BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT FEBRUARY 23, 2011 ITEM C8 SALES AND USE TAX APPEALS HEARINGS PETITION FOR REDETERMINATION filed by GUARANTY RV, INC. (Case No. 391657 EH) 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 Cary Huxsoll 17 Legal Department 18 Robert Tucker Legal Department 19 Kevin Hanks 20 Sales and Use Tax Department 21 For Petitioner: Jesse McClellan 22 Representative 23 Dan Davis Representative 24 Ed Morgan 25 Taxpayer 26 27 ---OOO--- 28 2 1 Sacramento, California 2 February 23, 2011 3 ---oOo--- 4 MS. OLSON: Our next item is C8, Guaranty RV, 5 Incorporated. Please come forward. 6 MR. HORTON: Mr. Levine, as they come can you 7 please introduce -- 8 MR. LEVINE: Sure. 9 MR. HORTON: -- the matter. 10 MR. LEVINE: I'm sure this is going to be a 11 very simple case after that one. 12 The issues in this petition -- 13 MR. HORTON: Cracked my crystal ball. 14 MR. LEVINE: -- in this petition for 15 redetermination of Guaranty RV, Inc. are whether 16 adjustments are warranted to disallowed claimed 17 non-taxable sales which includes the issue of whether 18 the presumption of Revenue and Taxation Code Section 19 6247 is applicable to some of the sales based on 20 Petitioner's contention that the sales were not 21 connected to its California locations. 22 Another issue is whether adjustments are 23 warranted for tax paid purchases resold of gasoline and 24 diesel and to the audited amount of Use Tax on 25 consumption whether Petitioner was negligent and whether 26 the amnesty penalty should be relieved. 27 MR. HORTON: Thank you. Would the taxpayer 28 introduce themselves for the record. You have ten 3 1 minutes to make your presentation. The Department would 2 then have ten minutes to make theirs, and you'll have 3 five minutes to rebut. 4 MR. McCLELLAN: Thank you, Mr. Chairman and 5 Members of the Board. My name is Jesse McClellan, 6 representative to Guaranty RV, Inc. I'm joined by my 7 partner, Dan Davis and also Ed Morgan, the CFO of 8 Guaranty, Inc. 9 Time permitting there's three areas of the 10 audit that we'd like to address. One being sales made 11 from Oregon. The other area is the audit of the 12 California locations and sales made from those 13 locations. And the third area is the penalties that 14 were assessed. 15 Prior to delving into the details I'd like to 16 provide some relevant background facts on the business 17 operations. 18 Guaranty's Junction City, Oregon operations 19 started in 1967. Its Indio, California dealership 20 started in 1996. And its Gilroy, California dealership 21 started in 1994. 22 For the purposes of this discussion each 23 dealership will be referred to by its city of location; 24 Junction City, Gilroy or Indio. Junction City is the 25 location in Oregon. 26 Each dealership was responsible for maintaining 27 and purchasing its own inventory. And each sought to 28 generate its own profit. Junction City is one of the 4 1 largest RV dealerships in the nation, largest by total 2 RVs sold, total acreage occupied and total inventory 3 maintained. 4 Junction City is located within 15 miles of 5 three major RV manufacturers which manufactured up to 50 6 percent of the high end RVs in the nation during the 7 audit period. Because of the longstanding relationship 8 and close proximity to the manufacturers, Junction City 9 was granted with the first opportunity to sell certain 10 new and limited edition RVs. What this means is that 11 they would be the only location in the western region 12 that a person could purchase a particular RV. 13 Many RV purchasers prefer to take factory 14 delivery because it permits them to customize their new 15 Rvs. The customers are provided with VIP treatment and 16 are allowed to tour the factory. Factories do not sell 17 directly to the public so many of the factory sales 18 would flow through Junction City. 19 As a result of its longstanding history, strong 20 customer base, expansive inventory and close proximity 21 to the major RV factories, individuals travel thousands 22 of miles from throughout North America to shop at 23 Junction City. 24 Issue one, whether the Board can force Guaranty 25 RV to collect Use Tax on sales occurring entirely 26 outside the State. The same question was addressed in 27 Montgomery Ward versus State Board of Equalization. In 28 Montgomery Ward the California Appellate Court 5 1 unanimously agreed that the Board of Equalization cannot 2 force an out-of-state business to collect Use Tax on 3 transactions occurring entirely outside of the State. 4 It found such imposition to be in violation of due 5 process, the commerce clause and equal protection under 6 the law. 7 The Board appealed the case to the U. S. 8 Supreme Court but the review was denied, further 9 supporting that the decision was correct. 10 The Department has not challenged the validity 11 of the Montgomery decision; rather they seek to 12 distinguish it from this case. To do so, the Department 13 asserts that because California purchasers resided in 14 closer proximity to Guaranty dealerships located in 15 Indio or Gilroy, California they must have been actively 16 solicited by those dealerships to purchase from Junction 17 City for the purpose of avoiding Sales Tax. 18 The Department offers no direct evidence in 19 support of its theory. In fact, Guaranty had no such 20 policy in place and several relevant factors make this 21 point clear. 22 First, compensation plans in place for 23 California sales managers encourage sales from each 24 respective dealership. If a sale was directed to Oregon 25 or a different California location, the sales managers 26 stood to lose two of the three components under which 27 they were compensated. That's presented under Exhibit 28 1. 6 1 We've all likely been involved with the 2 purchase of a -- of a vehicle and we all know that it's 3 not easy to leave the dealership. To suggest that there 4 was a policy established by a dealership corporation to 5 send purchasers away from a location is nonsense. 6 The California dealerships closed in 2007. An 7 analysis of sales from Junction City reveals that sales 8 to California residents made up 5.89 percent in 2006, 9 the year immediately preceding the closure. In 2008, 10 the year immediately following the closure, the 11 percentage of sales was 6.63 percent. 12 Even if you take the percentage of California 13 sales from 2001 through 2007 you still find that there 14 was no substantial change after the closure. If the 15 Department's claim were correct that there was an active 16 solicitation for the purpose of avoiding Sales Tax going 17 on with the California dealerships you would expect a 18 substantial change. There was no substantial change 19 regardless of how you look at the data. 20 The Department claims that purchasers would not 21 have traveled to Oregon without solicitation on their 22 own. However, the Department fails to recognize that 23 thousands of purchasers did that from much further 24 distances on their own. 25 Junction City sold roughly 2,000 RVs to 26 residents of 56 other states or provinces during the 27 audit period. Those purchasers traveled an average of 28 1,184 miles, yet no dealerships operate in those states. 7 1 California purchasers traveled an average of 681 miles, 2 a much shorter distance. 3 The California purchaser wanted to avoid Use 4 Tax -- I'm sorry, Sales Tax on these transactions. They 5 could have taken delivery in Nevada or Arizona. Nevada 6 is 274 miles from Gilroy. Junction City is 605 miles 7 from -- from Gilroy. Indio is 997 miles from Junction 8 City, yet it's only 147 miles from Arizona. If the 9 purpose was to avoid tax there was a much shorter 10 distance the purchasers could have traveled to accept 11 delivery outside of the State. There was no need for 12 them to travel 1,000 miles to go to Junction City to do 13 so, as the Department suggests. 14 The Department has provided virtually no 15 evidence to support its theory. The facts actually 16 support that there was no such policy in place. There 17 was no financial incentive for the sales managers to 18 push sales to Oregon. There was no incentive for the 19 corporation to push sales to Oregon since the profit 20 margin remained the same regardless of where the sale 21 took place. And there was no motivation for these 22 purchasers to travel up to a thousand miles when they 23 could travel a couple of hundred to a closer state. 24 Because the Department has provided virtually 25 no evidence to support its case and because the facts 26 actually refute the Department's theory, we ask that 27 this portion of the audit be deleted in its entirety. 28 Audit area number two, sales from California. 8 1 Two sales were disallowed in this portion of the audit 2 because there was a single line item not completed on 3 the 447 and 448 forms accepted by the taxpayer. That 4 line item is included on the 447 form and it requests an 5 out-of-state address of use. 6 If you look to Exhibit 9 you'll see these 7 forms. We believe that when you view the 447 and 448 8 form signed by the purchasers in their totality, the 9 forms which were accepted in good faith by the taxpayer 10 satisfy the out-of-state address requirement. The 11 second line on the 448 form specifically designates an 12 out-of-state address. There is no reason why the two 13 forms should not be considered in their totality. They 14 were both signed by the purchaser and the seller and 15 they were both accepted and provided contemporaneously 16 with the sale. 17 In fact, both of the forms specifically refer 18 to the other form. Because the 448 form contains a 19 designated address and because the purchaser used the RV 20 at that designated point, the moment they drove the RV 21 away the requirements under 6247 have in fact been 22 satisfied and sufficiently documented. 23 The other issue in the California sales portion 24 of the audit deals with the stat. sample. During the 25 audit the auditor allowed certain transactions the 26 Oregon portion that were missing to be replaced. 27 Guaranty RV, like all dealerdealershipsships, maintain 28 -- maintain their sales in deal jackets. It's hard copy 9 1 forms which are filed individually. 2 Some of those couldn't be located. The auditor 3 allowed them to be replaced. 4 On the California side of the audit, the 5 auditor automatically treated those items as errors. At 6 the Appeals Conference we requested that those items 7 that were automatically treated as errors be allowed to 8 be replaced by other randomly selected units. Rather 9 than allow those to be replaced the Appeals Division 10 actually removed the items that were previously 11 replaced, denied the request to replace the items we had 12 requested, and treated them all as errors. 13 To do so assumes that there's a hundred percent 14 error rate. The audit, itself, proves that that is not 15 the case. 16 MS. OLSON: Time has expired. 