1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JULY 14, 2010 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 ORACLE CORPORATION 14 NO. 217113 (BH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 P R E S E N T 2 For the Board Betty Yee of Equalization: Chair 3 Jerome E. Horton 4 Vice-Chair 5 Barbara Alby Acting Member 6 Michelle Steel 7 Member 8 Marcy Jo Mandel Appearing for John 9 Chiang, State Controller (per Government Code 10 Section 7.9) 11 Diane G. Olson, Chief 12 Board Proceedings Division 13 14 For Board of Jeff Angeja Equalization Staff: Staff Counsel 15 16 17 For Department: Chris Schutz Tax Counsel 18 Robert Tucker 19 Tax Counsel 20 Kevin Hanks Chief, Headquarters 21 Operations Division 22 For Petitioner: Eric Miethke Attorney 23 Wayne Sekigehama 24 Taxpayer 25 Rob Punzo Taxpayer 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JULY 14, 2010 4 ---oOo--- 5 MS. YEE: Good morning. Let's call the Board 6 of Equalization meeting to order. 7 Ms. Olson, our first item, please? 8 MS. OLSON: Our first item is C2, Oracle 9 Corporation. 10 Board Proceedings has received contribution 11 disclosure forms for this morning's hearings from the 12 parties, agents and participants. All forms were 13 properly completed and signed. No disqualifying 14 contributions were disclosed. All parties, agents and 15 participants are on the alpha listing provided to your 16 office. 17 Each person sitting at the table will be asked 18 to introduce themselves and, if necessary, their 19 affiliation with the taxpayer for the record. Ten 20 minutes is allocated for the Petitioner's opening 21 presentation, followed by ten minutes for the 22 Department's presentation and five minutes is allocated 23 to taxpayer for rebuttal. 24 Ms. Yee? 25 MS. YEE: Thank you very much, Ms. Olson. 26 Okay, Members, we are on item C 2, Oracle 27 Corporation. 28 Let me have Appeals introduce the matter. 3 1 Good morning. 2 MR. ANGEJA: Good morning, Madam Chairwoman and 3 Members of the Board. 4 I'm Jeff Angeja representing the Appeals 5 Division. This matter involves six unresolved issues. 6 First, whether further adjustments are 7 warranted to the disallowed claimed nontaxable sales; 8 second, whether further adjustments are warranted to the 9 audited amount of purchases subject to use tax; third, 10 whether the Petitioner is liable for use tax with 11 respect to its purchases from Propeller during the 12 second quarter of 1997; and, fourth, whether Petitioner 13 was negligent; fifth, whether Petitioner has established 14 that relief of interest is warranted; and finally, 15 whether Petitioner has established reasonable cause to 16 relieve the amnesty interest penalty. 17 MS. YEE: Thank you very much, Mr. Angeja. 18 Good morning, gentlemen. 19 MR. MIETHKE: Good morning, Madam Chair and 20 Members. With me today -- oh, I'm Eric Miethke with 21 Nielsen Merksamer representing Oracle Corporation. 22 To my immediate left is Mr. Wayne Sekigehama, 23 and further down is Rob Punzo. 24 MS. YEE: Before you proceed, Mr. Miethke, I 25 believe this is a matter for which the Chair has granted 26 15 minutes for presentation. 27 So -- 28 MR. MIETHKE: Thank you very much. 4 1 MS. YEE: -- please proceed. 2 MR. MIETHKE: We will try to proceed along 3 those lines. 4 MS. YEE: Okay. 5 MR. MIETHKE: And keep it to 15 minutes. Thank 6 you again. 7 The Oracle Corporation manufactures prewritten 8 software and sells related services worldwide and they 9 are based in Redwood City, California. 10 The way we think of it is there's really two 11 main groups of issues in this case. One involves 12 Oracle's purchases from Propeller Corporation in the 13 second quarter of 1997 -- yes, 1997 -- and whether 14 having paid tax to them one time, whether we are 15 compelled to pay tax a second time because Propeller did 16 not remit that to the Board of Equalization. 17 The second issue that really -- the main set of 18 issues involve whether the State can disregard the plain 19 wording of four blanket resale certificates that we'll 20 talk about. 21 We have asked the Board to waive the negligence 22 and amnesty penalties and we have asked for partial 23 relief from interest because part of this case was that 24 it was assigned, over the course of many years, to four 25 different Appeals officers, who would have a hearing and 26 then leave the Board or be reassigned before completing 27 a D & R, which required the process to be reset. 28 I'd like the start today, though, by talking 5 1 about the so-called Propeller issue. Propeller 2 Corporation, a portable computer corporation, sold 3 Toshiba laptop computers and other tech items to Oracle. 4 Propeller was a California company until 5 December of '93 and then its principals moved to Utah. 6 They cancelled their California seller's permit and they 7 stopped collecting tax from Oracle thereafter. 8 Early in 1997 Oracle wanted to have a full-time 9 representative of Propeller at Oracle stationed at 10 Oracle. And this was done, according to the D & R, 11 which found it, in February and March of 1997. So, 12 actually in the first quarter of 1997 the D & R found 13 that there was, in fact, a representative of Propeller 14 at Oracle. 15 Propeller started adding tax reimbursements to 16 its invoices starting on or about April 1st of 1997. 17 Now, there is no dispute that Oracle paid in 18 full the amounts designated as sales tax on the invoices 19 that it received from Propeller. There was a little -- 20 I did -- the one public document that I did see in 21 Propeller was the hearing summary and it said, oh, that 22 they made a representation that they were trying to 23 collect the tax from Oracle. 24 In fact, in our case, at least, which is what 25 we have access, really, to, they did -- it was not in 26 dispute that we, in fact, paid all of the use tax to -- 27 or sales or use tax to Propeller. So, I just wanted to 28 clear that up at the outset. 6 1 And, again, our understanding, because there 2 has been no facts in our case presented on this point, 3 at least, is that Propeller registered again with the 4 Board of Equalization in the fall of 2007 and gave a 5 start date of July 1st, 1997. 6 At some point in the future, to the best of our 7 understanding, that start date was moved back to 8 April 1st, 1997 in order to coincide with the date that 9 Propeller started collecting tax from Oracle. 10 And that was also in the D & R, that was found 11 by the hearing officer in the D & R, that it was moved 12 back to April 1st to coincide with the date they started 13 collecting tax from us. 14 And, again, it's a little bit of a curious 15 thing because the D & R also found that nexus was 16 established by Propeller earlier than that, but that's 17 where they set the date. It was linked, really, in the 18 D & R's mind, to our purchases. 19 Propeller was given a seller's permit as of 20 that date and not a use tax permit. That's something 21 also to bear in mind. 22 Sometime later, in 2002, during an ongoing 23 audit of Oracle, the staff noted those Propeller sales 24 in our work papers, but noted their belief at the time 25 that they thought they were sales transactions, subject 26 to sales tax and they would seek that from Propeller. 27 It wasn't until March of 2004, seven years 28 after these transactions took place, and well into our 7 1 appeal, we had actually -- we were well down the line on 2 appeal when -- of Oracle's own sales tax audit -- that 3 the staff changes its mind and asserted the tax against 4 Oracle. 5 Now as we understand the Department's argument, 6 it goes something like this, these transactions are use 7 tax transactions, not sales tax transactions. 8 Propeller had an obligation to collect the use 9 tax because it was engaged in business in the State and 10 that was by virtue of the fact it had nexus because they 11 had a full-time person here at Oracle. 12 But -- and this is where it gets curious -- 13 even though they agreed -- the Department agrees that 14 Oracle paid the tax that is sought from Propeller, we 15 have to pay again. And that's because even though they 16 had a legal requirement to collect the tax from you, 17 because they weren't registered with the Board, they 18 could under no circumstances issue a valid receipt for 19 those taxes that they were obligated to collect. 20 So, we see this as something of a conundrum, 21 where on the one hand there is a legal obligation to 22 collect it, but if you do collect it, you can't 23 indemnify the person you collect it from. 24 Now, we think the Department's analysis is 25 flawed for a number of reasons. One is that, at least 26 in this case, there's really been no proof at all that 27 the sales involved were use tax transactions. That was 28 asserted well down the line in the Appeals process, but 8 1 there really was no evidence taken on it. 2 We believe that there is, in fact, a 3 presumption in the law, in Section 6091 and in Lyon 4 Metal, that presumes that the sales of a retailer are, 5 in fact, sales tax transactions and subject to sales 6 tax. 7 The Department has also sort of posited that 8 even if the orders were taken and accepted in 9 California, that Propeller -- the Propeller or person 10 that was here could not have been involved in sales tax 11 transactions because they weren't working out of a place 12 of business in the State until the employee moved their 13 residence here in a July of 1997. And they cite 14 Regulation 1620 for that. 15 But, really, there was no evidence on the issue 16 of what a full-time Propeller employee, who had been 17 here on the premises at Oracle for five months, had for 18 a work space. Presumably, they had at least a dedicated 19 office or some place that the Board could easily find, 20 as a matter of law, that constituted a place of 21 business. 22 Understand what we're talking about here, in 23 this period there were 700 orders taken over a 24 three-month period. That's averaging ten orders a day, 25 every business day for three months. So, we're not 26 necessarily talking about a transient employee. This is 27 somebody who has to be there a great deal of the time. 28 But, more fundamentally, it's never been proven 9 1 in this case, there's no evidence in the case -- at 2 least in this case -- that Regulation 1620 applies at 3 all. And that's because it's never been shown, at 4 least, that the laptops purchased from Propeller were 5 not fulfilled from an in-state source. 6 In other words, 1620 only applies if the 7 property crosses state lines. And there's been no 8 showing of that in this case, at least thus far. 9 The evidence that does exist, that is in the 10 case, suggests that the Board could reasonably conclude 11 that the property was fulfilled from inside California. 12 Propeller didn't manufacture anything that it 13 sold Oracle, so, it had to be getting it from somebody 14 else. The invoices that we were able to recover, 15 because, again, by the time we found out that there was 16 a problem, this was already seven years past the time 17 when these transactions took place, the invoices that we 18 do have are labeled "drop shipments." They have numbers 19 on there that don't coincide with our purchase order 20 numbers, which makes it sound like they're being 21 fulfilled from a third party. We don't know whether 22 those were being fulfilled from inside the state or 23 outside the state. 24 So, there's been a lot of assumptions in this 25 case that have been sort of projected as fact and 26 then -- and then sort of here's how the law applies from 27 there. 28 But for all the reasons above, we think that 10 1 the appropriate tax is the sales tax and, therefore, the 2 Board's remedy should be limited to go collecting that 3 sales tax reimbursement that we have already paid to 4 Propeller from Propeller. 5 But even if the Board does find that this is a 6 use tax and not a sales tax, we shouldn't have to pay 7 the tax a second time because we do not believe, as a 8 matter of law, the seller has to be previously 9 registered with the Board in order to issue a valid 10 receipt for use tax. 11 First, it wasn't -- although it wasn't asserted 12 until the very last brief that the Department filed, 13 their closing brief -- they never have asserted that 14 backdating a permit back to a start date doesn't mean 15 that that person is a seller for all purposes back to 16 that date. 17 We can't -- at least I haven't been able to 18 find any authority that says that that's required to be 19 found. In other words, we found that, gee, just because 20 we move it back doesn't mean that they're a retailer for 21 all purposes. 22 So, you could reasonably find, as a matter of 23 fact, that when the staff backdated the permit back to 24 April 1st, 1997 that, in fact, it was a retailer for all 25 purposes, including the ability to issue a valid receipt 26 for any taxes that had been paid to that taxpayer. 27 But, ultimately, it may not matter because the 28 way we read Section 6202, again, the retailer -- it does 11 1 not say that a registered retailer with the Board can 2 issue a receipt and collect tax. It says, "A retailer 3 engaged in business in the State as being authorized to 4 issue a receipt," and I mentioned that before. 5 And there is no dispute in this case that 6 Propeller was a retailer engaged in business in this 7 state at the time of these transactions. 8 And if you look at the second part of 6202 it 9 even reinforces that because it talks about two types of 10 retailers. You're either engaged in business in the 11 state or if you're not engaged in business in the state, 12 then you do have to, in essence, comply with rules and 13 regulations set up by the Board in order to be 14 authorized to collect tax. 15 And there is a reason for that, we think. The 16 reason is is that if you are engaged in business in the 17 state and you collect tax, then the Board has remedies 18 against you because you have nexus here and you are 19 susceptible to legal process here to compel payment of 20 those taxes. 