believe was further substantiated from there. 8 But it clearly contradicted the first two conversations 9 I had had with him. 10 So, as I said, I think most of this -- you have 11 been provided copies of this evidence. 12 So, thank you very much. 13 MS. YEE: Thank you, Ms. Varney. 14 MR. MYERS: Thank you. 15 MS. YEE: Anything else at this point? 16 MR. MYERS: Not at this time. 17 MS. YEE: Okay. We'll give you time on 18 rebuttal. 19 How about to the affected jurisdiction? 20 MS. STURDIVANT: Good afternoon, Madam Chair 21 and Board Members. My name is Robin Sturdivant with the 22 HdL Companies representing the City of Merced. 23 The Finance Director for the City of Merced, 24 Bradley Grant, is also here in attendance today. 25 We are here to discuss two 1993 petitions filed 26 by MuniServices on behalf of Los Angeles and San Jose 27 and a 1997 petition filed on behalf of the City of 28 Irvine. 10 1 This Board hearing follows a denial by Board 2 Management in September 2001. This denial was 3 consistent with the allocation group decision and with 4 the decision and recommendation issued after the Appeals 5 conference. Given that there was seven years of no 6 activity on this case, we still maintain the position 7 that that case is closed. 8 This petition does not involve the warehouse 9 issue. And there were no regulatory changes pending 10 that would have influenced the outcome of this case. 11 However, if the Board Members believe this case 12 is open, the facts do not support reallocation. The 13 Petitioner's opening brief for this case focused solely 14 on the activity one employee of the taxpayer and one 15 customer and argues only the merits of the San Jose 16 petition. 17 To date, the Petitioners have not provided any 18 evidence to the Department or to the Appeals Division 19 that would demonstrate that te stay Los Angeles and 20 Irvine offices were involved in sales negotiations that 21 ultimately related in merchandise produced at the Merced 22 facility. 23 To provide some background, this retailer 24 produces a wide variety of printed materials -- books, 25 well-known weekly magazines, coupon inserts for 26 newspapers, as well as catalogues for large, nationwide 27 retailers. The Merced facility produces the popular 28 weekly magazines that we see in supermarkets and on 11 1 newsstands, as well as catalogues for high end 2 retailers. During the period in question, this facility 3 also printed large, bound soft cover books. Each type 4 of product requires a different type of printing press. 5 A machine that would print and bind books is different 6 from a machine that produces coupon inserts. Because of 7 this, each facility operated by this retailer is 8 dedicated to a different type of product or products. 9 The Plant Manager in Merced informed me that 10 the magazine and catalogue accounts were all negotiated 11 out the taxpayer's New York office. The corporate 12 offices for most of the major magazine publishers and 13 the retail giants are located in New York on the east 14 coast. 15 The information gathered by the Allocation 16 Group in the Department during the eight year period in 17 which this case was active all concluded that Merced is 18 the place of sale for local tax purposes. Again, the 19 Petitioner's opening brief points to one employee and 20 one customer. With this particular customer, contracts 21 were negotiated by sales team. The Petitioners admit in 22 a June 18, 2001 letter to Board Management that the 23 negotiations for this customer took place primarily out 24 of state and that discussions, minimal as they may be, 25 took place in Merced. The letter also states that 26 negotiations with this same California representative 27 took place at the Merced plant. 28 Here we're looking at one employee and the 12 1 Department and the Petitioners all agree that this one 2 employee was physically located inside the Merced 3 facility when involved in these negotiations. The 4 investigation by Board staff and the documentation in 5 this case file shows that this employee regularly 6 performed some of his work duties in San Jose and had 7 different duties that he performed in Merced. 8 The documentation in the file shows that the 9 negotiations for this one customer took place while that 10 employee was at Merced plant. There is no evidence that 11 this employee participated in any negotiations while in 12 the San Jose office. 13 If a taxpayer operates two retail stores in 14 opposite cities, the local tax is allocated to the city 15 in which their sales occur. If that taxpayer has an 16 employee that normally works in store A, but often also 17 works in store B, the local tax is assigned to the store 18 where that employee was located at the time the sale was 19 made. The sales do not follow the employee, but rather 20 are assigned to the place where the negotiations took 21 place. 22 That same rule applies here. That one 23 employee's sales are attributable to the office where 24 the employee was located at the time the sale was made. 25 On behalf of the City of Merced, we 26 respectfully request the Board to deny the petitions for 27 Los Angeles and Irvine. The Petitioners have provided 28 no evidence that demonstrates that sales for merchandise 13 1 produced and shipped from Merced were negotiated in 2 either Los Angeles or Irvine. 3 We ask the Board to deny the San Jose petition 4 based on the fact that the one employee in question was 5 physically located in the Merced facility when engaged 6 in sales negotiations and that all in-state negotiations 7 took place in Merced. 8 Thank you. 9 MS. YEE: Thank you very much, Ms. Sturdivant. 10 Department? 11 MS. RUWART: My name is Carole Ruwart. I am an 12 attorney Tax Counsel with the Board's Legal Department. 13 With me is Bob Tucker, Tax Counsel IV, and 14 Kevin Hanks the Sales and Use Tax Department. 15 Ms. Sturdivant has given a very good overall 16 picture of the Department's position in this case. 17 I wanted to make a clarification of some of the 18 statements made by Petitioners with respect to the 19 relevant law. I think that it is a bit mischaracterized 20 and leads to potential misunderstanding. 21 Regulation 1802 (a)(2)(B), the last sentence 22 thereof states, 23 "That for purposes of this regulation, all of 24 regulation 1802, an employee's activities will 25 be attributed to the place of business out of 26 which she or she works." 27 There is no mention of the word "customarily," 28 which is what Mr. Myers inserted into that reading. It 14 1 is actually not attributed to the place of business out 2 of which he or she works, rather the Department has 3 consistently interpreted this sentence, when it is 4 applicable, to mean the place of business out of which 5 he or she works contacting customers, making 6 presentations and soliciting orders for the work 7 involved. 8 This sentence also must be read in context with 9 the first sentence of 1802 (a)(2)(B), 10 "If a retailer has more than one place of 11 business in the state which participates in the 12 sale, the sale occurs at the place of business 13 where the principal negotiations are carried 14 on." 15 While it is true that what Mr. Myers said 16 people negotiate sales, we are looking for the place of 17 business of the retailer at which those negotiations 18 occur. 19 In this case it is undisputed that all of the 20 relevant negotiations occurred in Merced. 21 The full weight of the evidence also indicates 22 that the person who was also working out of the San Jose 23 office for other functions that he performed was 24 assigned by the taxpayer to Merced for purposes of the 25 contract negotiations under discussion. 26 This regulation and Department policy does not 27 limit salespersons to being assigned to a single 28 location. Merely because one is normally reporting to a 15 1 particular location, may conduct many or most of their 2 functions there, has a business card that is there, does 3 not necessarily mean that every single sale that they 4 are involved in negotiating is allocated to that place 5 of business automatically. 