BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT AUGUST 25, 2010 ITEM C2 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by MAIN STREET CALIFORNIA, INC. (Case No. 224746 OH ) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Barbara Alby Acting Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Tax Counsel IV 17 Cary Huxsoll Tax Counsel 18 Robert Tucker 19 Legal Department 20 Kevin Hanks Sales and Use Tax Department 21 For Petitioner: Troy M. Van Dongen 22 Attorney at Law 23 Paul Blough 24 Witness 25 ---OOO--- 26 27 28 2 1 Sacramento, California 2 August 25, 2010 3 ---oOo--- 4 MS. YEE: Our next item, please. 5 MS. OLSON: Our next item is C2, Main Street 6 California, Incorporated. Please come forward. 7 MS. YEE: Okay. Mr. Levine. 8 MR. LEVINE: The issues in this rehearing on 9 the petition of Main Street California, Inc. are whether 10 the gratuities Petitioner charged for parties of eight 11 or more were mandatory and thus taxable, and whether 12 further audit adjustments are warranted. 13 MS. YEE: All right. Thank you very much, Mr. 14 Levine. Good morning. 15 MR. VAN DONGEN: Good morning. 16 MS. YEE: If you'll introduce yourselves for 17 the record you have ten minutes for your presentation. 18 MR. VAN DONGEN: Thank you. 19 MS. YEE: Okay. 20 MR. VAN DONGEN: Good morning, Madam Chair and 21 Members of the Board. My name is Troy Van Dongen. I'm 22 with Winston and Strawn, appearing on behalf of the 23 taxpayer. 24 MS. YEE: Okay. 25 MR. VAN DONGEN: And with me is Paul Blough. 26 He's an employee of the taxpayer. He's the Director of 27 Operations for the restaurant group. 28 MS. YEE: Okay. 3 1 MR. VAN DONGEN: We have submitted a brief on 2 this matter and we still stand by the -- the points 3 raised in that brief. We believe that if a tip amount 4 is left to the discretion of the customer, as it is in 5 this case, then that tip is voluntary and it should not 6 be subject to tax either by interpretation of the 7 regulation in place at the time of this -- this audit 8 period, 1998 through 2001, or under the current 9 regulation as it stands today. 10 Here the tips truly are voluntary. They are 11 not negotiated in advance of the meal. They are not 12 imposed upon the customers in some sort of automatic 13 fashion. The guests do not have to opt out of the -- 14 the system in order to avoid paying the tip. In fact, 15 just the opposite is true. 16 With the Board's permission I'd like to present 17 the testimony of Mr. Blough to support our position. 18 EXAMINATION OF MR. BLOUGH BY MR. VAN DONGEN 19 Q. Mr. Blough, were you employed by Main Street 20 California during the years 1988 through 2002? 21 A. I was. 22 Q. And can you confirm that the policy that was 23 attached to our brief as Exhibit A was -- was in place 24 during those years? 25 A. Yes, it was. 26 Q. Can you describe for the Board how that policy 27 worked on a daily basis and how it was enforced? 28 A. The policy was put in place and a manager would 4 1 have to interact with that table as well -- as well as 2 to communicate it to the party that we would have that 3 available to them if they wished, and then the manager 4 would be the one that would put that in place, or add it 5 to the checks. 6 Q. Were these tips ever negotiated in advance of 7 the meal? 8 A. No. 9 Q. Did any of the large parties ever leave tips 10 that were below the suggested 15 percent amount? 11 A. Definitely. 12 Q. Did that often -- did that occur -- how 13 frequently did that occur? 14 A. I'd say 15 to 20 percent of the time. 15 Q. Did any of the large parties ever leave no tip 16 at all? 17 A. Definitely. 18 Q. And if a large party ever left a tip less than 19 15 percent or no tip at all did Main Street take any 20 action to try to force that customer to pay the tip? 21 A. No, they didn't. And -- yeah, our -- our 22 intent was just to make sure that -- that every guest 23 would leave satisfied or happy. 24 So, if they wished to not leave a tip and they 25 walked out the door, that was perfectly fine. 26 Q. What would happen if an employee ever tried to 27 force a customer to pay a tip that they didn't want to 28 pay in the first place? 5 1 A. They would be terminated. 2 Q. Was it possible -- is it even possible for a 3 server to add a gratuity to the bill without the 4 customer's consent? 5 A. No. 6 Q. And is that because the -- the manager was the 7 only person who had access to -- to the system to make 8 that happen? 