BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT MARCH 23, 2010 ITEM B1 FRANCHISE AND PERSONAL INCOME TAX HEARING APPEAL OF GRANITE ROCK COMPANY (No. 420038) BRUCE W. WOOLPERT AND ROSE ANN WOOLPERT (No. 420171) BRUCE G. WOOLPERT AND MARY E. WOOLPERT (No. 420181) STEPHEN G. WOOLPERT AND ELIZABETH M. WOOLPERT (No. 420221) ARTHUR WOOLPERT (No. 420187) MARIANNE WOOLPERT (No. 240219) JOSEPH WOOLPERT (No. 420222) and MELISSA E. WOOLPERT (No. 420223) AGAINST PROPOSED ASSESSMENT OF ADDITIONAL TAX Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 For the Board Betty T. Yee of Equalization: Chair 4 Jerome Horton 5 Vice-Chair 6 Barbara Alby Acting Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane Olson Chief, Board 13 Proceedings Division 14 For Board of Amy Kelly 15 Equalization Staff: Tax Counsel 16 For Franchise Tax Daniel Biedler 17 Tax Counsel: Tax Counsel 18 Terry Collins Tax Counsel 19 For Appellant: David Colker 20 Attorney at Law 21 Bruce W. Woolpert Taxpayer 22 ---oOo--- 23 24 25 26 27 28 2 1 Sacramento, California 2 March 23, 2010 3 ---oOo--- 4 MS. OLSON: Our next item is B1, Granite Rock. 5 Please come forward. 6 MS. YEE: Okay. 7 MS. OLSON: Board Proceedings has received 8 contribution disclosure forms for this afternoon's 9 hearings from the parties, agents and participants. All 10 forms were properly completed and signed. No 11 disqualifying contributions were disclosed. All 12 parties, agents and participants are on the Alpha 13 listing provided to your office. 14 Each person sitting at the table will be asked 15 to introduce themselves and if necessary their 16 affiliation with the taxpayer for the record. 17 Ten minutes is allocated for the taxpayer's 18 opening presentation followed by ten minutes for the 19 Department's presentation and five minutes is allocated 20 to the taxpayer for rebuttal. 21 Ms. Yee. 22 MS. YEE: Thank you, Ms. Olson. Let me have 23 Ms. Kelly introduce this case and particularly if you 24 maybe can recap where we are with respect to the 25 outstanding issues. 26 MS. KELLY: Yes. Thank you. 27 Good afternoon, Madam Chair, Members of the 28 Board. The third issue in this appeal is agreed by the 3 1 parties and therefore resolved. That issue concerned 2 whether the claimed refund amounts contained costs 3 incurred before the effective date of the Manufacturer's 4 Investment Credit and the parties agree that they do 5 not. 6 So, the remaining issues in this appeal are, 7 first, whether Appellant's mining activity ended at the 8 point at which it stockpiled crushed unwashed rock in 9 stockpiles for quantities to the public, so that the two 10 and a half mile conveyor belt at issue was used after 11 Appellant's asphalt manufacturing began, a qualified 12 activity for purposes of the Manufacturer's Investment 13 Credit. 14 Or whether the mining activity ended later, at 15 the point at which the crushed and unwashed rock was 16 washed and transported briefly by rail to Appellant's 17 hot plant so that the two and a half mile conveyor belt 18 was used as part of its mining activity, which is not a 19 qualified activity. 20 Second, assuming Appellant's mining activity 21 ended at the point the crushed unwashed rock was 22 stockpiled for quantities to the public so that the two 23 and a half mile conveyor belt was used after asphalt 24 manufacturing began, was its undisputed use removing 25 decanted fines or waste to the embankment area part of 26 the asphalt manufacturing process and thus eligible for 27 the MIC. 28 MS. YEE: Okay. Thank you very much, Ms. 4 1 Kelly. Good afternoon, gentlemen. 2 MR. COLKER: Good afternoon. 3 MS. YEE: If you'll introduce yourselves for 4 the record, you have ten minutes for your presentation. 5 MR. WOOLPERT: I'm Bruce Woolpert with Granite 6 Rock. 7 MS. YEE: Okay. 8 MR. COLKER: Thank you. I am David Colker with 9 DLA Piper, for Granite Rock. 10 MS. YEE: Great. Thank you. Please proceed. 11 MR. COLKER: Bruce and I would like to first 12 thank Tax Counsel Amy Kelly for helping the parties 13 narrow the issues in this case. In particular the 14 prehearing conference process worked very well. 15 As set forth in the hearing summary there are 16 now two issues for this Board to address. In 17 considering these issues it is important to recognize 18 that it is agreed that there are two activities 19 occurring at the large Aromas site, hard rock mining and 20 hot mix asphalt manufacturing. 21 As Ms. Kelly said, the first issue for this 22 Board is whether the specialized washing facility at the 23 Aromas site is the last step of hard rock mining or the 24 first step of asphalt manufacturing. 25 I'm going to briefly summarize why we believe 26 it is the first step in asphalt manufacturing. The 27 specialized washing facility processes a raw material 28 input which is unwashed aggregate in the manufacture of 5 1 hot mix asphalt by changing the quality and character of 2 that raw material input to make it suitable for mixing 3 with the asphalt binder. This constitutes part of a 4 manufacturing activity under the applicable law. 5 The washing is essential to the hot mix asphalt 6 production because it provides a suitable clean surface 7 to which the liquid asphalt binder will adhere, thus the 8 sole purpose for the specialized washing facility at the 9 Aromas site, as is stipulated by the parties, is to meet 10 the specific Federal and State requirements for the 11 manufacture of hot mix asphalt. There is no other 12 reason for the specialized washing activity. 13 If the hot mix asphalt manufacturing 14 requirements change then we must change that specialized 15 washing facility to meet those requirements. 16 The undisputed evidence in the case also makes 17 clear that hard rock mines simply do not have 18 specialized washing facilities. Mr. Woolpert has so 19 testified and has Mr. Hambly, President of the 20 California Construction and Industrial Materials 21 Association through declaration previously provided to 22 the Board. 23 We also surveyed the hard rock mines in the 24 region. None of them have specialized washing 25 facilities. And the reason is clear. Hard rock mines 26 produced an unwashed finished product that is sold in 27 large quantities to the public. There are no mining 28 requirements applicable to hard rock mines concerning 6 1 the washing of product. 2 The applicable SIC codes are also instructive. 3 The SIC code for hard rock mining does not include a 4 washing activity. However, the SIC code for sand and 5 gravel mining does include a washing activity. Sand and 6 gravel materials come from a riverbed and those 7 materials are contaminated with clay and mud and dirt 8 and other items. And they must be removed to make a 9 saleable product. 10 In contrast, a hard rock mine, such as the one 11 at the Aromas site, has never been contaminated. The 12 granite is simply mined, crushed and sold to customers. 13 So the presence of the washing activity in the SIC 14 description of sand and gravel mine and the absence of 15 the washing activity in the SIC description of a hard 16 rock mine further confirms the taxpayer's position. 