21 On the other hand, if you do not -- if you're 22 not engaged in business here, one would think if that 23 somebody was collecting tax, then if they didn't remit 24 it then it would be much more difficult for the Board to 25 gain jurisdiction over them unless they were registered 26 with the Board and, in essence, had voluntarily 27 submitted to that type of jurisdiction by registering 28 with the Board. 12 1 So -- so, in our view, if you think about it 2 too logically for a moment, what -- what is a consumer 3 like -- like Oracle to do? 4 You get thousands and thousands of invoices. 5 They say "sales tax." How would you ever know whether 6 it, in fact, on there is a sales tax or a use tax? If 7 it's a sales tax, there is no obligation of you to have 8 a receipt. If it's a use tax transaction, the only way 9 that you can indemnify yourself, as in this case in 10 staff's eyes, even if you pay the tax to that vendor, is 11 to make sure that you have a resale number. That is 12 just commercially impracticable. It also is not -- it 13 is certainly not enforced unless it's, you know, 14 convenient, like in this situation. And it's also a 15 very, very rare set of case. 16 Think of your own experience. How many 17 receipts have you seen where it actually has a seller's 18 number on a receipt or an invoice? I am not talking 19 about resale certificates, I'm talking about just a 20 regular commercial invoice. It just really does not 21 happen. 22 And, finally, just think about it this way: 23 What if that resale number had been there? What would 24 be different? The damage was not caused by the fact 25 that somehow Propeller was flying under the radar, that 26 the Board didn't know about them. 27 Indeed, they were registered with the Board. 28 The Board backdated it. The damage was caused by the 13 1 failure to remit the taxes that it collected to the 2 Board. 3 So, even if this -- even if this permit number 4 had been on that, it would not, in fact, have changed 5 the status quo at all. 6 Really, then, what that missing -- missing 7 resale number, that registration number, becomes is just 8 a convenient way again to have it both ways -- heads, we 9 win, tails you lose. 10 We either get it from Propeller, because they 11 had a compulsion to collect, or they collect -- or they 12 get it from Oracle a second time because under no 13 circumstances could -- could Propeller issue a valid 14 receipt to us. 15 We think that's just untenable. 16 I do want to take just a second to mention one 17 other argument we made in the brief. The Chair was very 18 gracious and gave us a little extra time on that. And 19 that is that we also think that under law the sales and 20 use tax imbues a retailer engaged in business in 21 California, in essence, with the responsibility to 22 collect tax. 23 When they fail to do so, they are not -- they 24 are not forced to pay over, in essence, use tax 25 themselves. What they're paying is a penalty. They're 26 paying a penalty that's measured by the amount of tax. 27 And that's pretty clear in a number of cases like Branch 28 and (unintelligible) and a number of these old chestnut 14 1 cases. And those amounts are debts owed by that 2 retailer to the State. 3 So, what we think is the situation, when you 4 look at it is the sales and use tax law, in essence, 5 makes that retailer the agent of the State for the 6 purposes of collecting use tax in these circumstances. 7 When Oracle paid that money over, they were 8 paying to it an agent of the State. And when that agent 9 of the State didn't turn it over, a constructive trust 10 arises because of their wrongful holding of that tax. 11 They, as trustee, had an obligation to pay that 12 to the State. When they did not, that gives, of course, 13 a rise to an action by the State against Propeller. 14 And, frankly, because it's reimbursement that 15 was collected, you've got all sorts of rights again 16 their principals as well and any successor corporation 17 that we certainly would not have. But, that's where the 18 remedies lie. 19 Again, it is in -- because, we think, a 20 constructive trust arises and they breached that duty, 21 it runs against -- it runs against Propeller. 22 We've discharged our responsibility by 23 transmitting that tax to this person, this agent, that 24 was well-known to the State. 25 MS. OLSON: Time has expired. 26 MS. YEE: Mr. Miethke, finish your thought and 27 then we'll give you time on rebuttal. 28 MR. MIETHKE: Okay, that's fine. I'll play it 15 1 there, thank you. 2 MS. YEE: All right, thank you very much. 3 Department, please? 4 Good morning. 5 MR. SCHUTZ: Madam Chair and Members, I'm Chris 6 Schutz from the Legal Department. To my right is Robert 7 Tucker, also from the Legal Department, and to his right 8 Kevin Hanks, representing the Sales and Use Tax 9 Department. 10 For reasons I will address in my presentation, 11 Petitioner's liability should be determined in 12 accordance with the Appeals Division's recommendation. 13 The first issue, as Mr. Miethke mentioned, is 14 with regard to the purchases Petitioner made from 15 Propeller Portable Computer Products, Inc. during the 16 second quarter of 1997. 17 Petitioner purchased laptops, computers and 18 related products from Propeller during this -- the audit 19 period. During 1996 and the first quarter of 1997, 20 Petitioner made significant purchases from Propeller. 21 Petitioner did not significantly accrue or 22 report use tax on these purchases these periods. In 23 fact, the relationship with Propeller goes back even to 24 the prior audit period where Petitioner also made 25 significant purchases from Propeller, both while 26 Propeller had a permit -- a previous permit and also 27 when Propeller moved out of the state and no longer had 28 a permit. In fact, the prior audit scheduled errors for 16 1 purchases from Propeller in that prior audit. 2 The reason Petitioner did not accrue use tax on 3 these purchases is because it had no mechanism in place 4 to accrue or report use tax until 1999. Petitioner has 5 conceded that its purchases from Propeller prior to 6 second quarter '97 are subject to use tax and is liable 7 for those transactions. 8 For second quarter 1997, the period in dispute, 9 the Department determined that purchases from Propeller 10 for that quarter were also subject to use tax for the 11 following reasons: 12 First, in order for a transaction -- a 13 transaction to be subject to sales tax and not use tax, 14 two things need to occur -- the sale -- title passage 15 must take place in the state, and, secondly, even if the 16 sale occurs in the state, if there is no participation 17 whatsoever in the transaction by any local branch 18 office, outlet or other place of business of the 19 retailer or by any agent of the retailer having any 20 connection with such branch office, outlet or other 21 place of business, then sales tax will not apply to that 22 transaction. 23 And this is under the Board's memorandum -- 24 Regulation 1620 subdivision (a)(2)(b), as well as the 25 Board's memorandum opinion in Long Beach Terminal. 26 Thus, unless a retailer has some business 27 location in California, it is not possible for it to 28 incur sales tax on its sales. Rather the applicable tax 17 1 with respect to such a retailer -- retailer's sales 2 would always be use tax, for which the purchaser may 3 also be liable. 4 Here we do not know whether the tangible 5 personal property Petitioner purchased from Propeller 6 was shipped from a location in California. It appears 7 that at the time part of Propeller's service was to 8 install upgrade in memory, software and platforms and 9 other customizations for its customers that might 10 require the property -- the product to be shipped from 11 Propeller's out-of-state location, which was in Utah. 12 Moreover, Propeller had repeatedly stated to 13 the Board, when requesting this permit, that it would be 14 making shipments from Utah and that Orem, Utah was its 15 only location. 16 Thus, based on the available evidence, it 17 suggests that sales were shipped into California from 18 out of state. 19 As to the second requirement, that there must 20 being local participation in the sale by a local branch 21 office, outlet or other place of business, the available 22 evidence also strongly suggests that Propeller did not 23 have such a location in the State. 24 Beginning no later than April 1st, 1997, 25 Propeller did have an employee traveling into California 26 in order to facilitate taking orders from Oracle. 27 Partly by its own concession for the period 28 prior to second quarter '97, Petitioner is suggesting 18 1 that Propeller did not have a local branch office prior 2 to two Q '97 after it left in '93. 3 There is no evidence that Propeller established 4 a location in California in second quarter '97. If it 5 did, since Propeller made 85 percent of its -- of all 6 its sales to Oracle in California, Oracle likely would 7 be aware of that development and have some evidence of 8 such location. 9 Here I note that -- that Petitioner has stated 10 that presumably it gave them an office, but they 11 don't -- I mean, they would be aware of it. They 12 haven't said they did give them an office, they did rent 13 them space for second quarter '97. They just said, 14 "Well, maybe we did." But they haven't confirmed that. 15 And it would be -- seems like it would be 16 simple for them to be able to confirm that they did give 17 them some office space. 18 Also Petitioner says that, well, based on the 19 volume of sales in second quarter '97, somebody must 20 have been there all the time and, really, established a 21 presence. 22 But these -- the amount of sales in second 23 quarter '97 were not significantly different than other 24 quarters where Petitioner -- where Propeller didn't have 25 a person coming into the State or possibly didn't have a 26 person coming into the State. 27 Moreover, as explained by Propeller, it was not 28 until on or around July 4th, 1997, in the third quarter 19 1 of '97, that an employee moved to California because 2 Oracle requested a person from Propeller be on site in 3 order to facilitate in taking orders. 4 Accordingly, since neither requirement for 5 sales tax to apply is met for these transactions, the 6 transactions at issue are subject to use tax and not 7 sales tax, thus, Oracle is also liable for the use tax. 8 Next, with regard to Petitioner's contention 9 that because an amount labeled as sales tax was charged 10 on invoices from Propeller, it has a proper receipt from 11 Propeller that relieves it of liability for the use tax. 12 We disagree with that. 13 Under Regulation 1685, Petitioner, as a 14 purchaser of tangible personal property for the storage 15 use or other consumption of which is subject to use tax 16 is required to pay use tax either to the person from 17 whom the property is purchased or leased, if such person 18 holds a seller's permit or certificate of registration 19 of use tax. 20 Now Regulation 1685, the Petitioner mentions 21 that this might create some sort of trust with regard to 22 Propeller for the payments they made. However, again 23 1685 says that -- that a purchaser must pay to the 24 person from whom said property is purchased or leased, 25 if such person holds a seller's permit or certificate of 26 use tax registration. That's the requirement in 1685, 27 or directly to the Board as well. 28 Furthermore, Regulation 1685 goes on to state 20 1 that, 2 "Purchasers and lessees should not pay the tax 3 to a person who does not hold either a seller's 4 permit or a certificate of registration for use 5 tax. Purchasers and lessees will be liable for 6 payment of tax to the Board." 7 Again, 8 "Purchasers will be liable for payment of tax 9 to the Board unless receipts are obtained from 10 sellers holding a seller's permit or 11 certificate of registration for use tax." 12 The clear implication of Regulation 1685 is 13 that if Petitioner did not obtain a receipt from a 14 retailer, who at the time of the transaction held a 15 seller's permit or certificate of registration for use 16 tax with the Board, any receipt taken from that retailer 17 does not relieve the liability for the tax. 18 Here, in October 1997, Propeller obtained a 19 seller's permit. At that time the start date for 20 Propeller was July 1st, 1997. During the audit of 21 Propeller it was discovered that Propeller had sales 22 personnel at Oracle during the second quarter of '97. 23 Accordingly, to its staff -- according to 24 established audit procedures, the auditor, with the 25 concurrence of the supervising auditor, pursuant to 26 California State Board of Equalization Audit Manual, 27 Chapter 2, which details the procedures for changing a 28 taxpayer's accounting records, submitted form BOE 523 on 21 1 December 3rd, 2001 to the Board's Account Analysis and 2 Control requesting that Propeller start date be changed 3 to April 1st, 1997. 4 In order to account for the additional 5 transactions with Oracle for the second quarter of 1997, 6 Propeller's start date was then changed to April 1st, 7 1997. 8 Now as a little background, part of the reason 9 that this is done is so that if there's a small period 10 that -- when we're auditing somebody, if there's a small 11 period of additional liability that we find and we can 12 change the start date so that we incorporate in one 13 Notice of Determination, one, that liability -- it makes 14 it easier, but not only for us in tracking these things, 15 but for the taxpayer, as well. 16 If the taxpayer was to receive two Notices of 17 Determination, one for a very tiny period during -- of 18 liability and one for a large period, they may, if 19 they're petitioning it, only put that one account number 20 on there 'cause that's all they're aware of and not the 21 newly created account number that we -- the arbitrary 22 account number. And, so, they may lose out on their 23 petitions rights for that small period. 24 So, both for our administrative ease, as well 25 as the taxpayer, so that they don't get confused, we 26 sometimes do change the start date. Now, this does not 27 mean that magically that person had a seller's permit on 28 that date. It simply does not. 22 1 Accordingly, regardless of the dispute 2 regarding the form and content of any invoice or receipt 3 Oracle obtained from Propeller, any receipt obtained 4 from Propeller during two Q '97 will not relieve Oracle 5 of the liability because Propeller did not hold a 6 seller's permit or certificate of registration. 