1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 APRIL 27, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 C7a BLACK HAWK TOBACCO, INC. 14 NO. 556011 (EH) 15 C7b FREDERICK ALLEN MC ALLISTER 16 NO. 417165, 445001, 469656 (EH) 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 19 20 21 22 23 24 25 26 27 Reported by: Juli Price Jackson 28 CSR No. 5214 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 14 Diane G. Olson, Chief 15 Board Proceedings Division 16 17 For Board of David Levine Equalization Staff: Staff Counsel 18 19 Robert Tucker Tax Counsel 20 Legal Department 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 For Department: Stephen Smith Tax Counsel 24 25 For Petitioners: Michael A. Robinson Attorney 26 27 Tim Hennessy Attorney 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 27, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson? 6 MS. OLSON: Our next item is C7a, Black Hawk 7 Tobacco, Incorporated and C7b, Frederick Allen 8 McAllister. 9 Please come forward. 10 MR. HORTON: As the Petitioner comes, 11 Mr. Levine, can you introduce the issues in this case, 12 please? 13 MR. LEVINE: Yes, the issues in these petitions 14 are whether Petitioners were required to collect and 15 remit use tax with respect to their sales of Native 16 American tobacco products on reservation land, whether 17 Petitioners were negligent and whether Mr. McAllister is 18 liable as a predecessor of Black Hawk because the Board 19 was not notified of the incorporation of the business. 20 MR. HORTON: Thank you. 21 Could the Petitioners introduce themselves for 22 the record? 23 You have ten minutes to make your presentation 24 and then we will move to the Department and back to you 25 for rebuttal. 26 MR. ROBINSON: Thank you, Mr. Chairman. 27 Michael Robinson from the firm of Fredericks, 28 Peebles and Morgan. 3 1 And with me is Tim Hennessy of the same firm. 2 MR. HENNESSY: Good morning. 3 MR. HORTON: Thank you. Please commence with 4 your presentation. 5 MR. ROBINSON: Well, as the Board was just now 6 informed, the primary issue in this case is the extent 7 of the State of California's taxing authority when 8 dealing with transactions involving Native American 9 produced products sold by Native Americans within the 10 boundaries of Indian country. 11 And the facts here really aren't much in 12 dispute. Frederick McAllister is a Native American 13 member of the Sac Fox tribe of Oklahoma. He opened a 14 retail tobacco sale shop within the boundaries of the 15 Agua Caliente Indian reservation on tribal trust land in 16 late 2003. 17 In 2005 Mr. McAllister incorporated. The sales 18 continued, but Mr. McAllister incorporated his business 19 and began selling cigarettes from an entity called -- 20 identified as Black Hawk Tobacco, Inc. 21 In 2008 Mr. McAllister incorporated under the 22 laws of the Sac Fox tribe of Oklahoma and continued 23 making sales, but selling under a tribally chartered 24 corporation. 25 The cigarettes that Mr. McAllister sells are 26 all manufactured by Native Americans from locations 27 situated on Native American land within Indian 28 country -- not all in California, in fact, mostly not in 4 1 California. 2 He only buys cigarettes from distributors that 3 are Native American entities -- Native American owned or 4 tribally owned and operating within the boundaries of 5 Indian country. 6 The issue comes down -- I mean, there are two 7 -- there are two -- jurisdictionally there are two 8 principal or two primary -- two primary issues and two 9 reasons that we think that the State of California -- we 10 believe the State of California does not have the taxing 11 authority that it claims. 12 The first one -- and it was an issue raised 13 initially for the first time in the tax Department's 14 reply brief where they seem to rely on tribal law to 15 collect -- to enforce California taxing statutes and 16 collect the taxes. 17 Agua Caliente Indian tribes adopted an 18 ordinance, Ordinance 4.01, in which they incorporate the 19 State law. They incorporated -- admittedly, they 20 incorporated every aspect of the California law relating 21 to tobacco sales and taxation and require that the taxes 22 be -- taxes be collected and remitted for sales 23 generally. 24 Now, the State seems to have picked up on that 25 and said, well, under this tribal law, we have the right 26 to collect these taxes because it requires compliance 27 with the California statutes. 28 But the mere incorporation by a tribe of State 5 1 law does not convert it into State law and it doesn't 2 give the state any -- any identifiable or enforceable 3 rights. 4 We briefed that in the -- in our response brief 5 and we don't need to get into it much more deeply, I 6 just wanted to raise that point. 7 The larger issue here is the application of 8 Rule 1616. And the problem is that Rule 1616 appears to 9 be based on what we think is a misreading of Supreme 10 Court case precedent. 11 In a number of cases the Supreme Court has said 12 that a state can tax sales by Indians on reservations to 13 nonmember Indians and to non Indians. 