17 For these reasons we ask the Board to resolve 18 the first issue by concluding that the specialized 19 washing facility is in fact part of the asphalt 20 manufacturing activity. 21 The second issue in this case is whether the 22 conveyor at the Aromas site that is necessary for the 23 continued operations of the asphalt manufacturing 24 activity is qualified property. First, under the 25 stipulated facts it is now agreed that the conveyor is 26 necessary for the asphalt manufacturing operations to 27 continue. If the conveyor stops working then the 28 asphalt manufacturing operations will be required to 7 1 shut down in as quickly as two days. 2 The law is clear and this Board has ruled that 3 assets that are necessary for continuing manufacturing 4 operations are qualified property. The Board so held in 5 appeal of Foster Poultry Farm. 6 Also under the stipulated facts the function 7 of the conveyor is to transport manufacturing waste at 8 the Aromas site so as to allow continued operations. 9 There is no case that holds that assets used to 10 move waste at a manufacturing site are not qualified. 11 And in the Board's own regulations there's an example 12 that indicates that a forklift used to move raw 13 materials is qualified property. 14 So the fact that something is moved as a 15 necessary part of operations is not a disqualifying 16 activity. 17 It is significant that the Board has treated 18 manufacturing operations as including qualified property 19 in many cases where the manufacturing operations must 20 have included assets to move wastes. Yet the Board has 21 never singled out those assets and denied the MIC credit 22 to them. 23 We cited the California Steel case as an 24 example where acid was used to remove impurities. It's 25 obvious that that acid wasn't allowed simply to fall 26 onto the floor. The operations had to have pipes and 27 systems to move those wastes out of the plant in the 28 same way that our conveyor system moves the wastes out 8 1 of the operation area to the canyon. 2 This case is unusual because of the large scale 3 of the operations at the Aromas site. However, the MIC 4 credit should not be denied for that reason. If instead 5 of a long conveyor there was a short pipe that allowed 6 the fines from the specialized washing facility to flow 7 into an adjacent settlement pond there likely would not 8 be a dispute. 9 Mr. Biedler argues in his March 19 brief that 10 the conveyor is not qualified property because it is not 11 pollution control equipment. We agree the conveyor is 12 not pollution control equipment. However, that 13 conclusion is not relevant as to whether the conveyor is 14 a qualified manufacturing asset. There is nothing in 15 the law that states that conveyers cannot be qualified 16 manufacturing assets. And we have no doubt that many 17 operations employ conveyers. 18 Whether a conveyor is a qualified manufacturing 19 asset depends on its function. Under the case law and 20 under the stipulated facts, the conveyor in this case is 21 a qualified manufacturing asset because it operates on 22 the manufacturing site. It primarily supports 23 manufacturing activities. And it is necessary to those 24 activities. That is all the law requires. 25 Mr. Biedler also argued in his March 19th brief 26 that the conveyor is not a manufacturing asset because 27 it is a mining asset. However, if the Board resolves 28 the first disputed issue in the taxpayer's favor then 9 1 that argument also is not relevant, because it is 2 stipulated that the conveyor does not operate in support 3 of the hard rock mine. The conveyor's operations 4 support the specialized washing facility. 5 In summary, the taxpayer believes that based on 6 the stipulated facts the Board should resolve both 7 issues in its favor. The evidence shows that the 8 specialized washing facility is indeed the first step in 9 asphalt manufacturing. It changes the character of the 10 raw material input. 11 Washing facilities such as the one at the 12 Aromas site are never part of hard rock mines and all of 13 the evidence in the record is consistent with that 14 determination. The only reason the washing facility 15 exists is to meet the manufacturing requirements for 16 asphalt production. 17 Second, the conveyor is a qualified asset 18 because it's located on the manufacturing site and is 19 necessary for the continued operations at that site. 20 However, even if this Board were to conclude that this 21 is a close case then under settled law the Board should 22 still resolve the case in favor of the taxpayer. 23 In Appeal of Save-Mart Supermarkets this Board 24 stated the MIC legislation should be liberally 25 interpreted in favor of taxpayers in order to effectuate 26 the purposes of the legislation. And in California 27 Steel the Board said again, as we have previously 28 stated, underlying our approach to the MIC is our belief 10 1 that the MIC should be interpreted liberally in favor of 2 the taxpayers. 3 For all of these reasons we respectfully 4 request that the Board resolve this case in favor of the 5 taxpayers. Thank you. 6 MS. YEE: Thank you very much, Mr. COLKER. 7 Mr. Woolpert, do you wish to make any statement 8 at this time? 9 MR. WOOLPERT: Not at this time. 10 MS. YEE: Okay. We'll give you time on 11 rebuttal. Thanks. 12 Franchise Tax Board. 13 MR. BIEDLER: Madam Chairwoman, Members of the 14 Board, my name is Daniel Biedler. To my right is Terry 15 Collins. And we represent Respondent Franchise Tax 16 Board. 17 The waste conveyor belt at issue in this case 18 is not qualified property for purposes of the MIC for 19 two reasons. 20 First, because it is used in the preparation of 21 quarry materials for sale, or whatever other use someone 22 might put them to. 23 Secondly, the conveyor which handles waste 24 material only does not meet the definition of qualified 25 property within the statute and regulations. 26 As the Board hearing summary very well pointed 27 out, the operations of the quarry are to extract hard 28 rock from the face of the quarry, crush it, sort it, and 11 1 in this case with this quarry, to wash it in preparation 2 of aggregate of various sizes in a washed or unwashed 3 condition, to be made ready for sale to the public or, 4 as in this case, for the taxpayer's -- the Appellant's 5 own use. 6 As a quick aside, the SIC code description for 7 the manufacture of asphalt does not mention washing of 8 unwashed aggregate, be it granite or other material. So 9 the lack of the mention in the SIC code should not be 10 considered definitive if it's not mentioned in the 11 mining SIC codes from Division B. 12 The definition of qualified property is 13 tangible personal property that is primarily used for -- 14 and I'm going to paraphrase a bit here for brevity, 15 manufacturing, processing or recycling of something, of 16 another type of property. 17 The definition of manufacturing is of 18 converting or conditioning property, the property being 19 converted or conditioned, by changing the form, 20 composition, quality or character of the property for 21 ultimate sale. Definition of processing, physically 22 applying the materials and labor necessary to modify or 23 change the characteristics of property. 