1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 DECEMBER 15, 2009 9 TAX PROGRAM NONAPPEARANCE MATTERS - ADJUDICATORY 10 LEGAL APPEALS MATTERS 11 ITEM H1 12 13 14 15 16 17 18 19 20 21 Reported by: Juli Price Jackson 22 No. CSR 5214 23 24 25 26 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 19 20 21 22 23 24 25 26 27 28 2 1 INDEX OF SPEAKERS 2 ---o0o--- 3 ITEM NAME PAGE 4 H1.1 Troy Von Dongen 4 5 H1.4 Dean Andal 19 6 H1.5 Amarjit Sekhon 37 7 H1.6 Fran Mancia 44 8 H1.6 Linda Lowry 46 9 H1.6 Stephen Conway 47 10 H1.6 Robert Cendejas 48 11 H1.6 Robin Sturdivant 49 12 H1.6 Jim DeBoo 52 13 H1.6 Pejmon Shemtoob 53 14 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 15, 2009 4 ---oOo--- 5 MS. OLSON: Our next item is H1, Legal Appeals 6 Business Tax Matters Adjudicatory. 7 And we have several speakers. 8 MS. YEE: Okay. Members, let's -- we are on 9 item H1, Legal Appeals Matters. Let me do this, we will 10 take each sub item separately. 11 The first sub item is Main Street California. 12 And we do have one speaker on this sub item. 13 ---o0o--- 14 H1.1 MAIN STREET CALIFORNIA 15 NO. 224746 (OH) 16 ---o0o--- 17 MS. YEE: Mr. Van Dongen is he in the audience? 18 Please come forward. 19 Good morning. 20 MR. VAN DONGEN: Good morning. 21 MS. YEE: If you'll introduce yourself for the 22 record? You have three minutes for your comments. 23 ---o0o--- 24 TROY M. VAN DONGEN 25 ---o0o--- 26 MR. VAN DONGEN: Thank you. My name is Troy 27 Van Dongen. I'm here on behalf of Main Street and Main, 28 Petitioner. 4 1 As stated in Main Street's petition, the 2 taxpayer is requesting a rehearing on several grounds. 3 However, in my limited time this morning I'd like to 4 address just one of those grounds, that's the due 5 process concern. 6 As the Board may recall, the underlying issue 7 in this case is the application of sales tax to certain 8 tips and gratuities that are paid by the customers at 9 the taxpayer's TGI Friday's restaurants. 10 In 2007 the Board amended Regulation 1603 in a 11 manner that created a presumption that certain 12 gratuities were considered mandatory and, therefore, 13 subject to tax. 14 And, secondly, that in order to overcome that 15 presumption, the taxpayer had to provide certain 16 documentary evidence and show that those tips were not, 17 in fact, mandatory. 18 Obviously, during the years at issue here, 19 which are 1998 through 2001, it would have been 20 impossible for any taxpayer to foresee that in 2007 the 21 Board would create a presumption that would require the 22 retention of documents retroactively in order to 23 overcome that presumption. 24 Yet if you read the Appeals Division's 25 analysis, the Department's case centers almost entirely 26 on this presumption and the taxpayer's inability to 27 overcome that presumption by presenting documentary 28 evidence. 5 1 During the initial hearing on this matter, Main 2 Street had to rely on the testimony of percipient 3 witnesses to present its case. And the Board Members 4 raised several questions that this particular witness 5 was unable to address. 6 Since that time, however, we've been able to 7 identify a witness that can address the specific issues 8 raised by the Board. And we're just asking for the 9 opportunity to present that evidence. 10 The taxpayer really had no way of knowing how 11 the Board was going interpret or apply the retroactive 12 provisions of Section 1603 when it came to this hearing. 13 And, indeed, you know, the courts have held that 14 retroactive document retention policies are a violation 15 of due process. 16 So, we would ask for your consideration in this 17 matter in light of these due process concerns. And even 18 if you are predisposed to uphold the original decision, 19 we would ask that, you know, for the sake of due 20 process, that you provide us the opportunity to try to 21 present this evidence to you and change your mind 22 otherwise. 23 Thank you. 24 MS. YEE: Thank you very much. 25 Questions, Members? 26 Okay, thank you, Mr. Van Dongen. Let us take 27 that under submission and we will decide your matter 28 later today. 6 1 MR. VAN DONGEN: Thank you. 2 MS. YEE: Thank you. 3 ---o0o--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 1 MS. YEE: Okay. Let's move on to sub item 2, 2 Select Office Solutions. There is no speaker for this 3 particular item. 4 ---o0o--- 5 H1.2 SELECT OFFICE SOLUTIONS, INC. 6 NO. 187460, 345451 7 ---o0o--- 8 MS. YEE: Is there a motion? 9 MS. MANDEL: I will move staff recommendation. 10 MS. YEE: Okay, motion by Ms. Mandel to adopt 11 the staff recommendation. 12 Is there a second? 13 MR. HORTON: Second. 14 MS. YEE: Second by Mr. Horton. 15 MS. STEEL: Object. 16 MS. YEE: Discussion? 17 MS. STEEL: I think we should move the -- abate 18 the interest for two and a half years because delayed by 19 the Board staff that, you know, during the Board hearing 20 that it came out -- so, not all of them, but just at 21 least April 1st, 2006 to September 30th, 2009. 22 MS. YEE: Okay. 23 MS. STEEL: Or we can recommend that -- the 24 offer in compromise, this is a lot of money for this 25 taxpayer. 26 MS. YEE: Okay. We have a motion and a second. 27 And let me just -- maybe Appeals, you can refresh our 28 memory on this case relative to Ms. Steel's question? 8 1 MR. LEVINE: Sorry, I don't remember the delay. 2 MS. YEE: Okay. 3 MS. MANDEL: Is this the excess tax 4 reimbursement case? Is that the right one? 5 MR. LEVINE: Yes, this is the one and it -- it 6 was originally postponed at Petitioner's request -- 7 MS. YEE: Right. 8 MR. LEVINE: -- because we had another audit 9 going on. So, I think that most of that delay was 10 because Petitioner wanted it consolidated. 11 MS. STEEL: You know, this first audit period 12 started 1998 and then you said that yes, Petition asked 13 for it, but it never came out during the first Board 14 hearing. 15 And our BOE staff changed mind on this, you 16 know, before this came out. And then somebody changed 17 mind that taxpayer asked for it. 18 But there's no proof about that. There's no 19 evidence. 20 MR. LEVINE: I don't have information on that. 21 My understanding was that they did, but -- 22 MS. STEEL: But it never came out for the 23 first -- during the first Board hearing. 24 And now, you know, staff is saying that 25 petition asked but there is no evidence about that. 26 MS. YEE: Well, I think there was also delay 27 relative to a settlement process too, wasn't there? 28 MR. LEVINE: I believe so. 9 1 MS. MANDEL: In trying to identify customers, 2 perhaps? 3 I know this was a similar motion that came up 4 at the hearing -- 5 MR. LEVINE: Yes, they had -- 6 MS. MANDEL: -- the day of the hearing. 7 MR. LEVINE: -- part of the delay during the 8 SD & R process was that once they were advised of our 9 conclusion that it would be excess tax reimbursement, 10 they said that they wanted to refund it to their 11 customers, which then this would be granted. And they 12 wanted to take out loans to do that. 13 So, there was some delay while they tried to do 14 that. And, eventually, they just didn't and they 15 dropped that argument. It was a funding problem. 16 MS. STEEL: There is definitely for both sides 17 had a problem at that point, that's why I'm asking to 18 abate interest only for two and a half years, not for 19 whole time period. 20 MS. MANDEL: I think the -- on the other -- on 21 the other side there was some interest, at least at the 22 time of the hearing, you know, as always referring 23 people to payment plans or advising them that there is 24 the offer-in-compromise program, if that's an issue for 25 them, they may not know -- 26 MS. YEE: Okay. 27 MS. MANDEL: -- that it exists, but -- 28 MS. YEE: Ms. Mandel, you want to just revise 10 1 your motion to at least get that information to the 2 Petitioner on the available programs? 3 MS. MANDEL: They can be -- you know, that 4 those are things that are handled at the staff level, 5 but they can be advised about -- 6 MS. YEE: Okay. 7 MS. MANDEL: -- payment plans and the 8 offer-in-compromise program. Those are probably 9 available programs to anyone who -- 10 MS. YEE: All right. 11 MS. MANDEL: -- is appropriate to avail 12 themselves, but -- 13 MS. YEE: Okay, other questions or comments, 14 Members? 15 We have a motion by Ms. Mandel, second by 16 Mr. Horton to adopt the staff recommendation. 17 Please call the roll. 18 MS. OLSON: Madam Chair? 19 MS. YEE: Aye. 20 MS. OLSON: Mr. Leonard? 21 MR. LEONARD: No. 22 MS. OLSON: Ms. Steel? 23 MS. STEEL: No. 24 MS. OLSON: Mr. Horton? 25 MR. HORTON: Aye. 26 MS. OLSON: Ms. Mandel? 27 MS. MANDEL: Aye. 28 MS. OLSON: Motion carries. 11 1 MS. YEE: Okay, next item, sub item 3, Elufa 2 Corporation. 3 ---o0o--- 4 H1.3 ELUFA CORPORATION 5 NO. 350440 (AA) 6 ---o0o--- 7 MS. YEE: Is there a motion? 8 MS. MANDEL: Move staff recommendation. 9 MS. YEE: Okay. Motion by Ms. Mandel to adopt 10 the staff recommendation. 11 Is there a second? 12 MR. HORTON: Second. 13 MS. YEE: Second by Mr. Horton. 14 Discussion? 15 MS. STEEL: Objection. 16 MS. YEE: Okay. Question, Michelle -- 17 Ms. Steel? 18 MS. STEEL: I think based on XYZ letters 19 confirmation here that we to have give them credit for 20 American Latex and Line One, at least, out of four 21 items. 