BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT MARCH 24, 2010 ITEM C3 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by TESTOUT CORPORATION (Case No. 400769, 400658 OH) 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 Bradley Heller 18 Legal Department 19 Robert Tucker Legal Department 20 Kevin Hanks 21 Sales and Use Tax Department 22 For Petitioner: Steve Young 23 Attorney at Law 24 ---OOO--- 25 26 27 28 2 1 Sacramento, California 2 March 24, 2010 3 ---oOo--- 4 MS. OLSON: Next item is C3, TestOut 5 Corporation. 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. 12 All parties, agents and participants are on the 13 Alpha listing provided to the office. 14 Each person sitting at the table will be asked 15 to introduce themselves and if necessary their 16 affiliation with the taxpayer. Ten minutes is allocated 17 for the opening presentation followed by ten minutes for 18 the Department's presentation and five minutes is 19 allocated to the taxpayer for rebuttal. 20 Ms. Yee. 21 MS. YEE: Thank you. We are on Item C3, 22 TestOut Corporation. Mr. Levine will introduce the 23 matter. 24 MR. LEVINE: Good afternoon, Madam Chair, 25 Members. David Levine for the Appeals Division. 26 The issue in this petition and claim for refund 27 of TestOut Corporation is whether Petitioner was 28 required to collect and report Use Tax because it held a 3 1 certificate of registration Use Tax. 2 MS. YEE: Okay. Thank you very much. Good 3 afternoon. 4 MR. YOUNG: Good afternoon, Madam Chair, 5 Members. I appreciate the opportunity to be here. My 6 name is Steve Young. 7 MS. YEE: Okay. 8 MR. YOUNG: No, I'm not the San Francisco 9 Forty-Niner's quarterback. I am an attorney from Utah 10 representing a company called TestOut Corporation. 11 MS. YEE: Okay. You'll have ten minutes for 12 your presentation. 13 MR. YOUNG: Wonderful. Thank you. 14 TestOut Corporation is a company based in Utah. 15 And this case presents a question under BOE Rule 1684 16 and the United States Constitution. 17 The question is this, when TestOut registered 18 for California Use Tax -- Use Tax certificate of 19 registration, was that registration voluntary or 20 involuntary? If voluntary, TestOut waived its 21 constitutional right to argue nexus. If involuntary, 22 TestOut did not waive its constitutional right and since 23 Nexus is conceded in this case for the 2003 through 2005 24 audit period before you, TestOut must prevail. 25 I will not belabor the facts because they were 26 laid out extensively in the -- in the briefing but I'll 27 just highlight a few today. 28 In 2001, the Department contacted TestOut and 4 1 reported that TestOut had nexus in California based on 2 very sporadic employee visits and demanded that TestOut 3 register to collect tax retroactively to 1999. 4 TestOut sent eight separate letters to the 5 Board objecting strenuously that it had no nexus and 6 that it did -- refused to register. 7 Quoting one letter, TestOut stated 8 jurisdiction over the Board -- of the Board over TestOut 9 and the obligation to collect tax is strenuously 10 disputed by TestOut. 11 This statement was repeated eight times in 12 eight separate letters between 2001 and 2003. Those 13 letters are attached to our brief and there was 14 extensive objections on TestOut's part. But despite 15 these objections TestOut, like any reasonable taxpayer, 16 was aware that if it did not register the Department 17 possessed authority to require TestOut to pay taxes, 18 penalty and interest, and if TestOut did not pay the 19 Department could damage TestOut's credit, lien or levy 20 or seize its property and force TestOut into prolonged 21 litigation. 22 TestOut thus finally acquiesced and registered 23 in 2003. 24 The BOE then issued two deficiencies to 25 TestOut totaling over $200,000. 26 TestOut appealed both deficiencies on nexus 27 grounds. TestOut settled the first because the -- 28 because the litigation was extensively burdensome for a 5 1 small company from Utah, but TestOut realized later that 2 this settlement was being used against it as was the 3 initial registration in 2003, and so TestOut has not 4 settled this case and that's what's here before you 5 today. 6 And TestOut is seeking relief on -- on nexus 7 grounds. 8 From 2001, from the initial contact until 2008 9 the Department maintained in every communication orally 10 and in writing that -- very strenuously that TestOut had 11 nexus in California for that entire period. 12 And -- and during this period the facts 13 changed very little. 14 TestOut sent out employees to California very 15 spor -- sporadically. Zero to one to two times per year 16 for -- for various reasons and -- and that really didn't 17 change much over time. 18 TestOut repeatedly asked me over this period 19 whether they could withdraw the certificate and stop 20 collecting tax. I said not until California agrees in 21 writing that you have no nexus. Otherwise you'll be 22 faced with taxes, penalties and interest and -- and 23 levies and seizures and so forth. 24 When I walked into the building today the 25 first sign I saw on the window said, "Get it in 26 writing." And that's exactly the -- the advice I had 27 given to my client back then. I don't think you have 28 nexus. I've never thought you had nexus. You didn't 6 1 think you had nexus. That's why we sent eight letters 2 to the -- to the Department stating that we didn't have 3 nexus. We didn't want to register but until the Board 4 tells you in writing that they agree with that we really 5 have no practical choice but to -- to register and 6 comply with what they're asking us to do, given -- given 7 their extensive authority to -- to damage our business. 