BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT MARCH 24, 2010 ITEM C1 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by MACROMEDIA, INC. (Case No. 461946 BH ) 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 Barbara Alby Acting 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 Scott Lambert 18 Tax Counsel 19 Robert Tucker Legal Department 20 Kevin Hanks 21 Sales and Use Tax Department 22 For Petitioner: Sonja Johnson 23 Tax Senior Manager 24 Purva Samant Tax Analyst 25 Tran Nguyen 26 Tax Manager 27 ---OOO--- 28 2 1 Sacramento, California 2 March 24, 2010 3 ---oOo--- 4 MS. OLSON: Good morning, Madam Chair and 5 Members. For this morning's meeting we have four Sales 6 and Use Tax hearings. The first one is Macromedia. 7 Board Proceedings has received contribution 8 disclosure forms for this morning's hearings from the 9 parties, agents and participants. All forms were 10 properly completed and signed. No disqualifying 11 contributions were disclosed. All parties, agents and 12 participants are on the Alpha listing provided to your 13 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 very much, Ms. Olson. 23 Okay, Members, we are on item C1, Macromedia, 24 Incorporated. Let me have Mr. Levine with the Appeals 25 Division introduce the matter. Good morning. 26 MR. LEVINE: Good morning, Madam Chair. Good 27 morning, Ms. Alby and the old time members. 28 David Levine for the Appeals Division. The 3 1 issue in this petition of Macromedia, Inc. is whether 2 various audit adjustments are warranted. 3 MS. YEE: Okay. Thank you very much. Good 4 morning. 5 MS. JOHNSON: Good morning. 6 MS. YEE: Thank you for your patience. If you 7 will each introduce yourselves for the record, you have 8 ten minutes for your presentation. 9 MS. JOHNSON: Okay. My name is Sonja Johnson. 10 MS. YEE: Okay. 11 MS. JOHNSON: I am -- I work for Adobe Systems, 12 Incorporated, which purchased Macromedia in December of 13 2005. 14 MS. YEE: Okay. 15 MS. JOHNSON: And I'm a Tax Senior Manager. 16 MS. YEE: Great. Thank you. 17 MS. NGUYEN: Hi. My name is Tran Nguyen and 18 I'm the Senior Tax Analyst for Adobe Systems. 19 MS. YEE: Okay. 20 MS. SAMANT: Hi. My name is Purva Samant. I'm 21 a Tax Analyst for Adobe Systems. 22 MS. YEE: Okay. Very well. If I could ask 23 each of you to just move closer to the microphone so we 24 can hear you better. 25 Thank you. Please proceed. 26 MS. JOHNSON: Okay. Thank you. So, we 27 appreciate your time that you're -- you're considering 28 our case because we know your time is valuable. 4 1 I just want to give you an overview to start 2 with. And I'm very -- I'm very visual so I prepared two 3 graphs and they're -- they're Exhibit 1 and 2. And if 4 we can start with Exhibit 2. I just want to give a 5 history of Macromedia has been audited throughout its 6 lifetime as a company. And in the first years as you 7 would expect, the initial audit -- the blue column 8 represents what our sales tax returns had been and then 9 the -- and the red column is what we agreed to on audit. 10 So in -- in early years -- earliest years 11 there's like a 15 percent adjustment which you'd expect 12 as you're getting to know more about the tax law and how 13 it was being implemented. 14 Then in the next two periods you can see that 15 the compliance has -- has increased quite a bit to 92 16 percent. And then in the last cycle to 99 percent. So 17 really small adjustments in that last period. 18 And then you see this -- now, this new audit 19 coming along where nothing has really changed in the -- 20 in the personnel or in anything -- procedures or any 21 sort of tax, you know, systems -- all of a sudden now 22 you have a big drop in what -- what we have compared to 23 versus the adjustment that's being recommended as 17 24 percent. 25 The second exhibit, which is Exhibit 1, 26 demonstrates the types of issues that are being -- that 27 have been gone along in the process. So in the 28 beginning years, let's just take, for instance, the blue 5 1 column which is Use Tax, which we just had a big 2 discussion about, and we can see that we've been 3 educated over the years and that compliance has gone 4 down to almost -- well, to a point where we actually get 5 a refund. And then you see a huge spike in this -- in 6 this audit period thinking, okay, here we've been all 7 educated in what needs to be but the Board -- the 8 Department is -- is coming up with a huge adjustment in 9 this area, an unwarranted one. 10 Same on the disallowed claims for exemptions. 11 It's kind of even throughout the years. This -- this 12 red column represents one -- unique one case situation 13 which Tran is going to get into why that -- the facts 14 they're using is not -- the evidence that they are using 15 is not -- there's more evidence that's on our side than 16 on the -- than we believe is on the Department's side. 17 And then the last one is understating of Sales 18 Tax, which is a brand new issue and never been happened 19 before. And so we want to talk about how that comes 20 into play. 21 So, with that -- so basically what we know from 22 our end is that Macromedia personnel knew the law. The 23 tax systems calculated the tax correctly, knew how to 24 apply the law, and that our audits have been clean. And 25 so from that I'm going to have Tran talk about 26 contention number one, and explain what the evidence is 27 in that -- in that particular situation. 28 MS. YEE: Great. 6 1 MS. NGUYEN: All right. So contention number 1 2 is disallowed claimed sales for resale and this is in 3 regards to the Trustee of the California State 4 University, so this particular customer. 5 So if you guys could turn to Exhibit 4. 6 Exhibit 4 is basically our standard contract agreement. 7 And although we know that, you know -- you know, we 8 shouldn't be really using a standard contract agreement, 9 but we do add additional language for a customer or the 10 Tax Department to include some customization in this 11 agreement. 12 So if you turn to the second page of this 13 agreement, which is going to show you a "Ship to," a 14 "Bill to" address, and the "Ship to" address it's going 15 to be noted as there's nothing there. The only 16 statement there is electronic delivery of software 17 which, you know, is -- you know, on request of our 18 customer. They wanted all their software and all their 19 items purchased by Macromedia to be delivered 20 electronically. 21 We also included in Rider C, which is about 22 four or five pages later that, you know, this is 23 basically for -- from the Tax Department would like -- 24 would like to include in these kind of agreements as, 25 you know, some kind of statement, you know, informing 26 our customer that if indeed they decide to, you know, 27 want some kind of tangible personal property that then 28 they will be liable for any Sales and Use Tax because of 7 1 that. 2 I'd like to point out really quick in this -- 3 the Rider C, the person named Keith Wandrey, just 4 because he's throughout -- he's going to be mentioned 5 later on, but I want to point his name out just for the 6 record. 7 If you look at a couple more pages, I included 8 also Amendment 5 and 6, both done in 2004 and '5. This 9 amendment to our original, you know, standard contract 10 just informs our customer that we're going to go ahead 11 and proceed with continuing the giving any software 12 electronically. 13 So that's the first is in our contract we -- 14 you know, we do outline that we are going to be giving 15 the customer all electronic downloads and no TTP. I -- 16 you know, so if we look at Exhibit 5 and we go to like 17 the third page, which is an XYZ letter, and XYZ letters 18 are normally standard procedures that the Department 19 used in the audit verification process from a third 20 party. 21 We gave the -- an XYZ letter to our customer, 22 the Trustees of California, and they, you know, note on 23 the XYZ letter that the software purchased was delivered 24 electronically and no backup copy of tangible media was 25 received. 26 They also included on their comments that all 27 software was delivered electronically. 28 We then were able to get in contact with Mr. 8 1 Keith Wandrey, and he is basically the person who 2 contacted Macromedia to, you know -- basically to strike 3 this deal and, you know, acquire Macromedia to be one of 4 the vendors to deliver this type of software. 5 And he spoke with the Department -- he spoke 6 with the District Principal Auditor, the Audit 7 Supervisor and the Auditor, herself and informed her the 8 reason why he chose Macromedia as the vendor. The 9 reason is because during that time Macromedia was the 10 only company that could be able to provide these kind of 11 software to them via electronic. And because they 12 handle all California State Universities they wanted to 13 be able to provide a platform for all the State 14 University just to go in and download the software from 15 the Internet instead of having, you know, multiple 16 copies of C.D.s, you know, passed around to different 17 departments. 18 So that was one of the reasons why -- that was 19 actually, I think, the main reasons why Macromedia was 20 chosen to be, you know, CSU's vendor. 21 So, I think in closing I -- I'd like to -- I'd 22 like to -- I'd like to basically first say that I really 23 feel like the Department didn't really take into 24 consideration the entire evidence. They felt -- I felt 25 like they basically kind of like took pieces of evidence 26 that would be deemed beneficial to them to disallow this 27 claim. And I would -- you know, I mean we have 28 documents that supports that this was USD. We have 9 1 customers' verbal and written testimony in Exhibit 5 2 that basically states and outlines that they didn't 3 receive anything tangible. And hopefully this is enough 4 evidence and this would be, you know, deemed to be 5 substantial evidence to the Board to, you know, make 6 your decision today with regards to allowing this 7 customer as being exempt via electronic download. 