14 The critical factor in each one of those cases 15 was what the court identified as tribe's marketing an 16 exemption for products that were not tribally produced, 17 marketing -- just simply marketing an exemption from 18 state taxation. 19 In other words, it would be like a tribe 20 purchasing Philip Morris cigarettes, selling them on the 21 reservation, not charging taxes. That's what was going 22 on in the cases that -- where the Supreme Court allowed 23 the taxation. 24 There hasn't been a case to date that has 25 noted -- that has allowed the State to tax any product 26 that was created within the sovereign confines of the 27 tribe, sold on a reservation to anyone and, in fact, the 28 cases that Regulation 1616 appear to be based on, each 6 1 one of them hints at the fact that the critical factor 2 in those cases was the fact that there was no value 3 added to the product on the reservation. 4 There is no dispute here that the cigarettes 5 that Fred McAllister was selling and Black Hawk Tobacco, 6 Inc. sells now -- or no longer sells, but was selling 7 until they closed business in May of 2010 -- were 8 manufactured by Indians on Indian land. 9 And that's just -- it's a -- it's a situation 10 that's just simply not addressed in Regulation 1616. 11 So, to the extent that disallowing the tax relies on the 12 Board ruling that 1616 is invalid, we recognize that you 13 don't have that authority. 14 The bigger problem is that it's just a 15 situation that's not addressed by 1616 and these items 16 don't fall within -- we don't believe fall within the 17 reach of or the purview of 1616 because they are purely 18 Native American character. 19 There's also an issue with regard to kind of 20 the nature of cigarettes in some of the sales that occur 21 on any Indian reservation dealing with cigarettes. 22 Publication 146 notes, in discussing the 23 application of the sales and use tax, that you don't 24 apply the sales or use tax to food items that are sold 25 to be consumed on a reservation. And the reason is that 26 they're not being consumed in California, they're not 27 being used in California. There is no connection with 28 California, really, in that instance. 7 1 Cigarettes are just as consumable. And when 2 you're dealing with some place like Palm Springs, 3 Cathedral City, Palm Desert, where Mr. -- Black Hawk 4 operated its business, substantial portions of those 5 cities are located on Indian land -- on Indian trust 6 land and the tribe enters into lease agreements with non 7 Indians and Indians alike to occupy the lands. 8 There is no way for anyone to tell who is 9 selling these cigarettes, where those cigarettes are 10 going to be consumed. And it would be unreasonable to 11 apply the tax to Mr. -- the use tax to Black Hawk in an 12 instance where the land of the area is so checkerboarded 13 and so much of the territory is Indian territory, that 14 it's probably more likely than not that the cigarettes 15 are being consumed on tribal lands. 16 And, again, that's not a situation that's 17 addressed in the regulation. It's simply not there. 18 The only consumable objection is for food. But there 19 are, obviously, a number of other items that are equally 20 consumable. 21 And, again, in the situations we are involving 22 landscape all over the west, but particularly where 23 Black Hawk was situated, property ownership is so 24 checkerboarded and so divided between fee ownership and 25 Indian ownership, it's just impossible to tell. 26 And part of the concern here is that the 27 stream -- the cigarettes being sold in the stream of 28 Indian commerce -- I mean, the policy of the federal 8 1 government for years has been to promote tribal economic 2 development. That seems to get played out as being 3 attributed only to tribes. 4 But that's not been the focus of the federal 5 government. The concern in the policy is for all 6 Indians to be able to enjoy tribal -- to enjoy economic 7 development because their land has been placed in such 8 isolated places. 9 So, the fact that these cigarettes are 10 manufactured, distributed and sold in the stream of 11 Indian commerce -- purely Indian commerce, they're not 12 sold in California, they're not sold in shops located 13 off reservation land, they're not manufactured in shops 14 or facilities located off reservation lands -- it's 15 purely a tribal enterprise in a tribal stream of 16 commerce. 17 Regulation 1616 simply doesn't apply to that 18 situation and doesn't address it. 19 MR. HORTON: Thank you very much for your 20 presentation. 21 Would the Department introduce themselves for 22 the record and commence with your presentation as well? 23 MR. SMITH: Good morning, Mr. Chairman and 24 Members of the Board. 25 I'm Steve Smith -- 26 MR. HORTON: Good morning. 27 MR. SMITH: -- with the Legal Department, along 28 with Bob Tucker and Kevin Hanks representing staff. 9 1 Regulation 1616 clearly provides that when 2 Petitioners made on reservation sales of cigarettes and 3 tobacco products to non Indians, Petitioners were 4 required to collect use tax from the purchasers and 5 report the tax to the Board. 