9 A. That's correct. 10 Q. Did the managers personally receive any part of 11 these tips? 12 A. No, they did not. 13 Q. So, the manager had no incentive at all to -- 14 to negotiate a tip up or down? 15 A. No 16 Q. Are you familiar with the reservation log that 17 was included with the Sales Department as -- as an 18 exhibit to their brief? 19 A. I'm familiar of that log because I saw it in 20 the brief. 21 Q. Is this log prepared as part of the company 22 policy? 23 A. No, it's not. 24 Q. The Department has asserted in their brief that 25 this log represents evidence that the tips for large 26 parties were negotiated in advance. Is that true? 27 A. No, it isn't 28 Q. Does this log somehow trump company -- company 6 1 policy? 2 A. No, it does not. 3 Q. Would a -- a reservationist who was taking a 4 telephone reservation from a customer for a large party, 5 you know, have the authority or the ability even to 6 impose a tip amount on the customer's bill? 7 A. No, they would not. 8 Q. That's because only the manager does? 9 A. That's correct. 10 Q. Is it fair to say that even if this reservation 11 log were used and even if the customer did say that he 12 or she wanted to leave a 15 percent gratuity that it 13 would still not be automatically added to the bill? 14 A. That's correct, they could still decide not to 15 leave anything. 16 Q. And that's -- that's also because the manager 17 would have to intervene? 18 A. That's correct. 19 Q. Are there any instances where a tip was just 20 automatically added to the bill? 21 A. Not that I know of, no. 22 Q. And, finally, during the years at issue did 23 Main Street operate or own all of the T.G.I. Fridays in 24 California? 25 A. No, they did not. 26 Q. Did they -- how many would you say they -- they 27 owned or operated in -- in southern California? 28 A. A large percent, but not all of them. 7 1 Q. Not all of them? 2 A. Yeah. 3 Q. And how about in Northern California? 4 A. We operated a smaller percent, I guess, 5 compared to the amount of restaurants that were up 6 there. T.G.I Fridays restaurants. 7 Q. Thank you, Mr. Blough. 8 MR. VAN DONGEN: I have no further questions 9 for Mr. Blough. We've presented our -- majority of our 10 legal arguments within our briefs and because the -- a 11 lot of this issue turns around the facts we've brought 12 him to answer any -- any questions that the Board may 13 have, as well. 14 MS. YEE: Thank you very much. We'll give you 15 both time on rebuttal. Thank you. 16 Department, please. 17 MR. HUXSOLL: Good morning, Madam Chair, 18 Members of the Board. I'm Cary Huxsoll from the Legal 19 Department, along with Robert Tucker and Kevin Hanks, 20 representing staff. 21 We concur with the recommendation of the 22 Appeals Division. The petition for redetermination 23 should be denied because the gratuities Petitioner 24 charged large parties were mandatory and subject to 25 sales tax. 26 Under Section 6012, gross receipts include any 27 charges for services that are part of the sale of 28 tangible personal property. Consistent with this, 8 1 Regulation 1603 states that when a restaurant makes a 2 mandatory charge to a customer, whether classified by 3 the restaurant as a tip, gratuity or service charge, 4 such an amount is part of the restaurant's taxable gross 5 receipts. 6 When a restaurant menu advises the customer 7 that a gratuity or service charge will or may be added 8 to the cost of a meal and the restaurant automatically 9 adds such an amount to the bill, such a charge is 10 mandatory and subject to tax. An amount is 11 automatically added when the retailer adds the amount 12 without first conferring with the customer after service 13 of the meal and receiving approval to add the amount to 14 the bill. 15 Petitioner's menu included a statement that on 16 parties of eight or more a 15 percent gratuity will be 17 added to your check. Please feel free to raise or lower 18 this gratuity at your discretion. 19 Petitioner kept records of this charge in its 20 daily sales journal which refer to the charge as an auto 21 gratuity. 22 Petitioner states that the amount it adds to 23 the bill was not automatically added and only included 24 in the bill after conferring with the customer following 25 service of the meal and receiving approval to add such 26 an amount to the bill. 27 Nonetheless it is presumed under the regulation 28 that any amount added by the retailer to a customer's 9 1 bill is mandatory, notwithstanding a statement on the 2 bill that such an amount is optional or may be 3 increased, decreased or removed by the customer. 