BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT SEPTEMBER 15, 2010 ITEM C9 LOCAL TAX REALLOCATION USE TAX HEARING PETITION FOR REDETERMINATION filed by CITIES OF LOS ANGELES, ROSEVILLE, SAN DIEGO AND SANTA CLARA (Case No. 422182 ) Reported by: Beverly D. Toms CSR No. 1662 1 1 P R E S E N T 2 3 For the Board Betty T. Yee of Equalization: Chair 4 Jerome E. Horton 5 Vice-Chair 6 Barbara Alby Acting Member 7 Michelle Steel 8 Member 9 Marcy Jo Mandel Appearing for John Chiang 10 State Controller (per Government Code 11 Section 7.9) 12 Diane Olson Chief, Board Proceedings 13 Division 14 For Board of Trecie Nienow 15 Equalization Staff: Appeals Division 16 Carole Ruwart Legal Department 17 Leonard Vega 18 Allocation Department 19 Robert Tucker Legal Department 20 For Affected 21 Jurisdiction, City of Huntington Beach: Robin Sturdivant 22 Representative 23 For Taxpayer, Applied 24 Computer Solutions: Warren Barnes, CFO Taxpayer 25 For Petitioners: Janis Varney 26 Representative 27 Eric Myers Representative 28 ---OOO--- 2 1 Sacramento, California 2 September 15, 2010 3 ---oOo--- 4 MS. OLSON: Our next item is C9, City of Los 5 Angeles, Roseville, San Diego and Santa Clara. 6 MS. YEE: Okay. Members, we are on item C9. 7 This is our Local Tax Reallocation matter, Petitioners 8 Cities of Los Angeles, Roseville, San Diego and Santa 9 Clara. Let me have Ms. Nienow introduce the issue. 10 MS. NIENOW: Madam Chair, Members, good 11 morning. Trecia Nienow from the Appeals Division. 12 The issue in this case is whether the local 13 sales tax that the taxpayer directly allocated to 14 Huntington Beach based on where principal negotiations 15 took place should be reallocated to the Petitioners. 16 Also, while confidential information regarding 17 the taxpayer typically must not be publicly disclosed, 18 today that is not the case as the taxpayer is here with 19 us to participate in this appeal. Thank you. 20 MS. YEE: Thank you very much. Good morning. 21 MR. MYERS: Good morning. 22 MS. YEE: If you'll introduce yourselves for 23 the record. You have ten minutes. 24 MR. MYERS: Thank you, Madam Chair and Members 25 of the Board. My name is Eric Myers. I'm an attorney 26 for an employee of MuniServices. 27 Seated next to me is Janis Varney, the Sales 28 and Use Tax Manager for MuniServices. And MuniServices 3 1 is here on behalf of the Petitioners in this case. 2 MS. YEE: Okay. 3 MR. MYERS: I'd like to take just a -- a moment 4 to introduce our case and then I'll turn some time over 5 to Janis Varney to discuss the evidence and -- and our 6 best understanding of the sales transaction here. And 7 then I'll speak a little bit more about our petition 8 from the legal perspective. 9 As stated in the Appeal summary, the retailer 10 sells customized computer systems and its corporate 11 headquarters is located in Huntington Beach. During the 12 period at issue the retailer maintained numerous offices 13 in California, including satellite offices utilized by 14 sales personnel in Los Angeles, Roseville which was 15 closed in 2005, San Diego and Santa Clara which was 16 closed in -- in 2006. 17 As further stated by the Appeals Department in 18 their summary for this hearing there is no dispute that 19 both the headquarters office and local sales personnel 20 from the satellite offices participate in the sales at 21 issue. 22 Where there are two participating places of 23 business under Regulation 1802, Subdivision (a)(2)(B), 24 the decisional question is which of the two 25 participating locations as the place of principal 26 negotiations. 27 We acknowledge, based on the evidence that's in 28 front of us, that the inside salespeople are 4 1 participating in the sale and thus there does appear to 2 be some sort of split sales function in place at this 3 company. 4 But regardless of the split sales function, 5 since the local salespeople are participating in the 6 sales the local sales office is presumed to be the place 7 of principal negotiation under long-standing Board 8 interpretations of the meaning of principal place of 9 negotiation. 10 Only in exceptional cases should the local tax 11 be allocated to some place other than the participating 12 local sales office. 13 And while this case is factually involved, and 14 we're privileged to have the taxpayer here with us 15 today, which is not always the case in cases like this, 16 it's not an exceptional case that would justify 17 allocating the local tax away from the participating 18 local sales offices, for reasons that we'll discuss. 19 Ms. Varney. 20 MS. VARNEY: Thank you, good morning. I'm -- 21 I'm going to just -- just take a couple of minutes to 22 walk through what we know to be the sales process 23 through our own personal investigations by myself and my 24 staff, in addition to information that has been provided 25 by the taxpayer throughout this process. 26 We also have provided an exhibit, Exhibit 3, 27 that kind of walks through the steps. Our understanding 28 is, is that the local salesperson is the person on the 5 1 ground who makes the initial contacts with the potential 2 customers. 3 MS. YEE: Ms. Varney, let me stop you for a 4 moment. 5 MS. VARNEY: Yes. 6 MS. YEE: We have this in front of us, this 7 Exhibit 3? 8 MR. MYERS: Exhibit 3 is a loose page at the 9 back of that bound copy -- 10 MS. YEE: Okay. 11 MR. MYERS: -- you received. 12 MS. YEE: Ah, okay. Here we go. 13 Okay, thank you. 14 MS. MANDEL: This -- do -- do they have it on 15 the other side there? Do you guys have it? 16 MS. YEE: Yes. 17 MS. MANDEL: Okay. Thank you. 18 MS. YEE: Okay. 19 MS. VARNEY: So, again, the local salesperson 20 makes the initial contact with the customers. 21 Ultimately sets up an appointment. Meets with that 22 customer. May or -- that meeting may or may not include 23 what they reference as an engineer. And they are 24 responsible for establishing that relationship with the 25 customer, sitting down with that customer, determining 26 what the customer's needs or wants are for their 27 products and their systems. And -- and discussing those 28 and, you know, getting the process in motion. 6 1 We also have reference to that on page 6 of our 2 Exhibit 1. 3 MR. MYERS: Yes 4 MS. VARNEY: Once they have met with the 5 customer and determined what the customer's needs and 6 wants are, that information is then forwarded to the 7 headquarter office in Huntington Beach where the inside 8 personnel, sales personnel will be involved in taking 9 those requirements, contacting the taxpayer's vendors to 10 get their pricing that ultimately will play into the 11 sales quote that will be given to the customer. 12 So the inside salespeople are involved in 13 negotiating the taxpayer's pricing with their vendors 14 that then goes into the sales quote. 15 Once the quote has been prepared and -- and we 16 don't dispute that the sales quote is prepared at the 17 Huntington Beach office, they forward that sales quote 18 to the customer also including the outside sales 19 personnel in that -- in that process and in that quote 20 that goes to the customer, which does include pricing. 21 So this is sent to the customer in the name of 22 the sales personnel, and copies all of the relevant 23 people. 24 From there there may be additional 25 conversations between both inside and outside sales 26 personnel. But ultimately once the customer accepts the 27 terms on the sales quote they would forward a purchase 28 order to the company. Sometimes those purchase orders 7 1 may go to the sales person or they may go directly to 2 the Huntington Beach office. 3 Again, in all cases it appears that the outside 4 sales personnel are copied in all of those steps of the 5 process. 6 The customer by forwarding a P. O. based on 7 statements or -- I'm sorry, language on their sales 8 quote at the time they issue the P. O. does state that 9 they are creating a binding purchase agreement. 10 So, again, throughout this process there may be 11 additional conversations including both the inside and 12 outside sales personnel based on the additional evidence 13 that was provided by the taxpayer. You can see that the 14 outside sales personnel is included in these 15 conversations every step of the way, which initially had 16 been one point of dispute, that once the salesperson 17 made the initial contact with the tax person -- the 18 potential customer, that they essentially walked away 19 and everything was handled from the inside 20 salespersonnel. I think the documentation shows that 21 that may not be the case. 22 So, again, the salesman starts the process 23 rolling and stays involved from beginning to end. Once 24 the product has been shipped to the customer and the 25 customer is invoiced, that invoice also references the 26 outside salespersonnel. And the quotes also are in 27 their name and it appears that they again remain 28 involved every step of the way. 8 1 So I'll let Eric finish here with some 2 additional information. 3 MR. MYERS: Thank you, Janis. As you can see 4 from our best understanding from the facts you have both 5 local or outside salespeople and inside salespeople 6 communicating with the customer, at various stages of 7 the sales process. But this is a process -- the sales 8 process, the presumption in the annotations that we've 9 briefed at length, and I won't hammer those here, but 10 the presumption is there because there's a -- a 11 front-loading to this process. 12 The salesperson who gets this ball rolling and 13 stays involved with the process has the relationship 14 with the customer. They're the person -- if you look, 15 for example, at the broader law on commissions in 16 California, since 1948 the law in California has been 17 that the person who's the originating cause of the sale 18 gets the commission, even if somebody else later comes 19 along and finishes the transaction. 