1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 15, 2010 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 FRONT PAGE COMMUNICATIONS, INC. 14 NO. 361961 (AA) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Betty 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 10 Chiang, State Controller (per Government Code 11 Section 7.9) 12 Diane G. Olson, 13 Chief Board Proceedings 14 Division 15 For Board of David Levine 16 Equalization Staff: Tax Counsel IV 17 Scott Lambert 18 Hearing Representative 19 Robert Tucker 20 Legal Department 21 Kevin Hanks Sales & Use Tax Division 22 23 24 For Petitioner: Carlos A. Salazar Representative 25 Athanase Sbarounis 26 Taxpayer 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 15, 2010 4 ---oOo--- 5 MS. YEE: Okay. We are on the Sales and Use 6 Tax Appeals Hearings. 7 Our next item, Ms. Olson? 8 MS. OLSON: Our next item is C3, Front Page 9 Communications, Incorporated. 10 Please come forward. 11 MS. YEE: All right, Members, we are on item 12 C3, Front Page Communications, Incorporated. 13 Let me have Mr. Levine introduce the issues in 14 this matter. 15 Good morning. 16 MR. LEVINE: Good morning, Madam Chair, 17 Members. 18 MR. SALAZAR: Good morning. 19 MR. LEVINE; David Levine for the Appeals 20 Division. 21 The issues in this petition of Front Page 22 Communications, Inc. are whether Petitioner was the 23 retailer of the satellite systems. 24 If so, whether the measure of deficiency is 25 correct and whether relief is warranted of the interest 26 accrued on Petitioner's liability or of the amnesty 27 interest penalty. 28 Regarding the measure of deficiency, in final 3 1 preparation for the Board hearing, the Department has 2 concluded that a further adjustment is warranted and 3 Appeals Division agrees. 4 In the D & R we recommended an adjustment for 5 materials. And the theory for that was Petitioner was a 6 consumer as a construction contractor but we overlooked 7 that Petitioner was a construction contractor with 8 respect to everything that was attached to the real 9 property, which includes the satellite system -- the 10 satellite disk, which is the big ticket item -- there 11 are some things that aren't, but the satellite dish and 12 some of the other things, such as wall mounts, which 13 were furnished installed pursuant to a construction 14 contract. If Petitioner was the retailer, that is how 15 it was furnished. As such, whether its materials would 16 be taxed on cost and fixtures that are installed in the 17 same form as acquired, which we believe all of these 18 items were, would be taxed on cost unless there was a 19 separate selling price. 20 So, we -- the Department recommends and we 21 agree that as long as you sustain that Petitioner was 22 the retailer that there be reaudit done because they 23 wouldn't have the numbers to determine how -- rather 24 than markup, that should be calculated based on cost for 25 the satellite dishes and any other property that was 26 installed to become real property. 27 MS. YEE: All right. Thank you very much, 28 Mr. Levine. 4 1 Okay, good morning. 2 MR. SALAZAR: Good morning, Dear Madam 3 Chairwoman and Members of the Board. 4 My name is Carlos Salazar. I am the CPA for my 5 client, Front Page Communications. 6 And we have gone through this process, it's 7 been six and a half years. 8 MS. YEE: Okay. 9 MR. SALAZAR: So, as the audit commenced and 10 we're very, very happy to be here. 11 MS. YEE: Good. And who's your colleague next 12 to you? 13 MR. SALAZAR: This is the shareholder, Mr. -- 14 MR. SBAROUNIS: John Sbarounis. 15 MS. YEE: Okay, very well. 16 You have ten minutes for your presentation. 17 MR. SALAZAR: Thank you. 18 We are of the position that the taxpayer is an 19 installer of equipment and not a reseller of equipment. 20 The taxpayer has been doing this for many years, has 21 maintained the same relationship with DIRECTV as a 22 qualified installer. 23 And his responsibilities are, essentially, to 24 go and install equipment. He -- he does have a 25 reseller's permit because, in addition to installing 26 regular satellite equipment, he has the right to sell 27 other equipment, such as flat screen TVs and, you know, 28 he's even purchased refrigerators and different items 5 1 from the distributor of the equipment. But his 2 responsibilities are to be an installer of this 3 equipment. 4 And as far as the background, I think it's 5 important that we give my client an opportunity to talk 6 about, you know, what his business is. And then I'd 7 like to take it from there. 8 MR. SBAROUNIS: I am Joan Sbarounis, the 9 taxpayer here. And we are an installation company for 10 DIRECTV, been in business since 1994. 11 That's basically what we do. And we still do 12 it today, not as much prior years, a little economy 13 difference here. But we've been sort of ran through a 14 lot of problems -- not problems, but emotional with all 15 of the six and a half years of nobody making a decision 16 on this thing and coming all of the way to this level. 17 So, I am hoping that we can get a resolution today. 18 MR. SALAZAR: Yes. And taking it from there, 19 I've actually represented another client who is also an 20 installer of DIRECTV equipment. And I find it redundant 21 that we have to be here again and revisit this issue 22 when the Department had already taken a position with 23 respect to that audit. 24 DIRECTV does not have any special arrangements 25 with respect to its installers. It follows the Uniform 26 Administrative Process with respect to all of its 27 installers. 28 And what I found was that representing both 6 1 clients, they are identical in nature and their 2 functions and their agreements with DIRECTV. 3 The Department took a position that the other 4 taxpayer was, in fact, an installer, not a reseller of 5 equipment. Yet in this case, they are taking the 6 position that he is a reseller of equipment and 7 ignoring, essentially, the memorandum as it being 8 associated with other matters as was quoted on the 9 summary. 10 As far as why he is an installer, you know, I 11 did work as an auditor with the Franchise Tax Board for 12 12 years and I was always very careful not to pay 13 attention to labels. And I always liked to go in and 14 look at the facts and circumstances of the case and make 15 a determination as to the proper tax based on the facts 16 and circumstances, not based on labels. 17 Seems to me that the Department is taking the 18 position that under placing full emphasis on labels and 19 titles and not necessarily looking at the facts and 20 circumstances of the case. 21 In the case at hand, it's quite simple. My 22 client has no rights to the equipment. It's not a title 23 holder to the equipment, does not have the right to 24 transfer the equipment. 25 Ultimately, doesn't matter if the subscriber's 26 holding the equipment for one day or five years, the 27 equipment reverts back directly to DIRECTV, not to my 28 client. 7 1 My client never purchased this equipment. Any 2 subscriber wanting to purchase insurance on the 3 equipment pays DIRECTV and not my client. 4 So, I really find it hard to understand why it 5 is that he's deemed to be a reseller of the equipment 6 when he has absolutely no rights to this equipment. And 7 that's been the main issue of contention, especially, I 8 mean, being -- again, I am repeating myself, but being 9 that the Department's already taken a position on the 10 same exact issues. So, I'm dealing with -- it's an 11 identical scenario and we're taking contradictory 12 positions. 13 And that's pretty much our position. 14 MS. YEE: Okay. Anything further, Mr. Salazar? 15 MR. SALAZAR: No, that's it. 16 MS. YEE: Okay. We'll give you time on 17 rebuttal after we hear from the Department. 18 Okay, thank you. 19 Department, good morning. 20 MR. LAMBERT: Good morning, Madam Chairwoman 21 and Members. My name is Scott Lambert and I'll be 22 representing the Sales and Use Tax Department today. 23 To my right is Kevin Hanks, also with the Sales 24 and Use Tax Department, and to Mr. Hanks' right is 25 Robert Tucker with Legal Department. 26 Front Page Communications, Inc. sells and 27 installs satellite television equipment. Front Page 28 incorporated and started operating April 1999. The 8 1 audit covered the period April 2001 to December 2004. 2 This was Front Page's first audit. 3 Front Page contracts with DIRECTV to sell and 4 install satellite television equipment. Front Page both 5 solicits customers that will subscribe to DIRECTV's 6 satellite service and DIRECTV provides customers. 7 Front Page purchases their satellite equipment 8 under a resale certificate from a company named DSI. 9 Consequently, no tax was paid to DSI on the purchase. 10 Under the terms of DIRECTV's contract, DSI is paid for 11 the equipment by both Front Page and DIRECTV. 