4 This presumption may be controverted by 5 documentary evidence showing that the customer 6 specifically authorized the gratuity to be added to the 7 bill. 8 Petitioner attempts to overcome this 9 presumption by providing a copy of its written policy, 10 which is found in an undated memo from its operations 11 team to its manager, which states the manager must visit 12 a table and receive the customer's approval before the 13 gratuity can be added to a check -- to a large party's 14 check. 15 Under reg -- under the regulation a retailer's 16 written policy alone is not sufficient to overcome the 17 presumption without additional veri -- verifiable 18 evidence that the policy was enforced. 19 When Petitioner provided its policy memo to 20 staff it also provided staff a copy of a reservation log 21 for parties of eight or more. Again, this log came 22 directly from Petitioner's representative and includes 23 Petitioner's logo. The log actually contradict's 24 Petitioner's policy of requesting customer's approval 25 after service of the meal, before adding such an amount 26 to the bill. 27 The log demonstrates negotiations concerning 28 the gratuity taking place at the time the reservation is 10 1 made before the service of the meal. 2 We note again the policy is also contradicted 3 by language on the menu which indicates that such an 4 amount will be added to the check by Petitioner. 5 Again, Petitioners failed to demonstrate that 6 the amounts it adds to customers' bills were voluntary. 7 These charges are mandatory and thus subject to tax. 8 Thank you. 9 MS. YEE: Thank you, Mr. Huxsoll. You have 10 five minutes on rebuttal. 11 MR. VAN DONGEN: If you take a look at what the 12 regulation says, it -- it defines tips as, you know, if 13 they're voluntary there's no question that they're -- 14 they're not subject to tax. If they're mandatory, 15 they're subject to tax. And then the reg. walks through 16 a test to determine is it mandatory or not. And it kind 17 of lays out three different tests under Section 18 1603(g)(2). 19 You know, and the first one is, you know, was 20 the tip negotiated in advance of the meal. You know, we 21 don't meet this test because, you know, the conversation 22 about the tips occurs not before the meal, it occurs 23 after the meal is served and before the check is 24 produced. So, we don't meet that test. 25 The second test is when the meal or the menu -- 26 rather, when the menu or other publications include 27 statements that notify the customers that a tip will be 28 added to the bill and the amount is then automatically 11 1 added to the bill then -- then it's considered 2 mandatory. 3 Now, we do have the statement on the menu, 4 there's no -- no debate about that, but the tip is not 5 automatically added. We don't meet the second element 6 because the manager has to intervene. He has a 7 conver -- he or she has a conversation with the customer 8 to get their consent as to whether they want the 15 9 percent or another matter -- amount added to the bill. 10 It could be even zero. 11 But in any event, it is not automatically 12 added. What -- the regulation defines what is 13 automatically added. Automatically added is defined as 14 when a retailer adds the tip to the bill without first 15 conferring with the customer after the service of the 16 meal. We do confer with the customer. That's our 17 policy and it's been rigorously enforced. 18 And then the third test for whether these tips 19 would be mandatory or not is if an amount is added to 20 the bill as a tip then it's presumed to be mandatory. 21 Now, the tips at issue are added to the bill, 22 but this presumption can be overcome by a number of 23 ways. And in particular when he retailer has a written 24 policy. We have a written policy and we have provided 25 that in our papers. We have verified it through 26 declarations and through the testimony of Mr. Blough 27 here that that policy was in place during the years at 28 issue. 