BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 5901 Green Valley Circle Culver City, California REPORTER'S TRANSCRIPT FEBRUARY 24, 2010 C4 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by TEAM DENNIS CONNER CORPORATION (Case No. 353247 UT ) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Tax Counsel IV 17 Robert Tucker 18 Legal Department 19 Kevin Hanks Sales and Use Tax Department 20 Chris Schutz 21 Tax Counsel 22 For Petitioner: Cris J. Wenthur Attorney at Law 23 24 Dennis Connor Representative 25 26 ---OOO--- 27 28 2 1 Culver City, California 2 February 24, 2010 3 ---oOo--- 4 MS. OLSON: Our next item is C4, Team Dennis 5 Corporation. Please come forward. 6 Board Proceedings has received contribution 7 disclosure forms for this afternoon's hearings from the 8 parties, agents and participants. All forms were 9 properly completed and signed. No disqualifying 10 contributions were disclosed. 11 All parties, agents and participants are on the 12 Alpha listing provided to your office. 13 Each person sitting at the table will be asked 14 to introduce themselves and if necessary their 15 affiliation with the taxpayer for the record. 16 Ten minutes is allocated for the Petitioner's 17 opening presentation followed by ten minutes for the 18 Department's presentation, and five minutes is allocated 19 to the taxpayer for rebuttal. 20 Ms. Yee. 21 MS. YEE: Thank you very much, Ms. Olson. 22 Mr. Levine, you want to introduce this case, 23 please. 24 MR. LEVINE: Thank you. Good afternoon, Madam 25 Chair, Members. David Levine for the Appeals Division. 26 The issues in this petition of Team Dennis 27 Connor corporation are whether Petitioner purchased the 28 subject vessel for use in California. And if so, 3 1 whether that use is exempt from tax. 2 MS. YEE: Thank you very much. Good afternoon, 3 gentlemen. 4 MR. WENTHUR: Good afternoon. 5 MS. YEE: If you will please introduce 6 yourselves for the record, you have ten minutes for your 7 presentation. 8 If you could pull that mike right in front of 9 you. Okay. 10 MR. WENTHUR: Madam Chair and Members of the 11 Board, good afternoon. My name is attorney Cris 12 Wenthur. And with me is Dennis Connor. 13 Today I would like to take you through the 14 facts of this case in a summary fashion and then also 15 summarize our -- our arguments. We have filed a full 16 brief on this issue. 17 I'm going to follow the time line that you 18 should have in front of you. I'm just going to follow 19 number 1 through 8 and just give you an outline -- an 20 overview of this case. 21 At issue is USA 66. USA 66 is an America's Cup 22 boat built in Rhode Island for the specific and sole 23 purpose of racing in the 31st America's Cup in Aukland, 24 New Zealand in 2003. 25 In -- on -- on or about February 18th of 2002 26 the vessel was trucked from Rhode Island to California, 27 where the manufacturer delivered it to the buyer, Team 28 Dennis Connor, outside the State of California. That's 4 1 been stipulated. And thereafter the vessel returned to 2 California. 3 We had submitted a letter ruling request on 4 this issue. Because there was -- there are two boats 5 involved in the campaign, USA 66 and USA 77 -- USA 77 is 6 not an issue. That vessel has been granted exemption. 7 But because the freighters that were taking the vessels 8 to New Zealand were not coming until August of 2002 -- 9 vessel number two came in February of 2002 -- so, a 10 letter ruling was sent in to determine that the time 11 sailing outside of California territorial waters would 12 be construed as use outside of California. 13 About the fourth day after the vessel was 14 delivered to the taxpayer outside the State of 15 California the -- the mast snapped in half. And so the 16 red section you see as number 3 on your chart, that's 17 the period during which the vessel was completely 18 unusable, and the mast had to be sent back to Minden, 19 Nevada, where the mast had to be completely redone. 20 The mast comes back in May of 2002. And 21 that -- from that point until August 6th of 2002 the 22 vessel is drug each day by a tender outside of 23 California -- outside the territorial waters and there 24 the team practiced until August 6th or 7th of 2002. 25 Then as of August 7th, 2002 until the 20th it 26 just -- it was waiting for the freighter. It was -- 27 the cradle was made and -- and the vessel was going to 28 be put on board the freighter. 5 1 Thereafter the freighter took the boat to New 2 Zealand and then it was there all the way through the 3 America's Cup, which was all the way through 2003, and 4 the vessel never ever returned to California ever again. 5 This vessel is a -- the argument is whether or 6 not this vessel was purchased for use in the State of 7 California. This vessel has no engine. It has no 8 toilet. It has no running water. It has no berths. It 9 has no kitchen. It takes 16 people to operate. 10 The -- on this vessel, in addition to the 16 11 people, what is reserved is what's called the 17th spot, 12 the spot we all aspire to be sitting in. That's the 13 spot that the sponsor gets to sit in and be on -- be on 14 the wonderful boat. 15 This team had 30 sponsors and their logo was -- 16 there's a picture there -- their logos were all over 17 the -- the sails of this vessel and were used as 18 advertisement. If Pepsi was on board there would be a 19 Pepsi sail that was flown. Whatever the vendor -- 20 whatever the sponsor was, that -- that sponsor's logo, 21 their -- their personal property, their property would 22 be displayed on that boat while it was involved in what 23 we are saying is clearly commerce. 24 A significant portion of -- and the tax return 25 was submitted as part of the brief, over $13 million in 26 sponsorships came in -- a significant part, four or five 27 million was actually for the purpose of occupying that 28 17th seat. The value of these executives to actually be 6 1 on this boat and participate on this America's Cup boat 2 while it's sailing off shore outside of California, and 3 also while it was in New Zealand, engaged in the 4 America's Cup race. 5 So those are the facts. This -- this case 6 would have been very simple had the mast not snapped in 7 half. 8 So now I'd like to take the Board through the 9 arguments of the taxpayer. The first argument is -- is 10 a basic one. It -- it relates to Regulation 1620. 11 Regulation 1620 creates a rebuttable presumption that 12 when property is purchased outside the State of 13 California and enters California before 90 days have 14 elapsed, there's a presumption that that property was 15 purchased for use in California. 16 We argue that just the nature of the facts I 17 just took you through, the fact this is a single purpose 18 boat, built for one purpose only, sailing in Aukland, 19 New Zealand in the 31st America's Cup, that fact in 20 conjunction with the no toilet, no running water, no 21 engine, all those factors, makes it very clear that 22 there is no way this boat could have been purchased for 23 use in the State of California. It has no value in the 24 State of California. Its value is limited to 25 participating in the America's Cup race in Aukland, New 26 Zealand. 27 So that presumption is overcome just by the 28 basic understanding of what an America's Cup boat is. 7 1 After the America's Cup boat is over the value is very 2 limited for these boats because the advertisement 3 dollars are no longer there and it takes 16 people to 4 run these things. 5 The second argument is under -- they're both 6 similar. They're the interstate 1620(b)(4), and the 7 watercraft exemption under California Reg. 1594(a)(1). 8 The primary difference between these two tests 9 is that under the 1620 exemption there is no $25,000 10 threshold and it's -- it's a six-month test. You must 11 show that more than one half of nautical miles during 12 the first six months were traveled in interstate 13 commerce. 14 Under the Reg. 1594(a)(1) argument there's a 15 $25,000 threshold and the principal use of the vessel 16 must be in interstate or foreign commerce. 17 I'm going to take the easy one first. The easy 18 one is the Reg. 1594(a)(1) argument. That is a 12-month 19 test. Well, obviously if the vessel was only used for 20 100 days in California and used for 181 days in New 21 Zealand, the principal use just by its very definition 22 is clearly going to be outside the State of California. 23 Now the issue is, is there commerce involved. 24 I don't know how anyone can argue commerce is not 25 involved with a -- when you receive $13 million in 26 sponsorships for displaying a property of third parties. 