17 MR. HORTON: Can you wrap it up, sir? 18 MR. McCLELLAN: Absolutely. The -- the 19 Appeals attorney relied largely on the statistical 20 sampling form, form 472. If you look at Exhibit 7 and 8 21 I included a portion of the language that's contained in 22 that form and it explicitly states that it's not binding 23 on the State or the taxpayer and that it should be 24 changed as necessary. And the auditor's own replacement 25 demonstrates that it was in fact changed. 26 MR. HORTON: Thank you very much. Will the 27 Department introduce themselves for the record. You 28 have ten minutes on your -- to make your presentation, 10 1 at which time we will return back for rebuttal. 2 MR. McCLELLAN: Thank you. 3 MR. HUXSOLL: Good morning, Mr. Chairman, 4 Members of the Board. I'm Cary Huxsoll from the Legal 5 Department along with Robert Tucker and Kevin Hanks 6 representing staff. 7 No adjustments are warranted to disallowed 8 claimed non-taxable sales or purchases subject to Use 9 Tax. Petitioner is a dealer of recreational vehicles. 10 Petitioner operated locations in Gilroy, California; 11 Indio, California and Junction City, Oregon. 12 We concur with the Appeals Division that 13 Montgomery Ward does not apply. There was a connection 14 between Petitioner's California locations and its sales 15 to California customers at its Oregon location. 16 Petitioner is a retailer engaged in business in 17 California under Section 6203. It must collect Use Tax 18 on sales made from the Oregon location. 19 No adjustments are warranted for sales in which 20 the Petitioner provided incomplete BOE form 447. BOE 21 form 447, statement pursuant to Section 6247 of the 22 California Sales and Use Tax law can be completed by 23 purchase of -- purchasers of vehicles to certify to the 24 seller that the vehicle is being purchased for use 25 outside of California. 26 Under Section 6247 it is presumed the property 27 delivered outside of California to a purchaser known by 28 the retailer to be a resident of California were -- was 11 1 purchased for use and used in California. 2 Section 6247 is explicit as to what is required 3 to controvert the presumption that the RVs in question 4 were purchased for use in California. 5 Section 6247 requires a statement that the 6 property was purchased for use at a designated point or 7 points outside the State. Form 447 includes a line for 8 purchasers to provide this information. Since this 9 information was missing from the 447s they are not 10 sufficient to controvert the presumption under Section 11 6247 that the RVs were purchased for use in California. 12 With respect to exhibits Petitioner submitted 13 this week, Exhibit 2, which provides a summary of sales 14 made by Petitioner's Oregon location, contains figures 15 that are inconsistent with sales figures Petitioner 16 provided as part of its own opening brief. 17 The figures in Petitioner's exhibit are also 18 inconsistent with audited sales from Petitioner's Oregon 19 location to California residents for 2002 and 2003. 20 Furthermore, the calculation of commission as explained 21 in Petitioner's Exhibit 1 is inconsistent with the 22 contracts provided by Petitioner in its opening brief. 23 Thank you. 24 MR. HORTON: Thank you very much. Rebuttal. 25 MR. McCLELLAN: Thank you, Mr. Chairman. 26 Before I address the Department's statements I'd like to 27 go through and address the penalties, which I didn't 28 have an opportunity to do on the opening. 12 1 There is an -- a negligence penalty which is 2 assessed in this audit and also amnesty penalties. With 3 respect to the negligence penalty, if you look at the 4 audit measure as it stands today, if there were no 5 adjustments made, it represents five percent of this 6 taxpayer's total sales for periods 2001 through 2005. 7 In the last exhibit, I believe it's Exhibit 10, 8 I provided a copy of the combined income statements. 9 The majority of the errors for that five 10 percent stem from the transactions which occurred in 11 Oregon. It's 80 percent of the measure. 12 With respect to the California error, the 13 majority of that error consists of disallowed 14 transactions for very minor deficiencies in 15 documentation, some of which we have addressed earlier 16 and believe actually should be accepted. 17 The audit establishes that the taxpayer's books 18 and records were complete and accurate; that there were 19 no computational errors in preparing the returns and 20 this is the taxpayer's first audit. When all of these 21 facts are considered it becomes clear that there is no 22 negligence present. And we ask that that penalty be 23 abated. 24 With respect to the amnesty penalties, upon 25 receiving notification the taxpayer promptly reviewed 26 their returns and records to determine whether or not 27 there was any error in reporting. What they found is 28 that there was no error in reporting and the audit 13 1 supports that. 2 The audit exit conference where the audit 3 errors are presented to the taxpayer occurred on 4 February 8 -- I'm sorry, February 28, 2006, several 5 months after the deadline, which is May 31, 2005. 6 The audit record does suggest that there were 7 requests for records made during the audit period, which 8 we do not dispute, but that's what an audit consists of, 9 a request and review of those records. 10 There is no indication that the taxpayer was 11 put on notice that there was a potential error or that 12 the taxpayer knew that there was an error. 13 We believe the amnesty program was not designed 14 to punish the unsuspecting taxpayer. Yet as it's 15 applied in this case it does just that. Had Guaranty 16 knowingly underreported and thereby knew it had a 17 liability at the time of the amnesty program deadline it 18 could have participated in the amnesty program with 19 immunity. However, because Guaranty operated in good 20 faith with the belief that it had reported properly the 21 Department now recommends that it be penalized. Amnesty 22 is not intended -- intended to punish good faith 23 efforts, and we do not believe that the facts support 24 the penalty here. 25 Now, with respect to the Department's 26 statements, they -- absolutely. 27 MR. DAVIS: The point in particular I'd like to 28 make, something that struck me when I was -- 14 1 MS. YEE: Speak in the microphone. 2 MR. DAVIS: Oh, I'm sorry. -- statement the 3 Department made that struck me was that the Montgomery 4 Ward case was being distinguished from what's happening 5 here because this is the same assertion they've made 6 throughout that there was a California connection with 7 the Oregon sales. Yet the Department has still not 8 clarified what this connection was. I mean, they claim 9 that again these California locations forwarded -- sent 10 potential buyers up to Oregon, which as my partner 11 pointed out is kind of a ridiculous assertion given, you 12 know, the actual facts of an operating dealership and 13 given the fact that Oregon is much farther away than the 14 other State lines which if they were gonna allow their 15 purchases to avoid tax they just sent them to Nevada or 16 Arizona. They wouldn't have sent them on this long trip 17 to Oregon. 18 I would like to know what the Department bases 19 its assertion that there was a California connection 20 with the Oregon sales. It -- it makes no sense to me. 21 MR. HORTON: Thank you for your inquiry. 22 Can -- is that the conclusion of your presentation or is 23 there additional -- 24 MR. McCLELLAN: Well, I suppose along those 25 same lines I think I was at a loss of words in 26 responding to the Department because it didn't really 27 seem like they said much in support of their case. They 28 attacked some of the exhibits but the numerical -- or 15 1 the numbers on the exhibits, in particular Exhibit 1, 2 wasn't meant to establish the exact figure. The -- the 3 purpose of that exhibit was to demonstrate if you had a 4 sale that occurred in California, you have an employee 5 that's going to be fully compensated. If it's sent 6 elsewhere, even to another California dealership, 7 they're not going to be compensated. 8 I tried to simplify that calculation and I only 9 used the audit measure when in fact of course there is a 10 significant portion of transactions that would increase 11 that figure because the audit liability, the -- the 12 stat. sample only established a 27 percent error. 13 So really that figure that I used to multiply 14 it by represents 27 percent of -- of the transactions 15 that occurred in Oregon. 16 But the -- the point of the exhibit is to 17 demonstrate that these employees had no motivation. The 18 other exhibit that they referenced was intended to 19 demonstrate that there was no substantial change. That 20 exhibit actually includes taxable transactions where 21 Guaranty had remitted the tax on behalf of California to 22 the State. 23 Again, there's only a 27 percentage of error, 24 and if you take that into account the percentages 25 significantly swing in Guaranty's favor. 26 If you look at the exhibit which lists all of 27 the different purchasers from all of the different 28 states and provinces, what you see is that there's over 16 1 2,000 purchasers that are traveling from much further 2 distance. None of this supports the theory that the 3 Department has established and it's just that, a theory. 4 So, we would ask them to -- to support their 5 claim or to recognize that the claim is not supported 6 and concede it. 7 We have nothing else to add. 8 MS. OLSON: Time has expired. 9 MR. HORTON: Thank you very much for your 10 presentation. 11 Mr. Runner, Ms. Yee -- Mrs. Yee and then Ms. 12 Steel. 13 MR. RUNNER: Thank -- thank you, Mr. Chair. 14 Let's -- let's go to the core of this issue in 15 terms of the -- the Issue One dealing with the Oregon 16 sales. And it's kind of the big item here. Let's kind 17 of start with there for -- for me. 18 What is it that we found in the audit that made 19 the connection between the sales in Oregon versus the -- 20 and the fact that they had sales locations in -- in 21 California? 22 MR. HUXSOLL: It was the volume of sales to 23 customers living closer to Petitioner's California 24 locations as opposed to the Oregon location. People 25 living within the vicinity of Petitioner's Gilroy and 26 Indio locations purchased the vehicles at the Junction 27 City location and -- and, you know, we -- we agree with 28 the Appeals conclusion that this alone is -- is 17 1 evidence, the great number of sales that went to 2 California customers who live within the vicinity of the 3 California locations but instead purchased at the Oregon 4 location is evidence of some connection with the sale. 5 MR. RUNNER: Do you need -- don't -- do we need 6 any evidence other than -- than the buyer's choice? I 7 mean, it seems to me what you come down to is the 8 buyer's choice at that point as to where they're going 9 to go to make -- make a -- make a decision and then 10 they're going to do whatever they're going to do when 11 they have to sign their paperwork correctly in -- in 12 Oregon. 13 MR. HUXSOLL: In -- 14 MR. RUNNER: Any -- well, let me add -- may be 15 more specific. 