BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT APRIL 13, 2010 ITEM H TAX PROGRAM NONAPPEARANCE MATTERS - ADJUDICATORY Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Betty Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25 26 27 28 2 1 Sub-item H6 2 (Deputy Controller Mandel not participating) 3 Sacramento, California 4 April 13, 2010 5 ---oOO--- 6 MS. OLSON: Our next calendars are adjudicatory 7 and we do have a speaker on H6.1. 8 MS. YEE: Okay. Why don't we take that up 9 first. May I have Mr. Winchester come forward, please. 10 MS. MANDEL: Which one is this? 11 MS. YEE: This is item H6. We have Mr. 12 Winchester, Chief Financial Officer for Kern Oil. 13 MS. MANDEL: This is a constitutional function? 14 MS. YEE: It is, yes. Thank you. 15 The Sub-item Deputy Controller Mandel not 16 participating as it is a Constitutional function. 17 Good morning, sir. 18 MR. WINCHESTER: Good morning, Madam 19 Chairwoman. 20 MS. YEE: You'll introduce yourself for the 21 record. You have three minutes for your testimony. 22 MR. WINCHESTER: My name is Robert Winchester. 23 I'm the Chief Financial Officer for Kern Oil and 24 Refining Company. Thank you for this time today. 25 I'm here requesting relief from penalty for a 26 late payment of a motor vehicle fuels tax deposit. The 27 late payment was made in September for August 2006 28 liability. The late payment was made three days late. 3 1 We caught the error ourselves, self-corrected and 2 deposited the tax immediately once we found it. 3 I'm requesting relief under Section 7657 of the 4 Revenue and Taxation code and in it it states that if 5 the failure to make a timely payment is due to 6 reasonable cause and circumstances beyond a person's 7 control and occurred notwithstanding the exercise of 8 ordinary care in the absence of willful neglect the 9 person may be relieved of the penalty. 10 I've searched through our records and I can't 11 find any other instances other than one back in November 12 of 2004. So, in a 22-month period we had had two late 13 payments for entirely different circumstances, different 14 reasons. We were relieved of the penalty from the 15 November 2004 late payment, but the August 2006 we were 16 not relieved of that penalty. A 24-month criteria was 17 referenced in determining that there were inadequate 18 internal controls or intentional disregard of statutory 19 requirements. 20 I would ask that this time frame be expanded to 21 indicate that there were only two occurrences over a 22 much more extensive period. I've looked back through 23 our records and I can't find another instance, at least 24 in the records that I can look through, and any recent 25 history over six or eight or ten years that we've made a 26 late payment on the motor vehicle fuels tax. 27 That motor vehicle fuels tax deposit is done 28 twice monthly. It's done on the 15th of the month for 4 1 95 percent of the liability and the balance is paid at 2 the end of the month. So we're making two tax deposits 3 per month. It's 24 times per year in addition to the 4 rest of the State tax deposits that we're making; 5 payroll and Federal fuels taxes, and we've had an -- an 6 excellent history of making timely tax deposits, and I 7 certainly don't believe that there has been a pattern in 8 this case. It just so happened they were 22 months 9 apart but errors and circumstances like this, they don't 10 happen on a time schedule. You know, they -- they just 11 happen sometimes. 12 And our employees were not able to catch that 13 in time and we did make it late, as we said. We've been 14 an excellent tax administrator for the State of 15 California over the years. We have completed our audits 16 timely. We've completed our audits without adjustment 17 when the auditors come out. We have excellent records 18 and we have enjoyed an excellent relationship with the 19 Board of Equalization professionals that we have 20 encountered over the years. 21 I'd also like to state that Kern Oil and 22 Refining Company is the last small refinery in the State 23 of California that manufactures highway motor fuels. We 24 employ 108 people and are an important part of the 25 Bakersfield economy. In this extremely difficult 26 economic climate it is imperative that anything and 27 everything that can be done to maintain business in the 28 State be considered. 5 1 There was only one other refinery between Los 2 Angeles and San Francisco that also manufactured highway 3 motor fuels. Sixteen months ago they declared 4 bankruptcy, laid off nearly all their employees and 5 ceased operations. It's difficult out there for 6 refiners right now. 7 This penalty won't put us out of business but 8 it's going to hurt. California is a challenging 9 business climate, particularly for refineries, and a 10 penalty of this size in a small business can be very 11 damaging. 12 Section 7657 of the the Revenue and Taxation 13 Code is in place to allow an otherwise diligent and 14 compliant taxpayer some relief. The State's actual 15 damages are just a few days of lost interest income. 