27 Their logos. And this is all -- the America's Cup is -- 28 yes, it is about sailing, but it's also about promotions 8 1 of sponsors -- intellectual property around the world. 2 So, it clearly meets the Regulation 1594(a)(1) 3 exemption. We argue that 100 percent of all nautical 4 miles traveled on this vessel were outside the State of 5 California. While the boat was training in California 6 it had to be drug out by a tender every single day. And 7 that's where the team would train. And at the end of 8 the day sails come down and the tender would tow the 9 boat back into -- in to port where it would stay, and 10 all usage -- and obviously in New Zealand it's outside 11 of California, as well. 12 The $25,000 threshold obviously is not an issue 13 because I gave you the tax return showing that there's 14 $13 million of income. So that's not the issue. So it 15 would qualify both under 1594(a)(1) and also 1620(b)(4) 16 because, again, the issue from the -- the Department's 17 perspective was there's no commerce involved. And I 18 just don't know how you can argue there's no commerce 19 involved when sponsors are paying $13 million for 20 advertising their products and their property -- their 21 intellectual property on -- on your vessel. 22 The other arguments, we can go -- there's four 23 or five other arguments. In an earlier argument -- 24 brief I submitted that the -- the -- even the old 25 six-month test was met because while the mast had 26 snapped in half, the argument is that the test period 27 should have been tolled, t-o-l-l-e-d, during that 28 period. And then it would clearly have met the 9 1 exemption under the old six-month test. That's not the 2 best argument but it is an argument that's -- that we're 3 putting forth. 4 But clearly there's been a change of 5 circumstances in this case. No one anticipated the -- 6 the mast snapping in half after the fourth day after -- 7 after the delivery. And but for that fact this boat -- 8 this vessel clearly would have qualified for exemption 9 under the letter ruling that was obtained. 10 MS. YEE: Thank you very much. 11 Mr. Connor, do you have any statement to make 12 at this time? 13 MR. CONNOR: No, ma'am. 14 MS. YEE: Okay. We'll give you time on 15 rebuttal. 16 MR. CONNOR: okay. 17 MS. YEE: Thank you very much. Department? 18 MR. SCHUTZ: Madam Chair and Members of the 19 Board, I'm Chris Schutz from the Board's Legal 20 Department, along with Bob Tucker and Kevin Hanks 21 representing staff. 22 I'm going to go ahead and go through my 23 presentation, then I'll address a couple of the points 24 Mr. Connor has made. 25 The Department agrees with the Appeals 26 Division's recommendation that the petition should be 27 denied. Here, the issue is whether the vessel met the 28 exclusion from tax under Regulation 1620(b)(4)(B)(2). 10 1 In order to do so one half or more of the nautical miles 2 traveled by the vessel during the six-month period 3 immediately following its entry into the State would 4 need to be commercial miles in interstate and -- or 5 foreign commerce. 6 Alternatively, the vessel could also qualify if 7 the vessel met the exemption from tax under Rev. and Tax 8 Code 6368 and Regulation 1594(a)(1). In order to meet 9 this exclusion it would -- the vessel would need to be 10 principally used in interstate or foreign commerce 11 involving the transportation of persons or property for 12 hire during the first 12 months after entry into the 13 State. 14 As background, Revenue and Taxation Code 6201 15 imposes an excise tax on the storage, use or other 16 consumption in the State of tangible personal property 17 purchased from any retailer for storage, use or other 18 consumption in the State. 19 Rev. and Tax Code 6246 provides for a 20 rebuttable presumption that tangible personal property, 21 such as the vessel here, which is brought into the 22 State, is purchased for use in this State. 23 Regulation 1620(b)(4)(A) provides for a 24 physical presence test and Subdivision 1620(b)(4)(B)(2) 25 provides for a test to determine whether the vessel was 26 used in interstate or foreign commerce as a way to prove 27 that the vessel was not purchased for use in this State. 28 First, with regard to Regulation (b)(4)(A) it 11 1 provides that Use Tax will not apply if the vehicle, 2 vessel or aircraft is used, stored or both used and 3 stored outside of California one half or more of the 4 time during the six months -- six-month period 5 immediately following its entry into this State. 6 I'd like to note here that -- that the letter 7 ruling that was requested by the Legal Department only 8 addressed whether or not the vessel if it -- if it 9 followed the facts that were presented to the Legal 10 Department met the test -- the physical presence test 11 under (b)(4)(A). 12 With regard to 1620(b)(4)(B)(2) this provides 13 if the property is a vessel Use Tax will not apply if 14 one half or more of the nautical miles traveled by the 15 vessel during the six-month period immediately following 16 its entry into the State are commercial miles traveled 17 in interstate or foreign commerce. 18 For purposes of Subdivision (b)(4) the term 19 "commercial" applies to business use and excludes 20 personal use. However, the term "commercial" is not 21 limited to for-profit businesses. 22 While these training trips are not what is 23 considered nautical miles traveled in foreign commerce 24 under the exclusion of 1620(b)(4)(B)(2) or voyages in 25 interstate or foreign commerce involving transportation 26 of persons or property for hire for the purposes of the 27 exemption in 1594(a)(1), first Regulation 1620 provides 28 examples of what is considered interstate or foreign 12 1 commerce for purposes of Subdivision (b))4). As 2 pertinent here, example 12 of the Regulation provides in 3 part that interstate or foreign commerce occurs when 4 vehicle -- when a vehicle, vessel or aircraft transports 5 a person or property for commercial purposes from 6 California to another state or country, from another 7 State or entry to California. Within the six-month 8 period, however, the vessel was merely going outside of 9 California's territorial waters. It wasn't entering 10 into another country or state. 11 Additionally, when Regulation 1620 was amended 12 in 2001 to include vessels in Subdivision (b)(4) for the 13 interstate or foreign commerce test, example 13 was also 14 added to further clarify what constitutes interstate or 15 foreign commerce for purposes of the regulation. This 16 example provides that a vessel transports persons or 17 property for commercial purposes from a California port 18 to a port in another state or country or from a port in 19 another state or country to a port in California. 20 There is simply no example that remotely 21 indicates that merely voyaging outside the territorial 22 waters of California without entering into another state 23 or country is considered foreign commerce under 24 Regulation 1620(b)(4). 25 Furthermore, by looking at what we have 26 regarded as foreign commerce for purposes of the 27 exemption under Section 6368 in Regulation 1594 provides 28 further guidance as to what is considered interstate or 13 1 foreign commerce for purposes of these regulations. 2 First, Annotation 600.0080 provides that the 3 fact that a vessel travels in part on the high seas in 4 the course of its journey to and from a California -- 5 from California ports does not exempt them under Section 6 6368 from California Use Tax as being used in interstate 7 or foreign commerce. 8 Additionally, the language in Section 6368 in 9 Regulation 1594 distinguishes between voyages in foreign 10 commerce and voyages that are merely outside territorial 11 waters of California. Specifically Section 6368 12 provides for an exemption for vessels used in commercial 13 deep sea fishing outside the territorial waters of the 14 state and for vessels that transport persons or property 15 for hire to offshore drilling platforms outside the 16 territorial waters of this State. 17 Thus, the distinction between foreign commerce 18 and the territorial -- there's a distinction between 19 foreign commerce and the territorial waters outside of 20 the State. There would be no need for these two 21 specific exemptions if foreign commerce in 1594(a)(1) 22 simply meant outside the territorial waters of the 23 State. 