24 The waste conveyor belt is -- and may I also 25 make the point that we're not talking about the wash 26 plant. We're talking about a conveyor belt that's 27 separated by some distance and a couple of steps. The 28 water from the wash plant goes to a settling plant where 12 1 it is then transported by truck some distance to the 2 other side of the quarry, put in piles in the drying 3 fields where it's left to sit for a period of time 4 before finally being put on the conveyor belt for 5 disposal in the canyon 2.5 miles away. 6 This is waste. The fines are not materials 7 that are recycled. They're not reintroduced in the 8 process. The conveyor belt has no contact with the 9 material that's eventually sold, washed aggregate. It 10 is disposing of a waste material of a product produced 11 for sale at the quarry. 12 Waste handling is not a qualified use, except 13 for pollution control. The statute specifically 14 includes pollution control as a waste handling activity 15 that is includable in the MIC but only where it's done 16 to meet or exceed local regulation for pollution 17 control. 18 The taxpayer chose through whatever 19 decision-making process to dispose of its fine waste 2.5 20 miles away in a canyon. It could have used a settling 21 pond as it had before if it was able to find -- procure 22 one or had the materials trucked out, perhaps. But it 23 didn't. There is no regulation that requires the 24 disposal of the fines in the canyon two and half miles 25 away. There is no regulation of the quarry of which I'm 26 aware that requires the fines to be disposed of in that 27 quarry. And the fact that but for the removal from the 28 quarry floor of the -- the fines -- the -- the water not 13 1 yet -- the water fines, is necessary not only for 2 continued washing but eventually it would flood the 3 entire quarry and they couldn't do any quarrying, 4 either. 5 So this is necessary for more than simply 6 washing aggregate. This is for the whole quarry to 7 operate. For these reasons Respondent contends that 8 this is not qualified property. 9 I'm happy to take any questions. 10 MS. YEE: Right. Thank you very much. Mr. 11 Collins, any comment at this point? 12 Okay. Thank you. You have five minutes on 13 rebuttal. 14 MR. COLKER: Thank you. I'd like to quickly 15 address a few of the points raised by counsel. The 16 finished product of the hard rock mine is the unwashed 17 aggregate. And that is the testimony of the -- of Mr. 18 Woolpert and of the experts whose declarations we have 19 provided to you. 20 There are no hard rock mines that produce 21 washed aggregate. So, Mr. Biedler's conclusion that the 22 washing facility is part of the hard rock mine is simply 23 contrary to the evidence and it's contrary to the mining 24 industry practices. 25 We think it is significant that the SIC code 26 does single out washing when it speaks of sand and 27 gravel mines. So it's very clear that the drafters of 28 the SIC code were aware of which type of mines involved 14 1 washing and which type did not. So I think in that case 2 the inclusion of the SIC code is evidence that hard rock 3 mines do not have washing. 4 With respect to asphalt manufacturing we are 5 relying on the Board's own rules which define when 6 manufacturing begins. It begins, as Mr. Biedler stated, 7 when the raw material input is processed. And the 8 evidence is undisputed that the sole purpose of the 9 washing facility is to process that raw material input 10 to change its character for the sole reason of making it 11 useable in the asphalt manufacturing activity. 12 Now, we're not aware of any case where this 13 Board has held that an asset that moves waste is a -- is 14 disqualified from the MIC credit. Every manufacturing 15 operation is going to produce waste and is going to have 16 to move it off that manufacturing site. As we indicated 17 in the California Steel case it was obvious the acid 18 wash wasn't just falling on the floor, it had to be 19 piped out of the site. 20 As Mr. Biedler indicated, we used to pipe this 21 to a settling pond. If we had a 100 foot pipe moving to 22 a settling pond I don't think we'd have a dispute. But 23 we have the same function with the conveyor. It's 24 longer but it's on the site. It's necessary for the 25 operations and it should qualify in the same way that a 26 100 foot pipe would qualify. 27 We think that's the Board's holdings from the 28 cases we've cited. If an asset is necessary then it 15 1 should be part of the manufacturing activity when it's 2 on site and it's primarily used for that purpose. 3 Last, we think the pollution control issue is 4 really not the issue here. The issue here is how are 5 assets treated that are essential to the manufacturing 6 operation, itself. Thank you 7 MS. YEE: Thank you very much. 8 Mr. Woolpert, anything else? 9 MR. WOOLPERT: Nothing. 10 MS. YEE: Okay. 11 MR. WOOLPERT: At this time. 12 MS. YEE: Thank you. 13 Questions or discussion, Members? 14 Let me start. I guess I wanted to get a little 15 bit of clarification maybe from both parties. We have 16 two different types of activity that are happening at 17 this facility. We've got the hard rock mining and the 18 manufacturing. 19 And I guess I want to ask the question in the 20 reverse, what happens if the specialized washing process 21 does not exist? You can't manufacture your product, I 22 take it. 23 MR. COLKER: That is correct. 24 MS. YEE: Okay. And from the Franchise Tax 25 Board's perspective you believe the specialized washing 26 is part of the hard rock mining activity. 27 MR. BIEDLER: Right, there's no requirement 28 that the taxpayer only make this washed aggregate 16 1 available to their own hot asphalt manufacturing located 2 at the entrance to this property. How they could sell 3 it as well for other people to do the same. 4 MS. YEE: Okay. Mr. Horton. 5 MR. HORTON: Sir, your -- 6 MS. YEE: Which sir? 7 MR. HORTON: Pardon? 8 MS. YEE: Which sir? 9 MR. HORTON: Oh, my apologies, to the 10 Department. Your argument seems to be an argument of 11 location, proximity and not necessarily an argument of 12 law. Maybe you could -- an argument that the equipment 13 does not qualify -- well, I don't want to make the 14 argument for you, but the argument that it is two and a 15 half miles away is -- is an issue of distance. It's not 16 an issue of law or -- I don't believe it's even the 17 issue of determining whether or not it's a step in the 18 manufacturing process. 19 They could have very well had a plant in 20 California, then another plant in Texas that was part of 21 the continuation of the manufacturing process, if in 22 fact the location was a determining factor. 23 So, I have some issues with that, trying to get 24 down to where the -- your argument relative to the law 25 is and ultimately I'm going to ask you to share that. 26 The distinction between a settle -- settling pond versus 27 a location that is some 250 miles away again is an 28 argument of location, geographics and so forth. 