16 MR. HUXSOLL: In the -- 17 MR. RUNNER: Any -- any act -- any act, any 18 paperwork that indicates go to Oregon? 19 MR. HUXSOLL: The -- the commission 20 calculations the Petitioner provided as part of its 21 opening brief -- 22 MR. RUNNER: Yes. 23 MR. HUXSOLL: -- included each of the different 24 salesperson who receives commission. Part of their 25 commission was based on the dealership net profit for 26 all of Guaranty RV's locations, that being the Gilroy 27 location, the Indio location and the Junction City 28 location. 18 1 So it is in the interest of one of the dealers 2 to -- as opposed to losing a sale to someone down 3 the street, to encourage a customer to save money and 4 purchase a vehicle at the Oregon location without having 5 to pay tax and that would still go back towards the 6 commission of that salesperson. There is incentive. 7 MR. RUNNER: What -- give me -- give me an 8 insight in regards to -- for that particular issue the 9 kind of financial benefit that may benefit then a person 10 who is working in the Indio store and sends somebody up 11 to the Oregon store. What does that mean to that 12 individual financially? 13 MR. HUXSOLL: Okay. The calculation of 14 commission is -- for the -- for the one document that 15 was presented for the time during the audit period, the 16 one commission contract, the -- the salesperson received 17 a commission based on the departmental operating profit, 18 the profit of the individual location they were at, and 19 the dealership as a whole's net profit. So, there was 20 incentive to -- 21 MR. RUNNER: How much? I mean, give me -- 22 MR. HUXSOLL: It's -- 23 MR. RUNNER: Give me -- I need to know what 24 kind of incentive it is. 25 MR. HUXSOLL: Okay. 26 MR. RUNNER: Is it a buck? Is it -- 27 MR. HUXSOLL: It's -- 28 MR. RUNNER: -- a hundred bucks? Is it $5,000? 19 1 MR. HUXSOLL: -- .237 percent of the 2 dealership's net profit, is the one we have for -- it 3 was the Jason Foerster (phonetic), that particular 4 salesperson. It was -- there was 2.3 percent for sales 5 made at the -- for the dealership -- the departmental 6 operating profit. But there was a .237 percent of the 7 dealership as a whole's net profit. The 8 dealerdealership being all of Guaranty RV's locations, 9 including the Oregon location. MR. RUNNER: Okay. I 10 still -- you're -- you -- I don't know, apparently -- I 11 don't think you could answer my -- maybe you just don't 12 have the information. But I'm trying to figure -- I'm 13 trying -- trying to monetize that to a -- to an event to 14 somebody who says, I'm going -- I'm a sales guy here, 15 how much more money am I going to make if I send this up 16 to Oregon versus going ahead and having it sent, sold -- 17 delivered here in -- in Indio. 18 MR. TUCKER: Robert Tucker on behalf of the 19 Legal Department. One of the problems we have is that 20 we don't have a complete picture. We only have partial 21 records, some from within the audit period, some from 22 without. But we don't have the full financial picture 23 so that we can say that this is precisely how it works 24 for this individual. What we do see is that there is a 25 relationship between the sellers at the California 26 locations and sales from the Oregon locations at the 27 Junction City store. 28 So there is clearly a connection between the 20 1 two, and so that when there is a sale made at Junction 2 City, the individuals in California do benefit from 3 those transactions. 4 MR. RUNNER: Okay, but we can't monetize that, 5 we don't know what it is? 6 MR. TUCKER: We don't have the records. 7 They're the only ones who have the records and they 8 haven't provided (inaudible). 9 MR. RUNNER: Okay. Well, let me ask you this 10 then, is there any -- in -- in the discussions with 11 sales individuals did we find an individual who said, 12 yes, that's what I do, it helps me to send somebody up 13 north? 14 MR. HUXSOLL: No, there was nothing like that 15 in the audit. The information came from the contracts 16 the Petitioner provided as part of its -- 17 MR. RUNNER: Okay. So in our audit we didn't 18 check out -- we didn't -- we -- we, I don't know, maybe 19 ordinarily don't do that. You don't go and check with 20 somebody if you're going to make an assertion that 21 somebody is going to make more money by selling this 22 here in -- in -- in -- by sending somebody out of state 23 versus going ahead and making the sale here in -- in 24 California? We don't -- do we -- we don't interview 25 somebody to see if that's the case? 26 MR. HANKS: Ordinarily, Mr. Runner, that 27 wouldn't be the -- the line of -- of questioning that 28 the -- the audit staff would have had with the 21 1 Petitioner. 2 In this case what we're doing is, is trying -- 3 MR. RUNNER: How about with the buyers? How 4 about with buyers, do we check with buyers to say, hey, 5 were you in -- was it -- was there a benefit to you to 6 go ahead and -- and consummate your sale? 7 MR. HANKS: If -- if circumstances require us 8 to -- to contact the -- the buyer, if there's some 9 ambiguity with respect to the forms 447 or 448 that have 10 been submitted -- 11 MR. RUNNER: Uh-huh. 12 MR. HANKS: -- then certainly we can contact 13 the -- the buyer to -- to obtain additional information. 14 In that case, however, it's -- it's difficult because 15 it's -- it's somewhat self-serving at that point. 16 Presumably -- 17 MR. RUNNER: Sure, for the buyer it is. 18 MR. HANKS: But the buyer. And -- and so that 19 makes it different. 20 On the other hand, the buyer can clarify with 21 us -- 22 MR. RUNNER: Of course the buyer -- yeah. 23 MR. HANKS: -- some details of -- of the 24 transaction. Where -- where did title and transfer 25 occur? 26 MR. RUNNER: As far as the -- the taxpayer is 27 concerned in regards to the benefit that occurred by the 28 person who's making the sale because of the commission 22 1 formulas? 2 MR. McCLELLAN: One thing I would like to add 3 that Ed pointed out to me last night in a discussion was 4 that some of the compensation plans in place actually 5 didn't include the third component, which was a 6 component that allowed for a percentage of the total 7 corporation profit. 8 But I think the issue is quite simple. If -- 9 if you take an individual that's being compensated, if 10 you sell RVs, and you provide that individual with the 11 opportunity to make three of the three compensation 12 components by making the sale inside California versus 13 one of those compensation components, it completely 14 eliminates the Department's position which is and has 15 been up to this point unless it's now changing that 16 there was active solicitation to avoid Sales Tax. 17 MR. RUNNER: Let me -- let me follow up just on 18 a -- a thought there. I'm trying to picture the sale. 19 I mean, here's Salesman A. He works down in Indio. And 20 he gets a commission. That commission is made up of a 21 number of things. One component is the overall benefit 22 that comes to the corporation, I guess, in regards to 23 this. Okay. 24 So that's how -- but that's part of his 25 compensation for selling a vehicle in Indio. Help me 26 understand if -- if that individual then said, "Why 27 don't you go to Oregon and buy it," okay, now how does 28 that -- is there -- was there any paperwork that showed 23 1 that that individual got compensated for that particular 2 sale that he sent somebody to Oregon for to go ahead 3 and -- and purchase that? 4 Any -- any indication that somebody who sold 5 some -- bought -- who sold as a -- somebody bought 6 something in Oregon and it then was -- there was a 7 compensation check for commission to somebody who works 8 in a California store? 9 MR. HUXSOLL: Nothing directly, but there was 10 one document presented that did show the reverse of a 11 sale made in Gilroy where the salesperson was listed as 12 the Junction City location. It wasn't an individual 13 dealer, but it did show -- 14 MR. RUNNER: One? 15 MR. HUXSOLL: Of the documents that were -- 16 MR. RUNNER: Okay. 17 MR. HUXSOLL: -- presented in questioned sales. 18 MR. RUNNER: Okay. But in general we're not 19 seeing -- I'm just trying to get over this compensation 20 issue in regards to the motivation. I'm a sales guy. 21 You know, I'm going to make my money by selling that RV 22 in California. That's where I'm going to make my money. 23 That's where I'm going to get my commission. My 24 corporation may make -- may -- may -- may help. My -- 25 my portion of it may help me -- my next sale or 26 something there if this guy goes and buys something or 27 somebody else buys something in Oregon I'm not going to 28 benefit from that sale. 24 1 Was there anything that said anywhere that 2 somebody who sold something in California directly 3 benefited from that same buyer who they ended -- who 4 they interacted with going to Oregon and buying 5 something? 6 MR. TUCKER: Yes, in -- in essence -- 7 MR. RUNNER: And what was that? 8 MR. TUCKER: And what the document was, and Mr. 9 Huxsoll can expand upon this, is that in the -- clearly 10 the first object of a salesperson would be to make the 11 sale in California. If they can't make the sale, then 12 the next best thing would be to make the sale at the 13 Junction City location because they were -- were 14 afforded a commission or a profit based on the -- or a 15 portion of the net profits from the Junction City 16 location. 17 So if it comes down to -- 18 MR. RUNNER: Not on that particular sale. 19 MR. TUCKER: But on all sales for that period 20 and that -- that one sale would be a component of that, 21 that transaction. Or a component of that net profit. 22 So it might not -- 23 MR. RUNNER: And in -- and I can -- I mean, 24 when we did the audit, any training material, anything 25 to show that that was indeed what it is that this -- 26 this company sought to do to help their salespeople 27 understand how it is that they can benefit financially 28 was to go ahead and shift that kind of -- of sale up to 25 1 Oregon? Any -- any -- anything, any -- any 2 documentation? 3 MR. RUNNER: Okay, thank you. 4 MR. HORTON: Madam Yee. 5 MS. YEE: Thank you, Mr. Chairman. From the 6 Department, this is the Petitioner's first audit? 7 MR. HUXSOLL: Yes. 8 MS. YEE: Okay. And I want to focus also on 9 the negligence penalty because -- and I -- it's -- and 10 because it is related to the Oregon transactions -- or a 11 significant portion of the deficiency is related to the 12 transactions from the Oregon location. 13 Is it possible that the deficiency may have -- 14 or the error may have resulted more from a 15 misunderstanding of the law versus inaccurate 16 recordkeeping? 