20 And the sales tax, that's not governing law 21 here, but again you see in the sales tax a similar 22 presumption that the person who gets the ball rolling as 23 the local salesperson creates the relationship, as long 24 as they stay involved in that process. As long as their 25 involvement is not incidental, they get the presumption 26 that they're the principal point of contact for 27 negotiation the terms. 28 And I think with that, we'd like to close our 9 1 opening statement and reserve any remaining time for 2 rebuttal. 3 MS. YEE: Okay. 4 MR. MYERS: Thank you. 5 MS. YEE: Thank you very much. Let's hear from 6 the Affected Jurisdictions. 7 MS. STURDIVANT: Good morning, Madam Chair and 8 Board Members. My name is Robin Sturdivant with the HDL 9 Companies. And I represent the City of Huntington 10 Beach. To my right is Warren Barnes, the Chief 11 Financial Officer for Applied Computer Solutions or ACS. 12 Mr. Barnes is happy to answer any questions you 13 may have. 14 The Petitioner's presentation contains numerous 15 false statements. But rather than go through these one 16 by one I'm going to provide some background on the case 17 and give you a factual description of the business 18 activities. 19 So, almost ten years ago a BOE Associate Tax 20 Auditor named John Hadley contacted ACS to ask about 21 their business practices in local tax allocations. 22 Since that time, almost ten years, the taxpayer has been 23 both responsive and forthcoming to countless Board staff 24 requests for information and documentation. 25 The taxpayer's participating in today's hearing 26 because they feel that confidential information they 27 provided to Board staff was misused. I won't go into 28 detail about that, but Mr. Barnes will be happy to speak 10 1 about that if you have questions. 2 It's also been suggested that the taxpayer's 3 here because of a tax-sharing agreement that existed 4 between the City and ACS. It's important to note that 5 in that agreement there's no pay-back clause, which 6 means that ACS does not have to repay the local tax to 7 the City should the Board choose to reallocate. 8 Despite the responsiveness of the taxpayer the 9 Appeals Division found this to be a tough case and was 10 looking for a level of detail that wasn't found in the 11 documentation. 12 Words like "excepted", "forwarded" and even 13 "sale," those words have a very broad and very general 14 meaning to anyone outside the local tax world but have a 15 very specific and finite meaning to all of us here. 16 So petitions are submitted using the best 17 information available at that point in time. After a 18 petition is denied by Board staff, the Petitioner goes 19 back to the source of information to reconfirm. And 20 it's not unusual to hear -- "I didn't understand what 21 you were asking" or "That's what I said but I went back 22 and checked and I was wrong," or, "That's not my 23 Department, but I -- I tried to help you." 24 99 percent of the time the taxpayers are not 25 intentionally misleading, but despite our best effort 26 sometimes the information in the original petition is 27 just wrong. 28 The Petitioner provided exhibits prior to the 11 1 hearing that included powerpoint slides. The slides 2 contained phrases such as "apparently," "one would 3 assume," and "we can only infer." 4 Local tax allocation is not about making 5 assumptions or taking your best guess. 6 I provided a series of exhibits that provide 7 factual information about ACS. Exhibit 1 is a flow 8 chart that shows the people involved in the sales and 9 order process. All parties agree that the Account 10 Manager of the field salesperson is the first point of 11 customer contact. Account Managers have predetermined 12 territories throughout California and the United States. 13 Account Managers are assigned and report to Huntington 14 Beach. ACS has established satellite officers in those 15 territories to offer administrative support to the field 16 salespeople. 17 The Account Manager may or may not utilize a 18 sales office; it's their choice. Some field salespeople 19 work exclusively in the field and only from home 20 offices. 21 So when the Board staff asked ACS how many 22 Account Managers work in what satellite offices, the 23 taxpayer hears "How many Account Managers are in each 24 territory?" 25 Because Orange County has quite a few 26 salespeople in that territory, Account Managers have the 27 option of utilizing Huntington Beach for administrative 28 support, as well. That information is not in the record 12 1 and it's because no one ever asked the taxpayer that 2 question. 3 Account Managers are responsible for 4 establishing and maintaining customer relationships. In 5 addition to computer hardware ACS offers training and 6 education, maintenance packages, consulting and other 7 service-based solutions. 8 Account Managers bill the ACS customer base by 9 making cold calls or following up on referrals or leads 10 from business partners. Their job is to get to know the 11 customer on a first name basis, learn about their 12 hobbies, play a few rounds of golf, ask about their 13 kids, take them out to lunch and that sort of thing. 14 This type of relationship building can go on for a year 15 or more before there's an opportunity for inside sales 16 to offer a quote. 17 The overall goal of the Account Manager is to 18 create a long-term repeat and happy customer. When that 19 potential customer is ready to upgrade or replace their 20 system, the Account Manager will make a presentation. 21 They talk about the advantages of using ACS. They 22 inquire about their existing technology and immediate 23 requirements and ask about long-term goals. 24 This is all detailed in the declaration 25 provided by Josh Wells and labeled as Exhibit 2. 26 This brings us to the role of the Engineer. An 27 Engineer may or may not accompany the Account Manager to 28 a sales presentation. And to be clear, an Engineer is 13 1 not an Account Manager. Those are two separate 2 individuals. 3 The Engineer is an enterprise architect that 4 will evaluate the current infrastructure and design a 5 solution to meet the customer's needs. Based on his 6 conversations with the customer the Engineer creates a 7 bill of materials that is forwarded to the inside sales 8 department in Huntington Beach. 9 The inside sales representative has a unique 10 role in the process. Because ACS does not maintain any 11 inventory, the inside sales rep. communicates directly 12 with vendors to check availability and negotiate the 13 cost price of each component. 14 After that's complete, the repail -- retail 15 price is calculated and the quote prepared. The inside 16 sales rep. sends the quote to the customer. Most often 17 that quote is sent by e-mail. 18 If after reviewing the quote the customer has 19 an issue with the cost the inside sales rep. has the 20 authority to negotiate price reductions on smaller 21 orders or -- or items. This often requires the inside 22 rep. to go back and renegotiate with the vendor. 23 Discounts on high dollar -- high volume quotes 24 are not negotiated by the Account Manager or inside 25 sales, but by the Regional Director located in 26 Huntington Beach. Terms and financing are negotiated 27 solely by Mr. Barnes here. 28 Once the parties agree on a price the customer 14 1 issues a purchase order. There's been much discussion 2 about how a customer might send a purchase order to a 3 satellite office in error, and how often this may 4 happen. 5 And this is really irrelevant because the 6 satellite offices do not have a cap -- the capability to 7 enter an order into the ACS system. 8 So if you think about the question from the 9 taxpayer's point of view, will a satellite office, 10 quote, accept an order, in a taxpayer's mind the only 11 alternative to that would be to reject the purchase 12 order. So of course the answer would be, yes, we will 13 accept it. They can't do anything with it, but they 14 want to accommodate their customer. 15 So when you ask a broad and general question 16 you get a broad and general answer. 17 There's a series of e-mails labeled Exhibits 4, 18 5 and 6. They illustrate the back and forth between the 19 customer and inside sales. 20 We see that the conversation negotiation 21 between inside sales and the customer can take place 22 without any involvement or participation by the Account 23 Manager. 24 ACS has a very unique business model. Because 25 ACS deals with a fast-changing and competitive business, 26 pricing and negotiations are kept centralized and 27 confidential. 28 The Petitioners believe that because the inside 15 1 sales representative types the Account Manager's name on 2 a quote, that constitutes participation. The Account 3 Manager is not involved in preparing the quote, 4 negotiating the price or discussing the terms or 5 financing. But if you'd like to label that activity a 6 principal negotiation, then the point of sale would be 7 the office to which they are assigned, which is 8 Huntington Beach. 9 There was also confusion about the petitions 10 that were filed and granted back in 2003, which are not 11 a part of today's hearing, but at that time ACS prepared 12 amended schedules at the request of an allocation group 13 auditor, but then shortly thereafter went back to their 14 originally reporting methods. 15 Exhibit 3 is a declaration by Tracy Glauberman 16 Gries that explains her role in that process. And 17 Exhibit 7 is the backup documentation that she refers to 18 in her statement. 