8 Finally, in September 2008, the Board -- or 9 the Department conceded in writing that TestOut had no 10 nexus for the 2003 through 2005 audit period before you. 11 Immediately upon receiving that writing TestOut withdrew 12 its certificate for Use Tax and has not been collecting 13 and remitting California Use Tax since that time. 14 The issue is thus whether TestOut voluntarily 15 registered in 2003 and voluntarily maintained that 16 registration until 2008. If so, then TestOut waived -- 17 if it was voluntary then TestOut waived its right to 18 raise nexus. But if it was involuntary TestOut has not 19 waived its right and we must prevail since nexus is 20 conceded. 21 We believe it's -- it's very strong under 22 California law that -- that this indeed was not a 23 voluntary action on TestOut's part. The California 24 Supreme Court looked at a very similar issue in a 1971 25 case called Blair. It's cited in our brief. And they 26 ruled that in the face of intimidating legal 27 authority -- or action in the face of intimidating legal 28 authority is not voluntary. 7 1 The Blair case dealt with a statute that 2 formerly existed in California called the Claim and 3 Delivery statute. Under that statute if a private party 4 felt like another private party had property that 5 belonged to them, they could go to the Sheriff and say, 6 "Sheriff, that guy has my property." And the Sheriff 7 would take a look at it and say, yeah, okay, I agree 8 with you, and the Sheriff would go over to the other 9 person's house and he'd say, "You have this guy's 10 property, let me in to get it." And then the person 11 would let him in and they'd obtain the property and -- 12 and take it -- take it back. 13 That was done without pursuing a Magistrate 14 and a probable cause determination and a search warrant 15 as is required under the Constitution under the search 16 and seizure provisions. 17 California residents sued the State and said 18 that statute is unconstitutional. In response the 19 Sheriffs office argued in Court, "Look, despite the fact 20 that we don't have a warrant, the homeowners waive their 21 constitutional right because they voluntarily let it -- 22 voluntarily let us into their home." 23 The California Supreme Court said no, that's 24 not right. They said a waiver is, quote, "an 25 intentional relinquishment or abandonment of a known 26 right or privilege." Continuing the quote, "Invitations 27 to enter one's house extended to armed officers of the 28 law who deem -- who demand entrance are usually to be 8 1 considered as invitations secured by force." 2 "A like view" -- and -- and this is, you know, 3 obviously, in our case we don't have people with guns, 4 but then they continue. 5 "A like view has been taken where an officer 6 displays his badge and declares that he has come to make 7 a search, even where the householder replies, "All 8 right." 9 In this case, the guy standing at the door 10 says, "Okay, you're a Sheriff, you say you can come into 11 my house, go ahead and come on in." That -- that was 12 the fact. They specifically -- the words came out of 13 their mouth, "All right, you can come into my house." 14 Continuing the quote, "In claim and delivery 15 cases the occupant of the premises is confronted not 16 only by the intimidating presence of an officer of the 17 law, but also by the existence of legal process which 18 appears to justify the intrusion. In such a situation, 19 acquiescence to the intrusion cannot operate as a 20 voluntary waiver of 4th Amendment rights." 21 They even use the word "voluntary", which is 22 exactly what we're dealing with here. Did we 23 voluntarily register? No, we did not. 24 This situation in -- this situation is in 25 essence what has occurred in our case. An officer, a 26 taxing agent, displayed his badge or BOE credentials and 27 declared that he had come to require TestOut to register 28 to do business -- or to register to collect tax in 9 1 California, to which TestOut replied, "I disagree with 2 your conclusion but," quote, "'all right.'" 3 You know, we -- we signed the paper, we won't 4 dispute that we signed the paper, but these folks also 5 welcomed the Sheriff into their house. 6 TestOut was confronted not only by the 7 intimidating presence of a BOE tax agent, but also by 8 the existence of legal process -- in other words, 9 several written and oral statements from the -- from the 10 Department backed up by the authority to impose taxes, 11 penalty and interest and lien, levy and seizure 12 authority, which appeared to justify the registration. 13 Quoting the Supreme Court in Blair, in such a 14 situation acquiescence to the registration cannot 15 operate as a voluntary waiver of constitutional rights. 16 Similarly, after TestOut registered and 17 considered withdrawing TestOut continued to be 18 confronted by the same intimidating presence of -- of 19 the Department, including two assessments, penalties and 20 interest, et cetera, which appeared to justify the 21 continued registration. 22 This continued until the Department conceded 23 in writing in September of 2008 that Texas -- that 24 TestOut had no nexus. Thus again quoting the Supreme 25 Court, in such a situation acquiescence to the 26 registration cannot operate as a voluntary waiver of 27 Constitutional rights. 28 We've been told throughout this litigation, 10 1 well, if you believed what you're saying you should 2 stand by the courage of your convictions and you should 3 have not registered in the first place. 