12 The satellite equipment purchases were compared 13 to Front Page's reported taxable sales. Only a small 14 amount of equipment sales were reported by Front Page as 15 taxable. Based on a review of the DIRECTV contract with 16 Front Page, it was determined that Front Page was a 17 retailer and was responsible for reporting of the sales 18 tax and that tax was due on the sale of tangible 19 personal property at the fair retail value and cost of 20 materials used, such as wire, to install the satellite 21 equipment. 22 The subscriber is sometimes billed by both 23 Front Page and DIRECTV. The billing arrangement is 24 based on the promotion being offered by DIRECTV at the 25 time. Generally, DIRECTV bills a subscriber for the 26 activation and subscription and Front Page bills for any 27 upgrades to more expensive equipment in excess of that 28 allowed under the terms of the agreement or for 9 1 additional equipment not covered by the contract. 2 The equipment purchases were marked up 19 3 percent and this am was added to the material cost 4 consumed on the construction contract to arrive at the 5 audited taxable measure. The underreported taxable 6 measure is 1.2 million. 7 The Petitioner argues that DIRECTV should be 8 responsible for the reporting of the tax on the 9 equipment sales. DIRECTV, in a letter to the Department 10 dated January 18th, 2006, writes that independent 11 contractors, such as Front Page, purchase and distribute 12 the satellite TV equipment on their own account. 13 Therefore, DIRECTV asserts that they would not be 14 responsible for reporting the tax. 15 Starting in March 2006, after the end of this 16 audit period, DIRECTV started collecting tax on the 17 lease of the equipment to the subscriber. The reporting 18 of the tax and entity responsible is no longer an issue. 19 The Petitioner's representative provided an 20 internal memo prepared by the Department's Audit and 21 Information Section, AIS, dated September 14th, 2007 22 involving another satellite TV installer. The memo 23 reaches the conclusion that the other installer is 24 acting as an agent of DIRECTV in regards to the 25 equipment sales and is, therefore, not responsible for 26 the reporting of the tax. 27 The other installer's permit was closed out 28 June 2007 and the file has been destroyed. The contract 10 1 discussed in the September 14th, 2007 memo is not 2 available. 3 It is important to note that DIRECTV changed 4 their method of reporting tax starting in March 2006. 5 At that time DIRECTV started reporting tax on leased 6 receipts and the installers were no longer considered 7 the retailers. 8 The September 14th, 2007 AIS memo refers to an 9 equipment lease addendum. This addendum would not have 10 existed under -- until DIRECTV changed their reporting 11 method. Therefore, the facts and circumstances in 12 effect at the time the September 14th memo was written 13 are different than those in effect throughout Front 14 Page's audit period. 15 Front Page asserts it was a consignee of the 16 equipment. However, no written consigner/consignee 17 agreements have been provided and none are alleged to 18 exist. 19 Without such agreement, the Department 20 concludes there is no such consignment relationship 21 between Front Page and DIRECTV. Front Page maintained 22 possession of and made payments and/or gave 23 consideration for such equipment. 24 Front Page also claims that the calculation of 25 the markup was faulty and the measure was overstated. 26 The Petitioner has not provided any evidence to support 27 this assertion. 28 With that said, in most case it appears that 11 1 the dish is installed to real property. The dish is 2 considered a fixture. Since a separate charge is not 3 made for the dish, Front Page would only owe tax on the 4 cost of the dish instead of the fair retail value. 5 Regarding interest, it appears Front Page is 6 requesting relief of interest due to the length of time 7 it took for this audit to go through audit and Appeals 8 process. 9 The audit started July -- during July 2004 and 10 was billed in July 2006. This was a relatively 11 complicated audit that was handled through the normal 12 process. There were some unforeseen and unavoidable 13 delays that occurred during the Appeals process which 14 were caused by a series of retirements and transfers. 15 From a -- from a list prepared from the Appeals 16 file, the case was promptly reassigned and worked by 17 each new attorney. Therefore, there does not appear to 18 be any unreasonable errors or delays by a Board employee 19 in this case. 20 Regarding amnesty interest penalty, Front Page 21 was made aware of the amnesty program. The audit was 22 started in July 2004. The Petitioner was asked to sign 23 a Waiver of Limitations at the end of July 2004 and was 24 aware that the Department had concerns regarding the 25 reporting of the equipment. 26 The fact that the audit has not been finalized 27 and Front Page's liability remain the subject of dispute 28 until the amnesty program ended does not excuse Front 12 1 Page's failure to do what the amnesty program was 2 intended to encourage, which was the careful review of 3 returns, file for amnesty eligible periods and payment 4 of previously unreported taxes. 5 Accordingly, except for the installation of 6 dishes, the Department concurs with the Appeals 7 Division's decision and recommendation. 8 Given the fixture issue, the Department would 9 recommend a 30-30-30 to allow the Petitioner to provide 10 a list of purchases of dishes and the percentage of 11 dishes that were attached to real property. 12 MS. YEE: Thank you, Mr. Lambert. 13 You recommended 30-30-30, would that entail a 14 reaudit or would you just be looking -- 15 MR. LAMBERT: More than likely. 16 MS. YEE: Okay, all right. Thank you very 17 much. 18 You have five minutes on rebuttal. 19 MR. SALAZAR: Yes, first of all, the contracts 20 for the previous audit do exist and I do have copies of 21 those contracts. I will have them available for you if 22 you need copies of those records. 23 MS. YEE: Okay. 24 MR. SALAZAR: For the record. 25 Second of all, nothing has changed in the 26 reporting before March 2006, which was the effective 27 date DIRECTV began charging -- assessing use tax on the 28 equipment, up until now. 13 1 So, we have seen no difference in any of the 2 reporting other than the fact that DIRECTV classified 3 these payments as being lease payments and began 4 assessing use tax on a monthly basis from the 5 subscribers. 6 Yes, they still require a reseller's permit but 7 now they're responsible for collecting the use tax, 8 whereas before they were not collecting sales tax on 9 this equipment. 10 As far as us making reference to the 11 consignment statute regulations, we're making reference 12 to that statute not because we so much believe that he's 13 a consignee but because we're focusing and emphasizing 14 the importance of the ability to have rights and power 15 to transfer property. 16 And in this case, 100 percent of the rights 17 exist with DIRECTV. They must approve of the 18 subscriber. They have to go through a credit check with 19 DIRECTV before the equipment is installed. 20 Also it's important to note that the taxpayer 21 does not incur any advertising expenses to solicit 22 clients only because DIRECTV pays for 100 percent of 23 these advertising expenses. 24 DIRECTV controls the contents of the 25 advertising and the pricing. And, ultimately, the 26 client is just like it's reimbursed for its advertising 27 expenses, it's also reimbursed for any purchase of 28 equipment as well. He never really purchases equipment. 14 1 There is a line of credit that he holds with the 2 distributor. And, so, this line of credit -- actually, 3 it fluctuates. It shows that there -- you know, he goes 4 and purchases or acquires, if you will, equipment, a 5 certain -- bulk units and, alternately, thirty days 6 later those units are actually credited to the account. 7 So, it's hard for me to say that, you know, 8 somebody's purchasing something when you are reimbursing 9 -- when you are getting reimbursed 100 percent. 10 Likewise, it's hard for me to say that I'm actually 11 advertising something when I have no control over the 12 contents of the advertising for solicitation purposes 13 and I am being reimbursed 100 percent as well. 14 MS. YEE: Thank you, Mr. Salazar. 15 Anything further? 16 MR. SALAZAR: No. 17 MS. YEE: Okay, thank you. 18 Questions, Members? 19 Ms. Steel? 20 MS. STEEL: To the taxpayer, that Department 21 used $155 per unit to compute a markup of 19.03 percent. 22 And in your opinion what is the normal selling 23 price and what's the proper markup? 24 MR. SALAZAR: Well, in my opinion, the taxpayer 25 has no control over the sales price of the equipment, 26 just like it has no control who the subscriber will be. 27 They have no control over who -- the amount 28 they will charge a subscriber on the equipment. 15 1 Ultimately, the subscriber is not charged anything for 2 the equipment, only because he's reimbursed for -- for 3 the cost of the equipment. 