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 MEDIA MANAGEMENT SERVICE, INC. 14 NO. 294859, 391611 (EA) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 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 For Department: Cary Huxsoll Tax Counsel 20 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 Robert Tucker Legal Department 24 25 For Petitioner: Clyde Sleigh Representative 26 27 Jim Elmore Representative 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 APRIL 27, 2011 4 ---oOo--- 5 MS. OLSON: Our next item is C9, Media 6 Management Services, Incorporated. 7 Please come forward. 8 MR. HORTON: Mr. Levine, as the taxpayer comes 9 forward, please introduce the issues in this case. 10 MR. LEVINE: The primary issue in this 11 administrative protest is the claim for refund for Media 12 Management Service, Inc. is whether the subject property 13 constituted materials for consumption in performing 14 construction contracts or fixtures for sale as part of 15 those construction contracts. 16 I note that there's -- that taxpayers made an 17 alternative argument regarding the property constituting 18 structures. However, property that is used to create 19 structure is, by definition, materials. 20 So, if the property -- if the Petitioner 21 prevails in the argument that it's a structure, then the 22 property that went into making that structure is 23 materials that Petitioner -- that taxpayer consumed. 24 Also at issue whether finality and amnesty 25 interest penalties should be relieved. 26 MR. HORTON: Thank you, Mr. Levine. 27 Taxpayer's setting up a chart that I'm 28 presuming will be brought closer or the Board will have 3 1 a copy of it? 2 MR. SLEIGH: We do have smaller -- 3 MR. HORTON: At least for my old eyes. 4 MR. SLEIGH: -- copies in the materials. 5 MR. HORTON: That'll work, sir. 6 MR. SLEIGH: We wanted this to be part of the 7 public record for the video as well. 8 MR. HORTON: Are we accomplishing that in this 9 location, Ms. Olson? 10 MR. SLEIGH: I've made arrangements and they 11 said yes, that we were. 12 MR. HORTON: Okay, all right. 13 MR. SLEIGH: And the taxpayer has updated his 14 exhibits. If we could have those distributed? 15 MS. OLSON: Yes. 16 MR. SLEIGH: Here is 9 copies. 17 MS. OLSON: Thank you. 18 MR. HORTON: One second, please. 19 Before you distribute those, has the Department 20 received copies of these updates? 21 MR. HUXSOLL: No. 22 MR. SLEIGH: We're supplying them right now. 23 There's, essentially, a few pictures that were 24 added to the pictures that were already part of the 25 exhibits. 26 MR. HORTON: So, it's not necessarily -- 27 MR. SLEIGH: There is more. 28 MR. HORTON: -- a material change? 4 1 MR. SLEIGH: No. 2 MR. HORTON: All right, Ms. Olson. 3 Will the Petitioner please introduce yourself 4 for the record? 5 You'll have ten minutes to make your 6 presentation, at which time we will go to the 7 Department, allow them 10 minutes to do the same, and 8 then return to you for rebuttal. 9 MR. SLEIGH: Thank you very much. My name is 10 Clyde Sleigh and this is Jim Elmore of Media Management 11 Service. 12 And I'll start off by saying thank you very 13 much for the opportunity to present this case to you. 14 We think it has some interesting implications, not only 15 for the case that we're looking at, but possibly for 16 transactions in the future as well. 17 Regulation 1521 provides that materials lose 18 their separate identity when they're affixed to real 19 property and that fixtures retain their identity. 20 Now in Regulation 1521 there's an Appendice C, 21 and it provides that -- in the right-hand column it 22 lists things that are not machinery and equipment. It 23 says that anything that is not machinery or equipment is 24 either a material or a fixture. 25 In Appendix B of Regulation 1521 it 26 specifically lists light fixtures as being light 27 standards, like street lights, like what we have in the 28 pictures over here (indicating) and I can walk over and 5 1 pick them up if I have to, but -- 2 MR. HORTON: That's okay. 3 MR. SLEIGH: -- those are fixtures, okay. 4 The diagram shows what is prefabricated in an 5 off-site facility. The -- there may have been some 6 misunderstanding at some point, I think what Mr. Elmore 7 will say in a moment will help clarify it, but the -- 8 but the top portion of that has to be attached to the 9 supporting column. The supporting column is not useful 10 for anything but to be connected to the integrated whole 11 for which it was designed. 