17 1 So, if you could, just for my understanding, 2 focus your argument on the legal aspect as to why you 3 feel in any case law that supports that a washing of 4 this product for the purpose as described by the 5 taxpayer is not part of the manufacturing process. 6 And let me share as well that the last thing I 7 heard you reference to was, is that the product, itself, 8 could be sold -- didn't have to be used by the taxpayer 9 for manufacturing, it could be -- could have been sold 10 to someone else. But it wasn't. I don't know that we 11 have any evidence that that was the case. 12 And the fact that it was up for -- even if it 13 was up for sale that in itself means that someone 14 manufactured it so that it would be available for sale, 15 which in and of itself would make it part of the 16 manufacturing process. 17 So the logic that you've conveyed seems to 18 contradict your position. So -- and I only share that 19 to ask for further clarification. 20 MR. BIEDLER: Thank you, Mr. Horton, and due to 21 the involved nature of your question, please feel free 22 to remind me if I leave any parts out as I reconstruct 23 your question in my answer. 24 The -- our contention is that the washed 25 aggregate is a quarry product just as the various sizes 26 of unwashed aggregate. Washed aggregate -- the taxpayer 27 at the Aromas quarry can wash whatever sizes or 28 combination of sizes of the unwashed aggregate that is 18 1 already crushed and sorted to meet a customer's 2 prescription, a demand. 3 So, it could be done -- 4 MR. HORTON: Let me give you -- 5 MR. BIEDLER: -- it could be done to order. 6 MR. HORTON: -- another example. Let's say 7 you're mining diamonds and so you've got this diamond 8 and at some point it has to enter into a process where 9 it's purified and -- and prepared for the market. What 10 would be the difference? You can either sell it as a -- 11 as a raw material -- I mean you could actually sell the 12 diamond in its form in which it's been extracted from 13 the mines or you can now take it and -- and convert it 14 into a tool. You can convert it into jewelry or a 15 number of different other fashions. 16 How would the law distinguish -- and does that 17 compare? I mean is that relevant? 18 MR. BIEDLER: You're asking facts-based 19 questions to go back. As you asked earlier to the law, 20 the law requires that the equipment, in this case a 21 conveyor belt handling waste, be used in a qualified 22 activity. 23 The first question is, is it used in a 24 non-qualified quarrying activity or is it used as part 25 of a qualified manufacturing activity, manufacture of 26 asphalt? The facts as far as distance and separation 27 are context but aren't necessarily determinative. The 28 question in the first part is which SIC code is -- is it 19 1 fit into. 2 Leaving that for a moment, the second question 3 is, is the use to which the waste conveyor is put within 4 the required use of manufacturing. Qualified property 5 to be precise which can be manufacturing processing or 6 recycling. 7 This conveyor conveys material that is no 8 longer going to be changed into anything for sale. It's 9 just the waste. If it were 100 feet long or two and a 10 half miles long, it makes no difference. It just 11 happens to be 2.5 miles away, the distance from the 12 quarry to the canyon where the materials are disposed. 13 To use your illustration of -- of transport 14 between a site in California and a site in Texas, if 15 there was further requirement for processing before 16 something was saleable, hypothetically because the facts 17 can certainly vary, then it could very well potentially 18 could still be qualified property as part of a 19 manufacturing process. 20 The washed aggregate is a raw material input to 21 the manufacture of hot asphalt. And once it has been 22 taken there by the rail to the entrance of the -- the 23 property here that has an asphalt plant, it certainly is 24 then an input of raw material for that process. 25 The distinction we are making is that just as 26 the taxpayer crushes and sorts the rock for size, adding 27 a step of washing is another way it could provide 28 material for sale, which is -- would be the outer 20 1 boundary of the quarrying activity. 2 Have I answered your questions? 3 MR. HORTON: So, your -- your -- the crest of 4 your argument, if I -- if I may, Madam Chair. 5 MS. YEE: Yes, please. 6 MR. HORTON: The crest of your argument is that 7 the disposal of waste in a manufacturing process is not 8 part of the manufacturing process. 9 MR. BIEDLER: It does not meet the definition 10 of manufacturing or processing, correct. 11 MR. HORTON: Okay. Now -- now I think we're 12 getting somewhere. So, if this was a self-contained 13 piece of machinery that had a byproduct that was waste, 14 the disposal of that, however it was occurred, would not 15 be considered an integral part of the manufacturing 16 process that it was necessary that you dispose that 17 waste? 18 MR. BIEDLER: The statute doesn't require that 19 it be an integral part. It requires that it meet the 20 definition, which includes the alteration of property. 21 In this example it's arguably -- ignoring the first 22 question, the changing of washed aggregate -- unwashed 23 aggregate to washed aggregate. That would be the 24 washing equipment. 25 MR. HORTON: Right. 26 MR. BIEDLER: The material from there is waste 27 and it's not -- that conveyor belt is not changing the 28 aggregate, which has been washed, it's not even touching 21 1 the aggregate. So it's only handling as if it were -- 2 imagine it were a contractor who we're doing it for, 3 then they constructed a truck route or other line to get 4 it to wherever they were going to take it. It's post or 5 outside manufacturing. 6 MR. HORTON: Okay. May I -- 7 MS. YEE: Please. 8 MR. HORTON: To the same -- to the taxpayer, I 9 mean do you have -- is there any -- do you have a legal 10 argument that -- or case law that indicates that the 11 byproduct or the disposal of waste is actually 12 considered part of the manufacturing process? 13 MR. COLKER: Well, I think when we read the 14 Board's cases we do reach that conclusion, Mr. Horton. 15 In the appeal of Foster Poultry Farm it involves some 16 electrical equipment. And the Board concluded the 17 electrical equipment was qualified property because it 18 was necessary. Without that equipment the operations 19 couldn't function. 20 That electrical equipment wasn't changing 21 anything, but it was a necessary asset. 22 MR. HORTON: In that case what did the 23 electrical equipment do? 24 MR. COLKER: It helped to service the 25 manufacturing facility. So it was necessary for the 26 manufacturing facility to operate. 27 MR. HORTON: It provided electricity for the 28 facility. 22 1 MR. COLKER: Yes. 2 MR. HORTON: Well, that's -- 3 MR. COLKER: Yes, I'm saying so the rule -- 4 MR. HORTON: -- clearly part of the -- 5 MR. COLKER: Well, I would agree, it is -- it's 6 clearly part but we have a stipulated fact here that 7 without the conveyor belt this manufacturing system 8 would come to a halt. That this is also necessary. 9 It's just as necessary as the electricity. Electricity 10 may help start the process, but the process can't 11 continue without the conveyor. That's stipulated in the 12 record. 