4 So, in this case, I don't believe there should 5 be any markup when there's never a purchase on the 6 equipment. He never purchased the equipment. There is 7 no cost. 8 And, likewise, he's never selling the 9 equipment, so -- 10 MS. STEEL: So, just getting directly from the 11 DIRECTV and then just did it? 12 So, there is no markup at all? 13 MR. SALAZAR: Not that we -- no, there is no 14 markup. He is getting reimbursed. 15 He's an installer of equipment. He -- he's not 16 involved in any aspect of the equipment -- in 17 programming it, he's not involved in understanding the 18 logistics of how the equipment works. He installs the 19 equipment. He knows how get a ladder. He knows how to 20 wire the equipment to a satellite dish. He knows how to 21 go on a roof and install it. 22 As far as the contents of how the programming 23 works, they need to get permission directly from DIRECTV 24 before they go out there. And once they're out there 25 and they install everything, they actually make a phone 26 call with the subscriber present to authorize DIRECTV to 27 send the proper signal so that they can go ahead and 28 operate that. 16 1 MS. STEEL: So, how did we come up with that 2 19.03 percent markup? 3 MR. LAMBERT: What it -- what it was, there 4 is -- the Petitioner is correct, there is no separate 5 billing -- 6 MS. STEEL: Right. 7 MR. LAMBERT: -- for that amount. 8 What it is is if you -- we found -- no, not 9 found. 10 In the contract it states that if you don't 11 subscribe for at least a year that you'll be charged 12 $155 for the receiver. And I believe there is also 13 something if you don't subscribe to the service within a 14 certain period of time that there is also that charge. 15 But what we did is we used that amount, that 16 $155, as a fair retail value and, basically, compared it 17 to all their purchases of receivers, which equaled about 18 $130 apiece and then took the 155 sales price over $130 19 and came up with the 19 percent. 20 MR. HANKS: Ms. Steel, if I could add too? 21 We have copies of the satellite application 22 forms in our materials. It looks likes Exhibit 4. 23 Some of those exhibits identify that selling 24 price for $155. That's where the auditor derived that 25 information for this audit price. 26 MS. STEEL: Okay. And then I just got the 27 letter that the DIRECTV's been collecting sales tax 28 since 2006. 17 1 So, did we check beforehand that they been 2 collecting the sales taxes? 3 MR. LAMBERT: Did we check with Direc -- 4 MS. STEEL: Yeah, because DIRECTV is the one 5 getting money when they sent out the equipment, they're 6 the one installing. So, to me, that DIRECTV's the one 7 collecting all the money, means they have to collect the 8 sales taxes. They are just doing only installation at 9 this point. 10 MR. LAMBERT: Right. Starting in March of 2006 11 `DIRECTV started billing their subscribers for monthly 12 rental on the receiver and collecting tax on that amount 13 and were remitting it to the State of California. 14 MS. STEEL: So, they are actually responsible 15 for those sales taxes? 16 MR. LAMBERT: Yes. 17 MS. STEEL: That's why they started working on 18 it. So, they didn't collect from 2000 -- this tax 19 period from 2001 to 2004 means that they actually owe 20 the sales tax. 21 Mr. Tucker has been shaking his head. 22 MR. TUCKER: Yes, I am sorry, Ms. Steel. 23 There is an agreement explicitly between the 24 Petitioner -- 25 MS. STEEL: Oh, I got that. 26 But, you know, that agreement is an agreement 27 that when the sales of DIRECTV start collecting -- it's 28 been collecting the money from the consumer side and in 18 1 2003 they changed it and they decided to collect sales 2 tax means they are responsible for sales taxes. That's 3 why they are doing it. 4 If they're not, why suddenly they change the 5 policy and start collecting those sales taxes? 6 MR. TUCKER: The reason they changed, 7 Ms. Steel, is because they went from selling the 8 equipment to actually leasing the equipment. So, it's a 9 complete change in business model by DIRECTV. 10 MR. HANKS: And that happened in 2006. 11 MS. STEEL: The cost of the equipment they can 12 pay -- before we had another case that had or have -- 13 it's a long day, so, you know, since yesterday -- so, 14 you know, you can pay up front for the cost when you 15 rent the things out, but let's not go that far. 16 MR. TUCKER: Right. 17 MS. STEEL: But you know, so, they are 18 collecting sales taxes now means that they are the ones 19 responsible. 20 So, they figured out that, you know, this -- 21 MR. TUCKER: Unfortunately -- 22 MS. STEEL: -- payor -- 23 MR. TUCKER: I apologize. 24 MS. STEEL: Sorry. 25 MR. TUCKER: Unfortunately, Ms. Steel, the 26 contract differs and their own practices differ. 27 The contract states -- or the agreement between 28 DIRECTV and the Petitioner states that Petitioner is the 19 1 retailer of the equipment. Furthermore, their actions 2 show that they're the retailer. Because they purchased 3 this equipment under a resale certificate stating that 4 they are the retailer of the equipment. 5 MS. STEEL: No, but they're -- the DIRECTV's 6 been collecting all of the money, though. 7 MR. TUCKER: Not during this period. During 8 this period it was the responsibility of the Petitioner 9 to collect and report the sales tax on these retail 10 sales. 11 MS. STEEL: I have one more question that 12 Mr. Lambert just said that there is no delay by the 13 Department. 14 But I saw there was a delay, we kept changing, 15 you know, people retire, people quit and, you know, so, 16 we really delayed that. 17 So, you are saying that we didn't delay at 18 all -- at least there is a few months that we delayed 19 that I see it here. So, please don't say just, you 20 know, we are not responsible for delaying it because at 21 least a few months of 2007 and 2008, 2009, I think we 22 have to really relieve the interest because we kept, you 23 know, giving assignments to different attorneys and 24 different people. 25 So, we really delayed it, though. So -- 26 MR. LAMBERT: What I said, I didn't deny that 27 there were delays, what I -- 28 MS. STEEL: Thank you. 20 1 MR. LAMBERT: -- because there were delays. 2 What I'm saying is that they were unavoidable 3 and unforeseen. There was -- at the time that they were 4 assigned to the particular attorneys, there was no -- it 5 wasn't foreseen that they were going to transfer out of 6 the Department. 7 And then the Petitioner, which is his right, 8 asked for another Appeals conference, which -- a second 9 one -- which caused there to be a delay in the results 10 of this case. 11 MR. SALAZAR: Can I interject? I do have 12 a point to make on that issue. 13 There was changes with an audit as well. We 14 went through multiple auditors before we got to this 15 point as well. 16 MS. STEEL: I got that. That's why I am 17 asking. 18 MR. SALAZAR: Before then there was actually -- 19 MS. YEE: Mr. Salazar, I'm going to have you 20 stop. 21 MS. STEEL: Thank you, Mr. Lambert, for 22 admitting that there was a delay because of the 23 Department, at least few months. 24 Right, you agree? 25 MR. LAMBERT: I agree there were unforeseen and 26 unavoidable delays. 27 MS. STEEL: There was. 28 MR. LAMBERT: There were delays. Well, I think 21 1 it says it's caused by the Board -- I don't have total 2 recall on exactly what the section says, but I believe 3 it says -- 4 MR. HORTON: I would look it up. 5 MR. LAMBERT: Yeah, we could and I could 6 probably find it here, but -- 7 MS. YEE: That's okay. 8 MR. LAMBERT: -- I believe it says it's 9 unreasonable delays that are caused by the Department. 10 And I don't believe in this case they were unreasonable, 11 they were just unexpected. 12 MS. STEEL: It's unreasonable or unexpected 13 delay is delay for taxpayer because they have to pay 14 interest, right? 15 MR. LAMBERT: That's right. 16 MR. HANKS: We're certainly mindful of that as 17 well, Ms. Steel. 18 MS. STEEL: Thank you. 19 MR. HANKS: Yes, we're aware of that. 20 And there were communications with the 21 Petitioner and representative regarding that accrual of 22 interest. 23 And that's why we remind them, several times, 24 actually, through the Appeals process that interest 25 continues to accrue. We certainly encourage payment 26 just as soon as they can to prevent the further accrual 27 of interest. 28 MS. YEE: Okay, we can deliberate on that when 22 1 we get to the matter. 2 Okay, thank you. 3 MS. STEEL: Thank you. 4 MS. YEE: Other questions, Members? 5 Ms. Alby, please? 6 MS. ALBY: Thank you. 7 Prior to the March 2006 change in the DIRECTV's 8 practice or contracts, whatever, what happened in the 9 event that the satellite dish that was installed by the 10 taxpayer, the subscriber contract expired, they went 11 to -- what's the other one, DISH, whatever, Comcast, 12 whatever -- what happened to that equipment? 