12 This case is about outdoor advertising signs, 13 not lighting fixtures. But we would suggest in the same 14 way that a lighting fixture is a lighting fixture 15 regardless of whether or not it has a light bulb in it, 16 regardless of whether or not the light bulb is switched 17 out, that these are signs, regardless as to whether or 18 not the advertising copy is occasionally switched out, 19 when a -- you know, a different company is paying for 20 advertising to be used on that particular sign. 21 So, we would say that there is an analogy 22 between a light bulb being changed in a light fixture 23 versus advertising copy being changed on one of these 24 outdoor advertising signs. 25 I am going to go ahead and ask Mr. Elmore to 26 quickly walk through the exhibits that have been passed 27 out. 28 MR. ELMORE: Hi, Chairman Horton, thank you and 6 1 the Board for allowing time here. 2 My name is Jim Elmore and I am President of 3 Media Management Service, Inc. 4 And by walking through the slides here, this -- 5 starting off with the page 1 here, 1 through 5, and then 6 I may refer, from time to time, over to the exhibits 7 over here (indicating) and you have those, I think, in 8 front of you. 9 But the -- my company and myself, we are a 10 California State contractor, a specialty contractor 11 classification, which is identified here on the front 12 page as here a C61 limited specialty. And there is a 13 sub class, D34 and D42. And those are highlighted down 14 here for your reference on this front page (indicating). 15 And those classifications are extremely 16 important to what we are doing and how we govern our 17 contracts and what we can do through the State of 18 California. And prefabricated equipment is the D34 19 classification and sign installation is the D42 20 classification. 21 So, that is the background behind the young -- 22 my company's ability to function as a contractor in this 23 case. 24 In the contract -- to enter in to it was to 25 install these prefabricated signs for a joint venture 26 with the MTA and the two entities in Los Angeles. 27 On page 2 of 5 this -- this gives you just -- 28 these are the photos related to kind of give an exhibit 7 1 or illustration of what the signs used to be and what 2 they are now. 3 These signs here (indicating), if you look at 4 them on the top, these were -- these were taken from raw 5 material to the field and were fabricated, installed 6 welded, manufactured, actually, on site. 7 This -- this activity took place 20, 25 years 8 ago. And I've been in the business about 35 years. I 9 did these. You know, so back in the early '70s that's 10 how they were built. 11 And then the lower one you see down here that 12 is on a pike (indicating), that one is a pike with a 13 head structure that goes up over it. That is a -- you 14 take that out and you take the one pipe and you can put 15 up -- you know, reuse that pipe for any sign. And those 16 were small -- are a small 8-sheet. So, they're in lump 17 sums and you build them on site. 18 But if you go to -- farther to the next page 19 here that shows just an illustration about the 20 advertising signs -- and this is taken off of CBS's 21 website -- and it gives the different illustrations up 22 top and then bulletins, posters and 8-sheets. 23 You know, the bulletins are what we really 24 are -- are referring to here, in this sign here 25 (indicating). And they're a billboard sign. And they 26 are prefabricated in a facility as a standard unit, like 27 this one (indicating) that entails support columns that 28 bolt together that are prefabricated in the shop. And 8 1 then there they're taken out to the site, put in a 2 foundation and bolted together and the top fits that 3 particular sign. It's made as one integral unit. And 4 that is called a billboard -- a bulletin, which is a 5 large sign. 6 The next page, I think in trying to 7 walk through this, is the actual activity that was 8 taking place during this, you know, failed attempt to 9 execute a contract. The contract was cancelled by -- by 10 the State -- or by the City and the entity sold. 11 But my job was to install these units and -- 12 provide them and install them. This pipe, the photo 13 here on page 4 of 5, shows one sign that was being 14 assembled and installed. This is the two columns here 15 (indicating) that are in -- if you look at and you'll 16 see the person standing beside one of the columns, so, 17 it kind of gives you, you know, just a comparison on the 18 size of them. 19 But if you look at the freeway above it up 20 there, that's how -- that's why those columns are 21 multiple stages. They have to get up to the freeway for 22 visibility. 