4 But that wasn't -- that wasn't the case in 5 Blair, that's not the standard. In standard -- or in 6 Blair, if they were going to stand by the courage of 7 their convictions they would have never let the Sheriff 8 in their house. The Supreme Court said letting the 9 Sheriff in your house when he's standing there with a 10 badge and purported legal authority is not voluntary. 11 In our case similarly dealing with a very 12 similar constitutional right under the commerce clause 13 rather than the search and seizure provision, it's not 14 voluntary. 15 Similarly to this California law, which is the 16 law of this State -- that's a binding case that's been 17 decided and has never been questioned or over -- 18 overturned. It was -- a statute was passed, you know, 19 repealing the claim and delivery provision because of 20 that case, but the case is still good law. And there's 21 also cases from other jurisdictions that have held 22 similarly. 23 In a 1999 New Jersey Federal District Court 24 case, the Compaction case, which is cited in our brief, 25 several parties were sued by the United States 26 government to fund the cleanup of an environmentally 27 contaminated superfund site under Circla. 28 The party -- 11 1 MS. OLSON: Time has expired. 2 MR. YOUNG: Okay, I'll -- 3 MS. YEE: Finish your thought, Mr. Young and 4 then we'll give you time on rebuttal. 5 MR. YOUNG: That -- that sounds great. 6 I'd just like to conclude by -- by saying that under 7 California law we think it's clear that this 8 registration was voluntary and therefore we have not 9 waived our right to argue nexus and because nexus has 10 been conceded -- or lack of nexus, we -- we prevail in 11 this -- in this case. Thank you 12 MS. YEE: Great. Thank you, Mr. Young. 13 Department. 14 MR. HELLER: Good afternoon, Madam Chair, 15 Members of the Board. My name is Bradley Heller. I'm 16 here with the Legal Department. To my right is Bob 17 Tucker, also with the Legal Department. And to his 18 right is Kevin Hanks from the Sales and Use Tax 19 Department. And collectively we're representing the 20 Sales and Use Tax Department in this appeal. 21 The Sales and Use Tax Department agrees with 22 the -- the Appeals Division's conclusion that the 23 Petitioner registered to collect Use Tax with the Board 24 and was required by Regulation 1684 and the Board's 25 unanimous memorandum opinion regarding the 2001 appeal 26 of B & D Litho, Inc. to collect California Use Tax from 27 its -- from its California customers and report it to 28 the Board until it closed out its account. 12 1 The Department also agrees with the Appeals 2 Division's recommendation to deny Petitioner's claim for 3 refund of the Use Taxes it collected from its customers 4 and reported to the Board while it was registered. 5 By Regulation 1684, Subdivision c clearly 6 allows retailers that are not engaged in business in 7 California to choose to register with the Board, and 8 once they do the regulation requires such registrants to 9 collect California Use Tax from their California 10 purchasers, give the purchasers a receipt for the tax 11 and pay -- report and pay the tax to the Board, and I 12 quote, "in the same manner retailers engaged in business 13 in this State." 14 Furthermore in -- in the B & D Lithographics, 15 Inc.'s case the Board held that retailerrers that choose 16 to register with the Board under Regulation 1684, 17 Subdivision c, are required to collect and remit tax -- 18 Use Tax to the Board regardless of whether they are 19 engaged in business in or have nexus with California. 20 And I believe the specific language in the case is that 21 nexus is irrelevant. 22 Therefore, the Sales and Use Tax Department 23 believes that the Petitioner was required to collect 24 California Use Tax during the audit period and is -- at 25 issue today and is liable for any uncollected Use Tax 26 under Regulation 1684, Subdivision e, which makes any 27 uncollected tax a debt to the Board. 28 In addition, the taxpayer is not entitled to a 13 1 refund of the California Use Taxes that it actually did 2 collect and report and pay over to the Board during the 3 audit period, and that's because the taxpayer has not 4 presented any evidence to show that those taxes that 5 were collected and reported were in excess of the amount 6 that was actually due to be collected and reported from 7 those purchasers. 8 In addition, as mentioned in the Decision and 9 Recommendation, a portion of the claim for refund was 10 not timely because it was not filed within three years 11 of the date, so the applicable payments -- so, the 12 periods prior to the second quarter of 2004 there -- 13 no -- no refund should be granted because there was not 14 a timely claim. 15 In addition, I just wanted to add that in the 16 context of tax we typically think of taxpayers complying 17 with the tax law as voluntary even in situations where 18 they're concerned that they will incur penalties or 19 interest if they don't comply. And so, I consider it 20 voluntary when I file my income tax return with the 21 Franchise Tax Board and the IRS, or my Use Tax return 22 with the BOE. And I recognize that I can receive 23 penalties if I don't file it on time or I don't report 24 the correct amount, but I don't consider it to be 25 involuntary. 26 And in addition, in this particular case our 27 auditors did not flash badges or show guns or come to 28 somebody's door in the middle of the night. They simply 14 1 sent the -- the letters that we typically send to 2 taxpayers that we believe are engaged in business in the 3 State and request that they comply with California law 4 and register. 