BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT FEBRUARY 22, 2011 ITEM C1 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by BERKELEY PATIENTS GROUP, INC. (Case No. 426761 CH) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 15 For Board of David Levine Equalization Staff: Appeals Division 16 Bradley Heller 17 Legal Department 18 Robert Tucker Legal Department 19 Kevin Hanks 20 Sales and Use Tax Department 21 For Petitioner: Eric J. Coffill 22 Representative 23 Timothy D. Schick Witness 24 25 ---OOO--- 26 27 28 2 1 Sacramento, California 2 February 22, 2011 3 ---oOo--- 4 MS. OLSON: Our next item is B1, Berkeley 5 Patients Group, Incorporated. Please come forward. 6 Board Proceedings has received contribution 7 disclosure forms for this afternoon's hearings from the 8 parties, agents and participants. All forms were 9 properly completed and signed. 10 All parties, agents and participants are on the 11 Alpha listing provided to your office. 12 Each person sitting at the table will be asked 13 to introduce themselves and if necessary their 14 affiliation with the taxpayer for the record. 15 Ten minutes is allocated for the taxpayer's 16 opening presentation followed by ten minutes for the 17 Department's presentation and five minutes is allocated 18 to the taxpayer for rebuttal. 19 Mr. Horton. 20 MR. HORTON: Thank you very much. Mr. Levine. 21 MR. LEVINE: Good afternoon, Mr. Chairman, 22 Members. David Levine for the Appeals Division. 23 The issues in this petition of Berkeley 24 Patients Group, Inc. are whether Petitioner's sales of 25 marijuana were exempt sales of prescription medicines. 26 Whether estoppel bars the Board from collecting 27 the tax due. 28 Whether the measure of deficiency includes 3 1 non-taxable charges for services. 2 And whether interest should be relieved. 3 MR. HORTON: Thank you very much. To the -- to 4 the taxpayer, could you introduce yourself for the 5 record. 6 MR. COFFILL: Yes, thank you. Eric Coffill, 7 appearing on behalf of the taxpayer, Berkeley Patients 8 Group. And to my immediate left is Tim Schick, who is 9 Executive Director of Berkeley Patients Group. 10 MR. HORTON: Thank you. You have ten minutes 11 on presentation. After your presentation the Department 12 will make a ten-minute presentation, as well, at which 13 time you have five minutes to rebut. 14 Please begin at your convenience. 15 MR. COFFILL: Thank you. The -- the hearing 16 summary, the taxpayer's briefing and the Board briefing 17 I think all adequately address the legal issues and 18 actually frame them quite well. 19 There is one issue due to time constraints that 20 we would like to address during oral argument, and that 21 is the issue of our contention that the Board of 22 Equalization is barred by equitable estoppel from 23 collecting the deficiency in issue in this case. 24 And in order to understand that issue because 25 equitable estoppel is -- is intensely factual you need 26 to understand the history of how the Board of 27 Equalization has treated the issue of medical marijuana, 28 and you need to overlay that with the history, the 4 1 particular taxpayer's facts. 2 Berkeley Patients Group is a grass roots 3 nonprofit medical marijuana dispensary located on San 4 Pablo Avenue in Berkeley. It began filing Board of 5 Equalization Sales/Use Tax returns in 2001 and from the 6 beginning those returns claimed an exemption on the face 7 of the returns for sales of medical marijuana. 8 The Board of Equalization accepted those 9 returns as filed from March 1, 2001 until audit over six 10 years later. 11 On October 3, 2007 the Board of Equalization 12 contacted Berkeley Patients Group by letter, there was 13 no audit. Following an exchange of correspondence on 14 August 25, 2007 the Board of Equalization assessed 15 Berkeley Patients Group the period July 1, 2004 through 16 June 30, 2007. The assessment was approximately $4.5 17 million in tax and currently as of February of this year 18 the deficiency's approximately $6.5 million. There are 19 no penalties in the case. 20 Now, to back up a minute you need to understand 21 the history of the Board's position on this and what we 22 contend is -- is a profound lack of clarity in guidance 23 to the outside world on the treatment of the taxation of 24 medical marijuana. 25 Before October 5, 2005 the Board of 26 Equalization would not even issue Sales and Use Tax 27 permits for sales of medical marijuana. 28 Going back even further, on December 9, 2002 5 1 the Board of Equalization issued an annotation on 2 medical marijuana. October 11, 2005 the Board of 3 Equalization issued a formal guidance paper, but not a 4 public document disseminated to the public, which talked 5 about the treatment of medical marijuana. It talked 6 about the reason for issuing the paper was, quote, "To 7 provide proper guidance," which to us means up to that 8 point there was no proper guidance. 9 You now jump forward to 2007. In February of 10 2007 the Board of Equalization issued a public special 11 notice, quote, to clarify the application of tax to 12 sales of medical marijuana. To us the inference is the 13 reason it needed clarifying is it was not clear. 14 October 2007 -- October 25, 2007, to be 15 specific, the Board of Equalization issued a second 16 public notice. October 3, 2007, very shortly after the 17 two public notices and the only two public notices that 18 were issued, Board of Equalization contacts Berkeley 19 Patients Group for the -- for the non-field audit. 20 The issue which we are arguing is equitable 21 estoppel. We feel the law is adequately covered on our 22 briefs at pages 10 through 19 and the easiest way, I 23 think, to frame the issue, is by looking at the 24 Department's reply brief. And there is a disagreement 25 as to whether it applies, but I think the Department 26 does frame the standard correctly. And that is 27 equitable estoppel may be applied, quote, "to bar the 28 Board from assessing taxes in the unusual case in which 6 1 justification is clear and the injustice is great." 2 So the question is under the facts of this case 3 is justification clear and is the injustice great. And 4 we think that both standards -- standards are met. 5 Berkeley Patient Group, as I pointed out, has 6 filed since 2001. There was no audit until October 7 2007. The returns were accepted as filed. The Board of 8 Equalization 2002 annotation was originally the only 9 guidance out there, but first under Board of 10 Equalization Regulation 5700 taxpayers cannot rely on 11 annotations and, second, in 2006 Board staff withdrew 12 the annotation, anyway. So the only authority that was 13 out there, which was non-authoritative, was then 14 withdrawn by the Board. 