13 MR. HORTON: The Department is arguing that 14 once the manufacturing process is concluded, once the 15 product is fully manipulated, and any subsequent actions 16 is not part of the manufacturing process. I thought I 17 heard someone earlier said that there was case law to 18 support the fact that -- in fact I remember in your 19 testimony, I'm trying to help out here, is that if this 20 was a pipe where the waste would be drawn off of the 21 equipment and it's -- and it's then disposed of somehow, 22 that pipe in and of itself would -- or -- or let's say 23 it was a -- a pump that pumped the water off, and so 24 that pump itself would be part of the manufacturing 25 process. 26 MR. COLKER: Yes. Yes. We would contend that 27 all of the Board's cases have allowed those types of 28 assets and have never once pulled them out and treated 23 1 them as non-qualifying assets. So in the California -- 2 in the case we cited involving California Steel, you 3 have to move the acid waste somehow out of that plant. 4 It has to be put into pipes. It has to be pumped. Yet 5 the Board did not say those are non-qualifying assets. 6 And in the Granite Construction case, which is our 7 competitor, the Board allowed the pipes that move the 8 waste to the settling pond. 9 So there's never been a case where you've 10 pulled those assets out and we would ask that you not 11 announce that rule today. 12 MR. HORTON: But is -- is it -- I'm sorry, sir. 13 Is the Department aware of the California Steel case? 14 MR. BIEDLER: Very much, sir. 15 MR. HORTON: And would you characterize it the 16 same way? The same way. 17 MR. BIEDLER: I would point out that none of 18 the precedential citeable cases that the Board has 19 published on the MIC nor any of the non-precedential 20 citeable cases that the Board has considered have 21 addressed specifically the question of waste handling 22 property. 23 Simply because the -- the Respondent hasn't had 24 the occasion for whatever combination of reasons to 25 bring it to your Board's attention for consideration 26 should not be considered, we would contend, to be a rule 27 to the reverse, that it should be allowable. 28 MR. COLKER: But that does mean for the entire 24 1 life of the MIC that no taxpayer has had this type of 2 asset pulled out and treated as non-qualified property. 3 We think that constant practice is evidence of the way 4 the Board has been interpreting, you know, this set of 5 facts. 6 MS. YEE: Okay. 7 MR. HORTON: Thank you, Madam Chair. 8 MS. YEE: And thank you, Mr. Horton. 9 Ms. Steel, then Ms. Alby. 10 MS. STEEL: Taxpayer made it very clear here 11 that manu -- manufacturing is raw materials to -- going 12 into the process. Do you agree with that? 13 MR. BIEDLER: I'm sorry, could you clarify your 14 question? 15 MS. STEEL: Manufacturing is raw material into 16 the process. You know, to -- 17 MR. BIEDLER: The manufacturing process -- 18 MS. STEEL: Right. 19 MR. BIEDLER: -- begins when raw material is 20 introduced. 21 MS. STEEL: Yeah, then it's a manufacturing. 22 So what taxpayer is saying is after that they crushed 23 and they -- you know, rock that 88 percent of the 24 unwashed rock is sale to the public. So we are talking 25 about these 12 percent that it goes into manufacturing. 26 So, the waste removal going through 2.5 mile 27 conveyor belt, if it doesn't fit manufacturing process 28 then what you call that? 25 1 MR. BIEDLER: The definition used in the 2 statute limits Respondent's ability to allow the MIC. 3 And waste handling is not in the definition of 4 manufacturing or processing and the only place, as I 5 pointed out earlier, that any waste handling property is 6 allowable is for pollution control. 7 The raw material for asphalt, one of them, is 8 washed aggregate. So, absolutely, once the raw material 9 of washed aggregate has arrived at the location of the 10 asphalt plant, which is a short distance from the 11 washing machine in this case, then, yes, at that point 12 anything that's done to it, any machine used or property 13 used to do something to it could qualify. 14 MS. STEEL: But without using that conveyor 15 belt they cannot keep opening up, right? If you don't 16 move those waste. 17 MR. COLKER: That is correct, Ms. Steel. 18 The -- the waste can't be stacked. They're accumulating 19 a tremendous rate. So the entire operation -- 20 MS. STEEL: So that is part of it. I really -- 21 cannot really understand that what you are exactly 22 talking about by the law because it's very simple 23 process, it crushed, selling to the public, that's 24 mining. And then after 12 percent it's been washed try 25 to use it, but try to use that it's manufacturing that 26 they try to put asphalt. And then after that, that they 27 have to deliver those waste -- you know, how -- I -- I 28 went through all the laws, but how can you really 26 1 explaining that -- that why you don't count that as 2 manufacturing because it's one of the process that they 3 are going through. 4 MR. BIEDLER: If the taxpayer, for hypothetical 5 sake, took unwashed aggregate over to the hot plant and 6 washed it there, I think we'd have a lot clearer case. 7 Because that way we could say that all this aggregate 8 that was being washed was exclusively for their plant. 9 MR. COLKER: I guess I would only comment 10 that -- 11 MS. YEE: Hold -- hold on. 12 MR. COLKER: I'm sorry. 13 MS. YEE: Complete your thought, Franchise Tax 14 Board. Mr. COLKER, I'll give you an opportunity. 15 MR. BIEDLER: That is done alongside the 16 location of the final piles of -- of crushed and 17 screened, sorted unwashed aggregate doesn't limit 18 them -- now they might actually have funneled it to 19 their hot asphalt plant but they could have sold it for 20 other people to take to their hot asphalt plants to use. 21 So it's not a delimiter -- I don't want to read 22 a rule in reverse. 23 MS. STEEL: Well, you're talking about if you 24 don't use a conveyor belt then it's going to be okay, if 25 it's next to the site? Is that what you are saying? 26 You know, what, I really cannot get that -- you 27 know, what you trying to get in because between the 28 process, manufacturing versus mining at this point, and 27 1 then I really cannot get that after already they went 2 into the manufacturing and part of those manufacturing 3 is not manufacturing that you said because they have to 4 remove those waste, then what's that? 5 MR. BIEDLER: Question one is where does 6 manufacturing of asphalt begin and where does the 7 quarrying activity end. 8 MS. STEEL: I thought we already agreed that, 9 that you know it crushed and washed it at that spot, 10 that that's manufacturing begins. Because they try to 11 use is -- because they're already using. Most part of 12 it they are selling to the public. So, we are talking 13 about this 12 percent of the rocks that they are 14 crushing it. 15 MS. YEE: Yeah. 16 MS. STEEL: That's what I'm asking, because I'm 17 not -- you both are not really disputing about 88 18 percent of the rocks that they are selling to the 19 public. We are talking about manufacturing site. 20 MS. YEE: 88 percent of un -- 21 MS. STEEL: But that's what -- that's my -- 22 MS. YEE: -- unwashed rock. 23 MS. STEEL: Yeah, unwashed rock is already 24 clearly that, you know, we know it's mining. But we 25 talking about this 12 percent that going into the 26 manufacturing -- went into the manufacturing you said, 27 yeah, we are throwing those -- they -- the taxpayer is 28 throwing those waste away by the conveyor belt so that's 28 1 not manufacturing, then what you call that? Between -- 2 MR. BIEDLER: Manufacturing for purposes -- 3 MS. STEEL: Maybe, you know -- you know, I 4 don't know about this business, try to understand but, 5 you know, I -- mine is very simple that, you know, you 6 call manufacturing or mining. Mining already done deal 7 because you both agree. We talking about this 12 8 percent of it. So they already went into it and you 9 agree because they are putting into the asphalt, right? 