1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 26, 2010 10 11 SALES AND USE TAX APPEAL HEARING 12 LOCAL TAX REALLOCATION HEARING 13 APPEAL OF 14 CITY OF IRVINE 15 NO. 434851 16 17 18 19 20 21 22 23 24 25 26 Reported by: Juli Price Jackson 27 CSR No. 5214 28 1 1 2 P R E S E N T 3 For the Board Betty Yee of Equalization: Chair 4 Jerome E. Horton 5 Vice-Chair 6 Bill Leonard Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson, 13 Chief Board Proceedings 14 Division 15 For Appeals Division: Trecia Nienow 16 Senior Tax Counsel 17 18 For the Department: Carole Ruwart Tax Counsel 19 20 For the Petitioner: Janis Varney Representative 21 22 For the Affected Jurisdictions: Cities of Costa Mesa, Robin Sturdivant 23 Mountain View, Sunnyvale, Representative Oakland 24 For the Affected Jurisdiction: 25 City of San Jose David McPherson Representative 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 26, 2010 4 ---oOo--- 5 MS. YEE: Okay, good morning, Members. 6 We will call the Board of Equalization meeting 7 to order. 8 Ms. Olson, our first item? 9 MS. OLSON: Our first item is C1, City of 10 Irvine. 11 Each person sitting at the table will be asked 12 to introduce themselves and, if necessary, their 13 affiliation with the taxpayer for the record. 14 Ten minutes is allocated for the Petitioner's 15 opening presentation and for this oral hearing the 16 affected jurisdictions and the Department have agreed to 17 share presentation time of ten minutes. 18 Finally, five minutes is allocated to the 19 Petitioner for rebuttal. 20 MS. YEE: Okay, thank you very much, Ms. Olson. 21 Let's hear from Appeals first. 22 Good morning. 23 MS. NIENOW: Madam Chair, Members, good 24 morning. Trecia Nienow from the Appeals Division here 25 along with David Levine, also from the Appeals Division. 26 The issue in this case is whether transactions 27 involving goods shipped into California from outside the 28 state, regardless of where title passes, are subject to 3 1 local sales tax when the goods were ordered at the 2 retailer's Irvine office. 3 The representative for some affected 4 jurisdictions has recently asserted that the Irvine 5 office is not the retailer's only California sales 6 office. However, this has not been conceded by 7 Petitioner or investigated by the Department, and is not 8 relevant unless you reject our recommendation that the 9 sales occurred outside California and are, thus, subject 10 to use tax rather than sales tax. 11 Also as a reminder to the hearing participants, 12 confidential information regarding the taxpayer must not 13 be publicly disclosed. This includes the identity of 14 the taxpayer or any other information that could easily 15 identify the taxpayer. 16 Thank you. 17 MS. YEE: Thank you, Ms. Nienow. 18 Good morning, Ms. Varney. 19 If you'll introduce yourself for the record? 20 You have ten minutes. 21 MS. VARNEY: Good morning, Madam Chair, Members 22 of the Board, my name is Janis Varney. I'm here with 23 MuniServices on behalf of the Petitioner, City of 24 Irvine. 25 We believe our position has been set forth in 26 our briefs. And being sensitive to the fact that the 27 Board has already ruled on other cases related to the 28 law applicable to this case and in the interest of time, 4 1 we only appear today to answer any questions that may 2 arise. 3 MS. YEE: Okay. 4 MS. VARNEY: Thank you. 5 MS. YEE: Thank you. 6 You sure you don't want to make any further 7 comment at this point? 8 MS. VARNEY: No. 9 MS. YEE: Okay, very well. 10 Then let's look at the Department and also the 11 affected jurisdictions. 12 You have ten minutes. 13 MS. RUWART: Good morning, my name is Carole 14 Ruwart. I am a tax counsel with the Board's Legal 15 Department representing the Sales and Use Tax 16 Department. 17 We believe that the Appeals Division 18 recommendation is correct and should be adopted by the 19 Board. 20 We also believe that the matters have been 21 fully and thoroughly briefed. 22 In the interests of time and out of respect for 23 the Petitioner's approach, we are also here to answer 24 any questions. 25 MS. YEE: Okay. Thank you very much. 26 Why don't we at least hear from the affected 27 jurisdictions' representatives who are here? 28 MR. MC PHERSON: Madam Chair, Members of the 5 1 Board, my name is David McPherson. I am the Deputy 2 Finance Director for the City of San Jose. 3 It has always been the City's position to 4 support Regulation 182 (verbatim) as regards to sales -- 5 place of sale, however, only when it is supported by 6 Regulation 1620 and 1628. 7 We feel that the Petitioner's position does not 8 support that position. And at this time we ask you that 9 you support staff's recommendation and deny the 10 Petitioner's appeal. 11 MS. YEE: Thank you very much, Mr. McPherson. 12 Next? 13 MS. STURDIVANT: My name is Robin Sturdivant. 14 Good morning, Madam Chair and Board Members. 15 I'm here representing the Cities of Costa Mesa, 16 Mountain View, Oakland and Sunnyvale. 17 This taxpayer, based in Germany, sells complex 18 enterprise integration software used to incorporate 19 several separate business management applications into a 20 single comprehensive system. 21 The petition brought forward by the City of 22 Irvine makes several factually incorrect arguments. The 23 first issue deals with sales tax versus use tax. 24 Because this product ships from Germany to the taxpayer 25 via common carrier, the Board of Equalization 26 categorizes this as a use tax transaction. 