12 1 And the regulation goes on to say, well, the 2 policy is not enough, you have to provide verifiable 3 evidence. We've provided five declarations stating our 4 position, and these are signed under oath and they are 5 self-verifying. We've provided a witness for your 6 convenience to answer any questions, to verify that -- 7 that this was in fact the case. 8 And given the fact that these requirements were 9 imposed, you know, roughly nine years after the years at 10 issue, we believe that it's only fair to allow some 11 latitude in what is the verifiable evidence here. 12 It's -- it's unfair to expect a taxpayer to go back nine 13 years to pull up guest receipts or the other kind of 14 documents that are listed as potential sources of 15 verifiable evidence in -- in the regulation. 16 Thank you. 17 MS. YEE: Thank you very much. Let me ask a 18 question as a point of clarification. 19 So Regulation 1603 as it was most recently 20 amended I don't believe changed the records requirement 21 in any way, did it? 22 MR. VAN DONGEN: The -- the prior regulation 23 did not say anything about the records for -- for 24 including guest tips. The prior regulation didn't 25 impose a presumption that had to be overcome by 26 verifiable evidence. 27 MS. YEE: Okay, Department, can you speak to 28 that? 13 1 MR. HUXSOLL: Section 6091 contains a 2 presumption that gross receipts are subject to tax. And 3 Regulation 1698 requires that a retailer maintain 4 documents to demonstrate any sales that it would not 5 consider subject to tax. And in this case -- so the -- 6 the recordskeeping requirement has always been there 7 under Regulation 1698. 8 MS. YEE: Okay. Then -- then let me ask you 9 this question, what would be -- and I don't believe the 10 declarations are sufficient to corroborate the policy 11 that was in place, but what would be sufficient evidence 12 on the part of the Petitioner that would satisfy the 13 requirement? 14 MR. HUXSOLL: You would -- you would see 15 various -- a variance in the amounts that's paid in 16 the -- in tips by large parties, in -- in terms of the 17 guest checks. You wouldn't have one consistent amount 18 being charged to a large party. 19 In -- in this case I note that, you know, all 20 that was presented with the written policy was the -- 21 the reservation log which actually contradicts it, 22 but -- but in a sense when they're voluntary we would 23 expect to see variance amongst different customers of 24 the Petitioner. 25 MS. YEE: Okay. And then -- and where are -- 26 are these records just not in existence any more? 27 MR. VAN DONGEN: Well, the records that -- 28 you're right, the records are not in existence and 14 1 really if you're going to drill down to that point to 2 that point to try to determine if one particular receipt 3 was for a large party you would have to take a look at 4 the guest receipts, I guess. Count up how many entrees 5 may be on that -- on that particular bill to see if that 6 was a large party or not and then look at the -- at the 7 tip. 8 At the time 15 percent was a standard in the 9 industry for -- for tips. And that was, you know, 10 pretty common. 11 MS. YEE: Okay. Thank you. Questions, 12 Members? 13 Ms. Alby, please. 14 MS. ALBY: Thank you. I have a question for 15 the taxpayer's rep. and that is -- sorry, I keep having 16 trouble with my voice. 17 When you have been -- my staff apparently had 18 spoken to you. You had had some conversations with 19 my -- my staff on this matter, and you had said at that 20 time that there was a key on the register -- you said it 21 was impossible to -- to put the tip on the bill 22 automatically today. That's what your testimony was, 23 there was no process for that. And then when you -- but 24 yet when you were with my staff you had said that there 25 was actually a key on the register that would 26 automatically add the tip. 27 Could you clarify that for us? 28 MR. VAN DONGEN: Yes. And maybe if I could ask 15 1 our -- our witness. 2 EXAMINATION OF PAUL BLOUGH BY MR. VAN DONGEN 3 Q. Mr. -- Mr. Blough, could you just describe the 4 process of -- of how a manager would go about, you know, 5 putting a -- a tip on a bill? 6 A. Well, since it was 15 percent, as it was stated 7 in the menu, the manager would go to the table to 8 confirm or, you know, see if the guest did want to in 9 fact leave 15 percent, and the manager would say, okay. 10 So the manager would go back to the point of sale system 11 or computer and use their manager card, which is -- 12 gives them the ability to comp. items or void items or 13 things like that. 14 And on that screen there would be a button for 15 a 15 percent gratuity. And they would have to issue 16 that through the button. 