22 MS. YEE: Okay. Appeals, any thoughts on this? 23 MR. LEVINE: We treated 75 percent of the 24 catalogues as sold. 25 And my just personal experience is that many 26 catalogues with prices on them are given away and some 27 are sold. 28 For example, Penney's -- I don't know what 12 1 they're doing now, but they would have $5, you could buy 2 it for $5, if you are a regular customer, I think I do 3 still get a card, "Come down and get it free." But 4 those are marked $5. 5 I think 75 percent is -- actually, I think we 6 were a little too lenient in our D& R. I think 75 7 percent is just more than reasonable. 8 Since they -- since Petitioner did not take a 9 valid and timely resale certificate, they can only be 10 allowed the actual amount that was resold. So, I think 11 75 percent is pretty reasonable. 12 MS. YEE: Okay. Other questions, Members? 13 MR. LEVINE: Just for the record, the amount in 14 dispute is a very small portion of what's left. 15 MS. STEEL: Yeah, but interest is $8900. 16 MS. YEE: Okay. We have a motion by 17 Ms. Mandel, second by Mr. Horton. 18 Please call the roll. 19 MS. OLSON: Madam Chair? 20 MS. YEE: Aye. 21 MS. OLSON: Mr. Leonard? 22 MR. LEONARD: No. 23 MS. OLSON: Ms. Steel? 24 MS. STEEL: No. 25 MS. OLSON: Mr. Horton? 26 MR. HORTON: Aye. 27 MS. OLSON: Ms. Mandel? 28 MS. MANDEL: Aye. 13 1 MS. OLSON: Motion carries. 2 MS. YEE: Okay, thank you. 3 ---o0o--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 1 MS. YEE: Next sub item is sub item 4, 2 Universal City Studies, Incorporated. We do have one 3 speaker on this issue. 4 ---o0o--- 5 H1.4 UNIVERSAL STUDIOS, INC. 6 NO. 373822, 378248 (AC) 7 ---o0o--- 8 MS. YEE: Mr. Andal, if you'll come forward? 9 And I think for this case -- let me ask 10 Mr. Levine, just to refresh our memory in terms of where 11 we left off last time. 12 MR. LEVINE: Yes. This is an issue of the 13 measure of tax for events provided by Universal on its 14 facilities where it sold food and beverages. 15 In our post hearing recommendation, after 16 reviewing the submissions, we concluded that an 17 adjustment should be made for the events where no food 18 and beverages were sold. 19 In reality, what we did is the Department's 20 method was to calculate a percentage that should be 21 applied to the events where food was sold. And we 22 basically just held the Department to the method they 23 chose. 24 Had the Department come, in their post hearing 25 analysis, and suggested that, perhaps, that number was 26 too low, the 45 percent taxable ratio, so, it should be 27 increased and the nonfood events should be removed, we 28 may have considered that. But the Department didn't. 15 1 So, we basically held the Department to its 2 method. And since it calculated a number for the food 3 events, we removed the nontaxable events. 4 We all -- but we added back an amount for 5 merchandise included in the nonfood events. 6 I note that we made a mistake. We treated that 7 as 4 percent because that is the figure that was on 8 Petitioner's schedule, but we didn't run the numbers and 9 the figure really should have been 5 and a half percent. 10 So, we were low there. 11 We didn't make -- anyway, Petitioners made a 12 submission last week asking for three additional 13 adjustments that we looked at, as discussed in the 14 revised summary we issued late yesterday. 15 Two related -- basically related to the 16 calculation of the 45 percent. And we think that that 17 number is very reasonable. 18 The Department calculated it from the ground up 19 on food, not taking into account merchandise, despite 20 what we may have alluded in our post hearing analysis, 21 that number was a food and beverage number. And it 22 used, realistically, the lowest possible number for 23 alcohol that was possible for any event that had 24 alcohol, which was like 88 percent. And Petitioner is 25 seeking an adjustment for the 12 percent where no 26 alcohol was served. 27 But if that allowance were made, then it would 28 be clear that the Department's use of the lowest 16 1 possible number would way undercalculate the amount -- 2 the measure for alcohol. 3 And on top of that, the Department made an 4 adjustment of over 10 percent from the 52 percent it 5 calculated. 6 So, the Department's 45 percent already 7 accounts for any adjustment for nonalcohol events. It 8 did not include a charge for beverages where there was 9 no alcohol. I assume Universal charged that, but either 10 way, that's, I think, a good number. 11 And the same type of analysis for Appeals on 12 the request for an adjustment for the non Globe events, 13 because that number already is reasonable and takes into 14 account that variation. 15 The one argument that Petitioner made that we 16 seriously considered was its request for an adjustment 17 for gift cards. At first we thought they were third 18 party cards. If so, an adjustment would be warranted, 19 but only based on the actual numbers on their schedule, 20 not the 4 percent we used. 21 But it turns out that these are cards issued by 22 Universal and Universal sold merchandise when those 23 credit -- when those cards were redeemed. And unless it 24 can establish that tax was actually paid when those 25 cards were redeemed, then there wouldn't be any 26 adjustment warranted. 27 I note there was a late submission, even after 28 the late submission, that appeared to argue that these 17 1 cards were used for food and beverages at the events. 2 I don't see how that's possible because it just 3 defies logic. They had to have been for the purchase of 4 merchandise by the donees. 5 And if Petitioner could show that tax was 6 actually paid, then we would recommend a small 7 adjustment, but only for the nonfood events, not for the 8 food events because that was not part of the 9 calculations and they've already -- haven't been 10 assessed for any merchandise as part of the food events. 11 MS. YEE: Very well. 12 MS. STEEL: Question? 13 MS. YEE: Thank you. 14 Ms. Steel? 15 MS. STEEL: So, if that gift card has been used 16 by the customers or -- yeah, customers, and then they 17 paid the taxes when they buy other merchandise from the 18 Universal Studios, I mean, any stores there, then that 19 sales tax is already paid for? 20 MR. LEVINE: We -- 21 MS. STEEL: So, that should not include for -- 22 you know, that's not taxable item for this situation 23 here. 24 MR. LEVINE: We agree, but we're talking about 25 a last minute submission. And Petitioner has the burden 26 of proof. 27 And to be quite honest, we think that the 28 number we've come up with is likely low. So, if there's 18 1 a percent or two on a few of the events, we think our 2 number already accounts for it. 3 Nevertheless, if they actually proved that 4 those were tax paid when the cards were redeemed -- 5 MS. STEEL: Right. 6 MR. LEVINE: -- then we would recommend a small 7 adjustment on the nonfood events. 8 MS. YEE: Thank you. 9 MR. LEVINE: A further adjustment. 10 MS. YEE: Thank you, Mr. Levine. 11 Good morning, Mr. Andal. 12 MR. ANDAL: Good morning. 13 MS. YEE: Let me give you three minutes. I 14 wanted Mr. Levine to just kind of give us an update of 15 where we were. 16 You've heard some of the questions. So, maybe 17 during your comment period, you can try to address some 18 of those? 19 ---o0o--- 20 DEAN ANDAL 21 ---o0o--- 22 MR. ANDAL: I'll talk fast. 23 I have a handout, which is just a summary of 24 the three adjustments and maybe the staff can pass it 25 out to the Board Members. It's nothing new. 26 Just -- just to set this up, the original audit 27 set a 52 percent number for taxable portion of the 28 events. They -- they did not offer any adjustments at 19 1 that time. That was simply the break between the 2 admission -- the value of the admission to the park and 3 all other taxable items. 4 And they reduced that from 52 to 45. And I 5 know it's not significant number, but it wasn't a 10 6 percent reduction, it's 7 percent. 7 And -- and that 7 percent in the record, which 8 we're obligated to follow, in the written record from 9 the audit to this point there is no evidence that the 10 audit staff adjusted for anything. There is no -- there 11 is no recognition that they looked at food and beverage 12 being applied to events that didn't have food and 13 beverage. There is no evidence of any adjustments 14 whatsoever. 15 And every time we present evidence that those 16 adjustments weren't made, staff relies on the fact that 17 they were right, you know, this vague concept that they 18 were right and they were reasonable with their number. 19 We have to -- we want to give credit to the 20 Appeals section because they did make an adjustment for 21 events that did not have food and beverage service. And 22 we believe that that's -- that's a rational thing to do. 23 We shouldn't apply food and beverage taxability to 24 events where no food and beverage has been applied and 25 there is no -- and there's nothing in the written record 26 to suggest that the auditor, the DPA, the Appeals 27 section or anyone else along this long, tortuous journey 28 made any adjustment for that in the 45 percent. 