BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT DECEMBER 15, 2010 FINAL ACTIONS P.M. SESSION Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Betty Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Barbara Alby Acting Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 Board of Equalization staff: David Levine 16 Tax Counsel IV 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 2 ITEM C4 3 Sacramento, California 4 December 15, 2010 5 ---oOO--- 6 MS. YEE: Okay, our next item, Ms. Olson. 7 MS. OLSON: Our next item are those matters 8 taken under submission. 9 MS. YEE: Okay. 10 MS. OLSON: Our first item is C4, Lockheed 11 Martin Government Services, Incorporated. 12 MS. YEE: Okay. Members, we're back on C4, 13 Lockheed Martin Government Services, Incorporated. 14 May I have a motion, please. 15 MS. MANDEL: I guess I'd move to determine. 16 I'm -- I'm concerned about the Department's assertion 17 that this would completely blow out transfers -- 18 electronic transfers of software and load them and 19 leave. I mean that -- maybe it's not related but 20 that -- that's a huge concern to -- 21 MS. YEE: Yes. 22 MS. MANDEL: -- do that through the case like 23 this, but the diskette-computer comparison seems 24 comparable, so it's a little confusing, but the 25 assertion that we're going to blow -- blow out the 1502 26 exclusions is pretty severe. 27 MS. YEE: Okay. So your motion, Ms. Mandel, is 28 to redetermine? 3 1 MS. MANDEL: Yeah. 2 MS. YEE: Okay, I'll second that motion. 3 Discussion? Further discussion? 4 Okay. Okay, we have a motion and a second to 5 redetermine. Please call the roll. 6 MS. OLSON: Madam Chair. 7 MS. YEE: Aye. 8 MS. OLSON: Ms. Alby. 9 MS. ALBY: Pass for a minute here. 10 MS. OLSON: Ms. Steel. 11 MS. STEEL: No. 12 MS. OLSON: Mr. Horton. 13 MR. HORTON: Aye. 14 MS. OLSON: Ms. Mandel. 15 MS. MANDEL: Now I'm making my own self 16 nervous. 17 Well, because I walked in here and I -- you 18 know, I know it's my motion, but I -- I don't like the 19 result that I'm getting told is going to happen. 20 I don't like that result. 21 MS. STEEL: I think we should make a new 22 annotation because computers been, you know, so 23 different now than before, so abide the annotation that, 24 you know, we read it's totally I think taxpayer was 25 right, but we cannot -- I cannot really go for a hundred 26 percent at the same time, but you know what, I -- you 27 know, by the law that what we did here that, you know, 28 they're -- I cannot really say they're wrong, either. 4 1 So -- 2 MR. HORTON: Madam Chair. 3 MS. YEE: Let me just get this vote dispensed 4 with. We're in the middle of the roll call. 5 MS. MANDEL: Well, now that I made myself so 6 nervous maybe I should withdraw it. 7 MS. YEE: Okay, you want to withdraw -- 8 MS. MANDEL: I hate it when I get that -- you 9 know -- 10 MS. YEE: That's all right. 11 MS. MANDEL: -- that feeling. 12 MS. YEE: We can discuss it further. 13 You want to withdraw the motion and -- 14 MS. MANDEL: Yeah, I'll -- I'll withdraw it for 15 the moment. 16 MS. YEE: Okay. 17 MS. MANDEL: But that's -- I mean, I see two 18 different things. I see the diskette and the computer, 19 and it sounds like it's analogous. But I don't know why 20 they do the diskette that way and then the computer not, 21 except that they have the argument that they -- that the 22 vet -- that the value's not really in the computer 23 because they separately have all the software about 24 which there seems to be some dispute. 25 But I -- I really do have a very serious 26 concern about the Department's assertion that if -- if 27 it's -- if these computers are not transferred in 28 substantially the same form because the software is 5 1 loaded after the computers are acquired by the person 2 who's going to sell them to the government, that that 3 necessarily undoes the Board's long-standing position on 4 software transfers. 5 That -- I -- you know. 6 MS. YEE: Mr. Levine, do you have a -- 7 MR. LEVINE: Yeah. Just for the record, I'm 8 not sure exactly the words they used but that can't be 9 what they mean. The Board -- it's -- in your regulation 10 you're required to follow load and leave and the 11 electronic transfer unless and until you change the reg. 12 A decision here, whatever you decide, won't 13 affect that. I think what the Department was trying to 14 say is its view that it was inconsistent defined that 15 this was a fabrication of the computer by adding on 16 software under facts that if it was just a -- a load and 17 leave on someone else's software would not be taxable. 