6 Petitioners essentially argue that Regulation 7 1616 shouldn't be followed in this case because it is 8 invalid. 9 In the new co-leasing case, the California 10 Appellate Court held that the Board must be faithful to 11 its own announced regulations. 12 It is the role of the courts to overturn Board 13 promulgated regulations if they are invalid. 14 Regulation 1616 has not been overturned. 15 Further, it is highly unlikely that any court 16 would overturn Regulation 1616. The United States 17 Supreme Court has already held in the Chemehuevi case 18 that the Board may impose use tax collection obligations 19 on retailers who make on reservation sales of cigarettes 20 to non Indians. 21 Because Regulation 1616 clearly provides the 22 Petitioners are obligated to report the tax and the 23 Board is required to follow its own regulations, these 24 petitions should be denied. 25 I'd be happy to answer any questions the Board 26 Members may have. 27 MR. HORTON: Thank you very much. 28 On rebuttal? 10 1 MR. ROBINSON: Like I said starting out, we 2 recognize that the Board has to be true to its 3 regulations. And to the extent that our claims would 4 require the Board to invalidate Regulation 1616, that's 5 not possible in this setting, the recourse is to go to 6 the courts. 7 Unfortunately, under the -- under the rules, we 8 have got to go through this process first to get there. 9 But I do believe that the -- the issue remains 10 that with these particular -- with these particular 11 sales, the nature that they are, 1616 simply doesn't 12 apply. There's no question that the United States 13 Supreme Court has ruled that states can collect taxes 14 for products that were -- that have no reservation -- on 15 reservation added value when they are sold to Indians, 16 nonmember Indians or Indians on a reservation. 17 That does not include -- and the courts were 18 clear to point out that the critical factor in those 19 cases was that there was no on reservation value added. 20 Here it's the exact opposite. All of the value 21 related to these cigarettes that Black Hawk is selling 22 is generated from on reservation activities taken by 23 Indians or tribes. 24 MR. HORTON: Thank you. 25 Discussion, Members? 26 Member Yee? 27 MS. YEE: Thank you, Mr. Chairman. 28 I am assuming that Black Hawk Tobacco Shop is 11 1 still in operation today? 2 MR. ROBINSON: Black Hawk is no longer in 3 operation. 4 MS. YEE: No longer in operation, okay. 5 MR. ROBINSON: And if I can elaborate on that a 6 little bit? 7 The Agua Caliente tribe notified Black Hawk in 8 May of 2010 that it believed that Black Hawk was 9 violating tribal law and at that point Black Hawk 10 shut down. 11 MS. YEE: Was violating -- 12 MR. ROBINSON: Tribal law. 13 MS. YEE: -- tribal law? 14 MR. ROBINSON: Yes. 15 MS. YEE: How so? 16 MR. ROBINSON: Because, as I said, the Agua 17 Caliente passed Ordinance 4.01, which incorporated 18 California -- California's laws into tribal law relating 19 to cigarette sales and tax collection. 20 So, when this matter arose, there is another -- 21 there is another action being pursued by the 22 Attorney General's office in the State court, when these 23 two matters arose, the tribe was notified of the 24 actions, the tribe contacted Black Hawk, told them it 25 was violating Ordinance 4.01 and Black Hawk shut down. 26 MS. YEE: I see, okay. 27 The reason I asked was just to see whether 28 you've changed any of your business practices. 12 1 But certainly the stance you are taking today, 2 what I was really after was whether there are any 3 records of to whom sales were made? 4 MR. ROBINSON: There are -- there are some 5 records to whom sales were made. 6 Black Hawk's policy was to maintain only -- 7 only records relating to mail order sales. And they 8 only kept records two years back. So, there are some -- 9 some records relating to mail order sales, yes. 10 MS. YEE: Okay. 11 MR. ROBINSON: The in store -- in the store 12 sale they used thermal receipts for basically everything 13 and they just had a cash register that they used. So, 14 they don't have any of those sales. 15 MS. YEE: All right, okay. Thank you. 16 MR. HORTON: Member Steel? 17 MS. STEEL: I didn't get the part that it was 18 sold to the Indians inside of the reservations. 19 What was the percentage of the tobacco products 20 being sold inside of the Indian -- I mean, to Indian? 21 MR. ROBINSON: The tobacco products are 22 manufactured by tribally owned or Indian owned entities 23 that operate within other reservations, not within the 24 Agua Caliente reservation. 25 Those cigarettes are then distributed by Native 26 American companies and transferred to -- transferred to 27 Black Hawk for storage and Black Hawk sale -- storage 28 facility, which is located on tribal land within the 13 1 Agua Caliente Indian reservation. 2 And then they sold the cigarettes. I mean, 3 unquestionably, they sold the cigarettes because Black 4 Hawk sold the cigarettes to Indians and to the general 5 public -- Indians, non member Indians, and not Indians 6 coming into the store and through mail order. 