6 If, as in this case, there is another place of 7 business of the retailer where the negotiations were 8 actually carried on and that person was physically 9 present and involved, then that person is considered 10 assigned and working out that place of business for 11 purposes of those sales. 12 Thus, the petition of the City of San Jose 13 should be denied. 14 We further note that there is no basis to 15 analogize the activities of the major customer 16 negotiations with respect to the San Jose/Merced issue 17 to the operations of the Los Angeles or Irvine offices. 18 Petitioners have presented no evidence that there is 19 any -- that there are any more sales printed at Merced 20 that should be allocated to Los Angeles or Irvine than 21 have already been determined. 22 For this reason, we request that the petition 23 be denied. 24 And, of course, I am happy to answer any 25 questions. 26 MS. YEE: Thank you very much, Ms. Ruwart. 27 You have five minutes on rebuttal. 28 MR. MYERS: Thank you, Madam Chair. 16 1 Excuse me. A couple of quick points. We 2 continue to hear there is no basis in evidence for the 3 LA offices and their sales activity. Well, the fact of 4 the matter is that the 1996 audit conducted by the staff 5 of the Department shows that there are sales attributed 6 to the LA office, as well as to the San Jose office, 7 outside of the particularly large contract that's sort 8 of the focal point of this discussion. So, it just 9 isn't true that there are -- that there is no evidence 10 in the record. 11 There is some dispute about how much -- how 12 much sales were going on from the LA offices. And we'll 13 be happy to answer questions about that. The dispute is 14 from the taxpayer's own allocation in 1995. They 15 allocated 29 percent of the tax to the LA office. And 16 in 1996 the audit found that only 2 percent should go to 17 the LA office. But, nonetheless, it remains essentially 18 undisputed that there were sales going on from both 19 San Jose and LA. 20 We also have not mischaracterized the law as 21 "customarily working out of." The annotations that we 22 attached to our brief and that clearly establish the 23 field sales office is the preferred place of sale, use 24 the term, as does 1699 -- Regulation 1699 -- in 25 discussing what a sales office is. And the reason for 26 that is because you can't have people bouncing around to 27 game the system, which is a legitimate concern. 28 And, so, we're looking and saying, "Does the 17 1 individual customarily work out of this particular 2 office?" The sales follow the individual to that 3 office. 4 We also -- I would like to correct a statement 5 from the affected jurisdiction, which I think indicated 6 that the Petitioners stated in a letter that the 7 negotiations were primarily out of state. It's not 8 accurate. There was a statement by the customer later 9 in 1998, the same customer that Miss Varney spoke to on 10 two occasions before, saying that he thought the primary 11 negotiations were conducted out of state. I think 12 that's what was being referred to there. 13 With that, Miss Varney? 14 MS. VARNEY: Just one -- one statement I would 15 like to make in reference to Miss Ruwart's statement 16 about policy, about assigning salespeople to different 17 locations if there's, you know, they can demonstrate 18 that a negotiation occurred at one versus another. 19 First of all, in twenty years I have never 20 known that to be done that way. And administratively 21 how does one do that? How does a taxpayer do that? 22 So, typically, taxpayers are instructed to 23 report the sales attributed to their salespeople to the 24 office out of which they are assigned and out of which 25 they work. 26 And, as we all know, salespeople do a certain 27 amount of their activities within their place of 28 business, their office, a certain amount of activities 18 1 out in the field, making customer calls, at, perhaps 2 customer locations, and then, furthermore, on occasion, 3 will take the customer -- if it's logistically 4 available -- take them to the production plant, take 5 them to where there are other personnel from the company 6 that might be available to assist in the negotiations 7 and allow the customer to see the operations. But that 8 has never to -- you know, I've never known that to 9 change the fact that the allocation still be would 10 pointed to that particular place of business, if, in 11 fact, it is a valid place of business, which we have, 12 you know, demonstrated through documentary evidence. 13 Thank you. 14 MS. YEE: Thank you very much. 15 MR. MYERS: And, finally, if we still have 16 time -- 17 MS. OLSON: You have a minute left. 18 MS. YEE: Yes. 19 MR. MYERS: Ms. Miller, I believe, would like 20 to make a final statement. 21 MS. MILLER: Yes, if I may? 22 The City of San Jose -- certainly the 23 representatives of Merced have indicated the time frame 24 with regard to this issue coming before you. We feel 25 again very strongly, having reviewed all of the 26 documentation, that it does, indeed, substantiate our 27 petition. 28 We also feel very strongly that the policy with 19 1 regard to situs allocation is a critical one for all 2 local jurisdictions around the State of California. And 3 we'd urge this Board to take a very careful look again 4 at our petition because we feel that it is with merit 5 and a critical issue for all local agencies on these 6 types of issues, particularly in the difficult financial 7 times that we find ourselves. 8 So, on that basis, we would urge the Board to 9 accept and approve our petition. 10 Thank you. 11 MS. YEE: Thank you very much, Miss Miller. 12 Anything further? 13 MR. MYERS: No. 14 MS. YEE: Okay. Discussion, Members? 15 I'll start. This is a very troubling case. 16 And I think for me, for the purpose of -- primarily 17 because of the different interpretations that various 18 parties are attaching to the specific provisions of 19 1802. 20 And I guess I want to just kind of go back to 21 the provision of 1802 that speaks to the place of 22 business. And, I guess, for me it really matters what 23 happens at this particular place of business and where 24 the principal negotiations take place. I understand 25 that with respect to the individual that we're focused 26 on in this regard, that was the Vice President, was 27 assigned to one place and was also doing business with 28 respect to negotiating a sale in another location. 20 1 And, so, I am really trying to, as much as we 2 all think we're gaming the system, depending on how we 3 are interpreting that provision, to me, I think that the 4 provisions of 1802 really has to be read in full so that 5 we are focused on the place where principal negotiations 6 occur. And it's not about where the person is assigned. 7 And, frankly, if they're assigned somewhere else and 8 there's principal negotiations going on there, that 9 would be what I would be focusing on, that there was a 10 lot going on in this Merced office that, at least for 11 me, that the balance of it seems to suggest that that's 12 where the allocation should be. 13 But I am open to hearing other thoughts about 14 that. But really as it relates to looking at 1802 for 15 the guidance that it's giving us, as far as how we look 16 at the place of business where principal negotiations 17 occur. 18 MS. VARNEY: May I respond to that? 19 I think you are right in the fact that we can't 20 just focus on this one particular person and this one 21 particular instance. You have to look at the bigger 22 picture. 