8 MS. YEE: Thank you very much, Ms. Nguyen. 9 MS. JOHNSON: Okay. Contention number 2 is Use 10 Tax. Again, that's our big spikey one on the graph. 11 So, a company like Macromedia has alternate 12 motivations to report Sales and Use Tax because there's 13 a California EZ Tax Credit on your income tax return, on 14 your California income tax return. And we were able to 15 find that -- some of those records. 16 So we have that included as Exhibit 7. And 17 that showed that we actually paid Sales and Use Tax tax 18 of 3.8 million in addition to the Use Tax that we 19 accrued of 1.2. So we -- overall Sales and Use Tax we 20 paid for that period is beyond $5 million. 21 The Board -- our big contention really is the 22 Board is trying to associate increase in sales with 23 our -- saying that if our sales increased from $80 24 million from the last tax period they audited up to 100 25 million that our Use Tax should have gone up 26 proportionately. And that's not true in a software 27 company. That might be true in, you know, liquor store 28 or a retail or something, you know, along those lines. 10 1 But a software company, their profit -- their operating 2 margin just becomes bigger and bigger and bigger as time 3 goes on. And their costs stabilize out. 4 So there's no correlation really between that 5 sales, and so we just think that's a faulty argument, 6 you know, to try to say, oh, you owe more Sales -- Use 7 Tax. 8 And second of all the -- in the past we have -- 9 we show that it's never been an issue in our audits, 10 right. It's come down to that we're doing it accurately 11 and -- and then also just showing that -- that we 12 have -- other than just in the tax return, itself -- on 13 the Sales Tax returns, themselves, that we had that 14 external piece that goes on this California tax credit. 15 So I provided the -- the California return in there, as 16 well. 17 MS. OLSON: Time has expired. 18 MS. YEE: Okay. Let me do this, we'll give you 19 time on rebuttal, if we -- okay? 20 We'll be mindful of the time constraints. 21 Department, please. 22 MR. LAMBERT: Good morning, Madam Chairwoman 23 and Members. My name is Scott Lambert and I will be 24 representing the Sales and Use Tax Department today. To 25 my right is Kevin Hanks, also with the Sales and Use Tax 26 Department. And to Mr. Hank's right is Robert Tucker 27 with the Legal Department. 28 Macromedia is a wholesaler and retailer of 11 1 software for web site design. The audit covered the 2 period July 2003 to December 2005. This was a fourth 3 Sales and Use Tax audit of Macromedia. 4 Macromedia merged with Adobe Systems at the end 5 of 2005. The only records provided for audit were an 6 electronic file containing sales with California 7 delivery for the period May 2004 to December 2005, sales 8 tax returns with supporting worksheets and resale 9 certificates. 10 The other books -- books of account, such as a 11 General Ledger, Sales Journal, Purchases Journal, 12 General Journal were not provided. 13 In addition, supporting sales and purchase 14 invoices were not provided. 15 A records request was made to the Petitioner 16 within nine months of the merger. Regulation 1698 17 directs that records are required to be maintained for 18 four years unless otherwise directed. 19 The lack of records has placed a significant 20 scope limitation on this audit. Decisions had to be 21 made using the available records which has led to the 22 areas of disagreement in this audit. 23 There are three areas of disagreement. One, 24 unreported taxable sales based on the electronic file of 25 sales. 26 Two, purchases subject to Use Tax. 27 And, three, disallowed resales. 28 Regarding unreported taxable sales. The 12 1 recorded taxable sales for the period July 2004 and to 2 December 2005 were compared to the reported taxable 3 sales for the same period. It was noted that there was 4 a 38,000 difference between the tax recorded and the tax 5 reported. 6 To establish the taxable understatement for the 7 period July 2003 to June 2004 a percentage of error, 5.7 8 percent, was developed from this information and applied 9 to the July 2003 to June 2004 time period. 10 The Petitioner claims that these additional 11 taxable sales were either holds or voids but were not 12 additional sales. 13 The Petitioner states that Macromedia used 14 Oracle software and Adobe uses SAP. Petitioner claims 15 that a filter was turned off when the SAP software was 16 used and therefore the fault sales are included in the 17 electronic file but never actually took place. 18 It should be noted that the file only contains 19 sales made into California. Somehow the Petitioner was 20 able to filter the data by shipping location. Also the 21 file contains credit memos and no charged sales 22 invoices, which indicates the file may be complete. 23 There were -- there were responses from six 24 customers during the exempt sales tax which indicated 25 that they could not find certain sales in their records. 26 The Petitioner claims that this supports their 27 contention that the file contained false invoices. 28 The Department believes that there could be 13 1 various explanations for why some customers may not be 2 able to locate purchases in their system. 3 Unfortunately, without all the backup, such as the sales 4 order sheet, purchase orders, Accounts Receivable 5 ledgers, shipping records, et cetera, it is not possible 6 for the Department to know why the sales do not show up 7 on the customers' records. 8 In the prior audit a customer returned an XYZ 9 letter that stated no invoice received, did not realize 10 there was no tax charged, paid with credit card. 11 Also, there were sales from a related company, 12 Modus Media, which used a different accounting system. 13 It is the responsibility of the Petitioner to 14 maintain and provide proper records for audit. In this 15 case the Department must use the best source of 16 information available that has been provided by the 17 Petitioner. 18 Regarding purchases subject to Use Tax, the 19 Petitioner did not provide any purchase information. 20 Therefore, the Department is unable to audit purchases 21 subject to Use Tax. 22 In the audit covering the period January 1992 23 to March 1995, the Petitioner failed to report 24 withdrawals from resale inventory, give-away and items 25 withdrawn from resale inventory used for training 26 classes. 27 Again in the audit covering the period October 28 1995 to September 1998 the Petitioner failed to report 14 1 withdrawals from resale inventory. 2 The Petitioner reported $5.3 million in 3 purchases subject to Use Tax in the prior audit period. 4 In the current audit period $1.2 million in purchases 5 subject to Use Tax was reported. 6 The percentages of taxable purchases to total 7 sales in this audit period was 1.2 percent. The taxable 8 purchase -- the taxable percentage in the prior audit 9 period was 6.6 percent. 10 As stated earlier, since there were no purchase 11 records there was no way to audit this area. Therefore, 12 the reported/audited percentages from the prior audit 13 were used for this audit period. 14 The Department noted that the Use Tax 15 percentages had been declining over the prior audit 16 period. 17 Also, it was noted that the merger between 18 Macromedia and Adobe Systems was known around January 19 2005. Therefore, the taxable percentage of the last 20 year of the prior audit period was used as the taxable 21 percentage in this current audit. 22 The taxable percentage for the last year of 23 2002 was 2.6 percent. 24 The difference between the 2002 percentage of 25 2.6 and the current audit period of 1.2 was calculated. 26 The difference was 1.4 percent. 27 The 1.4 percent difference was applied against 28 the reported total sales to arrive at the unreported 15 1 taxable purchases subject to Use Tax. 2 Regarding disallowed exempt sales. It was 3 decided to test the exempt sales contained on the 4 electronic file using statistical sampling. Three 5 different populations were selected. One, sales 6 invoices with a line item for freight. Two, sales 7 invoices with a tax code of exempt without freight. 8 And, three, sales invoices with a tax code other than 9 exempt and without freight. 10 Each population was divided into three strata. 11 Those sales over $10,000 were divided -- were audited on 12 an actual basis. Other errors were assessed for the 13 audit period July 2004 to December 2005 based on the 14 results of the statistical samples. 15 For the period July 2003 to June 2004 a 16 percentage of error was established from the test and 17 applied. The reported sales for this period were 18 increased by the same percentage that the reported sales 19 were understated for the period July 2004 to December 20 2005. 21 The Petitioner argues that the percentage of 22 error should not be applied against the increased sales 23 because the higher sales are due to false sales 24 invoices. This argument is not valid. 25 Basically, even if we consider that the 26 electronic data contains false invoices, the false 27 invoices were included in the test base. The test base 28 and the base the percentage of error is applied against 16 1 must be the same. 2 I can clarify this at a later time if needed. 3 Additionally, all -- on all transactions where the 4 customers stated that they could not locate the purchase 5 in their records, the questioned sale was allowed as 6 non-taxable. Therefore, no so-called false sales were 7 disallowed and in fact they were left in the test base. 8 Regarding sales to CSU Long Beach. Several 9 sales to CSU Long Beach that were over $10,000 were 10 included in the statistical sample. Only those 11 transactions that indicated that tangible personal 12 property was provided were disallowed. 13 The Department acknowledges that the initial 14 software was transferred electronically. There is no 15 question that the Petitioner provides tangible personal 16 property to some customers. 