15 The Board of Equalization would not even permit 16 medical marijuana Sales/Use Tax permits until October 17 2005. The October 2005 issue paper, as I pointed out, 18 was written to provide proper guidance to us, meaning 19 there was no proper guidance up until that point, and a 20 lack of guidance to that point. 21 And then finally in 2007, in February and June, 22 the special notices were issued, is the first time 23 public notices were put out to the world at large and to 24 individuals and companies like Berkeley Patients Group 25 that made the Board's position clear. 26 So our position is equitable estoppel should 27 apply and the justification is clear for us have taken 28 the position of claiming the exemption and we feel the 7 1 injustice is great under these circumstance where no 2 public guidance was provided for the Board for -- for 3 this long period. 4 There's -- there's one point which is raised in 5 the Board's brief, which I think we should address on 6 this point. It is a factual dispute so we could not 7 address it in our reply brief. 8 Our point, as I've explained, is we do not 9 think as a coincidence that the audit in this case on 10 October 7 -- October 2007 followed so closely on the 11 heels of the two and the only two public notices which 12 the Board put out. 13 Staff -- and I won't speak for Mr. Heller, but 14 the way I understand his brief is staff has a different 15 spin on the facts. It's their position that the only 16 reason they found out about Berkeley Patients Group and 17 audited and assessed at this period is an article that 18 was in the San Francisco Chronicle. 19 So, in other words, the audit was really not 20 tied to what we think is a clear record that the Board 21 really did not have a position until February of 2007 22 that anyone outside would have ever known about. 23 Did we have an exhibit marked? 24 MS. YEE: Yes. 25 MR. COFFILL: Yes, there is one exhibit which 26 was marked as Exhibit A, and I just pulled this from the 27 audit files on my way over. 28 This is a copy of one of the early returns 8 1 filed by Berkeley Patients Group. It's from the period 2 October 2004 through July-September 2004. If you notice 3 on the return the total sales are listed about 2.1 4 million. There is a very large exemption of about 2.1 5 million, leaving taxable sales of about 29,000 which the 6 taxpayer then paid tax on. 7 If you go to the bottom of page 2 you can see 8 it is written in the reason for the exemption is 9 medicine. If you go back to page 1 you will notice on 10 the upper left-hand corner there's a stamp from the 11 Board of Equalization, and this return came from the 12 Board's files. We got it under a Public Records 13 request. 14 It says, quote, "Return analysis December 16, 15 2004," and then an individual's name. So our position 16 is practically when these returns were coming in the 17 door the Board is analyzing these returns. I think it's 18 clear from the record. So to say that the Board did not 19 know about this as being a potential issue until 2007 we 20 just do not think is credible. 21 So, in summary, going back to the Board's own 22 standard or Board staff standard is that we think the 23 justification is clear and we think the injustice is 24 great. Board -- Berkeley Patients Group has been a good 25 corporate taxpayer. It is currently paying Sales and 26 Use Tax. It has been collecting and remitting Board 27 Sales and Use Tax to the Board since the audit. Last 28 year it remitted approximately $1.5 million to the 9 1 Board. And we do not believe it should be faulted to 2 the tune of $6.5 million for not being able to 3 comprehend the Board's policy on taxation of medical 4 marijuana before it was public in mid-2007. 5 MR. HORTON: Thank you very much for your 6 presentation. 7 Will the Department introduce themselves for 8 the record. You have ten minutes to make your 9 presentation upon which time the taxpayer will be 10 allowed five minutes to rebut. 11 MR. HELLER: Thank you, Chairman Hormon -- 12 Horton, Members of the Board. My name is Bradley Heller 13 from the Board's Legal Department. I'm here with Bob 14 Tucker, also from the Board's Legal Department. And to 15 his right is Kevin Hanks from the Sales and Use Tax 16 Department. 17 The Sales and Use Tax Department agrees with 18 the Appeals -- with the Appeals Division and recommends 19 that the Board deny the petition. 20 The gross receipts from the retail sale of all 21 types of tangible personal property in California are 22 subject to sales tax unless an express exemption or 23 exclusion applies and there is no blanket exclusion or 24 exemption applicable to all retail sales of medicine, 25 including medical marijuana. 26 For example, tax generally applies to gross 27 receipts from the retail sale of over-the-counter 28 medicine such as aspirin or cough syrup. 10 1 The Petitioner in its briefs and -- and in the 2 petition argues that its gross receipts from the sale of 3 medical marijuana are -- are -- during the audit period 4 at issue today are exempt from Sales Tax because its 5 Berkeley facility qualified as a clinic within the 6 meaning of the clinic exemption provided by Rev. and Tax 7 Code Section 6369 Subdivision (a)(3). However, the 8 Department disagrees. 9 Health and Safety Code Section 1200 expressly 10 requires that a facility provide direct medical, 11 surgical, dental, optometric or podiatric advice, 12 services or treatment to patients who remain less than 13 24 hours in order to qualify as a clinic within the 14 meaning of the clinic exemption. 15 The Department believes that a facility must 16 have staff that is licensed to practice medicine, such 17 as a physician or a registered nurse to provide direct 18 medical advice, services or treatment to patients within 19 the meaning of the Health and Safety Code. And the 20 Petitioner has not shown that its facility had any 21 licensed physicians or -- or registered nurses on staff 22 who actually provided direct medical advice, services or 23 treatment to patients at the facility during the audit 24 period. 25 Furthermore, the Department does not believe 26 that merely dispensing medical marijuana qualifies as 27 the provision of direct medical advice, services or 28 treatment within the meaning of the Health and Safety 11 1 Code. 2 In addition, the Department believes that the 3 Petitioner's Berkeley facility is essentially a medical 4 marijuana pharmacy, not a clinic, because its 5 predominant purpose is to dispense medical marijuana 6 pursuant -- pursuant to a doctor's recommendation. 