7 Again, during second quarter '97, if 8 Petitioner, or any other purchaser from Propeller, would 9 have contemporaneously inquired with the Board whether 10 Propeller had a seller's permit, which, if at the time 11 Petitioner had proper procedures in place to accrue and 12 report use tax, it likely would have done so 13 contemporaneously, as when Propeller, as one of its 14 out-of-state suppliers suddenly starts charging an 15 amount labeled "sales tax" on its transaction, 16 Petitioner would not have found a permit issued by 17 Propeller for second quarter '97. 18 Next, really briefly, with regard to the drop 19 shipment issue, as to any transaction where the tangible 20 personal property purchased from Propeller was delivered 21 to Petitioner by an owner or former owner thereof or by 22 a factor of agent or former factor of agent, again with 23 regard to the drop -- the ten transactions that appear 24 to be drop shipment transactions, we don't know if these 25 are coming from out of state or in state. But even if 26 they were coming in in state, they wouldn't be sales 27 tax -- they wouldn't necessarily be sales tax 28 transactions. 23 1 And Revenue and Taxation Code 6007 might -- 2 wouldn't apply because Propeller was, at least for the 3 second quarter of '97, engaged in business in the State. 4 And, so, by its wording, Section 6007 doesn't apply. 5 Now I note that Petitioner hasn't had an 6 opportunity to address the four transactions. If you'd 7 like me to address them first, I would be happy to do 8 so, or, if you'd like me to address them after? 9 MS. YEE: Why don't you go ahead and do that 10 now? 11 And then on rebuttal Mr. Miethke may want to 12 focus some attention on them. 13 MR. SCHUTZ: Okay, great, thank you. 14 With regard to the resale certificates, under 15 Regulation 1668, in order for a resale certificate to be 16 proper, the property to be purchased under the 17 certificate must be described either by an itemized list 18 of the particular property being purchased for resale or 19 by a general description of the kind of property being 20 purchased for resale. 21 A general blanket resale certificate, which 22 provides a general description of the items, is a resale 23 certificate that provides a general description of the 24 items to be purchased. 25 A qualified resale certificate, where a 26 purchaser wishes to designate on each purchase order 27 whether the property being purchased is for resale is 28 one that states, "See purchase order," in the space 24 1 provided for a description of the property to be 2 purchased. 3 First, with regard to CalTech as a customer, a 4 resale certificate was submitted dated February 15th, 5 1995, which indicates in the description of the property 6 referred to, "purchase order on offer, just for future 7 purchases." 8 This does not provide a general description of 9 the property. And, so, as Petitioner claims it is not a 10 blanket resale certificate, but a qualified resale 11 certificate. 12 Additionally, with CalTech there is a fixed 13 price contract provided, but we cannot tell if it 14 relates to the transactions at issue. There is no 15 cross-reference between the transactions that we have 16 listed and this fixed price contract that's been 17 provided. 18 With regard to TransCore, an S. A. I. C., 19 Petitioner submitted a resale certificate for 20 S. A. I. C. dated April 1992. Even though there's an 21 indication that it says, "states for resale note," in 22 the description of the property to be purchased, there 23 is no general description of the property, but again a 24 statement saying, "See purchase order." 25 So, this is a qualified resale certificate. 26 And the invoice submitted for the transaction at issue 27 does not say "for resale." 28 For Space Systems/Loral, it's the same thing. 25 1 The resale certificate submitted 4-15-1995 to describe 2 the item purchased says, "See purchase order." 3 With regard to Raytheon, the permit was issued 4 on 4-13-95 is not valid because it does not contain -- 5 and it also -- because the Petitioner makes sales of 6 licensed software where the contract often provides not 7 for resale, we simply don't believe that this resale 8 certificate was taken in good faith -- not only -- in 9 addition to its defect with regard to not representing a 10 resale certificate number that was valid at the time. 11 As to the negligence penalty, as I mentioned 12 before, Petitioner did not accrue use tax. During the 13 several past audits it was told of the problem, it 14 needed to accrue use tax. 15 It accrued significant liability during the 16 audit for use tax, but it still did not -- did not, 17 after three audit cycles, did not accrue and remit use 18 tax. 19 This unreported use tax represents more than 20 half of the liability at issue. Accordingly, the 21 negligence penalty should apply. 22 And with that, I'll save it for any questions. 23 MS. YEE: Thank you very much, Mr. Schutz. 24 Mr. Miethke, you want to take five minutes on 25 rebuttal? 26 MR. MIETHKE: Sure. Let me -- let me first 27 address some of the points he made about the Propeller 28 situation. 26 1 With regard to Regulation 1620, again there's 2 been no proof in this case, again, that any of this 3 property crossed over state lines. So, if that's the 4 case, 1620 just simply doesn't apply. 5 He also cited the Long Beach Terminal case. 6 Facts were completely different in that. That had to do 7 with whether somebody who simply had a construction 8 office in the state to install property, whether that 9 was a fixed place of business. Those aren't our facts. 10 We had somebody here from Propeller on our 11 premises, taking orders. And we have no idea, it's 12 true, this -- remember, by the time we became aware that 13 this was a problem, this is now quite a bit of time 14 later. And, again, a lot of the people that were there 15 at the time were no longer around now, which goes to the 16 issue of why we can't, you know, collect the evidence as 17 he noted. 18 So, the facts are completely different than 19 Long Beach Terminal. The case just doesn't apply here. 20 He mentioned that a number of the -- at least 21 he alleged, that a number of these transactions also 22 involved computer upgrades and things. Well, there's no 23 facts in our case about that. But even if it were true, 24 doesn't that even speak more to the -- wouldn't that be 25 more likely to be done onsite than in some remote 26 location? 27 So, again, no facts in our case, speculation, 28 at best. We think there's a presumption of sales tax. 27 1 You mentioned a little bit about 1685, that 2 regulation. Again, if you're -- in our brief we've 3 mentioned that we think there's two standards. There's 4 one that is -- applies to retailers who aren't engaged 5 in business in the State who are required to be 6 registered and 1685 should apply to them -- those types 7 of transactions -- not to people who are engaged in 8 business in the State and have nexus, as Propeller did. 9 But even if they did, what Mr. Schutz 10 didn't answer, of course, is this idea of a temporal 11 element. Why is it that a backdated start date doesn't 12 apply for all purposes? 13 He gave lots of good reasons why maybe it does, 14 maybe it doesn't. There is no authority that says it 15 shouldn't be considered in this case. 16 This taxpayer was well known to the Board. As 17 a matter of fact, the D & R -- our D & R found that they 18 had nexus as early as February and March, not April 1st. 19 So, if the staff set the date as of April 1st, they must 20 have done it because it coincided with the start date 21 when they were collecting the tax. 22 So, for the staff to turn around now and say, 23 "Gee, this is, you know, aha, we gotcha because they 24 weren't registered," seems to us unfair, at best, and 25 disingenuous at worst. 26 To the four resale certificates, we have an 27 exhibit -- I don't know whether this has been 28 distributed? 28 1 MS. YEE: Yes. 2 MR. MIETHKE: If you look at what they say, I 3 mean, our basic problem is that is look at what these 4 things say. 5 The first page of the -- of it has to do with 6 the Jet Propulsion Lab. It's basically certifying that 7 everything they buy is going to be resold. And to the 8 degree it isn't resold, it says, 9 "I understood that I am required by the sales 10 and use tax law to report and pay the tax 11 measured by the purchase price of some 12 property." 13 Now, understand that this is 1995. The 14 regulation that Mr. Schutz was citing wasn't adopted 15 until 2007. 16 So, now again, to look backwards and say, 17 "Well, gee, it doesn't comport to what the 18 regulation says." 19 Again it seems, 1, it fights with what the 20 plain language of it says -- of what the agreement 21 between the parties actually was, which is that 22 everything that we're going to buy is for resale. If 23 it's not for resale, then what we're going to do is 24 we're going to accrue it and report it ourselves. 25 If you go to the next page, to Science 26 Applications International Corporation, it says we're -- 27 we're in the business of selling property or services to 28 the United States government. 29 1 So, even if this regulation applied, we don't 2 think it does, but that's a general description. And it 3 says we're selling everything. We're reselling 4 everything, unless property ordered for resale, no. 5 So, there is very specific language that the 6 taxpayer had identified that said, 7 "That this will be our flag, but this is not 8 for resale." 9 None of the paperwork in this transaction had, 10 "For resale, no." on it. 11 So, again, the plain language of this again 12 saying that if we are not buying it for resale, we will 13 accrue it and report it. 14 It doesn't say, "Charge us tax." 15 So, for all we know, they did do just that, 16 report it and accrue it. 17 Third page, Space Systems/Loral, if you look 18 above the dotted line, 19 "We will deduct California sales and use tax on 20 materials and supply. We accept liability for 21 any State sales and use tax on materials and 22 supplies which may be due and make any required 23 payments directly to the State." 24 Similar language down below, 25 "In the event such product is used for any 26 purpose other than retention, demonstration or 27 display, while holding it for sale in the 28 regular course of business, we understand that 30 1 Space Systems/Loral's required by the Sales and 2 Use Tax to report and pay for the tax amount 3 measured by the purchase price of such 4 property." 5 All of these things have the same 6 commonalities -- the plain language of agreement between 7 these parties and the understanding is is that 8 everything they're buying is for resale, if it's not for 9 resale, they'll accrue it. 10 They are not using the purchase orders as a way 11 to flag whether it's taxable or not taxable. 12 It just -- it just doesn't comport with the 13 plain language of what's here. 14 The last one again is for Raytheon. He did 15 mention that this is -- that this registration number at 16 the time it was granted, at the time of these 17 transactions, this account number had been closed. 18 However, the taxpayer did have another -- opened another 19 number that was valid. 20 And the Board generally has said, 21 "Look, where there's technical infirmities in a 22 resale certificate, if -- particularly if 23 there's a -- if the purchaser does have a 24 valid resale number, even though it's not the 25 one listed, we're going to look by those 26 things." 27 So, and in this one, again, said everything 28 that they're going to purchase is for resale in the 31 1 regular course of business for the purposes of consuming 2 property purchased and producing for sale a new article 3 of tangible personal property to where they're going to 4 integrate it or what they're purchasing is a chemical. 5 We don't sell chemicals. So, we know it's not the 6 third -- that third thing. 7 So, again, the presumption is is that it's -- 8 it is all -- it's all going to be used for resale. 9 The description of the property has a very 10 important -- has a very important role in this. If you 11 have a blanket resale certificate and you're buying a 12 whole bunch of different things from somebody. And one 13 day you're buying screws and the next day you're buying 14 bolts, if you had screws on your resale certificate and 15 you bought bolts, then there's a question as to whether 16 it was taken in good faith or whether it wasn't 17 purchased for resale. 18 So, that's why in all of these things the 19 description says, "See purchase order." It is not to 20 determine whether it's for resale or not, it's to avoid 21 the problem of having to identify with specificity each 22 and every item that a big purchaser like a CalTech is 23 going to purchase from a vendor like Oracle. 24 MS. OLSON: Time has expired. 25 MR. MIETHKE: Madam Chair, could I just have 26 five more minutes? 27 MS. YEE: Actually take about one more minute 28 and then I'm sure we're going to have questions for you. 32 1 MR. MIETHKE: All right. That's all I'll say 2 on that then. 3 With regards to the negligence penalty, it -- 4 in actual fact, the use tax is only thing that it's -- 5 that the penalty is asserted on. 6 As you know, it affects the entire -- the 7 entire proposed determination. When you -- when you 8 make the reductions that Appeals -- the Appeals officers 9 found, it really amounts to be about 3 percent of our 10 gross receipts or about 4 and a half, if you include 11 Propeller. 12 So, while it's half the assessment, that 13 doesn't really tell the story. It's a very small part 14 of our gross receipts, particularly with some -- with a 15 company as large as Oracle. 16 We did -- we did struggle with use tax, no 17 question about it, in terms of having a system in place. 18 Immediately after this period there was a large accrual. 19 There was systems put in place. 