17 The Petitioner argues that the contract states 18 that the software will be transferred electronically and 19 that the billing and/or charges for C.D.s and shipping 20 were made in error. 21 Charges for C.D.s and shipping were only made 22 on some sales invoices to CSU Long Beach. Only those 23 sales that contain tangible personal property on the 24 invoice were disallowed. 25 The Petitioner also argues that CSU Long Beach 26 provided a statement that asked that they did not 27 receive tangible personal property. It should be noted 28 that the sales was made three years before CSU Long 17 1 Beach researched their records. 2 Without conclusive information the Department 3 must use the best information available. 4 On each of the invoices to CSU Long Beach there 5 contained a C.D. and a charge for shipping. In addition 6 the contract stated that CSU Long Beach will be provided 7 with a C.D. Therefore, the sales were considered 8 taxable. 9 The Department concurs with the Appeals 10 Division's decision and recommendation. 11 MS. YEE: Thank you very much, Mr. Lambert. 12 You have five minutes on rebuttal. 13 MS. JOHNSON: Okay. I just want to go through 14 our -- our point number 3, which is a gap analysis 15 between the 80 million and the 72 million reported. 16 MS. YEE: Okay. 17 MS. JOHNSON: If you take the -- the XYZ 18 letters and responses, how the Board has done -- how the 19 Department, excuse me -- the Department calculated this, 20 they've taken it as sales relative to a big pool of 21 sales. So let's say it's 50,000 that was disallowed 22 that were -- were reported as errors, okay. Because we 23 had basically three -- six invoices come back and say 24 that they were not found, okay. So six percent and 25 that's that calculation on that -- okay. 26 Anyway, if you refer to this calculation in 27 your memo here that shows how that gap analysis was 28 prepared, they -- they're basing it on sales, we're 18 1 basing it on actual number of transactions that would -- 2 have been -- should have been excluded from that 3 original number. 4 Okay. And now Purva's going to conclude with 5 some closing arguments. 6 MS. SAMANT: We just feel that we were 7 penalized unfairly only by picking and choosing what 8 they wanted to look at. And since we didn't have 9 documents, they didn't look into -- take into 10 consideration the prior audits for the Use Tax, how we 11 were doing a good job. And how even the auditors in 12 the prior three audits have complimented us in saying 13 that they -- that we learn from our mistakes and we were 14 doing a good job. 15 However, we couldn't provide them the -- the 16 purchase invoices. We feel that they just came up with 17 this liquor store, grocery store method to figure out 18 how much our liability should be for the Use Tax 19 portion. 20 So -- and I -- I just want to take -- give you 21 two examples how unfair and unprofessional the auditors 22 were. Basically I understand that the taxpayer 23 confidentiality is so important. I have been an auditor 24 for nine years for the Board of Equalization. They 25 faxed us a wrong (not understandable) for the wrong 26 taxpayer. Also during our Appeals Office -- Appeals 27 Conference the Supervisor from the San Jose District, he 28 was really unprofessional. He was very agitated. He 19 1 insulted our intelligence by saying that our 2 experience -- my nine years, hers two and a half years, 3 was not good enough. And he -- pretty much the Appeals 4 Officer had to interject and tell him to calm down. 5 And I just wanted to point these things out. I 6 don't want to sound bitter, but I just want to point 7 these things out to the Board because these are 8 important. The taxpayers are important. And taxpayer 9 confidentiality is important. 10 So also we feel that the entire -- you know, 11 entire audit was done pretty much unfairly. And I 12 would like the Board to take a look at all the 13 information that we provided today, our prior audits and 14 how we were doing a good job, and take that into 15 consideration into making your decision today. 16 And, yeah, all the supporting documents that we 17 gave today, our prior audits, the contract, everything 18 should be taken into consideration in the totality 19 versus just picking and choosing in what is beneficial 20 to when they prepared the audit. 21 That's -- that's it. Thank you for your 22 time. 23 MS. YEE: Thank you, Ms. Samant. Any further 24 comment at this point? 25 MS. JOHNSON: Well, there's a couple things I 26 dispute what he's saying but we -- we don't probably 27 have the time to explain it to you. 28 MS. YEE: Well, you have five minutes. Your 20 1 time isn't quite up yet. 2 MS. JOHNSON: Oh, okay. 3 MS. YEE: So -- but I was wondering -- 4 MS. JOHNSON: Well, I just wanted on the gap 5 analysis, so the reason why we were -- 6 MS. YEE: Actually, you have the remainder of 7 five minutes. 8 MS. JOHNSON: Okay. Do you want me to say it? 9 Okay. 10 MS. YEE: Please. 11 MS. JOHNSON: So, the reason we don't have the 12 records that we are looking for, we had the tax records. 13 But they -- we don't have the A.P. invoices. And we'd 14 actually pulled them all together, had them all boxed, 15 and it was sent off site to like Sa -- Data Safe, 16 right -- Data Safe, is a company that does off-site 17 storage. 18 And so we have -- we had done the record 19 retention process but when we go to retrieve it from 20 Data Safe they can't find the boxes. So we're sitting 21 here going, okay, what can we do? 22 So we're trying to build, you know, the story 23 around with other data that we have using the tax 24 return. 25 So it wasn't that we didn't do our due 26 diligence to try to retain that data. We did. We're 27 just relying on a third party now that has -- is not 28 able to find the boxes. 21 1 MS. SAMANT: Also for the CSU I know that he 2 said that we had to go back the three years after the 3 contract was done, but the same person, Mr. Wandrey, he 4 is the one who was involved throughout the audit, 5 throughout the -- from the inception of the contract all 6 the way until he spoke to the auditor. So he's the one 7 who gave his word and that's being considered, you know, 8 that he's being -- saying that he's lying pretty much 9 that he didn't get it -- get it electronic delivery. So 10 he was involved throughout. He is -- he signed the 11 contract. 12 MS. NGUYEN: And also he's basically the person 13 who seeked out Macromedia because we were the only 14 company at that time, like I mentioned, that could be 15 able to provide CSU with electronic downloads for their 16 software. And they -- you know, they mentioned to 17 Macromedia they do not want any C.D.s or what not, they 18 only want everything, you know, on line electronically 19 because it's just for efficiency purposes for the 20 California State University. 21 MS. YEE: Okay. Very well. Thank you very 22 much. Let me just ask the Department, have you seen all 23 these exhibits that have been provided today, 24 previously? 25 MR. LAMBERT: I think we've -- we've seen -- 26 MS. YEE: You've seen -- 27 MR. LAMBERT: I mean, we haven't seen the 28 charts and things, but -- 22 1 MS. YEE: Okay. 2 MR. LAMBERT: -- otherwise. 3 MS. YEE: But most everything else? 4 MR. LAMBERT: Yeah. 5 MS. YEE: Okay. Very well. Questions or 6 comments, Members? 7 MS. MANDEL: Question. 8 MS. YEE: Ms. Mandel then Ms. Steel. 9 MS. MANDEL: On the CSU, the X -- I mean there 10 are XYZ letters I guess on a variety of things, but 11 this -- on CSU he signed one saying, "The software 12 purchase was delivered electronically only, no backup 13 copy on tangible media was received," and typed in 14 comment are, "All software was delivered 15 electronically," and then "Invoice 1434207 was not paid 16 received and may not belong to CSU." 17 And this is from the Senior Director/ 18 Controller of CSU Long Beach. 19 So, my understanding is the Department included 20 CSU where you found in the taxpayer's records -- not 21 just that the contract, which is apparently a canned 22 contract that refers to giving a master C.D. and then 23 this one has no shipped to except for electronic, but 24 that you also relied on that you found some reference 25 in -- I guess it's this invoice reference in the 26 taxpayer's records showing a price for -- showing C.D. 27 delivery and a charge for shipping. 28 But can you explain a little bit -- I mean 23 1 usually taxpayers get XYZ letters and if you have 2 concerns about the XYZ letter you follow up, so -- with 3 the person who signed it. So, why this XYZ letter makes 4 no difference to you or these other XYZ letters that are 5 referenced on their contention 3, where -- which is -- I 6 guess they're calling it the gap, where they say that 7 the XYZ -- there were other XYZ responses indicating 8 that the invoices the Department listed didn't exist in 9 the customer's records. 10 Can you explain why that stuff is still being 11 picked up? 12 MR. LAMBERT: Well, to address the issue of 13 they're saying it's not included in the -- that the 14 sales were not included or didn't take place, none of 15 those sales were included as taxable in the audit. So, 16 all of them were basically treated as a -- they were 17 allowed as existing but non-taxable. 18 MS. MANDEL: Okay. Then what about the -- what 19 about the CSU? Is this particular CSU -- 20 MR. LAMBERT: The CSU -- 21 MS. MANDEL: -- that they've given us the 22 document on not -- 23 MR. LAMBERT: It is. 24 MS. MANDEL: It is which? I'm sorry. 25 MR. LAMBERT: That's okay. The -- the XYZ 26 letter that they provided pertains to several of the 27 sales that were made to CSU Long Beach that we included 28 as taxable. 24 1 Not all the sales were considered taxable in 2 the audit. Only those sales that had a line item for 3 C.D. delivery and also a freight charge on the invoice 4 were considered to be taxable. 