20 1 The three adjustments that we're asking for are 2 one for taxable merchandise that -- on the -- that we 3 should cut out the Starbucks issue. We do have evidence 4 and we have presented evidence -- this is a moving 5 target, so, we -- we have -- we reply as quickly as 6 possible to the evidence requirements of the staff. 7 We actually gave them evidence within a day of 8 being asked and that evidence is that the tax was 9 collected around the park as the meal vouchers, the 10 Starbucks were used. There is -- we also -- there was 11 no tax applied to it when they were distributed. So, 12 they were exactly like a Starbucks gift card. 13 The auditor actually reviewed this in his audit 14 and did not assert that we hadn't paid tax on the -- 15 after the cards were used around the park. 16 So, whether or not the baseline measure is 17 correct or not, we believe we needed an adjustment of 18 2.94 percent for the -- for the -- the gift voucher or 19 the meal vouchers that were used around the park. 20 We also -- just like the Appeals section said, 21 the tax shouldn't apply to events where no food and 22 beverage was served, we also don't think tax should 23 apply for alcohol at events that had no alcohol served. 24 We are not questioning and we think we have a right to 25 question that there were other events where alcohol was 26 served and not every man, woman and child that attended 27 those events used $12 of alcohol. We strongly disagree 28 that it's a conservative number. One hour's worth of 21 1 drinks for every person, including children, is not a 2 conservative number, but we're leaving that on the 3 table. We only want an adjustment for which no alcohol 4 was served. 5 If staff wants to apply a de minimis number for 6 soft drinks, I doubt that's going to be a significant 7 issue to us. 8 And then, third, the Globe Theater, which 9 opened midway through the audit, we're seeking an 10 adjustment only for those events that occurred before 11 the Globe Theater was put into place. For -- these were 12 things from picnics to desserts to breakfasts to things 13 that were much less substantive than a full dinner at 14 the Globe Theater. 15 We believe that's a conservative adjustment 16 because after the Globe Theater opened, a majority of 17 the events were not held in the Globe Theater. But 18 we're leaving that on the table for purposes of 19 resolution. 20 We believe we've done everything we can to 21 provide more information. And every time we do, the 22 staff goes back to the idea that they have a reasonable 23 number. 24 We don't think -- that's not something we can 25 rebut or compete with because it's a vague concept. But 26 we have provided evidence that these three adjustments 27 that should make in any sales and use tax audit were not 28 made. There is nothing in the written record to suggest 22 1 they've been made. And we ask the Board to make them 2 for us. 3 Thank you. And, by the way, I wanted to thank 4 too the Board Members and the staff for all of the time 5 and attention they've paid to this case because it has 6 been a lot of your time involved. 7 MS. YEE: Thank you very much, Mr. Andal. 8 Questions, Members? 9 MS. MANDEL: Yeah, a question. 10 MS. YEE: Ms. Mandel? 11 MS. MANDEL: On the gift cards, Mr. Andal said 12 that this was -- that whether -- when the gift card was 13 used at Universal Studios in one of the shops or 14 restaurants and I think from the -- from one of these 15 pieces of paper that I had from somewhere, that the -- 16 that the particular contract, which had a large amount 17 of gift cards was not a -- that one might not have been 18 a food contract, but he said that the auditor looked at 19 whether tax was collected when the cards were used. 20 And, as I understand it, if the audit 21 included -- because this was -- this is like the last 22 issue remaining off an audit and -- is what I 23 understand -- and if the audit included the -- the 24 Universal Studio shop and restaurants and someone came 25 in and used the gift card to pay for part of what they 26 are purchasing and the appropriate tax was collected at 27 that time and that was looked at in the audit, then 28 aren't we -- you know, leaving aside the staff thinks 23 1 the number is good enough anyway -- aren't we picking it 2 up a second time if we don't make an adjustment for it 3 here? 4 MR. LEVINE: Based on the Appeals methodology, 5 yes. 6 That's just -- we haven't had time to 7 investigate. They have the burden. 8 If you find that -- 9 MS. MANDEL: Well -- 10 MR. LEVINE: -- tax would have been paid, more 11 likely than not, when they redeemed the cards, the 12 adjustment they're requesting, though, would be wrong. 13 We picked up 4 percent based on their six 14 events that everyone agreed was representative. And 15 we're sticking with that. 16 Based on those events, as I say, we made a 17 mistake with the numbers, the actual breakdown was 3.14 18 percent for the cards and 2.38 percent for merchandise. 19 So, you'd have to subtract the 4 percent that we picked 20 up. So, take 2.38 from it for the actual merchandise 21 and that leaves 1.62 percent that we really picked up 22 for cards rather than what we would have picked up had 23 we understood the numbers better. 24 So, use -- if -- just using their number, the 25 impact on the taxable measure, I don't know if that's 26 right, but the actual number based on that would be 27 $250,909 if you accept -- 28 MS. MANDEL: 250,909? 24 1 MR. LEVINE: Right, if you -- 2 MS. MANDEL: If it's 1.62 instead of 2.94 3 because you're saying the 4 percent base was low? 4 MR. LEVINE: That's right. 5 MS. MANDEL: Because your math was -- 6 MR. LEVINE: We used the wrong -- we used their 7 percentage number rather than calculating the number. 8 They averaged the percentages rather than taking the 9 total of the contracts and dividing. 10 MS. MANDEL: Okay. 11 MR. LEVINE: And that's what we should have 12 done, but we didn't do that right. 13 I do just want to -- 14 MS. MANDEL: Okay. And then -- now he says it 15 was looked at in that -- the audit included -- that they 16 looked at this. 17 MR. LEVINE: I can't comment on that, I don't 18 know. 19 MS. MANDEL: And the Department didn't go back 20 to try to figure it out, they're just guessing that, 21 they're just guessing that -- 22 MR. LEVINE: We're talking about a last minute 23 submission that we were -- 24 MS. MANDEL: No, I understand that it was -- 25 MR. LEVINE: -- rushing to get it to you late 26 yesterday, so -- 27 MS. MANDEL: -- I understand. 28 MR. LEVINE: -- the basis of our recommendation 25 1 since we're unsure, we're not comfortable recommending 2 adjustment. 3 If the Board wanted to be sure, we could go 4 back and look. Or if you just find that it's more 5 likely than not, which really is the standard, that -- 6 that tax was fully paid when the cards were redeemed, 7 then that would be the adjustment we'd recommend. 8 MS. MANDEL: And was this -- is this the last 9 remaining issue that was off an audit of Universal 10 Studios? 11 I mean, I understand that they also, you know, 12 came into amnesty, you know, to sort of get that 13 protection, but -- 14 MR. LEVINE: I'm not sure I understand. 15 These are the only issues that -- 16 MS. MANDEL: Well, these are the -- you know, 17 sometimes there's a big audit of sort of the -- you 18 know, auditing the company and all of its operations and 19 by the time that it gets here, you only have sort of one 20 issue left in dispute, as opposed to somebody who maybe 21 paid a lot of money and then realized they shouldn't 22 have paid all this tax or "I don't think I should have 23 paid all this tax," and they file a one off claim for 24 refund on one issue and that's the only thing that's 25 going through the system. 26 MR. LEONARD: I thought they did concur on a 27 lot of tax. 28 MR. LEVINE: I think they probably did. These 26 1 are the issues left over. Whether they were all of the 2 issues or only a few, this is all that's left. But it 3 does look like there was probably a lot more issues. 4 MS. MANDEL: Right. And it was -- 5 MR. LEVINE: Well, a lot more audit items. 6 MS. MANDEL: -- and there was an audit. 7 MR. LEVINE: There definitely was an audit. 8 MS. MANDEL: And if the taxpayer had regular 9 retail operations at the -- in there, that would have 10 been -- they would have been -- 11 MR. LEVINE: If these cards were redeemed in 12 the regular course of their business as opposed to just 13 in the course of the events, which may have been a 14 different thing, if it was redeemed in the regular 15 course of business, maybe at the events, maybe later, 16 then they either screwed up on all of the cards or 17 reported tax properly. Not likely they would have 18 misreported only these cards, unless they were redeemed 19 primarily at the event. 20 But from what was said about them, it sounds 21 like maybe they were redeemed, in large part, at the 22 event. We just don't know. So, that's the basis of our 23 recommendation on the last minute. 24 If can I clarify a couple other things? 25 MS. YEE: Mr. Levine? 