18 And if it's not taxable, which is what the reg. just 19 said, it's not taxable, that means it's not fabrication. 20 So the Board has taken the position by 21 regulation that a load and leave is not fabrication. 22 And I think that's what the Department is saying, is 23 that the Board's reg. stands for the proposition that 24 the installation of the software was not fabrication and 25 it really shouldn't be regards as substantial change in 26 form, which again unless we're talking about trees that 27 grow, we normally look at as changes, because we look 28 at -- at plants that grow, at a certain point they're 6 1 something different than they were. We recognize that. 2 But otherwise we normally look to some form of 3 fabrication to change the form. 4 MS. MANDEL: So that's why they said that -- 5 that -- for the taxpayer is basically arguing they're 6 doing fabrication. 7 MR. LEVINE: Well, I don't want to put words in 8 their mouth here. 9 MS. MANDEL: Well, not fabricate, that's a 10 magic word for sales tax. 11 MR. LEVINE: Yeah, we view it as they really 12 need to be fabricating to change the form. I think 13 they're just relying on -- mostly on value. 14 MS. MANDEL: Yeah. 15 MS. YEE: Ms. Alby. 16 MS. ALBY: I'm actually (inaudible.) 17 MS. YEE: Well -- just ready to vote for the 18 motion. 19 MS. MANDEL: Yeah. Well, that's -- you know, 20 that's -- so -- 21 Yeah -- that's just my -- you know, that's my 22 feeling on the whole thing. 23 MS. YEE: Other thoughts, Members? 24 MS. MANDEL: I also don't know that we know 25 even if you went some other way that you know exactly 26 what -- how much of anything was, but -- you want the 27 motion again? 28 MS. STEEL: We can come back. 7 1 MS. MANDEL: Maybe I didn't eat enough and it's 2 my blood sugar and not eating. 3 MS. STEEL: You need some sugar. 4 MS. MANDEL: But that happens, too. 5 MS. YEE: Do you want to put this over? 6 MS. MANDEL: Yeah. 7 MS. YEE: It will be to the next meeting, 8 though. 9 MS. MANDEL: Oh, I don't want to wait that 10 long. 11 MS. YEE: Yes. 12 MS. MANDEL: I don't think we need to wait that 13 long. 14 MR. LEVINE: Later this afternoon? 15 MS. STEEL: No, after we vote other stuffs then 16 we can -- 17 MS. YEE: Yeah, let -- let's come back to it at 18 the end of the other items. Maybe we'll be inspired 19 then. Our next item? 20 ---oOo--- 21 22 23 24 25 26 27 28 8 1 ITEMC5 2 MS. OLSON: Our next item is C5, Sunkist 3 Enterprises Corporation. This was a waived appearance. 4 MS. YEE: Okay. Item C5, Sunkist Enterprises 5 Corporation. 6 MR. HORTON: Move to adopt. 7 MS. YEE: Staff recommendation? 8 MR. HORTON: Yes. 9 MS. YEE: Okay. Motion by Mr. Horton to adopt 10 the staff recommendation, second by Ms. Mandel. 11 Discussion? 12 MS. STEEL: Well, I wish taxpayer showed up and 13 just to show clear evidence for transfer. Then -- Mr. 14 Levine looking at me. 15 MR. LEVINE: I -- I don't think there was ever 16 a dispute that we're talking about the same corporation. 17 They were talking about transferring ownership by 18 selling shares, but we're just focused on the person 19 before us, which is the corporate entity. So, however 20 they sell the shares is irrelevant to that issue. It 21 may be relevant to like a 6829 case, but that's not what 22 we have here. 23 MS. STEEL: But did we go -- are we going after 24 the -- Irfan Mahmood? 25 MR. LEVINE: I'm not aware of anything else 26 other than the assessment against the primary taxpayer. 27 If it can't be sustained against the primary taxpayer it 28 couldn't be sustained against anyone. 9 1 MS. STEEL: No, I'm just asking that because 2 somebody who caused this trouble is different person 3 than who used to own. He could have gone to close 4 the -- a seller's permit but he didn't do that. 5 MR. LEVINE: Yes. 6 MS. STEEL: But I'm -- I'm going to go for the 7 staff recommendation because he didn't come but, you 8 know, I was reading it and it was just a -- that's what 9 I found out. So -- 10 MS. YEE: Okay. I have a motion by Mr. Horton, 11 second by Ms. Mandel, to adopt the staff recommendation. 