5 MS. MANDEL: And so the -- I mean I -- this 6 specific invoice that the gentleman refers to in the XYZ 7 letter, you're saying that one would -- would have been 8 treated as not taxable because he's identifying I don't 9 have that particular one? 10 MR. LAMBERT: Well, he's -- he's basically 11 saying, as I understand it, that all -- all the software 12 sold from Macromedia to CSU Long Beach was delivered 13 electronically. 14 MS. MANDEL: Right. That's -- 15 MR. LAMBERT: And we don't argue that fact. We 16 agree that that's in fact what happened. The problem 17 comes into is if the tax -- if the customer receives a 18 C.D. -- 19 MS. MANDEL: Uh-huh. 20 MR. LAMBERT: -- those charges all become 21 taxable. So, what we did is -- 22 MS. MANDEL: Right. 23 MR. LAMBERT: -- we allowed the ones that 24 had -- that didn't show tangible personal property being 25 delivered and taxed the ones that the invoices showed 26 that there was a delivery of tangible personal property. 27 MS. MANDEL: Right. And I guess I'm asking 28 about this specific invoice because he references a 25 1 specific invoice so that I assume that meant that you 2 guys were trying to pick that one up. 3 It's -- it says invoice 1434207. That's -- 4 MR. LAMBERT: Okay. 5 MS. MANDEL: He says he wasn't paid or received 6 and may not belong to CSU. So -- 7 MR. LAMBERT: Oh, was that -- that one included 8 in the audit? No, it was not. 9 MS. MANDEL: It was not. 10 MR. LAMBERT: It was included -- 11 MS. MANDEL: I mean, I'm reading the stuff for 12 the first time -- 13 MR. LAMBERT: Yes. 14 MS. MANDEL: -- so I want to make sure. 15 MR. LAMBERT: Yes, it was -- well, let me 16 just -- 17 MS. MANDEL: Was it -- 18 MR. LAMBERT: -- let me just clarify. 19 MS. MANDEL: Okay. 20 MR. LAMBERT: The sale was included in the 21 audit and it was treated as non-taxable. 22 MS. MANDEL: Okay. Thank you. 23 MS. YEE: Okay. Thank you. Ms. Steel. 24 MS. STEEL: I have a question to Appeal 25 Division that I want to follow up that things that when 26 they sold the merchandise by electronically it's 27 non-taxable. But they got the one compact disk to -- 28 for the backup reason, so suddenly it's taxable. Is 26 1 that like when you get one C.D. then suddenly that all 2 electronically delivered it's taxable that even it's 3 done before they got delivered for a compact disk, 4 itself? 5 What -- what's the law here? 6 MR. LEVINE: Well, I'm not sure I understood 7 the last question. 8 MS. STEEL: Okay. They -- they sold all the 9 electronically delivered merchandise, that's 10 non-taxable. And at one point they got C.D. -- compact 11 C.D. to back up. So suddenly when they had the tangible 12 item there then suddenly all these other downloads are 13 they taxable? 14 MR. LEVINE: When you have a contract for sale 15 of licenses of software to avoid tax you have to avoid 16 any tangible personal property. 17 MS. STEEL: Right. 18 MR. LEVINE: Just practically speaking. 19 MS. STEEL: So it's electronic, right. 20 MR. LEVINE: If a company gets a good download 21 and they're trying to avoid tax, they get the download. 22 They back it up themselves. I mean that's what I would 23 do in a -- theses are software people so they know how 24 to tell their customers how to do it. Get the software, 25 back it up. If there's a problem we'll do it again. I 26 assume they'll do it however many times. 27 If someone gets a C.D. or a DVD or whatever 28 tangible media transfers the software in connection with 27 1 the sale of licenses, there's no way for us to police 2 whether they got three of their outlying computer users, 3 downloaded it direct or got it off the DVD. 4 Basically, once you get the tangible property 5 in connection with the sale of licenses, yes, you've 6 infected the whole deal. And that's why when you sell 7 one DVD with ten licenses and they later say we want a 8 hundred more licenses, and they're using their existing 9 DVD to transfer them out, it's part of the original 10 sale. 11 So, yes, it's taxable. 12 MS. STEEL: No, I'm talking about before it 13 happened. 14 MR. LEVINE: If they had -- if you had a 15 situation -- you have technical and -- and practical. If 16 you had a situation where they bought some licenses 17 delivered electronically and then the same customer 18 bought more licenses with -- and got a DVD, if I was 19 auditing I'd have my doubts about that. If it were 20 truly a wholly separate transaction that was completely 21 done electronically then, yes, it's non-taxable. 22 MS. STEEL: Forget about you have -- I'm asking 23 just the law. I'm not asking you have to doubt that, 24 you know, their intention. Just the law, itself, that 25 asking because they bought it electronically and invoice 26 was all said that. And then this is like two or three 27 years audit period, and then after a few -- couple of 28 years or few months, I don't know exactly when they got 28 1 the compact disk, but that disk was purchased at that 2 point. 3 I'm asking you that by the law that you have to 4 go back that all electronically, you know, downloaded 5 ones are taxable, too. So you have to go back there. 6 That's what I'm asking. 7 MR. LEVINE: I don't understand that that's -- 8 MS. STEEL: I don't really care much about -- 9 MR. LEVINE: -- what the Department -- 10 MS. STEEL: -- after. 11 MR. LEVINE: I don't understand that that's 12 what the Department did. The Department took discrete 13 invoices that the Department concluded there was a 14 backup disk transferred and treated only that invoice 15 and the sales on that invoice as taxable but did not go 16 back and treat a different invoice for a completely 17 separate sale under the same master contract. 18 MS. STEEL: So Department is -- $395,000 one, 19 that that's not including the what it's been downloaded 20 before -- 21 MR. LAMBERT: That's correct. That's correct. 22 MS. STEEL: -- they got the physical compact? 23 MR. LAMBERT: Only -- 24 MS. STEEL: It's -- 25 MR. LAMBERT: Only the invoices that were 26 billed for that time period were taxed. So, this was a 27 specific invoice for a specific time period that they 28 received a C.D. at that time, based on the invoice. 29 1 MS. STEEL: So C.D. at that time and then after 2 on but not before? 3 MR. LAMBERT: That -- that's correct. 4 MS. STEEL: The same program. 5 MR. HANKS: Correct. So the C.D. would have 6 been provided contemporaneous with -- with the sale of 7 the software. 8 MS. NGUYEN: Can I interject really quick? 9 MS. STEEL: Yeah. 10 MS. NGUYEN: This invoice that -- that they're 11 saying that this -- there was a freight item and C.D., 12 it's not an invoice. We were never able to really 13 provide any invoice. We would provide -- be able to 14 provide like a -- like a line item, right, electronic -- 15 basically we provided the -- the Department with an 16 electronic download of a bunch of stuff from the Oracle 17 system -- 18 MS. SAMANT: Accounting. 19 MS. NGUYEN: -- that -- that we deactivated 20 like years before the -- the Department decides to come 21 in and audit us. 22 So they got download of, you know, a bunch of 23 line items, you know. So there's no actual invoice 24 because we don't have the actual invoice. 25 And for this one invoice there was a line item 26 for a C.D. and a line item for freight. And what we 27 believe happened, because we asked -- you know, well 28 actually when the XYZ letter was sent out the CSU 30 1 directly called the auditor and spoke directly to the 2 auditor. And the auditor was just like, you know, I'm 3 not -- I don't want to talk to you, basically. 4 So then the CSU then contacted me because my 5 name was on the XYZ form as a contacting person. And 6 I -- and I asked the CSU like did you guys -- did you 7 guys receive any, you know, C.D.s, because if they did 8 they're liable for the tax and, you know, I mean we're 9 not here trying to evade tax or avoid tax. If -- if 10 it's taxable, it's taxable. 11 MS. STEEL: So it never happened, that's what 12 I -- 13 MS. NGUYEN: So then they said to us, it 14 never -- we never got a C.D. And I even mentioned to 15 them, well, there's no line item that said that we 16 charged you $10 for freight, and it shows the C.D. 17 It's like, well, I can understand, and he -- 18 and he came up with this explanation, he said, okay, so 19 there's a line item for $10. I mean, you -- we're doing 20 transactions for hundreds of thousands of dollars. If 21 we overlooked $10, we overlooked $10, you know. 22 And another thing is he -- he told me, he said, 23 "How do I know that your A.R. clerk didn't, you know, 24 invoice us incorrectly?" 25 And I said, "Well, you're right. I don't know 26 that, you know." And he goes, "Your contract states 27 that we're going to be doing everything electronically. 28 You know, we've never received anything." 31 1 "I spoke to Keith, the guy who was basically in 2 charge of this whole process. And if anything were to 3 come, it would come directly to him." 4 And he said, "I've never got anything." So he 5 goes, "I don't know what you guys are talking about 6 because, you know, we're basically following with 7 whatever the contract. We download everything. We've 8 never received anything. I don't care what your invoice 9 says or what the line item says. I'm telling you I'm 10 telling the auditor that we didn't receive anything." 11 And that's where -- you know, that's basically 12 what we're getting -- 13 MS. SAMANT: Yeah. 14 MS. NGUYEN: -- from our customer. And I mean 15 I'm thinking that to be as it would be sufficient to the 16 auditor to say, hey, this one invoice could be an error 17 invoice from a clerk that, you know, pulled the wrong, 18 you know, product SKU or whatever, you know. 19 MS. STEEL: Did you get any letter or anything 20 from that person that you -- 21 MS. NGUYEN: Yeah, we got, actually a -- 22 MS. STEEL: Is this the one? 23 MS. NGUYEN: -- a letter, yeah, from Keith, 24 which is an Exhibit 5 where he said -- 25 MS. YEE: Right. 