23 And I think if we look at a salesman's 24 activities in total, to identify for any salesperson at 25 any given time where the principal or the major portion 26 of any negotiation of any sale occurs, how do you -- how 27 do you do that? And how would anybody administratively 28 take on that task, whether it be the taxpayer or the 21 1 Board? Because salesmen are going to handle different 2 aspects of any client negotiation at different levels 3 and at potentially different locations at any given 4 time, whether it be in their office, whether it be at 5 the customer's office, whether it be at a plant or 6 wherever it be. 7 So, then, how do you then decide, you know, 8 where, you know, for the purposes of reporting the local 9 tax, you know, where to allocate that local tax? 10 And it has always been my knowledge and my 11 understanding, and I believe how it's been administered 12 for years, is if there is a valid place of business, a 13 valid sales office out of which this person works, you 14 would attribute his activities to that location. 15 It -- again I just never experienced where a 16 taxpayer has had to identify at any given time where 17 that salesperson was when they were at some point of the 18 sales negotiation. And the example that was given by 19 Ms. Sturdivant, when you're talking about a retail 20 business, you can not draw that same analogy for a 21 retailer versus a business to business type sale or 22 salesman whose activities are different rather than a 23 walk-in business where, obviously, if a retailer has 24 more than one business where that -- where that sale 25 occurs. 26 So, that to me, is what this comes back to, is 27 that at any given time how do you determine where a 28 salesman's activities are or how much of his sales 22 1 negotiation occurs at what location and how would 2 anybody do that -- other than following the regulation 3 as it reads? 4 MR. MYERS: If I may, Madam Chair, also to 5 respond to your concern? 6 We acknowledge the concern of the Board at 7 reading the sentence and trying to isolate it from the 8 whole of the regulatory scheme. We are not asking the 9 Board to do that. 10 What we're asking the Board to do is look at 11 the context of that last sentence of 1802 (a)(2)(B). 12 And in the broader regulatory scheme, 1802 is trying to 13 locate where is the place of sale so we can allocate the 14 tax there? 15 Where there is more than one place of business 16 in the State which participates in the sale, we're 17 looking to principal negotiations -- where were the 18 principal negotiations carried on? 19 Now, if the last sentence of 1802 (a)(2)(B) 20 didn't exist, the answer would be solely just the 21 physical location. That would be it. But the sentence 22 does exist and what it says on its face is that the 23 activities of an employee are attributed to the place 24 out of which he or she works -- the place he or she 25 works out of. 26 But -- and that's specifically the rule at 27 issue here. 28 I think the evidence is quite strong that the 23 1 Vice President of Sales, his office that he was assigned 2 to and worked out of San Jose. 3 Miss Varney's statements and the documentary 4 evidence that we produced show that this individual was, 5 indeed, involved in some sales calls negotiations 6 relating to this contract from his San Jose office. 7 Were negotiations held in Merced? 8 Absolutely -- there were negotiations held in Merced, 9 but by an employee who worked out of the San Jose 10 office. And the mere fact that he showed up -- instead 11 of meeting the customer at the customer's place of 12 business, and, not, say, at -- you know, instead of 13 the -- instead of another permitted location for the 14 taxpayer, that shouldn't make the difference here. 15 The rule as stated in Regulation 1802, where 16 does the employee work out of? That employee's 17 activities are then attributed back to that office and 18 that's been the practice in sales offices. 19 Furthermore, we would note that there is some 20 evidence in a letter from Mr. Wils that's been produced 21 in the record that the -- that the customers maintained 22 some offices at the Merced location. 23 Now, if these meetings in Merced -- we don't 24 know, we don't have the details, neither side has 25 produced them -- but if the meetings in Merced were 26 taking place at the customer's office in that plant, 27 that's -- that's definitively not a place of sale. 28 So, we would ask the Board to read the entire 24 1 regulation in the context and that is to attribute the 2 activities of the employees to the office out of which 3 they work. 4 MS. YEE: Okay. Hang on one second. 5 Let me have Ms. Sturdivant comment, then 6 Mr. Horton. 7 MS. STURDIVANT: In the case documentation 8 there is a list of customers that the taxpayer had 9 prepared for the Board of Equalization. And this 10 particular customer is noted in here. And this sales 11 office tied to that particular customer is the Merced 12 office. 13 Also in the -- in the case file documentation 14 there was some handwritten notes from Board employee 15 Rhonda Krause that detailed her conversation with the 16 taxpayer. And those notes stated that this particular 17 customer sent their POs directly to the Merced location. 18 And the sales don't follow the employee. They 19 go to the point where the negotiations occurred. 20 Everyone's agreed those negotiation occurred in Merced. 21 And it doesn't make sense then to take those 22 negotiations and then apply them elsewhere. 23 This particular employee clearly had different 24 functions. He performed one set of functions in 25 San Jose and different set of functions in the City of 26 Merced. While in Merced, his job was to negotiate 27 sales. 28 MS. RUWART: And if I may just amplify a little 25 1 bit on the taxpayer analysis? 2 With respect to Miss Varney's administrative 3 difficulty argument, in this case the taxpayer did not 4 have any difficulty assigning the person in question to 5 the Merced facility for purposes of this contract. They 6 did so in reviewing their own information and preparing 7 the three-page handwritten list you have seen as part of 8 your exhibits that clearly assigns this person to the 9 Merced facility for purposes of this contract 10 negotiation. 11 I think that there may be some confusion in 12 terms of longstanding practice of when this last 13 sentence of 1802 (a)(2)(B) is generally applied. It's 14 generally applied when negotiations occur at a place 15 that is not a retailer's place of business. In other 16 words, salesperson normally works out of, for example, 17 the San Jose office and performs negotiations at a 18 customer's or at a neutral site. It is not proper to 19 allocate local sales tax of that retailer to the 20 customer's location. So, you attribute the activities 21 back to that salesperson's office. 22 But when that salesperson is at, physically at 23 the other place of business, we see no reason in the -- 24 we see no prohibition in the regulation from assigning 25 it there. We see no administrative barrier. 26 This taxpayer clearly could do it. And we 27 think that there is -- there are many other 28 substantiating reasons and records that this can be 26 1 tracked. 2 MS. YEE: Okay, thank you. 3 Mr. Horton? 4 MR. HORTON: This has been very helpful. I 5 mean, I started out reading Regulation 1802 -- and I 6 particularly like your statement that people, not the 7 place, determines the place of sale. 8 When, in fact, it is a combination of things, 9 it seems that the intent of the regulation is to 10 determine where the principal negotiation took place. 11 And, so, we're faced with having to look at the flow of 12 documents to try to determine where that occurred, 13 where -- what duties and responsibilities the 14 salesperson had, seems to me that testimony of the 15 Department is that they -- they had no transactional 16 duties outside of the Merced office that he was -- and 17 in the San Jose office his duties and responsibilities 18 were quite different than that of negotiating the 19 transaction. 20 And, then we -- the other -- I mean, I think 21 the place has some implication in that it is indicative 22 of some activities had to take place, otherwise you 23 would not have had a physical location in San Jose. 24 So, the salesman for -- went to -- had a 25 location for a purpose, went there for a purpose. But 26 it's a indication that some activity took place. So, 27 then we have to go one step further to try to define 28 what activities actually took place in San Jose versus 27 1 Merced. 