17 The reason I'm asking that is that it also 18 seems to me that the auditor made -- adjusted the 19 deficiency measure several times and put into question, 20 at least for me, about whether the Oregon transactions 21 were subject to California Use Tax. And so I just 22 wanted to kind of get a sense of what really was going 23 on here. 24 MR. HUXSOLL: It's -- the -- the initial 25 communications between the Petitioner and the auditor 26 indicated that the first person that the auditor spoke 27 to said that sales from Oregon were being reported under 28 a different permit number and then at the time of the 26 1 discussion of audit findings another person from 2 Petitioner's location questioned the auditor as to how 3 to treat sales from Oregon to California. There was 4 inconsistency in terms of one individual appeared to 5 understand that they were responsible for collecting 6 such tax, but it was done -- believed it was done under 7 another account, and these amounts were not being 8 reported. 9 However, there was another individual who 10 questioned how exactly to report these transactions 11 MS. YEE: Okay. Putting the Oregon related 12 transactions aside, how were Petitioner's recorded total 13 sales otherwise regarded? I mean, were they accurate? 14 Were they all documented? 15 MR. HUXSOLL: I believe the auditor was able to 16 reconcile the recorded versus reported sales, including 17 the General Ledger information. 18 MS. YEE: For the remainder, okay. 19 Okay, let me stop there for now. I'm trying to 20 leave some pieces to -- 21 MR. HORTON: All right, we'll return? 22 MS. YEE: Yeah. 23 MR. HORTON: Ms. Steel. 24 MS. STEEL: I think it's follow-up question too 25 for negligence penalty, that it's the first time ever 26 got audited. And what's the difference here, about 18 27 percent? The sales reported. 28 MR. HUXSOLL: The under -- 27 1 MR. HANKS: Oops. Ms. Steel, the one comment I 2 wanted to make relative to the negligence penalty was 3 that staff was also looking at just the totality of -- 4 of the understatement and comparing that to reported 5 taxable sales, not just reported total sales. Of course 6 you have a -- a smaller percentage if you compare it to 7 reported total sales. 8 But if you compare audited taxable sales with 9 reported total sales, then actually we have a -- a large 10 factor of error. That factor of error is 77 percent, 11 nearly 80 percent. And -- and based on that the staff 12 thought that -- that Petitioner was -- was negligent in 13 reporting those sums to the Board. 14 Additionally, there are notations that there 15 wasn't adequate documentation supporting some of the -- 16 the transactions that are at issue and -- and it became 17 a question within our statistical samples. 18 MS. STEEL: So how did you adjust it with the 19 missing transactions here, because according to the 20 taxpayer there is missing transactions that -- that was 21 returned. The -- or it was added to other record. So, 22 resorted. And how we audited that part of it? 23 MR. HANKS: Right. Right. Yes, Ms. Steel, I'm 24 glad you asked that question because it -- it does bear 25 an importance regarding those statistical samples 26 that -- that we conducted. Generally speaking, if -- if 27 there's no documentation that is supporting one of the 28 tested randomly selected items within a statistical 28 1 sample we don't replace it with another transaction. It 2 appears as though we mistakenly did that in a couple of 3 occasions with respect to -- to one of the statistical 4 samples that was conducted, but generally we do not do 5 that. 6 You might have a -- a situation -- different 7 type of situation where let's -- let's say the -- the 8 Petitioner had a fire in their operations and the 9 computer records for maybe one year's transactions were 10 destroyed. In that situation if our random sample is -- 11 is telling us to select invoices from -- from those 12 destroyed records we'll make adjustments for that and 13 only test items outside of that period where those 14 records are not available. 15 But generally speaking we -- we don't make a -- 16 a replacement for a document that -- that isn't within 17 the sample. 18 MS. STEEL: Okay. To the taxpayer, that you 19 have those transactions, the record and documents? The 20 missing documents. 21 MR. McCLELLAN: I'm sorry, what was that? 22 MS. STEEL: Those missing transactions. 23 MR. McCLELLAN: Well, the -- the auditor did 24 allow missing transactions to be replaced. I can tell 25 you that I've personally signed audit sampling plans on 26 behalf of my clients where missing sample units were 27 stated to be replaced. 28 As far as the Department's claim that that 29 1 isn't done, I find that hard to believe. And it's not 2 done mistakenly, especially in this case. It's not as 3 if there was a tap of the computer button and it was 4 replaced, we're dealing with deal jackets, what are 5 main -- which are maintained in a hard copy form. So 6 the auditor would have had to recognize that the -- the 7 deal jacket was not available. She obviously believed 8 that the absence of it was not done willfully and 9 permitted it be replaced. We think that's the fair 10 thing to do. 11 It's a random selection of the other 12 replacement unit. If the second replacement unit is 13 missing I would say that it would be certainly 14 reasonable to treat that as an error. But to simply 15 assume that a missing transaction is an error where the 16 audit, itself, demonstrates that there's a small 17 percentage of error, we don't think that's the fair 18 treatment to the taxpayer. 19 MS. STEEL: Okay. To the Department, that 30 20 some percent error rate here, that it's been adjusted 21 with those missing transactions? 22 MR. HANKS: Where we've encountered missing 23 transactions where there isn't documentation to support 24 the exemption, we've treated those items as errors. 25 MS. STEEL: Okay. 26 MR. HANKS: And -- and so that's -- that's what 27 we typically do. 28 MS. STEEL: Okay, thank you. 30 1 MR. McCLELLAN: Ms. Steel, may I add something 2 to that? 3 MS. STEEL: Sure. 4 MR. McCLELLAN: I think it's relevant because 5 the -- the Department seizes on the error calculation 6 that creates the highest error that -- that could be 7 recognized. They divide the -- the audit measure 8 against the reported taxable sales. Well, of course the 9 audit measure consists of disallowed exempt sales. So 10 it seems that at worst it would be most appropriate to 11 divide it by that. 12 And if you look at the -- the statistical 13 sampling stratums, each individual stratum has an error 14 rate that is much lower than that. For California the 15 material portions is 8.56 percent, 4.85 percent and on 16 an actual basis review there was a zero percent error. 17 The error percentage simply is not high. 18 Especially if you look at the total sales and look at 19 the error against some more relevant figures. For a 20 first time audit we think that it's very reasonable even 21 as it stands, and obviously we believe that there should 22 be a Significant portion of this audit deleted. 23 MR. DAVIS: I'd like to add to that, too, that 24 in my experience with dealing with Sales and Use Tax 25 audits, which spans about 40 years, I have seen many, 26 many samples where they did allow replacement. I would 27 say -- I mean, I never kept statistics on it, but I 28 would say most of them do allow replacement and there's 31 1 a reason for that. It's statistically more valid. 2 If you read a book on statistics and -- you 3 know, had I known this was going to be disputed I'd have 4 brought one -- sampling with replacement is generally 5 regarded as the fairest method of sampling. Not 6 regarding missing documents as automatically totally -- 7 a total error, a hundred percent error when throughout 8 the vast majority of the records you're coming up with 9 error rates of say 8 percent and then all of a sudden 10 because one transaction is missing that's 100 percent 11 error. It makes -- it doesn't make any common sense, 12 much less statistical. 13 MS. STEEL: Thank you. 14 MR. HORTON: Ms. Mandel. 15 MS. MANDEL: Sure. You might have covered some 16 of this a little before but let me just get back to it. 17 It -- you know, we have the -- with respect to whether 18 there was active solicitation by the California 19 dealerships, which seems to me to be the crux of the -- 20 distinguishing of Montgomery Ward because small 21 transactions versus large transactions, we don't -- 22 don't have different rules for small people and large 23 people. We have one rule. And Montgomery Ward was not 24 raised until the petition process when these -- these 25 representatives brought it up. So, it could be that the 26 people at the dealership were, you know, unaware of the 27 case and perhaps the auditor -- so it's kind of, you 28 know, hard to look at what happened at the audit. 32 1 But it looked like from the writeup that the 2 fact -- the factual evidence that the Department has is 3 that people lived in locations that on a mileage basis 4 were closer to Gilroy or Indio than to Oregon, that 5 there is no -- and there is a fact that the commission 6 structure for all the --- you know, for the salespeople 7 and the managers, whoever is getting some portion of 8 their compensation on commission, that there is a factor 9 for overall corporate net profit. And -- but that to -- 10 to take the fact of people live nearby or closer to 11 Gilroy and Indio you then -- to get to there was active 12 solicitation you have to make -- you have to infer that 13 those people went into these dealerships and that the 14 salespeople sent them up north. And that seems -- I 15 understand, you know, evidence and then reasonable 16 inferences from the evidence. And so, how am I to be 17 persuaded that it's a reasonable inference from the 18 evidence that these taxpayers, these -- I'm sorry, these 19 customers, every single one of them who was from 20 California went into one of these dealerships and got -- 21 and -- and was told to go up to -- go up to Oregon? 22 I mean, it -- it seems more speculative at some 23 level than a reasonable inference, and so that's -- 24 that's the issue that I'm having, because there is the 25 Montgomery Ward case, which is a Court of Appeal case, 26 where it -- Montgomery Wards was as you, Mr. Tucker, 27 described Guaranty, Montgomery Wards was a California 28 retailer. The sales that took place took place 33 1 completely extra territorial to California, and it seems 2 like the only real additional point here that's not in 3 Montgomery Ward is this assumption of active 4 solicitation. 5 Now, I don't know if that's even enough because 6 you're not talking about, you know -- that's how you're 7 then tying it to, oh, it's really just like any delivery 8 outside California whether they delivered them in Yuma 9 or Boomtown. 10 I'm -- I don't -- where's -- where's the link 11 so that it's a reasonable inference rather than just 12 sort of speculation? How do you make that link? 13 MR. TUCKER: I don't believe that Montgomery -- 14 Montgomery Ward required active solicitation. In 15 essence what it required was a connection between the 16 transactions. And here we see that connection between 17 the buyers located in California and the California 18 locations with their -- one, the knowledge that they can 19 go to Oregon and purchase these products. 