13 Does the -- did the taxpayer get to keep that 14 equipment and re-install and it and charge someone else? 15 MR. LAMBERT: It depends. If you subscribed 16 for a length of time -- and it was generally 12 months 17 or 24 months, I believe, depending on the type of 18 receiver it -- it became the subscriber's property and 19 they could do with it as they pleased. 20 It did not go back to the Petitioner in those 21 cases. It didn't go back to DIRECTV as well, which -- 22 MS. ALBY: Well, let's say a subscriber 23 defaulted, did not complete their agreement. What 24 happens -- whose property was that satellite dish? 25 MR. LAMBERT: If they didn't subscribe? 26 MS. ALBY: Finish their contract? 27 MR. LAMBERT: Then there was $155 charge for 28 that. And then it would revert -- my understanding, 23 1 revert back to DIRECTV -- or revert over to DIRECTV. 2 MS. ALBY: So, we're treating this taxpayer as 3 though they had personal property they were selling of 4 their own? 5 And yet if the -- I guess I am going to ask 6 the taxpayer to comment on that. 7 MR. SALAZAR: All right. And, actually, if 8 they ever defaulted on the payment or did not adhere to 9 the contract, terms of the contract, then they had to 10 return that equipment over to DIRECTV. DirecTV would 11 actually send a prepackaged box, a prestamped box so 12 that they received the equipment. The equipment never 13 reverted back to the installer. And, so, that was the 14 case. 15 And, by the way, this equipment -- I mean, it 16 didn't really matter if it was within the 12-month 17 period or three or four or five years, it's the same 18 policy. 19 And you may want to elaborate on that, John, 20 that if -- if somebody has held this equipment for five 21 years and they decide to cancel with DIRECTV, who gets 22 that equipment at this point? 23 MR. SBAROUNIS: They recommend -- 24 DIRECTV recommended that it came back to them. But if 25 it was within the 12 months, DIRECTV was the one that 26 backcharged them for that equipment and then was dealing 27 directly with them. 28 MR. SALAZAR: Right. 24 1 MR. SBAROUNIS: We would no longer deal with 2 them. 3 They would get a bill from DIRECTV for not 4 fulfilling that contract within the one year period. 5 MS. ALBY: So, despite -- they seem like the 6 pass-through. They were a pass-through from DIRECTV to 7 their subscriber, really. They didn't have any rights 8 to the property. 9 I don't understand. It seems to me that was an 10 easy thing for DIRECTV to do, to not have to pay the 11 sales tax, say, "They own the equipment." 12 Because, essentially, sounds like in 2006 they 13 realized they were responsible for the sales tax. So, 14 they changed their procedure. 15 But the relationship with the -- with the -- 16 these -- the taxpayer, stayed the same. They continued 17 to install the equipment, like they did pre 2006. 18 So, it seems almost -- I don't understand why 19 we aren't telling DIRECTV they owe us money. 20 MR. SALAZAR: Right. 21 MR. HANKS: The item I was thinking about, 22 Ms. Alby, is -- we've got copies of the contracts that 23 Petitioner entered into with DIRECTV that specifically 24 identify whose responsibility it is to charge the tax 25 reimbursement, be responsible for the payment of the tax 26 reimbursement. All of that responsibility in this case 27 rested with the installer, according their agreement 28 with DIRECTV. 25 1 We've got copies of invoices that identify the 2 tens of thousands, maybe hundreds of thousands of 3 dollars worth of purchases that Petitioner is making of 4 this property. 5 Yes, they're installing it, probably, for the 6 most part, in most of these instances, the subscribers 7 subscribed to the service for a period of a year. At 8 that time the property would revert to the purchaser. 9 It certainly appears, based on the information 10 we have, that -- that the installer was the seller of 11 the personal property in this case. 12 Now it could be later -- 13 MS. ALBY: How can you sell something you don't 14 own? 15 I mean, that -- just logic doesn't let me got 16 there. 17 MR. HANKS: But they're issuing a resale 18 certificate for the acquisition of that property from 19 DSI. We have copies of those invoices in the audit 20 working papers that identify these purchases. 21 So, the sales of the property are -- 22 MS. ALBY: That's the paper. That's the paper. 23 Reality was they didn't get property back if 24 something happened, that you say they owned and that 25 DIRECTV says they own, although they didn't own it. 26 MR. TUCKER: Ms. Alby, they were paid by 27 DIRECTV through credits. 28 So, in essence, they were paid for that 26 1 property. And it as if a sale -- the wrinkle to this 2 case is that rather than customers paying Petitioner 3 directly, it's going through a third party. 4 The payments are sent to DIRECTV. DirecTV then 5 pays Petitioner its portion of those proceeds. And 6 these proceeds are received over a period of time. 7 So, unlike most transactions in which you walk 8 into the store and you buy something and you pay for it 9 directly, here we have a case, because of DIRECTV's 10 obligation, because of DIRECTV's satellite service, for 11 convenience the customer is paying DIRECTV and DIRECTV 12 takes the portion of the proceeds related to the sale of 13 the tangible personal property by the Petitioner and 14 then funnels them to the Petitioner. 15 MS. ALBY: I am a DIRECTV subscriber, I have 16 DIRECTV. 17 I can tell you what, the guy that installed 18 this doesn't own it. I mean, I know that. 19 If we default, guess who gets the stuff back? 20 It isn't the installer. 21 And, of course -- taxpayer, would you kind of 22 help out? 23 MR. SALAZAR: Absolutely, absolutely. 24 As a matter of fact, what they're saying is 25 correct. It's been -- it's been the same thing before 26 March 2006 and it continues to be the same thing now. 27 So, why has DIRECTV made a decision to collect 28 use tax? 27 1 I mean, why -- 2 MS. ALBY: That's a very good question. 3 Anybody know? 4 MR. TUCKER: We'd have to ask DIRECTV. 5 I mean, we don't know why they changed. 6 I mean -- they made a decision that they 7 changed their business model, Ms. Alby. That's all we 8 know. 9 MR. LAMBERT: Ms. Alby, I'd have to ask when 10 did you start subscription with DIRECTV? 11 MS. ALBY: It -- 12 MR. HORTON: A month of Sundays. 13 MS. ALBY: -- I can't remember, to tell you the 14 truth. 15 MR. LAMBERT: Was it before March of '06 or -- 16 MS. ALBY: It could have been. 17 MR. LAMBERT: -- because if it was after March 18 of '06, their addendum now is that DIRECTV owns that 19 property. 20 And when it's leased -- when you are done with 21 that lease, it comes directly back to DIRECTV. Before 22 that time the subscriber kept that receiver and the 23 dish. 24 MR. SALAZAR: I'd like to interject here. 25 That's not true. I actually have a pre-2006 26 agreement which, by the way, we have provided to the 27 auditor and you guys used as an exhibit. 28 MS. YEE: What is does it say? 28 1 MR. SALAZAR: It says, 2 "Consequences of your failure to maintain an 3 agreement. 4 If you fail to maintain and pay for 12 5 consecutive months of the required programming 6 package, you agree that DIRECTV may charge you 7 a prorated fee of up to $150, including the 8 access card inserted into each DIRECTV 9 system receiver. The unit must be returned to 10 DIRECTV in working order, normal wear and tear 11 expected. And see DIRECTV.com or call 12 1-800-DIRECTV for "details." 13 This was dated August 9th of 2004. 14 MR. LAMBERT: Which is -- we don't dispute 15 that. That's basically that 12-month period. 16 If you don't keep -- you don't keep it, you 17 pay -- either you pay $155 or you have to give back that 18 receiver -- back to DIRECTV. 19 After it goes one year, that's not the case. 20 It's the -- before March of 2006, before they had that 21 lease addendum, it was a subscriber's. 22 In fact, during that time period you could also 23 buy your own equipment. Of course, DIRECTV would have 24 to give you the chip that -- to go into their for it to 25 work, but -- there is no dispute that after 12 months, 26 either you pay $155 or that goes back to DIRECTV. 27 MS. ALBY: All right. I'm having trouble 28 tracking all this now. 29 1 MR. LAMBERT: Yes. 2 MS. ALBY: I just -- my feeling is that their 3 practice hasn't changed, just -- DIRECTV still owns the 4 property, regardless. 5 I mean, they're going to get it back if they 6 default -- pre 2006, post 2006, nothing changed, except 7 they are now collecting taxes from the subscriber. 8 So, that I just -- it's just a logical 9 conclusion to me. That's why I'm -- I don't think 10 either one of us are going to convince the other. 11 So, let me go, if I could, to the penalty 12 issue, just to add my comments to Member Steel. I do 13 think, even though our change was moot, it wasn't 14 malicious in any way, it wasn't through any serious 15 error on our part, but we did delay the process 16 through -- 17 MS. YEE: The interest? 