26 MS. NGUYEN: -- "I received nothing." You 27 know, and he worked for California State University. He 28 works for the State of California. I don't think he's 32 1 going to perjurize himself or lie, you know. It's not 2 his money, you know. If they owe it, they owe it. If 3 we owe it, we owe it, you know. We're -- we're not 4 in -- you know, we're not trying to avoid tax. We were 5 all tax auditors at a point in time. We're, you know, 6 very aware of the law -- 7 MS. YEE: Okay. 8 MS. NGUYEN: -- and stuff like that. 9 MS. STEEL: So, Department is saying that -- 10 how you going to interpret that, that -- 11 MR. LAMBERT: How do we interpret it? 12 MS. STEEL: -- that person -- yeah, said that, 13 you know, we never received it, maybe invoice was wrong 14 and, you know, we never really physically received any 15 stuffs from the company. 16 MR. LAMBERT: Right. If the Department thought 17 that all transactions in regards to software took place 18 electronically we would agree that, you know, this was 19 just a mistake -- 20 MS. STEEL: Right. 21 MR. LAMBERT: -- and -- and should -- 22 MS. STEEL: But that letter that -- 23 MR. LAMBERT: And there's a letter there which 24 I'll -- I'll address in -- in a second. 25 They -- in the prior audit there's also sales 26 to State Universities of similar type products that were 27 included in the audit as taxable because they 28 received -- 33 1 MS. STEEL: You mean same tax period that, you 2 know, we been -- 3 MR. LAMBERT: No, it was a different tax -- it 4 was a prior audit, but the point that I'm -- that I'm 5 making is, is that they -- customers do receive C.D.s. 6 And so there's that issue. 7 MS. STEEL: But this is the customer said that, 8 no, we never received it, so -- 9 MR. LAMBERT: Right. 10 MS. STEEL: -- sometimes they receive it but 11 for this period that he said "I never received it" . 12 MR. LAMBERT: Right. And that -- the problem 13 that we come into is that there's their word and then 14 there's the records. And the records are 15 contradictory -- 16 MS. STEEL: Well -- 17 MR. LAMBERT: -- to what they said. And the 18 fact that someone might have been the purchasing agent 19 for this and whether somebody else received the C.D. or, 20 you know, a possibility. You know, the -- if you look 21 at the Board of Equalization the people that are buying 22 the products aren't necessarily the people that are 23 receiving the products. And the fact that it could have 24 been delivered to them three years earlier is a distinct 25 possibility. And the fact that, one, on the contract it 26 says they're entitled to a C.D., and then the -- the 27 invoice says they were sent a C.D., the Department used 28 that evidence to -- 34 1 MS. STEEL: But if he received it, why he has 2 to write a letter that he never received it? Because 3 you're not going to lie to the tax agency that -- 4 MR. LAMBERT: Right. 5 MS. STEEL: -- you know what they didn't 6 receive it. 7 MR. LAMBERT: Right. Well, I understand 8 that -- that point. 9 MS. STEEL: Yeah. 10 MR. LAMBERT: And you run into an issue here of 11 we're not taxing CSU Long Beach. The -- the tax is 12 against Macromedia and they're the ones that are 13 responsible for providing evidence that a sale is exempt 14 from tax and they haven't done it in this -- in this 15 case. 16 MS. STEEL: They're the -- responsible, that's 17 why they got a letter from their customer. So we cannot 18 really stretch that far for that, you know. 19 MR. LAMBERT: I -- 20 MS. STEEL: Okay, let's move on. For Use Tax, 21 seems like the Depart -- the taxpayer, the company, had 22 a very good record for the last 11 years. So we never 23 really changed penny that, you know, whatever they 24 reported. Why suddenly that, you know, we change and we 25 are giving them different rate of Use Tax for this 26 period? 27 MR. LAMBERT: Oh, on -- okay, on purchases 28 subject to Use Tax, they have been assessed tax in 35 1 previous audits for Use Tax. 2 MS. STEEL: How many? 3 MR. LAMBERT: Two -- 4 MS. STEEL: And for last 11 years? 5 MR. LAMBERT: Two out of the -- two out of the 6 three. 7 MS. STEEL: How much difference for those two? 8 MR. LAMBERT: I'm going to do it off the top of 9 my head. I think -- 10 MS. JOHNSON: Well, it's on the graph. 11 MR. LAMBERT: No, actually I'll look -- 12 MS. JOHNSON: It will tell you on our graph. 13 MR. LAMBERT: 180 -- 14 MS. YEE: Let -- let me have the Department 15 respond. 16 MS. JOHNSON: Oh, sorry. I'm sorry. 17 MR. LAMBERT: 64,000 -- 65,000 and -- in 18 measure, and approximately 200,000 in measure for the 19 two -- two audits. 20 MS. STEEL: So that's -- what's the percentage 21 of the total sales, the Use Tax? 22 MR. LAMBERT: A percentage -- 23 MS. STEEL: The measure, yeah. 24 MR. LAMBERT: I -- I don't know. We don't have 25 that information. The -- the audit -- I have 26 the previous audit -- 27 MS. STEEL: Uh-huh. 28 MR. LAMBERT: -- but I don't have the two 36 1 before that. And in the previous audit is not when we 2 had the problem with -- with that issue. 3 MS. STEEL: So how did we come up with this 4 1.379 percent error rate? 5 MR. LAMBERT: Yes, what we did is we took a 6 look at the -- we took a look at the prior audit period 7 and it was approximately six and a half percent. 8 Purchases were -- taxable purchases were six and a half 9 percent of total sales. And those purchases added up to 10 $5.3 million. 11 We took a look at our audit period and it added 12 up to 1.2 percent, $1.2 million. So, we could -- we 13 gave the taxpayer the benefit of the doubt by assuming 14 that the purchases -- the rate of withdrawals from 15 inventory or purchases subject to Use Tax were 16 declining. We used the last period last year in the 17 prior audit, which was 2.6 percent. We compared that to 18 the 1.2 percent that they reported during this audit 19 period and we came up with the approximately 1.37 20 percent. 21 MS. YEE: So the ratio you used was adjusted to 22 reflect declining activity going forward? 23 MR. LAMBERT: That's correct. 24 MS. YEE: Okay. 25 MS. JOHNSON: May I note here that they're -- 26 they're comparing it to sales. And again in our 27 situation sales don't matter. You know, they're trying 28 to build that ratio against a sales number, saying that 37 1 our proceeds -- our sales increased so therefore they 2 should have increased. But it doesn't, that's not how 3 it works in software. 4 MS. STEEL: How it works then? 5 MS. JOHNSON: How it works in software is that 6 you have -- so, a software -- the life of a software 7 company, the more -- the older you get as a company the 8 more your profit margin increases because you have 9 committed all your expenses. 10 You don't have -- you don't have a 11 relationship. You don't have inventory that's related 12 to your sales because you've already invested all this 13 time in building the code. Now you're just flipping 14 off, hey, you know, hamburgers off the -- or, you know, 15 the disks. That's all you're doing is churning disks. 16 So there's no relationship to sales -- excuse 17 me -- yeah, like a liquor store you have -- you're 18 buying liquor post-sale and then selling it retail, 19 right? You're always going to have that relationship. 20 MS. STEEL: Can you provide the -- the 21 documents for that Use Tax? 22 MS. JOHNSON: Oh, yeah -- well, the Use Tax 23 is -- what -- what -- can I provide what documents? 24 MS. STEEL: The records. Purchase records. 25 MS. JOHNSON: We don't have purchase records 26 but what I included in number 7 was all the Sales and 27 Use Tax that -- that show our purchase -- I'm sorry, 28 that is our purchase records, okay, that is -- that was 38 1 used for our sales tax credit -- Sales and Use Tax 2 credit. 3 So, this would have been similar and we would 4 have had those similar back in -- in those previous 5 audits, too. 6 MS. NGUYEN: So what those records are showing 7 is basically we paid $209,594.86 to California vendors 8 in tax for purchases made through -- through the one 9 year, which April 1st to, you know, March 31st, 2005. 10 For one year -- for one year we basically -- if 11 we were going to do it in measure, we basically 12 purchased $3.8 million of purchase of assets or fixed 13 assets, office supplies, computers and et cetera from -- 14 you know, from California vendors. 15 And then, you know, if you notice that we also 16 self-accrued, you know, any tax that were purchased from 17 out of state. And we self-accrued for that year about 18 another 823,000 in measure. 19 So if you add those to -- if you add that just 20 that one year, you know, what we did is we basically 21 purchased $4.8 million in -- 22 MS. STEEL: So, to the Department that, you 23 know, we assume these figures for percentage of rate of 24 error. 25 MR. LAMBERT: Right. 26 MS. STEEL: So, did you look at that what they 27 provided, all the documents and then did you go through 28 it? 39 1 MR. LAMBERT: The information that they 2 provided now -- 3 MS. STEEL: Uh-huh. 4 MR. LAMBERT: -- I don't believe so. 5 MS. NGUYEN: Well, we just found -- 6 MS. YEE: Let me have the Department answer and 7 I will -- 8 MS. NGUYEN: Oh, yes. 9 MS. YEE: -- get back to you. 10 MS. NGUYEN: We're sorry. 11 MS. YEE: I'll give you time. We're just 12 trying to get all this information in our head. 13 MS. NGUYEN: Yeah. 14 MS. YEE: Thank you. 15 MR. LAMBERT: We have not looked at that 16 information. The problem with -- with this is it's not 17 just purchases from vendors of -- of fixed assets and 18 consumable supplies. It's also withdrawals from resale 19 inventory that they're using for different reasons. And 20 the information is not available to look at to determine 21 any of that amount. 22 So, the fact that they provided this 23 information here is it's not going to help us come up 24 with an answer. 25 MS. NGUYEN: I'm sorry, but I'd like to -- 26 MS. SAMANT: Yeah, I know what he's talking 27 about. 28 MS. NGUYEN: Yeah. We don't have any 40 1 withdrawals from inventory, you know. 2 MS. SAMANT: We don't have inventory. 3 MS. NGUYEN: We're -- we're a software company. 4 We basically are, you know -- Macromedia is, you know, 5 basically trying to research new software, new 6 technology for, you know, photography or for, you know, 7 on-line access. There -- we don't have any -- we don't 8 withdraw any -- we don't have any inventory. We don't 9 keep inventory. 