24 Accordingly, the -- the vessel did not meet the 25 test for use in interstate and foreign commerce under 26 1620(b)(4)(B)(2) and Regulation 1594(a)(1) because they 27 were merely training with the vessel off the California 28 coast without leaving -- and when leaving California 14 1 territorial waters they -- they did not enter into a -- 2 a foreign jurisdiction or another state. 3 With regard to some of the specific contentions 4 that -- that Mr. Wenthur brought up today, first, Mr. 5 Connor brought up that -- that they had advertising on 6 the -- the sails and that would be considered under 1594 7 as carrying, I guess, property for hire. We would 8 disagree. We don't believe just merely having 9 advertising on -- on the hull or on the mast is what -- 10 what would be considered property for hire. 11 MS. MANDEL: It's their sail, as I understand 12 it. If the -- if -- I think this one's Computer 13 Associates in the pictures. If Computer Associates pays 14 whatever the huge fee that they pay as a sponsor to the 15 corporation, and as part of that sponsorship they get 16 a -- and these are pretty large sails -- I don't think I 17 ever packed one this big, but -- and if that's their 18 sail, and I don't know that -- they may be able to take 19 it later, maybe the gentleman could answer, but if -- if 20 as part of that sponsorship they get and own that sail, 21 I think that's -- that -- I think -- Mr. Connor, is 22 that -- is that somebody's sail that they -- they get to 23 keep as a memento or is it -- 24 MR. CONNOR: In the case of the CA, they -- 25 they cut it up and we sign the portions of it. 26 MS. MANDEL: Sign the pieces as -- as mementos. 27 MR. CONNOR: Send it out to the people that 28 attended the reception and then the employees in -- in 15 1 New York. 2 MS. MANDEL: That's why I asked. 3 MR. HORTON: You send it out to everyone? 4 MR. CONNOR: Well, not everyone because -- 5 MR. HORTON: Employees. 6 MR. CONNOR: Everybody loves CA, but -- 7 MR. HORTON: I mean the -- the folks who come 8 to the reception and -- 9 MR. CONNOR: Well, not all of them attended 10 the -- 11 MR. HORTON: I've got a piece. I've got a 12 piece of one. 13 MR. CONNOR: -- the cup in New Zealand. But 14 they came to the reception in Ithica, New York and -- 15 and in addition to the sails there is also crew gear 16 that -- the hats and the logos and the pens that we bore 17 when the CA people would come -- 18 MS. MANDEL: Make sure you're wearing -- 19 MR. CONNOR: -- to maximize their fulfillment. 20 To help try to pay it back -- pay them back for the 21 money they gave us. 22 MS. MANDEL: Right. And make sure you're 23 wearing blue when Pepsi is on board. 24 MR. CONNOR: We make sure there is no Coca Cola 25 there -- 26 MS. MANDEL: And make sure there's no Coca Cola 27 around. 28 MR. CONNOR: -- in the cooler, either. 16 1 MS. MANDEL: But -- I'm sorry to interrupt you, 2 Mr. Schutz, and to be talking over you, Mr. Connor, but 3 that's -- when they were talking about they were -- 4 that's how I understood the sort of carrying property 5 that the -- advertising on the sail and that it actually 6 be their property. 7 MR. CONNOR: And there's no -- there's no other 8 use for the sail because under the regulations the boat 9 might be ever raced again. You can't have 10 sponsorship -- it's not in the rules of the normal 11 racing fleet. 12 MS. MANDEL: So -- so, anyway. 13 MR. SCHUTZ: We -- we have not seen invoices 14 that show that there was a -- that various advertisers 15 bought specific equipment and then it was put onto the 16 boat. Again, if -- if the vessel -- if after the vessel 17 traveled the sponsors then -- because they're 18 sponsorship, they ended up selling it to them, at that 19 point that would be something different. If they're 20 saying that the -- certain equipment on the -- on the 21 vessel was specifically bought by -- by different 22 advertisers prior to them doing any practice or 23 practicing for it, I would like to see an invoice to 24 that effect. 25 Also, with -- with regard to the -- the days 26 here that -- that Mr. Wenthur's provided, I would say 27 that -- that they've provided a number of hours of 28 training -- training prior to them going outside -- 17 1 outside the State to -- to Aukland and where they would 2 be in a foreign jurisdiction at that point, and we would 3 need to see the hours that they traveled here in 4 California and then outside of California territorial 5 waters. They have somewhere along 2,000 plus hours of 6 training during that six-month period. 7 Whether or not -- once they got to Aukland they 8 actually -- how many hours that they -- was involved 9 in -- in training where the sail was then used in -- and 10 it was owned by another entity, and whether it was 11 transported, we would want to see that, as well, 12 those -- those type of hours. 13 I still -- I still think that -- that merely 14 just having a sail on board that was owned by another 15 person, if the intent wasn't transportation of that for 16 hire and merely just using it as part of a -- as a 17 sponsor giving you, you know, some of your equipment, I 18 don't know that fits within the four squares of 1594. 19 MS. MANDEL: Can you address the repair part 20 because I cut you off and you might have had more to say 21 on things. 22 MR. SCHUTZ: Are -- are you talking about 23 the -- the tolling of the time because of the repairs? 24 MS. MANDEL: Well, the -- the tolling or 25 whether the fact that -- I mean, there is some kind of 26 exclusion that has to do with when something is in 27 California for repair, and I know in this instance the 28 mast, you know, was a carbon something or other -- mast 18 1 had to go back back out of state for the mast itself to 2 be repaired. But I'm just curious about the application 3 of the general exclusion on repair and I -- I know that 4 Mr. Wenthur a little bit discounts his tolling argument, 5 but I'm curious about the repairs. 6 MR. SCHUTZ: Well, if -- if you're running to 7 this as -- as -- if you're approaching this as a -- as a 8 possibility that they never -- they never intended to 9 have it in California or using it in California, it was 10 because of some intervening purpose, the repair, that -- 11 that kept them here in California for -- and made it 12 miss the test, I would say that -- that their intent 13 was -- was to meet the tests and not -- their intent was 14 still to have it in California just it meet the -- the 15 particular test and we've never said that -- that a 16 change of circumstances when you're merely just trying 17 to meet the -- the particular test of 1620 is 18 sufficient -- is sufficient to prove that it wasn't 19 purchased for use in California. 20 MS. MANDEL: Right. But am I mis-remembering 21 on whether there's an exclusion from use for when 22 something is here for repair? 23 MR. SCHUTZ: Right, but I believe that came in 24 later. 25 MR. TUCKER: October 2, 2004. 26 MS. MANDEL: Oh, oops. 27 MR. SCHUTZ: Yeah, that -- that came in later, 28 so -- 19 1 MS. MANDEL: Okay. Thank you. 2 MS. YEE: Thank you, Ms. Mandel. 3 Anything else, Mr. Schutz? 4 MR. SCHUTZ: I believe that concludes my 5 presentation. 6 MS. YEE: Okay. Very well. Mr. Wenthur, you 7 have five minutes on rebuttal. 8 MR. WENTHUR: Okay. I'd like to first address 9 the issue of -- of business use, commercial use. It's 10 not just the idea of -- of the five to seven nation crew 11 on -- aboard this vessel as the crew outside of 12 California territorial waters. And it's not just the 13 intellectual property which is the major component of 14 that 13 million. It's that 17th person. 15 Mr. Connor, I just want to ask you, just in -- 16 of that $13 million, what would be a fair number to 17 attribute to the value of a use of occupying that 18 spot -- that 17th person position? 19 MR. CONNOR: It's hard to say because depending 20 on whether we want him for training or we're actually in 21 the race for the America's Cup, itself. It has a 22 different value for the person riding on the boat, and 23 how big a fan is the CEO of -- of the -- the America's 24 Cup. 25 But there's a significant portion of the 26 sponsorship dollars was for client entertainment and 27 very seldom the CEO would actually take the ride. So it 28 was more for their customers' entertainment. 20 1 So, it's hard to answer your question, but a 2 significant portion of it, without the 17th man ride and 3 the chance for the customer to be on television it would 4 either be impossible or very difficult to -- to get the 5 sponsorship at all. It's a big portion of the 6 fulfillment. 