20 Under the general circumstances we would hope 21 that the Board would see clear to waive that. 22 On the amnesty penalty, we did file for 23 amnesty. We made a substantial payment in amnesty. We 24 did not know what the final amount is and to this day 25 we're still trying to determine what the final amount 26 was. 27 We made significant payments. Apparently some 28 of it was credited to interest and not tax. We have no 33 1 idea why that might affect the amount of penalty 2 asserted. 3 We would ask under the circumstances, since a 4 lot of this was confusion with -- again with 5 Propeller -- we ask that be waived. 6 And on the interest issue, the use tax was not 7 even asserted against us until seven years after the 8 fact. So, instantly the interest, seven years later, is 9 going to be almost double the assessment. 10 With regards to then the number of hearing 11 officers that came and went, I mean, these were cases 12 where somebody would have a hearing, nine months would 13 go by and then they would leave before doing a D & R. 14 And this happened multiple times. 15 Under the circumstances, we think the Board 16 ought to be able to waive interest. We think there's a 17 blatant ambiguity in the law, the interest relief law, 18 that says -- that does allow the Board to do it. We 19 addressed it in briefs, I can address it on questions, 20 if necessary. 21 Thanks for the extra time. 22 MS. YEE: Thank you very much, Mr. Miethke. 23 Questions, Members? 24 Ms. Mandel? 25 MS. MANDEL: I have a question on the resale 26 certificates because there was something in the D & R 27 that you haven't spoken about but that I thought was a 28 troubling assertion, which was that a retailer should 34 1 make inquiry and obtain evidence from a United States 2 government contractor as to that contractor's contracts 3 with the federal government before accepting a resale 4 certificate. 5 And that seemed, let's just say, 6 extraordinarily unusual. The resale certificate is not 7 something that establishes taxability in the hands of 8 the purchaser, but is -- is a, you know, sellers don't 9 inquire. They're not generally held to have to inquire 10 about the anticipated purchase or resale down the line. 11 And it looked like the D & R says, except when 12 you're dealing with the U.S. government contractor, you 13 better get copies of their contracts. 14 MR. SCHUTZ: I look at that two ways. The 15 first is that because Oracle and their license 16 agreements did -- many license agreements did have this 17 no resale, you would -- you would have to, for good 18 faith, look at the -- look at the file to see if there 19 was some sort of flash title transfer. 20 The other thing is because in these -- these 21 transactions there weren't valid resale certificates. 22 And to get a resale, in fact, you would need to look at 23 the far clauses to see if -- how or when title 24 transferred under those far clauses. 25 MS. MANDEL: As to any of these transactions 26 with the federal contractors, did the Department look at 27 the reporting and auditing of those companies with 28 respect to these transactions? 35 1 MR. SCHUTZ: I believe that because of the -- 2 this information was provided, you know, during part of 3 the Appeals process, which it takes some time, I don't 4 believe that there was like XYZ letters sent out to 5 these particular -- 6 MS. MANDEL: So, you don't -- 7 MR. SCHUTZ: -- these particular customers. 8 There wasn't -- the audit states there was an 9 XYZ process that they did, but there was additional -- 10 because of this additional documentation and because it 11 was -- these arguments were developed in the Appeals 12 process, for these four I could find no XYZ letters that 13 were sent to these four. 14 MS. MANDEL: So, the answer's no, you don't 15 know if -- 16 MR. SCHUTZ: Yeah. 17 MS. MANDEL: -- CalTech J. P. L. paid tax? 18 MR. SCHUTZ: No. 19 MS. MANDEL: And, in any event, if they were 20 reselling to the federal government, there would be no 21 tax. 22 MR. SCHUTZ: That's correct. 23 MS. MANDEL: Then these are all U. S. federal 24 government contractors? 25 MR. SCHUTZ: Yeah, with the caveat that -- 26 MS. MANDEL: Well, they're not -- they're 27 not putting -- they're not putting, I don't think, 28 Oracle's products into real estate. 36 1 MR. SCHUTZ: Right, but the far clause would 2 still -- the far clauses would still need to be the -- 3 MS. MANDEL: Right, but then if the far clauses 4 were that CalTech and the others would pay tax if 5 they -- if the far clauses were good, then it's an 6 exempt sale by them to the United States government? 7 MR. SCHUTZ: Right, although -- 8 MS. MANDEL: Or they were simply buying as 9 agent for the United States government from Oracle. 10 MR. SCHUTZ: Depending on -- depending on what 11 the far clauses said. 12 Yeah, the other -- the other thing is that 13 since these are defective resale certificates, it's a 14 sales tax transaction. 15 So, they -- if they were audited, they may not 16 be subject to use tax because -- 17 MS. MANDEL: Okay. My recollection is that 18 when the regulation was changed recently to allow people 19 to use purchase orders as resale certificates, that -- 20 which was long after these documents, these resale 21 certificates were written -- that -- that that was 22 because people were coming forward with the purchase 23 order as a resale certificate. 24 MR. SCHUTZ: The prior Regulation 1668, which I 25 have in front of me, says -- again it requires that you 26 say, "See purchase order for qualified resale 27 certificate." 28 It says, 37 1 "Each purchase order must then specify whether 2 the property covered by the order is purchased 3 for resale or whether tax applies to that 4 order." 5 And, so, the new Regulation 1668 is more 6 specific about the language that you need to have on 7 there. But it's -- it's more beneficial. 8 I mean, otherwise, you have to -- it has to 9 specify whether the property was covered by the order or 10 not. 11 MS. MANDEL: So -- 12 MR. HANKS: Bur you're correct, Ms. Mandel, 13 that in many instances, going back many, many years, 14 that purchasers would rely on the purchase orders that 15 it issued, that would suffice. 16 MR. TUCKER: Just to -- and to further clarify, 17 the change that was is that purchase orders have been 18 used to create these qualified resale certificates, 19 however, in the past we -- staff required that it 20 specifically say "for resale" and there were changes to 21 the phrases that could be used to signify that it was 22 used for resale or purchased for resale because some 23 taxpayers claim they didn't have the ability to input 24 "for resale" on each purchase order. 25 MS. MANDEL: -- so, you're saying that the 26 portion of the regulation that had something about a 27 qualified resale certificate was in place when? 1995? 28 MR. SCHUTZ: The version I have, and if I am 38 1 looking at the amendments, there was an amendment to 2 this particular section, but the version I have was in 3 place in -- effective 2002. 4 There was no change to this particular 5 subdivision (b)(4) except for it replaced one word, 6 "whether," and then the prior change was in April 1986 7 where there was no change to that section either. 8 So, based on the history notes, I would say 9 this is the language that was in place in subdivision 10 (b)(4) with regard to a special or resale certificates 11 or qualified resale certificates. 12 MS. MANDEL: Do you have information going back 13 that's -- 14 MR. MIETHKE: We do not have that because, 15 again, this is all new. This is all -- this was never 16 argued by the Department down below -- at least not 17 until their reply brief, which we didn't have a chance 18 to reply to this issue that somehow this new regulation 19 is reaching back, you know, 20 years. 20 We -- if the Board so chooses, I am happy to 21 address it in a post hearing brief to look at it. 22 But, again, our view is that these things have 23 been in place a long time. The plain language of it 24 says everything is a representation, everything we are 25 buying is for resale unless we have it on the -- on 26 the -- on the purchase order that says it's not. 27 The default is is that it is. So, in essence, 28 you could look at every one that isn't marked and says 39 1 that -- has a notation that it's for resale because it 2 incorporates -- it incorporates that blanket resale 3 certificate that's on file in that language. 4 There's a lot of ways to look at it. But I 5 think that the -- the Department's sort of trying force 6 a legal construct into this that just doesn't comport 7 with the way things were done 20 years ago and certainly 8 what's not done with regard to these taxpayers. 9 I mean, that's the representation that they 10 made. That's the way they wanted to handle it. 11 And, again, we would agree if it wasn't for 12 resale, they would accrue it. 13 Again the Department said they've done -- we 14 don't know whether they did or they didn't. 15 And to your first point, Ms. Mandel, we think 16 you're exactly on point. We think the Department's 17 trying to graft additional requirements onto resale 18 certificates taken from U.S. government contractors that 19 just aren't there. 20 A resale certificate is not a representation 21 that a transaction is nontaxable. It's a way for -- 22 when taken in good faith, it's a way for a purchaser to 23 indemnify the seller from their responsibility for it. 24 Again, and the representation is is that -- is that if 25 it is taxable, then we, the purchaser, will accept 26 responsibility for that. 27 It shifts -- it has a way of shifting the -- 28 the responsibility of that from the seller to the 40 1 purchaser. 2 What the Department's trying to do, basically, 3 is say, oh, but because of something they did on the -- 4 on the back side, that we didn't have access to, you 5 could have never taken it in good faith in the first 6 place, therefore, the resale certificate is defective. 7 That's -- that's really kind of circular. 8 MS. YEE: Anything else, Ms. Mandel? 9 MS. MANDEL: No. I also would note on the 10 Propeller issue that the assertion of tax against Oracle 11 apparently did not arise at all until after the 12 Propeller D & R, just based on the dates. 13 MR. SCHUTZ: If I could provide a little 14 background for that? 15 During the Propeller audit -- 16 MS. MANDEL: Well, you know, the Propeller -- 17 the Propeller -- I don't know what you can tell us about 18 the Propeller audit and how that can get necessarily 19 drawn into -- these guys -- I don't know how they can 20 question, you know -- 21 MR. SCHUTZ: Although I can -- 22 MS. MANDEL: -- and there was this audit, 23 which, you know -- 24 MR. SCHUTZ: -- although I can say that we 25 received the paid bills from Oracle to establish the 26 Propeller audit. Oracle gave us their schedule of paid 27 bills. 28 Unfortunately, that original schedule that 41 1 Oracle gave us didn't break down, like the future 2 schedule that they provided in 2004, the sales tax. All 3 it had was the invoice amount and the invoice number and 4 the item purchased or this invoice description. But it 5 didn't have an amount broken out for sales tax. And, 6 so, we didn't know at the time that Propeller had 7 collected sales tax reimbursement. 8 But it was based on a schedule that Oracle had 9 provided for that audit that didn't break down that 10 amount. 11 And there was a subsequent point which was 12 pretty much identical to the schedule that then broke 13 down that amount -- those amounts and showed that sales 14 tax reimbursement was collected on most of the 15 transactions and they also provided us some invoices. 16 MS. MANDEL: Then that gives me a question I 17 have to ask you later, which isn't part of the Oracle 18 case. 19 MS. STEEL: I can go with this case, questions. 20 MS. YEE: We'll come back to Ms. Mandel. 21 Ms. Steel, please? 22 MS. STEEL: It seems like for Propeller 23 transaction between Oracle is double taxation here, that 24 already, you know, from the invoices that you saw that 25 they already collected sales taxes from Propeller and 26 those -- so, they already collect the sales tax from 27 Oracle. 28 And then there -- those invoices -- Propeller 42 1 invoices -- show that separate line of sales tax that 2 Petitioner paid. 3 And then second thing is invoices provided show 4 that there were drop shipment, that indicates that title 5 and sale took place in California. 6 And then third, that undisputed that 7 Propeller's employee came to California during second 8 quarter of 2007 and he was -- he or she was taking sales 9 orders and process all the sales. 10 And then -- means that Propeller participated 11 sale in California when salesperson was there. 12 So, sales tax has been collected by Propeller 13 and their sales representative, who was inside of 14 Oracle. And they collected. 15 And don't we suppose collect that taxes that 16 they already collected from Oracle and then we have to 17 go after you Propeller first? Because they already 18 collected it? 19 I thought when we been looking at all these 20 cases, when they collect it, you supposed to pay it to 21 BOE. 22 So, why suddenly -- and then on 2000 that we 23 gave Propeller refund or the return, the tax that they 24 paid for $428,000 back to Propeller? 25 So, what kind of, you know, internal work that 26 we are doing here? It's just so odd to me. 27 And then if Oracle didn't pay those sales taxes 28 then you can go for -- before we say use tax or sales 43 1 tax that they already collected, so, it's totally double 2 taxation. 3 Let's not go further than this -- just stay 4 with Propeller itself. It doesn't make any sense to me. 5 There is just so many indication that it's been 6 done here. Their salesperson was here. They collected 7 sales taxes. And then now that for 1997 case that you 8 going back to Oracle that you already paid it, but it's 9 a use tax so you to have pay us again. 10 MR. SCHUTZ: I'll address two points to start 11 out with there. 12 MS. STEEL: Maybe four points. 13 MR. SCHUTZ: I will start with two, then we'll 14 kind of talk. 15 The first -- the first is with regard to the 16 refund that you're talking about that was given to 17 Propeller. 18 It was -- there was a refund given to Propeller 19 in 2000 based on prior nonremittance returns that we had 20 to estimate for, I believe, 2000. 21 And they finally -- they ended up filing those 22 2000 returns. It turned out we accepted them and it was 23 -- what we had estimated was an overage. 