17 MS. ALBY: All right, thank you. 18 MS. YEE: Thank you, Ms. Alby. 19 MR. HORTON: Question. 20 MS. YEE: Yes, Mr. Horton. 21 MR. HORTON: Do you advertise this policy? 22 Does the public know? 23 MR. VAN DONGEN: The -- the policy is stated on 24 the menu. That's -- you know, that the -- a 15 percent 25 gratuity will be added to the bill of parties of eight 26 or more, but feel free to adjust that amount as you see 27 fit. 28 MR. HORTON: Staff, did you see that on the -- 16 1 on the menu? 2 MR. HANKS: We did. 3 MR. TUCKER: Absolutely. 4 MR. HANKS: Yes. 5 MR. HORTON: And there are two statements 6 there. First statement, parties eight or more a 15 7 percent gratuity will be added to your check. 8 Second statement, please feel free to raise or 9 lower this gratuity at your discretion. How did you 10 interpret those two -- 11 MR. HUXSOLL: This -- this has been 12 consistently interpreted by the Board -- by the staff as 13 being a mandatory charge even -- it's -- it's consistent 14 with Annotation 550.0715, which is attached as Exhibit 15 5, saying voluntary gratuities are not taxable. 16 In this situation, there was a notice on the 17 bill saying you may raise, lower or eliminate this 18 gratuity by telling your server. And -- 19 MR. HORTON: That was on the bill, as well? 20 MR. HUXSOLL: That -- no, this is in the 21 example in the annotation. But -- but the concept of 22 being able to raise or lower the amount does not change 23 the mandatory nature of the charge. And that's in 24 the -- that's currently in the regulation, also. 25 MR. HORTON: So, it's your position that once 26 the 15 percent was -- once the tax -- once the customer 27 was notified that it will be added to the bill that 28 triggers the tax? 17 1 MR. HANKS: Yes. 2 MR. HORTON: And if they didn't collect the 15 3 percent, what then? 4 MR. TUCKER: It wouldn't -- Mr. Horton, it 5 wouldn't show up on the records. We're simply looking 6 at the line item and it was labeled an auto gratuity and 7 15 percent gratuity. So they just took it off of their 8 record so it would show in essence probably what they 9 collected. 10 MR. HANKS: Within their General Ledger, 11 actually, they have a separate category that accounts 12 for this type of income. That General Ledger category 13 is -- is titled "Auto tip," auto tip dollars. 14 So that's what we looked at to compile what -- 15 what this revenue was for this time period. 16 MR. HORTON: Did we notice that the revenue was 17 less at any point? I mean, the tip was less. 18 MR. HANKS: We looked at each of the stores 19 where we had records and actually that tip income 20 varies, depending on the store's location. 21 MR. HORTON: It varies from one transaction to 22 another or just the total volume? 23 MR. HANKS: Just the total volume. 24 We also have copies of individual receipts -- 25 MR. HORTON: Uh-huh. 26 MR. HANKS: -- that identify the -- the 15 27 percent charge being added to the -- 28 MR. HORTON: Did any of the -- 18 1 MR. HANKS: -- the bill -- 2 MR. HORTON: -- vary -- 3 MR. HANKS: -- receipt. 4 MR. HORTON: -- in the amount, 15 percent 5 versus 10 percent or something else? 6 MR. HUXSOLL: No. No, we asked Petitioner's 7 previous representative for any records of variance in 8 these amounts and the previous representative stated 9 that none was available. 10 MR. HORTON: Any records available today? 11 MR. VAN DONGEN: No, we have tried to identify 12 records and we've been unable to, and that's why we're 13 providing what we can, and that is testamentary evidence 14 as well as affidavits. 15 MR. HORTON: Okay. Thank you. 16 MS. YEE: Thank you, Mr. Horton. Ms. Steel. 17 MS. STEEL: Just -- just followup question, for 18 those receipts that you see that how many do you have 19 under 15 percent there? 20 MR. HANKS: I don't have any receipts that 21 identify -- 22 MS. STEEL: Oh, so you don't have? 23 MR. HANKS: -- charges less than 15 percent. 24 MS. STEEL: Oh, so everything is over -- 25 MR. HANKS: The ones I have show -- 26 MS. STEEL: -- 15 percent? 27 MR. HANKS: -- show 15, that's correct. 28 MS. STEEL: Okay. I didn't hear the answer 19 1 when Madam Chair was asking you about the -- the 2 documents that taxpayer provided. You know, affidavit 3 and store policy and all others. What kind of documents 4 you need to prove that tip was optional? More than what 5 they already provided. It seems like sometimes we raise 6 bars that, you know, just a little more every time they 7 bring another documents here. 8 So what kind of documents to prove that tips 9 were optional here? Or you don't need any -- anything 10 because the law says, but -- 11 MR. HANKS: Right. Right. I -- I think we 12 are -- we are more or less looking at -- at the law, the 13 regulation that -- that identifies this category of 14 income being taxable -- 15 MS. STEEL: 1603? 