10 And then after that that waste was removed. So 11 that part is not manufacturing, then what is it? 12 MR. BIEDLER: We can only allow the MIC for 13 property used within a certain strict definition. Our 14 contention is removing of waste that is not going back 15 into to be -- into the area to be treated or sold 16 itself, to simply be disposed, it doesn't fit within 17 that strict not necessarily common sense definition. 18 It is parsing of words, but the definition is 19 specific in the statute. Our contention is that it 20 doesn't fit within that definition. Whatever -- call it 21 waste disposal, but it's not manufacturing according to 22 this definition in the statute. 23 MS. YEE: Even though it's an integral part to 24 the manufacturing step -- 25 MR. BIEDLER: Which is not a test contained in 26 the statute or the regulation. 27 MS. STEEL: Can we give taxpayer to explain 28 that? 29 1 MS. YEE: Yeah. Mr. COLKER, can you clarify, 2 please? 3 MR. COLKER: I mean, our view I think is that 4 the -- you know, the statute is somewhat general. It 5 speaks of manufacturing activities described in the SIC 6 code. And we have identified what those manufacturing 7 activities are. And when we look to the Board cases the 8 rule we see is that assets that are necessary for the 9 manufacturing activities are qualified. 10 And this -- as I said, this is no different 11 than ten feet of piping. It's just a very long device. 12 But we have a very large site. And the regulations 13 define establishment as a single physical location. And 14 all of these activities are happening on a single 15 physical location. 16 It doesn't matter whether the washing facility 17 is 100 yards or a thousand yards from the asphalt plant. 18 It's the first step and it doesn't matter whether the 19 conveyor belt is 100 feet or a thousand feet from the 20 washing plant. It's still performing a necessary 21 integral function. And I think the FTB is asking for a 22 rule that has never been articulated. And for that 23 reason we would ask that the Board not adopt that now. 24 Thank you. 25 MS. YEE: Thank you. Ms. Alby. 26 Oh. Ms. Alby, then Mr. Horton, and Ms. Mandel. 27 MS. ALBY: To the Department. I guess we have 28 established that asphalt manufacturing process begins 30 1 with the washing of the aggregate. 2 MR. BIEDLER: That's the contention, but not 3 agreed. 4 MS. YEE: That's not agreed to. 5 MS. ALBY: All right. So -- and you agree that 6 the waste removal is necessary for the washing of the 7 aggregate to continue? 8 MR. BIEDLER: From a common sense perspective, 9 yes. 10 MS. ALBY: But you contend that the conveyor 11 belt is not used in manufacturing? 12 MR. BIEDLER: Correct. 13 MS. ALBY: It seems very inconsistent. Isn't 14 it possible that the conveyor belt serves a purpose 15 similar to a tailpipe on a motor used in manufacturing? 16 MR. BIEDLER: I'll accept your hypothetical, 17 certainly. 18 MS. ALBY: I mean that seems logical and makes 19 sense to me. That's sensible, I think. 20 MR. BIEDLER: We are left to apply the statute 21 and the definition of manufacturing, and this is the 22 position we're asserting. It is not necessarily a 23 common sensible, easy to apply always, but it is the 24 law. 25 MS. YEE: Mr. Horton then Ms. Mandel. 26 MR. HORTON: To the -- to the point of law, 27 it's your contention that the determination of whether 28 or not it's an integral part of the manufacturing 31 1 process is not a point of consideration in the law. Is 2 that right? Am I characterizing that right? 3 MR. BIEDLER: It's not enumerated in the law, 4 in regulation or the statute and it's not a part of any 5 published case to this point. 6 In other words, it goes -- it's a line -- it's 7 a way of analyzing that it has to fit within the 8 confines of the law, of the statute. And it hasn't been 9 found to by your Board, and your Board has not had 10 occasion to entertain this question directly. 11 Whatever the Department -- Franchise Tax Board, 12 Respondent, has had the occasion and opportunity to do 13 over the course of the MIC cases -- the cases that we've 14 experienced before your Board have led us down a path of 15 refinement. And this is where we are now. 16 MR. HORTON: And if that is not in the -- 17 refined in the law, would that cause you to go to the 18 intent of the law? Both -- if it's not defined 19 certainly you can go either way, and that is not 20 specifically defined to be -- I mean, the disposal of -- 21 of a byproduct from a manufacturing process from what 22 you're sharing is not specifically defined as part of 23 the manufacturing process. And -- but it's not contrary 24 to it, either. So, it seems to me at that point we 25 would go to the intent of the law and at that -- the 26 intent of the law as I would understand it would be to 27 say that any machinery and equipment used in the 28 manufacturing process would be qualified -- qualified 32 1 for the MIC. And then that would cause us to go to 2 determine whether or not the disposal of waste, I mean, 3 is part of the manufacturing process. 4 And -- well, let me -- let me digress for a 5 second here. Are you arguing that the disposal of the 6 waste is part of the mining process or it's an act 7 subsequent to the manufacturing process? It can only be 8 on one end of the spectrum. 9 MR. BIEDLER: If the answer to question one is 10 that the washing is part of quarrying, then the conveyor 11 belt is clearly a part of quarrying, mining. 12 If the answer to question one is that it's a 13 part of a production of asphalt then our position is 14 that because it cannot meet the definition of 15 manufacturing or processing in the statute it falls 16 outside of what the statute specifically and the 17 Legislature clearly chose by its words to allow the MIC 18 for. 19 The fact that recycling is specifically -- 20 MR. HORTON: Wait, let's just deal with this -- 21 MR. BIEDLER: Sure. 22 MR. HORTON: You -- you have an either/or 23 situation here. If we decide this way, this is how you 24 will argue. If we are looking at it this way, this is 25 how you will argue. 