10 I mean if you were talking about inventory I 11 think it would be our Research and Development engineer 12 people. 13 MR. LAMBERT: Okay. Well -- 14 MS. NGUYEN: Yeah. So there is no -- there is 15 no inventory that we're pulling out and, you know, I 16 just wanted to also, you know, note that the -- the 17 Department is assuming that this Use Tax is lowered 18 because, you know, we're not accruing more. But they 19 don't also realize that we're probably transitioning 20 more to California vendors, so we're paying more sales 21 tax at source, you know, to our California vendors and 22 basically purchasing less from our out-of-state vendors. 23 And that could be the reason for the decline in Use Tax, 24 you know. 25 And if you look at the like prior audits I 26 mean -- I mean the Department has mentioned prior audits 27 and if you look at prior audits, you know, that we had 28 three cycles for the last 11 years this -- this -- you 41 1 know, this area has never been addressed too much to 2 something to 1.4 million in measure that they would 3 like -- that you guys would like us to pay now and, you 4 know, it really has not really been addressed and, you 5 know, we kind of like -- if you look at the prior audit 6 period we had no issue in it. 7 I mean, the auditor said pay bills test was 8 done for the year, nothing has came up, fixed assets 9 were looked at, nothing happened -- I mean it's in the 10 audit comments of these auditors for the last three 11 years and I'd like that to take into consideration that. 12 MS. STEEL: Department. 13 MR. LAMBERT: Yes. In the audit -- prior audit 14 has purchases subject to -- and I'm just reading from 15 the -- from the report, "Purchases subject to Use Tax 16 understated. Item A, items withdrawn from resale 17 inventory given away. B, items withdrawn from resale 18 inventory used for training classes." 19 So, obviously they do have withdrawals from 20 inventory for use, but the Department can't say how much 21 they had this time because we haven't been provided with 22 the documentations to audit to say it isn't accurate or 23 not. And that's the whole problem that comes into -- in 24 this case you have them reporting five -- I believe it's 25 5.6. That might not be an accurate statement. But over 26 $5 million in purchases subject to Use Tax in the prior 27 audit period and in this audit period you have 1.2 28 million. 42 1 It's a substantial difference. We don't -- we 2 haven't been allowed to audit anything. We've made 3 assumptions because of that. 4 MS. STEEL: Thank you. 5 MS. NGUYEN: One more point. I know that the 6 Department is pulling an -- an audit report dated back 7 in 1992. And during 1992 I don't think we were in -- 8 you know, we were basically in production of more like 9 hard goods, compact disks, more tangible stuff. But if 10 you're looking at, you know, the -- the more recent 11 audit, which is dated in 2000, where we just started the 12 dot.com, you know, industry, internet was very, you 13 know, available and Macromedia was one of the drivers 14 and one of the leaders in the innovation of putting 15 every -- all these softwares on line. 16 So, I mean, you know, that's when we started 17 moving away from all this inventory that, you know, we 18 had back in 1992 when we didn't even know really 19 computer really existed. 20 MS. YEE: Okay. I'm going to have you stop 21 there. I want to get all the questions out on the table 22 from the Members. 23 MS. STEEL: Thank you. 24 MS. YEE: Ms. Steel, thank you. Okay, Mr. 25 Horton. 26 MR. HORTON: Yeah. Is there any reason we 27 couldn't have extrapolated using Cost of Goods Sold 28 instead of sales? And would that have been in hindsight 43 1 maybe a better reflection? 2 MR. LAMBERT: I'm just thinking because I 3 hadn't thought of that before. Would Cost of Goods Sold 4 be a better indicator? 5 MR. HORTON: Based on the -- 6 MR. LAMBERT: You know -- 7 MR. HORTON: -- recent testimony. 8 MR. LAMBERT: -- yeah, I -- I don't know the 9 answer to that question. 10 MR. HANKS: Mr. Horton, I -- I think you 11 probably could have used either -- either method in -- 12 in this case. But I think Cost of Goods Sold would have 13 been rising at the same time that -- that their sales 14 were rising. So you probably have an incremental 15 increase in either Cost of Goods Sold or -- or in sales. 16 MR. HORTON: No, I -- I would agree, the -- the 17 taxpayers is contending that at some point there was a 18 change in the relationship of Cost of Goods Sold to 19 sales and particularly a relationship to the Use Tax, in 20 that they actually started to inventory less items. 21 So, theoretically, there would have been a 22 reduction somewhere along the lines in actual Costs of 23 Goods Sold. Just taking the testimony. I mean, I'm not 24 trying to -- 25 MR. HANKS: Right. 26 MR. HORTON: -- micro-manage the audit, but -- 27 MR. LAMBERT: I think -- I think there's a flaw 28 in that argument. You're basically saying -- what 44 1 they're saying is back in '92 and actually this audit 2 was in '96, but back in that period we've reduced it. 3 But then when you look at the taxable measure from the 4 prior audit it's 5.2 million. So it doesn't -- or 5.6, 5 I'm not sure, it's over 5 million -- that they reported 6 in purchases subject to Use Tax. So that -- that 7 argument doesn't really hold. 8 MR. HORTON: So -- 9 MS. YEE: Let -- I'll give you time. Please. 10 MR. HORTON: -- you're basically saying that 11 the Cost of Goods Sold -- the relationship to Cost of 12 Goods Sold and sales was consistent throughout the audit 13 period and the auditor didn't observe that there was any 14 fluctuation that would cause them to be concerned about 15 a reduction in the Use Tax -- extrapolating the Use Tax 16 from the test period? 17 MR. LAMBERT: Well, the auditor did not take 18 Cost of Goods Sold into account and -- I guess the basic 19 problem is -- 20 MR. HORTON: Did -- 21 MR. LAMBERT: -- is that we weren't -- we 22 didn't have access to that. All we had were just an 23 electronic file with sales on it and -- and that's 24 really the problem with this particular case. 25 MR. HORTON: Okay. So, I mean in the absence 26 of any other information the Department didn't -- it 27 didn't appear that they had any options. But with that 28 information, is that information available now? 45 1 MS. JOHNSON: Well, there's two things that's 2 available. One is that Exhibit 7, which gives all the 3 purchases for -- for California for that time -- 4 actually it's for everything but two quarters where -- 5 so it's two years and this is -- the audit period is two 6 and a half. I could find -- so, in essence there would 7 be even more than this if we looked at that further 8 analysis. 9 So that's -- that's new information that would 10 support -- 11 MR. HORTON: So Exhibit 7 has -- help me 12 understand that. 13 MS. JOHNSON: Yeah, there's a -- there's two 14 sections in there. There's -- 15 MS. SAMANT: There's a summary page in the 16 front. 17 MS. JOHNSON: Well, that's two -- that's for 18 the first section only. So there's -- there's a divider 19 with just a single white page. 20 MR. HORTON: Are the pages numbered? 21 No. 22 MS. NGUYEN: No, we should have done that. 23 MS. JOHNSON: So that if you look at the second 24 page that's for FY '05. Okay. So that shows you 1.7 25 million. And 146,000 of tax. 26 MR. HORTON: Got it. 27 MS. JOHNSON: Then if you -- then you have all 28 the detail behind it that supports that number. So 46 1 that's all the purchases. And then behind -- then 2 there's a blank page and then there's another page that 3 shows EZ Tax Credit from that -- that supports -- that 4 shows the number went onto that form. And then behind 5 that one shows the second -- 6 MR. HORTON: So this is the purchase of -- 7 of -- 8 MS. JOHNSON: Of equip -- this is the purchase 9 of -- 10 MR. HORTON: -- (inaudible) I'm sorry. 11 MS. JOHNSON: -- equipment, supplies, things 12 that we use -- the type of things that we purchase in 13 California, okay -- 14 MR. HORTON: And this -- 15 MS. JOHNSON: -- that we would be subject to 16 Use Tax. 17 MR. HORTON: And the -- and you pay the tax on 18 that? 19 MS. JOHNSON: And we've paid the tax on it. 20 MS. NGUYEN: Too, because these are California 21 vendors. So we paid at the source. We pay the sales 22 tax at the source to the California vendors. 23 MR. HORTON: What about the -- the additional 24 Use Tax that's being assessed by the Department? 25 MS. JOHNSON: Right. Well, that one's -- no, 26 so we have paid 1.2 which we recognized on our tax 27 return, itself, right. 28 MR. HORTON: Okay. 47 1 MS. JOHNSON: They're -- they're assessing us 2 an additional 1.4 million. But we're saying we don't -- 3 1.4 -- because they're contending that the percentage 4 relative to sales should be the same as the last 5 quarter -- should be the same as FY '02, for instance. 6 MR. HORTON: I don't know that this has any -- 7 MS. NGUYEN: Well, I mean that's -- that's if 8 they were saying that, you know, all of a sudden we -- 9 they're saying that if we continued using these 10 out-of-state vendors then we would accrue Use Tax, 11 right? But we're saying that, well what if we change, 12 you know, from using these out-of-state vendors and 13 start purchasing all of our offices and equipment in 14 California and started using California vendors, 15 therefore we are eligible for this California credit tax 16 because we -- you know, we purchase -- you know, and 17 using California vendors and we pay tax on these 18 California vendors. That's the reason -- 19 MR. HORTON: But that seems like a -- seems 20 like you're arguing several different things here. So 21 let me make sure that I can -- 22 MS. NGUYEN: Okay. 23 MR. HORTON: -- separate the two in my mind. 24 You've presented a schedule showing the Sales Tax that 25 you've accrued from California vendors. 26 MS. JOHNSON: Right. So that -- 27 MR. HORTON: And -- and -- 28 MS. JOHNSON: -- that shows all of our 48 1 purchases for that period. 