7 And the Department understands that the 8 Petitioner's Berkeley California facility cannot qualify 9 for the pharmacy exemption provided by Revenue and 10 Taxation Section 6369, Subdivision (a)(1) because it 11 does not dispense medi -- or, excuse me, its medical 12 marijuana is not dispensed by a registered pharmacist as 13 express -- expressly required by the statute. 14 Just to quickly address the Petitioner's main 15 argument today, the Petitioner did hold a seller's 16 permit since 2001, so it really was not affected by any 17 guidance regarding whether or not the Board would issue 18 sellers' permits to sellers of medical marijuana. And 19 in fact the Petitioner never informed the Board that it 20 sold medical marijuana when it filed that -- filed its 21 application for a seller's permit, nor did it indicate 22 on its returns that its deductions were for medical 23 marijuana, it just indicated medicine. 24 As far as we understand it, staff was never 25 aware that the deductions on those returns were for 26 medical marijuana until the time that the -- the 27 taxpayer's sister facility in Los Angeles was raided by 28 the Federal Drug Enforcement Administration -- or 12 1 Agency, excuse me, and articles were published 2 indicating that that event occurred and that its sister 3 facility in Berkeley was a medical marijuana dispensary. 4 We believe that's exactly when we first contacted the 5 taxpayer to determine whether or not deductions for 6 medicine were in fact for medical marijuana and whether 7 or not any exemption would apply. 8 So at this point we don't believe that staff or 9 the Board has done anything to unfairly prejudice this 10 taxpayer who could have -- could have written to the 11 Board for written advice regarding the taxation of 12 medical mari -- medical marijuana at any time, and it 13 never received any guidance from the Board indicating 14 that it -- that its sales of medical marijuana were 15 exempt. 16 Thank you. We can answer any questions you may 17 have. 18 MR. HORTON: Rebuttal? 19 MR. COFFILL: Yes, thank you. I think what's 20 interesting about the -- the Department's argument in 21 this case is -- is what they do not say as much as what 22 they say. For example, it appears there's no dispute in 23 the factual recitation of the case. In other words, the 24 fact the annotation was out there, the fact it was the 25 only authority, the fact the Board pulled that 26 authority, the fact until 2005 the Board would not even 27 issue permits, which -- which I think is a very telling 28 fact if in fact the Board's position is medical 13 1 marijuana has always been taxable. If its always been 2 taxable then how can the Board possibly have taken the 3 position they would not have even issued a permit for 4 it? 5 So it seems like there's some serious 6 inconsistencies in that position. We sense no push-back 7 from the Board either in its briefs or argument here 8 that the two notices in February 2007 were really the 9 first public notice put out to the Board of 10 Equalization. 11 The fact that the returns did not say -- the 12 return, you have copy of it as an exemplar -- the fact 13 the copy -- the returns did not say the exemption stated 14 for medical marijuana I -- I think is a red herring. I 15 don't think there's anything in Board of Equalization 16 authority through regulations, case law or even the law 17 that requires that kind of detail on a tax return. 18 There's a line for an exemption. You have to 19 explain what the exemption is. The exemption was 20 identified as medicine. And that is a second issue 21 which unfortunately we do not have time to talk about in 22 five minutes, which is the contention that medical 23 marijuana is in fact not taxable by the Board because as 24 Board agrees, number one, is medicine. As Board agrees, 25 number two, it is by order of a physician, and is a -- 26 and, number three, is the taxpayer and the Board staff 27 do not agree, the question is was it furnished by a 28 health facility. Our position is it was furnished by a 14 1 health facility because a health facility includes a 2 clinic, and the way the Board of Equalization staff 3 is -- the statute is written it refers to Section 1200 4 in the Health and Safety Code. Section 1200 does not 5 require a clinic to be licensed. 6 If the reference had been to another section of 7 the Health and Safety Code or if it had been to Section 8 1200 et seq. it would a different case. That's not the 9 case in front of us. 10 So we feel that issue is a pure legal issue and 11 we feel it's adequately briefed. But -- but we did not 12 want to bring that to the Board's attention. 13 MR. HORTON: Thank you very much. Ms. Yee. 14 MS. YEE: Thank you very much, Mr. Chairman. 15 There are a lot issues embedded in this case and I want 16 to see if I can try to tease them out a little bit 17 further for discussion purposes. And I guess where I'd 18 like to start is really concurring with the Petitioners 19 that I think the guidance from this agency has been a 20 little challenging for the dispensary community with 21 respect to what the expectation is on the part of the 22 State relative to taxation of medical marijuana. 23 Having said that, however, I also can explain 24 why that's been the case but I don't want to get into 25 that at this point. 26 What I'd like to do, though, is to really try 27 to isolate the issues to really focus on the one that, 28 Mr. Coffill, you raised and that is the application of 15 1 equitable estoppel. And I think the other arguments 2 that have been made and fully briefed with respect to 3 whether medical marijuana is medicine, that that would 4 be sub -- exempt from the application of tax to whether 5 it's being provided by -- in a health clinic setting, I 6 don't kind of concur with it and so I want to put those 7 aside at least for now. 8 But on the issue of equitable estoppel, I do 9 want to focus on that. We've heard generally the 10 application of that doctrine as it relates to income tax 11 cases, and I think -- I don't recall ever looking at it 12 with respect to a business tax matter before this Board. 13 And perhaps I think I'm going to look to you, Mr. 14 Levine, as to whether it merits some attention by the 15 Board in business tax matters. 16 MR. LEVINE: It's our position that the Board 17 cannot grant equitable estoppel relief. It's the very 18 reason we have Section 6596. I think this Board 19 sponsored it and the reason is the Board couldn't give 20 any relief before we had 6596. And that was -- that's 21 the extent of the relief that -- that was granted the 22 Board under those conditions which hasn't been argued 23 and isn't presented here. 24 And beyond that equitable estoppel is not an 25 option at this level and that's always been the Board's 26 position and that's our advice. 