26 MR. LEVINE: I'd mentioned an over 10 percent 27 adjustment, which is correct. 28 I was saying from the 52 percent, it was 27 1 reduced by more than 10 percent. It just depends on 2 what you're looking at. 3 And on the alcohol, it's just a red herring to 4 talk about how much people drank. It's irrelevant. 5 They billed per person, that's all that matters. 6 My understanding is if they charged $12 per 7 hour, then they allowed a one hour bar and they charged 8 $12 per person. If no one drank, then the customer made 9 a very bad decision signing that contract. But it would 10 still -- the tax measure would be the same. 11 So, $12 is the absolute minimum it could have 12 been for an alcohol event. 13 MS. YEE: Okay, thank you, Mr. Levine. 14 Mr. Horton? 15 MR. HORTON: Mr. Levine, there are some 16 comments that are a little uncomfortable, "sounds like, 17 not likely, possible." And I understand why. 18 But it seems to me that we ought to allow you 19 the time to take a look at this in a little more detail 20 to hone in on what is relative to the testimony that's 21 been provided today. 22 But I must say that part of my concern is that 23 when there's a condition subsequent to the audit that 24 wasn't considered in the audit, I don't think it's 25 appropriate for the Board to make the presumption that 26 it would have not made a difference, even though it is 27 an adjustment, because we were conservative in our 28 estimates. 28 1 Typically if we're making an estimate, 2 conservative or otherwise, it's -- it embodies our 3 thoughts or tests some other information as the basis 4 for that presumption. And if there is information that 5 is subsequent to that action or to that, then that 6 information should be considered over and above. 7 So, I don't know, quite honestly, but I 8 certainly don't agree with that argument. 9 So, I would almost suggest that we take a look 10 at -- allow staff to take a look at the new information 11 that's been recently provided and verify the particular 12 items. 13 Any thoughts on that? 14 MR. LEVINE: Well, as far as -- I'm not sure I 15 fully understood. 16 But if you're suggesting that -- basically, we 17 held the Department -- basically, you use this method 18 and we're just going to make you stay with it. 19 But normally every time we look at something, 20 if we find that a mistake was made, for or against the 21 taxpayer, in -- in doing a calculation, we correct. And 22 then we add any adjustments. 23 So, if the Department made, in their -- if we 24 knew -- 25 MR. HORTON: Did you make a correction for the 26 gift cards? 27 MR. LEVINE: We -- no, we didn't add anything 28 for the gift cards on the food events because we -- 29 1 because the Department calculated based on the ground 2 up, from food up, and then made an adjustment to be 3 conservative. 4 They didn't factor in merchandise or food cards 5 in their calculations of the taxable measure on that. 6 And we did not -- we didn't recommend adding 7 anything for that because, again, the Department didn't 8 do it and we're not in the -- Appeals isn't in the basis 9 of assessing things. But we do try to get the right 10 result. 11 But, again, this is -- we're second guessing 12 the audit. And we're trying to do best we can on 13 getting a number. And I think one thing that everyone 14 in this case knows is it's impossible to get the right 15 number here. 16 The goal is to get as close as we can. And 17 it's guesswork -- educated guesswork, but that's what it 18 is. 19 MR. HORTON: All right. 20 MS. YEE: Thank you, Mr. Horton. 21 Other questions? 22 Well, let me chime in on this one. I've -- I 23 guess I'm having a little bit of heartburn on the 24 additional proposed adjustments that Petitioner is 25 coming in with at this point. 26 I felt like what we were really struggling with 27 in our earlier hearing of this matter was really to 28 determine, I guess, the taxable ratio. And I think 30 1 the -- the Department and Appeals have gone back and 2 taken a look at specific contracts and there have been 3 assumptions made relative to adjustments for when there 4 has been no food and beverage served and I think there 5 have been some very generous adjustments made. 6 And on this issue of alcohol being served, the 7 number of events that -- where alcohol was not served is 8 quite small. But, again, I think the staff did take -- 9 really looked at the low end of making the adjustment 10 related to the issue of alcoholic beverages. 11 So, I don't know if we were to back on these 12 proposed adjustments that are coming in now, that -- I 13 get the feeling that we're going to be put on a track of 14 not kind of staying on course with really being focused 15 on the taxable ratio, which is really what we were 16 trying to back into after the original hearing. 17 So, I'm -- I would be curious to see what 18 others think. 19 MS. MANDEL: Well, obviously, I'm a little 20 bothered by the gift card issue. And I appreciate 21 Mr. Levine's clarification of the math. 22 The events with no alcohol was, you know, based 23 on what was in the, you know, the more recent -- the 24 post hearing adjustment that Appeals made that events 25 with no alcohol -- you know, it sounded interesting. 26 I see that the price lists are per person and 27 that the -- at least on the one price list, that the $12 28 is the beer, wine and soda per hour. 31 1 So, I'm a little bit, you know, if you're on 2 that, seeing that they're charging on a per person basis 3 and -- I don't know if there was no alcohol what the per 4 person is for soda and water or whatever they might have 5 provided. The -- but all along at the prior hearing, 6 what the prior hearings -- what the hearing seemed to 7 focus on was the use of Globe Theater pricing to 8 determine what was going on. And the idea that Globe 9 Theater was the way things went. 10 And the Globe Theater was relatively new and 11 wasn't there for a large part of the audit period and 12 was more expensive. 13 But, perhaps, we can get -- and then we got all 14 caught up in the calculations at the time and the idea 15 of whether gratuities were in or out -- which I'm still 16 not sure that that made a difference in the math -- but, 17 it was -- it was a little troubling about the use of 18 Globe Theater as though that was the be all and end all 19 of events for the prior period. 20 And maybe Mr. Levine went through it in his 21 little opening, but I don't quite recall what the -- 22 what the -- you know, what the response was on that 23 other than the general impression I have is that staff 24 just -- that the view that the number overall that staff 25 seems to think is -- is good enough. But I am still 26 bothered by the gift cards if this is an audit of 27 Universal at bottom. 28 And then maybe you could just refresh me again 32 1 about why it doesn't -- why it wouldn't matter, in 2 staff's view, other than we just think the number is 3 good enough, why it wouldn't matter that the -- that 4 the -- that the cost of meals, when they were serving 5 whatever out in the patios and buffets and, you know, 6 prior to Globe Theater with sitdown meals. 7 MR. LEVINE: I think I can sum up real quick. 8 The Department's position is that the 45 9 percent ratio was -- reasonably accounts for all of the 10 vagaries, including the nonfood events. 11 Appeals decided that the nonfood events should 12 come out and otherwise we agree. Once you pull out the 13 nonfood events, we find that the taxable ratio the 14 Department came up with more than accounts for any of 15 the vagaries with the non Globe events, which we agree 16 would warrant some adjustment if we were going contract 17 by contract. 18 MS. MANDEL: Now you say it more than accounts 19 for and I guess that's the -- what do we call that, the 20 sort of general words? 21 I mean -- maybe I don't -- 22 MR. LEVINE: The big picture. 23 The big picture -- the Department starts from 24 the ground up to get to the 52 percent -- 25 MS. MANDEL: But they did -- 26 MR. LEVINE: -- actual ratio. 27 MS. MANDEL: -- did they -- they did that based 28 on using Globe Theater? 33 1 MR. LEVINE: I believe so. 2 And then -- but they have the alcohol, which is 3 definitely, in my opinion, low and excludes -- it 4 excludes the gratuity and then -- 5 MS. MANDEL: So, what you're saying -- 6 MR. LEVINE: -- reduced that by -- 7 MS. MANDEL: -- is that yes, they started -- 8 they built from the ground up using Globe Theater and 9 but -- then the adjustments and the percentage we think 10 just, you know, takes care of a myriad of issues. 11 But at the hearing when we were talking about 12 building a taxable percentage from the ground up, if we 13 accepted the arguments that you shouldn't use Globe 14 Theater for the entire time period you would be building 15 from the ground up with some different number for a 16 large portion of it? 17 MR. LEVINE: And then you wouldn't have made 18 the same adjustments. 19 MS. MANDEL: I'm sorry? 