5 And then again in this case the taxpayer 6 actually had a prior appeal that they could have 7 litigated the issue of nexus on and decided not to and 8 instead voluntarily registered while represented by 9 counsel. So, we really don't believe that the Blair 10 case or the decision from New York have any application 11 here. 12 Thank you very much. And the Department can 13 answer questions if you have any. 14 MS. YEE: Thank you, Mr. Heller. 15 Mr. Young, you have five minutes on 16 rebuttal. 17 MR. YOUNG: Thank you. I'd just like to 18 expound a little bit on a couple of other cases which 19 are cited in our brief. 20 In this New Jersey case, the Compaction case, 21 the primary parties settled with the United States 22 government and went to -- after another party saying 23 they -- they owe some of this liability, too, for this 24 environmental damage. 25 That separate party said that's not true 26 because these first parties voluntarily agreed to pay 27 their liability to the United States government, 28 therefore under the statute it doesn't -- you know, 15 1 we're not liable. That's a standard that was at issue 2 in the case. 3 In response the Court said this, which is very 4 insightful for us, quote, "A party reacting to an 5 administrative order pursuant to Circla directing 6 parties to remediate a site was not acting voluntarily." 7 Continuing, "If a party failed to comply with 8 the agreements it made with the government they would be 9 directly liable in the form of civil fines or additional 10 injunctive orders. Action under such threats is hardly 11 voluntary." 12 Responding to the Department's argument 13 they -- they suggested that, you know, everybody files 14 an income tax return every year. Well, that's because 15 they're required to by law. We were not required to by 16 law, therefore we fall into a -- a different kind of 17 situation on voluntary versus involuntary and here, 18 given that -- that the BOE was sending us consistent 19 messages that we were not -- or that we were required to 20 register, we -- we really had no practical choice. 21 The Department mentioned -- mentioned the 22 Milford case out of New York. In -- in that case the 23 taxpayer obtained a sales tax permit very similar to 24 this. New York had a -- a similar statute. But when it 25 went to trial the New York Court said, "We're not going 26 to require you to -- to register -- or to collect tax 27 even though you voluntarily registered, and so they 28 basically disagreed with this Board's decision from 2001 16 1 in B & D Lithograph. 2 But there's some language from that case 3 that's very insightful -- that is helpful for this fact 4 situation. In B & D Litho the taxpayer voluntarily 5 agreed to register. But in the New York case the ALJ 6 writes, "There is an additional reason to reject the 7 Division's position that Petitioner's registration in 8 New York compelled it to collect Sales and Use Tax. 9 The registration in this case was clearly done so the 10 Petitioner would be authorized to issue a resale 11 certificate to a supplier in lieu of paying the Sales 12 Tax. As such, registration was not voluntary." 13 They registered solely to get a resale 14 certificate for a -- for a separate purpose. Similarly, 15 we registered solely because the BOE was telling us we 16 had to. And I question whether such involuntary 17 registration was intended to come within the scope of 18 the statute. Similarly here, is our involuntary 19 registration intended to come within Section 1684? No. 20 1684 is a waiver of our constitutional rights if we 21 voluntarily register. But if it's involuntary then 22 there -- there is no waiver and therefore no tax 23 collection responsibility, if there is no nexus in the 24 case, which there is not in this -- in this case. 25 In its Board hearing summary, the Appeals 26 Division staff stated, quote, of course had Petitioner 27 requested cancellation of the registration and the 28 Department refused, then from that point Petitioner 17 1 would have been regarded as holding the registration 2 involuntarily. 3 Well, the truth is that's basically what 4 TestOut did. TestOut requested permission not to 5 register eight different times and the Department 6 refused? TestOut's registration was thus involuntary in 7 the beginning. After it registered, TestOut continued 8 to object through letters and the Board -- the 9 Department refused to let TestOut withdraw. As time 10 progressed and TestOut asked if it could withdraw, the 11 Board said if you request a withdrawal we will allow it, 12 but we will come after you for tax, penalty and 13 interest. 14 This threat is tantamount to a refusal. That, 15 you know, we could have -- we could have gotten our 16 certificate withdrawn and they conceded that they would 17 have allowed that, but then they said, "We're going to 18 follow that up and come after you for tax, penalty and 19 interest for all these taxes you could have been 20 collecting and were not." So what choice do we have as 21 a taxpayer but to comply with what they're telling us? 22 It's the government agency with their police and taxing 23 powers able -- able to do what -- what they want. We 24 simply had no practical choice. 25 And because of this we have not waived -- 26 waived our constitutional right to argue nexus and 27 because nexus is not in dispute and they've conceded 28 that we have no nexus, we believe we must prevail. 