7 MS. STEEL: Okay. How about the -- you 8 mentioned about the interstate commerce, that that's the 9 bringing in? 10 MR. ROBINSON: Well, the idea is is that 11 commerce among the Indian tribes -- among tribes -- 12 there is an Indian commerce clause in the constitution, 13 so, commerce among the tribes is regulated by the 14 federal government, not by the states. 15 And the point of this case is is that the 16 entire stream of commerce here is Indian commerce. No 17 action -- no action that's involved in any step of the 18 process takes place on -- on land that's not federal 19 trust land held for the benefit of an Indian tribe or an 20 individual Indian. 21 MS. STEEL: Mr. Levine, I always get confused 22 because there is Indian land when you go, there is other 23 shops there, like some franchisers -- franchisees, it's 24 like McDonald or other companies. 25 How they count that when non Indians coming 26 into the reservations and they use that? And what -- I 27 mean, I always get confused because they are -- as long 28 as they are consuming everything inside of the 14 1 reservations, then it's nontaxable. 2 MR. LEVINE: Well, I didn't review the reg for 3 that and I believe a sale by McDonald's to a non Indian 4 would be taxable. 5 I bet Mr. Smith is up on this, but I think most 6 of the McDonald's sales are going to be taxable -- 7 MS. STEEL: So, this -- 8 MR. LEVINE: -- unless it's owned by the tribe, 9 by the franchisee who is a member of the tribe would 10 raise -- 11 MS. STEEL: Then it's not taxable? 12 MR. LEVINE: -- other questions. 13 Then we'd have to look at the Indian -- sales 14 by Indians provisions that we're talking about today. 15 MS. STEEL: So, right now that this taxpayer is 16 non Agua Caliente native, is that the reason that they 17 got into trouble? 18 MR. LEVINE: Well -- 19 MS. STEEL: If he was the same tribe and 20 selling inside of the same reservations, then it's not 21 taxable? 22 MR. LEVINE: No, he's selling -- selling 23 products -- the sales -- I believe probably all of the 24 sales are going to be exempt from sales tax. 25 The problem is the use tax. And these 26 cigarette retailers make, I believe, just from logic, 27 that the vast majority of their sales are to people who 28 live off the reservation. Those are all taxable, use 15 1 tax. 2 MS. STEEL: But if they are bringing from other 3 reservations, so, it's Indian reservations to Indian 4 reservations, then it's not -- 5 MR. LEVINE: If he was buying it for his own 6 use on the reservation from other Indian tribes, we 7 wouldn't be here. 8 It's his sales that we're focusing on. So, 9 you're right, the stream of commerce up to that point -- 10 MS. MANDEL: David, she's talking about -- I 11 think -- I am sorry. 12 I think she's talking about if the Petitioner 13 sold to an Indian who lives somewhere else, who was 14 taking it from Petitioner's business back to where that 15 Indian lived and that Indian lived on a different 16 reservation or on a parcel in Palm Springs that's Indian 17 land. 18 Is that the question? 19 MS. STEEL: Well -- 20 MS. MANDEL: Sorry. 21 MS. STEEL: -- my question is more of when -- 22 MS. MANDEL: Sorry. 23 MS. STEEL: -- you go to the coffee shop and 24 you ask that you are taking this food out or you going 25 to consume here. 26 So, inside of the Indian reservations, when 27 people coming in, you have to ask them that you going to 28 consume here or are you Indians or you are non native in 16 1 this reservations? 2 I mean, you know, there is just so many things 3 that -- really details that I really don't understand 4 that part, that how you going to find out that it's 5 being consumed inside of the reservations and it's 6 consumed by non Indians? 7 I mean, how you going to figure it out? You 8 ask every time you make sales? 9 MR. LEVINE: Yes, just like to go -- for here 10 or to go, you ask and you document. 11 They're trying to claim an exemption and 12 it's -- 13 MS. STEEL: Then we can make a little further, 14 because those restaurants, we ask them that they have 15 chairs outside that we always tell them that, "You have 16 chair outside means that you going to eat there." 17 So, these people that when they buy it, they 18 are inside of the reservations and they -- we assume 19 that they going to consume it inside of the 20 reservations. 21 MR. LEVINE: Well, if you're talking about 22 someone who buys a single pack of cigarettes and is 23 going to be visiting the reservation for a week, I 24 accept that. 25 MS. STEEL: Well, some people smoke more than 26 pack a day, so -- 27 MR. LEVINE: Right. But if you're talking 28 about someone who goes in and buys four cartons and 17 1 drives out, then I wouldn't accept that. 2 I don't know what the percentages -- they know 3 better than I do, but I believe a lot of the purchases 4 are that way, especially when you consider how much tax 5 is imposed on cigarette sales outside the reservation. 