20 MS. MANDEL: You would not have adjusted the 21 figure for the Globe -- for the post-Globe era. 22 Again, the Department had 52 percent, that was 23 already low because of mistakes, and then they reduced 24 it to 45. They would have stuck with 52 percent or 25 corrected to 53 or 4, based on the right numbers for the 26 Globe events and then had a different figure before, if 27 you run those numbers you see that it -- if there was 28 about the same amount before and after and it was about 34 1 halfway through. The pre-Globe number would have to be 2 something like 38, 39 percent to -- or 35 or 36 percent 3 to reduce the net deficiency. 4 And our bottom line is the net deficiency here 5 is not higher than the deficiency actually due. 6 MS. YEE: Other questions, Members? 7 Okay, is there a motion? Do you want to take 8 it under submission? 9 MR. HORTON: Yes. 10 MS. YEE: Why don't we move that we take this 11 under submission? 12 Is there a second? 13 MR. HORTON: Second. 14 MS. YEE: Second by Mr. Horton. 15 Without objection, we'll return to this item 16 later. 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 35 1 MS. YEE: Next item is sub item 5, Sukhwant S. 2 Sekhon and Amarjit Sekhon. 3 And we have a speaker for this item. 4 ---o0o--- 5 H1.5 SUKHWANT S. AND AMARJIT SEKHON 6 NO. 491719 (ET) 7 ---o0o--- 8 MS. YEE: Please come forward. 9 While you're coming forward, let me again ask 10 Appeals to just refresh our memories on where we last 11 left off on this issue. 12 MR. LEVINE: This is a tobacco products seizure 13 case. 14 At the hearing Petitioner argued that the 15 products seized were mispicked and misdelivered by the 16 vendor. 17 The Board asked ID to go back and check to see 18 if the UPCs on the boxes could identify them as coming 19 from McClain. That was not -- that didn't work. 20 In post hearing submissions, Petitioners had an 21 alternate theory that the items were purchased for their 22 other location and transferred to -- to the location 23 from which they were seized. 24 ID investigated and found that it was not 25 likely. And Appeals agrees. 26 And in a recent submission, Petitioner 27 submitted documents which indicate that there was a 28 mispick, misdelivery of some cigars after the hearing, 36 1 which Petitioners' search shows that McClain mispicks. 2 And I don't think there's any dispute by 3 anyone -- ID concedes that McClain mispicks 4 occasionally, but the nature of the mispick necessary to 5 compile the seized products, ID doesn't accept is 6 likely. 7 And the bottom line is that ID says that 8 Petitioner simply has not established that there was a 9 mispick and that tax had been paid on these products, 10 which is what is required. 11 And Appeals agrees it's a question of fact and 12 a matter of proof. 13 MS. YEE: Okay, thank you very much, 14 Mr. Levine. 15 Good morning. If you'll introduce yourself for 16 the record? 17 MS. SEKHON: Hi. 18 MS. YEE: I'll give you three minutes for your 19 comments. 20 ---o0o--- 21 AMARJIT SEKHON 22 ---o0o--- 23 MS. SEKHON: My name's Amarjit Sekhon and the 24 reason I'm here is because we're talking about $70 in 25 tax that hasn't been paid, No. 1. 26 No. 2, it took me to -- Investigations keeps 27 saying that taxes haven't been paid. Well, they didn't 28 even know as of September 17th what the amount was. 37 1 I went to McClain's facility myself with about 2 seven other franchisees and we took a tour. And the 3 product is handled by eight or nine people before it 4 gets to my store. It's unloaded. It's tagged. It's 5 put in the staging area. It's put in other different 6 places and then delivered to my store. 7 When it's delivered to my store, it's -- it's 8 counted, it's not checked. When the person who picks 9 the product, they pick it by light, he doesn't know what 10 he's picking. If somebody inputted (sic) it wrong and 11 the light goes on, the person picks it. 12 I cannot get Investigations to understand that, 13 hey, we only buy from McClain's. Day before yesterday I 14 sat down and I said, "Let me look at this." And I was 15 looking at a report. An average of $10,000 of tobacco 16 is purchased from McClain's a week in just one of my 17 stores. Okay, the other one averages, 8, okay. 18 Why would I not pay $70 in taxes? Those five 19 boxes were sent to us in error. We're trying to get 20 Investigations to understand they mispicked them and 21 sent them to us, okay. 22 The other three boxes that were in question, 23 they were always telling us that they were in January. 24 Well, everything was brought in January. It wasn't 25 until we came in this meeting and the gentleman said, 26 "Well, some of them are mis -- they're different dates." 27 When I got a letter in September from 28 Investigations, they said -- they finally gave us dates 38 1 as to what it was. So, we went back and we went to 2 McClain's again and I said, "You know, come on, we need 3 to find out what happened." 4 I've spent about ten times worth of what this 5 tax is I owe on this to figure out what, because, you 6 know what, we did the right thing. We only buy from 7 McClain's. And we pay taxes on this. I don't buy from 8 anybody else. 9 And Investigations keeps saying, "Oh, it's 10 highly unlikely, it's highly unlikely." Well, three or 11 four weeks ago I got some Cuban cigars in the place of 12 Hershey candy. Now, how unlikely? 13 I called them right away And I said, "What the 14 heck is going on? If the tobacco people were in my 15 store, I'd be written up again." 16 Within three hours they were in my store to 17 pick up this product. I took a picture of it and I 18 said, 19 "I need a signature because -- I need -- I need 20 some proof that, hey, guess what, you guys do 21 do mispicks." 22 And that's what we're here to tell you, 23 mispicks do happen. They're the ones who sent it to us. 24 The taxes on have been paid. 25 The three boxes that I -- that got sent from 26 one of our stores, I sent them an invoice. Their people 27 came into my store to recheck my San Leandro store. 28 And they came in and about five minutes before 39 1 they were ready to leave, I walked in. We talked about 2 how other vendors can sell cigars for 50 cents and how 3 this happened. They came in -- they were checking, 4 looking at my invoices and not one time did they ask for 5 the invoice that was dated September 30th -- 6 September 30th, 2008 that shows that we transferred it 7 over to the other store. 8 The investigators who came in in April didn't 9 look at any invoices other than January onward because 10 that's what they were saying. The investigators who 11 were in my store a few weeks -- in october, you know, if 12 they are looking for something, I even explained to 13 them, they said, "You know, do you transfer any 14 product?" I said, "We rarely want to do that. But if 15 it happens, it happens." 16 And I explained to them, I'll take a copy of 17 the invoice, I'll circle the product and we send it on. 18 He said, "Oh, that's fine, that's all you need 19 to do." 20 Then I get a letter, a thing coming back from 21 Investigations saying, 22 "Well, you haven't crossed your -- you haven't 23 dot your "I"s and crossed your "T"s, you didn't 24 put the amount, you didn't do this." 25 Well then, why are the investigators in the 26 field not telling us this? 27 And, No. 2, I'm just saying, 28 "Hey, I took this three boxes, my manager 40 1 transferred it. He sent it to the Alameda 2 store." 3 The invoice -- if they were looking for an 4 invoice, it should have went over there, it's over 5 there. 6 No. 2, I mean, we're not -- we don't buy from 7 anybody else. What -- what else can I do to prove? 8 McClain's does not take product back and give you an 9 invoice, a corrected invoice. 10 The taxes on it have been paid. It's 70 -- 11 it's -- actually, when I called Investigations and asked 12 them, they're the ones who told me, "Well, call your 13 vendor, we don't know." 14 MS. OLSON: Time's expired. 15 MS. SEKHON: So, I don't know where to go, you 16 guys. 17 I'm asking you to please just give me back my 18 product. We -- this is just not right. 19 MS. YEE: Thank you, Ms. Sekhon. 20 Is there -- are there comments or questions, 21 Members? 22 Okay. Hearing none, let us take this matter 23 under submission. And we will discuss it later today 24 and decide your case. 25 Thank you for coming forward. 26 MS. SEKHON: Thank you for the time. 27 ---o0o--- 28 41 1 MS. YEE: Next item is sub item 6, City of 2 Pomona. We have several speakers on this issue. 3 ---o0o--- 4 H1.6 CITY OF POMONA 5 NO. 469261 6 ---o0o--- 7 MS. YEE: Let me have you come forward. 8 Let's see, let me try to sort these through for 9 a moment. 10 Why don't we have the petitioning cities, I 11 think we have Mr. -- Fran Mancia, Ms. Lowry from the 12 City of Pomona, Mr. Cendejas, I think you're here 13 representing Long Beach and then Steve Conway -- Stephen 14 Conway with the City of Los Gatos. 15 If you could come forward and sit to the 16 righthand side of the room? 17 And then the affected jurisdictions, we have 18 Robin Sturdivant, Jim DeBoo with the City of Los Angeles 19 and also P. J Shemtoob, if you'll just kind of be on 20 deck? 21 Before we start on the public comments, let me 22 ask Ms. Nienow to provide us with a refresher on where 23 we last left off after we heard this matter and any 24 updates that you may have. 25 MS. NIENOW: Of course. Madam Chair, Members, 26 good morning, trecia Nienow with the Appeals Division. 