18 MR. HORTON: The interest. 19 MS. ALBY: -- the interest, yes, through 20 unforeseen things. 21 Taxpayer, in my mind, shouldn't have to bear 22 that burden. 23 If I had an auditor changed on me, I'd ask for 24 another hearing. I mean, these things are complicated. 25 The issues are very, very important and I would -- I 26 would do the same. 27 I would not -- I wouldn't want to trust anyone 28 from the government to make sure they read everything 30 1 and knew everything. I mean, they had a right to have a 2 hearing and I don't think they should be penalized. 3 Which brings me to the amnesty penalty, 4 interest penalty, did the taxpayer ask in the Appeals 5 hearings to be relieved of that at all? Do you know? 6 MR. LAMBERT: I -- 7 MR. SALAZAR: Yes, of course, we did. 8 MR. LAMBERT: I believe they did. I am not 9 sure if a form was signed or not, but it was an issue at 10 the Appeals. 11 MS. ALBY: So, if they need to do that, can 12 they do that here if they haven't? 13 Have you? 14 MR. SALAZAR: Yes, we did. 15 MS. ALBY: They did. 16 Okay, thank you. 17 MS. YEE: Thank you, Ms. Alby. 18 Other questions, Members? 19 MR. HORTON: Just for a point of clarification? 20 MS. YEE: Mr. Horton, please? 21 MR. HORTON: There are two different types of 22 transactions here, situations, rather -- one, the -- the 23 equipment -- the purchaser doesn't fulfill the agreement 24 to maintain the service beyond a year. What happens 25 then in the audit? How is the transaction treated? 26 MR. LAMBERT: I believe it would still -- I 27 don't believe there was any adjustment for -- for that 28 in the audit. 31 1 MR. HORTON: So -- 2 MR. LAMBERT: In other words, it was still 3 treated as a retail sale. 4 MR. HORTON: As a retail sale by the taxpayer? 5 MR. LAMBERT: By the taxpayer. 6 MR. HORTON: Okay. 7 MR. LAMBERT: And I'm not certain if that 8 circumstance came up. I would assume it probably would 9 have, but I'm unaware of if it did how often it did. 10 MR. HORTON: Without asking the taxpayer, which 11 I'll do later, let's presume it did come up and the 12 homeowner returned the equipment and was charged a fee 13 for that -- for the equipment. 14 What happens? 15 MR. LAMBERT: They return the equipment or -- 16 well, there's two different scenarios, either -- 17 MR. HORTON: They return the equipment and 18 they're charged a prorated fee for the portion of time 19 in which they used the equipment. 20 MR. LAMBERT: I don't believe they're charged a 21 prorated fee. 22 MR. HORTON: What happens -- what happens if 23 you cancel the contract within a year? 24 MR. LAMBERT: That -- you either have to pay 25 $155 or the -- 26 MR. HORTON: Who do you pay it to? 27 MR. LAMBERT: You would pay it to DIRECTV. 28 MR. HORTON: And is that $155 taxable? 32 1 What are they buying? Are they buying a 2 service or are they buying equipment? 3 Is that a lease? What is it? 4 MR. LAMBERT: That is going back between 5 DIRECTV -- if the equipment was returned, it wouldn't 6 come to the taxpayer in this particular case. 7 If the equipment came back and they were 8 charged, there would have to be some type of adjustment 9 made for that return. 10 MR. HORTON: When you say there has to be an 11 adjustment, elaborate. 12 MR. TUCKER: Can I -- excuse me, can I speak, 13 Mr. Horton? 14 MR. HORTON: Sure. 15 MR. TUCKER: My understanding is that this fee 16 that's paid, what happens -- and Mr. Lambert can correct 17 me if I'm wrong -- the Petitioner makes the contract to 18 sell and install the equipment and the dish. 19 Once that sale occurs, they are reimbursed 20 because the their customer is going to send their money 21 to DIRECTV. And, in that sense, it acts much like a 22 financing agreement because they are paying a small 23 amount over a period of time. So, they're sending 24 whatever their monthly payment is into DIRECTV. 25 DIRECTV, however, when they get this money, 26 they turn their -- turn the proceeds over to Petitioner, 27 that would equate to the sale of that equipment. And, 28 in essence, they are acting much like a finance company, 33 1 more or less -- much as if you went out to buy an 2 automobile. The bank will -- and although we don't have 3 the same circumstances here, they hold title to that 4 vehicle until it's -- until you have paid off your loan. 5 In essence, that's what DIRECTV is doing. They 6 are collecting money from the customer up until the 7 point that equals the amount that they have paid to 8 Petitioner and they determine that that's 12 months. 9 If you breach your agreement with DIRECTV prior 10 to that time, then you're required to, as I understood 11 it, pay $155 or send the equipment back. But that's to 12 cover DIRECTV because they've already given the money to 13 Petitioner. 14 Petitioner has already received the proceeds 15 from the sale. The sale took place between Petitioner 16 and its customer. This is simply DIRECTV's way of 17 protecting itself because it's already paid out that 18 money. So, after the one year period, after you've been 19 with a service for a year, then if you end service or if 20 you end the agreement with DIRECTV -- and I understand 21 in certain circumstances it may have been 24 months -- 22 but once your commitment has ended, the customer keeps 23 the equipment, it doesn't go back to DIRECTV at that 24 point. 25 That was a whole point is that they were 26 purchasing and that's why we have a different treatment 27 today, because if you're leasing, then you don't take 28 full title to that, you simply have for the period of 34 1 the lease. 2 MR. SALAZAR: I'd also like to add that before 3 March 2006 DIRECTV was collection $4.99 per month per 4 receiver. They started calling -- classifying that 5 $4.99 per receiver as a lease fee effective March 2006. 6 So, they've always collected $4.99, please per 7 receiver, before March 2006 and after 2006. The 8 difference is that they started -- they referred to that 9 fee as a lease fee to the addendum and began collecting 10 use tax on that. 11 Nothing has changed. So, if it wasn't their 12 equipment, why would they collect $4.99 per month per 13 receiver? 14 I have a contract here (indicating). 15 MR. HORTON: So -- so, prior to -- 16 MR. HANKS: If we can respond to what the 17 Petitioner just stated, just so we don't forget the 18 comment that he spoke of? 19 MR. HORTON: Sure. 20 MR. HANKS: He was referencing the $4.99 charge 21 that DIRECTV is charging. And we've got a copy of an 22 invoice that shows that amount too, but we note that 23 that's for an additional receiver. So, that's over and 24 above what your standard service is. 25 If you order additional receivers for bedrooms 26 in your house or dens in your home, then that's -- 27 that's treated separately, apparently by DIRECTV. 28 MS. MANDEL: But -- I'm sorry, because you just 35 1 mentioned that. 2 But is the install -- is the taxpayer coming to 3 someone's house and putting in three receivers and 4 you're picking up three receivers on his tax bill but 5 DIRECTV is then charging a couple of -- almost $5 for 6 the two additional receivers? 7 MR. TUCKER: On -- Ms. Mandel, on the receipt 8 we have, it -- it has it listed under subscription and 9 then it says "additional receiver." And that's simply 10 how it's titled. 11 And it's because you have above and beyond. 12 MS. MANDEL: You think it's -- it's an 13 additional subscription cost? 14 MR. TUCKER: That's how it's billed. 15 MS. MANDEL: And now they're billing the same 16 charge and calling -- and somehow charging tax on it or 17 you don't know? 18 MR. TUCKER: I don't know. 19 MR. SALAZAR: The same, just changed the 20 name. 21 MR. HORTON: Is there -- of the taxpayer, is 22 there ever a situation where you are not reimbursed for 23 the equipment? 24 MR. SBAROUNIS: No. 25 MR. HORTON: You are -- 26 MR. SBAROUNIS: Everything reverts back to the 27 end user, which is the subscriber. 28 MR. HORTON: So, regardless of the contract 36 1 between the -- between the homeowner and DIRECTV, you're 2 always reimbursed for it? 3 MR. SBAROUNIS: Reimbursed for everything, 4 yeah -- yes. 5 All that happened on that 4.99 is identical. 6 The 4.99 was called one thing in 2005 and it was called 7 something else in 2006, it's still the 4.99. 8 I don't know what happened there between 9 anybody paying or not paying taxes. 10 MR. HORTON: What does the contract between the 11 DIRECTV and the customer say relative to these fees? 12 They call it fees? They call it reimbursement? 13 Do they mention failure to return the 14 equipment? Do they tie it to the tangible personal 15 property in any way whatsoever? 16 MR. TUCKER: Mr. Horton, the notice that they 17 would have to pay that $155 was actually on the receipt 18 between the Petitioner and the customer. 