19 Thank you. 20 MS. YEE: Thank you very much. 21 Any other comments, from the Affected 22 Jurisdictions? 23 Ms. Ruwart. 24 MS. RUWART: Good morning. This -- my name is 25 Carole Ruwart. I am a Tax Counsel with the Board's 26 Legal Department. 27 With me here is Bob Tucker, also with the Legal 28 Department. And available from the Allocation Group is 16 1 Leonardo Vega. 2 I believe the points have been well-covered but 3 I just wanted to summarize the position of the 4 Department, the Sales and Use Tax Department. We agree 5 with the recommendation of the Appeals Division that 6 there is no basis for reallocation. We would note that 7 under the legal arguments raised by the Petitioners they 8 believe that this is not an exceptional case as 9 contemplated by our annotated letters, which as you know 10 are not regulations or have the force of law, but merely 11 represent examples of how we in the Legal Department 12 have applied the law to certain sets of facts. 13 A close reading of the annotations indicates 14 that there are -- are ambiguities even in the language 15 of the annotated letters that are also reflected in this 16 situation, but what it boils down to is, is that even if 17 you consider that there is a presumption that outside 18 salespeople generally perform principal negotiations 19 that this clearly falls into the exceptional case. 20 Here the inside salespeople are not limited to 21 what is referred to in the annotations as merely final 22 approval of a deal already negotiated by an outside 23 salesperson or price discount authority, or authority to 24 merely set prices in the absence of everything else. 25 The bottom line here is, is that personnel 26 associated with the Huntington Beach office, the inside 27 sales folks, the Engineers and Mr. Barnes, himself, are 28 responsible for negotiating all of the principal terms 17 1 and conditions of the contract. 2 And when we're looking at principal 3 negotiations, that is what we're looking for, who 4 negotiates with the customer to set the terms of the 5 contract that are important to the contract. And we 6 believe the preponderance of the evidence, especially 7 with the new evidence that's been submitted by 8 Huntington Beach and on behalf of Huntington Beach in 9 connection with this oral hearing indicate the 10 preponderance of evidence -- indicate that the inside 11 salespeople and the Huntington Beach location perform 12 the principal negotiations. 13 Therefore we concur with the recommendation of 14 the Appeals Division. 15 MS. YEE: Thank you, Ms. Ruwart. 16 You have five minutes on rebuttal. 17 MR. MYERS: If it please the Chair, we'd like 18 to ask for a little bit of additional time on rebuttal 19 to deal with 21 pages of evidence that was presented on 20 Monday. We'd -- we'd like to go through that in a 21 little more detail. 22 MS. YEE: Okay. Why don't you get started and 23 then let's see -- 24 MR. MYERS: Okay. 25 MS. YEE: -- how we do. 26 MR. MYERS: Thank you. 27 There are a number of statements that have been 28 made that we'd like to -- if we had unlimited time, 18 1 respond to. But I'd like to focus this on the 2 understanding of the sales transaction. 3 The understanding of that transaction is 4 derived primarily from the documents, themselves. And 5 despite the unsupported accusation from HDL that we've 6 made numerous false statements, we -- we have done our 7 utmost best to draw our conclusions from the documents 8 that have been presented by the taxpayer. 9 And we have on occasion indicated where we've 10 made an assumption or an inference from those documents 11 because we think that reasonable public discourse 12 requires us to disclose that we're not -- this isn't 13 stated, but we're making a reasonable inference from 14 direct evidence. 15 An issue has been raised about where -- and 16 I -- maybe I can address this to Trecia just real 17 quickly, am I okay to say the name of the outside 18 salesperson? 19 MS. NIENOW: Yes. 20 MR. MYERS: Okay. So, a dispute has been 21 raised about where these outside salespeople office, 22 where -- where do they work? And the evidence on the 23 record is a declaration from one outside salesperson by 24 the name of Josh Wells. 25 And it's interesting to note that Josh's 26 business card lists him as -- gives the Encino address. 27 That's where his fax number apparently is. And with the 28 declaration -- as an attorney, I have to look at what's 19 1 also not said in that declaration. And what -- what's 2 clearly not said is, "I don't ever work out of the 3 Encino office." 4 And as a matter of fact there's no -- there's 5 no new business card to show us that he's not working 6 out of that office. 7 So, what we have is a declaration that he 8 sometimes works in other places. 9 I'd like to have Ms. Varney speak just to a 10 minute to the site visit they made to the Encino office. 11 MS. VARNEY: Yes, as part of our investigation, 12 one of my staff members went out and personally visited 13 the -- the Los Angeles office and met personally with 14 Mr. Wells. And this -- granted, this was a -- a number 15 of years ago as this case was early in the process. 16 And he provided her with an overview of his 17 duties in the sales process, which is not all that 18 different than -- than what we've stated here. But it 19 was very clear that, you know, he worked from that 20 office and that there was some administrative support 21 and so forth, you know, for him and other salespeople at 22 that location. 23 One point I would like to address in addition 24 to that, to Ms. Sturdivant's comments about how when you 25 originally may talk to someone for a taxpayer then -- 26 then someone else will provide information that's 27 contrary. And she is absolutely correct, that -- that 28 is a very common thing. 20 1 However, attempts to go back and reverify 2 information or at least discuss some of the information 3 that was in dispute over this, to speak with Mr. Wells 4 was repeatedly met with him advising us that he would be 5 terminated if he spoke to us. 6 So we had no ability to even have a discussion 7 with him that -- to clarify any information that we may 8 have misinterpreted. So we did make attempts to do so. 9 And one other point that is, you know, brought 10 up about the documentation and the outside salesperson's 11 involvement is that one of the points in the 12 Department's summary on this case states that part of 13 the reason that they feel that this is an exceptional 14 case is because the pricing and so forth is proprietary 15 and not even the outside salespeople are provided with 16 that information. And I think the documents provided by 17 the taxpayer that included the distribution of a quote 18 to a customer that also included Josh Wells as the 19 outside salesperson refutes that statement. 20 MR. MYERS: I'd like to note in addition that 21 the -- we're not asking the Board to draw any inferences 22 from the fact that we were told that Mr. Wells couldn't 23 speak to us. That's perfectly within the right of any 24 corporation to control how the flow of its information 25 goes. Now, only to explain that we did try to get some 26 additional information and -- and that avenue was not 27 open to us, but that's okay. I mean, that's their right 28 as the taxpayer to control who flows the information 21 1 where, in our perspective. 2 MS. OLSON: Time has expired. 3 MS. YEE: Please continue. I'm going to give 4 you like another three minutes, but I -- I know we have 5 questions. 6 MR. MYERS: Okay. Two points then. First, on 7 the use of the annotations, I would simply point that -- 8 to Regulation 5700, which is a regulation and which 9 tells us that the annotations are a research tool -- 10 this is in (c)(2) of that regulation -- annotations are 11 a research tool to locate selected legal rulings of 12 counsel, and thus provide guidance regarding the 13 interpretation of statutes and Board regulations as 14 applied by the Board staff to specific factual 15 situations. 16 So we acknowledge that they're not controlling. 17 We do think they're helpful for trying to think about an 18 undefined term, principal place of negotiation. What 19 does it mean and how is it to be applied. 20 We would like now to just go through an example 21 of the documents that were provided by HDL, presumably 22 originating with the taxpayer. And if you would turn 23 with me to their Exhibit 6. 24 MS. MANDEL: You might want to say what it 25 looks like so people can find it quicker. 26 MR. MYERS: It's labeled Exhibit -- well, let's 27 go to Exhibit 5, and it's labeled Exhibit 5. It's page 28 16 of a -- 31 pages and it's a string of e-mail quotes. 22 1 Some highlighted with some commentary provided. 2 MR. HORTON: Six or five? 3 MR. MYERS: Exhibit 5. 4 MS. YEE: Exhibit 5. 5 MR. MYERS: Excuse me. 6 You'll see that on December -- you have to kind 7 of start at the back. These are in reverse 8 chronological order. So -- if you start at the back on 9 the e-mail from December 18, 2008, at 8:56 a.m., you see 10 that the customer sent a request for a quote to Josh 11 Wells and to Amy Sundell, who are respectively outside 12 and inside sales reps. as we understand it. 13 If you go forward a page or back to the page 14 prior, you'll see that the customer -- the next 15 communication is three minutes later, also presumably 16 from the customer -- it's blacked out but it's also to 17 Josh and Amy, and it's an update on what he needs, 18 what -- or -- or she, what the customer needs. 