7 MR. WENTHUR: The next issue I would like to 8 address is the commerce issue. The -- the Business Law 9 Tax Guide annotation that the Department relies on is a 10 a 1954 annotation. I -- in my brief, I'm not going to 11 go through it in detail, but I've given the Board three 12 United States Supreme Court cases and a nice fresh new 13 Florida Supreme Court case that make it very clear that 14 traveling from port to more than three nautical miles 15 off shore and back to port is absolutely interstate 16 commerce. And that's U. S. Supreme Court. And I think 17 that overrules the Business and Law Tax Guide. 18 The final issue is the examples -- the examples 19 in the regulation, they don't make the law. They're 20 simply interpretations. And what's really missing from 21 the 600.008 Business Law Tax Guide annotation, that is 22 with reference to the 12-month test under the watercraft 23 exemption. The Department's forgetting about the fact 24 that this boat went to New Zealand. 25 And that's where -- if you apply that test to 26 the fact that this boat -- just look at the letter of 27 the law and look at where the boat was, it absolutely 28 qualifies for exemption under 1594 because New Zealand 21 1 is where it spent the bulk of its time. 2 And even if you said a hundred percent of all 3 the time in California, a hundred percent of it was in 4 California, inside the State, within three miles, you -- 5 the Board's -- the Department still loses because once 6 the boat leaves it's -- it's in New Zealand for at least 7 181 days out of a total 282 days of op -- of functional 8 use, of operating time. 9 So it doesn't matter where the use was in 10 California under the -- under the 1594 12-month test. 11 And as far as the tolling issue, the tolling 12 argument is probably better couched in terms of a change 13 in circumstances argument. I think that's probably a -- 14 a better way to look at it. But for that mast snapping 15 in half, the -- this would have qualified for exemption 16 under the -- under the letter ruling. And we only 17 applied for the letter ruling under the simple six-month 18 test because a simple -- it's a simple test. 19 But I want to close by saying this -- this -- 20 this -- your decision is not just important for this 21 taxpayer. The America's Cup, as you know, has come back 22 to U. S. soil as of last week. We all, as a State, for 23 our benefit, have to address this issue when we have 12 24 to 14 new countries coming in with very expensive boats. 25 Are we going to start trying to assess these boats a ten 26 percent Use Tax for participating in an America's Cup in 27 our State? Because if that's the position, I can 28 guarantee you the next America's Cup, they're not -- 22 1 it's not going to be in California. 2 MS. YEE: Thank you very much, Mr. Wenthur. 3 MS. MANDEL: Question. 4 MS. STEEL: Yes. Ms. Mandel. 5 MS. MANDEL: Just in case there was a question 6 about it, and you talk about sort of the advertising 7 value and the 17th man, but while the boats are 8 conducting the training runs off San Diego -- 9 MR. WENTHUR: Long Beach. Off of Long Beach. 10 MS. MANDEL: Long Beach. 11 MR. WENTHUR: Yeah. 12 MS. MANDEL: There's -- there's coverage, press 13 coverage, trade press coverage and specific interest, 14 but also general press coverage. And presumably I think 15 people go out to watch the training runs, don't they? 16 MR. WENTHUR: And the 17th man, as well. 17 MS. MANDEL: Right. 18 MR. CONNOR: More often the -- because we're 19 not racing, they can send more than one person. Like 20 Pepsi or CA could send four or five people to sit there 21 and in essence be part of our training run. So we had 22 two boats racing against each other, it was quite 23 exciting and they often would send a photographer, too, 24 to get the pictures of the guests behind the helm 25 wearing their CA gear. 26 MS. MANDEL: Was it -- I mean if people know 27 that you're out there training they can come out in 28 their boats to -- to see a boat like that. 23 1 MR. CONNOR: Well, Saturdays and Sundays were 2 more popular than during the week. 3 MS. MANDEL: Right. 4 MR. CONNOR: And we were a little offshore. So 5 it wasn't the kind of crowds that you're used to seeing 6 in the America's Cup, but -- 7 MS. MANDEL: Yeah. 8 MR. CONNOR: -- it wouldn't have been unusual 9 to have a couple dozen boats out there, yeah, on a daily 10 basis. 11 MS. MANDEL: Thanks. 12 MS. YEE: Thank you, Ms. Mandel. 13 Other questions, Members? 14 Let me just pose a question to maybe Appeals, 15 Mr. Levine. The Court cases that Mr. Wenthur cites, did 16 we take a look at those? 17 MR. LEVINE: I don't think we had those at the 18 time of the Appeals Conference. 19 MR. SCHUTZ: I can address that. 20 MS. YEE: Yes, Mr. Schutz. 21 MR. SCHUTZ: With regard to those Court cases 22 they deal with what -- under the commerce clause the 23 Federal government can regulate, and for those purposes 24 foreign commerce is more expansive. It is outside -- 25 just the territorial waters of any state. But we're 26 talking about foreign commerce as it -- as it applies to 27 a specific California regulation, which we've provided a 28 number of examples which wouldn't fit four squares into 24 1 what -- what foreign commerce means for these -- these 2 series of cases. 3 MS. MANDEL: Yeah, maybe -- 4 MR. LEVINE: Just an added point, probably not 5 where you think I'm headed, but this statute was I 6 believe adopted in 1949 and that annotation was shortly 7 thereafter, and I think that this is what was understood 8 by the Legislature and by us contemporaneous with it, 9 and I mean, you could argue both sides. 10 Arguably, it should be identical with the Feds 11 but it's not required. This is a State exemption and 12 it's clearly under circumstances that if the State wants 13 to tax this, it can. Maybe it's not taxable under our 14 laws, but the State can tax this activity. 15 The -- the boat was in California and it's 16 pretty much enough. Even under -- under current Federal 17 law the State can tax it. The question is whether under 18 State law it should be taxed. 19 MS. MANDEL: Okay. Let me -- 20 MR. WENTHUR: I emphatically -- emphatically 21 disagree -- 22 MS. YEE: I'll give you -- I'll give you time. 23 Hold on, Mr. Wenthur, please. 24 MS. MANDEL: Let me just -- 25 MS. YEE: Ms. Mandel. 26 MS. MANDEL: -- ask you some questions about 27 that because I thought that we had a couple of different 28 types of exemptions in the Code, and one of which is 25 1 that we don't tax anything that we can't tax under the 2 Constitution. 3 MR. LEVINE: 6352. If -- 4 MS. MANDEL: Which -- 5 MR. LEVINE: If we can't tax it, we don't need 6 any other exemption. 7 MS. MANDEL: We don't need anything else and 8 that -- that the stuff used in interstate and foreign 9 commerce, which is usually done by these 50 percent 10 tests as a matter of convenience, if you will, is a sort 11 of separately stated exemption, isn't it? 12 MR. LEVINE: That's correct, it's not -- it's 13 not required. This -- this statute is for vessels that 14 are principally used for -- 15 MS. MANDEL: In interstate or foreign commerce. 16 MR. LEVINE: -- carrying property or people in 17 interstate or foreign commerce. So that's kind of a 18 core question, is even if these -- this property is 19 being carried, and even if you say it's commercial, is 20 the principal purpose of this boat to do commercial 21 stuff or win the America's Cup? 22 MS. MANDEL: Well -- okay, I guess there's a -- 23 there's a couple of things there that raise -- raise 24 questions. One would be whether when the watercraft -- 25 the more specific one that speaks about interstate and 26 foreign commerce, whether when they passed that what 27 they meant by those terms of interstate and foreign 28 commerce is -- is property that's used in interstate or 26 1 foreign commerce as those interstate and foreign 2 commerce is -- is in the U. S. Constitution and has that 3 moved if these new Supreme Court cases say that cruises 4 to nowhere are in -- in foreign commer -- inter -- 5 foreign commerce. 6 The -- oh, I lost the second piece. And -- 7 and, you know, Mr. Connor's sitting here but it is not 8 Mr. Connor who owned this vessel. It is a corporation 9 that owned this vessel and -- and it sounds like what 10 they're saying is that the business of this 11 corporation -- I don't know if corporations have 12 personal use, but this business of this corporation is 13 to acquire a vessel that they hope they will be able to 14 win the America's Cup race with, and that that sounds 15 like that's their business purpose, at least the way 16 that they lay it out. 17 So -- 18 MR. LEVINE: I agree with that completely. 