19 So, they were given -- and that's included as 20 the exhibits to the D & R. 21 MR. SALAZAR: Yes, I also want to add to that 22 statement that he made. 23 The exhibits that they provided show this front 24 page. We provided the auditors with both the front page 25 and DIRECTV's application as well. 26 The exhibit only shows this front page and not 27 the second page -- same signature, same dates. This 28 agreement right here (indicating) was not written by the 37 1 taxpayer, but written by DIRECTV. 2 And you guys are not using that as an exhibit 3 and I just wanted to bring that forward now that what 4 was provided was simply the front page but not the 5 second page. 6 The second page is not my client's agreement. 7 This is between DIRECTV and subscriber. 8 MR. HORTON: Okay, thank you. 9 MS. YEE: Thank you, Mr. Horton. 10 Other questions, Members? 11 MS. ALBY: I do. 12 MS. YEE: Ms. Alby, please? 13 MS. ALBY: If anyone knows, anyone, I was 14 wondering -- surely -- this is a huge company, DIRECTV, 15 are there other there -- there's got to be other 16 situations like this out there. 17 How did -- yes? 18 MR. SALAZAR: Yes, I'd like to elaborate on 19 that very statement. 20 When I won that case dealing with the same 21 issue, I'm now private -- I'm working privately now as a 22 CPA. 23 And I went ahead and I sent out questionnaires 24 to other installers in Southern California, letting them 25 know that if they had this issue, to contact me because 26 I was very familiar with the process. That's how I 27 ended up getting my client, by the way, through that 28 correspondence. 38 1 But I also was able to contact 20 other 2 installers and everybody was in the same exact 3 situation. Unfortunately, people are afraid and many 4 people were just paying the tax on the assessments. But 5 there was a lot of ambiguity as to that very issue. And 6 a lot of these people are not represented by CPAs or 7 attorneys oftentimes and they are intimidated, they pay 8 the tax. 9 But in the case at hand, I did, obviously, this 10 is totally informal, but I did make my phone calls and I 11 went to inquire about this issue because I am a 12 businessman and I'm trying to help people as well. And 13 I had communication with other installers and everybody 14 dealing with the same exact issue. This is not special, 15 by any means. 16 MS. STEEL: Madam Chair? 17 MS. YEE: Mr. Horton, then Ms. Steel. 18 MR. HORTON: Here's my concern is that when -- 19 if the property was repossessed, let's say, turned it 20 back in, would get to keep the property in exchange for 21 compensating DIRECTV? 22 I am good on the original transaction of the 23 sale of the tangible personal property to the purchaser 24 and so forth, but when the transaction is -- when the 25 contract is breached for some reason and, in turn, you 26 get to keep the tangible personal property if you pay a 27 fee, whether you lose it or whatever happened to it, you 28 get to keep the tangible personal property and, so -- 39 1 I'm going to pull out the law. Maybe Mr. Levine can 2 give some clarity so I don't have to do that. 3 But let's take a hypothetical situation and say 4 this was a car. And you get to keep the car if you pay 5 us $150, or a proporti0onate to the value of the car, 6 what then? 7 MR. TUCKER: I believe you are just completing 8 your original contract agreement. Would you have 9 negotiated the sales price at the beginning of the 10 period. 11 MR. HORTON: You're paying additional 12 compensation in order to be able to do that. 13 In this case you paid off the car or maybe you 14 didn't. 15 MR. TUCKER: I don't think you did. 16 MR. HORTON: In this case DIRECTV paid off the 17 car. So, the finance company paid off the car to the 18 broker and is now reimbursing themselves proportionally, 19 is that how you're viewing this? 20 MR. TUCKER: I guess the reason I offer that 21 example is simply to show that, in essence, that DIRECTV 22 is financing the arrangement. They are collecting these 23 proceeds over a period of anywhere from 12 to 24 months. 24 And, so, in order for them to completely 25 satisfy the selling price, they have put in this $155 26 charge or whatever the amount might be. 27 MR. HORTON: Okay, I am good. 28 MS. ALBY: One more? 40 1 MS. YEE: Ms. Alby -- I am sorry, Ms. Steel 2 then Ms. Alby. 3 MS. ALBY: I'm sorry. 4 MS. STEEL: You just talked about there is case 5 that you had. What case you are talking about? 6 Did you come to the BOE hearing or -- 7 MR. SALAZAR: It never got to that point. We 8 had an audit. We got with high ranking auditors and -- 9 in Southern California from the West Covina office and 10 Culver City -- 11 MS. STEEL: BOE office? 12 MR. SALAZAR: BOE office and they consulted 13 with the technicians up here in Sacramento as well, 14 headquarters, and as a result of that audit, actually, 15 through the process of the audit, I requested some 16 guidance in writing and discussed how I got my hands on 17 the memo. 18 MS. STEEL: So, you had those in writing? 19 MR. SALAZAR: I do. I have a memo from the 20 Board of Equalization stating the facts, citing the 21 statute and citing case law as to taking -- as to why it 22 is that the Installer was not -- as to why he was not a 23 retailer, but, in fact, an agent of DIRECTV. 24 This is by the Board of Equalization. This was 25 just -- I think it was 36 months ago. 26 MS. STEEL: Okay. We have -- so, DIRECTV sells 27 it. They are installing it. And when they want to 28 return it, it goes directly to DIRECTV, the equipment? 41 1 MR. LAMBERT: Well, it doesn't work exactly 2 like that. And during this time period if it went past 3 a year, they just kept the property and that's what 4 happened in most of the instances. 5 MS. STEEL: So, within that one year period 6 DIRECTV gets it? 7 MR. LAMBERT: During the audit period the 8 customer kept it. 9 MS. STEEL: During when -- in one year? 10 MS. ALBY: If they defaulted. 11 MR. LAMBERT: If they defaulted -- 12 MS. STEEL: If the customer decides -- 13 MR. LAMBERT: -- yeah, they'd either have to 14 pay $155 or return it. 15 MS. STEEL: Return to DIRECTV? 16 MR. LAMBERT: They'd have to give it to 17 DIRECTV. 18 MS. STEEL: Not to him? 19 MR. LAMBERT: That's correct. 20 MS. STEEL: So, he's just installer here? 21 MR. TUCKER: Ms. Steel, he was paid for -- 22 MS. STEEL: Who owns that? 23 MR. TUCKER: The customer owns that. 24 MS. STEEL: DIRECTV sells it. 25 MR. TUCKER: DIRECTV doesn't -- the agreements 26 explicitly state that Petitioner sells it. The 27 agreements specifically between DIRECTV and Petitioner 28 state, "You are the retailer." 42 1 Petitioner then -- 2 MS. STEEL: Then why at they start collecting 3 the sales taxes? 4 I keep going back to the same spot because why 5 2003 suddenly they changed that we are collecting sales 6 taxes. 7 MR. TUCKER: It's actually -- 8 MS. KELLY: If they're the retailer, then they 9 going to keep doing the same practice that they been 10 doing. 11 MR. TUCKER: -- the reason it changed, 12 Ms. Steel, is because they actually changed practices. 13 They went from selling the equipment to leasing 14 the equipment. Those are two completely different types 15 of transactions. 16 MS. STEEL: But the $4.99 was there beforehand 17 too. 18 MR. TUCKER: It simply -- 19 MR. HANKS: If I could just add with respect to 20 4.99 charge, that that does relate to an additional 21 receiver, but it's a service. It relates to the service 22 subscription for you to have access to the pay per view 23 type -- 24 MS. STEEL: But isn't that what you said they 25 changed that and it's been leased, right? 26 MR. SALAZAR: Again, and I cannot emphasize 27 this enough, nothing has changed. Nothing has changed 28 other -- 43 1 MS. STEEL: Amounts is all same. 2 MR. SALAZAR: -- than they started calling that 3 4.99 a lease, that's all they did. Nothing has changed. 4 And also I want to reiterate the fact that this 5 equipment is useless if you are not working with 6 DIRECTV, whether you are past 12 months -- you cannot 7 use that same equipment with DISH network or any other 8 provider. That equipment is useless. 9 MS. STEEL: Thank you. 10 MS. YEE: Thank you, Ms. Steel. 11 Ms. Alby? 12 MS. ALBY: Thank you, Madam Chair. 13 I was -- Mr. Horton used a term about DIRECTV 14 being a finance company and I think we got that from 15 something you said. 16 I just want -- they aren't -- their business is 17 not finance, their business is leasing, selling, 18 satellite dishes and service. That is the business. 19 And, so, this -- they're quite clever in this, 20 how they've structured this. 21 Can you help me, taxpayer, with -- explain 22 again what DSI does? You are required to work through 23 them? 24 MR. SALAZAR: Yes. DSI has a relationship, an 25 agreement with DIRECTV, where they provide the equipment 26 to the installer. They actually ship the equipment to 27 the installer. The installer orders equipment on an 28 as-needed basis, typically in bulk, in bulk, they'll 44 1 order 50 receivers at a time, for example, directly from 2 the distributor. 