6 MS. STEEL: Because last four and a half years 7 that I been going through every cases for these taxable 8 and nontaxable and I barely draw the line now, and that, 9 you know, where to draw the line, but this case just 10 threw me off from there because, you know, I knew if 11 they had couple of chairs outside with restaurant, they 12 really have to charge tax on their -- even to go stuffs 13 a lot of times because we sit there and we watch and 14 then we say that common, you know, tables out there. 15 But now that we are telling totally different 16 things to this taxpayer, that's what I am, you know, 17 hearing today. So, -- 18 MR. ROBINSON: If I may? 19 I think that the -- I think the assumption that 20 was just presented to the Board, especially in places 21 like Palm Springs, Palm Desert and Cathedral City, it's 22 not really reasonable. 23 The majority of those cities is tribal land. 24 And you can have somebody buying 100 cartons of 25 cigarettes and if they live on tribal land, the use tax 26 doesn't apply if it's sold by an Indian retailer 27 operating on the reservation. 28 And there is just -- there's no possible way to 18 1 know where somebody who comes in for a face-to-face 2 transaction is going to use that cigarette. 3 And tribal lands in the western United States 4 create an interesting and unique problem because you 5 have major cities that are -- they're essentially split 6 in half, one-half's tribe land, one-half's State land, 7 but it doesn't go in clean lines. 8 It's literally, you look -- you look at the 9 maps and it's literally a checkerboard situation. 10 MS. STEEL: Maybe you have to put the sign on 11 that you have to consume these cigarettes inside of the 12 reservation -- 13 MR. ROBINSON: Many of the cigarettes -- 14 MS. STEEL: -- or on Indian land. 15 MR. ROBINSON: -- many of the cigarettes that 16 Black Hawk sells have stamped on the packs, "For 17 Reservation Use." 18 MS. STEEL: Okay, thank you. 19 MR. HORTON: Mr. Runner? 20 MR. RUNNER: Again just -- I mean, this ends up 21 getting a little more foggy than that because the fact 22 that it's -- it's a -- it's a, as you talked about, an 23 Indian chain of commerce, that the challenge for that is 24 that the Indian chain of commerce ends on Indian land; 25 that where that -- that where those who have had that 26 land in that tribal trust have adopted a different 27 policy. 28 So, it seems to me that's what kind of makes 19 1 this a little foggier than this chain of lines of 2 commerce because the tribe that has that property in 3 tribal trust has, as a policy, said, "We are going to go 4 ahead and abide by the State law." 5 And, so, therefore, it seems to me it's a 6 little -- it's a little bit different in the sense of 7 the commerce chain because part of that commerce chains 8 have adopted and accepted the State law. 9 MR. ROBINSON: Well, I would -- 10 MR. RUNNER: Okay, go ahead. 11 MR. ROBINSON: If I may just address that 12 point? 13 MR. RUNNER: Yeah. 14 MR. ROBINSON: They've accepted -- what Agua 15 Caliente has done is accepted the policies of the State 16 of California. 17 MR. RUNNER: Right. 18 MR. ROBINSON: They've adopted it and 19 incorporated the State of California's laws into its own 20 laws. 21 So, what -- what that would do at that point 22 would give the Agua Caliente tribe jurisdiction to 23 enforce those laws. 24 It doesn't transfer that jurisdictional 25 authority over to the State of California. 26 MR. RUNNER: Correct, okay. 27 But I mean -- okay, but I mean in that sense 28 that they have adopted that and they have allowed that 20 1 to take place -- and I guess what -- I guess what you'd 2 have to be arguing is that they could only do that -- 3 again, that would be voluntary on their part and that 4 can not be compelling then to any other tribe who 5 happens to then -- or Indian individual -- who happened 6 to then set up a business on land in -- that's -- that 7 is under the Agua Caliente tribe. 8 MR. ROBINSON: I think where the difference 9 would come in is if another tribe adopted a different 10 ordinance. 11 Say you had -- 12 MR. RUNNER: No, the only ordinance that is of 13 importance here and the only tribe that is of importance 14 here is Agua Caliente. 15 MR. ROBINSON: Right, correct. 16 MR. RUNNER: Okay. So, that -- and their land 17 in trust. 18 MR. ROBINSON: And their land in trust, 19 correct. 20 MR. RUNNER: So, the question is, why does some 21 other Native American have the ability to come in, set 22 up a business, do that outside of what they have agreed 23 to do in their tribal ordinance in relationship with the 24 State of California in their land of trust? 25 MR. ROBINSON: Arguably, they don't have the 26 right to do that. 27 But it's for Agua -- it's for the Agua -- 28 MR. RUNNER: You mean they don't have the 21 1 sovereignty over their own property? 2 MR. ROBINSON: No, no, no. As I understand -- 3 as I understood your question, it was what right does an 4 individual have to come on and set up shop on the Agua 5 Caliente Indian reservation and not abide by the tribe's 6 laws? 7 And an individual doesn't have that right, 8 especially in a situation where you have to enter into a 9 lease to open your shop and the lease has to be approved 10 by the Bureau of Indian Affairs because you are leasing 11 Indian lands. 