19 Appeals' view would be that -- and I think they'd agree, 20 that they were going to do whatever they could to get 21 enough money to buy a boat that they -- would give them 22 a good chance of recapturing the cup. I'm sorry they 23 didn't succeed. But with that -- but they got the boat. 24 But I think that that's -- I guess it's all in 25 the way you look at it. I look at it that they were -- 26 they did what they could, including the sponsorships or 27 primarily the sponsorships to get the funds to get the 28 boat. But the reason for getting the boat was to win 27 1 the race. I guess it's which came first, the chicken or 2 the egg. 3 MS. MANDEL: So are you saying that -- that -- 4 that -- well, and if he -- if he hadn't had the prior 5 successes and reputation that he had presumably he 6 wouldn't be able to get people to sponsor a boat that he 7 was going to captain. But I guess it's -- it's -- I 8 kind of started with whether, you know, it has always 9 been about carrying people and passengers from place to 10 place and, you know, from here to -- and -- and I don't 11 know if he -- you know, it's -- Stars and Stripes has 12 been always his boat, so but maybe he only always 13 carried Americans, I don't know. But, you know, we used 14 to have these things with, well, was there someone from 15 a foreign country or another State who was going out to 16 somewhere. But I just wonder whether the Supreme Court 17 cases and the background on why we have a specific 18 exemption on watercraft for interstate and foreign 19 commerce, whether that interstate and foreign commerce 20 was tied to the U. S. Constitutional provision. And I 21 think that's what Mr. Wenthur's trying to argue and I 22 don't -- 23 MR. SCHUTZ: I would say that -- that the cases 24 that he cites actually deal with what the Federal power 25 is to regulate commerce, not the State's power to tax 26 it. Under those -- those cases I think, starting with 27 the case that's actually cited in -- in 60.0080 and then 28 I guess ending it with maybe like Japan Lines, the State 28 1 does still have the power to tax this particular 2 transaction. 3 It's just he's going for what the definition of 4 "foreign commerce" is and he's citing -- he's citing 5 Federal cases that deal with foreign commerce with 6 regard to what specifically the -- the Federal 7 government can regulate as an area outside -- outside 8 the territorial waters of the States, the Federal 9 government can regulate it, not that -- the distinction 10 being that not that the States cannot tax it, there are 11 still a separate line of cases that deal with that, and 12 I think we're still -- 13 MS. YEE: Okay, let -- let me hear from Mr. 14 Levine, then Mr. Wenthur, maybe you can clarify for us 15 your reliance on the -- the cases. Mr. Levine. 16 MR. LEVINE: Well, I think -- I think one of 17 your questions is this statute is required to provide an 18 exemption that would not exist but for the statute. So 19 if it doesn't come within the statute and there's no 20 other reason to exempt it, it's going to be taxable. 21 This vessel, even if you accept the way it's 22 characterized by Petitioner, was in California. It was 23 used here by storage. That's a use. It came in and 24 out. It doesn't qualify for 6009.1. There's tax unless 25 there's an exemption. It's not required by Federal law 26 so this statute is required and just -- I don't think 27 that -- the principal purpose for the -- again, it's 28 apples and oranges, chicken and egg. The vessel was not 29 1 obtained to provide sponsorship. The sponsorship was 2 obtained to get the boat, and the boat -- the principal 3 purpose of the boat was not carry the sail. Carrying 4 the sail helped get the boat. The purpose of the boat 5 was to win the race. 6 And it just does not qualify in -- in my view 7 for a 1594 exemption under these facts. 8 MS. YEE: Okay. Mr. Wenthur. 9 MR. WENTHUR: The primary purpose of -- of this 10 boat is to win the race and increase the value of the 11 trademarks that are advertised on this boat. I mean, 12 everyone wants to win the race. But there would be -- 13 we would have none of these races, this never -- we 14 would have no America's Cup right now if we don't have 15 the corporate sponsorships because of the cost. 16 Mr. Connor's name and winning the cup greatly 17 enhances the value of the marketing dollars for these -- 18 for the sponsors. The -- the U. S. -- the -- the 19 Federal government has exclusive authority over 20 international waters. The State cannot tax anything 21 that would impede the flow of inter -- of interstate and 22 foreign commerce. Has no right to. 23 These regulations are nothing more than answers 24 to -- trying to avoid the violation of State law from 25 impeding the flow of interstate commerce. And 26 California has chosen to simply adopt this -- these 50 27 percent rules as a way of trying to be in compliance 28 with the Federal law that precludes the State from 30 1 taxing any -- any item involved in commerce that would 2 impede its flow, under the U. S. Constitution. 3 These are -- and the -- the case that's 4 probably easiest to understand is the new -- the new 5 Florida Supreme Court case. That was the gambling case 6 where the -- the boats go out from Florida, they go into 7 international waters and they come back again, and 8 Florida wanted to tax a holding and the government said, 9 "No, you can't -- can't do it." Once you're -- once 10 you're beyond Florida waters can have -- you have no 11 jurisdiction, you know, what -- whatsoever. 12 MS. YEE: Thank you. Ms. Steel. Oh, I'm 13 sorry, Mr. Horton then Ms. Steel. Thank you for your 14 patience. 15 MR. HORTON: You indicated that there was 16 training that occurred outside the California waters. 17 MR. WENTHUR: All the training occurred outside 18 of California waters. And you -- 19 MR. HORTON: What happened after the training? 20 The day of training, what happened? 21 MR. WENTHUR: The race -- the sales come down. 22 The tow boat -- the tow boats come out to the boat, and 23 they drag it into shore in Long Beach for the night. 24 MR. HORTON: Back into California. 25 MR. WENTHUR: Back into California. 26 MR. HORTON: Was the Petitioner in the business 27 of transporting goods or passengers? Is that the 28 business or is this some other business? 31 1 MR. WENTHUR: Well, the business is 2 participating in an America's Cup. And to say it's not 3 a business, I mean there's $13 million of income -- 4 MR. HORTON: I think that is a business -- 5 MR. WENTHUR: Yeah. Yeah. 6 MR. HORTON: -- no doubt. The question is if 7 that's the transportation of goods and products and 8 persons. 9 MR. WENTHUR: Products in the form of the 10 intellectual property of all the sponsors and the -- as 11 far as the 17th person, which is -- is it -- of the $13 12 million in excess of what -- how many million would that 13 value be, just -- just what would be a fair estimate? 14 One million? 500,000? Two million? 15 MR. HORTON: Mind you, I'm not really -- 16 MR. WENTHUR: Okay. 17 MR. HORTON: It's not the value -- 18 MR. WENTHUR: Okay. 19 MR. HORTON: -- it's actually the transaction. 20 So, the -- the question is are we transporting persons 21 or tangible personal property or even intangible 22 property if it can be transported, if you will, for hire 23 and if that's what the compensation is for. 24 MR. WENTHUR: Yes. Absolutely. 25 MR. HORTON: And after the race it no longer 26 has that value? 27 MR. WENTHUR: You may spend $2 million -- 28 back -- back in that time frame you may spend $2 million 32 1 on a boat. The value of that boat after the race is 2 over, if you lose the race, 400 grand? 3 MR. O'CONNOR: Really a liability because then 4 you have to insure them and there's not much use. 5 But I'm not sure -- I didn't really follow on 6 exactly what you're saying, but obviously Larry Ellison, 7 when he just won the America's Cup and his BMW/Oracle 8 boat was on the front page of the New York Times and 9 even the San Diego Union had a picture of him -- I mean 10 this has tremendous value for Oracle and -- and Larry 11 Ellison. 12 MR. HORTON: Any of the sponsors for this 13 particular boat here in California? Is there any reason 14 that we -- that the Petitioner practiced outside of Long 15 Beach? Was there any benefit of being outside of Long 16 Beach? 17 MR. WENTHUR: That's what -- that's where -- 18 well, that's where the wind is. 19 MR. CONNOR: Aukland's windy -- 20 MR. HORTON: You have wind all over the world. 