2 And, so, it seems to me that the evidence is 3 leaning towards the principal activity by virtue of his 4 duties, by virtue of his responsibility, by virtue of 5 access to information. I think there was testimony that 6 individuals from out of state flew in and met in the 7 Merced office. So -- and to counter that, we have 8 testimony from individuals that's kind of dated a little 9 bit here and conflicting. And, so, that reduces our 10 assessment down to just the documents that we have and 11 the facts that are before us. 12 Now, relative to how this affects the 13 allocation of tax on an ongoing basis, I mean I think 14 the law is pretty clear I mean I think the regulation is 15 pretty clear. I think that it's clear that the intent 16 is for all parties involved to try to determine where 17 the principal negotiation took place. And then the 18 regulation, as well as the other -- the annotation and 19 so forth -- give you some guidance as to what -- what 20 set of facts you can use to make that determination. 21 So, it's just a comment, it's not really a 22 question. 23 MS. YEE: Thank you. 24 Mr. Myers? 25 MR. MYERS: May I respond, Madam Chair? 26 I would simply note that the statements by the 27 Department and the affected jurisdictions' 28 representative are not supported by any evidence in the 28 1 record as to the division of labor with respect to this 2 Vice President of Sales. That is an inference, a 3 conjecture that they've made from an entry on a 4 document. 5 Contrast that with the fact that Miss Varney 6 met personally with the individual in the San Jose 7 office, that he held himself out -- 8 MR. HORTON: What do you have to substantiate 9 that they met? 10 MR. MYERS: Miss Varney met personally. 11 MS. VARNEY: I did. 12 MR. HORTON: You met with the -- 13 MS. VARNEY: I did and we resubmitted the 14 affidavit. 15 MR. HORTON: The purchaser or the salesperson? 16 MS. VARNEY: The salesperson. 17 MR. HORTON: What does that have to do with the 18 principal negotiation? 19 MS. VARNEY: Well, again, your comment in terms 20 of the fact that the information's dated and the fact 21 that you were going with -- you know, maybe what's my 22 interpretation, but I think what's important here is -- 23 MR. HORTON: I am. 24 MS. VARNEY: -- this particular person in a 25 letter stated what his duties were and the duties he 26 performed out of the San Jose office, which to me, 27 should carry more weight than assumptions and notes by, 28 you know, Board auditors in the file. 29 1 So, you know, what do you believe? 2 MR. MYERS: You asked, Mr. Horton, what does 3 that have to do with the principal place of 4 negotiations? 5 MR. HORTON: I may have interrupted you too 6 soon. 7 Let's continue that. My apologies. 8 MR. MYERS: We're here to answer your 9 questions. 10 The reason it's important is precisely as you 11 have indicated, we're looking at what activities did the 12 individual undertake and where did those activities get 13 attributed? That's how 1802 is established. 14 And what we're hearing are statements, I 15 believe, that are uncorroborated inferences from the 16 record that all negotiations occurred in Merced. There 17 wasn't any sales activity for this particular individual 18 occurring out of the San Jose office. 19 And that's -- that's not the case. I mean, 20 what we've heard from the affected jurisdiction was that 21 there was a split in duties and the negotiational duties 22 were only at Merced. 23 And what we're saying is that the evidence 24 doesn't support that fully. We do agree that there were 25 negotiations that took place at Merced. And we do agree 26 that there were conversation that took place there. 27 But we also draw the Board's attention to the 28 fact that in conversations with the customer there were 30 1 mention of phone calls between the customer, who had his 2 office in San Francisco, and the San Jose sales office 3 with this particular Sales Vice President, that this 4 particular Sales Vice President was involved in the 5 negotiations, as is shown by the documentary evidence 6 that the Department has mentioned, as well as the 7 affected jurisdiction. So, you've got an individual who 8 was conducting sales from both locations from our 9 perspective. And sales activities on this particular 10 contract even from both locations. 11 And you -- you have a rule that says you 12 attribute it to the office that they work out of, not 13 the place where they might happen to be on that day, 14 even if that place was another permitted place of 15 business. 16 MR. HORTON: Well, the challenge here is that 17 all agree that he operated out of both locations. I 18 haven't heard any dispute of that. 19 MS. VARNEY: You say "operate" -- I am sorry to 20 interrupt. 21 When you say "operated out of," what does that 22 mean? 23 MR. HORTON: Without getting into the duties 24 that he had an office in San Jose and he also visited 25 the Merced office for a number of different reasons. 26 And, so, it seems to me that the testimony here 27 is that what occurred in the Merced office is what I'm 28 really more concerned with. I'll give you that because 31 1 he had a location in San Jose that at some point it is 2 possible, and to some extent a little bit probable, that 3 he did negotiate some transactions. But relative to 4 this transaction, it seems that I have heard that the 5 activity that took place in the Merced office were 6 significant. I have yet to hear of any activity that 7 took place in the San Jose office -- and we just looked 8 at the flow of documents, the activities, if I'm not 9 mistaken and may be reiterating here, that individuals 10 from out of town, the corporate office, flew in to 11 Merced and met with him in Merced. Well, that's 12 typically not necessary to determine whether or not you 13 can actually print the product. 14 And typically one step beyond the initial 15 negotiations there is another layer of negotiations that 16 took place. The mere fact that they met there adds 17 another layer to the determination of principal 18 negotiation. 19 I'm listening to try to -- I haven't heard 20 anything that took place in San Jose other than his 21 testimony that he did negotiate transactions out of 22 San Jose. And I would venture to say that it probably 23 did happen. 24 So -- but what we're looking at here is this 25 one transaction. And, so, I am -- I am listening, 26 trying to see if I can get a little more. 27 MS. YEE: Miss Varney? 28 MS. VARNEY: Something that I would like to add 32 1 that may kind of add to that, even with what you are 2 saying in terms of this one transaction presents even a 3 larger problem, even if you were looking at this in 4 terms of the full scope of time that we're talking about 5 for this, because even based on that, the numbers that 6 have been -- that were being by the Department were for 7 one particular year. And if you look at that and you 8 try to spread that over the entire amount of time at 9 issue here, you would be assuming that that one customer 10 was, you know, the lion's share of their business for 11 all of those years and I don't think that we can make 12 that assumption. 13 Whereas the allocations that were generated by 14 the taxpayer directly in 1995 on her tax returns, where 15 she went in, by her own word, and the -- as she -- the 16 transmittal that she gave the Board was that when she 17 went back and re-evaluated the salesman's activities, 18 she then attributed sales to the different locations 19 based on that review, which gave a much different 20 picture than just looking again at that one particular 21 customer and how you were viewing their activities. 