3 And they have a line of credit with the 4 distributor. And, so, the distributor's always keeping 5 tabs how much equipment is being sent to the premises 6 for installation and how much of that equipment is 7 actually being -- how much has been reimbursed to the 8 installers as well. 9 So, ultimately, it's also a pass-through, a 10 conduit, if you will, a flow-through as well. There 11 is -- it's not -- there is two entities, if you will, 12 between DIRECTV and the subscriber and what happens to 13 be the distributor and dealer happens to be the 14 installer. 15 The installer, by the way, per agreement, is 16 not allowed to touch money from or collect monies from 17 the subscriber, if he does it's means -- it's grounds 18 for termination. 19 MS. ALBY: And if I could -- I thank you, 20 taxpayer. 21 Just so that I understand, my understanding is 22 that DIRECTV is in complete control of the entire 23 transaction, it does all of the advertising, if the 24 customer wants to subscribe, DIRECTV must first 25 authorize that customer -- we went through it -- credit 26 check. 27 MR. SALAZAR: Yes. 28 MS. ALBY: I heard that. 45 1 You're required to tell the customers that they 2 will be charged $155, so, you're following orders from 3 DIRECTV. They require its agent installers to purchase 4 the equipment from just two companies, DSI and the 5 other? 6 MR. SALAZAR: Perfect 10. 7 MS. ALBY: Perfect 10. You can't get the 8 equipment from any other source You must follow the 9 strict set of rules if you want to be one of DIRECTV's 10 agents. And once the equipment is installed, you're -- 11 DIRECTV is responsible for all customer billing as well 12 as reimbursing taxpayer, you. 13 MR. SALAZAR: That is correct. 14 MS. ALBY: The customer continues to pay a 15 monthly fee to DIRECTV for lease of the equipment. 16 So, they are in charge of this? 17 MR. SALAZAR: Yes. 18 MS. ALBY: People that don't own it any more? 19 MR. SALAZAR: Yes. 20 MS. ALBY: From start to finish? 21 MR. SALAZAR: Yes. 22 MS. ALBY: That's what I wanted to make sure I 23 knew. 24 Thank you. 25 MR. SALAZAR: That is 100 percent correct. 26 MS. YEE: All right. I think it's a little -- 27 slightly different from that, but we won't prolong 28 this. 46 1 Mr. Horton, do you have another comment? 2 MR. HORTON: Yes, one question. 3 How do we handle this with telephones? 4 MR. LAMBERT: Well -- 5 MR. HORTON: There's a cancellation of the 6 phone and service. I know there isn't an installer 7 involved, but when the phone is cancelled, how do we 8 treat that extra fee associated with the cancellation of 9 the contract? 10 MR. LAMBERT: -- well, it's slightly different 11 in this particular case. And maybe I'll let Mr. Tucker 12 answer after I give my part. 13 But 1585 specifically relates to cell phones, 14 the bundle and unbundled -- 15 MR. HORTON: Right. 16 MR. LAMBERT: -- and, you know, if its less 17 than 50 percent and you're the consumer of that. 18 In this particular case they're two separate -- 19 two -- that regulation doesn't apply to this particular 20 case because the -- 1585 only relates to wireless 21 electronic devices. 22 I don't know if you -- 23 MR. TUCKER: And just to add onto that, the tax 24 is collected at the time the transaction takes place. 25 MR. HORTON: Initially? 26 MR. TUCKER: So, I'm assuming the rest will be 27 associated with a service cancellation. 28 MR. HORTON: Okay. 47 1 MS. YEE: All right. 2 MR. HORTON: Oh, yes, one other question. 3 You indicated that you received the memo -- 4 MR. SALAZAR: Yes. 5 MR. HORTON: -- and that there were 20 others 6 that were not collecting the taxes or had been advised 7 they didn't have to collect the tax? 8 MR. SALAZAR: Well -- 9 MR. HORTON: The memo -- let me ask the 10 question. 11 Was this memo pursuant to a written request 12 from you? 13 MR. SALAZAR: Yes. 14 MR. HORTON: You sent in a letter and you asked 15 the question and this was the answer to the question? 16 MR. SALAZAR: Well, no. Actually, we were 17 involved in an audit and -- full-blown audit. And we 18 took the position that the installer was an agent, not a 19 retailer. 20 And we dealt with the Principal Auditors at 21 these two offices. And with the consultation of 22 Sacramento, they reached a decision that agreed with our 23 position. 24 I requested -- after finding that they agreed 25 with the position, I requested that they provide me 26 something in writing stating just that only because I 27 wanted that for my records. 28 And I was provided with a copy of this 48 1 memorandum. Yes, it is internal, but I was provided 2 with a copy. 3 MR. HORTON: It wasn't directed to you, it was 4 an internal memo? 5 MR. SALAZAR: Yes, it does -- it's an internal 6 memo. 7 It scratches out the names of the taxpayers and 8 my name off it, but it's my case. 9 MR. HORTON: Thank you very much. 10 MS. YEE: Thank you, Mr. Horton. 11 Ms. Steel? 12 MS. STEEL: Just to the Department, you read 13 this, right? 14 MR. LAMBERT: That's correct. 15 MS. STEEL: So, how you respond that? 16 MR. TUCKER: Ms. Steel, it's different facts 17 and circumstances. 18 MS. STEEL: How it can be different? It's an 19 installer there. 20 MR. TUCKER: Because, 1, it takes place -- it's 21 written in 2007 and when this memo -- 22 MS. STEEL: Have we changed the law since 2007? 23 MR. TUCKER: What has changed and the reason 24 the facts are different is that when this memo was 25 written, they determined that they were only acting as 26 an agent of DIRECTV, that they weren't the actual 27 retailer. 28 Here we have the contract from DIRECTV that 49 1 states Petitioner is the retailer. And, so, we have 2 completely different facts that warrant different 3 treatment. 4 MR. SALAZAR: No, no, it's the exact same 5 contract. 6 They claimed it was misplaced and I have copies 7 of it. 8 MS YEE: Mr. Salazar -- 9 MR. SALAZAR: Sorry. 10 MS. YEE: -- stop. 11 Mr. Tucker, proceed. 12 MR. SALAZAR: I apologize. 13 MS. STEEL: I got that. Thank you. 14 MR. SALAZAR: Thank you. 15 MS. YEE: Okay, I think we've heard enough on 16 this. 17 Is there a motion? 18 MR. HORTON: Move to take it -- well, wait a 19 minute. 20 Considering what Mr. Levine has shared and the 21 discussion here today, I would suggest that we do a 22 30-30-30, giving the Department, if necessary, the 23 authorization if necessary to do a re-audit. 24 MS. YEE: Okay. That's fine. 25 Let me pose a question to Mr. Levine. Sounds 26 like there might be a desire on the part of the Board to 27 look at an adjustment to the interest, given the delay 28 with respect to the Appeals process. 50 1 So, at what point would that be appropriate for 2 the Board to consider? 3 MR. LEVINE: If you're going to do a 30-30-30, 4 then it would come back. 5 MS. YEE: Okay. 6 MR. LEVINE: And you could do it now or you 7 could do it later. 8 Another option is just to -- if you decide the 9 case and accept our recommendation to do a re-audit and 10 it wouldn't come back to you unless there was some 11 problem and you could leave it to our discretion to 12 bring it back to you if there was a dispute about the 13 numbers in the re-audit, there will still be a dispute 14 if you uphold the recommendation with the underlying 15 recommendation. 16 MS. YEE: Yes, yes. 17 MR. LEVINE: And, if you are going to do that, 18 then you should decide the interest relief question as 19 part of the motion today. 20 MS. YEE: Okay. 21 MS. STEEL: So, what that 30-30-30 30 will do? 22 MS. YEE: It essentially will allow time for a 23 re-audit and -- 24 MR. HORTON: Madam Chair? 25 MS. YEE: Mr. Horton? 26 MR. HORTON: Mr. Levine, would the Department, 27 in the 30-30-30 re-audit, have the discretion to relieve 28 the penalty or is that something -- 51 1 MR. LEVINE: No, that's something -- 2 MS. YEE: The Board has to. 3 MR. LEVINE: -- the Board has to decide. 4 MS. YEE: Yes. 5 MR. HORTON: Okay. 6 MS. YEE: It's interest, not penalty. 7 So, I want to just -- I guess typically when we 8 do a re-audit, although we have had a lot of discussion 9 on this matter, the cases aren't brought back for 10 another oral hearing. 11 MR. LEVINE: Right. 12 MS. YEE: And I'm -- I don't know that I would 13 feel differently about that, in which case I'm happy to 14 entertain the interest relief issue today, if Members 15 wish to do so. 16 MS. STEEL: I think we should relieve the -- at 17 least the interest of nine months, but there is a 18 motion. 19 MS. YEE: Yeah. I mean I think, Mr. Horton, 20 adding onto your motion -- I mean, I don't know where 21 you are on the interest relief issue, but it seems to me 22 that this matter was kind of handed around a few times 23 and, through no fault of the Petitioner. 24 But I think there was a discrete period between 25 December 3rd of 2008 and June 24th of 2009, so, it was 26 the day after the original due date of the D & R and 27 then the day that the case was assigned to the holder of 28 the second Appeals conference, but that would be a 52 1 discrete period that I would look at. It's not 2 something I generally do, but in this case it just 3 seemed like this case was handed off a couple different 4 -- several different times, multiple different times. 