20 MS. MANDEL: But -- but how do you get there? 21 Where's the evidence that these customers had knowledge 22 that they could, you know, go to Oregon? They might 23 have had knowledge because -- I don't know when -- 24 remember this time period but, you know, somebody could 25 do a sort of internet search and go, oh, you know, I'm 26 going to go to -- go to Oregon. 27 I mean, how do we -- we -- I mean, just because 28 they have a -- a dealership here in California that 34 1 somebody lives closer to than going up to Oregon, you're 2 talking about RV people, the -- the company has a lot of 3 people coming from other places to Oregon. Apparently 4 there's -- are there manufacturers up in Oregon? 5 I mean, you -- it seems to be an assumption 6 that necessarily the California dealerships were somehow 7 involved and -- and it's -- and it seems like you're 8 going just by the fact that there -- you know, that 9 there are dealerships in California and that the people 10 live in California. 11 I mean, there's -- and live closer to those 12 dealerships, therefore there must have been this 13 involvement of the California company in a sale that 14 took place outside of the State -- and not outside the 15 State because you've got a sale attributed to Indio -- 16 oh, no Indio -- Indio? 17 MR. McCLELLAN: Indio -- 18 MS. MANDEL: Indio, okay. I'm losing all my 19 locations. And -- and they delivered it to the guy in 20 Yuma, Arizona. You know, you just have a sale that by 21 all appearances just seems to be completely -- 22 MR. HANKS: Ms. Mandel, if -- if I could -- if 23 I could just speak to -- to one item, just the empirical 24 evidence I -- I think is -- is significant in this case. 25 When we look at the Oregon sales that -- that we 26 allocate to that Junction City location in -- in Oregon 27 they had approximately $60 million in -- in total sales 28 during this relevant time period. We have identified 35 1 that over 50 percent of those sales were disallowed 2 sales to California residents. 3 Now, those are the ones that we've disallowed. 4 Certainly we've allowed some exempt sales to -- to 5 Californians, also. So, what that's saying is that 6 you've got -- you've got upwards of who knows, certainly 7 exceeding well over 50 percent of sales just targeting 8 people from California, many of whom live within 9 proximity of these other locations in California that 10 the Petitioner operates. 11 And so it -- it just makes you wonder why -- 12 why didn't you just go down the street to Indio or why 13 didn't you just go down the street to Gilroy and make 14 that purchase as opposed to driving hundreds of miles 15 outside the State. So that's -- that's one element of 16 it. 17 And I think another element of it is -- 18 MS. MANDEL: Okay, you said certainly some were 19 allowed to people in California. 20 MR. HANKS: Correct. If -- if -- the 21 Petitioner provided us with forms 447 and -- and 448 22 that -- that identified transactions -- sales of -- of 23 the vehicles occurring outside of California where 24 there's evidence of -- of residence outside of 25 California, presumably those -- those were allowed. 26 MS. MANDEL: Well, you said presumably, so now 27 I'm not sure if that's a fact. 28 MR. HANKS: Well, I'm -- I'm cert -- we've 36 1 disallowed $37 million of -- of these sales. I'm just 2 guessing of -- of the remainder of the $60 million of 3 sales associated with -- with that location in -- in 4 Oregon that other sales were made to California 5 residents and -- and we accepted -- 6 MS. MANDEL: Well, I -- 7 MR. HANKS: -- the documentation. 8 MS. MANDEL: Yeah, I don't know. I don't know 9 if you're assuming or not assuming because my impression 10 was that -- that sales to -- because they had so many 11 other sales that were to other people. So -- 12 MR. McCLELLAN: May I add something to this 13 discussion which may shine some light? Where -- well, I 14 don't know where -- where Mr. Hanks gets his Oregon 15 sales figure. During the audit period the Oregon 16 location was three times the size of the California 17 locations combined. I mean, it was six times the size 18 of each individual location. The total revenue for 19 the -- the corporation, if you look at the income 20 statement, just the RV sales new and used for 2005, for 21 example, is over $260 million. 22 Now, if you -- if you take the math their -- 23 their sales exceeded $60 million in a fraction of a year 24 for one year. 25 So to say that $37 million in sales to 26 California represents 50 percent of their sales is 27 complete folly. It's not correct. 28 I -- I would also say rather than -- than 37 1 focus -- well, I'll give the Department this; at the 2 time that it wrote the decision it didn't have any 3 information. None was requested. We made this argument 4 for the first time at the Appeals Conference. Rather 5 than pick up the phone or write a letter, send an e-mail 6 saying, hey, look, can you give me some information, I'd 7 like to make a decision here, instead they looked at 8 where these people lived. They actually did a 9 completely erroneous calculation based on the reported 10 total sales and divided it by three and said, you know 11 what, we're actually being generous to Oregon here 12 because Oregon probably sold a lower amount. They 13 completely failed to recognize what the facts of this 14 business were, and then -- and then drew the inference 15 without anything more perhaps it's reasonable. That's 16 even questionable. 17 But once you start to take a look at the actual 18 facts, you look at the fact that we're -- that there 19 were 2,000 purchasers during the same time frame from 20 Alaska, from Florida, from New York, from Canada, from 21 all over the place. How did they get there? Were they 22 actively solicited? No. You take a look at the facts 23 of the Junction City operation. 24 It was the largest in the nation at one point 25 and had a -- had a huge inventory. And it was located 26 by factories. And purchasers like to take factory 27 deliveries for a number of different reasons. 28 So you have these purchasers traveling from 38 1 throughout North America to Junction City and our 2 position is that regardless of whether or not these 3 California operations were in place, these California 4 purchasers still go to Oregon. And if you look at the 5 Exhibit 2 you see that the percentages have remained 6 consistent, they're still going to Oregon. There's no 7 dealerships in operation. 8 MR. HORTON: Ms. Mandel. 9 MS. MANDEL: Yeah, I just -- I mean, the 10 Montgomery Ward case is -- it -- it just seems unless 11 you can get these people somehow to the dealership 12 Montgomery Ward is sort of like just a mere connection 13 to California, you know, based on residency in 14 California or sort of proximity didn't -- wasn't by 15 itself enough. That's why there was a stress, I think, 16 in the D & R on we're assuming that they were sent to 17 Oregon by the -- I'm hesitating because I say guys -- by 18 the -- you know, generic guys, the salespeople, by the 19 dealership. 20 So there -- there's an assumption that there 21 was a connection to the dealerships. Not that just that 22 there was a dealership in California and there was a guy 23 who lived in California who lives closer to the 24 dealership and went to Oregon, but that there was some 25 connection. And it seems like a sort of principle of 26 evidentiary analysis that -- you know, I -- I want to 27 get away from it. Are we just speculating that this 28 must have happened or is it reasonable to infer from the 39 1 facts that we do know that it did in fact happen? 2 MR. TUCKER: Ms. Mandel, we believe it -- we 3 believe it is reasonable to infer. One, as they noted 4 in the D & R they looked at the sheer volume. Two, we 5 had the compensation agreements with the California 6 locations. We understand that this -- because it was 7 raised later in the process we didn't have a chance to 8 fully vet it. But we also have figures that they 9 provided in their initial brief that -- that discuss the 10 volume of sales and how it dropped. 11 MR. HUXSOLL: In -- 12 MR. HORTON: Let me -- let me encourage the 13 Department not to -- to the extent that they can, not be 14 redundant in your defense. I think we've heard that. 15 But -- just a suggestion, that's all. 16 MR. HUXSOLL: In -- in Petitioner's opening 17 brief it argued that inconsistent with the figures that 18 it's now provided that Guaranty as a corporation made 19 sales of 1596 RVs in 2005 prior to the location of the 20 Cal -- the closure of the California locations, with 132 21 of these sales being sales from its Oregon location to 22 California residents. 23 In its opening brief it then said that after 24 the Oregon location had sold -- or had -- or after the 25 California locations had closed in 2008 it sold 756 RVs 26 with 65 of those being sales to California residents. 27 In terms of pure volume the sales to residents of the 28 State of California from the Oregon location dropped in 40 1 half after the closure of the California locations. 2 That's consistent with the numbers that they've also 3 provided as part of this exhibit. 4 In this exhibit from 2001 through 2007, even 5 though they closed in 2007, the Oregon location sold 6 approximately 190 RVs per year to California customers. 7 After the closure it dropped down to a hundred RVs per 8 year. 9 So -- so in terms of volume -- and if you look 10 at the percentages from year to year you're 11 approximately eight percent during the audit period 12 that's dropped down to five percent during the year of 13 closure of the California locations and about six 14 percent subsequent to that. So it dropped by about 25 15 percent in terms of -- 16 MR. HORTON: Okay. Ms. -- Madam Yee. 17 MR. McCLELLAN: Ms. -- Ms. Yee, may I add 18 something to that? 19 MS. YEE: Briefly, yeah. 20 MR. McCLELLAN: Yes, I'll -- I'll make it 21 brief. The figures they're relying upon are wrong. I 22 admit that -- that they were submitted with the brief. 23 They were the figures that I was provided with. 24 Subsequent to submitting that and discussing the case 25 with several members of the staff we decided to expand 26 the analysis and at that point we made a query of the 27 system, and that's where Exhibit 2 came from. 28 And I agree with the Department that in 2007, 41 1 during which the dealerships were open, the percentages 2 is 5.89 -- I'm sorry, 4.93 and in 2008 it's 6.63. But 3 simple math tells us that that's an increase after 4 closure. 5 MR. HORTON: Madam Yee. 6 MS. YEE: Thank -- thank you, Mr. Chairman. 7 I'm listening to this discussion and I am kind of 8 backing myself up to kind of some fundamental issues. I 9 appreciate Ms. Mandel's inquiry with respect to any 10 reasonable inference that we may draw given the Oregon 11 transactions. 