16 The $97,500 penalty is extremely harsh and it's 17 unnecessary for this taxpayer. I respectfully request 18 that the penalty be waived for our August 2006 late 19 payment of tax. 20 Thank you 21 MS. YEE: Thank you, Mr. Winchester. 22 Department, do you have anything to add? 23 MR. BISHOP: Well, our understanding is -- 24 Phillip Bishop of the Fuel Taxes Division, that -- 25 MS. YEE: Mr. Bishop, if you'd come right up to 26 the microphone. 27 MR. BISHOP: Sure. 28 MS. YEE: Thank you. 6 1 MR. BISHOP: -- that Mr. Leonard had this item 2 pulled so that -- that he could take a look at a partial 3 relief of the penalty. And I believe our Legal 4 Department has recommended that that's not within the 5 authority of the Board. 6 With respect to the penalty itself, and the -- 7 the time frame of the prior one, it was within two years 8 and generally we look back in time to see when the last 9 late prepayment or late payment was due, and we look for 10 a clean history. We look for the first time with which 11 to give a relief. 12 There are extenuating circumstances, but we 13 didn't see it in this particular case. And so our 14 recommendation was to deny relief. 15 MS. YEE: Thank you very much. Questions, 16 Members? 17 MS. STEEL: Just one quick question. 18 MS. YEE: Ms. Steel, please. 19 MS. STEEL: You know, some of companies that 20 they do it annual report and this company does, you 21 know, twice a month. So, it's 24 times a -- you know, a 22 year. 23 So, if you give them first relief, I mean, you 24 know, within two years period it's only two times. why 25 Department is not really considering that, that you 26 know, we have to treat them differently when somebody 27 does often and somebody doesn't. 28 MR. BISHOP: Well, our advice to staff is to 7 1 look back over a period of time to see if there have 2 been prior -- 3 MS. STEEL: So we treat them same that, you 4 know -- 5 MR. BISHOP: We do treat them the same, whether 6 they're on a monthly or on a quarterly or annual. 7 And, again, that comes down to generally 8 monthly taxpayers are reporting in excess of $100,000 a 9 month in tax. So we would put someone in a -- a yearly 10 reporting basis if they were reporting very small dollar 11 amounts. 12 So the impact to the State is greater. And so 13 there's probably -- I mean, that's one way to look at 14 there would be a higher scrutiny in those situations 15 because of the dollar impact. 16 MS. STEEL: But when they pay two times a month 17 they pay -- that's better for the State because you 18 collect faster -- 19 MR. BISHOP: Correct. And that -- that's 20 all -- 21 MS. STEEL: -- and that the other companies 22 that -- 23 MR. BISHOP: -- within the statute. 24 MS. STEEL: -- hoping -- 25 MR. BISHOP: And that's the purpose for that. 26 MS. YEE: Thank you, Ms. Steel. Other 27 questions, Members? 28 Ms. Alby. 8 1 MS. ALBY: Remembering this last go-around on 2 this issue if I can, our understanding is that the Rev. 3 and Tax code does allow the Board to relieve the 4 penalty. 7657 in particular says that the taxpayer may 5 be relieved of the penalty. 6 MS. YEE: It's partial relief, right? Is that 7 the question? 8 MS. ALBY: Well, it doesn't address that, 9 according to us. 10 MR. BISHOP: Right. 11 MS. ALBY: The Code doesn't say whether it has 12 to be complete abatement or no abatement. 13 MR. BISHOP: That's correct. And we -- we have 14 the authority to request relief or to grant relief of a 15 penalty. In this situation we did not. 16 MS. ALBY: The Board does, as well? 17 MR. BISHOP: Yes, the Board does itself. 18 MS. ALBY: Fine, thank you. 19 MS. YEE: Thank you, Ms. Alby. 20 Any other questions, Members? 21 Okay. Mr. Winchester, thank you for coming 22 forward. We're going to take this matter under 23 submission and discuss it later this afternoon. 24 MR. WINCHESTER: Okay. Thank you very much. 25 MS. YEE: Thank you very much. 26 Okay. Actually, let me make a motion to that 27 effect, I'll move to take the matter under submission. 28 Is there a second? 9 1 MR. HORTON: Second. 2 MS. YEE: Second by Mr. Horton. Without 3 objection, motion carries. Thank you. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 Sub-itemH1 2 MS. YEE: Okay. Let us return to item H1 if we 3 could, Members. One -- we have one sub-item under H1, 4 Travel Traders Hotel Stores, Incorporated. May I have a 5 motion, please. 6 I'm sorry, we are on Item H1, Legal Appeals 7 Matters; one sub-item, Travel Traders Hotel Stores, 8 Incorporated. 9 MS. MANDEL: I -- 10 MR. HORTON: Go ahead. 11 MS. MANDEL: I was going to move the staff 12 recommendation and I have a question for staff. 13 MS. YEE: Okay. 14 MR. HORTON: I'll second. 15 MS. YEE: Ms. Mandel moves to adopt the staff 16 recommendation, second by Mr. Horton. Ms. Mandel has a 17 question. Please. 