21 So -- 22 MR. CONNOR: But Aukland's particularly windy 23 and we don't have -- enjoy those kind of conditions in 24 San Diego where I live. So we commuted by bus to Long 25 Beach to train out in the Catalina gulch between Point 26 Fermin and Long Beach because it more -- 27 MR. HORTON: So -- 28 MR. CONNOR: -- similar to the -- the 33 1 conditions that we have in -- in Aukland. 2 MR. HORTON: So, the environment, the 3 conditions here in California or outside of California 4 were similar to where the race would take place? 5 MR. CONNOR: More similar than San Diego. 6 MR. HORTON: So there is a benefit in having 7 the boat stationed here? 8 MR. CONNOR: Well, it could have been anywhere. 9 It could have been in Aukland or it could -- it could 10 have been -- 11 MR. HORTON: But the decision -- the fact that 12 the environment was comparable to where you were going 13 to race, California was the right place to be. 14 MR. CONNOR: Oh, in Long Beach. 15 MR. HORTON: Long Beach. 16 MR. CONNOR: Oh, it would have been better if 17 there were another ten knots of wind, but -- 18 MR. HORTON: Gotcha. Thank you. 19 MS. YEE: Ms. Steel. 20 MS. STEEL: Well, I think if it's not 21 commercial use how you going to raise $13 million even 22 they put advertising on the mast -- am I saying right? 23 I don't know anything about the boat, but if you don't 24 do it then, you know, how you going to raise it? 25 So I think that's commerce use as is. This 26 case is different than most of other cases that they 27 don't want to pay Use Tax because they don't have any 28 intention to use it here. But it was really interesting 34 1 that Petitioner didn't say anything about that, what you 2 put it in here that State Board of Equalization before 3 all of us were born, 1950, that they wrote a letter here 4 that by the law that at the time of purchase a purchaser 5 did not intend to use the car -- this case it's a boat 6 in the State -- we will regard the tax as not 7 applicable. Means that they don't have an intention to 8 use it and never came back. So how you going to assume 9 that this boat was used in this State? 10 So I think that, you know, you can push it so 11 many other ways to charge taxes on this boat, but I 12 don't think this is really right. So, -- and another 13 question is the mast. It was broke. Can you use that 14 boat without a mast? 15 MR. WENTHUR: Impossible. 16 MS. STEEL: So you are -- so this -- this is 17 almost same as those case that we had that you -- you 18 have hearing aid that inside of your body that somebody 19 implant that then it's non-taxable; but outside that you 20 just attach to it that was taxable. That's the way we 21 interpret it. 22 Actually, Board of Equalization interpreted it 23 but we didn't vote it that way because it goes in one. 24 So, when mast broke and they shipped the mast outside of 25 the California, I think that was like whole -- same as 26 whole boat goes out. 27 So even we count that way, still that, you 28 know, it's non-taxable for this boat. That's the way I 35 1 interpret. 2 MR. LEONARD: Madam Chair. 3 MS. YEE: Yes, Mr. Leonard. 4 Actually, let me just see if the Department has 5 a response to Ms. Steel's -- 6 MR. SCHUTZ: I didn't -- there wasn't -- I 7 don't believe there there was a question there, so -- 8 MS. YEE: Okay. All right. Mr. Leonard. 9 MR. LEONARD: Yes, to the Department. Mr. 10 Wenthur at the end suggested that it is likely that 11 California will again host America's Cup race. Is it 12 now the policy of the Department and was it the policy 13 the last time we hosted the race to assert Use Tax on 14 every entry? 15 MR. SCHUTZ: There would be a number of 16 factors. When they purchased it. Where they purchased 17 it. 18 MR. LEONARD: Well, these are all new boats. 19 They all are shipped by land if they enter America -- 20 apparently this one was cross country from Rhode 21 Island -- so European or entries -- others will come up 22 by freighter to California, perhaps for training because 23 wind conditions are unique in every jurisdiction. 24 Tell me what's the difference. 25 MR. SCHUTZ: Yes. 26 MR. LEONARD: Why we wouldn't -- why -- how do 27 we distinguish between -- 28 MR. SCHUTZ: I think -- I mean, you look at the 36 1 time of when it was purchased, where it was purchased, 2 where first functional use occurred. We would -- we'd 3 follow basically the structures of 1620. Certainly, and 4 as -- as here with the other boat it's -- it's very easy 5 to sort of meet that particular 1620 test. 6 Here -- 7 MS. MANDEL: I think the other boat sank. 8 MR. LEONARD: So if -- if New Zealand's entry 9 met the same set of facts we'd assert a Use Tax against 10 that, correct? Is that what you're saying? 11 MR. SCHUTZ: If they -- if -- if it was first 12 functionally used -- if the first functional use 13 occurred and it was brought in to the State within 90 14 days and -- and that particular period -- the test has 15 changed now from 2002 to currently but, yeah, we 16 would -- we would assert Use Tax. 17 MR. LEVINE: I point out that we anticipate, 18 and I bet Mr. Connor can give chapter and verse, but I 19 would anticipate that the New Zealand boat will be 20 picking the most California-like weather off New 21 Zealand, in which case they will not come to California 22 in time for this question to even arise. 23 MR. LEONARD: Right. And that's my -- that's 24 not my question. If the facts are the same -- 25 MR. LEVINE: But if they came here for -- if 26 they came here for training, then they would have 27 purchased it for use in California. 28 MR. LEONARD: So were were you guys at NASCAR 37 1 in Fontana last weekend? I mean, seriously. Those are 2 expensive vehicles. Were you there? I mean, is that 3 what we do? Is that -- I mean we've driven a lot of 4 business out of California because of our tax policy, 5 but I never thought of NASCAR and America's Cup and now 6 I am thinking about them. 7 Did -- were you -- was the Board of 8 Equalization there? 9 MR. WENTHUR: And how about the Olympics next 10 time? 11 MR. HANKS: To my knowledge, no. 12 MR. WENTHUR: We're going to start taxing 13 bobsleds and skis? 14 MS. YEE: Mr. Wenthur, please. 15 MR. LEONARD: Were you guys there? 16 MR. HANKS: Not to my knowledge, Mr. Leonard, 17 no. 18 MR. LEONARD: I understand the Department's 19 definitions. I'm not sure they've ever been examined in 20 light of -- of this set of facts. I mean, I'm thinking 21 about aircraft that fly off the coast of California 22 carrying banners. Certainly it's a commercial use but 23 there's no product or passenger. And I assume 24 they're -- under FAA regulations they're -- they're -- 25 they may be in Federal waters but flying off the coast. 26 Do we -- do we deny anyone's request for Use -- or Sales 27 Tax exemption on -- on an aircraft towing a -- a banner? 28 And I think I've even seen boats off shore 38 1 towing banners advertising restaurants that are popular 2 in town. 3 Is -- so that -- so we just uniformly say 4 that's not a commercial use even though the -- it's an 5 income-producing enterprise but it doesn't have your 6 idea of a product or a passenger so it doesn't qualify? 7 MR. SCHUTZ: If it was merely off the -- the 8 California coast I think we wouldn't -- we wouldn't 9 consider that to be foreign -- foreign commerce. It 10 might be a business enterprise -- 11 MR. LEONARD: Right. 12 MR. SCHUTZ: -- but it's not foreign commerce 13 because it's not -- you're not going to a -- a foreign 14 port or other State jurisdiction. 15 MR. LEONARD: So the -- the real -- I guess the 16 real legal dispute here is -- is the foreign commerce 17 definition, do you have to touch a foreign shore or can 18 you merely leave California waters for periods of time 19 to engage in your enterprise and then return to be 20 qualified as foreign or interstate commerce. 21 MR. LEVINE: Can I ask a -- 22 MR. LEONARD: Mr. Levine. 23 MR. LEVINE: -- clarification because I think 24 we're getting -- we have two separate concepts here. 25 One is 1594, it's statutory. The other 1620, 26 commercial -- use in commercial interstate or foreign 27 commerce, that's not based on interstate or foreign 28 commerce. That's actually based on the concept of 39 1 purchase for use. And there's no statutory support for 2 it. It's something the Board added to the regulation. 3 Therefore, as long as it's in the regulation it's the 4 law, we follow it. 5 But there is nothing in the statute to support 6 the concept that interstate or foreign commerce within 7 the State of California constitutes not for use in 8 California. But that's what the reg. says. 9 It really does not tie into any Federal law or 10 Federal requirements for interstate or foreign commerce. 