27 MS. YEE: Okay. And is that -- and was 6596 28 enacted with, I guess, specific Court decisions in mind 16 1 in terms of how the Courts have rendered -- 2 MR. LEVINE: I -- I don't recall the actual 3 genesis. I don't think there was a specific Court 4 decision that generated it, but I can't tell you for 5 certain. 6 MS. YEE: Okay. I'm -- I'm -- I'm trying to 7 just see -- Mr. Coffill, you and the Petitioner had 8 relied on a particular Court decision. I think it may 9 have been the -- was it the Lentz decision? 10 MR. COFFILL: Well, we relied on a number of 11 cases starting at page 10, I believe, of our brief. 12 There are cites to the California Constitution. There 13 are cites to a number of Board of Equalization cases. 14 Winkenbach is one of them. Colorprint is another one. 15 Campbell is another one. Smith is another one, where we 16 believe the -- the record shows the Board has exer -- 17 exercised equitable powers. There are cites to Court of 18 Appeal cases. There are cites to a number of cases. 19 There are actually a number of pages of them. 20 MS. YEE: Okay. 21 MR. COFFILL: The argument which you were 22 discussing with Mr. Levine as to -- to the history of 23 6596 and the interplay between the enactment of 6596 and 24 the case law on equitable estoppel, that has not been 25 briefed by the Department. That's not an issue they 26 raised at the Decision and Recommendation appeals 27 conference nor is it an issue raised in their brief. So 28 I -- I would want to see that briefing before I could 17 1 really respond in detail. 2 MS. YEE: And I guess what I'm driving at is 3 that is -- is this an issue that needs to be developed 4 further or are we on sure footing with respect to 6596 5 being our sole authority, and I just didn't know how 6 these Court decisions really play into what we have on 7 the books right now. 8 MR. COFFILL: Well, we -- we are very 9 comfortable, of course, advocating the decision that the 10 Board -- 11 MS. YEE: Yeah. 12 MR. COFFILL: -- fully has equitable 13 authority -- 14 MS. YEE: Okay. 15 MR. COFFILL: -- irre -- irrespective of 6596. 16 MS. YEE: Let me just go back to Mr. Levine in 17 terms of whether it merits some further look with 18 respect to some of these Court cases. 19 MR. LEVINE: Well, we're of course happy to 20 look at them. These are older cases and I haven't gone 21 through them individually recently, but this has been 22 our long-standing position, none of these old cases 23 has -- has changed it. There's no case that I know of 24 that has said that the Board can grant equitable relief 25 because if we had a binding opinion like that we 26 wouldn't be telling you the opposite. 27 MS. YEE: Okay. And then are you able to 28 comment -- and maybe, Ms. Mandel, I may look to you on 18 1 this, so what is the underlying with respect to 2 equitable estoppel on Franchise and Income Tax cases? 3 MR. LEVINE: I'm not -- 4 MS. YEE: Is that a statute or any other 5 authority? What's -- I'm just trying to understand the 6 difference. 7 MR. LEVINE: We -- we can get that information. 8 I can go and talk to our Franchise people who will know. 9 I can't speak to that. 10 MS. YEE: Okay. I may ask that this be put 11 over for that particular matter. 12 On a more practical note, the Berkeley Patients 13 Group also was subject to raid and seizure by the 14 Federal government, is that correct? 15 MR. COFFILL: I'll -- I'll refer this question 16 to Tim. 17 MS. YEE: Yeah. 18 MR. SCHICK: I actually joined the organization 19 in early 2009. 20 MS. MANDEL: Can -- can you speak up because 21 they're running a -- 22 MR. SCHICK: I'm sorry, I actually joined 23 the organization in early 2009. That happened prior to 24 my arrival at Berkeley Patients Group. But it is my 25 understanding that a sister company, which is no longer 26 a part of Berkeley Patients Group, was raided. 27 MS. YEE: Okay. But it was sometime -- when 28 was that, do you recall? I think it was in 2007. 19 1 MR. SCHICK: 2007, I believe 2 MS. YEE: Okay. And my question really relates 3 to the assets that were seized. As with many 4 dispensaries that have been raided and -- and accounts 5 seized, they included proceeds that were collected from 6 actually sales tax reimbursement. So -- 7 MR. COFFILL: That's correct. 8 MS. YEE: But in this case was there sales tax 9 reimbursement -- 10 MR. COFFILL: Yes. 11 MS. YEE: -- collected? 12 MR. COFFILL: We were collecting it -- 13 MS. YEE: Collecting it, right, at that time? 14 MR. COFFILL: That's correct. 15 MS. YEE: Okay. 16 MR. COFFILL: Yes. 17 MS. YEE: All right. Okay. And then my final 18 set of questions really relates to in the event that 19 this Board decides to not provide relief, and I'm 20 looking at what we've done with other dispensaries 21 relative to the Offer in Compromise program, the 22 expanded program where it really applies to those 23 businesses that currently are still operating but for 24 which the sales tax reimbursement was collected from 25 their customers -- in this case there was, and this is 26 really more to the staff, I guess what it raised for me 27 is what different considerations are we giving to 28 businesses that currently still exist and are operating 20 1 as compared to those that are terminated. 2 Mr. Heller, you're raising your hand. 3 MR. HELLER: Ms. Yee, I just wanted to clarify, 4 as far as I -- we under -- as the Department understands 5 the taxpayer was claiming an exemption for all the sales 6 of medical marijuana during the audit period and didn't 7 collect sales tax reimbursement -- 8 MS. YEE: Okay. 9 MR. HELLER: -- on those particular sales. 10 MS. YEE: All right. 11 MR. HELLER: So we don't have any reason to 12 think they wouldn't be eligible for the current 13 provisions of the -- 14 MS. YEE: Okay. 15 MR. HELLER: -- Offer in Compromise program. 16 MS. YEE: All right. So then it sounds like 17 the accounts that were seized were not necessarily 18 comprised of proceeds from collecting sales tax 19 reimbursement. 20 MR. HELLER: Right. And my -- actually, my 21 understanding was they did collect a little bit of sales 22 tax reimbursement during that period but it was only for 23 items that they didn't claim were exempt. 24 MS. YEE: Not on the -- 25 MR. HELLER: So it would have been on, you 26 know, other -- 27 MS. YEE: All right. 28 MR. HELLER: -- tangible personal property and 21 1 it wouldn't be affected by -- this assessment wouldn't 2 relate to that because that -- those taxes were 3 eventually paid. 4 MS. YEE: Okay. 5 MR. HELLER: They actually self-reported 6 taxes -- 7 MS. YEE: Okay. 8 MR. HELLER: -- on those amounts. 