18 1 Thank you. 2 MS. YEE: Thank you, Mr. Young. Let me just 3 clarify a couple points. And I do want to 4 acknowledge -- I don't think I've seen a taxpayer 5 vigorously try to appeal a tax agency determination as 6 vigorously as -- as TestOut has. 7 But I guess once you did register you -- you 8 had an option to cancel the certificate and the 9 registration is a means to allow you to collect and 10 remit the tax to the State. And so, I guess I'm unclear 11 in terms of the subsequent appeals once you had the 12 registration certificate. What -- 13 MR. YOUNG: What do you mean appeals? 14 MS. YEE: Well -- well, you still continued 15 to -- 16 MR. YOUNG: Object? 17 MS. YEE: -- object. 18 MR. YOUNG: We just wanted to make it clear 19 that we were never voluntarily registering or retaining 20 our registration. 21 MS. YEE: You could have voluntarily 22 cancelled, though. 23 MR. YOUNG: And we eas -- we could have 24 voluntarily cancelled but then the Board -- we're a 25 small Utah company making sales into California. We -- 26 we continue -- if we cancel our registration we're -- 27 we're prohibited from collecting tax. 28 So, at that point we start -- or we don't 19 1 collect any tax for a period of months, the Department 2 comes after us and assesses us for all that tax plus 3 penalty, plus interest. 4 If they're telling us we have nexus we have no 5 choice but to -- to comply with that. Otherwise we get 6 stuck holding a very substantial burden. And while we 7 could have litigated the case in the first appeal, we -- 8 it -- it's very expensive. Once we realized that was 9 being held against us, we came back and litigated it in 10 this appeal. We didn't think that was going to be held 11 against us, but the -- the taxpayer has not conceded now 12 and we are, you know, I guess backing up what we said in 13 the beginning, we -- we don't believe we ever had nexus, 14 nor that we ever voluntarily registered. 15 MS. YEE: Well, and then I think if -- if 16 that's the basis of -- of your cancellation of the 17 certificate you would have grounds. I mean, you -- you 18 didn't have -- you didn't have any physical presence in 19 California and you could have cancelled the certificate 20 and you wouldn't have had no obligation to collect and 21 remit the tax. 22 MR. YOUNG: But the Board was telling us that 23 if we did that they would be coming after us and 24 auditing us for all that tax, penalty and interest. So, 25 why should we disbelieve what they were telling us at -- 26 at that time? 27 MS. YEE: Okay. Let -- let me entertain some 28 questions and let me try to get clarity on that issue. 20 1 Ms. Steel. Go for it. 2 MS. STEEL: I -- there is a lot of letters 3 sent to BOE that you don't have any sales in California, 4 that I'm looking at it here, that from 2002 -- that -- 5 is that intention to close out the sell -- seller's 6 permit? 7 MR. YOUNG: At what -- at what point? 8 MS. STEEL: All these letters that, you know, 9 you went out on July and March, too. 10 MR. YOUNG: What -- what year? 11 MS. STEEL: That -- 2003. 12 MR. YOUNG: Okay. We -- we really wanted to 13 close it. 14 MS. STEEL: Uh-huh. 15 MR. YOUNG: But we -- we -- 16 MS. STEEL: But you couldn't close it 17 because -- 18 MR. YOUNG: We -- we couldn't because they 19 were telling us if -- well, we -- we could have 20 expressly asked to close it. And at no point along 21 here, you know, did they refuse to let us close it 22 specifically when we asked. But every time we said if 23 we close it are you going to come after us, they said, 24 "Yes, we are." 25 And so, as a practical matter we had no choice 26 but -- but to keep it open. 27 MS. STEEL: Department, is -- is that our 28 practice? And do you have a copy of that letter? 21 1 MR. YOUNG: Of the letter where -- 2 MS. STEEL: From the Department that they 3 going to come after you. 4 MR. YOUNG: I don't -- I don't believe they 5 ever said that in writing. 6 MS. STEEL: So, it was on the phone? 7 MR. YOUNG: Every time we had oral 8 conversations with them and said, you know, can we close 9 our account and just be done with -- with this, because 10 we don't have nexus, and they said, "We believe you do 11 have nexus," and they continued to maintain that until 12 2008. 13 So they said, "Go ahead and close it if you 14 want, but we're going to come back and -- and hold you 15 responsible for all these taxes that you should have 16 been collecting. 17 MR. HANKS: Ms. Steel, if I could offer, I 18 think probably what happened is when -- when the 19 Department sent our questionnaire to the taxpayer's 20 business and -- and asked them questions pertinent to 21 whether or not they had nexus and -- and a presence 22 within California, they must have responded 23 affirmatively that -- that they had employees coming 24 into California to service their customers. 25 Petitioner has indicated as -- as much today 26 that -- that they continue to make what he indicated was 27 sporadic employee visits to customers within California 28 and that the business has -- business model really 22 1 hasn't changed over time. 2 So, I can only imagine that -- that that 3 questionnaire indicated that this type of communication 4 and -- and relationship existed with the Petitioner's 5 customers wherein the business TestOut sent their 6 employees within California and that triggered nexus. 7 So, I think the Department's always been 8 mindful that -- that the Petitioner would have a 9 presence in California, nexus would be triggered, and 10 they would be responsible for payment of -- of that Use 11 Tax liability. 12 So at that time we -- we typically suggest to 13 them that they apply for a registration of -- of Use 14 Tax -- certificate of registration of Use Tax so that 15 they can collect that Use Tax from their customers and 16 more or less as a convenience really to their customers, 17 remit that tax to us so those customers don't really 18 have to worry about making that individual payment here 19 in California. 