11 It's an interpretation of physicality. Is it purchased 12 for use in California? 13 The other one, 1594, that one does tie into the 14 specific statute that says principal use for carrying 15 people or property in interstate or foreign commerce. 16 MR. LEONARD: Did the -- 17 MS. MANDEL: And it's -- it's the latter one 18 where you were saying to me it's a question of chicken 19 and egg? 20 MR. LEVINE: Yeah, 1594. 21 MS. MANDEL: Oh. I just want to keep it 22 straight. Okay. Yeah. 23 MR. LEVINE: But 1620 you can get caught up in 24 the interstate it's not for the purpose of interstate 25 commerce, it's for the purpose of defining is it 26 purchased for use in the State. 27 MR. LEONARD: The other question I had -- thank 28 you, Mr. Levine, I think. The other question was the 40 1 training issue. We've had other taxpayers assert 2 that -- that it was the -- the operation of the boat, 3 plane or car was not for the intended use but for 4 training the crew how to use it properly when they did 5 enter into its intended use. Where do we stand on -- on 6 that as a definition? 7 Do we always tax or do we sometimes tax or 8 never tax? 9 MR. SCHUTZ: Are you -- are you -- I guess to 10 clarify you're talking under the 1620(b)(4) versus 11 the 15 -- 12 MR. LEONARD: You can pick any one you want. 13 All of them. I mean, that's -- just like a general 14 policy, how -- how do we apply it? Do we ever ask an 15 owner of a -- a vessel, aircraft or vehicle to document 16 the training as -- as when it's -- when it's clear it's 17 training and not the intended commercial use of the -- 18 of the item? 19 MR. SCHUTZ: I believe under -- 20 MR. TUCKER: 1593 -- Regulation 1593 refers to 21 personnel training for use in aircraft and I believe it 22 said that we do not regard it as operational use. 23 MR. LEONARD: Okay. Fine. Does that apply 24 here? 25 MR. TUCKER: We're not -- in general we're 26 looking at whether it's operational use versus the use 27 of the aircraft. And so that's not necessarily what 28 we're talking about under these circumstances. And 41 1 it -- 2 MR. LEONARD: Why not? 3 MR. TUCKER: Well, in this case because it's 4 specific to aircraft as -- as imposed by the regulation. 5 MR. LEONARD: The statute is specific to 6 aircraft or just our reg.? 7 MR. TUCKER: The regulation is specific. 8 MR. LEONARD: Yeah. Is the statute more 9 generic and we just adopted a reg. and apply it to 10 aircraft? 11 MR. LEVINE: It -- the -- the exemption for 12 aircraft, 6366 and 6366.1 is for aircraft sold or at 13 least to common carriers. And so, we've adopted a 14 principal use test. We've excluded some things and not 15 others. And as Mr. Schutz pointed out, if it's train -- 16 certain training just doesn't count in the test. 17 MR. LEONARD: Right. 18 MR. LEVINE: Other training does. But it's all 19 use. It's all use for purposes of general Sales and Use 20 Tax, but it's not operational use for purposes of 21 calculating whether the aircraft has qualified for the 22 common carrier since this is not common carrier, it's a 23 different test. 24 MR. LEONARD: Here we're talking about the -- 25 the six-month, 12-month, 90-day test. Is there -- is 26 there a parallel training anywhere for the time period 27 test? 28 MR. SCHUTZ: If -- if the training was merely 42 1 off the coast of California it wouldn't -- or within 2 California, if you were simply training flying from, 3 say, Oakland to Ontario, or you were merely training and 4 you were going outside the territorial waters of 5 California but not entering into another State, it 6 doesn't meet the interstate commerce or foreign commerce 7 test under 1620(b)(4). 8 If you were to -- if -- if your business -- if 9 your business was to fly people from -- from Portland, 10 Oregon to Eureka -- Eureka and you had a training 11 exercise where you're like, okay, we got -- we got to 12 teach this guy the route, and for that one particular 13 flight you could say certainly under 1620(b)(4) that 14 would be a business purpose and it -- and so it would 15 be -- meet the interstate commerce for that. But you're 16 entering into another State. You're entering into 17 another jurisdiction. 18 MR. LEONARD: I was setting aside interstate 19 commerce. I'm talking about the -- the month tests, 20 about is -- is training considered use? 21 MR. HORTON: Now, quick question, is there a 22 distinction -- 23 MR. LEVINE: Can I give you a simple answer? 24 MR. LEONARD: And your answer is yes. And I 25 assume your answer is -- 26 MR. LEVINE: It's yes, the -- the simple answer 27 is that there's no exclusion for training in these 28 tests. It's just a question of is it use? Is it 43 1 interstate use? 2 MR. LEONARD: That's in the law or in our 3 regs.? 4 MR. LEVINE: I would say it's in the absence 5 of -- there's nothing that says what I just said. 6 There's nothing that deals with training because that's 7 how we've always dealt with it. It's not specifically 8 excluded while it is in the aircraft exemption because 9 that's what by regulation the Board decided should be 10 not counted in that particular test. 11 MR. SCHUTZ: Right. Under 1594, since you're 12 not taking -- under that training, if you're not taking 13 persons or property for hire, it wouldn't meet as a 14 qualifying time or -- or operational use for 1594 15 because you're not taking it for persons or property for 16 hire, you're just merely training your own staff. 17 MS. YEE: Okay, Mr. Horton. 18 MR. WENTHUR: I disagree with that, as well. 19 MS. YEE: Okay. Hold on. 20 MR. HORTON: Just a question of staff. 21 MS. YEE: Mr. Horton and then Mr. Wenthur. 22 MR. HORTON: Can you define the type of 23 training that would qualify? Or are you saying that 24 training operational, functional training, training to 25 actually use the equipment? In this case it appears 26 that the training is to win the race. 27 MR. SCHUTZ: I think we have two things here. 28 We have location of the training, and there could be 44 1 because of the allocation of the training where the 2 training occurred it could not qualify under -- for the 3 1620. 4 MR. HORTON: As far as the time line is 5 concerned. 6 MR. SCHUTZ: No, as far -- as far as when the 7 time line, also where it occurred. If the training was 8 merely within the boundary of California or just outside 9 like here, just outside the territorial waters but it 10 never entered into another State or foreign country, 11 it's not going to meet foreign commerce or interstate 12 commerce under 1620(b)(4). 13 If the training was -- if your -- if your 14 business purpose is to -- to take people back and forth 15 again from -- from one state to another and you were 16 to -- to have some be -- for 1620(b)(4) you were to take 17 a person to train them in that business, that flight 18 could be considered a business -- commercial business 19 purpose flight for 1620(b)(4). For 1594, because it's 20 persons or property for hire it would not qualify. 21 MR. HORTON: So, are you saying that if -- if 22 you're training a person to operate machinery and that 23 training occurs here in California, and the training 24 takes 60 days just because of the nature of the -- of 25 the machinery and what it takes to just train an 26 individual, would that training count towards usage in 27 California? 28 MR. SCHUTZ: Yes, it would have. 45 1 MR. TUCKER: Absolutely. 2 Mr. Horton, in the case of the aircraft, the 3 training actually tends to work against the air -- the 4 aircraft companies, the common carriers. 5 MR. HORTON: I'm actually asking for 6 clarification. 7 MR. TUCKER: Okay. 8 MR. HORTON: It's a lead -- it's a leading 9 question. 10 MR. TUCKER: I understand. Okay, I'm sorry. 11 MS. YEE: Thank you. Mr. Wenthur. 12 MR. WENTHUR: If I can -- four -- four very 13 quick points. First, I want to read 1620(b)(4)(B)(2) 14 because I don't see a distinction between that and the 15 watercraft exemption. It states, "If the property is a 16 vessel Use Tax will not apply if one half or more of the 17 nautical miles traveled by the vessel during the 18 six-month period immediately following its entry into 19 the State are commercial miles traveled in interstate or 20 foreign commerce." 21 I don't see the difference between that and the 22 watercraft exemption. 23 That's point number one. Number -- point 24 number two, think of the commercial fishing exemption. 25 All you -- you have to show that more than one half of 26 your commercial fishing is outside of -- outside of 27 California territorial waters. They won't ever touch a 28 foreign port. And that's allowed as an exemption. 