23 So, this is one complete unit here 24 (indicating). This is a part of that unit that was 25 going in before the project was halted and subsequently 26 cancelled. 27 And then when it was cancelled, my agreement 28 was to install the signs complete. The project was 9 1 cancelled and then the inventory was removed from the 2 site by the MTA and the other entities. 3 And it was -- basically, this is what the 4 material looked like after a protracted court case and 5 it became spoiled inventory. It wasn't usable for 6 anything. 7 MR. SLEIGH: Right. So, what had happened was 8 the MTA had entered into a contract with STI, which was 9 the joint venture of two other parties. STI was the 10 entity that contracted with Media Management Services 11 for the installation of the signs. 12 The California legislature passed the law that 13 was going to go into effect the following January 1st 14 that was going to make it much more difficult to install 15 these large outdoor billboard signs. An attempt was 16 made to at least get started on as many of them as 17 possible. 18 And the LA City Attorney started filing 19 litigation to basically stop it, and saying, you know, 20 you are not going with the spirit of the law that the 21 legislature had passed. This was all written up in the 22 Los Angeles Times on various articles. 23 So, that is how it came about that this 24 particular contract fell apart. Nobody got paid. If it 25 had been completed as had been planned, you know, the 26 State would have received the tax on the cost, 27 regardless of whether we were calling these materials or 28 fixtures. It was only because the whole contract fell 10 1 apart, nobody got any money anywhere, that the -- that 2 the notion that -- well, let's consider these to be 3 materials came up. 4 Because the incidence of taxation for materials 5 is when the contractor acquires them, whereas the 6 incidence of taxation for fixtures is upon their 7 installation. 8 You know, we've provided evidence that none of 9 these were ever installed to completion. In fact, 10 that's why we recently amended our claim for refund 11 amount. 12 Originally at the District office level 13 Mr. Elmore had been willing us -- just to try to get 14 this resolved and behind him -- had suggested that, 15 look, for anything that we had poured concrete footings 16 for, we'd be willing to say, for purposes of just 17 getting this resolved, that we'll regard those as having 18 been installed. When, in point of fact, they never were 19 installed and so, that's why we modified the claim for 20 refund. 21 Lastly, I'll just quickly say that the Board 22 did litigate in a case, Boyd Industries, Richard Boyd 23 Industries, about the issue of signs. And one of the 24 points that is interesting is that the Court of Appeal 25 held that the Board of Equalization had not erroneously 26 applied Regulation 1521 in determining in the 27 contractor's construction contracts to sell and install 28 signs on real property. The contractor installed 11 1 fixtures as opposed to materials. 2 It went on to say that the sign may 3 appropriately be classified as a fixture if it does not 4 lose its identity as a sign. 5 So, that's our presentation. 6 Thank you. 7 MR. HORTON: Thank you very much. 8 Will the Department please introduce themselves 9 for the record and commence your presentation? 10 MR. HUXSOLL: Good morning, Mr. Chairman, 11 Members of the Board. 12 MR. HORTON: Good morning. 13 MR. HUXSOLL: I'm Cary Huxsoll from the Legal 14 Department, along with Robert Tucker and Kevin Hanks, 15 representing staff. 16 The base columns purchased by taxpayer to 17 furnish and install in construction contracts were 18 materials and, thus, use tax is owed on the purchase 19 price, even if the materials were not installed. 20 Taxpayer's a construction contractor that 21 erects advertising signs and billboards. Taxpayer 22 entered a lump sum contract with STI Outdoor, a limited 23 liability corporation, to furnish and install 43 outdoor 24 advertising signs. Taxpayer purchased the 25 pre-fabricated base columns and head sections from an 26 out-of-state vendor without payment of tax and these 27 items were delivered to the job sites. 28 Due to changes in law, taxpayer was only able 12 1 to install portions of about 7 of the 43 base columns. 2 The uninstalled items were moved to storage facilities 3 and title was later transferred to STI pursuant to a 4 settlement. 5 The items in question are materials and not 6 fixtures and, thus, taxpayer incurred liability upon 7 receiving the items at the job sites in California. 