12 Without objection, such will be the order. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 ITEM D2. 2 MS. OLSON: Our next item is D2, CRC/TR 3 Corporation. 4 MS. YEE: Okay. Item D2, CRC/TR Corporation. 5 May I have a motion, please. 6 MR. HORTON: Move to adopt staff 7 recommendation. 8 MS. YEE: Okay. Motion by Mr. Horton to adopt 9 the staff recommendation. Is there a second? 10 MS. MANDEL: Second. 11 MS. YEE: Seconded by Ms. Mandel. 12 Discussions? 13 Hearing none, objection? 14 Motion carries. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 ITEM C4 (Continuing). 2 MS. YEE: Okay. 3 MS. OLSON: That brings us back to C4, Lockheed 4 Martin Government Services, Incorporated. 5 MS. YEE: Okay. 6 MS. MANDEL: Well, then I'll -- I'll renew the 7 motion to redetermine. 8 MS. YEE: Okay. 9 MS. MANDEL: Board be consistent in its view of 10 software. 11 MS. YEE: Okay. Motion by Ms. Mandel to 12 redetermine. I'll second that motion. 13 MR. HORTON: May I -- 14 MS. YEE: Mr. Horton. 15 MR. HORTON: -- comment. This is somewhat of a 16 Catch 22 in that ruling in favor of the taxpayer 17 actually rules against the taxpayer in subsequent 18 transactions. And in the absence of any documentation 19 that indicates that title has passed to the U. S. 20 Government prior to, it's difficult to assess the -- 21 even the -- the value of the -- of the modifications to 22 the point that that value actually changes the 23 characteristics of the initial property purchased. And 24 then the confusion as to who actually performs the 25 service, is it performed by the vendor and at what point 26 does the seller get involved and engaged in that, in 27 that aspect. 28 Despite our efforts to -- to try to -- to get 12 1 there, to a point where the title either passes to the 2 U. S. Government or these are actually not transferred 3 to the U. S. Government in substantially the same form. 4 We start out with a computer and then there's a change 5 in the -- in the -- there's a change in the valuation 6 but not a change in the character or the form of the -- 7 of the property. And I think we have to defer back to 8 the law in determining -- in the law in determining -- 9 in the regulations, not the annotations, in determining 10 what governs. 11 Is it the -- is it the valuation or is the -- 12 the definition pursuant to the law, pursuant to Webster 13 and so forth that will indicate a substantial change. 14 And the inherent danger that -- that I see here 15 is -- is one way the taxpayer wins; the other way the 16 taxpayer loses. But at the end of the day I think 17 ultimately the taxpayer would lose because of the 18 intrinsic value of the change if in fact it was treated 19 as a lease to non-U. S. Governments. 20 And a ruling of that nature would cause 21 significant change throughout the industry, whereas 22 others will begin to rely on that and that type of 23 ruling would actually increase the taxes for a lot of 24 folks that have made a conscious decision to minimize 25 their tax liability by paying the taxes up front on the 26 acquisition and not on the subsequent markup to the 27 transaction. 28 So it's that culmination in -- of those -- 13 1 those concerns as well as Ms. Mandel's concerns that 2 kind of gives me pause but causes me to have to go to 3 the greater good. 4 MS. YEE: Okay. Thank you, Mr. Horton. Other 5 comments, Members? 6 Okay, we have a motion and a second to 7 redetermine. 8 Objection? Yeah, please call the roll. 9 MS. OLSON: Madam Chair. 10 MS. YEE: Aye. 11 MS. OLSON: Ms. Alby. 12 MS. ALBY: Aye. 13 MS. OLSON: Ms. Steel. 14 MS. STEEL: No. 15 MS. OLSON: Mr. Horton. 16 MR. HORTON: Aye. 17 MS. OLSON: Ms. Mandel. 18 MS. MANDEL: Aye. 19 MS. OLSON: Motion carries. 20 MS. YEE: Okay. Our next item? 21 MS. OLSON: That concludes our -- all of our 22 items for today. 23 MS. YEE: Okay. Thank you very much, Members. 24 We will recess until 9:30 tomorrow morning. 25 Thank you. 26 ---oOo--- 27 28 14 1 REPORTER'SCERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 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 14 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: December 23, 2010. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 . 28 15