12 I guess I'm going back to trying to balance 13 that and I'm sympathetic. I mean, this is -- I don't 14 generally focus on negligence penalties because it -- 15 oftentimes to me, at least, it's pretty clear when the 16 penalty is applied and usually around adequate records 17 or documentation. And -- but I'm coming back to that 18 very question in this instance, and that is given that 19 the Oregon location seems to be making sales to 20 California residents but also residents from other 21 states, as well, it seems to me that you still have the 22 responsibility of overcoming the presumption as to 23 whether these transactions are subject to tax. 24 And so, can you kind of help us here with 25 respect to documentation that at least suggests that -- 26 that can support that these are sales that are not -- 27 MR. McCLELLAN: Well, first I'd like to add 28 some facts that were specifically cited in the 42 1 Montgomery case. The -- 2 MS. YEE: Actually, I want -- I want to kind of 3 get down to -- 4 MR. McCLELLAN: So -- 5 MS. YEE: I -- I'm -- 6 MR. McCLELLAN: Well, you -- you want to 7 know -- 8 MS. YEE: I'm trying to balance kind of the 9 discussion here and we've been focusing a lot on the 10 staff and kind of what is -- 11 MR. McCLELLAN: So if we assume that these 12 transactions that occurred in Oregon are taxable, is 13 what you're saying, what then? 14 MS. YEE: No. If you assume that these sales 15 to California residents that took place at the Oregon 16 location -- 17 MR. McCLELLAN: Are taxable? Are subject to 18 Use Tax collection? 19 MS. YEE: What kind of documentation are you -- 20 do you have that at least supports that these are 21 non-taxable sales that Guaranty RV can claim -- 22 MR. McCLELLAN: We're not -- we're actually not 23 contesting that issue. We're -- the stat. sample, 24 itself, we didn't go into the individual transactions to 25 determine, well, the staff should have accepted this 26 because there was actually sufficient documentation. We 27 looked to what the decision in Montgomery said, which 28 specifically stated solicitation. It recognized that 43 1 salespersons were traveling from the out-of-state 2 locations into California. 3 MS. YEE: Okay. So in relying on Montgomery 4 you don't believe you should have maintained any kind of 5 documentation? 6 MR. McCLELLAN: Well, the documentation that 7 was maintained was the General Sales records, and the 8 audit verified that their recordkeeping was accurate. 9 With respect to supporting documentation to support an 10 exemption, there's no exemption necessary if tax doesn't 11 apply to the transaction. 12 MS. YEE: Isn't there a presumption that has to 13 be overcome here and who -- who's responsible for -- 14 MR. McCLELLAN: Inside -- inside California 15 that exists. I can actually read an excerpt from a very 16 well-written paper that Mr. Levine wrote back in 2001 17 that addressed -- 18 MS. YEE: Actually, you know what, let me pose 19 the question to Mr. Levine. 20 MR. McCLELLAN: Okay. 21 MS. YEE: Because I -- I -- here's what I'm 22 stuck on. I mean, as we've typically talked about 23 negligence penalty it's really focused on adequate or, 24 you know, really inadequate recordkeeping or 25 documentation, and we've heard a lot based on Ms. 26 Mandel's inquiry relative to what we can infer as to 27 these transactions that took place in the Oregon 28 location to California residents. 44 1 But isn't there still a fundamental presumption 2 that has to be overcome by the Petitioner? 3 MR. LEVINE: You know, I'd say the first step 4 is defined that there was a Use Tax collection duty if 5 taxable, which is the Montgomery Ward issue. 6 MS. YEE: Okay. 7 MR. LEVINE: And I'd say -- so you'd have to 8 find based on the facts, and what we found, the critical 9 thing in the D & R is we found that it was a reasonable 10 inference, the facts indicated that there was active 11 participation in California, the facts that -- as we 12 understood it and absent a credible explanation from 13 Petitioner, Petitioner being in control of the facts. 14 I don't believe, and I wasn't there, Mr. 15 McClellan can correct me, but I don't believe that the 16 documentation he submitted as an exhibit in the last few 17 days, submitted at the time of the Appeals Conference, 18 we had this information, including our inferences about 19 the sales from Oregon, there was no RFR filed to correct 20 us and say you're using wrong figures, we've got better 21 information -- we don't necessarily call up someone as 22 we're writing a D & R and say, this is what the evidence 23 we have tells us and say do you want a chance to rebut. 24 Sometimes we do, but we didn't think it was necessary 25 here. But that doesn't stop a Petitioner from filing an 26 RFR and say here's some more information. 27 So, based on the information we had, and we 28 would still based on this information find that it's the 45 1 preponderance of evidence, that's the test. More likely 2 than not. And we concluded it's more likely than not 3 based on the facts we knew it that there was 4 participation in California which -- with each of these 5 transactions. 6 Having found that, that raises the presumption 7 that the sales that -- that Petitioner would have to 8 show the sales were not taxable. But if you find that 9 there was not the participation in the sales by 10 California locations then we're done with those sales. 11 MS. YEE: All right. Thank you. 12 MS. MANDEL: And on the -- and -- and there is 13 nothing else in the audit? Because I had a question on 14 the negligence penalty assuming -- assuming that the 15 Oregon sales were tossed out as not -- I mean, they're 16 taxable presumably but the issue is -- is Use Tax 17 collection obligation, and if Montgomary Ward says no, 18 then is there -- you're saying we're done because 19 there's not something else that supported the negligence 20 penalty? 21 MR. LEVINE: Well, we're done with the Oregon 22 sales. 23 MS. MANDEL: Correct. 24 MR. LEVINE: There's still California sales -- 25 MS. MANDEL: Right. 26 MR. LEVINE: -- and there's still a negligence 27 penalty that would be applicable, and there's still -- 28 MS. MANDEL: Okay. So then -- then the 46 1 question for the Department is how -- what -- if the -- 2 if the Oregon sales are not in the measure because they 3 didn't have a Use Tax collection obligation, if -- if 4 that's where things went -- 5 MR. LEVINE: And I -- 6 MS. MANDEL: -- then what's -- is there enough 7 to support a negligence penalty? 8 MR. LEVINE: Correct. 9 MS. MANDEL: Because I didn't have a sense of 10 that. 11 MR. LEVINE: And I'd point out that while the 12 percentage -- my calculation, the percentage based on 13 the numbers we have would still be like 12 percent, but 14 that's not accurate because you'd have to pull out all 15 of the Oregon sales from the calculation. So the 16 population we're carrying -- comparing the error to 17 would be much smaller or somewhat smaller. So, I don't 18 know what the percentage of error would be, but it still 19 would not be slight. 20 MS. MANDEL: Okay. 21 MR. HORTON: Thank you. Question of the 22 taxpayer. I mean, what's the average selling price of 23 the RVs? 24 MR. MORGAN: It would be probably in excess of 25 $150,000. 26 MR. HORTON: And the Sales Tax on that based 27 on -- would be? Somewhere around -- Mr. Levine, you 28 want to help me out? 47 1 MR. MORGAN: $9,000, thereabouts. 2 MR. McCLELLAN: Nine or ten. 3 MR. HORTON: Okay. 4 MR. LEVINE: A little bit more, 12,000. 5 MR. MORGAN: Yeah. I suppose -- it would 6 depend on the rates. 7 MR. HORTON: What's the percentage of sales in 8 California? What is a -- that receives -- well, strike 9 that. What's the commission received? 10 MR. McCLELLAN: The commission is actually 11 based on net profit. And -- 12 MR. HORTON: What's the percentages? 13 MR. McCLELLAN: It varies by the individual 14 based on what I looked at. Ed can certainly expand on 15 this, but what I've -- what I've seen is net profit 16 components of 1. -- 17 MR. HORTON: So, on average -- 18 MR. McCLELLAN: -- 1.5 percent. 19 MR. HORTON: 1.5 percent. And what's the 20 percentage if the transaction takes place in Oregon? 21 MR. McCLELLAN: Zero for two of the three 22 components, for the sales -- 23 MR. HORTON: Overall? 24 MR. McCLELLAN: Correct. 25 MR. HORTON: Overall. 26 MR. McCLELLAN: Overall. So, overall if it's 27 in California it would be 4.5 if -- if each was 1.5. 28 And if it was in Oregon it would be 1.5. 48 1 MR. HORTON: Okay. 2 MR. McCLELLAN: The -- I would like to add that 3 the Department's position is that there was active 4 solicitation. Now, I take that to mean, and perhaps I'm 5 misinterpreting the allegation, but I take that to mean 6 that somebody walks on the lot and they're saying -- 7 MR. HORTON: No, I mean -- 8 MR. McCLELLAN: -- let's -- let's get up to -- 9 MR. HORTON: -- allow me an opportunity to get 10 there. 11 MR. McCLELLAN: Absolutely. 12 MR. HORTON: The company, does it have any 13 shared marketing or are there marketing that takes place 14 in Arizona separate from the marketing in California? 15 Or do you share that? 16 MR. DAVIS: I don't actually know that -- the 17 answer to that question. 18 MR. HORTON: Advertising on the web. 19 MR. MORGAN: Each location would advertise on 20 its own. We -- we did do national magazine advertising 21 just for the industry in general. 22 MR. HORTON: Okay. I thought I heard testimony 23 that the benefit of going to the factory was you could 24 go there, you get a tour of the factory and -- and a 25 number of other things. 26 MR. McCLELLAN: Uh-huh. 27 MR. HORTON: Is the factory actively involved 28 in soliciting sales? 49 1 MR. McCLELLAN: That would be something Ed 2 would have to speak to, but as far as what I've come to 3 understand is that a purchaser would be able to select 4 the color scheme -- 5 MR. HORTON: Oh, no, no, the -- the question 6 is, is the factory actively involved in soliciting 7 sales? 8 MR. DAVIS: I -- 9 MR. McCLELLAN: Ed, can you answer that? 10 MR. DAVIS: No. 11 MR. HORTON: They're not. How would a customer 12 come to know that they could go to the factory? Is that 13 the national advertising? 14 MR. MORGAN: The factories advertise their 15 products on their own. I guess if you mean that as an 16 act of solicitation of a sale, then I would -- that 17 would be yes. 18 But they do their own advertising to -- to 19 promote their brands. 20 MR. HORTON: So the factory could be in direct 21 competition with the California-based retailers? 22 MR. McCLELLAN: They don't sell direct to the 23 customer. If they got a sales lead they would refer it 24 to a dealer. 25 MR. HORTON: So they're only making sales as a 26 result of a lead from some dealer? 27 MR. DAVIS: That's correct. 28 MR. HORTON: And -- and in this case -- 50 1 MR. McCLELLAN: It's the opposite. 2 MR. DAVIS: May be true, actually. 3 MR. HORTON: You -- you want to add to that 4 testimony? 5 MR. McCLELLAN: What you had said was so 6 they're -- they're only making sales as a result of a 7 lead from a dealer. 8 MR. HORTON: I'm just repeating exactly what -- 9 MR. McCLELLAN: Well, I think what he said was 10 that they do their own marketing. So they may get a 11 sales lead which they refer to a dealer because it has 12 to flow through a dealership. They don't compete with 13 the dealers. So -- 14 MR. HORTON: Okay. 15 MR. MORGAN: That's right. 