46 1 And then point number three. Point number 2 three, the letter ruling we obtained. The Department 3 granted the letter ruling to us, that it -- it was 4 exempt under Regulation 1620 for interstate commerce as 5 long as you met the training schedule, which we would 6 have met except for the mast breaking. 7 So they must view training outside of 8 California as -- as outside of California for interstate 9 commerce purposes. 10 Point number four, and this is the new cup. 11 The new cup. One-year test now for a resident, six 12 months for a non-resident. The Kiwis built their new 13 boat in Aukland. They're not going to be training that 14 boat -- that boat's going to have to come here to 15 California. And so now they're not going to be able to 16 come in before six months before the races to -- before 17 they finish the boat? They're not going to be able to 18 come here until six months before the race to get ready 19 for the race? Or Spain? Because we've got 14 countries 20 hopefully coming for this next one. 21 These are all -- this is all foreign 22 international commerce. All this stuff happens. The 23 last race, 30 miles off shore is where we were racing. 24 And these things don't happen in California. We need to 25 be logical about this. 26 MS. YEE: Thank you, Mr. Wenthur. Let me go to 27 Mr. Horton and then I'd like to -- Mr. Levine, if you 28 could set into perspective for us the -- the letter 47 1 ruling. Okay. Mr. Horton. 2 MR. HORTON: The -- I mean, the purpose of the 3 statute or -- or the interpretation of the statute, as I 4 understand it, I'm asking this question hopefully to get 5 some clarification -- is to -- is to determine the 6 purpose, the intended purpose. Was it intended to be 7 used in the State of California? 8 And so, we've come up with these different 9 qualifying factors to make that determination. And so I 10 have to share that part of what concerns me is, is that 11 the benefit derived from having the offshore 12 environmental conditions similar to that of the race and 13 the other benefit seems to be having sponsors being 14 able -- that are here in California or nearby, they can 15 come out and sort of participate in this activity. 16 So to the extent that there's an intended 17 purpose that's associated with California and the point 18 of origin is California, and there is no transportation 19 of tangible personal property or person thereby 20 determined to be commerce, it's a little challenging. 21 Maybe -- and I'm asking the Petitioner if they 22 can kind of speak to those concerns and help me out a 23 little bit. 24 MR. WENTHUR: Yeah. First of all, I'm not sure 25 where you're getting your information from about -- 26 these are -- these are sponsors all around the world. I 27 don't know where you're getting this information about 28 California sponsors. You may have one or two out of the 48 1 30, but these are large international sponsors that -- 2 MR. HORTON: I think I got it from the 3 testimony that said -- I think there was a question that 4 said while you're practicing off the California coast is 5 that -- does that provide a commerce activity whereby 6 the 17th person can participate in that activity, can 7 actually observe that activity, and if I'm not mistaken 8 the response was, yes, it does and it did in fact, that 9 people sort of -- we had over 300 sponsors and many of 10 them wanted to participate off the California coast 11 during the practice. And the practice served a -- a 12 value in the overall marketing of the product, in this 13 case the boat. 14 MR. WENTHUR: The practice occurred outside of 15 California. The sponsors would maybe fly in from 16 Atlanta, New York, London. This is -- so I'm not sure 17 where you're going with it. 18 MR. HORTON: No, I'm not saying where they 19 live. I'm trying to determine if California had a 20 value, if there was a decision that was made to actually 21 locate here in California for the benefit of being able 22 to practice off of Long Beach. 23 MR. WENTHUR: No. 24 MR. HORTON: Or it just happened that way 25 because the sail broke and somewhere else and we just 26 happened to come to California, and it happened to have 27 similar training opportunities? You could have done it 28 anywhere, why come to California? 49 1 MR. CONNOR: Well, I lived in San Diego, so it 2 was from a selfish standpoint. Myself and several of 3 our key crew lived in San Diego. So it made it more 4 convenient that I wouldn't have to move my family and 5 their families to train in a better site. 6 It would have been best to train -- train in 7 Aukland, but that's a long -- long way away. 8 And as far as the -- 9 MR. HORTON: At what point did you make that 10 decision? 11 MR. CONNOR: Well, it was my 8th cup so I've 12 been at it for a while. And it's always better to train 13 in the venue where you're going to -- 14 MR. HORTON: That was kind of premeditative 15 when you purchased the boat. 16 MR. CONNOR: No, it was just like California 17 was on the way to Aukland. Because the boats were built 18 in Rhode Island and they had to -- they had to -- the 19 best way to do it is to head west. So they came here 20 kind of on the way. As far as the training, it would 21 have been best to go all the way to Aukland. And as far 22 as the sponsors, they'll -- they'd go wherever the boat 23 was. 24 When we trained in Hawaii they -- obviously 25 they came to Hawaii for the same reasons, to sail on the 26 boat. 27 MR. HORTON: So the fact that you lived here 28 and most of the folks who assist in operating the boat? 50 1 MR. CONNOR: Well, I would say 10 or 15 percent 2 of the hundred-person team -- ten would have lived in 3 San Diego. So it was more convenient from a -- just a 4 personal gratification standpoint. Our friends could go 5 up and watch and it was more fun to train here than it 6 would have been in Aukland. 7 MR. HORTON: Okay. Thank you. 8 MS. YEE: Thank you. Mr. Levine. 9 MR. LEVINE: The letter ruling has had -- and 10 granted it was because of a change of circumstances, but 11 this was purely on the 90-day test and the principal use 12 test and nothing else. And it related -- this is an 13 objective test. In many of Mr. Wenthur's -- for many of 14 Mr. Wenthur's clients, they benefit from the subjective 15 test when practically they're buying the 16 vehicle/vessel/aircraft for use in California. We all 17 know it. 18 But if they meet the objective test -- here it 19 was a 90 days, if they kept it out more than 90 days of 20 use, even though they really bought it for use in 21 California, legally we'll regard it as not purchased for 22 use in California. 23 And the same thing goes the other way. The -- 24 the intent rule is if you never intended to bring it 25 into California and then something happened, it's not 26 something happened to change your intent to satisfy the 27 test, it's a change in intent to never bring it to 28 California. 51 1 Here the legal advice was if you do what you 2 are planning it won't be taxable. And unfortunately 3 they couldn't. It's an objective test. And that's all 4 it said. It said document it -- you need to document 5 it. And what the writer did, apparently, is he counted 6 the hours in a spreadsheet of when the vessel would be 7 in the State versus when it wouldn't. During the 8 six-month test period he counted a little over 2,000 9 inside California and over 2200 outside California, and 10 based on that he said it will be outside of California 11 more than half the time, if you comply with your plans. 12 And that's all it said. 13 MS. YEE: Very well. 14 MR. WENTHUR: I do not disagree with that. 15 That's what the ruling was. 16 MS. YEE: I think we know where you stand on 17 that. Thank you. 18 Other discussion, Members? 19 Very well. Hearing none, is there a motion? 20 MS. MANDEL: Take the matter under submission. 21 MS. YEE: Motion by Ms. Mandel to take the 22 matter under submission. Is there a second? 23 MR. HORTON: Second. 24 MS. YEE: Second by Mr. Horton. 25 Without objection, such will be the order. 26 Thank you both very much. 27 MR. WENTHUR: Thank you very much. 28 MS. YEE: And we will discuss your matter later 52 1 today and send you written notice of our decision. 2 Thank you. 3 ---oOo--- 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 53 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 February 24, 2010 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 53, 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 21, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 54