24 And there was a refund given in, I believe, 25 2001, but that was prior to the audit being completed of 26 Propeller. We didn't -- we didn't even have an 27 established liability yet for Propeller. 28 MS. STEEL: No sense when BOE gave refund that 44 1 easy? 2 MR. SCHUTZ: Well, it was -- it was simply a 3 matter of they proved -- they didn't file returns. They 4 proved up -- they filed returns, they proved up their 5 sales for those, I believe, two quarters. 6 And, so, it was simply a matter of, like, okay, 7 you have proved it up, our estimate was wrong and 8 overstated. And we're going to give you a refund. 9 But it was, again, prior to the time that we 10 had made any determination against Propeller upon audit 11 or, you know, gone through any Appeals process. 12 So, it's unfortunate that the refund was given, 13 but those were the circumstances in which the refund was 14 given to Propeller. 15 The second point is is I agree with you that -- 16 that Propeller did collect an amount that they 17 represented as tax and we agree the D & R mentions that 18 to the extent that we can exhaust collection activity 19 with Propeller first, we should do so. 20 But here we're talking about a dual liability 21 where both the purchaser and the retailer are liable and 22 the State can go after both. 23 MS. STEEL: How it can be dual liability when 24 somebody already paid it? 25 MR. SCHUTZ: They did not pay it to us. I 26 mean, it was not paid to us and it was not paid under 27 the circumstances where -- 28 MS. STEEL: They already collected, though? 45 1 MR. SCHUTZ: Well -- 2 MS. STEEL: I am talking about your dual 3 liabilities, Oracle versus Propeller. 4 Propeller already collected the taxes. So, how 5 it can be dual because somebody who already paid sales 6 taxes here? 7 MR. TUCKER: Ms. Steel, at the time that that 8 amount was collected, they did not have a seller's 9 permit or a certificate of registration with the State 10 of California. 11 MS. STEEL: But all those invoices indicated 12 that they collected already. 13 MR. TUCKER: They collected an amount as tax, 14 but they weren't -- they did not have the authority to 15 collect. 16 MS. STEEL: Why don't we go after them? 17 It's kind of like, you know, we -- 18 MR. TUCKER: We are going after them. 19 MS. STEEL: -- I am thinking that they are 20 outside of the state, so, it's easier to go after Oracle 21 because they are located in California. 22 Is that the reason? 23 MR. SCHUTZ: I still think that we were going 24 to exhaust administrative -- or our collection -- our 25 collection activities against Propeller once we have a 26 final liability in place. 27 MS. STEEL: Why is that? Why don't we just go 28 after Propeller first? 46 1 Because they already collected the sales taxes, 2 why we have to finalize this first and then ask Oracle 3 to pay double? 4 And then if you collect from Propeller, then 5 you going to give them refund? 6 I mean what -- what's the process here? 7 MR. HANKS: Ms. Steel, we are actively working 8 with Propeller to collect amounts that they want to pay. 9 But, as you know, their case is also in 10 petition status. We don't have a final liability 11 against Propeller or with Oracle Corporation at this 12 point. 13 But after -- after both of these cases become 14 final and they're redetermined, then, of course, 15 collection action can start with either of the 16 companies. 17 We would agree with you, we would like and 18 anticipate collection from Propeller to the extent that 19 they've collected these taxes. 20 On the other hand, it is a use tax 21 responsibility of Oracle. The payment has not been made 22 to the State of California. We're mindful that these 23 amounts are owed. We don't -- 24 MS. STEEL: Do you agree that they paid it, 25 though? They paid sales taxes? 26 MR. HANKS: -- yes, it appears as though -- 27 MR. TUCKER: Yes. 28 MR. HANKS: -- an amount of taxes -- 47 1 MS. STEEL: So, if we decide today that Oracle 2 is still responsible because it's a use tax and then you 3 collect it from them, for tax plus interest, and, I 4 mean, all these penalties. 5 And then if we collect from the -- after that, 6 another collection goes out to Propeller? Or then if we 7 collect another sales tax, whatever they collected, then 8 you going to give them refund? 9 I mean, what's our process? 10 MR. HANKS: The process is, in connection with 11 these transactions, if Propeller pays the use taxes 12 that's owed on these transactions, most certainly Oracle 13 will receive credit for those payments on a dollar per 14 dollar basis. 15 In fact, the payments that have already been 16 made by Propeller will -- 17 MR. MIETHKE: They haven't been credited -- 18 MR. HANKS: -- they've not yet been credited -- 19 MR. SCHUTZ: Because this is -- 20 (Speaking at the same time, unintelligible). 21 MS. STEEL: What happened to penalties then? 22 MR. HANKS: They will receive credit for 23 that. 24 MR. MIETHKE: Ms. Steel, just a -- 25 MS. YEE: Mr. Miethke, if you will wait one 26 second. 27 MS. STEEL: Just one more question. 28 What happened to those penalties? 48 1 Means that Propeller is admitted when they pay 2 us taxes back, whatever they collected, then why 3 Oracle's responsible for other penalties? 4 MR. HANKS: The other penalties in this case 5 relate to amnesty-related penalties. 6 And I believe Mr. Miethke discussed that 7 earlier. He was -- he was suggesting that the payment 8 that they had made during the amnesty that was supposed 9 to cover some amnesty-related liability, should have all 10 been accrued and credited as tax payments. 11 We didn't do that at the time because we were 12 directed by Oracle to apply a certain portion of that 13 payment to tax, another portion to interest. 14 In doing so, that eliminated any 15 amnesty-related penalty for that -- those earlier 16 periods. 17 MS. STEEL: Is that true that you paid the 18 amnesty penalty, then asked them to certain portion goes 19 to principal and certain portion goes to interest? 20 I thought you just send a check out and then 21 BOE randomly just divided. 22 MR. MIETHKE: That's a question we're going to 23 have to address to these gentlemen on my left. 24 MR. SEKIGEHAMA: We remitted all this data 25 and -- 26 MR. MIETHKE: Do you recall any direction? 27 MS. YEE: Do you want to speak into the 28 microphone? 49 1 And then we can better sort this out. 2 MR. SEKIGEHAMA: Wayne Sekigehama, Director of 3 Sales Tax at Oracle. 4 We made a $2 million, a little bit over 5 $2 million payment in the -- within the amnesty period. 6 But it's unclear to me whether we designated 7 a portion of that to be tax and interest or that was 8 just the $2,000,000 tax. 9 MS. YEE: You don't recall whether -- 10 MR. SEKIGEHAMA: That's correct. 11 MS. YEE: -- that was -- 12 MR. SEKIGEHAMA: That's correct. 13 MR. SCHUTZ: I will note that under amnesty you 14 needed to pay both for the period to have the relief, 15 the carrot, the relief of a liability, which they got 16 relief of $56,000 of the negligence penalty, you had to 17 pay tax and the interest for that portion or period. 18 So, it was apportioned over -- in order to give 19 them relief, portions of the negligence liability, you 20 had to pay tax and interest on the liability under 21 amnesty. 22 MS. STEEL: How you going to decide when you 23 just receive one check for $2 million? How you decide 24 that, you know, which one goes to interest and which one 25 go to -- goes to penalty? 26 MR. SCHUTZ: I think with regard to the amounts 27 that they're saying we're certainly willing to, after 28 this becomes a final liability, and would be determined 50 1 how best to apply this payments to -- to help the -- to 2 help Oracle here, we certainly would move them around so 3 that they get the best benefit available. 4 But we would -- we would need, probably, to do 5 that after a final determination and we can work with 6 them after -- after your determination to determine how 7 to -- 8 MS. YEE: I guess let me ask the question 9 another way. 10 Under the amnesty program did a taxpayer have 11 the ability to designate how the payment would be 12 applied? 13 MR. HANKS: Yes, they did. 14 MS. YEE: Okay. 15 MR. HANKS: And it's my understanding that that 16 designation was applied in accordance with Oracle's 17 wishes. 18 MS. YEE: Requests? Okay. 19 MR. HANKS: And in doing so, that -- 20 MR. MIETHKE: We don't have -- 21 MR. HANKS: -- abated -- 22 MS. YEE: Yeah. 23 MR. HANKS: -- a $56,000 amnesty-related 24 negligence penalty. 25 MS. YEE: All right, okay. 26 And you don't recall that? 27 MR. MIETHKE: We don't have any -- we don't 28 have any record of having done that. 51 1 So, I don't know what the basis for the 2 assertion is, but we would be happy to look at whatever 3 it is that they relied on -- supposedly relied on. 4 MS. YEE: Okay. 5 MS. STEEL: Madam Chair? 6 MS. YEE: Let me follow up on the negligence 7 penalty. 8 This -- the portion of the liability 9 attributable to what Petitioner paid to Propeller is 10 troublesome, as Ms. Steel has alluded to, but let's put 11 the issue aside for now. 12 The negligence penalty is applied to -- over 13 the entire liability. It's calculated based on the 14 entire liability. 15 Any -- any latitude that the Board has? 16 MR. TUCKER: No, unfortunately, we do not. 17 MS. YEE: Mr. Miethke? 18 MR. MIETHKE: Well, you know, this is kind of 19 interesting. I've seen the Legal Department change its 20 position from time to time, not necessarily on this 21 penalty, but like, for instance, when you're in the 22 property tax context and there is questions of whether 23 there can be full or partial relief for that, and I 24 believe the analysis was that if the Board has the 25 authority to waive 100 percent of it, it also has the 26 inherent authority to waive some portion of it. 27 So, I don't know whether that necessarily -- 28 whether there's a statutory difference here that would 52 1 change that analysis, but that is what I have heard 2 quoted before this Board by the Legal Department before. 3 MS. YEE: Okay, I think we've been back and 4 forth on that one a couple of a times. 5 MR. MIETHKE: Indeed. 6 MS. YEE: Okay. 7 MR. MIETHKE: Can I just respond to two quick 8 things? 9 MS. YEE: Please? 10 MR. MIETHKE: Okay. 11 MS. YEE: And then let me entertain further 12 questions. 13 MR. MIETHKE: You bet. 14 Mr. Tucker responded to Ms. Steel's question 15 about -- again about Propeller. 16 And he had represented that, gee, they really 17 weren't authorized to collect use tax -- let's assume 18 it's use tax -- because they weren't registered with the 19 Board. 20 The statute doesn't say that. 6202 says, 21 "A retailer engaged in business in the State 22 has a duty to collect tax on those sales." 23 So, by virtue of the fact that they had nexus 24 with California, they had an obligation to collect use 25 tax from Oracle. 26 And, indeed, that's the very thing that they're 27 being chased for. They're being chased not just because 28 they collected it from us, but they're being chased 53 1 because they had an obligation to collect use tax 2 whether they were registered or not registered with the 3 Board. 4 So, I just wanted to address that. 5 To Ms. Mandel's earlier issue about these 6 resale certificates, in talking to Mr. Punzo, in our 7 reading of this and our recollection of the audit, the 8 only reason why these particular resale certificates 9 were focused on was because they involved government 10 contractors. 11 In other words, the same resale certificates, 12 same wording, were approved in the audit if they didn't 13 involve a U. S. government contractor. 14 But the auditor raised this far clause, and 15 you've got to show this and you've got to show that 16 because it's a government contractor. The entire focus 17 was on the fact that these were sales to people who were 18 selling to the government. 19 And, so, you know, again, we don't have any 20 control over that and the regulation doesn't have 21 anything to do with that, whether there is -- whether 22 our clients' contracts -- what that relationship is with 23 their customers. 24 And, so, I just wanted to establish that. 25 Thank you. 26 MS. YEE: Thank you. Other questions, Members? 27 MR. HORTON: Madam Chair? 28 MS. YEE: Mr. Horton, please? 54 1 MR. HORTON: There we go -- it's good it wasn't 2 on. 3 You know, there are so many different issues 4 and points of law and points of fact relative to this 5 case that it makes it in and of itself confusing, but 6 yet still relatively simple. 7 So, the challenge here is to -- how do we get 8 at the facts of the case from a legal perspective and 9 whether or not the documents are available. 10 And in the absence of those documents, what 11 presumptions can we legally make as an agency? 12 And, so, I'm -- just want to ask a few -- I 13 will tell you in advance that they're a few leading 14 questions, if you will. 15 What is the basis for -- is the taxpayer 16 considered engaged in business in the State of 17 California? And when were they considered engaged in 18 business? And what was the basis for that 19 determination? 20 MR. SCHUTZ: When you talk about "the 21 taxpayer," you are talking about Propeller? 22 MR. HORTON: Propeller. 23 MR. SCHUTZ: Right. And based on -- based on 24 discussions and during the Propeller audit, as well as 25 during the Appeals conference with Propeller staff, as 26 well as -- as well as -- since this was also referred as 27 At11 64 (verbatim) from the Oracle audit to us based on 28 representations we received from the Oracle audit staff 55 1 as far as what -- what they were aware of as being 2 Propeller's presence in the State -- 3 MR. HORTON: I am asking you to -- 4 MR. SCHUTZ: -- for that particular quarter -- 5 MR. HORTON: -- answer the question, by the 6 way. 7 MR. SCHUTZ: -- so, based on the -- based on 8 the documentation, we established that they were engaged 9 in business in the state for second quarter of 1997. 10 And it wasn't until third quarter 1997 that 11 somebody actually moved here. 12 MR. HORTON: And you just -- I didn't hear the 13 last part? 14 MR. SCHUTZ: And it wasn't until third quarter 15 1997 that somebody actually moved here. 16 Also with regard to the invoice -- 17 MR. HORTON: What -- 18 MS. YEE: Mr. Schutz, slow down. 19 MR. SCHUTZ: I'm sorry. 