16 MR. HANKS: -- if it's mandatory. Correct. 17 MS. STEEL: But 1603 was -- at -- that new 18 requirements was added on 2007. 19 MR. HUXSOLL: And -- and the amendments in 2007 20 emphasize that the amendments were clarification of 21 existing law, hence they do apply retroactively. 22 And like -- like I stated earlier, Regulation 23 1698 has always required a taxpayer to maintain records 24 to demonstrate its reported sales, and non-taxable 25 sales, too. 26 MR. TUCKER: I think, Ms. Steel -- I'm sorry to 27 interrupt, but I think the answer you're looking for, we 28 would look at the invoices, themselves, and it would 20 1 show that there's some sort of variance, that it's 2 not -- 3 MS. STEEL: But it's ten -- 4 MR. TUCKER: -- 15 percent every time. 5 MS. STEEL: But it's ten years ago that -- you 6 know, some of those individual receipts it's very -- 7 very hard to find and it's not really fair to taxpayer. 8 So -- 9 MR. TUCKER: I -- let me say, we would have 10 looked at those at the time of the audit, Ms. Steel, and 11 they should have been on hand when we performed the 12 audit. 13 MS. YEE: And they were not at the time of the 14 audit, either? There was nothing available at the time 15 of the audit? 16 MR. HUXSOLL: The -- the staff indicated that 17 it requested documentation of lesser amounts being paid 18 by large parties and none was available. 19 MS. YEE: Okay. And then there was a prior 20 audit; was this issue of gratuity looked at in the prior 21 audit? 22 MR. HUXSOLL: No, staff reviewed the prior 23 audit and did not see any potential 6596 issues. 24 MS. YEE: Okay. Thank you. 25 MR. VAN DONGEN: Madam Chair. 26 MS. YEE: Yes. 27 MR. VAN DONGEN: May I just touch on this point 28 about how the gratuity is -- is calculated, and perhaps 21 1 clarify why the -- the staff has only seen a 15 percent. 2 And maybe -- maybe -- if I may ask Mr. Blough. 3 EXAMINATION OF PAUL BLOUGH BY MR. VAN DONGEN 4 Q. You were employed during that time frame. What 5 specifically would happen if a customer asked for a 6 gratuity -- or they said they did not want to use the 15 7 percent and they wanted to go with maybe a ten percent 8 or a 20 percent gratuity, something other than the 9 standard, what -- what would then happen at the cash 10 register? 11 A. Well, the receipt would be produced for the 12 table or the party and it would have just the amount 13 owed. So it wouldn't have any -- any percent at all 14 describing what they need to leave. They would have to 15 figure it out on their own, or if they decide to pay 16 with a credit card, as with almost all credit card 17 receipts, there's a place for a tip or a gratuity. And 18 they could figure it out themselves on that. 19 So -- 20 Q. So the button that was pushed basically just 21 did an automatic calculation at 15 percent and no other 22 percent, is that correct? 23 A. That's correct. 24 Q. So, if somebody wanted to leave a specific 25 dollar amount or a different percentage it would not 26 show up on the records because no button was pushed, is 27 that correct? 28 A. That's correct. 22 1 MR. VAN DONGEN: I hope that helps clarify some 2 of the questions. 3 MR. HORTON: That actually were -- Madam 4 Chair? 5 MS. YEE: Let -- let me have Ms. Steel complete 6 her questions -- 7 MS. STEEL: Just one question then. 8 MS. YEE: -- and then Mr. Horton. 9 MS. STEEL: Here that store policy is 15 10 percent gratuity here and then our Department said that 11 there's no dates on it. But most of companies that when 12 they put the policy usually they don't put dates because 13 they want to keep it for long time. 14 So, my question is, if you had a date then you 15 kept this as a -- one of the proof that you can -- the 16 taxpayer can use? 17 MR. HANKS: Ms. Steel, I think part of the -- 18 the difficulty in -- in this case is that we've also 19 looked at the menu, however, and the menus have the 20 statement that a 15 percent gratuity charge will be 21 included on -- on receipts for parties of -- of eight 22 people or more. 23 So I think that statement in and of itself 24 is -- is what places us directly into Regulation 1603 25 that indicates these are taxable charges. 