19 The next e-mail follows about nine minutes 20 later. And it's from Josh to the customer. Hey, I'll 21 get you this stuff this afternoon, is that okay? 22 And the customer responds back to Josh with a 23 carbon copy to Amy -- good luck but I need it early 24 afternoon. I need to have this filled out. 25 You see then in fairly short order that Amy 26 sends an e-mail -- I'm assuming to the same person, to 27 the customer, and to Josh Wells saying, well, what level 28 of support do you want it; for how long? 23 1 And that's followed by a response from the 2 customer about the length of service and the -- that 3 response is to Amy and Josh together. 4 The next e-mail, okay, is from another party. 5 I -- it's not clear to me whether it's the customer, but 6 the notation says that it is. 7 And the customer says, okay, this is really 8 what I need, and he sends it to Amy and Josh. 9 MS. OLSON: Time has expired. 10 MS. YEE: Just -- let me have you finish 11 this -- this description of this e-mail chain and then 12 we'll conclude. 13 MR. MYERS: And then you see in -- in the last 14 e-mail in this chain, a little bit more than hours has 15 elapsed in this set of conversations, Amy sends to 16 presumably the customer and to Josh a copy of the sales 17 quote. 18 So you've got an outside sales rep. who is part 19 of this discussion who the customer's asking for quotes 20 from. Absolutely is Amy Sundell participating? Yes, we 21 don't argue that. But you've got an outside sales rep. 22 who's also participating, who's seeing the sales quote. 23 These prices aren't being withheld from them. They're 24 being copied. And you'll find that they're copied on 25 every single sales quote in all three of the 26 transactions provided on -- on Monday. 27 And so you have the process as we've 28 represented it, both sides participating, given the 24 1 presumption in the annotations the taxes should go to 2 the local sales office. 3 Thank you for your time. 4 MS. YEE: Thank you very much. 5 Discussion, Members? Questions? 6 MS. STEEL: One. 7 MS. YEE: Ms. Steel. 8 MS. STEEL: That you said sales 9 duty/administrative that you are getting from the main 10 office, main office. That what kind of administrative 11 support that you are getting there? 12 MS. VARNEY: In -- in this actual sales office? 13 MS. STEEL: Yeah. 14 MS. VARNEY: Well, initially what we were told 15 is, is that -- by Josh Wells when we had met with him, 16 was that once he meets with the customer -- and again 17 this goes back years and we understand that processes 18 and things change with business as technology changes, 19 but initially that he would come back to the office and 20 then he would put into the computer or he would pass it 21 off to his administrative support person in the office 22 to input the information on what the customer's requests 23 or requirements were -- put that into a computer that 24 then was transmitted to Huntington Beach. 25 So that -- at that time that was the basic 26 information we had in terms of what the administrative 27 support was doing in the field sales office. 28 MR. MYERS: We -- I'm sorry, I just wanted to 25 1 clarify that we're -- that was the initial report. 2 We -- we understand that Josh Wells has made a statement 3 on paragraph 14 of his declaration explaining what he 4 thinks the administrative folks are doing and so we have 5 to take that -- that declaration at face value, as well. 6 MS. STEEL: So, are there outside salespersons 7 operating out if Huntington Beach, too? 8 MS. STURDIVANT: Yes, the -- because the 9 taxpayer set up their satellite offices within their 10 territories those Account Managers that have Orange 11 County as their territory, if they chose to would look 12 to Huntington Beach for their administrative support. 13 MS. STEEL: But you have salespersons -- 14 salespeople in -- out of Huntington Beach, too? 15 MS. STURDIVANT: Right. 16 MS. STEEL: So, okay, thank you. 17 MS. YEE: Okay. Other questions, Members? 18 Mr. Horton, please. 19 MR. HORTON: Thank you, Madam Chair. I want 20 to -- I'm trying to read the declaration by Mr. Wells. 21 So if you can bear with me. 22 The salesperson or AM -- 23 MS. STURDIVANT: Account Manager. 24 MR. HORTON: Account Manager. They -- I'm -- 25 they've been characterized in the declaration and then 26 the testimony today as a Public Relations person that's 27 dealing with a highly technical product. 28 Part of the -- there has to be some knowledge 26 1 base there. Do -- does this Public Relations person 2 receive any training on the products that you're 3 selling? I mean, he's doing more than just taking them 4 to dinner and golfing. I mean he has to have some level 5 of knowledge. I would think. I mean, I'm -- it's more 6 of a question than a statement. 7 MR. BARNES: Sure. Yes, they do have some 8 training. Most of the training they receive, however, 9 is sales techsnique -- techniques on the product 10 involved. There -- there is some level of technical 11 capability but they certainly couldn't configure a 12 system to meet a customer's needs. 13 MR. HORTON: Oh, I -- I -- it's pretty obvious, 14 but they -- they have a basic understanding of what the 15 product offers to the customer and -- 16 MR. BARNES: Yeah, I would call it a basic 17 understanding would be a fair way to characterize it. 18 MR. HORTON: And when the -- how often does 19 this training take place? 20 MR. BARNES: It depends on the product. 21 Sometimes once a year. Sometimes every couple of years. 22 It depends on how often the -- the product manufacturers 23 change technologies themselves. So -- 24 MR. HORTON: So the training is -- coincides 25 with the changing in technology. Is that -- 26 MR. BARNES: It certainly drives some of it, 27 yes. 28 MR. HORTON: Okay. So, would the salesperson 27 1 have this basic knowledge, just to use the term, of the 2 technology prior to it being changed, and then when the 3 change took place it would be the company's thought to 4 train them on the new technology so that they know what 5 they're selling. 6 MR. BARNES: Sure. As much as anything, 7 though, the product manufacturer is when our salespeople 8 train because they're representing them, as well, in the 9 field. And it's -- it's important that their products 10 get best foot put forward. So that training is driven 11 by as much as anything the manufacturers. 12 But, yes, certainly the company -- we -- we 13 don't want people standing in front of customers who 14 can't answer basic questions. 15 MR. HORTON: So at what point of technical 16 experience would the salesperson have to defer to the 17 experts? 18 MR. BARNES: Pretty early on in that 19 conversation. It's -- I'm trying to think of a good 20 analogy, but it would -- you know, I -- I don't know 21 your expertise, but if it was about, say, automobiles, 22 you certainly know how to get in and drive a car. But 23 you probably wouldn't know how to put together -- I 24 beg -- beg your pardon if you do, but -- 25 MR. HORTON: No, no, go ahead. 26 MR. BARNES: -- you may not know how to put 27 together an engine or have it fuel-injected properly to 28 maximize performance 28 1 MR. HORTON: Yeah, the car analogy is -- it's a 2 good one, actually, because the salesperson has enough 3 knowledge to sell the car but when I decide to order -- 4 you know, beef up the engine and add other things to it, 5 then it has to go to the manufacturer and they make 6 decisions as to what that will cost. And then they 7 communicate that back to the salesperson. And the 8 salesperson communicates it back to the customer. 9 MR. HORTON: The -- so the -- the district 10 office -- at some point the salesperson turns the 11 transaction over to the district office. And -- 12 MS. STURDIVANT: Do you mean the headquarters 13 office? 14 MR. HORTON: Headquarters office. 15 MS. STURDIVANT: Okay. 16 MR. HORTON: Head -- I'm sorry, I'm thinking 17 BOE. Through the headquarters office. My apologies. 18 And at that point the salesperson is no longer involved 19 in the transaction? 20 MR. BARNES: Well, I wouldn't say no longer 21 involved all together. They're certainly aware of 22 everything that's going on. They -- they are -- 23 MR. HORTON: When you say "aware," what does 24 that mean? 25 MR. BARNES: You've seen the examples where 26 they're copied on the submission of the quote, so that 27 they're aware that the customer in fact has a quote in 28 place and would know possibly the pricing and what the 29 1 configuration is. 2 But it -- it's not -- it's out of their hands 3 from that point on in terms of negotiating thing -- 4 anything. 5 MR. HORTON: So the Account Manager/salesperson 6 is aware of the quotation and what makes up the quote? 7 And -- and I know you went through all this, my 8 apologies. I'm just trying to get it up in my head. 9 And at -- at that point no longer interfaces with the 10 customer any more, with the exception of closing the 11 deal or at all? 12 MR. BARNES: In -- in most cases these 13 relationships are very regular interfaces. So it's hard 14 to say that they no longer have any discussions or 15 conversations about the deal. These are people that are 16 in their -- they're in our customer's offices and -- and 17 places of -- of work sometimes daily, certainly weekly 18 with larger customers. So -- 19 MR. HORTON: Is that anticipating future sales 20 or are they -- 21 MR. BARNES: Sure. 22 MR. HORTON: -- engaging with them on this 23 trans -- on this transaction -- 24 MR. BARNES: It would -- it would -- 25 MR. HORTON: -- hypothetical transaction that 26 we've created. 27 MR. BARNES: It could be both. 28 MR. HORTON: Could be both. 30 1 MR. BARNES: They're there regularly as part of 2 their routine. 3 MR. HORTON: So they serve a purpose of 4 maintaining the -- the relationship through the process 5 of negotiating the sale, let's say. That -- am I 6 characterizing it properly? 7 MR. BARNES: Yeah, I just want to be careful 8 about -- yes, their -- their role is maintaining the 9 relationship without regard to the negotiation. 