20 MR. HORTON: -- what caused them to be engaged 21 in business in the second quarter of '97? 22 MR. SCHUTZ: The second quarter of '97 is 23 because we determined that they had somebody visiting 24 the State to facilitate sales with Oracle. 25 MR. HORTON: So, we established nexus by virtue 26 of the activity, not necessarily physical brick and 27 mortar? 28 MR. SCHUTZ: That's absolutely correct, yes. 56 1 MR. HORTON: And in the third quarter you said 2 they were engaged in business as well? 3 MR. SCHUTZ: For the third quarter they were 4 engaged in business as well. 5 They did have somebody move to the state in the 6 third quarter. They had stated, 7 "We have somebody now living in the State in 8 the third quarter." 9 MR. HORTON: Does it really matter whether 10 they're living in the State or they're -- 11 transactions -- transacting sales and activity in the 12 State? 13 MR. SCHUTZ: It could certainly because the 14 home of that representative, that now established home, 15 could be in a local branch office or other place of 16 business. 17 Now, whether or not -- 18 MR. HORTON: I mean, but you -- you have two 19 basic qualifications. 20 And, so, if one exists, based on the 21 activities, there's nexus us in California? 22 MR. SCHUTZ: Right. 23 MR. HORTON: And then the second, they're 24 not -- 25 MR. SCHUTZ: No, you would still under 603 -- 26 MR. HORTON: -- I don't know why -- 27 MR. SCHUTZ: -- they would still be a -- 603 28 retailer engaged in business in the State under 6203, 57 1 that's correct. 2 MR. HORTON: So, I don't -- so, there is no 3 real argument that they have to have a physical presence 4 in order to be engaged in California. 5 And I think that's a misconception here is 6 that -- and, so, when we argue that there is no physical 7 presence and, therefore, the presumption is that they're 8 not engaged business. 9 Then we have to go to the second phase and say 10 that they are engaged in business because of the 11 activity. 12 The activity in and of itself, they're engaged 13 in business in both the second quarter and the third 14 quarter, if nothing happened -- whether they moved 15 somewhere here or not, they would still be engaged in 16 business as long as they continue to transact business 17 here in the State of California. 18 MR. SCHUTZ: Absolutely. The only thing that 19 it goes to is whether or not it could be -- meet the 20 requirements of it could be a sales tax transaction for 21 third quarter where you actually have a local branch 22 office or other place of business in the State. 23 MR. HORTON: And we'll -- 24 MR. SCHUTZ: But -- 25 MR. HORTON: -- okay, so, they're engaged in 26 business. 27 And as a retailer engaged in business in 28 California, they're liable to collect the sales tax, 58 1 right? 2 MR. SCHUTZ: As a retailer engaged in business 3 in the State, if it's a -- they would be liable for -- 4 for sales tax transaction if it was a sales tax 5 transaction. 6 MR. HORTON: And they're also liable for use 7 tax transaction? 8 MR. SCHUTZ: That's correct. 9 MR. HORTON: Irregardless of the physical 10 location? 11 MR. SCHUTZ: That's correct. 12 MR. HORTON: Although you recently said that 13 the location would make a difference relative to use 14 tax. 15 Can you -- 16 MR. SCHUTZ: It would -- it would -- physical 17 location wouldn't make a difference with regard to use 18 tax, but it would -- 19 MR. HORTON: It would or wouldn't? 20 MR. SCHUTZ: It would not have. 21 MR. HORTON: But you recently said it would. 22 MR. SCHUTZ: It would not have with use tax, 23 I'm sorry if there was some misunderstanding. 24 It would be to whether or not you had a sales 25 tax transaction. 26 MR. HORTON: Okay, all right. 27 And the courts have ruled from time to time 28 that sales tax and use tax are interchangeable 59 1 semantically. 2 You know, if you say sales tax, well, it really 3 depends on a lot of other things what it is, just the 4 mere fact that you labeled it sales tax, it creates a 5 debt to the State, but it really doesn't, in and of 6 itself, according to the courts -- and I'm just putting 7 that out here for your -- to you to expound on. 8 The circumstances will determine what that 9 really is. The fact that you've labeled it either sales 10 tax or use tax creates a debt to the State of 11 California, therefore, you owe this to the State of 12 California or you have created an excess tax 13 reimbursement situation. 14 And even if you did owe it to the State of 15 California, you paid too much or you didn't pay it 16 properly, we have got to give it back. 17 What's your thoughts on that? 18 MR. SCHUTZ: What a purchaser labels -- I'm 19 sorry, what a seller labels on their invoice, if they 20 label it sales tax or use tax, it doesn't change the 21 nature of the tax. 22 It -- what matters -- 23 MR. HORTON: Let me give you an example. 24 Let's say it was a leasing company. And the 25 leasing company, by virtue of our law, can't be subject 26 to sales tax. 27 And, so, let's say the leasing company labeled 28 it, incidentally, you know, mistakenly or whatever, they 60 1 labeled it sales tax. 2 We're there. We're saying, 3 "You are liable for the use tax. Circumstances 4 indicate you are liable for the use tax, but 5 it's been labeled sales tax." 6 The Board is going to say what? What -- in 7 that situation? 8 MR. SCHUTZ: If -- based on the facts of the 9 transaction, if it was a use tax transaction, it 10 wouldn't matter what it was labeled on the invoice. 11 MR. HORTON: Okay. You can't have it both 12 ways. 13 You can't say that the circumstances 14 surrounding the transaction will determine it and the 15 label doesn't matter and yet, still, the label does 16 matter. 17 And this is -- this is why we've -- we've -- 18 in fact, I think we've got a recent case that's in the 19 court where the court ruled against the Board of 20 Equalization and the court took the position that the 21 sales tax and the use tax are interchangeable relative 22 to the legislation, even though the legislation only 23 specifically says sales tax. 24 I wish I could remember that case. I think 25 it's on the docket. But, anyway, let me just continue 26 the line of questioning. 27 So, they've paid over -- they've collected this 28 tax. And, arguably, in the absence of Oracle, they owe 61 1 that tax to the Board of Equalization -- either they owe 2 sales tax to the Board of Equalization or they owe use 3 tax to the Board of Equalization. 4 Am I correct? 5 How do we establish that this was a use tax 6 transaction? What -- what established this to be a use 7 tax? 8 I mean, we have a retailer engaged in business 9 in the State of California, required to collect both the 10 sales and use tax. 11 So, now I'm curious about the burden of proof 12 and the -- how does that shift? That's where I'm going. 13 So, how did we establish that this was a use 14 tax transaction? 15 MR. SCHUTZ: There are two requirements to have 16 a -- 17 MR. HORTON: I'm not asking what the 18 requirements are. 19 I mean, what's the facts that support that this 20 is a use tax transaction? 21 MR. SCHUTZ: Right. And with regard to the 22 first requirement, the facts regarding the first 23 requirement, we did not have any evidence that -- that 24 these transactions occurred in the State. 25 Moreover -- moreover, the prior periods there 26 was multiple transactions with -- with Propeller and 27 Oracle that was -- they're considered use tax 28 transactions. 62 1 MR. HORTON: You said they're considered use 2 tax? 3 MR. SCHUTZ: Right, right, they were -- 4 MR. HORTON: Why? 5 MR. SCHUTZ: -- we considered them use tax 6 transactions. 7 One, because Propeller -- Propeller didn't have 8 a presence in the State at that -- at the time. 9 MR. HORTON: This is prior to the second 10 quarter '97? 11 MR. SCHUTZ: Prior to the second quarter of 12 '97 -- 13 MR. HORTON: They didn't have a physical -- 14 MR. SCHUTZ: -- they didn't have any physical 15 presence. 16 MR. HORTON: No salesmen, no transactions, no 17 -- here operating, helping to consummate the sale? 18 MR. SCHUTZ: Right, we could not establish that 19 they had any -- any presence in the State. 20 MR. HORTON: But that, in and of itself, 21 they're not a retailer? 22 MR. SCHUTZ: Right. 23 MR. HORTON: So, that's going to make -- 24 MR. SCHUTZ: That's going to -- 25 MR. HORTON: -- it a use tax transaction 26 automatically? 27 I'm really speaking of the second and third 28 quarter. They're retailers. They're engaged in 63 1 business in the State of California -- or maybe let me 2 help out a little bit. 3 MR. SCHUTZ: Right. 4 MR. HORTON: So, prior to 1997 how they 5 facilitated the transaction wouldn't matter. They're 6 not engaged in business in California and, therefore, 7 can not be subject to the use tax -- for the sales tax 8 and can't even be held liable to collect the tax -- 9 sales tax, under Congress laws, right? No nexus, not 10 required to do it? 11 So, I don't understand how those facts can -- 12 you can use that information as a basis for presuming 13 now that this is a use tax transaction. 14 MR. SCHUTZ: Right. They didn't have any -- 15 they didn't have any break any more like you said any -- 16 MR. HORTON: Didn't need it. 17 MR. SCHUTZ: No local participation in the 18 State prior to second quarter of '97. 19 All we had available as far as their presence 20 was somebody coming in and visiting Oracle on -- on not 21 a permanent basis. 22 So, there was no way that we could establish 23 that there was a local branch office or other place of 24 business. 25 They didn't have any local branch office or 26 other place of business prior to second quarter of '97. 27 And based on the records -- available record, 28 we didn't have any information that they established 64 1 anything that could be considered a local branch office 2 or other place of business in this State until third 3 quarter of 1997, when somebody physically moved here. 4 MR. HORTON: Okay. 5 MR. HANKS: The other part of this, too, I 6 think -- 7 MR. HORTON: First, let me just share. 8 I don't think it really matters whether they 9 have a brick and mortar in the State of California. 10 I mean, if they're engaged in business in 11 California by virtue of their activity, they have a 12 salesperson here and the Board has consistently ruled 13 that this be the case, they're engaged. 14 They're required -- they're a retailer required 15 to have -- required to -- I mean, they're a retailer in 16 the State of California. 17 Subsequent to -- I mean, prior to the second 18 quarter of '97, the same thing probably existed, I mean, 19 you know, with the exception Oracle probably took a 20 position that we want someone -- and Oracle can testify 21 on their own, I shouldn't really interject what they 22 thought because I don't know. 23 Possibly, we're saying that these are use tax 24 transactions because of the shipment and how the product 25 was -- 26 MR. SCHUTZ: We -- 27 MR. HORTON: -- the out-of-state location? 28 MR. SCHUTZ: Right. 65 1 MR. HORTON: Is that -- 2 MR. SCHUTZ: We don't -- we don't have evidence 3 of where these things were shipped from. 4 MR. MIETHKE: Right. 5 MR. SCHUTZ: And if they were shipped in 6 California, that's one of two prongs in order make it a 7 sales tax transaction. 8 The other prong is local participation in the 9 State. We don't have evidence of either for second 10 quarter of 1997. 11 MR. HORTON: Oh, I'm -- I thought we -- I 12 thought it was agreed that in the second quarter there 13 was a salesman in -- 14 MR. SCHUTZ: Absolutely there was a salesman 15 and that means under 6203 they're engaged in business in 16 State and they have a requirement either -- if -- for 17 transactions that are use tax transactions, to -- to 18 collect the use tax, in transactions that are sales tax 19 transactions to collect the sales tax. 20 MR. HORTON: And, so, there was participation? 21 MR. SCHUTZ: Not from a local branch office or 22 other place of business, which has to be a physical 23 location. 24 MR. MIETHKE: Mr. Horton? 25 MS. YEE: Mr. Miethke, stop. 26 Let's get clear on this. 27 Mr. Tucker? 28 MR. HORTON: Let me -- let me ask our 66 1 representative to -- 2 MR. ANGEJA: Thank you. 3 MS. YEE: Mr. Angeja? 4 MR. ANGEJA: Jeff Angeja on behalf of Appeals. 5 If I'm understanding your question correctly, 6 you are asking for how we know it's subject -- well, not 7 that we know -- how would it be subject to use tax in 8 the first place? 9 Which I'll -- let me if focus it. The default 10 is use tax. Property that comes into the State is 11 presumed to be subject to tax under 6246. 12 There is an exemption from the use tax. A 13 purchaser can show that it is subject to sales tax under 14 6401, the taxpayer bears the burden of proving it's 15 entitled to an exemption to qualify for the -- 16 MR. HORTON: But -- let me -- and my apologies 17 for interrupting, but there's a point of law that I just 18 wanted to make sure that I understand. 19 Is that -- what you are citing here is when 20 tangible personal property comes from out of state into 21 California? 22 MR. ANGEJA: It's presumed to be subject to use 23 tax. 24 MR. HORTON: It's presumed to be subject to use 25 tax, okay. 26 Everybody agrees with that, right? 27 Okay, keep going. 28 MR. ANGEJA: So, in order to -- for a consumer 67 1 to show that it's not subject to use tax, one of the 2 ways to do that -- 3 MR. HORTON: We haven't proven that it came 4 from out of state yet? 5 MR. MIETHKE: Right. 6 MR. HORTON: I mean, there's no evidence that 7 it came from out of state? 8 Is there any evidence? 9 MR. MIETHKE: Not in this case. 10 MR. HORTON: In this case? 11 MR. SCHUTZ: In this case we do have a 12 statement from Propeller when they opened their -- 13 Propeller when they opened their seller's permit that 14 they were making all shipments from out of state. 15 MR. HORTON: Okay. 16 MR. SCHUTZ: That's what we have. 17 MR. MIETHKE: That's not in this case. 18 MR. HORTON: To the taxpayer, do you refrute 19 that? 20 MR. MIETHKE: Well, first of all, we don't 21 have -- we don't have access to that. 22 That is not in this case. That may be in the 23 other case -- 24 MR. HORTON: It's in the case now. 25 MR. MIETHKE: -- but we don't have -- 26 MR. HORTON: They just brought it in. 27 MR. MIETHKE: Well -- 28 MR. HORTON: I think the best thing to do is to 68 1 say it exists or it doesn't exist. 