27 The Board heard this matter on August 31st of 28 this year, after which the Board deferred its decision 42 1 to give the parties an opportunity to reach a 2 compromise. 3 Our recommendation as to Los Gatos was not 4 disputed. And our recommendation on that appeal remains 5 that it should be granted. 6 For the appeal by Pomona, however, a number of 7 substantially affected jurisdictions did participate in 8 that hearing to dispute our recommendation, which was to 9 grant for periods beginning October 1st of 1993. And 10 it's the appeal of Pomona for which the Board actually 11 deferred its decision. 12 The parties, unfortunately, did not reach a 13 global resolution or compromise. The only acceptance of 14 Pomona's offer was by Long Beach. And that offer 15 originally was a 20 percent reduction with eight 16 quarters in mitigation. 17 Pomona later changed its offer, increased it to 18 a 20 percent -- 25 percent reduction with -- without 19 mitigation. 20 The affected jurisdictions that participated in 21 the proposal process, their proposal was to have Pomona 22 accept a 99 percent reduction, meaning that they 23 would -- they would only incur a 1 percent reallocation. 24 Given the Board's discretion under Revenue and 25 Taxation Code Section 7209 to redistribute a lesser 26 amount than the total amount eligible for 27 redistribution, and in view of the eight year delay, it 28 took Pomona to request a hearing, we think that the 43 1 Board should redistribute some, but not all, of the 2 disputed tax. 3 So, our current recommendation as to what we 4 think is fair and reasonable is to redistribute 50 5 percent of the local tax incurred for the periods 6 October 1st of 1993 through December 31st of 2007 from 7 the Los Angeles countywide pool directly to Pomona. 8 We also think that Long Beach should be 9 included in our recommendation and that the affected 10 jurisdictions should be offered eight quarters of 11 mitigation. 12 MS. YEE: Thank you very much, Ms. Nienow. 13 Let's see hear from the Petitioners first and 14 we'll give you -- I'm going to ask you to try to not be 15 redundant and succinct, but we'll give you three minutes 16 each. 17 ---o0o--- 18 FRAN MANCIA 19 ---o0o--- 20 MR. MANCIA: Good morning, Madam Chair and 21 Members. My name is Fran Mancia. I'm here before you 22 on behalf the Town of Los Gatos and the City of Pomona. 23 I'd like to thank the Board Members and their 24 staffs for their input, guidance and direction and 25 consideration of this important matter. 26 This correction appeal follows under the 27 guidelines which resulted in over 30 warehouse 28 corrections based on clarifications of Regulation 1699 44 1 and 1802 in 2003 and again in 2006. Those changes were 2 intended to clarify the intent of the regulation when it 3 was originally implemented in 1993, with the goal of 4 supporting situs allocation. 5 The law applied to these facts, I believe, 6 favor the Petitioner and a ruling in favor of the City 7 of Pomona and the Town of Los Gatos would be consistent 8 with these other recent warehouse cases that have been 9 before the Board and the facts in this case are not in 10 dispute. 11 Obviously, this appeal has certainly gained a 12 great deal of attention due to the large dollar amounts 13 involved and the potential fiscal impacts for 14 jurisdictions on both sides of the appeal, especially 15 during these economic times, that -- which are 16 difficult, indeed. And I'm certainly most sensitive to 17 those concerns. 18 However, if it were not for the large dollar 19 amounts involved, it's really doubtful that this appeal 20 would have been opposed based on the lack of reaction to 21 other similar appeals heard by the Board that involved 22 lesser amounts and which were not opposed at all. 23 I ask for your support of the staff position to 24 allocate 100 percent of the reallocation to the Town of 25 Los Gatos in their portion of the appeal as it is not 26 opposed by any other jurisdictions. 27 And I certainly support the position of the 28 City of Pomona, as will be outlined by Ms. Lowry. 45 1 Thank you very much for your consideration. 2 MS. YEE: Thank you. 3 Next? 4 ---o0o--- 5 LINDA LOWRY 6 ---o0o--- 7 MS. LOWRY: Thank you. 8 When I -- 9 MS. YEE: If you could introduce yourself for 10 the record, please? 11 MS. LOWRY: Linda Lowry, City Manager, City of 12 Pomona. 13 When I addressed the Board last August, it was 14 as a City Manager who thought she had a balanced budget. 15 That, unfortunately, is not the case now, having lost 16 all of our American car dealerships, having one KIA 17 dealer left, suffering continued economic decline, the 18 City's facing a $4.4 million shortfall, which also is 19 very close to the amount of our General Fund balance. 20 The City's position to negotiate, as directed 21 by the Board, we feel was done in good faith. And that 22 the second offer of a further discount of 25 percent, 23 rather than 20, with dropping the mitigation, was more 24 or less an outcome of our realization of what our new 25 circumstance was fiscally in the current year. 26 Included in that realization was a $999,000 27 adjustment on the Board of Equalization's distribution 28 of our sales tax in September and October. 46 1 So, we're well aware of what the consequence 2 can be with a reallocation of taxes to a city trying to 3 balance its budget. 4 What we would like to offer, again in a further 5 attempt to negotiate closure to this that's fair for 6 everyone, we would like to offer again the 25 percent, 7 but instead of not including the mitigation, we would 8 like to ask for mitigation to be included in our offer 9 for eight periods, quarters, but we would like the first 10 two quarters to be frontloaded in order to allow us to 11 deal with the outcomes of the current year's fiscal 12 impacts. 13 That would mean that the first two quarters 14 would be one-fifth of the total amount and that the 15 following six quarters would be one-tenth of the total 16 amount, which would allow the City closer to balance its 17 budget and maintain its fiscal integrity, avoid a going 18 concern finding by our auditors and prepare -- continue 19 to prepare ourselves for the new economic reality of 20 fewer revenues. 21 MS. YEE: Thank you very much, Ms. Lowry. 22 Next speaker, please? 23 ---o0o--- 24 STEPHEN CONWAY 25 ---o0o--- 26 MR. CONWAY: Good morning, Chairwoman Yee and 27 Members of the Board, I'm glad to be here. My name is 28 Stephen Conway, Town of Los Gatos. 47 1 I'd like to thank the staff for their support 2 and guidance as we have been interested in this matter 3 for a number of years and would like to thank the Board 4 for their attention and just expressing our interest in 5 our allocation, which is a much smaller dollar amount, 6 but at the 100 percent level as we are unopposed. 7 Thank you. 8 MS. YEE: Thank you, Mr. Conway. 9 Next? 10 ---o0o--- 11 ROBERT CENDEJAS 12 ---o0o--- 13 MR. CENDEJAS: Good morning, Members of the 14 Board. My name is Bob Cendejas, I'm representing the 15 City of Long Beach, who happens to be -- get the second 16 largest share of any of the cities in the LA County 17 pool. It's about equal to the amount the LA County 18 itself receives. 19 I'm not here to argue the merits of the case. 20 It's been well briefed on both sides and by the Legal 21 Department. What I am here is to urge the Board Members 22 to help settle this, perhaps today, with a fair amount, 23 based on the merits of the case, but also to include a 24 mitigation period, a period of time to help the cities 25 budget for the reallocation. 26 Thank you. 27 MS. YEE: Thank you very much. 28 If I could ask you all to make your seats 48 1 available for the affected jurisdictions 2 representatives, please? 3 Okay, good morning. 4 MS. STURDIVANT: Good morning. 5 MS. YEE: If you'll introduce yourself for the 6 record, you also each have three minutes for your 7 points. 8 ---o0o--- 9 ROBIN STURDIVANT 10 ---o0o--- 11 MS. STURDIVANT: Good morning, Madam Chair and 12 Board Members. My name is Robin Sturdivant with the HdL 13 Companies, here today representing 23 of the affected 14 jurisdictions. 15 We acknowledge that this is a difficult and 16 unusual case and we understand that it was this Board's 17 desire that the parties reach a settlement. 18 Knowing that, HdL, on behalf of our clients, 19 made a sincere effort to consider all of the possible 20 options. We struggled to find a compromise that would 21 make sense from a policy standpoint, while, at the same 22 time, be supported by the Board of Equalization 23 regulations and California law. 24 The proposal made by the HdL Companies, the 25 Palmdale group of cities and the City of Los Angeles is 26 directly tied to a very important event -- the effective 27 date of the regulatory change. 28 HdL could not, in good faith, recommend to our 49 1 clients a compromise that was simply based on a 2 percentage split, while ignoring the fact that Board 3 staff, Board management, the Appeals Division and the 4 BOE legal counsel all determined that this case was time 5 barred because the Petitioner failed to bring the case 6 forward within a reasonable amount of time. We could 7 not ignore the potential precedent that would be created 8 if this petition is granted. 