18 MS. MANDEL: It was -- it just was because of 19 the writeup, it was just interesting to me that it 20 was -- that the person they had bought from was an 21 out-of-state distributor who used to have a license but 22 the license was closed out for some reason, but they 23 kept -- they kept reporting and paying tax. That was 24 the amounts that hadn't been given back to them, I 25 guess. But it was just interesting to me that there was 26 an out-of-state person who wound up having their license 27 ended for some reason, and yet they kept -- so it was 28 just curious that if we were getting returns and monies 11 1 from someone whose license was closed out by us why 2 wasn't it somehow reopened or whatever. 3 If you know anything about it or maybe they can 4 tell us later, but I just thought that was curious and 5 interesting. 6 MS. CHIU: According to the Board records -- 7 MS. YEE: Could you introduce yourself for 8 the -- 9 MS. CHIU: Oh, I'm sorry. I'm Cindy Chiu with 10 the Board's Legal Department. Good afternoon -- 11 MS. YEE: Thank you. 12 MS. CHIU: -- Madam Chairwoman and Members of 13 the Board. According to the Board records what happened 14 is when the renewal application was coming up in 2004 15 Excise Taxes noticed that the Cigar Works, the Vendor 16 out-of-state, had fallen out of status with the 17 Franchise Tax Board and had a forfeited status. 18 So then Excise Taxes worked with Cigar Works to 19 try to fix that status and notified them that the status 20 needed to be changed in order for the license to be 21 renewed. 22 Unfortunately, during that time Cigar Works 23 wasn't able to fix that status but as they were 24 continuing to work on fixing their status with the 25 Franchise Tax Board, they kept on filing returns and 26 remitting tax. 27 MS. MANDEL: Okay. 28 MS. STEEL: I can -- all of the question -- 12 1 MS. YEE: Okay. Yes, Ms. Steel. 2 MS. STEEL: Yeah, it was really interesting 3 because their license has been, you know, gone and they 4 closed down. They are still doing the tax report. But 5 they -- we received some of the invoices, but they 6 cannot provide for a hundred percent. So how many, you 7 know, that it seems like 17 cigars that we couldn't find 8 that -- you know, the invoice was not provided. But how 9 many we found it from the beginning? 10 MS. CHIU: So, the taxpayer provided invoices 11 issued by Cigar Works with their petition and on that 12 petition it listed the Macanudo cigars. So Macanudo 13 cigars and Cohiba brand cigars had been seized and so we 14 returned all the Macanudo cigars listed on those 15 invoices. 16 MS. STEEL: But all the Cohiba cigars were -- 17 their invoices were not provided? 18 MS. CHIU: There were no invoices for the 19 Cohiba brand cigars, that's correct. 20 MS. STEEL: Thank you. 21 MS. YEE: Okay. Thank you, Ms. Steel. 22 Okay, we have a motion by Ms. Mandel, second by 23 Mr. Horton. 24 Without objection, to adopt the staff 25 recommendation, that motion carries. 26 Thank you. 27 ---oOo--- 28 13 1 Sub-Item H2. 2 MS. YEE: The next item is H2, Franchise and 3 Income Tax Matters. We have one sub-item here, Members, 4 Terry Jones. May I have a motion? 5 MR. HORTON: Move to sustain FTB. 6 MS. YEE: Okay. Motion by Mr. Horton to 7 sustain the Franchise Tax Board. 8 Is there a second? 9 MS. ALBY: Second. 10 MS. YEE: Second by Ms. Alby. 11 Discussion? Without objection that motion 12 carries. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 1 Sub-Item H4. 2 (Deputy Controller Mandel not participating.) 3 MS. YEE: Next item is H4, Sales and Use Tax 4 Matters. One sub-item here, Bodybuilding.com, LLC. 5 MS. MANDEL: Madam Chair. 6 MS. YEE: Yes, Ms. Mandel. 7 MS. MANDEL: I'm not participating in this item 8 because our Alpha lists show Liberty Media Corporation 9 as a majority shareholder. 10 MS. YEE: Uh-huh. 11 MS. MANDEL: So due to a potential conflict -- 12 MS. YEE: Okay. 13 MS. MANDEL: -- I'm not participating. 14 MS. YEE: Okay. Ms. Mandel is not 15 participating in this matter. 16 May I have a motion? 17 MS. STEEL: I can have staff -- staff 18 recommendation to abate the penalty -- this is the staff 19 recommendation is abate the penalty. 20 MS. YEE: To grant -- yeah, to grant the 21 request for relief. 22 MS. STEEL: So move. 23 MS. YEE: All right, okay. 24 Motion by Ms. Steel, second by Mr. Horton to 25 adopt the staff recommendation with Ms. Mandel not 26 participating. 27 Without objection, that motion carries. 28 Okay. And why don't we take up item H6 this 15 1 afternoon. 2 ---oOo--- 3 REPORTER'S CERTIFICATE 4 5 State of California ) 6 ) ss 7 County of Sacramento ) 8 9 I, BEVERLY D. TOMS, Hearing Reporter for the 10 California State Board of Equalization certify that on 11 April 13, 2010 I recorded verbatim, in shorthand, to the 12 best of my ability, the proceedings in the 13 above-entitled hearing; that I transcribed the shorthand 14 writing into typewriting; and that the preceding 15 15 pages constitute a complete and accurate transcription 16 of the shorthand writing. 17 18 Dated: April 30, 2010. 19 20 21 22 ____________________________ 23 BEVERLY D. TOMS 24 Hearing Reporter 25 26 27 28 16