20 MS. STEEL: So taxpayer collected about 21 $105,000 for taxes. 22 MR. HELLER: Right. 23 MR. HANKS: Yes. 24 MS. STEEL: But Department assessed additional 25 $45,000 on the top of it. Where we got that amount 26 from? 27 MR. HELLER: That amount came from an actual 28 examination of claimed reported sales for resale. And 23 1 in a direct examination of those actual sales the 2 taxpayer was not able to substantiate that those sales 3 were sales for resale, during the official audit. 4 The Department did work with taxpayer to send 5 out XYZ letters, to contact the consumers to see if any 6 of them were -- could substantiate that those were sales 7 for resale. They did receive one XYZ letter from a 8 tax -- from a taxpayer who said that they were sales for 9 resale, and we did a reaudit and eliminated that 10 transaction from the measure. 11 MS. STEEL: But that was right be -- that was 12 until before that their seller's permits been closed. 13 Because after that seller's permit's been closed that it 14 has to be Use Tax that buyer has to pay for the Use Tax 15 on that, right? 16 MR. HELLER: After whose -- whose permit was 17 closed? 18 MS. STEEL: Because I was not really clear. I 19 was reading this case because, you know, we have to make 20 it very clear that after they close down the seller's 21 permit then not seller but buyer's side has to be 22 responsible for Use Tax. Because when they are no 23 longer existing in California for -- 24 MS. HELLER: Ms. Steel, maybe I can kind of 25 put some background on -- on how this works and 26 relates -- how the Department views it. But essentially 27 if you are a taxpayer -- if you're a retailer, like an 28 out-of-state retailer and you're engaged in business in 24 1 California then regardless of whether you register with 2 the Board or not you're required to collect Use Tax. 3 MS. STEEL: Even you don't have salespeople or 4 sales present? 5 MR. HELLER: Well, in that case -- what I'm 6 saying is you're engaged in business in California and 7 in that case you would probably either have salespeople 8 here or -- or a physical business office -- 9 MS. STEEL: So even you have seller's permit 10 or not -- 11 MR. HELLER: -- or some other contact. 12 MS. STEEL: -- that are still responsible? 13 MR. HELLER: Right. 14 MS. STEEL: Is that what you are saying? 15 MR. HELLER: As long as you're engaged in 16 business in California you're responsible to collect Use 17 Tax whether or not you register with the Board. 18 However -- 19 MS. STEEL: What's exactly engaging in 20 California? Because a lot of outside companies are 21 selling to California -- 22 MR. HELLER: Correct. 23 MS. STEEL: -- residents, but what's the 24 difference here engaging means because right now that's 25 not really clear. 26 MR. HELLER: Well, in general Revenue and 27 Taxation Code 6203 defines engaged in business. But in 28 most cases taxpayers are basically -- what they're doing 25 1 is they're set -- they're actually sending 2 representatives into the State to solicit sales or 3 otherwise service customers in some way that promotes 4 their sales ac -- the company's sales activity in the 5 State. 6 And if they don't have any physical contacts 7 where there's now employees or agents coming into the 8 State, they don't have any property they own here, 9 they're not leasing anything, then in most cases they 10 wouldn't be engaged in business in the State and 11 assuming they didn't register. 12 MS. STEEL: That's exactly what these letters 13 are saying, that we are not doing anything here. This 14 is the letters that they keep sending it out -- 15 MR. HELLER: Correct. 16 MS. STEEL: -- to BOE that we have nothing to 17 do to California even there is some customers are buying 18 it. 19 So how we going to assess additional $45,000 20 for that? 21 MR. HELLER: Well, in this particular case, as 22 we mentioned earlier, the taxpayer did register to 23 collect Use Tax and under our regulation, once you -- 24 MS. STEEL: Yeah, we asked them to open up -- 25 have seller's permit that time, so they did it. But 26 meanwhile that they thought that they got threat -- I 27 don't know that telephone conversation really went or 28 not. 26 1 But on the letters that they are saying that 2 we don't have any business in California, this is what 3 I'm looking at, every six months they send out -- 4 MR. HELLER: Correct. 5 MS. STEEL: -- to BOE that, you know, we don't 6 need seller's permit because we don't have any 7 businesses and we have nothing to report. 8 That $105,000 I understand that because they 9 already collect it, but that the other $45,000 I still 10 cannot really get it why we assessing them when they 11 didn't engage any business in California. That's 12 what. 13 MR. HELLER: Well, in this particular case I 14 could just reiterate that the Department's basing that 15 additional assessment besides the fact that there were 16 disallowed sales for resale, the -- the basis for 17 asserting any tax is the fact that the taxpayer was 18 registered to collect Use Tax under Regulation 1684, and 19 any uncollected Use Tax is a debt to the State under 20 Regulation 1684, Subdivision e. 21 And then in addition, the Board's memorandum 22 opinion in B & D Litho -- 23 MS. STEEL: Just give me like little plain 24 English. Forget about this regulation. 25 MR. HELLER: Basically, what we're saying 26 is -- 27 MS. STEEL: (inaudible) 28 MR. HELLER: -- is they've consented to follow 27 1 the Board's regulation and collect Use Tax by 2 registering with the Board. And they have to do it -- 3 MS. STEEL: So you assume that they had the 4 sales? 