2 MR. HORTON: -- Ms. -- 3 MS. YEE: Ms. Johnson -- Ms. Johnson, you'll be 4 well served to listen to the question first, please. 5 MR. HORTON: And so -- so, in -- and you're 6 saying that you're entitled to a tax paid resold credit 7 because you actually sold some of this? 8 MS. NGUYEN: No, no. 9 MR. HORTON: What's the credit that you're -- 10 MS. JOHNSON: Can -- can I explain the credit? 11 MR. HORTON: -- you're -- 12 MS. JOHNSON: All right. 13 MR. HORTON: -- entitled to? 14 MS. JOHNSON: This is -- this is a -- we had to 15 support purchases that they were -- they were paid Sales 16 Tax on those purchases, or Use Tax, okay. But we had 17 to -- we didn't have our invoices -- 18 MR. HORTON: -- enterprise. 19 MS. JOHNSON: -- our records -- vendor records. 20 So, what we did is we found on our California income tax 21 return there is a sales tax credit that you can get, 22 there's a -- it's called the California EZ -- 23 MR. HORTON: Right, right. 24 MS. JOHNSON: -- Sales and Use Tax credit. 25 This is the documentation that supports that credit, 26 which shows all of our purchases for '05 and and '04 -- 27 '04 and '05, okay? 28 MR. HORTON: Okay, I got it. I got it. 49 1 Now -- now, help me understand how that has 2 relevance to the audit and the audit liability. 3 MS. JOHNSON: Because -- 4 MR. HORTON: I mean, this is the amount that 5 you've -- you've collected, you've accrued. You took 6 the credit on the 385 Z -- 7 MS. JOHNSON: Uh-huh. Yeah. 8 MR. HORTON: -- on the enterprise zone credit. 9 So you've got that credit, I understand that. 10 MS. JOHNSON: Yup. 11 So, what it is says is that would have asked us 12 for detail of what were your purchases, and we would 13 have provided this information saying, "These are our 14 purchases and we would have shown that we've already 15 either paid sales tax on it because it shows sales tax 16 on there, or -- or we would have accrued Use Tax on it. 17 MR. HORTON: Okay. For the Department. Is 18 there -- the sales tax that the taxpayer has accrued and 19 has evidence that they have accrued the Sales Tax, are 20 any of these items included in the tests? 21 MR. LAMBERT: There was no test. So we didn't 22 have -- 23 MR. HORTON: Oh, in the amount that you picked 24 up. 25 MR. LAMBERT: I don't know how to answer -- 26 either -- I don't know how to answer that other than we 27 used the percentage from the prior audit. They -- what 28 took place during this audit period -- 50 1 MR. HORTON: Uh-huh. 2 MR. LAMBERT: -- we had no information for, we 3 had no detail. We didn't know what assets were 4 purchased. We didn't know what consumable supplies were 5 purchased. We didn't know the withdrawals from 6 inventory for whatever reason. Anything that they would 7 accrue tax on, we did not have access to that 8 information. We -- we couldn't and did not audit that. 9 So -- 10 MR. HORTON: So -- 11 MR. LAMBERT: We used -- 12 MR. HORTON: -- tell me, how did the Department 13 come up with the -- 14 MR. LAMBERT: We used the prior -- the 15 percentage from the prior year -- well, let me start 16 exactly how we did it. 17 The -- the prior audit they reported 5 point 18 something in measure, in taxable measure on line 2 of 19 their returns. We took that amount and divided it into 20 their total sales to come up with a percentage. And 21 I -- I believe it came up to 6.4 percent. 22 MR. HORTON: Yeah. 23 MR. LAMBERT: And so, what we looked at was 24 that we could see that it was -- that anyway there might 25 have been some decline in the 2002 period. 26 MR. HORTON: Right. 27 MR. LAMBERT: There was only -- it worked out 28 to be 2.6 percent of their sales were equal to the 51 1 purchases that were subject to Use Tax. And so we used 2 that last ratio for 2002 as our audited figure for this 3 audit period. 4 MR. HORTON: Okay. 5 MR. HANKS: Giving them allowance -- 6 MR. HORTON: Let me -- 7 MR. HANKS: -- for the 1.3 percent that they 8 had previously reported to us in -- in Use Tax measure. 9 MR. LAMBERT: Right. 10 MR. HANKS: So we held a 2 percent of -- of -- 11 of this calculation was subject to Use Tax; we were 12 taxing 1 percent basically and giving them credit for 13 the 1 percent that they were already self-reporting on 14 line 2 of their Sales and Use Tax returns. 15 MR. HORTON: Okay. Now it's their argument 16 that they actually paid tax to California vendors on 17 equipment purchases. Is this new information? 18 MR. LAMBERT: This -- this is new information 19 that they provided. Number 7 -- 7 -- 20 MR. HORTON: Right. 21 MR. LAMBERT: -- all that information is new -- 22 MR. HORTON: All that is new? 23 MR. LAMBERT: -- is new to the Department. 24 So -- 25 MR. HORTON: And if the Department was to take 26 this under consideration would that change? 27 MR. LAMBERT: Well, I'd have some questions. I 28 don't know. And I guess my question is -- 52 1 MR. HORTON: I mean, let's presume that this is 2 correct, accurate, they actually purchased from 3 California vendors -- they changed their purchasing 4 practices to now buy from California vendors and to pay 5 the tax, presumingly as evidented by this subject to the 6 review of the Department, would that change your 7 assessment? 8 MR. LAMBERT: Well, I guess the question I 9 would ask -- and I -- I don't know all the details. I'd 10 probably need to know a little bit more, but it's 11 possible that that change had already been made in the 12 prior year and that's why you went from 6.5 percent, and 13 actually the years before that were higher than that, 14 down to the 2.6 in 2002. 15 MR. HORTON: Gotcha. 16 MR. HORTON: Okay. 17 MS. NGUYEN: I'm sorry, Mr. Horton, I'd like to 18 also mention one thing, that Macromedia was basically 19 getting acquired. So, you know, if you look at the 2005 20 their purchases, they wouldn't be -- you know, if they 21 were going to be acquired they wouldn't be going out and 22 buying a whole bunch of, you know, soft -- like servers 23 or whatever it is, they'd have to be -- 24 MS. YEE: And I think what the Department had 25 mentioned earlier was that there was some consideration 26 made in terms of what was -- 27 MS. NGUYEN: Well -- 28 MS. YEE: Yeah, I think -- 53 1 MR. HORTON: I mean, the challenge we have here 2 is the Department didn't have any books and records to 3 look at. So they used the information that they had and 4 made an -- an assessment. And now you're providing 5 additional information and so we have not been able 6 to -- to -- to evaluate this information and -- and see 7 whether or not it's been incorporated in the implied or 8 actual innate modifications relative to what occurred 9 previously. 10 So, no one's been able to make that decision so 11 I mean we can't make that decision, either. I mean, in 12 the absence of -- we can't do the audit, so in the 13 absence of the information the -- the Department has 14 right now that you've provided -- only right by virtue 15 that their making the decision based on the most 16 accurate information that's available to them. And now 17 we're providing additional information and additional 18 evidence that based on your argument that you're -- 19 the -- your purchase -- purchasing practices changed 20 from the prior audit significantly to say that the prior 21 audit information doesn't reflect the current 22 situation. 23 Is that -- am I -- 24 MS. JOHNSON: That part -- that's partly true. 25 However, there is no relationship to sales. That's what 26 we're trying to deliver here, the message is. 27 MR. HORTON: Well, we're saying the same thing. 28 We're saying the same thing. 54 1 MS. JOHNSON: But so their percentage is based 2 on sales. And so they want to take that, multiply it, 3 because our sales went up then therefore our percentage 4 should have gone up. 5 MR. HORTON: Yeah, that's -- that's a normal 6 logic. You -- you've changed your practice, the 7 industry has changed because you no longer need to have 8 inventory, you can now send it electronically, but 9 theoretically I mean that's a presumption that could 10 have gone both ways. The auditor could have presumed 11 because now you're -- you're -- you're more technically 12 advanced that you're actually going to acquire more 13 equipment than you would if you were using the hard copy 14 in your old machinery. 15 So -- but the -- but, again, all of this is 16 something that is subject to facts and subject to 17 documents that wasn't available to the auditor at the 18 time. And so now what you might be asking us is 19 to allow you time to provide this information to the 20 Department so the Department can make an assessment of 21 its validity. 22 But, again, I don't want to make your arguments 23 for you. 24 The XYZ letter -- 25 MS. JOHNSON: Uh-huh. 26 MR. HORTON: -- did -- was there -- I'm about 27 to ask a question -- was there -- was there a contract 28 on that particular transaction, that -- 55 1 MR. LAMBERT: There were contracts, yes. 2 MR. HORTON: And did the contract provide for 3 the transfer of -- of a disk? 4 MR. LAMBERT: It did. 5 MR. HORTON: It -- okay. And -- and so all the 6 evidence indicated that something was transferred? 7 MR. LAMBERT: Not all the evidence but -- 8 MR. HORTON: All the available evidence? 9 MR. LAMBERT: We should -- the evidence we got 10 from them indicated that there was a C.D. -- that they 11 had the ability to obtain a C.D. and that the electronic 12 files that they presented us showed that a C.D. was 13 provided and shipment was made. 14 MR. HORTON: Okay. 15 MR. HANKS: If I could provide, also, Mr. 16 Horton -- 17 MR. HORTON: Yes. 18 MR. HANKS: -- when looking at these invoices 19 for the -- the sales to the University we note that 20 there's a -- a detailed description of the software 21 that's sold and -- and there's -- there are separate 22 line items that delineate the -- the C.D.s that were 23 provided. 