26 Sound -- and correct me if I'm not stating this 27 properly, it sounds like you said if -- if the 28 determination is that it is part of the washing, it can 33 1 be part of the mining or it can be subsequent to the 2 manufacturing. I don't think it can be both. It can 3 only be one and I'd like to know which one are you 4 arguing so I can focus on that. 5 MR. BIEDLER: Thank you for the opportunity to 6 clarify. We offer alternate grounds, which aren't 7 exclusive of one another for you finding that this is 8 not qualified property for the MIC. 9 The first is that it's used in a non-qualified 10 activity, mining, quarrying. 11 The second is that -- 12 MR. HORTON: Well, I can tell you I don't 13 believe that it's used in the mining process. I -- I 14 don't believe that. I mean, it is a -- it is an act 15 that occurs subsequent to the completion of the -- of 16 mining the product. The product's been mined, it's been 17 extracted. It's there. It's available for sale. 18 80 --88 percent of the time it is sold in that form, and 19 if you want to use it in another process and 20 particularly in the development of asphalt there are 21 specific regulatory environmental requirements that you 22 have to comply with in order to manufacture asphalt, 23 which causes it to have to be washed in order to be part 24 of the manufacturing process. 25 So, the -- the point that I'd like to -- to 26 hear the Department's position on is whether or not the 27 subsequent act, the -- the disposal of the waste is 28 considered in law part of the manufacturing process or 34 1 not. 2 If we were looking at this from a cost 3 accounting perspective I would venture to say that we 4 would probably attribute that cost to manufacturing. 5 The cost of disposal would be from an accounting 6 perspective in accordance with AICPA and all this other 7 stuff out there we would attribute it to. 8 But I know that that's not necessarily the way 9 the MIC is structured. Because there are lot of other 10 administrative costs and -- and so forth that wouldn't 11 qualify under the MIC. I get that. 12 So -- but I -- if you can tie the -- that end 13 of it up -- because you're only confusing -- not 14 confusing, but you're -- in my -- I'm hearing 15 contradictory arguments when you separate -- when you 16 bifurcate the two and you argue if it's this then that, 17 if it's this then that. I mean, so -- 18 MR. BIEDLER: Thank you, Mr. Horton. Both 19 arguments would exist, it being a waste handling would 20 still exist even if it were a quarrying activity. But 21 if we had determined it were a mining activity we 22 wouldn't have to get to that question. 23 So, we look at the second question, which is 24 only is it waste handling? Yes. Is waste handling 25 equipment qualified property? 26 MR. HORTON: What do you -- what do you think 27 they're doing with it? Are they processing waste? I 28 mean, this is a byproduct. 35 1 MR. BIEDLER: They're -- 2 MR. HORTON: They refill -- 3 MR. BIEDLER: They're transporting waste. 4 MR. HORTON: Okay. 5 MR. BIEDLER: They're -- they're not processing 6 it -- no, it doesn't meet the definition of processing. 7 MR. HORTON: They're transporting waste. 8 MR. BIEDLER: No changes are being made to the 9 fines. It's purely disposal of the waste. 10 MR. HORTON: Okay. 11 MR. BIEDLER: And that's outside the definition 12 of manufacturing in the statute. 13 MR. HORTON: Okay. Now that we've got the --- 14 that argument sort of tied down, does the taxpayer -- 15 MR. COLKER: I have just two -- 16 MR. HORTON: -- have some -- 17 MR. COLKER: -- brief comments. 18 MR. HORTON: -- evidence to the contrary? 19 MR. COLKER: Well, the Board's own regulations 20 say that a forklift that transports raw materials is 21 qualified property. So -- 22 MR. HORTON: Well, that transfers -- that -- 23 that particular reference dealt with a specific case 24 where they were actually transporting it within the 25 manufacturing process. I would suggest that you can -- 26 you focus on the byproduct and the waste after the 27 product has been manufactured. 28 MR. COLKER: Well, I think there's two things 36 1 then, Mr. Horton. First that the statute does have 2 specific exclusions. So, the statute not only describes 3 manufacturing as a qualified activity, and we think 4 assets that are integral to that process would be a 5 natural meaning of what manufacturing means, but the 6 statute goes on. There are specific statutory 7 provisions that exclude assets from the MIC. 8 And we -- we listed those in our brief, but 9 furniture, facilities used for warehousing, there's a 10 long list of assets that the Legislature put in the MIC 11 to clarify whether these assets could be viewed as part 12 of manufacturing or not. 13 And so, the Legislature did think about what 14 does manufacturing mean and what it doesn't mean. And I 15 think the fact that moving waste when it's an integral 16 and necessary part of manufacturing was not included in 17 that list suggests that the Legislature did think about 18 excluded assets and this is not on the list of excluded 19 assets. 20 A much more natural meaning is that if an asset 21 is integral to manufacturing, it is part of 22 manufacturing. 23 Given the intent of the legislation to 24 encourage investment, it would be a very bizarre 25 interpretation of legislative intent to think that they 26 would have intended to exclude assets that are integral 27 to the manufacturing from what manufacturing is. 28 And as I said, we've never seen any indication 37 1 of that in the history of the MIC. 2 MS. YEE: I guess let me kind of piggyback on 3 that point to the Franchise Tax Board. The concept of 4 reintroducing the waste that's removed back into the 5 manufacturing process, is that -- where does that come 6 from? 7 MR. BIEDLER: The definition of recycling. 8 MS. YEE: Definition of recycling. Okay. So 9 one of the -- 10 MR. BIEDLER: Where the waste is -- is 11 converted into a product for sale then it's -- that 12 specialized equipment is -- is allowable. 13 MS. YEE: Okay. I'm trying to track your 14 arguments with respect to waste removal and, Ms. Kelly, 15 can you -- 16 MS. KELLY: Ms. Yee, the examples in the 17 reg. -- 18 MS. YEE: Yes. 19 MS. KELLY: -- two of them I think address 20 recycling. And that is where -- first of all, the 21 qualified taxpayer has to be engaged in a line of 22 business described in Division d. And if that's the 23 case and they're using a recycled material from their 24 own waste or other post-consumer waste material and 25 reintroducing it into the manufacturing process then 26 that is -- the equipment used to do that is considered 27 qualified property. 28 That's a little different than what's happening 38 1 here, but those -- those examples are in the regulation. 2 MS. YEE: Okay. All right. That's -- 3 MS. KELLY: It's a little different than what's 4 happening here. 5 MS. YEE: Okay. We're not talking about 6 recycling -- 7 MS. KELLY: No. 8 MS. YEE: -- as it relates to what's going on 9 on these premises. 10 MS. KELLY: No. 11 MS. YEE: Okay. All right, I just wanted to 12 clarify if there was a statutory basis with respect to 13 the concept of reintroducing the waste back in the 14 process. 15 All right. Ms. Mandel. 