9 MS. YEE: I guess the interest here is really 10 with respect to the expanded Offer in Compromise 11 program. What do we do differently in terms of 12 assessing a business enterprise's ability to pay when 13 they're trying to keep their operation going as compared 14 to what we do relative to examining any assets that are 15 available for a terminated business. 16 Obviously this is an operation that is still in 17 business. We'd like to see it continue to be in 18 business. I think it's trying to be responsible in 19 terms of other liabilities that they're currently on a 20 payment plan for but -- but for this large liability 21 that's still pending. So I'm trying to just get a sense 22 of what -- how do we look at this differently? 23 Would have -- Gina. Oh. 24 MS. FONG: Hi. Gina Fong, representing the 25 Offer in Compromise program. 26 I have met with Mr. Schick previously and we 27 are in discussions but we wanted to afford Berkeley the 28 opportunity to go through their appeal to see what would 22 1 happen with the liability. 2 MS. YEE: Uh-huh. 3 MS. FONG: We always want to see if there's 4 going to be any adjustments. We are working with them 5 currently in an Offer in Compromise proposal. 6 MS. YEE: Okay. Hypothetically, if we were to 7 decide this case and there were no adjustments on a 8 general basis, not related to dispensaries for those 9 business establishments that are currently still 10 operating, how do we look at them differently from a 11 terminated business in terms of their ability to pay? 12 Obviously, they've got a lot more -- 13 MS. FONG: We look to see -- 14 MS. YEE: -- activity going on. 15 MS. FONG: We look to see if their sales have 16 decreased based off of the economy. And I've talked to 17 Mr. Schick about that. 18 We look at what their ability to pay is, what 19 their equity is in assets. Do they own any other -- do 20 they have any other business ventures. 21 In this case with Mr. Schick we've been 22 discussing that. 23 MS. YEE: Okay. 24 MS. FONG: We're basically looking at their 25 overall ability to pay, what their income tax returns 26 show over a period of time. We're looking at -- to see 27 whether they've -- their sales have declined versus 28 increased. 23 1 MS. YEE: Okay. I'm only raising this because 2 now as a -- I mean that's as a general matter and I 3 appreciate kind of the thought about how you look at 4 existing businesses differently with respect to 5 dispensaries, as you probably well know. I think 6 sometimes the numbers don't really support what's really 7 happening with the -- with the business activity in that 8 the numbers may seem very, very big but the cost of the 9 product is also very, very huge. 10 And so I want to be sure that there's 11 sensitivity about that. There also is a lot of local 12 regulation with respect to, you know, local, you know, 13 taxes and -- and business receipts tax and that kind of 14 thing. 15 So, do you take all of that into consideration 16 as you -- 17 MS. FONG: We do. 18 MS. YEE: Okay. 19 MS. FONG: And he did give us the information 20 that his taxes within his own counties have increased, 21 based off of that. So we are taking that into 22 consideration with the evaluation. 23 MS. YEE: Okay. All right, thank you. Thank 24 you, Mr. Chair. 25 MR. HORTON: Thank you. 26 Further discussion, Members? 27 MS. STEEL: I have just one question that there 28 is non-taxable like hospice services and Yoga and other 24 1 treatment. Did we adjust that on total tax? 2 MR. HELLER: Ms. Steel, that's an excellent 3 question. In this particular case the taxpayer 4 basically -- as far as we understand, the taxpayer 5 reported all of its gross receipts from its own sales of 6 tangible personal property and claimed its own exemption 7 for sales of medicine for its sales of medical 8 marijuana. We've just simply disallowed the exemption 9 for sales of medical marijuana and we have no reason at 10 all to believe that there was -- that the taxpayer 11 reported any receipts from sales of services in its 12 sales -- in its gross receipts from tangible personal 13 property or claimed an exemption for any of those 14 amounts. So we have not reduced the amount of the 15 assessment for any services that could have been 16 reported. 17 MS. STEEL: So you didn't get any documents or 18 any receipts for that? 19 MR. HELLER: We have nothing at all -- 20 MS. STEEL: You have any of those? 21 MR. HELLER: -- indicating that there was a -- 22 any joint trans -- any transaction in which both 23 services and medical marijuana were paid for in a lump 24 sum. And so we have no reason to make an adjustment to 25 the gross receipts from the medical marijuana. 26 MS. STEEL: Do you have any documents? 27 MR. COFFILL: Well, here -- here's -- here's 28 the problem with us making this argument in all candor, 25 1 The services, such as massages, are not charged for 2 separately. So Mr. Heller is correct, there's no 3 separate receipts coming in for the services that are 4 being provided. What you would have to do is you will 5 have to allocate the costs of those services somehow and 6 spread them over the costs of the sales of mena -- 7 marijuana. 8 We have talked to the Board about doing that, 9 but the problem is then you get into something called 10 the true object test and -- and some very complicated 11 case law which says that the true object of the 12 transactions for tangible personal property, it's very 13 difficult to break out a non-tangible component like -- 14 like services and somehow allocate some of the sales tax 15 to that. 16 So we have had this discussion with the Board 17 of Equalization. We had this discussion at the -- the 18 Appeals Conference with the Decision and Recommendation. 19 The Board of Equalization's position is there is no way 20 to break out some portion of the marijuana sales to 21 account for the -- the services because the services 22 were not separately taxed. 23 MS. STEEL: That's interesting to hear. 24 MR. COFFILL: Well -- 25 MS. STEEL: Mr. Levine, I think some -- some of 26 sales to the patients are just marijuana only and some 27 of them are with the services, Yoga, hospice, treatment, 28 so how it can be so difficult to separate? 26 1 MR. LEVINE: It's very simple, it's all 2 taxable. 3 MS. STEEL: Yeah. 4 MR. LEVINE: And the reason is, is that 5 Petitioner is selling marijuana for a certain price. If 6 Petitioner could show that someone could come in and it 7 was clear that they can buy -- I don't know what the 8 sizes are, but a given unit of marijuana for one price 9 with the service and another price without the service, 10 as long as it's optional we would look at the numbers 11 and say, well, that amount is just for a service, it's 12 optional. 