9 Our firm reached out to Pomona via e-mail after 10 our initial offer and we indicated that we would be 11 happy to discuss other options, but, again, we felt any 12 agreement had to be based on good public policy and look 13 at the potential precedent setting implications. We did 14 not receive a response. 15 The Appeals Division post hearing analysis 16 addresses the fact that the Petitioners waited eight 17 years to request a Board hearing. It discusses the 18 possible motivations for that delay and suggests that 19 there should be a price to pay for the unnecessary and 20 unreasonable delay. 21 If this petition is granted in part or in 22 whole, the affected jurisdictions will pay that price 23 and Pomona will reap the rewards. 24 Board staff has implemented a December 31st, 25 2001 end date for this petition. Pomona is guaranteed 26 nearly $1 million in local tax from the first quarter 27 2008 through the current period, as well as all the 28 local tax going forward. No matter the outcome of your 50 1 decision, Pomona wins. 2 When looking at the cases brought forward 3 before the Board under the 1807 (g)(2) transition rule, 4 we can see that the Board approved hearings for all the 5 warehouse cases and denied hearings for any case that 6 involved a different issue. 7 However, in all 17 cases, the Appeals Division 8 recommendation was to deny hearing. All 17 cases had 9 been filed within a three-year period. And all 17 cases 10 have been denied by Board Management within the same 11 two-year period. 12 If a case is denied a hearing because it is 13 time barred, the same set of criteria should apply to 14 all cases, regardless of the issue. A closed time 15 barred case should be just that, closed and time barred. 16 After all is said and done, the parties need 17 to look at the outcome and know that the decision made 18 today is consistent, fair and has taken all of the 19 factors into consideration. 20 And when we look back on the other warehouse 21 cases that were brought forward, they were all either 22 unopposed, because there was no affected jurisdiction, 23 or the same representative represented both the 24 Petitioner and the losing jurisdictions. 25 We respectfully ask the Board to consider 26 consistency and continuity and exercise discretion when 27 making your decision on this matter. 28 Thank you. 51 1 MS. YEE: Thank you, Ms. Sturdivant. 2 Next speaker? 3 ---o0o--- 4 JIM DE BOO 5 ---o0o--- 6 MR. DE BOO: Madam Chair and Members, my name 7 is Jim DeBoo. I'm the Chief Legislative Representative 8 for Mayor Antonio Villaraigosa and the City of 9 Los Angeles. 10 First of all, without repeating everything that 11 Robin just spoke on, we -- we concur with HdL's 12 assessment of the situation. 13 The City of Los Angeles is facing unprecedented 14 budget struggles, just like every other jurisdiction in 15 the state. And in the out years we're looking at over a 16 billion dollars. So, every dollar does count in this 17 situation. 18 We did offer a counteroffer, which Robin 19 outlined as well, you know, which is -- so far has been 20 rejected. 21 But without repeating everything that Robin's 22 already spoke upon, I'd like, if it's okay with the 23 Board, to defer the rest of my time to my colleague, 24 P. J. Shemtoob, from the City of Los Angeles, City 25 Attorney's Office. 26 MS. YEE: Thank you very much, Mr. DeBoo. 27 Yes, please? 28 ---o0o--- 52 1 PEJMON SHEMTOOB 2 ---o0o--- 3 MR. SHEMTOOB: Thank you, Jim. 4 Good morning, Honorable Members of the Board. 5 My name is P. J. Shemtoob and I'm a Deputy City Attorney 6 in the Los Angeles City Attorney's office. 7 First of all, on behalf of the City of 8 Los Angeles, I would like to thank the Board again for 9 the extended time and attention you have devoted to this 10 matter. Your commitment to making the proper decision 11 is both praiseworthy and sets an example for all 12 administrative Boards. 13 Unfortunately, the City of Pomona was not 14 receptive to even considering the merits of our 15 challenge to its petition, but I'm confident that the 16 Board will give the merits due consideration. 17 If you'll just allow me to briefly outline 18 three major legal flaws that renders the petition at 19 hand unenforceable by any court of law? 20 Namely, that any reallocation that would be 21 made would be against the public policy and the 22 legislative intent -- and legislative intent as a matter 23 of law. 24 Secondly, the appeal never should have been 25 granted in the first place. And that has been 26 acknowledged by the Board's own counsel. 27 And, thirdly, that if the Board hearing was 28 granted for the City of Pomona, it should have been 53 1 granted for all jurisdictions. The fact that there 2 weren't clear guidelines setting forth which 3 jurisdictions would be entitled to a Board hearing under 4 the amended 1807 renders any -- any picking and choosing 5 subject to judicial review. 6 Based upon the history of Pomona's petition, 7 the amendments to Regulation 1802 and 1807, the relevant 8 Revenue and Taxation Code Sections, including Section 9 7209, and case law and after speaking to the Board's own 10 legal counsel, it is clear that Pomona's position is 11 nonstandard and inconsistent with the intent of the 12 legislature, and, for that matter, against public 13 policy. 14 The Board is certainly granted discretion by 15 the legislature, however, such discretion is limited to 16 what is reasonably necessary for carrying into effect 17 the purpose of the statute. As you know, Revenue and 18 Taxation Code Section 7209 limits reallocations to only 19 two quarters prior to the date of the Board's knowledge 20 of the misallocation. 21 From the face of Section 7209, it is apparent 22 the legislature desired there to be an element of 23 finality to any allocation made. 24 Even if an allocation was made in blatant 25 error, the Board could only grant a reallocation for 26 that limited period of two quarters. And even that 27 reallocation would be completely discretionary. 28 The legislature granted the Board the 54 1 discretion to choose not to make any reallocation at 2 all. Certainly the circumstances surrounding the Pomona 3 petition dictate that the Board such exercise such 4 discretion to deny Pomona's petition altogether. 5 Pomona is seeking to take advantage of an 6 ambiguity in Regulation 1807 and the Board's appeals 7 process prior to Regulation 1807 to recover reallocation 8 16 years prior. That plainly contradicts the 9 legislative intent of Section 1709. 10 If Pomona was not satisfied with the Board 11 Management's denial in July of 2000, it had two 12 options -- either pursue a full Board hearing then over 13 -- almost nine years ago -- or take its case to the 14 courts. 15 For no clear reason, it chose neither option. 16 Instead, Pomona sat on its Board Management denial for 17 eight years, until MuniServices wrongly relied on a 2008 18 amended Regulation 1807 to resurrect a stale petition. 19 The Board's reliance in September 2008 on 20 Regulation 1807 to grant Pomona a hearing, when its 21 petition was denied by Board management in July 2000, is 22 not within reason. The Board acted against its own 23 counsel's recommendation. 24 There is no documentation suggesting that 25 Pomona's petition remained open. And the Board did not 26 set forth any clear guidelines for which petitions would 27 be granted a Board Member hearing. 28 Since not all cases were granted the Board 55 1 Member hearing under the new Regulation 1807, one could 2 argue that the Board's picking and choosing of cases is 3 subject to judicial review as being arbitrary and 4 capricious. 5 Upon review of Regulation 1807, it is apparent 6 that no Board hearing should have ever been granted. 7 The amended regulation 1807 (g)(1), states that it shall 8 have no retroactive effects. 9 1807 (g)(2) only permits a Petitioner to 10 perfect any access it may have to a Board Member 11 hearing. 12 According to the Board's process reviewing 13 reallocation inquiries, which was provided to me by a 14 legislative analysis (sic) at the SBOE, in effect, prior 15 to the adoption of Regulation 1807, August 2002, Pomona 16 could have requested a Board Member hearing upon the 17 denial by Board Management in July of 2000. 18 While the process then was not explicit as to 19 the timeline to request a review by the Members of the 20 Board, it is beyond reason to argue that Pomona still 21 had access to a Board Member hearing over eight years 22 later in September of 2008. 23 The Board's position that the appeal remains 24 open contradicts the plain language of 1807 (g)(1) that 25 states the regulation shall have no retroactive effect. 26 As mentioned, the Board's own counsel has 27 acknowledged that the appeal should have been denied as 28 untimely. 56 1 An administrative's authority -- authority's 2 interpretation is certainly granted court deference, but 3 only when such interpretation is reasonable and 4 consistent. 