16 MR. HORTON: All right. So is there a shared 17 management of the -- all of the operations? Is there 18 one management, one -- 19 MR. MORGAN: Each location would have a General 20 Manager, General Sales Manager. 21 MR. HORTON: Okay. To the Department, is there 22 any evidence of any -- any correlation of activity aside 23 from the sale, on the marketing side, on the management 24 side, or on the -- on the -- in this case the 25 registration of the vehicle activity? It sounds as if, 26 though, the factory is not necessarily registering cars 27 or filling out that document. It sounds like they're 28 not soliciting sales, per se, unless -- because if the 51 1 sale comes they're going to refer it back to a dealer. 2 But before you answer, let me go back to the 3 taxpayer and ask them a question. If the factory 4 received an un -- a sale, someone came in, which dealer 5 would you refer it to? Yours or your competitors? 6 MR. MORGAN: If they got a lead from a -- from 7 a location that -- where they had another dealer their 8 practice was to refer it to that dealer. 9 MR. HORTON: So -- 10 MR. MORGAN: If they could not determine 11 that -- 12 MR. HORTON: Let me -- let me make -- let me 13 make sure. You get a lead that is not tied to a dealer 14 at all, but the person is living in California. I mean, 15 where -- how do you determine where to send that lead in 16 order for the paperwork to be processed? 17 MR. MORGAN: I can't speak to the 18 manufacturer's practice in that area. 19 MR. HORTON: Well, I mean -- 20 MR. MORGAN: Their -- their normal practice 21 would be to -- to refer to the dealer nearest the 22 address of the customer. That would be the normal 23 practice. 24 MR. HORTON: And if that address happened to be 25 in California would you select one of your own dealers 26 or would you sell it -- I mean would you refer to a 27 California dealer that is not part of the company 28 family? 52 1 MR. LEVINE: I think you're confusing him with 2 the manufacturer, who apparently lives next door to 3 his -- close by his Oregon facility. 4 MR. HORTON: Oh, let's go back to the 5 representative. 6 MR. McCLELLAN: Okay. 7 MR. HORTON: Can you answer that question? 8 MR. McCLELLAN: I don't think I can. I can try 9 and clarify the facts for you, though. 10 MR. HORTON: No. No, no, I just -- 11 MR. McCLELLAN: No? 12 MR. HORTON: The question is -- 13 MR. McCLELLAN: I can't answer the question. 14 MR. HORTON: Okay. Back to the Department, any 15 shared activity? 16 MR. HUXSOLL: Mr. Horton, you asked about the 17 management and the reporting. In the compensation 18 program for Brian King the Petitioner provided as part 19 of its opening brief, Brian was holding the position of 20 the RV General Sales Manager of Gilroy and he actually 21 reported to Junction City as his immediate supervisor. 22 So there was -- I mean, there was a management structure 23 where the General Manager of the Gilroy location, 24 according to this contract, would report to Junction 25 City. 26 MR. HORTON: The sales to California consumers, 27 who -- who -- who registered those sales? 28 MS. MANDEL: You mean registered the vehicles? 53 1 MR. HORTON: I mean registered the vehicles. I 2 mean, who filled out the paperwork to -- in order for 3 the vehicles to be registered? 4 MR. HUXSOLL: I believe there is a note from 5 the DMV to the Oregon location that they were not to 6 fill out -- I believe it's the third party arranged for 7 the registration to California. 8 MR. HORTON: So someone in California would 9 have to participate in that process, which is a 10 continuation of the sale? True? Not true? 11 MR. HUXSOLL: Yeah, I -- I believe that third 12 party would participate in -- 13 MR. HORTON: All right. Thank you. 14 MR. HUXSOLL: -- the registration. 15 MR. RUNNER: There's --- 16 MR. HORTON: Okay. I'm finished. 17 Mr. Runner. 18 MR. RUNNER: Just -- just a real quick 19 clarification, a followup, because the question was 20 asked what kind of paperwork you may have -- you may be 21 responsible for or the dealership may be responsible for 22 these California buyers who happen to live in 23 California, if you happen to even find out that they 24 live in California. 25 The -- the point would be -- would seem to me 26 that if you are a seller of anything in another state 27 you're responsible for just responding to what that 28 state's laws are, not necessarily what California's laws 54 1 are. It's the taxpayer who has responsibility -- 2 MR. McCLELLAN: Correct. 3 MR. RUNNER: -- at that point to then make sure 4 that he -- whatever purchases that they're doing outside 5 of state then conform to California State law. Would 6 that be a fair description, Mr. Levine? 7 MR. LEVINE: Well, I think it -- in many times, 8 for example, a customer wants the retailer to collect 9 Use Tax. If you had a California consumer unconnected 10 to a California location go up to Oregon and say, "I 11 want to avoid the tax but I want it registered in 12 California, can you take care of that for me," and 13 Petitioner took care of that for me, that would in 14 Appeals' view add a point against them for California 15 participation, if they had a California person do it, 16 which -- that's a California connection with the sale 17 because they're not completing the sale without that 18 participation. 19 MR. RUNNER: Right. 20 MR. LEVINE: Because that's what the customer 21 wants. 22 MR. RUNNER: But the general obligation that 23 they have then in terms of trying to keep paperwork to 24 show that this individual that they did something, they 25 just do the sale, right? 26 MR. LEVINE: If -- 27 MR. RUNNER: I mean if it -- if it took place 28 in Oregon it's up to the taxpayer then to deal with the 55 1 responsibility of the Sale -- the Use Tax? 2 MR. LEVINE: If there was -- it's always the -- 3 if the sale occurs in Oregon the -- 4 MR. RUNNER: Right. 5 MR. LEVINE: -- the purchaser is always going 6 to be -- 7 MR. RUNNER: Right. 8 MR. LEVINE: -- primarily liable. 9 MR. RUNNER: Right. 10 MR. LEVINE: As far as whether they'd have a 11 Use Tax collection duty, only if there is a California 12 participation with that sale. So -- 13 MR. RUNNER: Right. Only if there -- again we 14 get to this direct lo -- discussion, back to the -- 15 MR. LEVINE: If it was -- 16 MR. RUNNER: -- back to the beginning of our 17 discussion and that is what did the -- what -- was there 18 a California connection in regards to the sale of -- of 19 that -- of that RV in this case. 20 MR. LEVINE: Which also could be completion of 21 the paperwork which is -- 22 MR. RUNNER: Okay. 23 MR. LEVINE: -- nothing we considered, but on 24 either side would be in our view the California 25 participation necessary to support the duty -- 26 MS. MANDEL: You have to -- 27 MR. LEVINE: -- otherwise. 28 MS. MANDEL: -- have participation. 56 1 MR. LEVINE: Right, you need -- 2 MS. MANDEL: Participation. 3 MR. LEVINE: -- some sort of California 4 participation with -- 5 MR. RUNNER: Right. 6 MR. LEVINE: -- the sale -- 7 MR. RUNNER: Yeah. Okay, thank you. 8 MR. LEVINE: -- to pass the Montgomery Ward's 9 test. 10 MR. RUNNER: Thank you. 11 MR. McCLELLAN: May I add to that? 12 MR. HORTON: Mr. Runner? 13 MR. RUNNER: Real quick. Real quick. 14 MR. McCLELLAN: In -- in the paper that you 15 wrote you specifically stated if, however, there was 16 Cali -- there was a California contract with the 17 transaction such as the parties entering into a contract 18 of sale of a vehicle inside California, with the vehicle 19 then being delivered outside of the state, then it 20 wouldn't fall under Montgomery Ward. 21 I think we're starting to lose focus here. 22 Montgomery Ward didn't say, look, because there's 23 involvement with California or if there was involvement 24 with California you would not violate these 25 constitutional principles. They laid out several 26 different factors, including active solicitation by 27 these out-of-state locations, direct advertisements 28 which impinged on these, and the Board took the position 57 1 that, hey, look, these are right on the border. They 2 may as well be in California. 3 Now the Board takes the position that, look, 4 these guys are so far away there must have been 5 involvement. 6 Now we think the law is strongly on 7 Petitioner's side in this case and we believe that if 8 this case is forced to go to Court it would be a further 9 drain not only on the taxpayer but on the State's 10 resources, and there's no indication that we see in any 11 of the cases that the Court's prepared to change their 12 direction in these issues. 13 MR. HORTON: Okay. Mr. Levine, is there a 14 statute issue relative to the Board of Equalization 15 going after the consumers for the tax? 16 MR. LEVINE: Absolutely not. 17 MR. HORTON: Absolutely not. 18 MR. LEVINE: Not if they owe the tax, you -- 19 they're primarily liable. The basic principle is the 20 Board goes after the retailer because it's far easier. 21 And the only reason we have the Use Tax on the exemption 22 in California sales by -- on some of these -- on 23 vehicles, vessels, aircraft is because they're big 24 ticket items that it is worthwhile to go after the 25 purchaser. But -- 26 MR. HORTON: What's the audit period again? 27 Flipping through my notes. 28 MR. HUXSOLL: April 2001 through March of 2005. 58 1 MR. HORTON: How many transactions 2 theoretically involved? 3 MR. HUXSOLL: 715 to -- from Oregon 4 to California residents. 5 MR. HORTON: Wow. 6 MR. LEVINE: You're talking about if -- for 7 those who didn't file returns, which I would expect to 8 be most or all back to early 2003. So the transactions 9 prior to that would be barred by the Statute of 10 Limitations. 11 MR. HORTON: All right. Thank you. 12 MS. MANDEL: Did you check to make sure that 13 every single one of these transactions did not pay the 14 tax when the vehicle was registered? DMV used to always 15 collect tax, sometimes even I think when you came in 16 from out of state with a used car. 17 MR. HUXSOLL: I -- I know that we checked 18 with -- we made sure to look at the accounts that the 19 Consumer Use Tax section had investigated, but I don't 20 know the extent of looking at -- 21 MS. MANDEL: Vehicle by vehicle. You don't 22 know? 23 MR. HUXSOLL: I -- 24 MR. HORTON: They're conferring. 25 MR. RUNNER: Let me see if I understand that. 26 So -- so -- 27 MR. HORTON: Mr. Runner. 28 MR. RUNNER: See if I -- just clarifying the 59 1 question. 2 MR. HORTON: One second, sir. 3 MR. RUNNER: Just to -- 4 MR. HORTON: I'll allow them to respond to Ms. 5 Mandel. It appears as if the -- 6 MR. HANKS: Yes. Mr. Runner and Ms. Mandel, 7 that's a great question and typically in a situation 8 like this the purchaser would go to the DMV or possibly 9 have another person assist them in -- in registering the 10 vehicle with DMV. If they could document that the 11 vehicle was acquired outside of California and the 12 records -- the paperwork was supplied as it is in most 13 of these instances, then Use Tax would not be collected 14 here in California. The whole purpose for -- for them 15 to supply that paperwork would be to avoid paying the 16 Use Tax. 17 MS. MANDEL: Wait. Who's -- who is "they?" 18 MR. HANKS: The purchasers. 