8 It has been the longstanding position of the 9 Department, as evidenced in several annotations, that 10 large advertising signs erected upon land are structures 11 and that the poles and components of these structures to 12 which signs are attached are materials. 13 This analysis is consistent with other 14 annotations addressing poles and support posts. 15 We concur with the recommendation of the 16 Appeals Division. The claim for refund and 17 administrative protest should be denied. 18 Thank you. 19 MR. HORTON: Thank you. 20 Discussion, Members? 21 MR. SLEIGH: May we -- 22 MR. HORTON: Oh, I am sorry -- 23 MR. SLEIGH: -- rebut? 24 MR. HORTON: My apologies. 25 Rebuttal, please? 26 MR. SLEIGH: Thank you. 27 We just briefly would say that poles and 28 support posts are not the same thing as these 13 1 prefabricated columns and that the taxpayer had 2 attempted to try to match -- they were doing the best 3 they could to match the payment of tax that they were 4 making on the progress of the job that they were doing. 5 So, that's how it came to be that on the items that they 6 did acquire, they had paid tax on approximately half of 7 it. 8 At issue was about a million and a half dollars 9 worth of purchases. They had paid and reported tax on 10 about half of that. They were, you know, attempting 11 to -- they knew at the time, regardless as whether it 12 was a fixture or material, that they were going to owe 13 tax on their costs and they were attempting to try to 14 match that reporting with the progress that was being 15 made. 16 And this notion of base columns, again, you 17 know, it's our contention that that's all one integrated 18 unit. It's not a separate pole and then a head fixture, 19 like some of the other things that Mr. Elmore showed in 20 the exhibits that he walked through. 21 Thank you. 22 MR. HORTON: Thank you very much. 23 Mr. Elmore, did you want to add anything? 24 MR. ELMORE: Just to add -- just to reiterate 25 what Mr. Sleigh was saying here too is that we were 26 doing a project that was a large project. It entailed 27 43 structures throughout the County of Los Angeles. 28 And, so, to try to keep an ongoing record of 14 1 what was being installed and how it was being progressed 2 -- how that progress was being accomplished, that's what 3 we -- that's where we have this, you know, that base 4 columns that were in because this was all going into one 5 sign unit, you know, and it was -- we had to track it 6 internally so that we knew how to invoice accordingly 7 for progress payments and for the -- and, eventually, 8 for being able to get the full price of the installed 9 unit from the entity, STI and Viacom, who was the 10 partner with the MTA. 11 So, that was the purpose for the -- for the 12 lump sum contract is one, but it also was a progress 13 that goes over many months to complete. So, this was 14 only a starting position before it was cancelled. And 15 then everything was removed and nothing got installed. 16 And -- we did pay some taxes on what we thought 17 we would owe, but because we were trying to be 18 accountable and make sure that our records were being 19 kept. 20 So, I mean, that was the whole purpose behind 21 it, it wasn't to, you know, fixtures are materials. We 22 knew they were fixtures. They were all -- they were 23 prefabricated specifically for that site as one complete 24 unit on a standard plan. That was issued by the City of 25 Los Angeles. 26 MR. SLEIGH: In the footnote to our opening 27 brief, we had indicated that the raw material cost of 28 these structures -- and I use "structure" as a term of 15 1 art within the industry, they're -- sometimes they'll 2 call them outdoor advertising signs, but, you know, to 3 not to be stumbling over the words, signs, billboards -- 4 but, you know, these items -- about $15,000 in raw 5 material cost, but the cost to Media Management was 6 about $80,000 a copy. 7 So, the differential is -- see, normally the 8 Board would say -- leans toward saying that things are 9 fixtures because they want to have the taxable measure 10 to include the fabrication labor, the overhead, the 11 profit. 12 And, so, in this particular case the only 13 reason why it's being argued that there is materials is 14 because the contract fell apart. And any other future 15 going on case it would be in State's preferred interest, 16 I would think, to regard these things as fixtures so 17 that tax would properly be paid on the entire 18 acquisition cost of the -- this is an industry that's 19 full of all kinds of joint ventures. They commonly -- 20 you know, Media Management's customer was a joint 21 venture. 