5 In Agnew versus State Board of Equalization, 6 the California Supreme Court explicitly affirmed the 7 clear -- 8 MS. OLSON: Time has expired. 9 MS. YEE: Finish your thought, Mr. Shemtoob, 10 and then we'll have questions, I'm sure. 11 MR. SHEMTOOB: Thank you, Honorable Members of 12 the Board, I'd just -- would just like to reiterate that 13 all we ask is that you consider the merits of the claim 14 and recognize that every jurisdiction is facing 15 financial difficulties. 16 MS. YEE: Thank you very much. 17 Comments or questions, Members? 18 You want to start, Mr. Leonard? 19 MR. LEONARD: Mr. Shemtoob? 20 MR. SHEMTOOB: Yes? 21 MR. LEONARD: Are you saying that if you lose 22 in this matter that you will sue the Board of 23 Equalization? 24 MR. SHEMTOOB: It's not my intent to threaten a 25 lawsuit, however, I think that we would be left with 26 very few options. I think it's clear, based on the law 27 and based on the process in this petition and public 28 policy, we'd have a duty to defend the public policy and 57 1 the legislative intent. 2 MR. LEONARD: Can you tell me the name of the 3 Board of Equalization lawyer that told you that this was 4 a mistake? 5 MR. SHEMTOOB: I don't understand. 6 MR. LEONARD: You extensively quoted from some 7 Board of Equalization counsel that a lot of this process 8 was in error and a mistake. 9 Can you tell me their name, please? 10 MR. SHEMTOOB: According to -- without naming 11 names -- 12 MR. LEONARD: No, I need you to name names. 13 MR. SHEMTOOB: Okay. According to the Appeals 14 Division's final action summary, the Board counsel 15 recognized -- admits that they had advised the State 16 Board to deny the rehearing as untimely and that is a 17 correct application of the law and you're -- 18 MR. LEONARD: You are beyond just denial of the 19 hearing. 20 MR. SHEMTOOB: That is all I -- 21 MR. LEONARD: No, you also cited some sources 22 and said once the hearing was granted that the whole 23 procedure was illegal. 24 MR. SHEMTOOB: That's based on the law, that's 25 not based on -- 26 MR. LEONARD: That's your interpretation? 27 Okay. 28 Thank you, Madam Chair. 58 1 MS. YEE: Other questions, Members? 2 I'm sorry, Mr. Leonard, I was preoccupied, but 3 I guess I had a question for the affected jurisdictions, 4 and, that is, as the Board had directed at the prior 5 hearing relative to all of the parties coming together, 6 can you, Ms. Sturdivant, speak to this again? 7 And if you had said it during your testimony, I 8 completely missed it and I apologize. 9 But what were some of the offers that had been 10 put on the table by the affected jurisdictions? 11 MS. STURDIVANT: Well, we initially offered to 12 use the effective date of the regulatory change. 13 And when that offer was rejected by Pomona, we 14 contacted them again and said we'd be happy to have a 15 conversation, but we needed to make an offer that was 16 based on some sort of public policy, you know, good 17 public policy, not just you a percentage-based number 18 and if they had any ideas or suggestions about an offer 19 that was based on that, we'd be more than happy to have 20 further discussions. 21 And they did not respond to us. 22 MS. YEE: Okay, all right. 23 I'm going to make a comment here because this 24 is -- and I appreciate everyone's testimony, we've had a 25 history with respect to these warehouse cases and I 26 am -- completely understand your legal arguments, but 27 where we're at today with this appeal before us. 28 And I am disappointed that the parties were not 59 1 able to get together to strike a compromise. 2 I personally am not going to decide this case 3 based on cities' budget woes. Our decision is based on 4 the proper allocation of tax. And, frankly, that 5 overrides any issue about the time barred nature of 6 these appeals. And my vote to deny some of the appeals 7 that were before us had to do with the fact that there 8 was no evidence, no information to even back up our 9 ability to even hear the issue at hand. 10 So, I'm -- I really want to kind of keep the 11 focus with respect to, you know, how we look at the -- 12 the allocation question. 13 But I -- and thank you for the clarification in 14 terms of what was put on the table by the affected 15 jurisdictions. 16 Other questions or comments, Members? 17 Mr. Horton? 18 MR. HORTON: Sure. 19 MS. YEE: Yes? 20 MR. HORTON: Members, unfortunately I wasn't 21 necessarily on board, for me, at least, when we were 22 going through this process. So, I'm left with having to 23 look at these -- these issues collectively and what 24 would be the overall impact if, in fact, we were to go 25 back to -- to inception and begin to make the proper 26 allocations based on law. 27 The issue of the Board's legal staff, Appeals 28 and the Board Management taking a position time and time 60 1 again that this was time barred is concerning to me. 2 The issue of whether or not the Board had the 3 authority to include and exclude participants, potential 4 litigants, is concerning and, in and of itself, might be 5 somewhat discriminatory to say that we're going to 6 include 35 and not include the other 17, for whatever 7 reason, when, in fact, the circumstances are somewhat 8 the same. 9 And then you -- it's one of those cases where I 10 kind of think that whether we want to or not, we're 11 going to end up punting to the court. And time and time 12 again the Supreme Court has ruled that it is 13 discriminatory to exclude a person simply because they 14 weren't there, they didn't participate or they didn't 15 raise their hand, which was the term to somehow describe 16 a legal jargon in layman's terms. 17 It's somewhat difficult, you know, and it would 18 have been nice if you could have worked it out. It 19 seems like the argument that the other cases that came 20 before us were not contested, it seems to me the 21 testimony was that they reached a compromise, which is 22 where we would ultimately have to go if we opened up 23 the -- if we included everyone and we went back and 24 looked at every one of these cases. 25 So, I only share that to -- to say to both 26 parties that this is concerning, you know, and not 27 necessarily because of this case. I mean, if it was 28 just this case and this case alone and the other cases 61 1 didn't exist, I would probably say it's been time 2 barred, if it was -- if that was the case. 3 If we were to include every potential case out 4 there and give every city an opportunity to determine 5 if, in fact, there has been an inappropriate allocation 6 and then let's see what happens, what comes out of the 7 wash, which would probably be the most equitable thing 8 to do in hindsight, but we didn't and we evidently 9 can't. 10 So, I mean, there are -- two things that I 11 might suggest, is that the Board take a five, ten minute 12 break and allow the two of you to meet again, see if you 13 can come up with some compromise. But it's not my -- I 14 don't have that authority either. 15 With that, I just wanted to sort of share that 16 this -- I am going look at this as if all of the other 17 cases were before me, every potential case out there, 18 and how would I deal with those issues? 19 And given that they are not, I'm going to 20 presume that if this goes to court that the court is 21 going to do that, that it's going to say that you can't 22 discriminate against one transaction over another, that 23 there is -- there should be some element of finality and 24 that you have defined that finality, Board of 25 Equalization, as six months. 26 You've also defined it by codifying the 27 regulation in 2006 to make an adjustment. Even though 28 tax policy allows you to make it retroactive, tax policy 62 1 can't supercede public policy, especially in the court 2 of law. 3 So, those are the things that concern me. I 4 only share that with my colleagues, as well as those who 5 are here before us. 6 MS. YEE: Thank you very much, Mr. Horton. 7 Other questions or comments, Members? 8 Okay, shall we take this under submission? 9 Okay, let's -- 10 MR. HORTON: Yes. 11 MS. YEE: Motion by Mr. Horton, second by Yee, 12 we'll take this matter under submission without 13 objection. 14 Thank you all very much for coming before us. 15 We will discuss your matter later today. 16 Thank you. 17 ---o0o--- 18 19 20 21 22 23 24 25 26 27 28 63 1 MS. YEE: Next sub item is sub item 7, Zuma Arc, Incorporated. 2 ---o0o--- 3 H1.7 ZUMA ARC, INC. 4 NO. 466074 (ET) 5 ---o0o-- 6 MS. YEE: There are no speakers on this matter. 7 Is there a motion? 8 MR. HORTON: So moved. 9 MS. YEE: Motion by Horton to adopt the staff 10 recommendation. 11 Is there a second? 12 MS. MANDEL: Second. 13 MS. YEE: Second by Ms. Mandel. 14 Any discussion on sub item 7, Zuma Arc? 15 MR. LEONARD: No objection. 16 MS. YEE: Okay. Without objection, that motion 17 carries. 18 Thank you, Members. 19 ---o0o--- 20 21 22 23 24 25 26 27 28 64 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 DECEMBER 15, 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 pages 1 13 through 64 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 14, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 65