16 MS. MANDEL: It's true in every case that we 17 have to take law and apply it to the facts that are 18 presented in the particular case, and in this case as 19 Members have pointed out and as is in the evidence, we 20 all know there's two things that happen on this one big 21 site. There's mining and there's asphalt manufacturing. 22 And we also all know that -- that most of what they mine 23 out of there is once it's ground up into the different 24 little sizes it's getting sold off the site. And maybe 25 some other people buy it for asphalt manufacturing and 26 they'll do their own washing. Washing is in a separate 27 structure from the manufacturing. And -- and as I 28 understand the facts of the case the location of various 39 1 pieces of what goes at this site is in large part 2 informed by the topography of the particular property or 3 real estate. 4 And so, it does seem very hard under the 5 testimony -- the expert testimony about rock mining and 6 the -- the facts here that the washing would be part of 7 mining. It does seem that that's the beginning of the 8 manufacturing process. As the stipulated facts and the 9 testimony also has been that if the entire construct 10 which, you know, you talk about the conveyor belt being 11 so far away, but there is a way that the decanted fines 12 gets from the wash plant and finally finds its way to 13 the conveyor belt. And, Mr. Woolpert, correct me if I'm 14 wrong, but it was my understanding that that's kind of a 15 continuous loop process, as the washing plant's working 16 some trucks are taking it to the fields where they dry 17 off for a while. And when they drop them off they pick 18 up some dry stuff and take it to the conveyor belt and 19 that it's a loop. Is that right? 20 MR. WOOLPERT: That's correct. 21 MS. MANDEL: While the -- and so, you know, we 22 talk about, well what -- what is manufacturing is really 23 then what it comes down to. When does manufacturing end 24 and what you want to do -- what Franchise Tax Board 25 wants to do it seems is to strip out -- once anything, 26 you know, goes off to the side, if you will, you want to 27 strip that out and say, okay, now whatever -- whatever 28 you have to do over there that's no longer part of the 40 1 manufacturing process because that material, in this 2 case the decanted fines I guess is the technical term of 3 what they are -- are not -- they're not marching forward 4 to be made into a product. They've fallen off the side. 5 So we, Franchise Tax Board, think that that's not in the 6 definition of manufacturing because you're no longer 7 converting that thing, that decanted fine, into 8 something. 9 And that's what we're calling the -- I guess 10 you're calling it waste. But manufacturing is -- 11 it's -- it's a process of converting something, which in 12 this case was the -- actually the unwashed aggregate is 13 what started it. And so, at the end you have asphalt. 14 But you -- it sounds like you want to peel out pieces of 15 what goes on in between even though everyone has agreed 16 that if you don't do something with the decanted fines, 17 which in this case just because of the type of 18 operations going on at that property is all being 19 handled by tangible personal property. If it was 20 somehow being handled by -- I don't know, fixtures or 21 real estate somehow we wouldn't, you know, be arguing 22 about it because we wouldn't be talking about 23 possibility of MIC. 24 But it almost sounds like you want to take a 25 piece of the asphalt manufacturing process and say, 26 yeah, but part of it, which you have to keep doing or 27 else at -- what I'm -- what was it, like a day and a 28 half or something or two days, the wash plant would 41 1 cease to function. And if you took the stuff out and 2 stopped it at the fields, you'd stop in -- what, 3 Mr. Woolpert, a few weeks or something? 4 MR. WOOLPERT: Yeah. About ten days. 5 MS. MANDEL: About ten days. So for -- for the 6 company to continue manufacturing anything at that site, 7 and it's all one big site, so we don't have an issue of 8 it being somewhere else -- you know, because we restrict 9 the MIC to the one site, right? 10 It's like you want to break what seems to be a 11 manufacturing process into -- into two parts. And 12 that's -- I think that's what's confusing. 13 And I don't know if there's a question there, 14 but you probably heard one, so -- 15 MR. BIEDLER: Well, the definition of process 16 has a statement of a beginning, raw materials, and end 17 when the part is ready for sale. Including packaging, 18 if necessary. 19 But within each component part of a process 20 there may be waste thrown off. In this particular case 21 if we include the washing as the first step then it's 22 thrown off very early. And the statute defines 23 manufacturing as the handling, changing, affecting of 24 property, in this case asphalt -- excuse me, aggregate 25 into asphalt. 26 But the handling of waste -- waste material, is 27 not being recycled -- the statute specifically allows 28 the MIC for equipment used for recycling, which requires 42 1 that it be put back into the process or a new 2 manufacturing process. But this is not meeting that. 3 And the only other place where the statute 4 specifically addresses waste handling equipment, 5 although it's not used in that vernacular, it's 6 pollution control, is where there's a requirement that 7 it be handled a certain way, and it meets or exceeds 8 that. 9 It doesn't fit recycling. It doesn't fit 10 pollution control. And it doesn't fit manufacturing. 11 I'm not trying to strip anything, but to 12 identify a part that happens in this unique set of facts 13 to be waste material that's cast off in the process. 14 MS. MANDEL: Did you hear a question in -- that 15 you wanted to respond to in what I -- 16 MR. COLKER: I heard a comment that I'd like to 17 respond to, please. 18 MS. MANDEL: Oh. 19 MR. COLKER: Just very briefly, I mean it's 20 inconceivable to imagine any process in manufacturing 21 that doesn't produce waste. So, I -- I think it's clear 22 that the Legislature had to have intended that the 23 assets necessary to move waste that are constantly 24 produced in a process are part of that process. And I 25 think it's -- this would be a very, very extreme reading 26 of the statute and the intent to conclude otherwise. 27 MS. YEE: Ms. Mandel, anything further? 28 MS. MANDEL: No, my head hurts. 43 1 MS. YEE: Okay. Other questions, Members? 2 Comments? 3 Okay, pleasure of the Board? 4 MR. HORTON: Move to take it under submission. 5 MS. YEE: Okay. We have a motion by Mr. Horton 6 to take the matter under submission. Is there a second? 7 MS. ALBY: Second. 8 MS. YEE: Second by Ms. Alby. 9 Without objection, that motion carries. Thank 10 you, gentlemen. We will discuss your matter later today 11 and send you written notice of our decision. 12 Thank you, Franchise Tax Board. 13 MR. COLKER: Thank you for your time. 14 MR. WOOLPERT: Thank you very much. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 44 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 March 23, 2010 I recorded verbatim, in shorthand, to the 10 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 44 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: April 9, 2010. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 45