5 MS. ALBY: Does taxpayer have to fill out 6 that -- make a request for -- what is the status of the 7 amnesty? 8 MR. LEVINE: There was a request for relief 9 that is adequate. So, there is adequate foundation in 10 the record for the Board to make a decision without 11 further submission. 12 MR. SBAROUNIS: Can ask I ask something or -- 13 MS. YEE: Let us get clear on the issue first 14 and then I'll have you. 15 MR. HORTON: Madam Chair? 16 MS. YEE: Yes, Mr. Horton? 17 MR. HORTON: I wanted to ask the taxpayer a 18 couple of questions regarding the interest, if I may? 19 MS. YEE: All right. 20 MR. HORTON: Is it your opinion that your 21 liability should be zero, that there is no tax due? 22 MR. SALAZAR: Yes. 23 MR. HORTON: That would be the reason that you 24 didn't make payments in order to stop the interest from 25 accruing -- 26 MR. SALAZAR: The reason -- 27 MR. HORTON: -- even to the extent that you 28 felt you had a liability? 53 1 MR. SALAZAR: The reason payments were not made 2 is because, unfortunately, we're dealing with an 3 insolvency situation and we cannot pay. 4 MR. SBAROUNIS: Yeah, we -- I never -- 5 MR. HORTON: No, I am not suggesting that you 6 should pay, I am just asking from your assessment it 7 appears that -- 8 MR. SBAROUNIS: Yeah, from the beginning -- 9 MR. HORTON: -- you would concur that there is 10 some liability here or maybe not the full liability from 11 your perspective. 12 MR. SALAZAR: Right. 13 MR. HORTON: But is it your position that your 14 liability is zero or that there is some liability and 15 you are trying to assert what you believe the liability 16 should be? 17 MR. SALAZAR: Well, it's our position that the 18 liability is zero, based on the facts and 19 circumstances. 20 MR. HORTON: All right. 21 MS. STEEL: Mr. Horton, that -- actually there 22 is 2001 -- 2001 and 2004 Department computed the average 23 quarterly sales, but you didn't have those purchase 24 invoices right there, so -- still -- you still think the 25 liability is zero? 26 Or can you provide those invoices during that 27 time? 28 MR. SALAZAR: We didn't have those invoices 54 1 available and -- but, again, the reason we maintain our 2 position that it's zero is based on all of the facts and 3 circumstances that we provided today. 4 But we're dealing with invoices from ten years 5 ago. A lot of the information was provided to the first 6 auditor. I think it went to three auditors but the 7 first auditor and a lot of -- there was a lot of 8 information that was given. 9 MS. YEE: Including invoices? 10 MR. SALAZAR: I'm sorry? 11 MS. YEE: Including invoices? 12 MR. SALAZAR: Yes, everything, yes. 13 MS. ALBY: I have another follow-up question. 14 MS. YEE: Ms. Alby? 15 MS. ALBY: Is it customary for the taxpayer to 16 pay before the D & R is final in this kind of 17 circumstance? 18 MR. LEVINE: Only if they want to stop interest 19 from running, but I haven't done an assessment, but it 20 doesn't surprise me to see no payments. 21 It's also common for taxpayers to not even pay 22 concurrent amounts because although interest is 23 accruing, the law does not -- it's not due and payable, 24 a final liability, if a petition is filed. 25 So, it's not unusual. 26 MS. ALBY: Okay, thank you. 27 MS. YEE: Okay, pleasure of the Board? 28 MS. ALBY: Was your suggestion a motion? I 55 1 would be glad to second. 2 MS. YEE: Let me do this, I would move a 3 30-30-30 and -- to allow more time for the Department to 4 essentially go back and review what additional 5 information is available, probably constituting a 6 re-audit. 7 I am not particularly interested in having this 8 case come back before the Board for an oral hearing. It 9 can come back on an adjudicatory calendar. 10 But I am ready to entertain abatement of the 11 interest today, or partial abatement of the interest 12 today, in which case my motion would be to abate 13 interest between the dates September 3rd, 2008 and 14 June 24th, 2009. 15 MS. STEEL: Can I add one more? 16 MS. YEE: Yes. 17 MS. STEEL: That this memorandum, internal 18 memorandum from BOE, and comparing that to the other 19 audit that it was done and because if it was exactly 20 same situation, I think this one is erroneous advice 21 that gave out from the Board. 22 So, I want you to recheck it. 23 MS. YEE: I want to make a comment about the 24 Departmental memo. 25 I don't know that it ought to be treated as 26 providing advice. I think these memoranda generally, 27 even though there are facts presented that then result 28 in some findings and conclusions with respect to the 56 1 issues posed and questions raised, does not relate to 2 this particular Petitioner, one; and, secondly, I would 3 venture to guess that what information was offered in 4 that memorandum was probably more general, such that I 5 would have a hard time thinking it could be applied 6 directly to the facts in this matter. 7 MS. STEEL: I want the Department review it, 8 though. 9 MS. YEE: No, I think they should review it, I 10 would agree. 11 But I am not -- I am not comfortable with the 12 degree of reliance that's been placed on it thus far 13 with respect to this petition. 14 Okay, so that would be my motion is to allow a 15 30-30-30, but to propose abatement of interest between 16 September 3rd, 2008 and June 24th, 2009. 17 MS. STEEL: What happened to Jerome's motion? 18 MS. YEE: He made part of the motion, so, I 19 kind of put it together. 20 Okay, is there a second? 21 MS. ALBY: Second. 22 MS. YEE: Second by Ms. Alby. 23 Discussion further? 24 Objection? 25 Hearing none, such will be the order. 26 Mr. Levine, you want to describe the 30-30-30 27 process, just so we're clear? 28 MR. LEVINE: Maybe it will be kind of a joint 57 1 thing. 2 Normally, you have 30 days to provide the 3 information, any additional information. And the 4 information we're looking for relates to which items 5 were installed onto real property. I think most of your 6 satellite dishes were, but some may have been put in 7 canisters or something, they wouldn't be attached to the 8 real property. So, sufficient documentation to the 9 Department so it can distinguish which of these -- the 10 transactions involve satellite dishes that were attached 11 to real property and anything else that was attached to 12 real property that was not already allowed, that we 13 recommended an adjustment for consumables, but we 14 narrowed what the Department had initially done. So, 15 anything else that was attached -- if the wireless 16 telephone adapters were attached to real property that 17 would cover it, wall mounts would be attached -- any of 18 that information, try and provide that in 30 days. 19 The Department will then -- 20 MR. SBAROUNIS: How does the satellite dish be 21 a part of the house when it only can be used for DIRECTV 22 product? 23 MR. LEVINE: If it's screwed onto the roof, 24 it's part of the house. 25 MR. SALAZAR: Real property. 26 MR. LEVINE: Your representative can explain it 27 to you. 28 Then the Department will have 30 days to do its 58 1 recommendation based on that. 2 And then the rest of the time is for Appeals to 3 bring it to the Board. I'd encourage you during your 30 4 days to consult with the Department if you have any 5 doubts. And, perhaps, the Department will send the 6 District folks over. 7 Isn't that what you would normally do? 8 MR. HANKS: Yes. 9 MR. LEVINE: So, there will be interaction 10 during your 30 day period to help you. 11 MR. SBAROUNIS: So, we have 30, they have 30 12 and what's the last 30? 13 MR. LEVINE: 30 is for Appeals Division to 14 bring it back to the Board on what's called a 15 nonappearance calendar. 16 I think you are notified, but it's not a 17 hearing, it's just me presenting it to the -- my 18 recommendation to the Board. 19 MR. SALAZAR: I do have a question. 20 When you talk about additional documentation, 21 I'm not sure -- 22 MR. LEVINE: Any -- I think the Department -- 23 MS. YEE: The Department will work with you -- 24 MR. LEVINE: -- will work with you. 25 MS. YEE: -- in terms of identifying what else 26 would be helpful. 27 MR. LEVINE: It may be they don't need 28 anything, but they'll consult with you and ask you for 59 1 what you need. 2 It's more -- in this case I think it will be 3 more of a joint 60 days or 50 days and 10 days for them 4 to wrap it up, they'll work with you. 5 MS. YEE: Okay, thank you, Mr. Levine. 6 Okay, Members, without objection, such will be 7 the order. 8 Thank you both very much. And, hopefully, we 9 can get some better understanding and resolution to 10 this. 11 Thank you. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 60 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 DECEMBER 15, 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 pages 1 13 through 60 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 19, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 61