22 So -- 23 MS. MANDEL: I -- 24 MS. YEE: Hold on a minute. Ms. Mandel and 25 then -- 26 MS. MANDEL: Okay. Now the way that I heard 27 these two things, they always sounded to me like there 28 was two different things potentially going on in the 33 1 case. 2 You know, I had my one grumpiness about these 3 kinds of cases because I always thought we were supposed 4 to get them if there were no disputed facts and now I 5 hear these disputed facts and that makes me a little 6 grumpy, but -- 7 MR. LEONARD: Me too. 8 MS. MANDEL: Yeah, I mean -- but one was this 9 issue of the particular contract with Merced -- in 10 Merced, where the -- where the actual customer said, "We 11 really negotiated it out of state and anything that 12 happened in California happened in Merced." 13 The other piece that I had seen in the papers a 14 little bit, which Mr. Myers mentioned briefly, and 15 you're now talking about, is how much -- because the 16 staff had said, well, they're only talking about the 17 San Jose issue, which the San Jose versus Merced on this 18 one contract. And you referenced the allocations to the 19 three jurisdictions that were done on the returns as 20 somehow better than what happened in, I guess it's in 21 audit, technically, which looked to be an audit that was 22 done on some kind of a test basis. We see a lot of 23 cases where audits are done on a test basis to determine 24 what the validity of -- of -- it's not an allocation, 25 but taxable versus nontaxable or whatever, on -- on a 26 sales tax return. 27 So, I kind of saw those as two things -- 28 leaving aside the, you know, are we here on time issue, 34 1 two things in the audit -- as two things in the fight as 2 separate -- San Jose versus sort of Merced is its own -- 3 was it own little thing, in my mind and maybe I was 4 wrong -- and then this other issue where you wanted just 5 accept the percentages that the taxpayer reported as 6 more reasonable for this entire period among the three. 7 Now, that's the way -- you are shaking your 8 head no, but that's the way it sounded to me and maybe 9 it's -- and it may have been the way it sounded to the 10 Department, I don't know because they were saying you 11 didn't say anything about LA and Irvine to show that 12 there were sales there that shouldn't have been there. 13 So, if someone -- I don't know who's 14 appropriate to help me out with this? 15 MS. YEE: Let's start with Mr. Myers and 16 Ms. Sturdivant. 17 MR. MYERS: Are there two issues? Yes. 18 There are -- there are issues about this 19 particular large contract, which depending on whether 20 you look at the 1995 numbers that were done by the 21 taxpayer or the 1996 numbers that were the -- that come 22 out of this test, this particular contract represents 23 anywhere between -- somewhere upwards of 69 and 98 24 percent of all taxable sales for the years that were 25 reported. 26 MS. MANDEL: Let me stop you right there 27 because this contract was one of the things that was 28 pulled in the test? 35 1 MR. MYERS: Yes. And my understanding is that 2 there was a full sales inventory from 1996 and that the 3 auditor spoke -- looked at each -- each of the sales, 4 whether they were taxable or not taxable -- and I'm 5 sorry, Mr. Levine, if you -- 6 MR. LEVINE: Let me just -- 7 MS. MANDEL: If you know -- 8 MR. LEVINE: -- correct me if I'm wrong, this 9 is my view of it: We had the test that Petitioner would 10 like -- Petitioners would like to rely on for the 11 reporting of the taxpayer of 29 and a half percent to 12 Los Angeles and Irvine -- 13 MS. MANDEL: Right. 14 MR. LEVINE: -- and 68.2 percent to San Jose 15 and I -- I understand that the 68.2 to San Jose is 16 basically this big contract? 17 MS. VARNEY: I don't think -- 18 MR. MYERS: If you -- I am going to incur the 19 wrath of Ms. Mandel with this answer, but it's actually 20 more complicated than that. 21 You've got the 1995 numbers that have the 22 68 percent -- the 29 percent for LA, 68 for San Jose. 23 Those numbers come from the taxpayer's reporting on, I 24 believe it's on Schedule C, they wrote in those 25 locations, attributed that amount of dollars to each of 26 those locations when they reported in the second and 27 third quarters of 1995. 28 In 1996, in the test, because the Department 36 1 disputed those numbers and undertook to test, in 1996, 2 when you look at finally when we get the summary in 1997 3 from auditor Alexander, what we get is 98 percent of the 4 dollars are attributed to this one contract and then 5 attributed further to Merced in the test -- 2 percent 6 goes to the LA/Irvine and it's .4, so, it's a little bit 7 less than 2 percent to LA/Irvine and. 4 -- .45 percent 8 or so to San Jose. So, we do see in the test there's 9 sales activity. 10 To come back to your two issue points here, 11 the majority of the dollars followed this dispute 12 between Merced and San Jose about which is the place of 13 sale, given that the tax that the individual who was 14 negotiating -- 15 MS. MANDEL: With respect to the one contract? 16 MR. MYERS: -- with the respect to the one 17 contract because the majority of the dollars tend to 18 follow that contract. 19 MS. VARNEY: For that period. 20 MR. MYERS: Yeah, for '96. 21 One of the things -- and this is a problem of 22 having fairly stale evidence, I acknowledge -- is we -- 23 neither side has more than one data point. 24 We've got a 1996 allocation that came from the 25 test. We have the taxpayer. And we don't know whether 26 that variability between those two, 69 and 98 percent, 27 whether that -- 28 MS. MANDEL: You don't know -- 37 1 MR. MYERS: -- is standard. 2 MS. YEE: -- you don't know if they had this -- 3 this was a one off contract with this customer? 4 MR. MYERS: I believe there is evidence from 5 Rhonda Krause's notes that the customer said he'd been 6 doing business for ten years. So, I had had a contract 7 for ten years and that statement was recorded by 8 Miss Krause in around 1998. 9 So, I don't know if there was ten one-year 10 contracts or a long-term contract. I can't say to the 11 Board. But it was a longer term contract. 12 The problem is, we don't know how much of a 13 percentage it was over those years of the overall sales 14 tax. We have two differing numbers, '95 and'96. 15 MS. MANDEL: Well, when the -- when the audit 16 test of '96 is done, that's in conjunction with what, 17 the -- this is really for staff. 18 Is that in conjunction with the petition of the 19 whatever we call them, inquiring minds want to know 20 jurisdictions or is that just a general review of the 21 taxpayer's return or did -- 22 MS. NIENOW: I think that was based on the back 23 and forth going on between all of the parties during 24 that period of time. 25 MS. MANDEL: So, at that time if somebody 26 thought that the -- that the particular test was not 27 representative of the time period which they had under 28 dispute, they would make the same pitch that taxpayers 38 1 make in regular types of sales taxes -- I don't like the 2 tax, I don't think the test is good. You need to look 3 at more, you need to look at something else. 4 MS. NIENOW: That's correct. 5 And also in the D & R that was issued in 2001, 6 the Local Appeals Tax auditor indicates that the 7 taxpayer indicated that that was representative of the 8 allocation period. 9 MS. MANDEL: All right, thank you. 10 MS. YEE: Thank you, Ms. Mandel. 11 Ms. Sturdivant, did you have a comment? 12 MS. STURDIVANT: Yes, I did. 13 Again this case is 16 years old. And all of 14 the statements that the affected jurisdiction is making, 15 they're not the implied not assumed. They're -- it's 16 based on the actual information in the case file, which 17 comes from the taxpayer themselves, which comes from 18 statements from the Petitioner and it comes from the 19 Department notes. 20 And, so, we're not implying or suggesting or 21 assuming anything here, we're stating the facts as they 22 are in the record. 23 MS. YEE: Okay. Other questions, Members? 24 MR. HORTON: Just -- 25 MS. YEE: Mr. Horton? 26 MR. HORTON: -- so, I am talking -- so, what 27 are you asking us to do? 28 MR. MYERS: We're asking the Board, No. 1, to 39 1 find that this -- that, in fact, the last sentence of 2 1802 (a)(2)(B) means that the taxpayer Vice President of 3 Sales, who was intimately involved in negotiating this 4 contract, that his activities are attributed back to 5 San Jose and that winds up being the principal place -- 6 place of principal negotiation and the sales dollars for 7 that contract go there. 