26 MS. STEEL: Isn't that kind of wish list, they 27 want to have over 15 percent -- a policy itself that you 28 have to ask manager; manager ask customers that how much 23 1 they have to put? So it's different than what their 2 policy is. So what you looking at it's depends on that 3 their policy can be much more reliable than menu, 4 itself. Be -- because most of servers, that they want 5 to get 15 percent but a lot of customers that they don't 6 want to pay 15 percent, and their policy itself is that 7 you have to confirm with your customers first. 8 So -- 9 MR. TUCKER: Ms. Steel, I think we see that the 10 note -- or the menu places them on notice much as it 11 discusses in the regulation that there is a mandatory 12 tip on -- for their meal for parties of eight or more, 13 and at that point then it becomes subject to tax. 14 MR. HANKS: I think that, also, just -- just 15 talking from my own personal perspective, there's 16 somewhat of a -- a different relationship between, say, 17 a party of two, my wife and I going out to dinner and -- 18 and leaving "x" percentage as -- as a tip versus going 19 in a -- a party. 20 If -- if I'm going in a party with eight or ten 21 people ordinarily a -- a mandatory charge is included 22 in -- in that type of service. And I think most of us 23 are accustomed to paying that because it's -- it's 24 rather standard in -- in the industry for -- for 25 restaurants to charge this. 26 So, I haven't seen a situation where anyone 27 varies that -- that calculation. 28 MS. STEEL: Thank you. 24 1 MS. YEE: Thank you, Ms. Steel. Mr. Horton. 2 MR. HORTON: Have you altered your invoice -- 3 menu to clearly indicate that it's optional on the menu, 4 to date? 5 MR. VAN DONGEN: What the menu today says is 6 basically the same language but it includes that a sales 7 tax will be added on top of that. 8 And if -- if I may just -- I think there was a 9 misstatement in the law a moment ago. The -- the -- the 10 regulation does not state that merely having a statement 11 on the menu makes it mandatory. There's two elements. 12 A statement on the menu -- the second element is 13 automatically added. In this case it is not 14 automatically added because you have to have the 15 intervention of the manager. 16 In fact, Mr. Blough, if the manager did not 17 intervene, if the manager perhaps wasn't even available 18 for whatever reason, is there any way that the 15 19 percent gratuity could be added to the bill? 20 MR. BLOUGH: No. 21 MR. VAN DONGEN: And that's -- that's because 22 the manager has to -- 23 MR. HORTON: Let's try asking the question this 24 way. If in fact the customer added 15 percent to the 25 bill and the manager was not available, would the 15 26 percent be returned to the customer by the server? 27 MR. BLOUGH: Well, if the manager wasn't 28 available that receipt to the customer wouldn't have 15 25 1 percent on it. That's -- the only way that that 2 customer would --- 3 MR. HORTON: You indicated earlier that the 4 customer could actually add 15 percent especially if it 5 was a credit card, that they could put 15, 20 percent -- 6 they actually had the -- some discretion and that the 7 process in which they accomplished that was not 8 necessarily with the assistance of a manager, they would 9 just simply add -- if they paid cash they just would add 10 15 percent, give it to the server. 11 Now, without some manager's approval would that 12 15 percent be returned to the customer? 13 MR. BLOUGH: I don't understand why it would be 14 returned. 15 MR. HORTON: Well, it hasn't been approved. 16 MR. BLOUGH: But the -- 17 MR. HORTON: Has to be approved -- 18 MR. BLOUGH: But the customer -- 19 MR. HORTON: -- by the -- 20 MR. BLOUGH: -- left it, though, willingly. 