12 MR. RUNNER: Okay. 13 MR. ROBINSON: You've entered into a consensual 14 relationship at that point with the tribe. 15 MR. RUNNER: Okay. 16 MR. ROBINSON: And at the point of entering 17 into a consensual relationship with the tribe, the tribe 18 has regulatory authority, adjudicatory authority over 19 that person. 20 MR. RUNNER: Okay, okay. 21 MR. ROBINSON: So -- 22 MR. RUNNER: So, why is this different? 23 MR. ROBINSON: -- it's not different. 24 The difference is that the State of California 25 doesn't have the right to enforce the tribe's laws in 26 California -- through California processes, the Agua 27 Caliente Indian tribe -- 28 MR. RUNNER: Even though it's the intention of 22 1 the leasor, who's the property -- who has the property 2 in trust, to -- to follow? 3 MR. ROBINSON: Well -- 4 MR. RUNNER: See, it seems to me -- the 5 argument seems strange to me in that sense. 6 You're trying to -- it's an argument of 7 sovereignty, but what you're saying is that the Agua 8 Caliente has certain sovereignty, which they've 9 extended -- because of their sovereignty -- to their -- 10 to their tribal lands. 11 MR. ROBINSON: Well, no -- 12 MR. RUNNER: But yet you're arguing that -- 13 hang on just a minute. 14 But yet you're extending then the sovereignty 15 of another tribe that almost displaces their desire to 16 accept then the State -- the following of State law -- 17 MR. ROBINSON: I think we're -- 18 MR. RUNNER: -- on their own property. 19 MR. ROBINSON: I think in -- and to use an 20 airline analogy, we're flying on two different flight 21 paths here and we're going over the top of one -- one's 22 going over the top and one's going under the other. 23 Agua Caliente has adopted its tribal law. Agua 24 Caliente sovereign authority attaches to and covers all 25 of its land under any circumstance. That never changes. 26 So, by enacting this law, Agua Caliente isn't 27 expanding its sovereignty, it's exercising its 28 sovereignty over its sovereign territory. 23 1 There is no other tribe coming in and upsetting 2 Agua Caliente's laws. What you have, inarguably, and 3 Agua Caliente notified Black Hawk of this, is you have 4 an Indian, who is a member of a different tribe, who has 5 entered into a consensual relationship with Agua 6 Caliente, who violated Agua Caliente law. No question 7 about that. 8 When Agua Caliente notified Black Hawk that it 9 was in violation of tribal law, Black Hawk shut down and 10 quit doing business there because it wasn't going to 11 violate tribal law. 12 But there is no expansion of the tribe's -- 13 this case doesn't involve an expansion of the tribe's 14 sovereignty -- sovereign authority, what it is is an 15 attempt by the State of California to expand its 16 sovereign authority over the tribe and to catch in its 17 taxing net individuals who have entered into consensual 18 relationships with the tribes operating on tribal lands 19 in this stream of Indian commerce. 20 MR. RUNNER: Okay. 21 MR. HORTON: Mr. Runner, with your permission, 22 possibly Mr. Levine can shed some light on the inquiry? 23 MR. LEVINE: I wanted to correct what I said to 24 Ms. Steel. 25 But I'm happy to shed light on this. I believe 26 the argument -- the reason it's hard to connect is 27 because the argument is pretty far-fetched. He's 28 apparently arguing that the tribe is extending 24 1 California law and will enforce it itself or delegate it 2 to the State and that's just not what happened. 3 They said follow State law. They didn't say to 4 the State, "We're delegating to you the right for you to 5 enforce your own law." They're just standing back and 6 saying, "Yes, our -- these people will follow your law. 7 You have to follow State law." 8 Ms. Steel, I believe I gave you an incorrect 9 answer and maybe Mr. Smith is chomping at the bit to say 10 that. 11 There is no exemption for use on the 12 reservation by non Indians except for the food 13 provision. What the statute -- what the reg says is 14 that, 15 "An Indian retailer selling to a non Indian or 16 an Indian who doesn't reside on the 17 reservation, must collect use tax, except as 18 exempted below." 19 And the exemption is for the sales of food. 20 So, I believe that that issue doesn't come up about 21 where they reside or where they're going to smoke it. 22 MS. STEEL: Thank you. 23 MR. ROBINSON: If I may with -- 24 MR. HORTON: One second, sir. 25 Mr. Runner, does that conclude your -- 26 MR. RUNNER: Yeah. 27 MR. HORTON: Okay, further discussion, Members? 28 MS. YEE: I have some questions. 25 1 MR. HORTON: Member Yee? 2 MS. YEE: I just wanted to get clarification, 3 if I could. I have heard a lot about the Indian stream 4 of commerce and also about the -- perhaps, some of the 5 sales scenarios that could have taken place. And I just 6 wanted to be sure I understood -- I heard this 7 correctly. 8 The use tax collection requirement is for sales 9 by Indian sellers to non Indians and to Indians who do 10 not reside on the reservation, right? 11 Is that correct? 12 Is it not reside on a reservation or any 13 reservation? 