5 MR. HELLER: -- until they unregister. 6 MS. STEEL: So you assume that they had the 7 more sales that we are assessing -- 8 MR. HELLER: Oh, no, no, no. No, excuse me. 9 MS. STEEL: -- $45,000. 10 MR. HELLER: I'm sorry, Ms. Steel, I don't 11 think I understood your question earlier and -- and 12 maybe I can backtrack because I -- or I don't want to 13 cut you off, either, Ms. Yee. 14 MS. YEE: No, that's okay. I -- I think 15 the -- the distinction is whether there continued to be 16 activity in California or -- or was this triggered by 17 virtue of the taxpayer holding the certificate. 18 So, if you can comment on both. 19 MR. HELLER: Okay. Let me just -- I'll be 20 slightly broader because I think I'm going to hit 21 something that Ms. Steel is asking about. 22 MS. YEE: Okay. 23 MR. HELLER: But I think basically the 24 taxpayer did continue to make sales into California 25 to -- to California consumers and the Department 26 believed that during this period that they were in fact 27 sending agents into the State that were related to its 28 sales activities. And this was the reason why the -- 28 1 well, actually, the Department thought they were doing 2 this during the prior audit period and still does 3 believe they did, and thought they were during this 4 entire audit, as well. And didn't -- didn't receive the 5 additional facts that they -- the Department used to 6 determine that they weren't no longer engaged in 7 business in California until after we'd pretty -- 8 already determined the sales for resale. 9 And so, in this particular case they weren't 10 actually -- the Department's conceded that they didn't 11 have nexus or weren't engaged in business in California 12 during that period, but the whole audit and everything 13 was triggered by the fact that we thought that they were 14 and we had received information indicating that they 15 were. 16 MS. STEEL: You thought they were or they 17 were? 18 MR. HELLER: At this point we've conceded that 19 they were not engaged in business or had nexus with 20 California during this audit period. But at the time we 21 thought -- when we started the audit we thought that 22 they were engaged in business in California. 23 MS. STEEL: So, even you were getting these 24 letters that we have nothing to do with -- we don't have 25 nexus and we don't -- we don't have any business in 26 California, and they are kind of -- they didn't say that 27 close out the seller's permit -- 28 MR. HELLER: Right. 29 1 MS. STEEL: -- but they are saying that, you 2 know, we don't have any business. 3 Could you explain a little bit about this 4 letter with what intention that you had, why you keep 5 sending these letter out to California and keep -- 6 MR. YOUNG: We -- we sent out the letters for 7 this very case before you right now. Because Regulation 8 1684 says if you voluntarily obtain a permit then you 9 have to collect tax. 10 So we didn't want anybody accusing us of 11 voluntarily obtaining a permit. We wanted to put -- 12 fill the record with letters showing we're doing this 13 only kicking and screaming because you're making us. 14 And -- and once you concede that we don't have any more 15 nexus and when we initially filled out the questionnaire 16 we said we come to California zero, one, two times a 17 year, very sporadically, different for different years 18 and that continued from '99 through 2003, and then 19 through 2008 it was -- it was very similar. 20 We had zero several years. We had one a few 21 years. We had two a few years. And -- and we 22 thought we didn't have -- we thought that was a 23 diminimus -- diminimus level of activity and it didn't 24 rise to the level of nexus. 25 They disagreed with us and continued to 26 disagree with us until we finally got the letter in 27 writing in September 2008 that said, okay, we now agree 28 that for 2003, '04, '05 you had no -- no -- not enough 30 1 presence to establish nexus and so, you know, we'll 2 agree with you on the nexus basis, but you still have to 3 collect because you had a permit. 4 And that's when this voluntary issue becomes 5 important with these letters because we say, good, if we 6 have no nexus then the only reason -- the only way you 7 can -- can get us and make us collect tax is if we 8 voluntarily registered. 9 So, it's very important whether -- whether our 10 registration was voluntary or not. And that's the whole 11 purpose for the letters. 12 MS. STEEL: So for nexus that when you have 13 one salesperson comes in one every two or three years is 14 that still nexus existing? 15 MR. HELLER: If in fact -- 16 MS. STEEL: What's -- what's the meaning of 17 that? 18 MR. HELLER: -- one person came in in a -- in 19 a three-year period to make one small sale, no, that 20 would not create a nexus -- 21 MS. STEEL: What's the -- 22 MR. HELLER: -- or engaged in business. 23 MS. STEEL: -- line -- 24 MR. HELLER: Basically it's systematic 25 contacts with the State of California and generally 26 speaking -- and we don't have a bright line test, but 27 generally we're looking at two or three visits on a -- 28 MS. STEEL: Per year? 31 1 MR. HELLER: -- per year, usually, or more 2 substantial over a slightly larger period. 3 So like I say, if it was over a three-year 4 period and there was more than three visits during two 5 of those years and then maybe none in -- in -- in one of 6 the years, taxpayer still might be considered to have 7 been engaged in business and a nexus with California -- 8 MS. STEEL: So is that what happened? 9 MR. HELLER: -- for trailing periods. 