13 But if they charge a given amount for marijuana 14 and then they provide massages to people who ask for it 15 for no additional charge, it's not an optional service; 16 it's either a free service or it's a mandatory service 17 that you're paying for the marijuana and if you want 18 some additional service you get it, but you pay that 19 amount for the marijuana. There is no optional service 20 component to this charge. And if there were Petitioner 21 would have been able to provide us with the numbers to 22 show it. 23 MR. COFFILL: There's some discussion in our 24 briefing on -- on this issue in a case called Dell 25 Computer and -- and we read that case differently than 26 staff. The question is that there are services and 27 non-services, taxable transactions, and services -- 28 non-taxable services built into the same transaction. 27 1 Is there some way to break them out and not tax for one 2 and -- and tax for the other if in fact there's a single 3 price that covers all of them, and -- and that's a legal 4 dispute where we've had no luck with the Board of 5 Equalization. 6 MS. YEE: What -- what's your practice now? 7 MR. COFFILL: I beg your pardon? 8 MS. YEE: What's your practice now in terms of 9 breaking them -- 10 MR. SCHICK: Is -- as in terms of the -- the 11 services that we offer? 12 MS. YEE: Uh-huh. 13 MR. SCHICK: We don't charge for the services. 14 MR. COFFILL: There's nothing broken out by -- 15 by invoice. 16 MS. YEE: You still don't, okay. 17 MR. COFFILL: No. 18 MR. RUNNER: So the -- so -- so the sales tax 19 that's being applied right now is on the -- based upon 20 the cost of the marijuana? 21 MR. COFFILL: There -- there are two streams of 22 sales tax and -- and Tim can correct me if I'm wrong. 23 One is if you go in and buy marijuana, that is a 24 transaction which is being taxed and reported to the 25 Board of Equalization. 26 MR. RUNNER: Right. 27 MR. COFFILL: And that's -- that's something 28 that happened as a result of the audit. 28 1 There has been a second stream of income which 2 has always been taxed, and that's why the taxpayer 3 originally got the permit, and that is if you go in and 4 buy, for example, a candle or a T-shirt -- 5 MR. RUNNER: Right. 6 MR. COFFILL: -- or a book, those are items 7 which were taxed and those have been taxed and 8 transacted separately. 9 MR. RUNNER: Right. But, no, I mean, the -- 10 the thrust of the question, though, was that your 11 current practice still taxes the marijuana -- current -- 12 current practice taxes the marijuana, does not separate 13 out the services. 14 MR. COFFILL: That's correct 15 MR. RUNNER: Thank you. 16 MR. HORTON: Further discussion, Members? 17 MR. RUNNER: Just one quick question. You 18 know, I think you -- you had talked about some -- some 19 concerns of ambiguity that the -- that the -- that -- 20 that you may have felt coming from the -- from the 21 Board. Was there anything you could point to that -- 22 that would indicate that -- that the marijuana sale was 23 not taxable? 24 MR. COFFILL: Well, I think the easiest way is 25 if -- if Berkeley Patients Group in 2001 had gone in and 26 gotten their permit and not been selling either candles 27 or T-shirts or something, or had just out and out not 28 been honest and -- and had not mentioned that and 29 1 applied for a permit and listed medical marijuana as the 2 item, the Board of Equalization would not have given 3 them a permit. 4 So I think it's a difficult position to place 5 taxpayers in if the Board had a written -- a stated 6 position up through October of 2005 which in one sense 7 said, well, this is something that's taxable and another 8 sense said there's no way to report it because we won't 9 even give you a permit number for it. 10 So I'm -- I'm not sure how someone would have 11 taken the position it's taxable at that point. I think 12 it's quite clear from the outside world that was a 13 signal that -- that tax was not to be collected and 14 remitted. 15 MR. RUNNER: What -- what was that signal? 16 MR. COFFILL: The signal is the fact that up 17 until October 2005 the Board would not have issued a 18 sales tax permit for medical marijuana. 19 MR. RUNNER: Right. Right. But you -- but 20 you -- but you were selling other things. 21 MR. COFFILL: Right. We had the permit and 22 that's only because we were selling other products. But 23 up until that point, October 2005, if you were simply 24 trying to sell medical marijuana the Board would not 25 even have issued you a permit on it. 26 So I think it's very difficult for people on 27 the outside to understand that as being the Board is 28 supposed to be -- you were supposed to be collecting and 30 1 remitting tax to the Board on these transactions. 2 MR. RUNNER: Mr. Heller, how -- how would 3 you -- how do you see that same set of circumstances, 4 and let me ask this other -- next question then, and 5 that is if that's the case how -- how do -- how are 6 other dispensaries doing with the issue of sale and tax 7 of marijuana? 8 MR. HELLER: Let's see. Well, first of -- the 9 first part of the question, at least as -- at the time 10 that the taxpayer applied for a seller's permit there 11 was no published guidance from the Board saying that we 12 would not issue them a seller's permit if they were to 13 report that they were selling medical marijuana. So I 14 think at that time if I was a real -- reasonable 15 taxpayer who really just wanted guidance as to what was 16 going on and -- and, you know, thought there was 17 confusion in the area or didn't know how to read the 18 Rev. and Tax Code myself, or what -- for whatever 19 reason, I would have just explained what I was doing to 20 the Department and either ask for written guidance if -- 21 or I should say and if I didn't -- wasn't satisfied with 22 the response I would ask for written guidance from the 23 Department or the -- or the -- the Legal Department. So 24 we both will issue written guidance that taxpayers can 25 rely upon and they can get relief from all taxes, 26 interest and penalties if they rely on written guidance 27 from the Board to their detriment. 