10 MR. HORTON: Well, what do you think would 11 happen during that relationship, hypothetically, if they 12 couldn't articulate what was going on? 13 Do you think your customers -- let me -- let me 14 just share, and then maybe you can help me kind of bring 15 a little clarity to both sides. One of my neighbors 16 sells very, very technical equipment for the medical 17 industry, which changes rapidly. He's always 18 complaining about having to study this stuff. 19 Now certainly not to the extent of being able 20 to build one of the advanced X-ray machines. In fact, 21 he -- there's -- there's -- I mean they've made a lot of 22 advances with X-ray machines. It's -- it's just 23 amazing. 24 But, anyway, I have to listen because I'm 25 watering the grass at the same time. But -- so, but he 26 has -- from my perspective as a layman, he -- he's an 27 expert. But certainly from the perspective of the 28 people who design the equipment he probably isn't. But 31 1 he has to have a level of sophistication and knowledge 2 in -- in order to be able to articulate and communicate, 3 excuse me, with the customer intelligently. I mean, 4 can't just say how's -- how's the baby every day or 5 how's the wife. I mean, he has to talk about the 6 transaction as he -- as you go through the process. 7 And I would speculate that you want a level of 8 sophistication in your salesperson. You want them to 9 have a knowledge base of the equipment that they're 10 selling. 11 And so where do we -- 12 MS. STURDIVANT: I think that's where the 13 Engineer comes in a lot of the time for ACS because -- 14 MR. HORTON: Does the Engineer actually 15 communicate with the customer? 16 MR. BARNES: Always. Very regularly, yes. 17 MR. HORTON: And are they doing it together 18 or -- 19 MR. BARNES: Often, yes. 20 MR. HORTON: So, often their 21 salesperson/Engineer -- 22 MR. BARNES: There -- there could be times when 23 it was an Engineer alone. It could be times when it's 24 an Engineer and a salesperson. 25 May -- maybe if I can, the best way to 26 characterize this -- the differences, the salesman's 27 relationship and kind of ongoing conversations with the 28 customer are -- are critical in sort of a strategic 32 1 relationship level, where they're dealing with CIOs, 2 Directors of functional organizations within the IT 3 organization at large companies, typically. 4 MR. HORTON: Uh-huh. 5 MR. BARNES: The engineering organization works 6 at the sort of grass roots level helping define specs -- 7 MR. HORTON: So they're communicating Engineer 8 to Engineer? 9 MR. BARNES: Yes. 10 MR. HORTON: They're not really dealing with 11 the decision-makers, they just -- 12 MR. BARNES: No. So the -- the sales guy has 13 the strategic stuff trying to understand what's coming 14 long term. And sometimes these -- these opportunities 15 are multi-year arrangements. There's been many cases 16 where there's three -- four years of -- of time invested 17 by a salesman before even a nickel's worth of hardware 18 is sold. 19 MR. HORTON: No, I -- 20 MR. BARNES: So, it's -- 21 MR. HORTON: -- I -- I get that. I mean, post 22 all of that. 23 MR. BARNES: Yeah. 24 MR. HORTON: I'm trying to see who's talking 25 to -- who's talking to the decision-maker. 26 As I -- if I understand your testimony 27 correctly, the Engineers are talking to the Engineers. 28 MR. BARNES: Yes. 33 1 MR. HORTON: And they're talking about the 2 technical aspect of it. Once that conversation is 3 resolved then at the conclusion of that conversation is 4 elevated to another level, which is pricing and things 5 of that nature. And I'm curious what the salesman's 6 knowledge once it -- once it's outside of pricing and 7 engineering, because I don't really view pricing -- I 8 don't really view engineering as part of negotiation. I 9 mean, it's -- it's -- it's an integral part of a 10 decision-making process, but it's -- it's the technical 11 part. Here's what I want. Can you get it for me? 12 So once it's -- once you've -- once the 13 technical parties on both sides have determined what the 14 technical needs are of the customer, at that point a 15 price is assigned to it and once the price -- once the 16 technical needs are determined, is the salesperson for 17 necessity or in order to enlighten them or are they 18 still involved in the transaction and are they made 19 aware that here is the conclusion between the technical 20 folks, here's the resolution? 21 MR. BARNES: They're involved with the ongoing 22 relationship. I think what I said before was, yes, but 23 not with any elements of negotiation. All elements of 24 negotiation, including price, which is done with the 25 inside sales team, or the Senior District Manager, which 26 is in Huntington Beach, or terms and conditions which is 27 done between myself and another individual in Huntington 28 Beach -- 34 1 MR. HORTON: So -- 2 MR. BARNES: -- those are the only elements of 3 negotiation that are discussed. The salesman is -- 4 would be aware of what's going on but has no impact on 5 it whatsoever. 6 MR. HORTON: Okay. Who -- who in the company 7 actually at that point interfaces with the customer? 8 Let -- let me -- 9 MR. BARNES: At what point? 10 MR. HORTON: -- reiterate. At the point that 11 the engineers have determined the specs. and they've got 12 a meeting of the minds as it relates to the specs, at 13 that point there's a pricing on the order and that 14 pricing is then communicated to the customer and the 15 customer has an option to say yes or no. 16 MR. BARNES: Uh-huh. 17 MR. HORTON: Who conducts that activity? 18 MR. BARNES: That's the inside sales rep. in 19 Huntington Beach. 20 MR. HORTON: And the outside sales rep. has no 21 involvement? 22 MR. BARNES: Other than being in this -- the 23 example that was cited -- copied on the e-mail -- 24 MR. HORTON: Okay. 25 MR. BARNES: -- for information. 26 MR. HORTON: Is that the Department's 27 understanding, that the inside salesmen, they sort of 28 pass the baton -- the outside salesman passes the baton 35 1 to the inside salesman, and then the inside salesman 2 deals directly with the customer? 3 MS. RUWART: Yes, that is our understanding and 4 that is what we believe these exhibits more fully 5 develop and confirm. 6 MR. HORTON: Okay. How is the inside salesman 7 compensated? 8 MR. BARNES: Straight salary. 9 MR. HORTON: And the outside salesman? 10 MR. BARNES: Straight commission. 11 MR. HORTON: Okay. 12 MR. BARNES: I should stand to correct it, 13 there's a very small element of quarterly bonus 14 available to inside sales team based on broader team 15 goals, as well. 16 MR. HORTON: One last question. Typically 17 in -- in these cases when you have suppliers involved, 18 they generally have a requirement of their distributor 19 to -- and generally, I don't know if this is the case, 20 but generally have the requirement that the distributor 21 have a level of sophistication throughout the company. 22 In those relationships established over three 23 or four years of playing golf and so forth is where they 24 place a huge value. Does that exist with your 25 manufacture -- with your vendors? 26 MR. BARNES: Do they expect our sales team, are 27 you asking, to have a certain level of -- 28 MR. HORTON: Both inside and outside. 36 1 MR. BARNES: Certainly, yeah. 2 MR. HORTON: They expect them to maintain that 3 relationship and participate throughout the transaction 4 to make sure it happens? 5 MR. BARNES: Yes. 6 MR. HORTON: Okay. No other questions -- I 7 mean for now. I mean, I don't know. 8 MS. YEE: All right. Thank you, Mr. Horton. 9 Let me pose a few questions. I've spent a lot 10 of time on this case and I really appreciate both 11 parties trying to bring clarity with respect to the -- 12 the process, and the interaction between the outside 13 sales representatives and the Huntington Beach staff. 14 I want to follow on to Mr. Horton's comments 15 because throughout the process there are a lot of 16 decisions being made, there are a lot of different types 17 of personnel that are involved and I'd like both sides 18 to comment on what's wrong with my analysis here. But 19 I'm just really trying to cut through the fundamental 20 question before us, and that is where does the principal 21 negotiation take place. 22 And in my mind it's really where the price is 23 set and negotiated. 24 I mean, just kind of work through all of the 25 kind of different points in the process but where the 26 pricing and -- is set and where it's negotiated that 27 then forms the basis of the sales transaction and 28 agreement seems to me to be the fundamental question 37 1 here. 2 And after kind of wading through all of the 3 exhibits that have been provided by both sides it 4 suggests to me that that takes place in Huntington 5 Beach. 6 Not to say that the outside sales 7 representative isn't continually involved throughout the 8 whole process but what's compelling to me is that that 9 confidential pricing information is held at the 10 Huntington Beach location and there may be even 11 subsequent customer care that happens that involves the 12 outside sales representative, but I guess let me ask the 13 Petitioners what's wrong with this analysis aside from 14 the fact it's really simplistic. 15 MR. MYERS: Well, thanks for the loaded 16 question. The first thing I'd like to say is we don't 17 dispute factually that the pricing is held at Huntington 18 Beach and that it gets put into the sales quote by the 19 inside sales rep. That -- I think that's clear from the 20 documents, that it's the inside sales rep. who's -- 21 who's putting the price and getting -- there's been 22 documents submitted earlier in the record showing that 23 the inside sales rep. is -- is making contact with the 24 vendor to get the pricing, what -- for this particular 25 configuration, what parts, what pricing. 