27 The Irvine opening brief makes the incorrect 28 assumption that the buyer does not accept the product 6 1 until the software is installed and argues that because 2 of this, title passes in state and the transaction is 3 subject to sales tax. 4 In order to properly address this issue, I'd 5 like to give you some background on this taxpayer and 6 how their product works. Before implementing the 7 taxpayer's software, a buyer would have separate 8 software programs that manage inventory, logistics, 9 accounts payable, accounts receivable, payroll and so 10 on. These are separate software programs that all 11 operate independently of one another. Through this 12 taxpayer, the company is able to purchase software that 13 allows them either to tie all these programs together 14 into one integrated system or replace them completely 15 with a business enterprise application. 16 As you can imagine there is a long negotiation 17 and design process that takes place before a buyer will 18 commit to spending upwards of a half million dollars on 19 this type of software. 20 During this negotiation and design process, the 21 taxpayer has become intimately acquainted with the 22 buyer's existing system and the buyer and seller work 23 together so there are no surprises when the system is 24 implemented. 25 Even before the merchandise has shipped, the 26 buyer has had ample opportunity to inspect the product. 27 Prior to purchase and delivery, the account manager and 28 sales team have already demonstrated how the software 7 1 will work or replace their existing system. 2 The buyer is not waiting for installation, 3 hoping it will work and then, if it does, accepting the 4 product. 5 As such, the transaction is correctly labeled a 6 use tax transaction. The Appeals Division has 7 recommended the City of Irvine receive a direct local 8 tax allocation only for those transactions over $500,000 9 that ship directly to the jurisdiction, as is allowed 10 under regulation 1802 (d)(1). We are in agreement with 11 that recommendation. 12 The second issue involves the retailer's place 13 of business in California. The Petitioner's opening 14 brief states that the taxpayer makes all sales from a 15 single location in Irvine, California. 16 Our research indicates the taxpayer operates 17 sales offices throughout California, including one in 18 San Francisco and an eight building campus in Palo Alto. 19 The Petitioner recently filed a request for 20 official notice that consisted of a declaration by 21 MuniServices. The declaration stated that a telephone 22 call was made to the taxpayer's Palo Alto office and 23 they asked for the sales and order department and was 24 told that there was no salespeople at this location. 25 Again, this is sophisticated enterprise 26 software that requires the buyer and seller to work 27 together for months prior to implementation. This is 28 not software for your home PC that could be purchased by 8 1 calling an order desk. 2 The sales customarily are made through 3 consultants who work directly with account managers that 4 are employers of the taxpayer. A retailer selling this 5 type of product would not have an order department. 6 The declaration also stated that web pages 7 included in the HdL brief were very recent. I can only 8 assume that this implies that the company's other in 9 state sales offices are relatively new or were not 10 operating at the time the petition was filed. 11 I've submitted some exhibits for today's 12 hearing that I believe have already been distributed. 13 Exhibits 1 through 5 are from the internet 14 archive Way Back machine, which is a virtual library 15 that allows users to view historical versions of a 16 website at any given point in time. 17 The exhibits I provided walk you through the 18 steps that take you back to the taxpayer's website as it 19 appeared in December 1998. 20 I have accessed the taxpayer's list of their 21 branch sales offices in 1998 and included are listings 22 for offices in San Francisco and Palo Alto. 23 In addition, the business networking site 24 LinkedIn shows dozens of profiles for individuals that 25 list this taxpayer as their employer, list their job 26 title as account manager or sales and indicate that they 27 work out of the Palo Alto or San Francisco office. Some 28 profiles indicate that the individuals have been working 9 1 out of the taxpayer's offices in the Bay area for nearly 2 eight years. I've included those profiles as Exhibit 6. 3 If The Board Members vote to grant this 4 petition, the result would be a reallocation of all 5 local tax allocated statewide to the City of Irvine and 6 would not take into consideration the taxpayer's other 7 offices in California. 8 Regardless of the decision, the Board Members 9 make today, we feel it is important that the record 10 accurately depict the taxpayer's business activities in 11 California. 12 Thank you. 13 MS. YEE: Thank you, Ms. Sturdivant. 14 Ms. Varney, you have five minutes on rebuttal. 15 MS. VARNEY: I don't have any rebuttal. 16 Thank you. 17 MS. YEE: Okay, very well. 18 Questions or discussion, Members? 19 Okay, hearing none, is there a motion? 20 MS. MANDEL: Take it under submission. 21 MS. YEE: Motion by Ms. Mandel to take this 22 matter under submission. 23 Is there a second? 24 Second by Mr. Horton. 25 Without objection, that motion carries. 26 Thank you all very much for coming forward. We 27 will discuss your matter later today. 28 ---o0o--- 10 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 JANUARY 26, 2010 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 10 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: March 19, 2010 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 11