19 MR. HORTON: Customer. 20 MS. MANDEL: The customer. 21 MR. HANKS: The customers. The customers. 22 MS. MANDEL: So if the customer went to DMV 23 with 447s and 448s that you found defective, assuming 24 you didn't just disallow every single sale to a 25 California person that was registered here, which I had 26 some impression that you did, you're saying that DMV 27 would just accept the defective -- what you view as a 28 defective 447, 448 and not collect tax when they 60 1 register in California within the 90 days, or within the 2 12 month, which I think is how you -- I mean, it's been 3 a long time since I've bought a -- 4 MR. LEVINE: I sure hope not. 5 MS. MANDEL: I sure hope not, too. 6 MR. LEVINE: They -- they shouldn't be relying 7 on any 447 as to the purchaser because that is 8 meaningless as to the purchaser. That's only for 9 purposes of letting the retailer off -- 10 MS. MANDEL: Yeah. 11 MR. LEVINE: -- the collection hook. 12 MR. RUNNER: Just -- 13 MR. HORTON: Mr. Runner. 14 MR. RUNNER: Yeah, just to quali -- just again 15 to follow up, just again procedural in terms of how this 16 would take place, could a -- could a person in that -- 17 in that audit, in those numbers there have bought their 18 vehicle there in Oregon from California, drove their 19 vehicle then to California, went and -- went and 20 licensed their -- their -- their vehicle in California 21 and then pailed -- paid the Use Tax? 22 MS. YEE: Uh-huh. 23 MR. HORTON: They could have. 24 MR. HANKS: Yes. 25 MR. TUCKER: Yes. 26 MR. RUNNER: Okay, so they could have done 27 that? 28 MR. HANKS: It's conceivable. 61 1 MR. RUNNER: Okay. So -- 2 MR. HANKS: That's conceivable. Of course 3 the -- the whole purpose, though, in -- in purchasing 4 this vehicle outside of California and preparing the 447 5 and the 448 is -- is to not acquire that -- 6 MR. HORTON: It's a -- 7 MR. RUNNER: Well, no, let me -- 8 MR. HANKS: -- that Use or Sales Tax -- 9 MR. RUNNER: -- let me ask about that. I'm not 10 sure that that's true. It may be because you wanted to 11 go tour the factory, right? 12 MR. LEVINE: Mr. -- 13 MR. RUNNER: The -- the way they were built and 14 that's -- that was the closest location to where you 15 could buy it. 16 MR. HORTON: One -- one second. Members, it 17 appears that we may be headed towards a 30-30-30 to 18 verify some additional information to give the taxpayer 19 an opportunity to provide documentation on items that 20 where -- or may have been missing. But I put that on 21 the table only for our consideration and deliberation 22 because we're -- we're very focused on these issues. 23 MS. YEE: Yeah, I think Mr. Runner would agree 24 it would also give staff additional time, as well. 25 MR. RUNNER: Yeah, I -- it seems to me the 26 taxpayers have their material together. It's actually 27 questions that we're giving to the staff at that point 28 more than anything else. 62 1 MR. LEVINE: Yes, I don't think the -- the 2 taxpayer would have this information. Just two -- two 3 points about -- I do think a 447, signing that indicates 4 that the purchaser wants to avoid tax. Nevertheless, 5 hopefully the Department already did, but they can't 6 assure you, they really -- it was a statistical test so 7 they didn't examine everything on an actual basis. But 8 the ones that they looked at they should have confirmed 9 that we have no evidence of tax being paid, and it is 10 possible that tax was paid. 11 Now, hopefully they -- they did that, but since 12 they're not sure -- 13 MR. HORTON: Can -- can the Department testify 14 in that regard? 15 MR. HANKS: No, we can't. 16 MR. HORTON: All right. 17 MR. HANKS: We're not certain that that -- that 18 test was done for these 23 transactions. 19 MR. HORTON: Okay. All right. We're going to 20 need that information in order to be able to move 21 forward. 22 So, Members, I'd recommend that we do a 23 30-30-30 to allow that to happen. And -- unless there 24 is a desire of the membership to move forward. 25 MS. MANDEL: To allow what to happen? 26 I'm sorry. 27 MR. HORTON: To -- to allow the Department to 28 verify whether or not some of the 12 transactions in 63 1 their test period, which will be ultimately extrapolated 2 if that be the case, was in fact included. 3 I believe Generally Accepted Accounting 4 Principles does allow for the replacement or the 5 non-replacement of these items as well as that the 6 information was subsequent to the identification of the 7 transaction that was missing. Therefore the transaction 8 probably should have been included in the audit and that 9 the support wasn't there. But that's a whole another -- 10 MR. RUNNER: Quick -- quick question, though, 11 Mr. Chair -- 12 MS. MANDEL: That's the -- 13 MR. HORTON: Ms. Mandel, then Mr. -- 14 MR. RUNNER: Yeah. 15 MR. HORTON: -- Runner. 16 MS. MANDEL: That goes to the -- that -- I'm 17 sorry. That goes to the -- that goes to the statistical 18 sampling piece of the audit? I think I lost track of 19 which piece of the audit we were talking about. Or 20 was -- because I -- I -- I thought the argument -- 21 MR. HORTON: How about we allow the Department 22 to -- 23 MS. MANDEL: Yeah. 24 MR. HORTON: -- share. 25 MR. HANKS: Right. Mr. Chairman and -- and Ms. 26 Mandel, yes, the issue that Mr. Horton raised deals with 27 the statistical sample and -- 28 MR. HORTON: Well -- 64 1 MR. HANKS: -- and the -- 2 MR. HORTON: -- just -- 3 MR. HANKS: -- methodology. 4 MR. TUCKER: Two issues. 5 MS. MANDEL: Okay. So -- so that's separate -- 6 that's different -- 7 MR. HANKS: That's separate from -- 8 MS. MANDEL: -- than the Oregon issue? That 9 give me that easy answer. 10 MR. HANKS: Yes. 11 MR. TUCKER: My understanding -- 12 MS. MANDEL: The question he's talking about is 13 different than the Oregon issue? Okay. That -- 14 MR. TUCKER: Okay. 15 MS. MANDEL: That's the answer, it's different? 16 MR. HORTON: Yes. 17 MS. MANDEL: Okay, because I got confused. 18 MR. HORTON: Yeah. No problem. 19 MS. MANDEL: All right, thanks. 20 MR. RUNNER: Well, yeah, and I'm trying to 21 get -- walk through this in terms of the issue of the 22 30-30-30. I guess, yeah, if we need more time for -- 23 for Department to kind of come back with some 24 information. Again, I'm -- I'm -- my major thought in 25 regards to this particular issue is on that Oregon sale 26 issue, which is 80 percent of this case. 27 MS. MANDEL: Yeah. 28 MR. RUNNER: And -- and so I -- I certainly 65 1 believe it -- my opinion would -- I mean, I -- I 2 would -- I'm support of the taxpayer on that Oregon 3 issue. I'm willing to move forward today on that 4 particular issue in order to get that resolved. 5 MS. MANDEL: Well -- 6 MR. HORTON: Further discussion, Members? 7 MS. YEE: I think I'd prefer to -- if we are 8 going to allow more time for additional examination into 9 the issue you raised, Mr. Chairman -- 10 MR. HORTON: Uh-huh. 11 MS. YEE: -- that we put -- should put the 12 entire matter over. I'd like to see it -- I'd like to 13 see the information in its totality again. 14 MR. HORTON: So un -- unless there is -- 15 MS. MANDEL: If it doesn't -- 16 MR. HORTON: Ms. Mandel. 17 MS. MANDEL: -- if it -- if -- if -- if the 18 additional information doesn't go to the one issue -- 19 MR. HORTON: I -- I think it will -- it will 20 also allow the Department to further solicit information 21 as a result of the issues surrounding Montgomery Ward 22 and the in-state participation as it relates to the 23 registration, relates to the marketing, as it relates to 24 the sales and all of those activities which are an 25 integral part of any sales transaction. 26 It appears by the -- based on the testimony of 27 the taxpayer and the taxpayer's representative that 28 there was a collaboration, if you will, on the sales 66 1 activities by all the departments, from my vantage point 2 of the testimony. 3 So -- 4 MR. RUNNER: Isn't -- isn't that what the 5 Department's already supposed to have been done? 6 MR. McCLELLAN: And I didn't mean to impart 7 that -- 8 MR. HORTON: No, I -- I think -- 9 MR. McCLELLAN: -- there was active -- 10 MR. HORTON: I think what happens is, is that 11 new information will evolve as a result of this process 12 and when that occurs and new inquiries we allow the 13 taxpayer or the Department additional time. 14 I mean, I would say on -- based on the facts 15 presented here today I would probably rule against the 16 taxpayer because I see that there is participation. 17 But, you know, I'm willing to try to resolve those 18 matters in order to give the taxpayer the benefit of the 19 doubt. 20 MR. TUCKER: Mr. Chairman -- 21 MR. HORTON: I think the Board is sort of 22 deliberating here, unless you -- 23 MR. TUCKER: I have some -- 24 MR. HORTON: -- wanted to say something -- 25 MR. TUCKER: -- additional information. 26 MR. HORTON: Okay. 27 MR. TUCKER: In -- in regards to whether or not 28 the sales were examined to see whether or not they had 67 1 reported -- this is directly from the audit report, they 2 looked at a number of different factors. One is whether 3 the customers paid tax to the taxpayer but the taxpayer 4 did not remit the tax, where they failed to report it in 5 error. Two, whether the audit tax was collected by the 6 Consumer Use Tax Division. And so those were examined. 7 And one of the other factors was whether it was 8 paid directly to DMV. So it was considered -- 9 MR. RUNNER: (Inaudible) -- considered issue -- 10 MR. TUCKER: -- in the course of that sale. 11 MR. RUNNER: So -- 12 MR. McCLELLAN: Right. And I -- I can attest 13 to that, as well. There was a Use Tax CUT's review done 14 on the transactions that were tested. Now, if I 15 understood the question to be is it possible that there 16 is transactions that were not tested where individuals 17 paid tax, then of course the answer is yes. But the 18 statistical sample units were reviewed by the CUT 19 section. 20 MR. RUNNER: Okay. 21 MR. HORTON: All right. In such case, is there 22 a motion, Members? 23 Or further discussion. 24 MS. MANDEL: Let's -- let's take it under 25 submission right now. 26 MR. HORTON: It's been moved to take it under 27 submission, second by Mr. Runner. 28 Without objection, such will be the order. 68 1 Ms. Olson, what is the next scheduled matter? 2 MR. RUNNER: Thank you, Members. 3 MR. HORTON: Thank you. The Members will 4 deliberate and take the matter under consideration and 5 send you a written notice of our decision. 6 Thank you so very much for coming today. 7 MR. McCLELLAN: Thank you. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 69 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 23, 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 69 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: March 10, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 70