26 So we don't dispute that factually. I think 27 where we would -- would differ with your analysis, Madam 28 Chair, is -- is in whether there's a sort of wide open 38 1 field to decide what the price -- place of principal 2 negotiation is and -- and whether price is the 3 determinative factor in that. 4 And our -- our reading of the annotations and 5 I -- I know I'm on thin ice by referring back to the 6 annotations again, but our reading of the annotations, 7 particularly 71009 I think shows why price is not the 8 determinative factor. A factor? Sure. The 9 determinative factor? In a close case, no. 10 If -- if you'll permit me to quote from it, 11 quote, "The sales" -- and the background to 09 is that 12 you have divisions who control the pricing and local 13 sales reps. who have no authority over pricing, and 14 Taxpayer is saying that they should have the tax 15 allocated to their headquarters and not to the local 16 sales office. And the conclusion in 09 was not it 17 should go to the local sales offices. 18 And -- and here's the quote that I think is key 19 to understanding our analysis about why price is a 20 factor but not the determinative factor. 21 Quote, "The salespersonnel make presentations, 22 discuss the features of products, negotiate the various 23 terms and conditions of the sale with the customer 24 except for price and are paid sales commissions." 25 And they go on to conclude, "Thus we conclude 26 it is not" -- blank "is not properly allocating its 27 Bradley-Burns taxes regarding the sales from its Irvine 28 and Sunnyvale offices. And Irvine and Sunnyvale were 39 1 the -- the local sales offices there. 2 So the -- the longstanding interpretation here 3 is that -- and we think a fairly common practice is that 4 you -- you may have to get pricing from headquarters, 5 particularly with a business model like the retailers 6 where prices change, we've been told, and the services 7 and what's -- what's available. 8 So the fact that you're getting pricing from 9 the headquarters, we don't think that the longstanding 10 interpretation or even the practice out there at large 11 supports that price is the determining factor in these 12 cases. 13 What you have in the annotations is a 14 presumption that if the local sales office is more than 15 incidentally involved, they're in this game, then they 16 get the -- the credit for the local sales. 17 MS. YEE: Okay. I'm going to stop you there -- 18 MR. MYERS: Yes. 19 MS. YEE: -- and I'm glad you picked that 20 annotation because it's probably the one that's the most 21 analogous to the situation at hand. But the situation I 22 believe covered by the annotation involved local sales 23 representatives that also had a role in discussing other 24 terms and conditions of the sale. 25 And -- I mean it didn't involve multiple 26 locations, but the -- there was a heavier responsibility 27 with respect to what the local sales representatives 28 were authorized to do. 40 1 And -- and I'd be curious to hear from maybe 2 Appeals or the Department with regard to that. I just 3 want to get clear about what the annotation addressed. 4 MS. RUWART: We respectfully disagree with how 5 this annotation's facts would apply to the situation. 6 We think that this annotation supports the 7 recommendation of the Appeals Division in its analysis. 8 In this annotation, as is pointed out, the 9 salespersonnel make presentations, discuss the features 10 of the products, both of which apparently are conducted 11 by outside sales representatives here and are paid sales 12 commissions as here. 13 However, as you note, and this is I believe the 14 key factor in this annotation, is in the annotation the 15 outside salespersonnel negotiate the various terms and 16 conditions of the sales to the customers except for 17 price. In this case personnel associated with 18 Huntington Beach negotiate all of the various terms and 19 conditions of the sales and the price. 20 This is why we believe this annotation actually 21 supports that Huntington Beach should be the -- is the 22 property of the place where the tax is allocated because 23 in this case, compared to this particular list of 24 factors, the -- the outside salespersonnel would only 25 make the presentations, discuss the features and happen 26 to be paid sales commissions which sometimes is related 27 to performance or principal negotiations and sometimes 28 it's not. 41 1 I think that everybody here -- I would hope 2 everybody here would agree that defining principal 3 negotiations, especially where there are multiple 4 personnel involved, is a very fact-intensive 5 investigation. And these are guidance, but even under 6 the guidance the -- the way -- the facts match up to 7 this particular guidance would lead you to conclude that 8 Huntington Beach is properly the place that conducted 9 the principal negotiations. 10 MS. YEE: Okay. I'm -- I'm going to go back to 11 Mr. Myers briefly, but I do want the -- Ms. Ruwart, if 12 you want to address kind of my analysis. 13 I don't know how you get around pricing not 14 being kind of the main -- the main factor to be 15 considered. 16 MR. MYERS: I -- not to be overly simplistic, 17 but I think -- 18 MS. YEE: And if not, what would you have us 19 draw our attention to? 20 MR. MYERS: We don't disagree that the test is 21 who's negotiating the terms of the sale, who's 22 discussing with the customer the terms of the sale. 23 So let's take a look at what the -- what a sale 24 is made up of. Something that you as a customer decide 25 you want to buy at a price that the seller is willing to 26 offer. And then with some other terms maybe a time for 27 performance, although that can be implied at law. It 28 can be a very simple exchange, as we know, from walking 42 1 into a store and making such an exchange. 2 So the issue is that price is not the 3 determinative factor. If that were the case, one has to 4 worry about is -- is a technology company, let's say, 5 whose pricing changes a lot and so it gets held at 6 headquarters and the pricing gets set by headquarters, 7 and they're out of state. And they -- they want to set 8 their pricing from out of state. 9 If pricing is the end all and be all of the 10 analysis, if it's the decisional factor, that -- that's 11 a very easy function to move as opposed to who's talking 12 to the customer and about what. 13 We -- we agree that the second question has to 14 be answered. But the second question about what, we 15 respectfully disagree with the Department's analysis. 16 What you see from the documents and what we 17 think is a reasonable inference from those documents, 18 and certainly Mr. Barnes is here and can speak to it 19 more knowledgeably than I can, is that the local 20 salespeople are talking to the customer about what do 21 they want to buy. 22 There's no interpretation of the law of 23 contracts that I'm aware of that leaves out the -- the 24 what do you want to buy as part of the -- the 25 fundamentals of the deal. 26 And so we don't think that price should be 27 ignored, we simply think that you can't look at price 28 and stop there. 43 1 You've got pricing at Huntington Beach here. 2 We -- we don't dispute that. But you've also got a very 3 involved outside salesperson who is discussing with the 4 customer what they want to buy. You can see that in the 5 e-mails that we received that -- now, they know what the 6 operating system is sometimes and what -- what the 7 customer needs. 8 So it's not just that they're, hey, how you 9 doing, let me turn you over to Amy Sundell, it's what do 10 you want to buy? What -- what are the needs. And lots 11 of people are involved in it. It makes this a very 12 interesting factual scenario. 13 Nonetheless, the presumption is that if you've 14 got a local sales office that involved they get the 15 local sales. 16 MS. YEE: Okay. They're -- they're -- I don't 17 dispute the involvement with respect to the amount of 18 interface with the customer resides with the local sales 19 office. I -- I understand how that process works. But 20 in my mind they're just a conduit for information to 21 ultimately get to a setting and negotiation of a price 22 that then -- I mean, they're -- it's -- they're 23 intaking -- they're taking in all this information about 24 what the customer wants -- 25 MS. STURDIVANT: If I may make -- 26 MS. YEE: -- initially. 27 MS. STURDIVANT: -- just a quick response to 28 that. I think -- again, I contact and talk to 44 1 businesses every day. So this practice is truly not 2 that uncommon for companies to have their pricing and so 3 forth established by their headquarters or by people 4 that -- in the home office that have to go out and put 5 together that -- that -- that sales quote. 6 And the -- you know, it would stand to reason 7 that the sales quote is going to establish a certain 8 level of terms and conditions, but it's also very 9 unrealistic to think that this salesperson who is 10 essentially 100 percent commissioned is going to then 11 step away and let any further -- any questions about 12 terms and conditions or anything about that sale now be 13 handled by somebody else without him being intricately 14 involved in those conversations. 15 So I think that that's a really important point 16 which you obviously -- 17 MS. YEE: No, and I don't dis -- no, these 18 sales representatives are highly motivated to stay 19 involved. I don't think there's any dispute about that, 20 that they are a conduit for information to ultimately 21 get to, and I do place a lot of premium on price. It is 22 what the basis is of a sales agreement or transaction. 