8 MR. HORTON: So, you're not asking us to -- 9 it's a leading question, but I am asking -- you're not 10 asking us to determine if the San Jose -- if there were 11 transactions in the San Jose office throughout the -- 12 throughout the term of this particular individual's stay 13 there that should be allocated to San Jose, it's just 14 one -- just this transaction in 1996, I guess? 15 Is that what you're asking? 16 MR. MYERS: No, we're actually asking for the 17 full weight of this contract, the dollars that go with 18 this contract, to be allocated to San Jose for the 19 reasons that we've argued. 20 We are also then -- 21 MR. HORTON: So, you -- 22 MR. MYERS: -- then the dispute becomes what, 23 as Ms. Mandel has pointed out, which -- we've asked that 24 the Board follow the 1995 allocations from the taxpayer. 25 There was a 1996 test which would shift, you 26 know, 98 percent, if we -- I am sorry. 27 MR. HORTON: Question, if I may? 28 MR. MYERS: Yes. 40 1 MS. RUWART: May I address that? 2 MR. HORTON: In 1995 -- I mean, we're not -- 3 are we allocating the results of the test in 1996 back 4 to '95, '94 and so forth? 5 MS. RUWART: Yes. 6 MS. YEE: Yes. 7 MS. RUWART: Yes, we are. 8 MR. HORTON: We are? 9 MS. RUWART: And the taxpayer indicated that 10 that test period was representative of the entire 11 period. 12 The reason why -- one of the reasons why we 13 believe that the test is applicable to the Los Angeles 14 and Irvine offices as well is the test included both 15 those offices. 16 And the nature of the printing that occurred in 17 Merced was such that those kinds of products just were 18 not negotiated out of Los Angeles and Irvine. 19 MR. HORTON: Okay. 20 MS. RUWART: So, it's not that Los Angeles and 21 Irvine didn't negotiate any sales, those sales were 22 generally printed at other plants and, so, they are not 23 at issue in this petition. 24 MR. HORTON: Help me understand if there was 25 any difference in 1996 transactions versus '95 and '94? 26 This seems to be -- I mean, this one transaction seems 27 to take up a significant amount of the sales for that 28 period of time. 41 1 And I don't know -- I am asking -- is that 2 representative of the -- of the mix, the sales mix, in 3 the other periods? 4 So, in 1995 there was one large transaction 5 that made up 80 percent, 90 percent of the activity; in 6 1994 there was one large transaction? And, if so, why 7 not look at it transaction by transaction unless we're 8 saying that all of these large transactions are 9 negotiated the same way? 10 That's the premise of our argument? 11 MS. YEE: Mr. Levine? 12 MR. LEVINE: Let me give you the bottom line 13 and then I'll answer your specific question. 14 And, again, if I have got it wrong, someone can 15 raise their hand. 16 My understanding is we have two theories. One 17 is that one that the Department and interested parties, 18 substantially affected jurisdiction, has argued and 19 Appeals has upheld, that the test performed by the 20 Department, which has most of the funds going to Merced, 21 would apply for the entire reallocation period. 22 The alternative is Petitioner's view that the 23 way the retailer reported with the 68 percent and the 24 29 percent for a few months in 1995 would apply again 25 for the whole reallocation period. 26 I understand the parties to basically accept -- 27 perhaps because there is no way to prove otherwise -- 28 that the allocation should be consistent throughout the 42 1 reallocation period. And we're just arguing about which 2 allocation. 3 And as far as what you're talking about, we're 4 not really talking about individual transactions here 5 because of the weird way that the legislature has chosen 6 to have local tax -- local jurisdictions fend for 7 themselves, battle over local taxes. 8 We have a contract that -- which is why the 9 discussion about the Petitioner wasn't sure if it was a 10 one-year contract or ten-year contract -- you could have 11 one negotiation, ten minutes, sign a contract for ten 12 years and all that money would go -- would be regarded 13 as -- the sales would be regarded as having occurred at 14 that point without regard to where the sales really 15 occurred for other purposes, including other sales tax 16 purposes. 17 So, this one large contract could have been the 18 only contract for the entire period, we don't know. But 19 I think we're assuming that if there was another 20 contract, it was probably done about the same way, 21 because we have no facts otherwise. This is the way 22 you're going to get a lot of local tax cases. 23 MR. HORTON: This -- this one transaction -- 24 MR. LEONARD: He's a prophet. 25 MR. HORTON: -- the case in point, did occur. 26 I mean, it occurred in 1996. So, sounds like we don't 27 really know if it happened in '95 and '94, do we? 28 MS. VARNEY: May I correct you? I think that 43 1 this occurred before that. This test period, of which 2 they were looking at taxpayer's reporting or sales, 3 occurred for the test period of the first quarter '96 4 through fourth quarter '96. 5 And, again, that -- those numbers prepared by 6 the auditor are very contrary to the taxpayer's own 7 reporting in '95. And that's where the -- part of the 8 differences come in. 9 But I also want to clarify that throughout this 10 case we -- our request is for the same, it's that sales 11 tax be reallocated to both sales offices, representative 12 of sales occurring there. 13 And, again, we just felt that the taxpayer's 14 direct reporting in 1995, you know, was representative 15 of that -- when you don't have a lot of other 16 information. 17 And is it safe to assume that one customer 18 would have dominated? 19 MS. MANDEL: I hear what you are saying, I am 20 sorry? 21 MR. HORTON: Maybe staff could help with my 22 question. 23 I understand and agree with what Mr. Levine has 24 shared. Unfortunately, the law is law. The principal 25 negotiation took place, even though the activity may 26 occurred over a period of time. 27 My concern is is that the transaction in 28 question, when did it actually take place? If it took 44 1 place in '96? And are we making presumption as to the 2 nature of the untested periods? 3 Or do we have information that supports 4 otherwise? 5 MS. RUWART: We do. And I am trying to find 6 the exact reference. 7 But the conversations the Department had with 8 the customer -- the major customer's lead negotiator -- 9 and I believe these are also indicated in Miss Varney's 10 notes, although I am not absolutely sure -- indicate 11 that these -- that this business was or this printing 12 work was given by this major customer to this printer on 13 a year after year basis. 14 MR. HORTON: Okay. 15 MR. MYERS: The -- 16 MS. RUWART: I don't think that's disputed, 17 really. 18 MR. MYERS: If I may real quickly, just for 19 your reference? 20 MS. YEE: Actually, I am going to have you hold 21 on for a second. 22 Ms. Mandel, did you have a question? 23 MS. MANDEL: I forgot it. 24 MS. YEE: Okay. 25 MS. MANDEL: I just -- I mean I feel like -- 26 again it's with these local tax cases where everyone's 27 arguing about what the taxpayer did or what the 28 taxpayer's customer did and what the taxpayer's customer 45 1 said -- and because they're the facts of local tax 2 cases, we don't -- you know, we don't have them. 3 They're not -- that's by the Boards. 4 But we have written correspondence from the 5 customer saying their negotiations were out-of-state 6 people and to the extent that they did anything in 7 California, we have the taxpayer, who upon receipt or 8 whatever you want to call it of the 1996 test apparently 9 said, at least the Board records reflect, that the 10 taxpayer said that that was representative of the entire 11 period. 12 So, maybe I'm missing something, but it's 13 just -- and then we have some letters from the VP 14 where, you know, you could read them and say they're 15 sort of nonspecific. 