28 So basically the taxpayer just filled out an 31 1 application that didn't tell us that they sold medical 2 marijuana when it was clear that that's what they were 3 intending to do, and then they just proceeded to stay in 4 business and sell medical marijuana and just claim an 5 exemption so I don't -- to me it doesn't seem like there 6 was a reasonable basis for them -- 7 MR. HORTON: Excuse me. I'm sorry, there's a 8 certain amount of conjecture in there. I don't know -- 9 MR. HELLER: Oh, pardon me. 10 MR. HORTON: -- that you can interpret what the 11 taxpayer intended at the time. 12 MR. HELLER: Sorry. Then I really -- all I 13 could say is what I would have done was to have 14 requested those things. Otherwise I would be just 15 taking my chances if it was just me and then -- what was 16 the second half -- 17 MR. RUNNER: In regards to the issue of how 18 other dispensaries have been dealing with this during 19 that same period of time in terms of a -- 20 MR. HELLER: I mean, I don't have information 21 on every dispensary out there. I think a number of them 22 were not permitted and we didn't really have a clear 23 understanding of exactly how many dispensaries were 24 actually operating within the State. As we've indicated 25 before, we weren't totally aware that the -- or we were 26 not aware that the Berkeley Patients Group was operating 27 a medical marijuana dispensary until 2007. 28 So basically during that period staff and the 32 1 Board Members, themselves, were working through both the 2 issue of whether or not to grant -- whether or not to 3 grant sellers' permits and then basically just working 4 through what are the applicable exemptions to sales of 5 medicine and whether they could apply to somebody who 6 dispenses medical marijuana. 7 MR. RUNNER: Thank you. 8 MR. HORTON: Member Yee. 9 MS. YEE: Thank you, Mr. Chairman. 10 MR. HELLER: Can I make one additional comment? 11 MR. HORTON: One second, sir. Member Yee. 12 MS. YEE: Thank you. I wanted to just respond 13 to Mr. Runner a little bit because this has been a 14 little problematic, but -- problematic on both sides, 15 both with respect to our agency and I think the 16 dispensary community as a whole. And that is, you know, 17 with respect to this petitioner, Berkeley Patients 18 Group, they applied for a seller's permit in 2001, which 19 predated the annotation that speaks to the legality 20 issue, which then was subsequently repealed in 2006. 21 We did have a case come before this Board in 22 February of 2005 where we denied the petition of another 23 dispensary and -- but we also had the Board also change 24 the policy with respect to what happens when someone 25 comes in and applies for a seller's permit, such that a 26 dispensary could come in and apply for a seller's permit 27 without disclosing what they sell. But also with the 28 understanding that if you don't disclose what you sell 33 1 we may not be giving you all the information that you 2 need to comply with the law, and that was really the 3 tradeoff. 4 It was a sensitive matter because as you know 5 dispensaries have been under the chill of the Federal 6 government under the prior presidential administration 7 and without speaking on the merits of that, but we had 8 the dispensary community essentially split where many of 9 them wanted to be in compliance with the law but were 10 fearful that they would then be identifying themselves 11 and fearful that they would be raided and shut down. 12 And many other dispensaries, because they feared that, 13 stayed underground. So it was a very, very untenable 14 situation for this agency to get the word out about 15 having to comply with the Sales and Use Tax law. 16 And we did it because we did specific outreach. 17 I have many of these in my district. I went out and 18 spoke to the community frequently in these early years 19 and I'd have to say I -- we've got actually pretty good 20 compliance. I mean, we get calls for assistance to help 21 them comply for a seller's permit because they do want 22 to comply with the law. 23 Having said that, the issues that are raised in 24 this particular appeal about whether medical marijuana 25 constitutes medicine, whether it's being provided by -- 26 you know, in a clinic setting, those issues I think this 27 Board has been very clear about with respect to whether 28 they -- the product is exempt from tax and also whether 34 1 we regard dispensaries as -- as medical -- as health 2 clinics. 3 So those in my mind don't have merit and so 4 I -- I think what's before us is really, you know, how 5 do we look at, you know, these liabilities now now that 6 we do seem to have some clarity in the law, which didn't 7 necessarily exist at the time of when the liability was 8 incurred, and what do we do -- and I'm particularly 9 sensitive with the Berkeley Patients Group because they 10 still are in operation. They're providing a service, 11 providing a product that's -- people need. And I think 12 from my perspective, my -- my perspective only, I want 13 to figure out how to move forward that keeps this 14 establishment in business but also is not going to hurt 15 them as they try to satisfy the liability in the best 16 manner possible without shutting them down. 17 I -- I do want to just kind of get some 18 feedback with respect to whether I'm -- I'm all wet with 19 respect to the equitable estoppel argument because we've 20 never heard it in a business tax context as Mr. Levine 21 has pointed out. We have 6596, that if that is an 22 underdeveloped area, I would like to see some more work 23 done in that regard. 24 MR. HORTON: Ms. Yee, are you -- 25 MS. YEE: I'm done. 26 MR. HORTON: Okay. Thank you. 27 Any other discussion, Members? 28 MS. YEE: I see Mr. Ferris. I think he may be 35 1 ready to speak to this. 2 MR. FERRIS: Well, as to the equitable 3 estoppel, the Board most frequently sees that in the 4 income tax context, and that's because it is a Federal 5 concept related to Federal statutes that come into 6 California law through California conformity statutes. 7 And so that's why we get into discussions about 8 equitable estoppel in California income tax cases. 9 But Mr. Levine is correct as to the -- the 10 Board's historic understanding with respect to its 11 powers under statute in the Sales and Use Tax law, that 12 the Board only has equitable powers for that program to 13 the extent the Legislature expressly grants it to them. 14 MR. HORTON: Okay. Thank you very much. 15 Question of the Department, is there a document 16 out there that says the Board of Equalization will not 17 issue sellers' permits to individuals who are selling 18 medical marijuana? 19 MR. HELLER: Mr. Horton, there was originally 20 an annotation that was published in 2002 that was -- 21 MR. HORTON: I thought the annotation said 22 it -- 23 MR. HELLER: -- subsequently withdrawn -- 24 MR. HORTON: -- it was taxed. 25 MR. HELLER: -- in 2006. And it basically 26 indicated that we wouldn't issue a seller's permit for 27 people who were -- whose only selling activity was 28 illegal sales of contraband in general, and including -- 36 1 MS. MANDEL: But -- and -- 2 MR. HELLER: -- marijuana. 