23 And that's what we're negotiating. 24 MR. MYERS: If I may -- 25 MS. YEE: Please. 26 MR. MYERS: -- Madam Chair. 27 MS. YEE: Enlighten me. 28 MR. MYERS: I don't think I will take that 45 1 burden on but I'll try to share with you why we see it a 2 little differently. 3 MS. YEE: Okay. 4 MR. MYERS: Is price an essential term? 5 Absolutely. There's no question that it is an essential 6 term. However, if you'll permit a brief hypothetical. 7 You indicated -- your metaphor was that the salespeople 8 were conduits for price and information. Let's take a 9 sales transaction where -- including the two that were 10 produced by Mr. Cicione in his letter in 2007 where 11 there doesn't appear to have been any negotiation over 12 price or -- and I say appear to be because all we can do 13 is base off of what was presented to us then. 14 In those two transactions there -- you have a 15 sales quote going out, a purchase order coming back. 16 That's a purchase agreement at that point. And final 17 invoices being issued. So, a very straightforward 18 transaction. No back and forth over pricing as far as 19 we can tell from the evidence. 20 In that case both sets, inside and outside, are 21 just conduits. Based on the information that we were 22 given in Josh Wells' declaration, Amy Sundell may do 23 some minor negotiation on -- on very small cases, but 24 she doesn't have the authority to change price, either. 25 So in both of those cases salespeople are 26 acting as conduits. In fact, if I would -- could be so 27 brash I would say salespeople primarily are conduits. 28 They're not the attorneys setting the terms and 46 1 conditions. They're not the CFO or an accounting 2 department deciding where the margins are on this 3 process and who will then set the price for the margins. 4 And they're certainly not probably present in strategic 5 discussions making the final decisions about what 6 vendors will carry what, and who will -- what lines will 7 carry from those vendors. 8 So they are I think fundamentally conduits of 9 information. And the fact that they are a conduit means 10 they're the one talking to the customer. They're the 11 one providing the information so the customer can make a 12 decision. 13 MS. YEE: But they're not ultimately setting 14 the terms of the sales agreement, I guess is what -- 15 MR. MYERS: They -- they are not, but if you 16 look at the -- I think -- and I think this is the 17 overwhelming authority in the annotations 09, 12, 13 18 states it this way -- it doesn't matter that they don't 19 have final authority. So if they don't have final 20 authority, they're not the one finally setting the 21 terms. They may be discussing them. They may even get 22 some provisional approval. 23 But if they have to send it back to 24 headquarters for final approval, we know from the 25 annotations that that's not enough to shift the monies 26 to the headquarters. 27 So the fact that they don't have the control 28 over setting the pricing or approving it, it is not in 47 1 the history of the Board's interpretation of this 2 phrase -- phrase, that has not been the decisional 3 factor. A factor? Sure. I think that's why this is 4 a -- has been called a tough case by Appeals. 5 But it's not the decisional factor, in our 6 opinion. And I -- I don't want to belabor -- 7 MS. STURDIVANT: Madam Chair, if I may? 8 MR. MYERS: -- the point. 9 MS. YEE: Yes. 10 MS. STURDIVANT: If you read Josh Well's 11 declaration, Amy Sundell does have authority to 12 negotiate prices on -- on smaller orders or items. She 13 can negotiate that directly with the customer's inside 14 sales rep. Negotiations on -- you know, large systems 15 or high dollar orders, that comes from the Regional 16 Director in Huntington Beach. 17 And from my perspective if I'm looking at 18 purchasing a product from Company A and Company B, price 19 is going to be the factor which is going to make me 20 decide who to purchase from. 21 If the sales guy from Company A takes me out to 22 lunch once a week, that's great, but it's not going to 23 be the deciding factor in my purchase. It's going to be 24 price. It's going to be -- if that product is financed 25 the percentages, the terms, all of that entire package, 26 which all comes out of Huntington Beach. 27 MS. YEE: Okay. Thank you. Appeals, any -- 28 MS. NIENOW: You know, clearly from my 48 1 perspective there are other terms that are being 2 negotiated here. It's not as cut and dry as Mr. Myers I 3 think seem to make it appear by the evidence. I think 4 that the indication from the taxpayer here has been that 5 there is communication between the inside sales 6 representatives and other people at the headquarters 7 office with respect to the terms of the sale. 8 There might even be the Legal Department that's 9 involved negotiating an indemnification, something -- 10 you know, something more specific like that. Delivery 11 is also another term that I believe the inside sales 12 team negotiates. 13 So, you know, while, yeah, it's not all about 14 price, but when you look at the whole magnitude of the 15 evidence there's nothing that indicates to me that the 16 outside salesperson is actually negotiating a term of 17 the contract with the customer. He's there to 18 facilitate the gathering of information. That's -- 19 that's the way I see it. 20 MS. YEE: Okay. I'm going to ask the 21 Department and the Affected Jurisdiction just to comment 22 briefly about my analysis. I want to turn to Mr. Horton 23 after. 24 MS. RUWART: The comment I would make would be 25 that with respect to Mr. Horton's framework I -- I 26 thought was -- was helpful and the way he and Mr. 27 discussed it was that the outside salesperson takes a 28 strategic role with respect to sales generally and 49 1 relationships generally. The Engineers talk to the 2 other Engineers at the technical level. 3 That that leaves as the question to be decided, 4 though, is who negotiates the actual sales contract. 5 And it seems clear to us that inside sales and other 6 personnel located at Huntington Beach to do that. 7 Regardless of whether the outside salesperson under our 8 annotations doesn't have to have complete authority to 9 set price. The bottom line is, is that the evidence 10 indicates here that the outside salespeople do not 11 negotiate any of the terms of that sales contract. 12 They are involved. They're aware of the terms, 13 but that is entirely consistent with the outside 14 salesperson having a long-term relationship with the 15 company. It's consistent with them being paid by 16 commission because if, for example -- not that it would 17 actually happen, say the inside sales or the Huntington 18 Beach office was a little slow or a little unresponsive 19 to the customer, they would be there to -- to egg on 20 the -- the headquarters to make sure their customer is 21 taken care of, and assist in interpreting. But they 22 don't -- it doesn't appear they negotiate any of the 23 terms of the contract. 24 And that's what we're trying to decide when 25 we're determining the principal negotiations and the 26 place of allocation. 27 There are lots of activities going on here. 28 The outside salespeople clearly work very hard. They 50 1 know a lot and they do a lot. But the question is do 2 they perform principal negotiations of specific sales. 3 And we think that even though they're aware of the 4 negotiations and they may have some small role, the bulk 5 of the actual negotiation activity does -- is -- is not 6 performed by them, and in fact is performed by the 7 inside salespeople and others located at Huntington 8 Beach, all of which leads to the same answer is, is that 9 the tax properly allocated to Huntington Beach 10 regardless of whether inside sales actually performs 11 every single negotiation of every single term. 12 MS. YEE: Okay. Thank you, Ms. Ruwart. 13 Mr. Horton, please. 14 MR. HORTON: You know, I think the Chair brings 15 up an excellent point. I mean, I -- I do believe that 16 it is the culmination of the activity that -- that's 17 involved in pricing that somewhat determines the 18 negotiations. And so -- and I'm going to share this and 19 hopefully to give you an opportunity to respond. 20 Negotiations for me is where the dialogue takes 21 place between the -- a representative of the purchaser 22 and a representative of the seller. And it depends on 23 where that representative is that is conducting that 24 dialogue to determine whether or not there's a 25 transaction that takes place. 26 Very much understanding of the various 27 different components of a transaction. But at the end 28 of the day every component will be assigned a price and 51 1 that price will be discussed. Whether it's delivery, 2 whether it's a widget, a gidget, whatever that happens 3 to be, at some point some negotiation is going to take 4 place and some -- often incrementally discussions are 5 taking place. 6 And so we have here is the initiation of the 7 transaction which seems to clearly take place -- I mean 8 clearly be the function of the outside salesman. And 9 then you've got the outside salesman participating in 10 communicating to the purchaser the details of the more 11 technical aspect, because I do believe that a good 12 outside salesperson was going to protect their own best 13 interests. It's kind of human nature, inherent, and 14 just making sure that the commission is there. 