14 MR. SMITH: On the reservation of the sale. 15 MS. YEE: Okay, all right. I just wanted to be 16 clear about that because of some the scenarios that have 17 been -- 18 MR. SMITH: And a different subdivision applies 19 the tax to non Indian retailers, again, who make sales 20 too. 21 So, for a majority of the audit period, Black 22 Hawk, Inc. was a corporation, incorporated under 23 California law, which is another wrinkle to this case. 24 For a majority of the audit period, they weren't even 25 Indians for purposes of this regulation. 26 MS. YEE: Purposes of the regulation, right. 27 MR. SMITH: But it doesn't really matter, they 28 still end up owing the same tax. 26 1 MS. YEE: Okay, all right. Thank you. 2 MR. HORTON: Could the Petitioner elaborate on 3 the acquisition of the cigarettes? 4 Earlier it was your testimony that the 5 cigarettes are manufactured by a tribal government, I 6 believe, or someone on a tribal reservation? 7 MR. ROBINSON: Correct. Black Hawk's business 8 practice has been, since the day it opened and continued 9 to the day it closed, that it would only buy 10 cigarettes -- they refused to buy cigarettes from any 11 entity that was not tribally owned directly -- directly 12 owned by a tribe, owned by a tribal member, an enrolled 13 member of a federally recognized tribe and which were 14 produced on tribal lands. 15 So, in other words -- 16 MR. HORTON: So -- 17 MR. ROBINSON: -- they wouldn't buy Camels and 18 sell them. 19 So, the brands they sell -- 20 MR. HORTON: -- so, they're -- they're 21 cigarettes manufactured by someone other than the 22 traditional manufacturers of cigarettes? 23 MR. ROBINSON: Absolutely, yes. 24 MR. HORTON: And did the Department look at 25 that relative to excise tax? Tax stamps? 26 MR. SMITH: The Special Taxes Department is 27 currently investigating that. 28 And that's actually the point of the Attorney 27 1 General's litigation too, because the product was off 2 directory and is part of the A. G.'s diligent 3 enforcement of the Master Settlement Agreement. That's 4 why they got the court to enjoin their continued -- the 5 product was considered contraband in California. And 6 that's why the court issued the injunction against 7 continued sales of the contraband. 8 MR. HORTON: So, there wasn't a compliance with 9 the Master Settlement Agreement, Prop. 99, Prop 10, all 10 of that? 11 MR. SMITH: Right. 12 MR. HORTON: All right. Thank you very much. 13 Further -- 14 MR. ROBINSON: Just one clarif -- 15 MR. HORTON: -- further -- my apologies, sir. 16 Further discussion, Members? 17 MS. STEEL: One simple question to the 18 Department. 19 MR. HORTON: Member Steel? 20 MS. STEEL: The Department fully adjusted the 21 liability of Petitioner's exempt sales and inter 22 commerce -- interstate commerce? 23 This amount is -- 24 MR. SMITH: For their sales, we didn't make any 25 adjustments for sales in interstate commerce. These 26 Petitioners have not provided any documentation that 27 they actually made sales -- shipped in interstate 28 commerce. 28 1 MS. STEEL: But I heard that when Ms. Yee asked 2 that you have paperworks some of them? 3 MS. YEE: I think your response had to do with 4 mail order. 5 MR. ROBINSON: Yeah, there were -- there were 6 cigarettes sold in -- in store, face-to-face 7 transactions and there were mail order transactions. 8 Unfortunately, the Petitioner Black Hawk did 9 not keep records on -- as to whether the purchasers 10 coming into the -- into the store, through mail order 11 were members of a federally recognized Indian tribe. 12 MS. MANDEL: Did any of the mail order sales -- 13 were they mail order to outside of California? 14 MR. ROBINSON: Yes. 15 MS. MANDEL: That's the -- 16 MS. STEEL: That's what I meant. 17 MS. MANDEL: -- that's what she's asking. 18 MR. ROBINSON: Yes. 19 MS. STEEL: Do you have those paperworks? 20 MR. ROBINSON: We can provide that paperwork, 21 yes. 22 MS. STEEL: So -- 23 MR. ROBINSON: We have records, as I said, 24 Black Hawk, for their mail order -- for mail order 25 maintained records only -- what its business practice 26 was was to maintain business records only for two -- for 27 the two previous transactions. 28 So, in some cases that goes back, you know, to 29 1 2008, but for the most part the transactions for mail 2 order, all of the records will relate to 2009. 3 MS. STEEL: So, if you look at those interstate 4 commerce receipts, can we adjust that? 5 MR. SMITH: We could make adjustments if they 6 documented that they actually made sales in interstate 7 commerce. 8 It's been our position that they're required to 9 give us documentation of that and they haven't to date. 10 MR. TUCKER: And part of the complication is 11 that all sales were claimed as resales. There were no 12 sales claimed as interstate commerce. 13 MS. STEEL: But -- 14 MR. ROBINSON: I -- 15 MS. STEEL: -- Petitioner just said that they 16 have -- some of them are interstate commerce sales. 17 So, that's why I'm asking that Department is 18 willing to adjust those amounts as -- you know, as long 19 as they can provide the documents? 20 MR. TUCKER: Right. It just -- I was just 21 pointing out that they had -- they were claimed as 22 resales. 