24 For instance with this one invoice I'm looking 25 at it indicates that they're going to contribute three 26 C.D.s with respect to -- to this one invoice. Another 27 relates to software called Free Hand MX Max C.D. 28 provided. Macromedia Captivate Win C.D. Freight 56 1 charges in connection with the transfer and -- and 2 shipping of -- of these C.D.s was $10 in this case. 3 When we look at another invoice I have similar 4 descriptions of Flash Paper 2 Win C.D. English version. 5 Authorware 7.0 C.D. only. Contribute three C.D.s Dream 6 Weaver MX 2004 C.D. in English. Fireworks C.D. So 7 you've got detailed descriptions of -- of the particular 8 software that was supplied under these contracts. 9 MR. HORTON: Yeah. 10 MR. HANKS: And so it indicates that C.D.s 11 supplied, and in connection with all of these invoices 12 we see freight charges -- 13 MR. HORTON: Got it. 14 MR. HANKS: -- that presumably relate to the 15 shipment of those C.D.s. 16 MR. HORTON: So to the taxpayer, so there's an 17 employee at the University that's willing to say -- 18 MS. JOHNSON: Yes. 19 MS. NGUYEN: Yeah. 20 MS. JOHNSON: Yes. 21 MR. HORTON: -- that that's not true? 22 MS. JOHNSON: He did. He did and he -- and 23 may -- yeah. 24 MR. HORTON: And what's his position? 25 MS. JOHNSON: He's the one that was negotiating 26 the contract and then he probably had his supervisor 27 sign the contract. 28 MS. NGUYEN: So, his position is Contract 57 1 System Technology -- we're like System Technology 2 contract, contract service procurement. He also is 3 willing to -- you know, if you guys want to give him a 4 call and speak with him, he's willing to do that, too. 5 MR. HORTON: No, we don't want to call him. I 6 want to share a conversation I had with Bill Gates. We 7 were at his facility. He was asking for a favor of the 8 Legislature. 9 But I asked him, why don't you just transfer 10 all these things electronically, and he indicated that 11 there's a certain legal benefit in having the hard copy 12 and that there's a certain possessory interest and he 13 went into a whole bunch of other stuff and I just left 14 it alone, after about -- very intelligent guy. I mean, 15 he was just -- but I got it in the first couple of 16 words. 17 I don't know if -- maybe if you -- if the 18 University itself was willing to -- to say that that 19 contract is no longer valid and that there is no 20 contractual relationship because you are -- the contract 21 calls for the transfer of tangible personal property. 22 And generally speaking there's a logic behind it and 23 we're not in the position to -- to second guess what the 24 University was asking for or to second guess the -- the 25 information. 26 But I don't know if the University is willing 27 to -- to put itself off on the limb legally to libel 28 itself. Maybe this individual is, but maybe the 58 1 University is not. 2 But if there was additional testimony where the 3 University said this contract is no longer -- is not 4 valid, this provision in the contract is not valid and 5 whatever obligations your company has relative to that 6 contract are no longer valid because you did not have to 7 comply with that, it's difficult -- you know, it's 8 difficult to -- to impeach the facts subsequent to that. 9 But if you -- maybe you can get us additional 10 information where someone is willing to go that far 11 other than an employee with the -- with the University. 12 But I -- this is not something that I think we can -- we 13 don't have enough information to -- to resolve this in 14 any other way than to rule in favor of the Department. 15 MS. STEEL: Mr. Horton, are -- are you asking 16 them to bring the paper on the University stationery or 17 you are asking for a letter from higher position person? 18 MR. HORTON: You know, again I want to defer to 19 the Department to -- I make that call but what I would 20 say to the Department is, is that if there was -- if the 21 University, itself, and their legal team was willing to 22 say that this contract was not valid or that there was 23 an error in the contract and therefore whatever 24 obligations that this company has pursuant to this 25 contract they no longer have that obligation, because 26 the mere fact that you called for the transfer of the 27 document gives them certain rights in a Court of law if 28 you don't comply. And subsequent rights, if for some 59 1 reason the software that you transferred electronically 2 doesn't work. And so, because that exists I don't know, 3 you know, if -- strike that. Because the mindset 4 exists relative to the purchaser in asking for it, the 5 intent of the parties has been established. So to 6 unwind that has legal ramifications and I don't know if 7 the University would be prepared to go there, but if 8 they would I would suggest that the Department sort of 9 entertain that. MS. YEE: Okay. Thank you, Mr. 10 Horton. 11 Ms. Mandel. 12 MS. MANDEL: Did I have a question for you, Mr. 13 Levine? 14 MR. LEVINE: Well, I think we already have the 15 Department agrees that under this contract if there is 16 not other evidence of delivery of TPP that the 17 Department has accepted that the sale is electronic 18 only. 19 My concern about these, and maybe it's just 20 because I don't understand the facts, is it appears that 21 the person who sent the letter is the person who 22 negotiated the master contract and then perhaps for all 23 of the University system who places orders under that 24 contract with the same terms. 25 So, if that's the case he can state what -- 26 what his intent is but he can't state whether Long Beach 27 actually did say send us a backup and so we would need 28 it from the persons involved in the actual transaction 60 1 in dispute. 2 MS. NGUYEN: I just want to say one thing, so 3 California State University, this particular vendor, 4 they're actually the people who, you know, purchase all 5 the stuff for California University. So it wouldn't be 6 where, you know, like say Sacramento State calls them up 7 and say, "Hey, I can't download this, can you tell 8 Macromedia." It's not like different contracts. It's 9 basically this person speaks on behalf of -- 10 MS. YEE: System-wide. 11 MS. NGUYEN: -- yes, system-wide. 12 MS. YEE: System-wide. 13 MS. NGUYEN: And he's saying that, "I want you, 14 Macromedia, to provide this platform so I could have my, 15 you know, CS -- my California University IT group go on 16 line and access this information, then download it 17 down." 18 MS. YEE: Okay. 19 MR. HORTON: Well -- Madam Chair. 20 MS. YEE: Yes, Mr. Horton. 21 MR. HORTON: The request of the Department 22 is -- is fair. It seems to be fair, it seems to be 23 equitable. It seems to be easily accomplished. 24 So, as you've been able to -- to get this 25 gentleman to -- to -- to document his intent, maybe 26 there is some way that you can get the University or 27 the -- the decision-makers who made that decision to -- 28 to -- to document that, as well. 61 1 I certainly would caution you, which I can't do 2 because I don't have the legal authority, though, but I 3 don't think they're going to do it because of the -- 4 the -- the possessory interest that's created when that 5 document is transferred. 6 But if they will, that seems something that -- 7 that you can accomplish. I don't know why we're -- 8 MS. JOHNSON: Yeah, we would -- we wouldn't 9 mind -- we would do that very thing. We can -- we'll 10 contact this and pursue that avenue. 11 MS. MANDEL: Madam Chair. 12 MS. YEE: Yes, Ms. Mandel. 13 MS. MANDEL: You know, I appreciate that you 14 have this letter but technically it says that he did not 15 receive, and I think that's what the Department is 16 saying. And then he says, you know, it's to the best of 17 his knowledge, information and belief formed after 18 reasonable inquiry. 19 And I think when he says "I," he -- he may be 20 referring, you know, to the University, but he hasn't -- 21 he hasn't explained what -- you know, what he did to try 22 to figure out that nobody at the University got it. He 23 just says formed after reasonable inquiry. And if you 24 were normally laying out why you want someone to rely 25 on -- on an individual's statement when there seems to 26 be some con -- potential conflict in the underlying 27 documents they would -- they would go lay out what they 28 did that -- that led them to form that belief. 62 1 MS. NGUYEN: I'd like -- 2 MS. MANDEL: So it's kind of a little 3 incomplete. 4 MS. NGUYEN: I'd like to also point out that 5 the -- the Department like the -- DPA, the audit 6 Supervisor and the auditor, you know, he phoned in. He 7 spoke with them. They were able to ask him numerous 8 questions. 9 MS. MANDEL: No, I understand that. But this 10 Board sitting here today has to go off of what we have 11 in front of us. And what we have in front of us is this 12 document. So, -- 13 MR. HORTON: I can only speak -- 14 MS. YEE: Mr. Horton -- 15 MR. HORTON: -- for myself. 16 MS. YEE: -- please. 17 MR. HORTON: If you have the lawyers for the 18 University write a letter that says under penalty of 19 perjury that they did not receive this document and that 20 the contract that was originally drafted is incorrect, 21 it's invalid because it's incorrect and here's an 22 amended contract we want to send over there and so 23 therefore then that's a good beginning. 24 MS. YEE: Okay. Other questions, Members, on 25 this? 26 Okay. Hearing none, is there a motion? 27 MS. MANDEL: Take it under submission. 28 MS. YEE: Motion by Ms. Mandel to take this 63 1 matter under submission. Is there a second? 2 MS. ALBY: Second. 3 MS. YEE: Second by Ms. Alby. Without 4 objection, that motion carries. 5 Thank you very much. We will discuss your 6 matter later today and send you written notice of our 7 decision. 8 MS. JOHNSON: Thank you. 9 MS. YEE: Thank you. 10 MS. NGUYEN: Appreciate that. 11 MS. YEE: Thank you, Department. 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 64 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 March 24, 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 64 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: May 6, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 65