2 MR. MIETHKE: All we can say is that the 3 evidence -- the evidence it does exist in this, the 4 invoices that we do have strongly suggest that it was 5 not coming in from out of state, that it was being 6 fulfilled from another source. 7 MR. HORTON: Okay. So, they disagree with it? 8 MR. MIETHKE: We disagree with it, it's not in 9 our -- 10 MR. HORTON: Have you seen the invoices? 11 I think -- 12 MR. SCHUTZ: I have seen the -- 13 MR. HORTON: May I? 14 I think Mr. Miethke is referring to the 15 invoices that I heard testimony said installation, 16 training -- a lot of activities that sort of imply some 17 participation by the seller in the State of 18 California. 19 MR. SCHUTZ: I think he was referring to 20 invoices that said "drop shipment" and they were Toshiba 21 computers. 22 And, so, I think the implication that 23 Mr. Miethke was making that, well, it's a drop shipment, 24 so, it's -- it must be coming from a California 25 location -- although we don't know -- necessarily know 26 that for drop shipment -- if it is coming from a 27 California location or from out of state. 28 And also these are these are -- these are ten 69 1 invoices out of 720 invoices -- or 720 transactions. 2 MR. HORTON: So -- 3 MR. SCHUTZ: So, we don't know for the bulk of 4 the transactions whether they're all drop shipment or -- 5 but we do have these ten transactions that say "drop 6 shipment." 7 I noted another place they said Fed Ex. 8 MR. HORTON: I am sorry, I took his law book. 9 So, go ahead. 10 MR. SCHUTZ: And in some of these transactions 11 there seems to be a little bit of a conflict of whether 12 or not it's drop shipment. 13 But they do have -- all the transactions have a 14 drop shipment statement. And then some of the 15 transactions in the shipping shipped to, say, Fed Ex, 16 Serve, but I'm not sure what -- if that's just a 17 shipper. 18 MR. MIETHKE: In the absence of clear proof 19 that these -- the property did move across state lines, 20 none of the presumptions that Mr. Angeja gave apply and 21 Regulation 1620 doesn't apply either. 22 MR. ANGEJA: Which I wanted to clarify. 23 6241 imposes the use tax on the purchase of 24 property sold by any person for delivery in the State. 25 I'm not going to be able to quote it exactly here. 26 It -- it isn't that use tax only applies if it 27 comes in from out of state. The purchase and use of 28 property in this state is subject to use tax unless we 70 1 can show it is subject to sales tax. 2 MR. HORTON: Regardless? 3 MR. ANGEJA: So, it's a bit of red herring to 4 argue over whether or not it crossed state lines. 5 The presumption is use tax, unless the consumer 6 can show that it is subject to sales tax. 7 MR. HORTON: Well -- 8 MR. MIETHKE: I'm sure retailers -- 9 MR. HORTON: -- first -- 10 MR. MIETHKE: -- would like to hear that. 11 MR. ANGEJA: California -- 12 MR. HORTON: I really don't want to watch you 13 guys dance, but the -- there's a presumption that is 14 rebuttable that it's use tax. 15 You buy something. You store it in the State 16 of California. You owe the use tax. 17 But if you buy it from a retailer, it's a 18 different thing, you know. 19 So, you buy it from a retailer, all of a sudden 20 it's a sales tax transaction. 21 Therein, the argument -- the basis of the 22 argument that the two are interchangeable depending on 23 the circumstances. 24 So, the circumstance is it properly came from 25 out of state, then it's a use tax transaction. But if 26 it came from out of state and the out-of-state 27 permits -- the out-of-state seller is also engaged in 28 business in California, then we shift the liability to 71 1 the out-of-state seller and say, 2 "You're responsible for collecting because 3 you're doing business here in the State of 4 California." 5 MR. ANGEJA: Yes, which is a collection 6 obligation, the customer -- 7 MR. HORTON: Collection obligation? 8 MR. ANGEJA: -- the consumer still has the 9 obligation, it's still primarily -- 10 MR. HORTON: They both -- that's -- that's 11 the -- that's where we are, I mean, that's the crust of 12 this thing is that there is -- there's the unique 13 situation that we have here. And there is some 14 presumptions of fact as well -- and I will get to that. 15 But the unique situation where you have the 16 presumption that the product was shipped from out of 17 state to California, presumption, therefore, is subject 18 to use tax. 19 You've got an in-state seller engaged in 20 business in California responsible for collecting the 21 tax, but not necessarily responsible for the tax. 22 And the in-state consumer, in order for them to 23 relieve themselves of that liability, the Board has set 24 forth certain things they should do. 25 But here's the other challenge for me is that 26 the reality is it's been collected. And the tax has 27 been collected. And, so -- and it just hasn't been 28 reported. And it's been collected by a person that had 72 1 the obligation to collect it. 2 And, so, I understand how we could hold both 3 parties liable, but seems to me that the primary 4 liability is on the person who is responsible for 5 collecting it. And only secondarily -- I mean, to hold 6 the consumer liable for tax that they've already paid -- 7 and I'm just speaking out loud here, you guys can talk 8 about the law -- because of the form of a document and 9 the verbiage description seems to be, you know, just 10 stretching it a little bit. 11 Any comments from the Department? 12 MR. SCHUTZ: I would say that -- that because 13 Propeller didn't have a permit at the time, we don't 14 really even look to what the receipt from Propeller 15 looks like. 16 Any receipt wouldn't be valid because under 17 Regulation 1685 they need to be -- if you are going to 18 get a receipt, it needs to be from somebody who's 19 permitized with us in order to relieve you of liability. 20 MR. HORTON: No, the regulation is an 21 interpretation of the law. 22 There's nothing in the law that says you've got 23 to have that. The law simply says you are engaged in 24 business in California. 25 MR. TUCKER: Mr. Horton, what the law says 26 specifically, it says, 27 "To accept a receipt from a retailer engaged in 28 business in this state, or a retailer who is 73 1 authorized by the Board," 2 And then this is the important part -- 3 MR. HORTON: You see that "or" in there? 4 That's called a -- you know, that "or" -- 5 MR. TUCKER: Right, it says, "Or someone" -- 6 MR. HORTON: Just engaged in business in 7 California, that's all you really need. 8 MS. YEE: Can hear the cite, part of the "or"? 9 MR. TUCKER: And then it follows up by saying, 10 "Under the rules and regulations, as it may 11 proscribe." 12 And the rules and regulations are provided in 13 Regulation 1685, which says -- and it says in black and 14 white, 15 "Purchasers and lessors should not pay the tax 16 to a person who does not hold either a seller's 17 permit or certificate of registration of use 18 tax." 19 MR. HORTON: Yeah, I know. 20 MR. TUCKER: And that's -- that's what we're 21 looking at. 22 MS. YEE: Okay. 23 MR. HORTON: That's the -- that's the crust -- 24 I mean I am really trying. 25 I am really -- I have a pretty good 26 understanding of this and, so, I'm really doing this to 27 make sure that we isolate the facts in the case and the 28 law. 74 1 And when you've got a taxpayer that's paid the 2 tax and you've -- and we have to adjudicate this, I want 3 to understand that this is a form over substance 4 argument. 5 And, so, I'm subjecting a taxpayer to a -- to 6 tax because of a form and not because of substance. 7 And that's a difficult thing in my mind to sort 8 of process. So -- and I would imagine it is in others 9 as well. 10 Madam Chair, with your permission, it appears 11 that -- 12 MS. YEE: Mr. Angeja? 13 MR. ANGEJA: Only that I wanted to clarify what 14 I slightly misspoke last time, 6202, 15 "Every person storing, consuming or otherwise 16 using property in the State from property 17 purchased from a retailer is liable for the 18 tax." 19 The tax being use tax. 20 So, the way -- as we had said earlier, the way 21 I -- if it were a California retailer, that's one way to 22 show that it's not otherwise applicable. 23 MR. HORTON: So, to the taxpayer, any evidence 24 whatsoever that the property didn't come from 25 out of state or that there is some FOB information, 26 shipping instructions that indicate that the title 27 passed in California or circumstantial evidence? 28 MR MIETHKE: Again, you know, the type of 75 1 property that Oracle sells is pretty generic. It's 2 software and related products. So -- 3 MS. MANDEL: He's talking about the 4 Propeller -- 5 MS. YEE: The Propeller? 6 MR. MIETHKE: I'm sorry. 7 MS. YEE: I think it's -- 8 MR. MIETHKE: I'm sorry, I just shifted gears 9 on you there. 10 I don't think there's anything necessarily 11 unusual about it that would indicate that it necessarily 12 came from in state or out of state, other than -- 13 MS. YEE: It was -- 14 MR. HORTON: Do you have you a copy of the 15 shipping documents or -- 16 MR. MIETHKE: No. 17 We have -- again, this arose -- 18 MR. HORTON: Is there a contract between 19 yourself and Propeller or -- 20 MR. MIETHKE: No. 21 MR. HORTON: No contract? No shipping 22 documents? 23 MR. MIETHKE: Remember, this arose seven years 24 after the transactions. So, no, we don't have -- we 25 don't have those. 26 MS. YEE: Just labeled "drop shipment" on the 27 invoices that suggests -- 28 MR. MIETHKE: Well, the -- 76 1 MS. MANDEL: Labeled "drop shipment and sales 2 tax." 3 MR. MIETHKE: And sales tax? 4 MS. YEE: Right. 5 MR. MIETHKE: Yeah. 6 That's what -- again, that's what gives us a 7 hint that it could be. 8 And we don't know -- we're assuming that if 9 there's these ten that we do have that say it, you know, 10 the presumption that there is -- gee, this is the only 11 ten out of 700 that are done this way, seems -- because 12 there aren't any that really fall to the contrary, at 13 least that we have. 14 But -- 15 MS. MANDEL: And sales tax in the records is on 16 all of them? 17 MR. MIETHKE: Yes. 18 MS. MANDEL: On all of them? 19 MR. MIETHKE: There's no question that sales 20 tax reimbursement, some form of reimbursement was added 21 and was paid, yes. 22 MR. HORTON: What's the Department's view of 23 the term "drop ship"? 24 Does that, in and of itself, imply anything? 25 MR. SCHUTZ: No, it -- "drop ship" could be 26 either from a California location or it could be out of 27 state. 28 It's a term of shipment that -- that -- that 77 1 the shipment is coming from a third party, but that 2 third party could be located out of state or in state. 3 So, it's neutral on that term. 4 MR. MIETHKE: You know, our position has been 5 that there's been no -- that there is no evidence one 6 way or the other. 7 In other words, there's nothing in our 8 record -- at least other than we've suggested -- that 9 leans towards, again, some sort of a sales tax 10 transaction involving a third party, how it was labeled, 11 et cetera, on the invoices we've got. 12 The -- I think, largely at the end of the day 13 what we think is that the staff sort of assumed it's 14 drop shipment because the -- because -- 15 MR. HORTON: You want it to be a sales tax? 16 MR. MIETHKE: We want it to be a sales tax, 17 absolutely. 18 MR. HORTON: You're arguing against that? 19 MR. MIETHKE: No, what I'm saying is that the 20 evidence that we see in the records suggests sales 21 tax. 22 MR. HORTON: Okay. 23 MR. MIETHKE: Okay? But the assumption -- we 24 think that what the staff's putting forward again is 25 sort of a presumption or an assumption that everything 26 is use tax. 27 We just don't think that's supported by the 28 facts. 78 1 And also, again, I think we followed your 2 analysis, that when you are engaged in business in 3 California, you are authorized under 6202 to issue a 4 receipt. 5 And the reason is is that the portion that 6 Mr. Tucker read goes on, actually the rules and 7 regulations that the Board may proscribe to collect the 8 tax and who is, for purposes of this part, relating to 9 the use tax, regarded as engaged in business in the 10 State. 11 In other words, all of that discussion of 12 pursuant to regulations that the Board may promulgate 13 relates to that second class of retailer, not that 14 person. 15 So, as a legal matter, we think that you can -- 16 MR. HORTON: I mean, as a legal matter, that 17 verbiage exists whether it's written or not in every law 18 when you have a regulatory body. 19 Very rarely does the legislature say, 20 "Board of Equalization, you can't interpret 21 this legislation. You have to apply it as 22 written." 23 So, it's always going to make reference to the 24 regulatory. 25 But let me shift, if I could, to the -- to 26 the -- I kind of wish there were some documents -- 27 MR. MIETHKE: We all do. 28 MR. HORTON: -- that would be very helpful here 79 1 or that you had the ability to work with Propeller and 2 obtain the documents from them as to how the transaction 3 really was consummated. 4 Maybe -- I'm not suggesting or trying to be an 5 attorney here, but maybe if you guys -- did you file a 6 lawsuit? 7 I can ask like that, have you filed a lawsuit 8 against Propeller? 9 MR. MIETHKE: Am I authorized to answer that? 10 MR. SEKIGEHAMA: No. 11 MR. MIETHKE: My client has authorized me to 12 respond no, we have not. 13 MR. HORTON: Have you considered -- 14 MR. MIETHKE: Depending on the outcome of-- 15 MR. HORTON: If the minimum just to compel them 16 to provide books and records to bring some clarity to 17 this? 18 MR. MIETHKE: -- depending on the outcome of 19 the case today, I'm sure that that will be actively 20 considered by the company. 21 And we'll consider all its remedies. 22 MR. HORTON: Sales for resale? 23 Madam Chair -- 24 MS. YEE: Yes, Mr. Horton -- 25 MR. HORTON: -- if I may -- 26 MS. YEE: -- please? 27 MR. HORTON: -- shift? 28 MR. MIETHKE: May I point some other things 80 1 out, though, if you were to ask my opinion about a 2 lawsuit? 3 MR. HORTON: No, I shifted. 4 MR. MIETHKE: Oh, I'm sorry. 