23 So, based on the information we have right now, 24 we don't have sufficient -- 25 MS. MANDEL: She understands -- 26 MR. TUCKER: Okay. 27 MS. MANDEL: -- I think why you didn't do it to 28 date. 30 1 MR. TUCKER: Okay. 2 MS. MANDEL: But you'd be able to do it if 3 their information was later than the audit period? 4 I think you said -- do you have anything that 5 goes back to the audit -- 6 MR. ROBINSON: I don't have it. 7 MS. MANDEL: -- to the 4 to 7? 8 MR. ROBINSON: There are no -- there are no -- 9 MS. MANDEL: No records that go back far? 10 Is there -- 11 MR. ROBINSON: -- there are no records that go 12 back that far. 13 MS. STEEL: Thank you. 14 MS. MANDEL: Is there a way to make -- make an 15 adjustment for -- 16 MR. HANKS: We would need to -- 17 MS. MANDEL: -- where you would look at it and 18 figure out whether there was something or not? 19 MR. HANKS: We'd need to look at the records 20 that are contemporaneous with the audit period. So, we 21 couldn't rely on looking at records from a later period 22 to make a determination about what was sold in the prior 23 period. 24 MS. STEEL: But, Mr. Hanks, that if they going 25 to provide the informations even after that, they can -- 26 you can -- we do assume a lot of times that you can just 27 look at the paperworks and then you can check it because 28 that business is not changed within one year or two 31 1 years periods. 2 So, you can, at least, adjust some of the 3 amount of the interstate commerce sales? That's what 4 I'm asking. 5 MR. HANKS: Right. Ms. Steel, I think our 6 difficulty would be making the determination that the 7 volume of interstate commerce sales in 2009 equated to 8 the same volume of sales in the prior years. 9 And we -- we just can't make -- make that 10 connection unless there is more documentation that 11 indicated that there was some level of -- of interstate 12 commerce sales from prior years. 13 If they had, let's say, UPS booklets that 14 identified shipments from both periods, then we could 15 look at that. 16 Ordinarily, we'd ask to look at sales invoices 17 also that -- 18 MS. STEEL: So, if Petitioner, do you have 19 anything -- 20 MR. HANKS: -- tie to those. 21 MS. STEEL: -- during this tax period 2004 to 22 2007? 23 MR. ROBINSON: No. Trust me, if we had any 24 documentation because the of -- a large percentage of 25 Black Hawk sales occurred outside -- mail order sales, 26 which occur outside of California. 27 The problem is, like I said, Black Hawk's 28 business practice was to maintain only sales records 32 1 relating to the last -- to the two prior sales. And 2 that period's really limited to 2000. 3 And in terms of shipping, they used the United 4 States Postal Service until the PAC Act was passed. So, 5 they don't have -- they don't have large -- they don't 6 have UPS invoices or anything like that. 7 They went to the post office and dropped their 8 stuff off and shipped it. 9 MS. STEEL: Let me ask you just one thing then. 10 Business practice been changed a lot from 2004 11 to 2009, until they closed? 12 MR. ROBINSON: No. Their business practice -- 13 their -- Black Hawk's business practices, as I 14 understand them, were -- the only significant change was 15 when Black Hawk opened in 2004 and when they were 16 incorporated in 2005, up until about 2007 they didn't 17 engage in any mail order sales. 18 Mail order sales didn't begin until late 2006, 19 early 2007. And that was the significant change in 20 their business. But for that -- for those initial sales 21 they just did not maintain records. 22 MS. MANDEL: Let me ask -- one more just try -- 23 did they -- did they -- they might not have kept the 24 sale -- particular sales information back to late 25 2006-2007 because people -- they only kept the last two 26 transactions that any particular person purchased. 27 Did they have a regular customer list? Did 28 they have -- you know, if you have something from 2009 33 1 that some guy purchased and they would -- and the guy 2 was in, you know, Oklahoma, did they have any records 3 that show when that guy first became a customer? 4 MR. ROBINSON: (Shaking head.) 5 MS. MANDEL: Okay. 6 MR. ROBINSON: No. Not that I'm aware of or 7 not that's been provided to us. 8 MR. HORTON: Further discussion, Members? 9 Hearing none, is there a motion? 10 MS. YEE: Move to take the matter under 11 submission. 12 MR. HORTON: Moved by Ms. Yee to take the 13 matter under submission. 14 Second by Ms. Steel. 15 Without objection, Members, such will be the 16 order. 17 Sir, thank you very much -- 18 MR. ROBINSON: Thank you. 19 MR. HORTON: -- for appearing before us today. 20 We will take your matter under consideration later on 21 this evening and send you a written report of our 22 decision. 23 MR. ROBINSON: Thank you, Mr. Chairman, Board 24 Members. 25 MR. HORTON: Thank you very much. 26 ---o0o--- 27 28 34 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 APRIL 27, 2011 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 34 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 13, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 35