10 MR. YOUNG: Is what what happened then? 11 MS. STEEL: Two times per year or three times. 12 MR. YOUNG: It was -- 13 MS. STEEL: Whatever Department -- 14 MR. YOUNG: Starting in '99 through 200-- 15 well, let's -- let me -- let me see if I can remember. 16 I think it was zero or one or two times per 17 year from '99 through 2003. Various during -- during 18 those years. From 2003 through 2004 it was zero times 19 per year that no -- nobody came. 20 For 2005 I think one person came back. 21 2006, '7, '8 I think maybe one person again. 22 And I don't believe anybody has been in the State since 23 2008. 24 MS. STEEL: So, between January 1, 2003 to 25 December 2005 how many? 26 MR. YOUNG: I think one person came into the 27 State. 28 MS. STEEL: For three years. 32 1 MR. YOUNG: For that entire three-year period. 2 But they had been telling us in relation to the prior 3 audit that one was enough. I said that's got to be 4 diminimus. 5 MS. STEEL: But that's not what I heard today, 6 so, yeah. 7 MR. YOUNG: No, and -- and I'm glad to hear 8 them say that, that one isn't enough. Because I had 9 heard them say one is enough, one is not diminimus. 10 MS. STEEL: Okay, thank you. 11 MS. YEE: Mr. Levine, you want to -- 12 MR. LEVINE: Well, yeah, I don't agree with 13 the Department. If -- if a company -- I think that 14 the -- I have to admit the D & R is deficient because 15 had we known -- we should have asked about this and we 16 should have discussed nexus and discussed this other 17 element. When a company stands ready, and -- and I 18 don't know the reason for the visits, but talking about 19 one person doesn't tell you the whole story. If they 20 are here for six months that's more than -- and if it's 21 one person coming in for a day we still need to know the 22 reason. 23 But basically if a -- if a retailer stands 24 ready to come into California, if needed, and comes into 25 California to service its customers when needed, then 26 they have to stay out a long time before they lose their 27 status as retailer engaged in business. Even one visit, 28 and -- and I don't know the circumstances of -- of this 33 1 taxpayer because we did not investigate -- but for 2 example if they put on their website and we've seen this 3 type of thing or tell their customers, yes, if you need 4 us we'll be there. We don't come to California often 5 but if you need us to come we will, and occasionally 6 they come to California because they need to service 7 their customers. 8 And it's not necessarily sales, it's anything 9 that supports their sale. So, if it's after the sale 10 they come in to do tech. work, that counts. 11 So, based on what I've heard, and I don't know 12 enough to make a decision, but it sure seems to me like 13 they -- they were engaged in business before when -- 14 when the Department asserted it, and that they still 15 did. 16 MS. STEEL: But, Mr. Levine, they said they 17 came only once. I mean, how -- what you hear is 18 totally -- I mean, how you can assume that they were 19 engaging in the business when you heard what I heard? 20 I hope that it was the same thing that we 21 heard together. 22 MS. YEE: I thought this -- 23 MR. LEVINE: If -- if we had this in Appeals 24 Conference, if I were making the decision I'd be asking 25 a lot more questions. I'm just saying that based on 26 what he said there's enough for me to think that there 27 could be -- and I would need to ask. I couldn't make a 28 decision based on what we've heard, but I wouldn't say 34 1 it's not enough based on what I've heard. 2 MS. YEE: I -- I thought I heard one person in 3 2005. 4 MR. YOUNG: In three years, that -- 5 MS. YEE: There was one -- 6 MR. YOUNG: That's correct and -- 7 MS. YEE: -- and -- and then the question, 8 what was the nature of the activity? 9 MR. YOUNG: The nature of the activity was I 10 believe contacting a po -- or visiting with a potential 11 customer who they were hoping to do business with. And 12 these facts were very extensively vetted with the 13 Department in the beginning of this appeal. We 14 explained -- we went through all of our records. We 15 went through all of our travel documents and we showed 16 exactly who came to the State and when and where and 17 why. 18 They reviewed all of that. Just as Mr. Levine 19 is saying, he thinks maybe we should do now and -- and 20 conceded after reviewing all of that that there was no 21 nexus. This hearing is not the time to raise a new 22 nexus argument. As a matter of due process we can't 23 show up here and suddenly recharacterize the case 24 differently than what they've asserted in their -- in 25 their audit deficiency. 26 MS. YEE: Well, it is to the extent that there 27 was a nexus determination the prior period that was the 28 basis of why you continue to hold the certificate or 35 1 apply for the certificate. 2 Ms. Steel, other questions? 3 MS. STEEL: I'm done. Thank you. 4 MS. YEE: Okay. Other questions, Members? 5 Okay, hearing none is there a motion? 6 MS. MANDEL: Take it under submission. 7 MS. YEE: Motion by Ms. Mandel to take this 8 matter under submission. 9 Is there a second? 10 MS. ALBY: Second. 11 MS. YEE: Second by Ms. Alby. 12 Without objection, that motion carries. 13 Thank you, Mr. Young. 14 MR. YOUNG: Thank you. 15 MS. YEE: We will discuss your matter later 16 today and send you written notice of our decision. 17 MR. YOUNG: Thank you. 18 MS. YEE: Thanks. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 36 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 36 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 9, 2010. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 37