21 The only thing that has to be approved is on 22 parties of eight or more that 15 percent being put on 23 their check. That's all that has to be approved. And 24 the manager has to be the one that -- that talks to the 25 guest and then goes through the process of putting that 26 on their check. Everything else, a guest can leave 27 whatever they want. As -- as with this policy, this 15 28 percent, multiple times in my experience the -- the 26 1 customer will say, "We had a great time, it was -- it 2 was a great party, but we don't want to leave the 3 gratuity," and my answer would be every time, "No 4 problem, you don't have to." 5 MR. HORTON: You also indicated that there -- 6 there would be situations where they would actually 7 leave more than the 15 percent, but the -- the cash 8 register only allowed you to add 15 percent to the bill. 9 What happens if they leave 20 percent and so 10 the extra amount of the tip, where is it -- how is it 11 accounted for? Or is it? 12 MR. BLOUGH: What they -- what they could do, 13 if they completely just opted out of it being put on to 14 their check, they could -- if it was $100 they could 15 say, well, here's a $20 bill. Or if it's a credit card 16 receipt they could leave $30 and it would be a 30 17 percent tip. 18 So they could do those things, as well. Or if 19 they wanted the convenience of it put on their receipt, 20 we would -- 21 MR. HORTON: No, I think my question is how is 22 it accounted for. 23 MR. BLOUGH: How is -- 24 MR. HORTON: How is -- how is the amount in 25 excess of 15 percent accounted for. 26 It's not in the books, or is not on the 27 register. 28 MR. BLOUGH: Well -- 27 1 MR. HORTON: So, how do you account for it? 2 MR. BLOUGH: I mean, the only thing that we can 3 account for is what's on a credit card receipt. 4 MR. HORTON: So, you don't? 5 MR. BLOUGH: Well, we have our employees that 6 collect tips. They're -- they're supposed to claim 100 7 percent of their tips. So then we can -- 8 MR. HORTON: Do they -- do they -- do you have 9 a shared tip policy where the -- where the busboy or the 10 bus person gets a percentage of the tips? 11 MR. BLOUGH: Yes, sir. 12 MR. HORTON: And what's that policy? 13 MR. BLOUGH: The busers and the bartenders, it 14 varies a little bit from location to location, but this 15 is currently, they are tipped 1.5 percent of the sales 16 of that server or bartender. 17 MR. HORTON: Irrespective of whether the tip 18 was received or not? 19 MR. BLOUGH: Irrespective. 20 MR. HORTON: Wow. 21 MR. BLOUGH: It's a tough gig. 22 MR. HORTON: Yeah. Now the -- the -- the tip 23 percentage is standard now, 15 percent. It's no longer 24 10 percent. Has that number gone up? 25 MR. BLOUGH: I would -- I would argue that 26 it's -- it's probably less than ten percent with the -- 27 MR. HORTON: No, no, no, I'm not suggesting 28 what people leave. I mean, the norm -- I mean the norm 28 1 is 15 percent now. I -- I mean, when we go to a 2 restaurant we generally leave 15 percent. There's a 3 rule of double the tax and all of this. 4 Given that the -- the -- the amounts have 5 changed, did you change the amount on this for large 6 groups? 7 MR. BLOUGH: I believe it is 18 percent 8 nowadays. 9 MR. HORTON: It went up? 10 MR. BLOUGH: Yeah. 11 MR. HORTON: And -- and why would -- why would 12 a restaurant charge more for a larger group than a 13 smaller group? Or in your case, or in -- to stay 14 consistent with your testimony, why would they seek to 15 obtain more than the norm for just a couple of two? 16 MR. BLOUGH: Are -- are you referring to our 17 policy nowadays, the 18 percent? 18 MR. HORTON: No, your professional experience, 19 what -- why do you think they do that? 20 MR. BLOUGH: I -- I just think they base that 21 number on the industry, on the norm in the industry. 22 Because when I go out to eat and there is a gratuity or 23 there's something and I do like my restaurants that I 24 work for, but I tend to go out to maybe something a 25 little bit above that, and it's 18 percent. 26 So I think that's the -- the standard. But I 27 don't know for sure. 28 MR. HORTON: All right. Thank you. 29 1 MR. BLOUGH: Uh-huh. 2 MS. YEE: Thank you, Mr. Horton. 3 Other questions, Members? 4 Okay. Hearing none, may I have a motion, 5 please. 6 MR. HORTON: Move to take it under -- 7 MS. YEE: Motion by Mr. Horton to take the 8 matter under submission. 9 MR. HORTON: -- submission. 10 MS. YEE: Is there a second? 11 MS. MANDEL: Second. 12 MS. YEE: Second by Ms. Mandel. Without 13 objection, that motion carries. 14 Thank you very much, gentlemen. 15 MR. BLOUGH: Thank you. 16 MS. YEE: We will -- 17 MR. VAN DONGEN: Thank you. 18 MS. YEE: -- discuss your matter later today 19 and send you written notice of our decision. 20 Thank you. 21 MR. VAN DONGEN: Thank you, Madam Chair. 22 ---oOo--- 23 24 25 26 27 28 30 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 August 25, 2010 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 30 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 21, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 31