15 So there is a level of participation, be it a 16 conduit, knowledgeable, not knowledgeable at all. 17 But this introduction of the inside salesperson 18 not communicating and participating in the negotiation 19 is what creates some challenge to the transaction. And 20 that you have a person located at the headquarters who 21 is actually having dialogue to determine -- or to 22 produce an agreement. And true enough, the outside 23 salesperson may participate in that process, as well. 24 So that's where, you know, the challenge is for 25 me. I -- I just can't -- I concur that the outside 26 salesperson is not going to abandon his transaction. I 27 would not want to rely on an inside salesperson to 28 consummate a transaction that predicates my way of life. 52 1 I just wouldn't do that. 2 So they're going to have a knowledge base. 3 They're going to have a level of participation and 4 they're going to be a conduit. And to the extent 5 conduits are -- it's okay, you know, conduits, they 6 negotiate, as well. I mean, they take what they've been 7 told and go cut the deal. That's how it works. 8 Bifurcating this is where the challenge is. So 9 I'm just going to take a minute and just go over these 10 documents one more time and if there is any -- any 11 testimony relative to the documents and how these 12 documents substantiate that or bring clarity to where 13 the dialogue took place that produces this agreement -- 14 and that's a dialogue between the seller and the 15 purchaser on negotiating price. 16 Once you get beyond the terms I believe -- you 17 know, you -- part of the terms is the widgets. Do you 18 want -- do you want it -- so -- this size, you want 19 this. And not to minimize the complexities of what you 20 do, sir, I -- in fact, the minimization is an indication 21 of how complex it is. I can't seem to grasp it right 22 away. 23 So -- and it appears that a lot of the 24 negotiations is taking place at the headquarters office 25 via this inside salesperson but at the same time the 26 outside salesperson is participating because of their 27 own, lack of a better term, proprietary interest in this 28 transaction. 53 1 So -- and I would think it's in the best 2 interest of the company for -- to have them to have the 3 capacity to be able to do that. The knowledge base to 4 be able to do that. 5 I mean, you're not -- guys isn't going out 6 there twiddling his thumbs, he's engaged in this. So -- 7 MR. MYERS: May I? 8 MS. YEE: Mr. Myers, please. 9 MR. MYERS: I'll keep it very brief. 10 MS. YEE: That's all right. I want to hear. 11 MR. MYERS: First off and splitting the baby, 12 since it's an inanimate amount of money here, would not 13 necessarily be objectionable to us. 14 But, secondly, and I'll just hit this on a very 15 summary level, if you look at the documents provided on 16 Monday, those are three transactions. If you look at 17 the documents provided by Mr. Cicione in 2007 you have 18 two transactions. 19 Out of five transactions you find no 20 documentary evidence of back and forth between Amy 21 Sundell or any other inside salesperson over price. The 22 price is set internally. It's sent -- and we have to 23 focus on what's the vehicle for the discussion here. 24 Based on the documents we have, the vehicle for 25 the discussion is the sales quote and the e-mails. And 26 those e-mails are coming back to Josh Wells and to Amy 27 Sundell. And the sales quote's being offered in Josh's 28 name. 54 1 So the vehicle for communicating is written 2 here. And Mr. Wells is participating in those 3 discussions. And if you look, the taxpayers had five 4 bites at the apple here, five transactions that they 5 selected to show presumably representatively what 6 happens in their transactions. 7 And in none of those five do you find -- I 8 don't recall any discussion of price, but -- or 9 negotiation over price between Amy Sundell and anyone 10 else. What you see is a sales quote's offered, often 11 the purchase order comes back, you now have a binding 12 agreement according to the sales quote, itself. 13 There's no more discussion that has to go on in 14 that transaction about price or terms and conditions. 15 So, I would just say look to the documents 16 because I don't think they tell the story of lots of 17 discussions between Amy Sundell and the customer over 18 price outside of the documents, themselves, which are 19 the e-mails of the sales quote. 20 And when those come back they're to Josh Wells 21 and -- and to Amy Sundell. And I think that speaks 22 volumes about the continued involvement. 23 MS. STURDIVANT: Madam Chair? 24 MS. YEE: Yes. 25 MS. STURDIVANT: If -- if you look at Exhibit 5 26 that -- that Mr. Myers referred to, early on sort of in 27 the back because again they're in reverse chronological 28 order, you'll find that -- that Josh Wells talks about 55 1 in there that very early in the morning that he's 2 leaving to take his daughter to get her driver's 3 training test. 4 So although he's cc'd on those e-mails, he's 5 not participating in that conversation. Having -- 6 having your name typed on a quote doesn't mean you 7 participated. 8 If you're cc'd on an e-mail string, that 9 doesn't constitute participation. I agree that they 10 definitely want to keep that -- that Account Manager in 11 the loop as to what's going on, but being in the loop is 12 not the same as participating. 13 MS. YEE: Okay. 14 MR. MYERS: It is when everybody is talking 15 through the same medium. 16 MS. YEE: Okay. I -- I'm gonna -- 17 MR. MYERS: So -- 18 MS. YEE: I -- I will concede that my prior 19 analysis was simplistic and that certainly there are 20 terms of the sale that are being discussed and certainly 21 involving the local sales representatives. But you 22 don't consummate I guess a sales agreement without the 23 price. 24 And I'm going to go back to price. It may not 25 be central, it may not be the -- the key, but you don't 26 have a sales agreement without a price that is set and 27 negotiated, after all this information has take -- 28 and -- and discussion and negotiation has taken place. 56 1 And -- and I'm -- I'm sorry to get hung up 2 here, but I -- I think we're talking about participation 3 in a much broader sense. I think we're talking about 4 negotiation that is negotiation at every step of this 5 process and beginning with what the customer wants in 6 terms of the product. 7 But I just kind of come back to price and where 8 that gets set and where it gets negotiated, because you 9 do not have a sales agreement that is consummated 10 without that piece of it. 11 That's -- that's -- so I'm -- that's where I'm 12 hung up. 13 MR. MYERS: Well, if you'd like us to respond, 14 I will, but I really don't want to belabor our -- our 15 point. 16 MS. YEE: I -- I under -- 17 MR. MYERS: So if you're asking for -- 18 MS. YEE: I understand where you stand. 19 MR. MYERS: Thank you. 20 MS. YEE: Thank you. 21 Other discussion -- questions, Members? 22 MR. HORTON: One last question, Madam Chair. 23 MS. YEE: Mr. Horton. 24 MR. HORTON: I can't recall who said it but 25 someone said that the -- Mr. Wells was admonished not to 26 discuss this item any further. Is that true? 27 MR. BARNES: Not to my knowledge. 28 MR. HORTON: Okay. 57 1 MR. BARNES: Mr. Wells is one of the company's 2 top salespeople and has been with us a very long time. 3 I think 12 years. And I seriously doubt anybody would 4 have ever said that to him. 5 The only person that talked to him about this 6 was either myself or -- 7 MR. HORTON: And I'm mindful of that. The 8 only -- the only reason I ask is it speaks to the 9 credibility of his declaration. That's why I'm asking, 10 trying to just make sure that -- 11 MR. MYERS: We -- and I would clarify again, 12 we -- we have no desire to ask you to infer anything 13 about the credibility of his declaration from -- 14 MR. HORTON: Okay. 15 MR. MYERS: -- the statement -- 16 MR. HORTON: Okay. Right. 17 MR. MYERS: -- Ms. Varney made. We take it at 18 face value. We just look to what's not said there, as 19 well. 20 But as to his credibility, we're not asking for 21 an inference on that. 22 MS. YEE: Okay. 23 MR. HORTON: At -- the home office, is there 24 ever anything other than a home office; it's always a 25 home office? Any other salesmen -- Mr. Wells works out 26 of his home, evidently. Any other salesmen have a 27 physical office outside of their home? 28 MR. BARNES: Are you talking about some of 58 1 the -- the different territory offices like -- 2 MR. HORTON: Right. Yes. 3 MR. BARNES: Yeah, a number -- a number of them 4 do, yeah. Different locations in different cities. 5 There are some that work almost exclusively -- 6 exclusively from their home, their -- their residence. 7 MR. HORTON: Is there a job description on 8 these individuals? 9 MR. BARNES: I'm sure there is. 10 MR. HORTON: Thank you very much. 11 MS. YEE: Thank you, Mr. Horton. 12 Other questions, Members? 13 Hearing none, may I have a motion, please. 14 MS. MANDEL: Take it un -- under submission. 15 MS. YEE: Okay. Motion by Ms. Mandel to take 16 this matter under submission. 17 Is there a second? 18 MS. STEEL: Second. 19 MS. YEE: Second by Ms. Steel. 20 Without objection, such will be the order. 21 Thank you all very much. We will discuss your 22 matter later today and send you written notice of our 23 decision. 24 MS. STURDIVANT: Thank you for your time. 25 MS. YEE: Thank you. 26 MR. BARNES: Thank you. 27 ---oOo--- 28 REPORTER'S CERTIFICATE 59 1 2 State of California ) 3 ) ss 4 County of Sacramento ) 5 6 I, BEVERLY D. TOMS, Hearing Reporter for the 7 California State Board of Equalization certify that on 8 September 15, 2009 I recorded verbatim, in shorthand, to 9 the 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 59 12 pages constitute a complete and accurate transcription 13 of the shorthand writing. 14 15 Dated: October 4, 2010. 16 17 18 ____________________________ 19 BEVERLY D. TOMS 20 Hearing Reporter 21 22 23 24 25 26 27 28 60