16 You know, yeah, he works out of -- you know, "I 17 work out of LA. I work out of Sacramento. I work out 18 of, you know, another unnamed place." 19 But it's -- I love these local tax cases. I 20 guess that's more of a comment too than a question. 21 MS. YEE: Yes. Let me just follow up this and 22 then I will give the parties time to close. 23 And that's the frustration. We've got various 24 characterizations as to the nature of the activities of 25 these different locations. And, so, given that, I think 26 where I am kind of going back to is really the fact that 27 the majority of the business of this retailer was from 28 this one major customer. 46 1 And, yes, the Vice President for Sales with the 2 retailer was the Vice President for Northern California 3 Operations. Yes, I expect him to be in San Jose. I 4 expect him to be in Merced. I expect him to be in 5 San Francisco. But what actually took place in those 6 various locations -- and I think given kind of the 7 weight of what we've seen -- I still think it kind of 8 tips in favor of the activities, particularly principal 9 negotiations, taking place in Merced. 10 I think there has been more definitiveness 11 about that than anything else I have seen. I mean, it's 12 really hard to kind of reconcile these different 13 characterizations of what happened where. 14 And just because a Vice President assigned to 15 San Jose doesn't necessarily mean, you know, the 16 activities that matter for 1802 took place there. 17 MS. MANDEL: See and that's where it seems to 18 all fall down to -- or come back to, don't say fall 19 down -- to their original pitch that that last sentence 20 governs all and it doesn't matter where the guy is in 21 California -- at any of the 27 offices some company 22 might have, it all goes back, you know, to wherever he 23 was primarily assigned out of. And that's their view of 24 that regulatory sentence. 25 Where staff's -- as I understand it -- the sort 26 of staff perspective is that comes into play more for, 27 you know, the sort of traveling about kind of guy. 28 Because we're looking for a place and he may be doing it 47 1 at some point. 2 I mean, that's how I understood. And that's 3 why, I think, they come all back to down to that one 4 sentence and say it doesn't matter. 5 I think they would even say, 6 "We don't care if he did it all in Merced," 7 almost. 8 MR. MYERS: Well -- 9 MS. MANDEL: They would say, 10 "We don't care if every -- if this VP 11 negotiated this contract, we don't care if he 12 did it all out of Merced, we still think it 13 goes to San Jose." 14 That's almost the impact of your -- because 15 he's assigned out of San Jose. 16 MR. MYERS: That's obviously not the argument 17 we're making. But, in essence we think that's how the 18 rule reads and ought to read. 19 And the reason for that is relatively 20 straightforward. There is no reason to create a new 21 rule simply because this person, who is a salesperson 22 and salespeople work outside their offices and do sales, 23 happened to be at another permitted location, now we 24 adopt a new analysis that we don't adopt if the 25 negotiations had taken place at a Starbucks or at a 26 customer location. Now we're adopting a new rule. 27 And the rule is 1802 (a)(2)(B), the last 28 sentence applies unless he happens to negotiate from 48 1 another permitted location. Now we're going to have 2 another rule. 3 So, yes, while that isn't what we're arguing, 4 we're arguing there were sales activities from San Jose 5 on this contract. 6 We would say that the general thrust, 7 conceptually is, even if it was all at Merced, you have 8 to look at who did the activity. 9 Okay, the person who was involved in the 10 negotiations and the regulations say you have to 11 attribute their activities back to the sales, to the 12 office out of which they work. And it's not that it's 13 assigned out of, not just that he's assigned there on 14 paper, it's that he works there, he does sales stuff 15 there. 16 So, that -- that's what we're trying to say, 17 so -- 18 MS. MANDEL: Did I just make a big monkey 19 wrench? 20 But I mean, I think that's where their argument 21 was going. 22 MR. LEVINE: That would -- that's why we said 23 it would stand it on its head. 24 We understand they have the -- I would phrase 25 it an alternative argument to make it more reasonable 26 and I understand that. 27 But it would be my conclusion that if you found 28 that that sentence means what Petitioner says it means, 49 1 that it would mean exactly what you say. That's how we 2 would interpret that unless the Board gave us other 3 directions. 4 If you find that that sweeps the whole 5 regulation, we say, "You're assigned here," we are not 6 looking at anything else. 7 MS. YEE: Mr. Horton? 8 MR. HORTON: Seems to me that -- seems to me 9 the first standard of the regulation is the place of 10 business. 11 And, so, clearly the primary place of business 12 is in Merced. It's where the product is produced. It's 13 where the majority of the employees are located -- the 14 majority of any activity sort of takes place. 15 So, it's probably where the business tax 16 license is set. So, therein of itself -- but the 17 regulation goes on to say that if there are two places 18 of sale -- sales, then we need to determine where the 19 principal negotiation took place. 20 And that seems to be where we are. 21 Quick question? There is another document 22 here, that document is the return filed by the taxpayer. 23 What did the taxpayer say on that document? 24 MS. RUWART: Do you mean the 1995 return? 25 MR. HORTON: Uh-huh. 26 MS. RUWART: I don't know that they said 27 anything in particular, but would I like to -- 28 MR. HORTON: What did they report? 50 1 MS. RUWART: They reported the percentages to 2 Los Angeles and San Jose we previously discussed, which 3 were different than the what test percentages came out 4 to be. 5 And what I would like to clarify is why the 6 Department does not believe that it is reasonable to 7 rely on those two quarters of return reporting to 8 allocate the percentages. 9 Is that just a matter of timing? That the 10 taxpayer obviously prepared the two quarters of returns 11 in 1995, but the taxpayer themselves also provided the 12 information for the 1996 test and verified, after the 13 test was over, that that -- that that was, in fact, 14 indicative of the entire petition period. 15 So, what I would say is that you can't say the 16 taxpayer said something in 1995 binding the future 17 taxpayer themselves, the next year or two when they went 18 back with more detail and more attention to this and 19 coming up with a completely different result. 20 We believe that the 1996 test and the 21 taxpayer's verification of it is the most reliable 22 information that there is. And it's much more reliable 23 than two returns' worth in 1995. 24 MR. HORTON: Unfortunately -- I mean, the 25 Petitioner has to meet the burden of proof in this case. 26 Some concern about when the taxpayer makes -- fills out 27 a return and we dispute that return, I mean, even though 28 it's not necessarily codified in the law, once we 51 1 dispute what the taxpayer said on the return, I believe 2 the burden of proof shifts a little bit towards the 3 middle in that case, but -- okay. 4 MS. VARNEY: If I may? 5 MR. HORTON: Madam Chair, thank you. 6 MS. YEE: Any other questions, Members? 7 Okay, Ms. Varney and Ms. Ruwart, then I will 8 entertain a motion. 9 MS. VARNEY: I do want to respond a little bit. 10 In the taxpayer's transmittal to the Board, 11 this is where she was actually filing an additional 12 amended return in addition to the two returns she had 13 already filed. 14 Her transmittal is attached as the reallocation 15 for the first quarter of 1995. This is based on our 16 review of the locations in California and their 17 functions. 18 Furthermore, there is notes in here from her 19 staff assistant saying that they received notification 20 in December -- on December 7th, 1995 from the State 21 Board auditor telling them that they should not 22 allocates to local tax -- to the local sales offices. 