5 MS. YEE: I don't think we want to be talking 6 about lawsuits. 7 MR. HORTON: Yeah, believe me, that's why I 8 shifted away from it. 9 The -- a resale, in fact, if we had a situation 10 where the documents were all wrong, absolutely wrong, 11 and you had an auction of a car dealer selling to a 12 dealer, but no resale certificate was on file and the 13 one that had -- that was on file didn't have a permit 14 and was just totally wrong, we would presume that that's 15 a resale in fact. And, so, the form wouldn't really 16 matter. 17 And we only argue form when we're trying to 18 determine where the burden lies or when it's not clear 19 that it was a resale in fact. 20 Is that -- does everyone agree with that? 21 MR. SCHUTZ: Yeah. 22 MR. HORTON: Department? 23 MR. SCHUTZ: Uh-huh. 24 MR. HORTON: On the sales for resale in 25 question here, is there any -- of the taxpayer, do you 26 have any evidence that would imply that this product had 27 to be sold for resale? 28 For example, you sold a WXYZ kikiwakiwoo, or 81 1 whatever, gidget, but that gidget, in and of itself 2 cannot really be consumed by this particular purchaser 3 because it's designed to be part of the F11 and just has 4 to be part of it. 5 And the federal -- whatever the federal 6 government is working on, it has to be part of it, 7 mindful that the far clauses can actually go as far as 8 to say toilet paper was resold to the U. S. government, 9 that doesn't have to be there -- but, in and of itself, 10 it happens to be there because of the technical aspect 11 of your product. 12 Does that -- did that exist? 13 MR. MIETHKE: The company manufactures 14 prewritten software. There is nothing unusual about the 15 software that would identify it as specifically only 16 being able to be owned or utilized in the U. S. 17 government contract. 18 These aren't -- these aren't, at least -- 19 correct? 20 MR. SEKIGEHAMA: Correct. 21 MR. MIETHKE: In other words, it's not the 22 windshield of an F15. 23 MR. HORTON: Okay. Any -- in the contract 24 between the seller and the purchaser, with the 25 government contractor, they sometimes make reference in 26 the purchase order. 27 They make reference to the far clause. They 28 don't exactly say what it is, but they'll say, "Far 82 1 clause, Section 021," and so forth. 2 You don't -- do you have those documents? 3 MR. MIETHKE: Well, there -- we do have the 4 documents related to the sale. We have purchase 5 orders -- or, no, they're not purchase orders, per se. 6 MR. SEKIGEHAMA: No, they're order docs. 7 MR. MIETHKE: They're just order docs, but 8 they're purchase orders. 9 Some companies don't issue purchase orders. 10 And some of these companies do not issue purchase 11 orders. 12 MR. HORTON: And, so, we're back to having a 13 form that determines the burden of proof. 14 And -- because we have nothing that would 15 substantiate a sale for resale? 16 Is that -- to the Department; is that right? 17 MR. SCHUTZ: Right, if we had the far clauses 18 we would be -- here if we had the far clauses in the 19 contracts, we would be able to establish -- 20 MR. HORTON: Even a reference -- 21 MR. SCHUTZ: -- to a resale in fact. 22 MR. HORTON: -- to far clause in the contract? 23 MR. SCHUTZ: We'd be able to establish a resale 24 in fact. 25 MR. HORTON: To the taxpayer, is there any 26 documentation that can substantiate a resale in fact 27 that will negate this lack of form? 28 MR. MIETHKE: The earlier testimony was, I 83 1 believe, that no XYZ letters were sent, although we're 2 not certain of that -- what the Department did or didn't 3 do on that front. 4 The -- we are not privy to what our customers 5 ultimately did with it. And again the representation to 6 us was to the degree that it wasn't resold, that they 7 would accrue it and pay it on their own returns. 8 And I believe that the testimony of the 9 Department was is that -- 10 MR. HORTON: The document -- my apologies, 11 Mr. Miethke. 12 It's flawed because it's an opinion. The 13 statement is just an opinion, "we think, we should do 14 that," as I read it, but -- continue, please? 15 MR. MIETHKE: No, I was just going to say 16 that -- so, we don't know and apparently the Department 17 has not checked whether it was accrued or paid by the 18 taxpayer because they he represented that -- 19 MR. HORTON: Is there -- 20 MR. MIETHKE: -- they would. 21 MR. HORTON: Is there any -- 22 MR. MIETHKE: And if it was a U. S. government 23 contract, it would be exempt. 24 MS. YEE: Mr. Miethke, stop. 25 MR. HORTON: -- is there any way that we 26 couldn't have helped the taxpayer and sent out XYZ 27 letters or -- 28 MR. SCHUTZ: Well, these would be considered 84 1 sales tax transactions. 2 And, so, Oracle would be responsible for the 3 sales tax. 4 MR. HORTON: Unless they sold it for resale. 5 MR. SCHUTZ: Right, unless it was a sale for 6 resale. 7 And, so, we have to -- we'd have to establish 8 that by, at this point, there being a resale in fact. 9 So, we'd need those particular contracts. 10 MR. HORTON: I mean in a normal -- I mean, not 11 a normal, but in many audits what the agency will do 12 when the form itself -- the document is missing or it 13 misses a number or it fails to put a description in 14 there or the other circumstances that we are faced with 15 in this case, we will seek third party confirmation. 16 And we refer to that as an XYZ letter. 17 We didn't -- did we do that in this case? 18 MR. SCHUTZ: There was an XYZ process during 19 the audit. My understanding, from the audit notes, is 20 that for these particular transactions, because some 21 documentation was provided and it was still being 22 reviewed, there was no XYZ process that for these 23 customers ever happened on our part. 24 But that was because the taxpayer provided some 25 documentation at that point that was reviewed. And, so, 26 there was no thought to it at that point, sending out 27 XYZ letters. 28 And they didn't -- then it went into the 85 1 Appeals process and, so, it didn't get -- XYZ letters 2 didn't go out for these -- these customers. 3 MR. HORTON: Okay. 4 On the negligence, why did we apply a 5 negligence penalty? 6 MR. SCHUTZ: We applied a negligence penalty 7 because -- for Oracle, for several past audits it was 8 continuing repeated absence of accrual for use tax and 9 that occurred again in this -- after a third cycle of 10 audit. 11 And we had also sent them pamphlets saying, 12 "You need to," you know a number of pamphlets saying, 13 "You need to accrue use tax. You know, you have this 14 obligation." 15 And, so, because of this repeated error, we 16 applied -- and because it was a substantial portion of 17 this audit liability, we applied a negligence penalty. 18 MR. HORTON: Was it -- was it -- was it an 19 error? Or was a difference of opinion as to what the 20 law was? 21 MR. SCHUTZ: No, I don't believe so. I think 22 that the -- 23 MR. HORTON: They knew? 24 MR. SCHUTZ: -- yeah, Oracle, certainly after 25 first cycle of audits and all of the different pamphlets 26 that we provided them, knew that they had an obligation 27 to accrue use tax. 28 I think it was the determination that it was 86 1 probably more beneficial not to bother and wait for us 2 to find it. 3 MR. HORTON: Question of the taxpayer, do you 4 have a systemically -- is it set up to collect use tax? 5 Do you have a use tax accrual account? Do you 6 have a method? Is there some policy, procedure as to -- 7 directs individuals if they don't -- if their product is 8 being used and we self-report the use tax? 9 MR. SEKIGEHAMA: We have a manual process that 10 was started beginning the 1999 -- 11 MR. HORTON: So, subsequent -- 12 MR. SEKIGEHAMA: -- quarter. 13 MR. HORTON: -- subsequent to the audit you've 14 corrected your system to now acknowledge that you could 15 have a use tax transaction? 16 MR. SEKIGEHAMA: Yes. 17 MR. HORTON: This is -- what audit? How many 18 audits? 19 MR. SCHUTZ: This would have been the third 20 audit with the same issue. 21 MR. HORTON: Wow. 22 MR. MIETHKE: We don't know whether it was the 23 third audit. 24 We don't know. 25 MR. HORTON: You don't? 26 MR. MIETHKE: We don't know whether that was 27 the third audit or not. 28 We have no reason to disbelieve the staff, but 87 1 we can't confirm that, that it was the third time we 2 were -- this was the third audit in which this had 3 occurred. 4 MR. HORTON: Okay. 5 MR. HANKS: We're also mindful of the overall 6 understatement in this case. It was just under 7 $48,000,000 measure. 8 MR. MIETHKE: Well -- 9 MR. HANKS: Inclusive of all of the findings. 10 MS. MANDEL: As a -- I mean, usually what we 11 look at -- we see is a percentage of reporting because 12 the same, you know, 1 percent mistake for a tiny 13 taxpayer, a 1 percent mistake on a big taxpayer is 14 necessarily going to be big number. 15 MR. MIETHKE: Yes. 16 MS. MANDEL: So, what's the -- what does that 17 translate to? Because you usually what you talk about 18 is percentage of the understatement as being just so 19 huge that somebody should have realized it. 20 MR. HANKS: True. The actual percentage of 21 error in this case is 7 percent overall in relation to 22 what was reported to the Board. 23 But, as Mr. Schutz indicated, apparently there 24 was no policy put in place to accrue any use tax on any 25 of these transactions. 26 MS. MANDEL: Okay. So, you -- you have 7 27 percent and before I heard like 3 percent or 4 and a 28 half if they wind up with the Propeller. 88 1 So, what -- where is the math missing? 2 MR. MIETHKE: Appeal adjustments, I believe. 3 That's my understanding. 4 MS. MANDEL: Oh, Appeal adjustments? 5 So -- okay. 6 So, after the Appeal adjustments, it's -- 7 MR. MIETHKE: It's 3 percent. 8 MS. MANDEL: -- it's basically half of what it 9 was before? 10 MR. SCHUTZ: Correct. 11 (unintelligible) 12 MR. HANKS: It's 4 percent. 13 MR. HORTON: We have got a small problem, I 14 think. 15 The negligence penalty -- negligence in 16 recordkeeping is negligence as well. Failure to 17 establish the appropriate system to prevent the tax 18 liability could be, in itself, be negligence, 19 particularly after three audits. 20 But here's -- here's a concern of mine, is that 21 how much of this is negligent? If we take the total 22 liability as if there was a pie, what piece of the pie 23 is negligence -- attributed to the negligence and what 24 piece is not attributed to the negligence? 25 And then -- so, if I'm looking at this company 26 as a -- from a totality perspective, was the company 27 negligent or were they partially negligent? 28 MR. SCHUTZ: Right. And we had said before, 89 1 you really can't get partial negligence in penalty. 2 If -- if they were negligent for some portion 3 of it, then they're negligent for the entire thing and 4 there's no way -- 5 MR. HORTON: That's not -- 6 MR. SCHUTZ: -- to apportion it. 7 MR. HORTON: -- that's not necessarily true. 8 Because if you go into a company and you find 9 that they're 90 percent perfect, 90 percent -- 99 10 percent perfect, but they were negligent 1 and 2 percent 11 or that the liability is a result of -- the liability -- 12 part of the liability, 80 percent of the liability, 13 there is no negligence whatsoever, it's only on the 20 14 percent, then it seems to me that the -- that we should 15 look at the company as a whole. 16 If -- if that's not the case, you could have -- 17 the auditor could go out and say, 18 "99.9 percent of the time this taxpayer is not 19 negligent based on the liability, $50,000,000 20 liability. However, this $1 million 21 transaction, they were liable. And, therefore, 22 as a whole, they're liable." 23 It seems to me that the -- that the presumption 24 would shift the other way if that was the case. 25 I don't know, I'm asking, I'm just not -- 26 MR. HANKS: Right. 27 MR. HORTON: -- I'm just -- 28 MR. HANKS: Mr. Horton, we do agree with you on 90 1 that point. 2 And I think -- I think things would be 3 different and we'd have a different recommendation if 4 Oracle had made an attempt to report their use tax 5 purchases on line 2 of their sales and use tax returns. 6 We're not expecting anything different of 7 Oracle than we do my church that also reports use tax. 8 We're trying to communicate to people that there is an 9 obligation to report accurately their use tax 10 responsibility. 11 Now in this case, we have Oracle, who's been 12 audited on repeated occasions. We have assessments even 13 related to Propeller purchases in the prior audit. They 14 were certainly mindful of that at that time. 15 And yet during this time period, we have -- we 16 have what $13 million in purchases from that one vendor 17 that Oracle didn't report any use tax on. 18 We've got other purchases -- other 19 underreportings. 20 So, I think the penalty is most certainly 21 justified in this case, given that history. 22 MR. HORTON: Okay. Thank you, Madam Chair -- 23 MS. YEE: Thank you, Mr. Horton. 24 MR. HORTON: -- for indulging me. 25 MS. YEE: Thank you for your questions. 26 Other questions, Members: 27 All right, hearing none, may I have a motion on 28 this, please? 91 1 MS. MANDEL: Take it under submission. 2 MS. YEE: Motion -- 3 MR. HORTON: Second. 4 MS. YEE: -- by Ms. Mandel to take this matter 5 under submission. 6 Second by Mr. Horton. 7 Without objection, that motion carries. 8 Thank you all very much for coming forward. We 9 will discuss your matter later today -- 10 MR. MIETHKE: Thank you very much, Madam Chair 11 and Members -- 12 MS. YEE: -- and notify you of our decision. 13 MR. MIETHKE: -- for your kind indulgence. 14 MS. YEE: Thank you. 15 ---o0o--- 16 17 18 19 20 21 22 23 24 25 26 27 28 92 1 REPORTER'S CERTIFICATE. 2 State of California ) 3 ) ss 4 County of Sacramento ) 5 6 I, JULI PRICE JACKSON, Hearing Reporter for the 7 California State Board of Equalization certify that on 8 JULY 14, 2010 I recorded verbatim, in shorthand, to the 9 best of my ability, the proceedings in the 10 above-entitled hearing; that I transcribed the shorthand 11 writing into typewriting; and that the preceding pages 1 12 through 92 constitute a complete and accurate 13 transcription of the shorthand writing. 14 15 Dated: September 7, 2010 16 17 18 ____________________________ 19 JULI PRICE JACKSON 20 Hearing Reporter 21 22 23 24 25 26 27 28 93