3 MS. MANDEL: -- Mr. Levine was here when we 4 went through that with the Business Taxes Committee. So 5 maybe that would shorten it up. But there was 6 something -- there was a legend on the sellers' permits 7 that had been there since like the -- some long time 8 ago, about illegal -- 9 MR. LEVINE: I don't remember -- 10 MS. MANDEL: -- activity. 11 MR. LEVINE: -- the legend but we have -- it's 12 been decades that the Board did not issue sellers' 13 permits to anyone doing illegal activities. 14 MS. MANDEL: Right. 15 MR. LEVINE: One of my first cases before the 16 Board in the '80s was a drug case. No seller's permit. 17 That was part of the argument, how would you file 18 returns? File them anonymously? 19 I was on the other side and I didn't actually 20 bring it to the Board because I wasn't comfortable with 21 it, but that's been the Board's long-standing position 22 when it came -- there was considerable internal 23 dissension, mostly from me, which came up in the 24 marijuana case that was argued and the Board did change 25 the policy with respect to marijuana, which was -- 26 obviously has a -- a constitutional amendment related to 27 it and is different than any other contraband. 28 So, I believe -- I'm not sure but I believe our 37 1 policy continues to be to not issue permits to other -- 2 to drug -- to illegal drugs, this not being an illegal 3 drug for -- for California purposes. 4 MS. MANDEL: Right. 5 MR. LEVINE: But mar -- heroin -- 6 MS. MANDEL: I -- I remember a discussion, 7 though, that just the fact that the activity might be 8 illegal didn't necessarily mean there wasn't tax due. 9 MR. LEVINE: That's what you would have heard 10 from me, where my -- my position was always if a heroin 11 dealer wants to get a permit, give him the permit, tell 12 him we're going to tell the D. A. Give him the permit. 13 Assess the tax. They owe the tax. The criminality has 14 nothing to do with this agency. 15 I never prevailed internally until the Board 16 changed the rule on the marijuana sales. 17 MR. HORTON: Yeah, I think it was the Montana 18 versus Kurth Ranch, the -- before the Supreme Court that 19 said that ille -- the illegalness of a transaction does 20 not make it exempt from tax. In fact, when you go back 21 to the days of Al Capone, that's how Al Capone was 22 eventually prosecuted. It was a result of him owing tax 23 on illegal activity. 24 So -- but I'm -- I'm just -- the annotation 25 that was issued in 2002 did or did not specifically say 26 that the sale of marijuana -- that the Board would not 27 issue a permit to individuals that were selling 28 marijuana? 38 1 MR. LEVINE: Yes. I believe that was one based 2 on an analysis from a former ACC on whether sales were 3 criminal under the proposition which I personally 4 objected to because I don't think it's our job to decide 5 if it's criminal or not. 6 MR. HORTON: Right. 7 MR. LEVINE: He was the ACC and I wasn't. So 8 his rule went into effect and it was not deleted -- 9 actually in 2000 we had a little problem. When I was in 10 charge I was going to pull that annotation but I got 11 overruled by the Chief Counsel, just to -- because it 12 was a long-standing Board policy. And there was not a 13 comfort level of doing that without having the Board 14 itself do it, which is what you did in 2006. 15 MR. COFFILL: May I interject for one minute 16 then? 17 MR. HORTON: Sure. 18 MR. COFFILL: I think this discussion to some 19 extent off the record and certainly not a public 20 discussion of the history of these transactions -- 21 MR. HORTON: You can't go off the record, sir. 22 MR. COFFILL: No, no, we -- I think -- what 23 we're hearing here is off the record in the sense 24 that -- 25 MR. HORTON: Oh. 26 MR. COFFILL: -- if in fact you were a clinic 27 out there looking for public information, I mean hearing 28 what Mr. Levine says from being there at the time, I -- 39 1 I think that's much different than what you would have 2 heard if you were actually on the street or outside at 3 the time. This is information which is really anecdotal 4 at this point. It's not information you could have ever 5 found in any of the FTB publications, and there real -- 6 really were no public -- publications -- public 7 publications until the two notices in 2007. 8 So, for example, Exhibit G to our brief is a 9 copy of the June 2007 notice. And one of the questions 10 it addresses was a permit issue. And if I can read, 11 it's very brief. 12 "In October 2005, after meeting with taxpayers, 13 businesses and advocacy groups, the Board directed staff 14 to issue sellers' permits regardless of the fact that 15 the property being sold may be illegal or because the 16 applicant for the permit did not indicate what products 17 were sold." 18 This new policy was effective immediately. It 19 was a new policy. There's no doubt it was a new policy 20 and that's the way it was explained to people in June of 21 2007. 22 MR. HORTON: Okay. Well, let me personally 23 apologize. I think the Board was wrong. I think -- and 24 certainly if we had equitable estoppel I would like to 25 entertain that, but obviously we don't. 26 But, you know, Revenue and Taxation Code 60 -- 27 6051, medical exemptions have been around for a long 28 time and so it's pretty clear what the law says relative 40 1 to the taxability of medical marijuana. And even the 2 illegal sales of medical marijuana in my view, unless 3 they meet the provisions of the exemptions of the law, 4 are taxable and tax should be collected, should be 5 reported. If not reported, collected and done so under 6 the letter of the law. 7 But that said, I want to thank you very much 8 for your sharing and bringing this up. It's been very 9 interesting. 10 Any -- further discussion, Members? 11 Hearing none, is there a motion? 12 MS. YEE: Move to take the matter under 13 submission. 14 MS. MANDEL: Second. 15 MR. HORTON: It's been moved by Ms. Yee, second 16 by Ms. Mandel, to take the matter under submission. 17 Without objection, Members, such will be the 18 order. 19 Thank you so very much for coming before us 20 today. The Board will discuss your matter later on 21 today and we will send you written notice of our 22 decision. 23 MR. SCHICK: Thank you. 24 MR. COFFILL: Thank you. 25 ---oOo--- 26 27 28 41 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 February 22, 2011 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 41 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 4, 2011. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 42