23 And, so, they had no option other than to 24 report to Merced. 25 MS. RUWART: All those events occurred prior to 26 the 1996 test and analysis. 27 I just don't think that is what we should rely 28 on when the taxpayer, at the end of the 1996 test 52 1 period, validated it. 2 MS. YEE: Okay. Ms. Sturdivant? 3 MS. STURDIVANT: I'd just like to say that this 4 Vice President of Sales is the salesperson that we're 5 talking about. He wasn't a traveling salesperson. The 6 sales negotiations didn't take place in a Starbucks. 7 They took place at his employer's place of business in 8 Merced. 9 And when we look back at the regulation, it's 10 clear that it talks about the place where principal 11 negotiations occurred and that was the City of Merced. 12 MR. HORTON: What was the office in San Jose 13 for? 14 MS. STURDIVANT: From what I understand, the 15 taxpayer provided all sorts of different printing 16 options for their customers. 17 So, not necessarily all of the sales that were 18 made out of Merced were printed out of -- or, excuse me, 19 the sales that were made out of San Jose were 20 necessarily printed out of Merced. 21 They had printing facilities all over the 22 United States and Canada that were dedicated to 23 different types of printing jobs. 24 So, there may have been sales made out of 25 San Jose that were printed, you know, elsewhere in the 26 Midwest, in Canada. 27 And whatever the percentage is that the test 28 period came up with was the small percentage of sales 53 1 that were made in San Jose, that were printed in the 2 Merced facility. 3 MR. HORTON: I mean, by our own test we've said 4 that some sales -- by our own test, we said that some 5 sales were principally negotiated in San Jose. 6 So, that's indicative that the San Jose office 7 could have been used for negotiations, principal 8 negotiations? 9 MS. RUWART: I can address that more. 10 I think that the -- 11 MR. HORTON: And that if we looked at it on a 12 transaction basis, disregarding the amount -- so, you 13 have got one transaction that was negotiated in Merced, 14 and the 2 percent could represent ten transactions that 15 were negotiated in San Jose, I really don't know. 16 But if I just looked at that, I would say this 17 individual is principally negotiating transactions in 18 San Jose. 19 So -- believe me, I'm taking this all in, 20 this -- 21 MS. RUWART: The letter that this Vice 22 President sent describing the operations of the San Jose 23 office for which he was functionally responsible, 24 described a general sales procedure involving account 25 executives who apparently were not him. 26 And they would contact customers, create 27 proposals, accept bids and bring contracts to San Jose 28 for signing. Those contracts would then be signed -- 54 1 allocated -- assigned out by the central or head office 2 to the appropriate printing plant based on what was 3 required by the job that they negotiated. 4 That's the general procedure. 5 MR. HORTON: That argues the principal 6 negotiation in my mind took place in San Jose. 7 MS. RUWART: That's right. That's where the .2 8 or .4 percent of sales because all of -- of the 9 100 percent of sales that were clearly negotiated by the 10 account executives, who were not the Vice President in 11 San Jose, all but -- less than a half percent were 12 printed at the printing plants other Merced. 13 MR. HORTON: So, why this one being treated 14 differently? 15 MS. RUWART: Here's what was -- here's what was 16 different about this: This is a major customer who 17 apparently had a longstanding annual relationship with 18 the Merced printing plant. 19 Our understanding is that the principal 20 negotiations occurred with the out of state offices and 21 that, as the customer states themselves, of course, you 22 can't have a negotiation without the customer, whatever 23 discussions that took place in California, minimal as 24 they were may be, were in California -- were in Merced. 25 The -- what -- what was occurring in Merced was 26 that this Vice President, who may or may not have 27 negotiated other sales while he was in San Jose -- but 28 if he did -- did -- none of those sales were printed in 55 1 Merced, so, we don't have any record of them. 2 He was assigned to the Merced location, which 3 was also a permitized sales office, to negotiate -- to 4 conduct -- to be involved as a team member in whatever 5 discussions took place with the customer physically at 6 Merced. 7 One thing -- a fact that may have gotten lost 8 in this is that this Vice President was not the only 9 person who negotiated with the customer in Merced. The 10 customer clearly indicates that there was a team of 11 operational managers who provided important information 12 to subsequently negotiate the contract. 13 In other words, there was sales negotiation 14 activity that was performed by persons who were in 15 disputably assigned to and permanently working out of 16 Merced with respect to this contract. 17 It was not just the activities of this person 18 that should be considered here. This is additional 19 weighting toward Merced having the most significant 20 participation in the negotiations. 21 We don't believe that principal negotiations 22 incurred in this state. But, if they did, they occurred 23 in Merced. 24 We also don't believe that any of the 25 activities were attributable to San Jose, but even if 26 they were, Merced had, by far, the greater significance 27 of participation. 28 No. 1, the customer themselves was there. 56 1 No. 2, all of the act -- the great majority, if 2 not all of the substantive discussions occurred there. 3 No. 3, the taxpayer considered that the 4 operation -- the other managers and this Vice President 5 were assigned there for purposes of negotiating this 6 contract. 7 We believe that the totality of the evidence, 8 both from the taxpayer's perspective and from the 9 customer's perspective indicate that Merced was the 10 appropriate place of sale. 11 MS. YEE: Are all of the petitioning 12 jurisdictions registered locations of the retailer? 13 MS. RUWART: Yes. And to answer Mr. Horton's 14 prior question, it appears that the San Jose, 15 Los Angeles and Irvine offices were more traditional 16 sales offices, smaller locations, fewer employees 17 engaged in mostly true sales. 18 The Merced location was a printing plant that 19 also had sales functions. So, it had always -- in fact, 20 prior to 1993 it was the only permitized location in the 21 State. And it was resolved definitively during the 22 Appeals during the Local Tax Appeals auditor's review 23 that they did take orders and that they did work -- were 24 required to register with the seller's permit. 25 So, they -- 26 MR. HORTON: This is the Merced? 27 MS. RUWART: The Merced, it is a printing 28 plant/sales office. 57 1 MR. HORTON: But the principal activity is 2 printing plant? 3 MR. LEONARD: Whole business? 4 MS. RUWART: It is unclear to us the extent of 5 the sales activity. 6 But, in any case, they definitely took orders. 7 MR. LEONARD: Field trip. 8 MS. RUWART: They were a sales office and 9 San Jose, Los Angeles and Irvine were only sales 10 offices. 11 MS. YEE: Okay. Other questions, Members? 12 Hearing none, is there a motion? 13 MR. HORTON: Move to take it under submission. 14 MS. MANDEL: Second. 15 MS. YEE: Motion by Mr. Horton to take this 16 matter under submission. Second by Ms. Mandel. 17 Without objection, that motion carries. 18 Thank you all very much. We'll discuss your 19 matter later today. 20 MS. STURDIVANT: Thank you. 21 MS. VARNEY: Thank you. 22 MR. MYERS: Thank you. 23 MS. YEE: Thank you. 24 ---o0o--- 25 26 27 28 58 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 NOVEMBER 18, 2009 I recorded verbatim, in shorthand, to 11 the best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 58 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: December 14, 2009 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 59