22 It would not, you know, in the future, other 23 companies would be able to form joint ventures and pay 24 tax on the $15,000 instead of the 80. 25 We don't think that's a fair outcome in the 26 future just to try to charge tax on a transaction that 27 nobody really -- everybody lost on in every direction on 28 this particular contract. 16 1 MS. STEEL: Question? 2 MR. HORTON: Member Steel? 3 MS. STEEL: So, taxpayer just told us that you 4 paid certain amounts of sales taxes. 5 What you did pay for and what exactly -- can 6 you give me specific? 7 MR. ELMORE: We were -- what the bookkeeper 8 that was in office at the time -- because this took 9 place in October, November and actually November and 10 December of 2001, I think. 11 The State law changed in 2002, January 1. So, 12 we -- this project was really supposed to take over a 13 two-year period starting in 2002. However, the State 14 law was -- was going -- that was passed and signed by 15 the Governor in 2001, in September. So, my contract -- 16 you know, and my employer said, 17 "Hey, we need you to get this started before 18 January 1. And we need X number of these 19 columns and parts of the structures, parts of 20 the signs, placed upon the property in order to 21 be fully vested." 22 That was their -- that was their direction to 23 me and the MTA. And, so, we were putting these signs 24 out. So, we tried to -- we tried to, at the end of the 25 year, when we were filing our, you know, 2002, filing 26 our 2001 sales tax -- 27 MS. STEEL: Okay. 28 MR. ELMORE: -- we went back to -- looked at 17 1 that measurable amount that we had out there that we -- 2 we figured, you know, this thing was going to eventually 3 complete. 4 MS. STEEL: Okay. 5 MR. ELMORE: We wanted to make sure that we 6 paid at least that much of it. 7 MS. STEEL: So, this base columns and head 8 section that you already got approved by the City of 9 Los Angeles means that you cannot really sell it to 10 others. 11 So, when your contract was not really finished 12 with -- they just -- they undone the contract, so, you 13 couldn't even sell it -- 14 MR. ELMORE: Yeah, I didn't even have -- 15 MS. STEEL: -- because that was already 16 designed for the City of Los Angeles? 17 MR. ELMORE: (Inaudible response.) 18 MS. STEEL: I want to ask Department that -- it 19 does -- the physical size of the TPP determine whether 20 it's categorized -- categorized as fixture or a 21 material? 22 MR. HUXSOLL: The physical size isn't 23 necessarily -- if we look at the definition of fixtures 24 and materials, and these were -- I should just say no, 25 the size is not the only issue. 26 MS. STEEL: So, can you give me exactly why you 27 said it's material then, you know, they have to pay 28 sales taxes? 18 1 Give me the exactly what the -- you know, I am 2 always having a problem with line that we are really 3 thinly, I mean, it's always sways, you know, each 4 direction when we ask for the taxes. 5 So, give me exactly like one sentence each 6 fixture and materials here for -- for this taxpayer. 7 MR. HUXSOLL: It's a material because the 8 column is a component part of an overall -- we viewed 9 the total sign as a structure and a column is a 10 component part of the structure. 11 A fixture is defined as an item which is 12 accessory to a building and they do not lose their 13 identity as an accessory when installed. 14 This is a part of that structure. 15 MS. STEEL: So, what you are saying is on the 16 top part, it's a fixture and then the pole is a 17 material? Is that what you are saying? 18 MR. TUCKER: Correct. 19 MS. STEEL: But it's not going to stand by 20 itself, so, why don't we say that it's together -- put 21 it together, then it's a fixture? 22 It's really -- I mean, you know, for me, that 23 top part that you said it's a fixture, cannot stand 24 without the column. 25 MR. TUCKER: Correct. 26 MS. STEEL: It's one fixture together. 27 MR. TUCKER: Correct. I was just going to 28 point out, many fixtures are installed on materials. 19 1 Much like we have light fixtures here in this 2 building, it does not change the nature. 3 It's simply that the past legal practice, past 4 historical practice has been -- we can look -- even so 5 much as looking at the appendix that is in 6 Regulation 1521 talks about signs as beings fixtures, 7 but it also reflects -- 8 MS. STEEL: But this is a sign. 9 MR. TUCKER: Correct, but then it goes to on 10 say that the poles, including, for example, power poles, 11 towers, those are regarded as materials. 12 So, the pole itself is regarded as a material. 13 However, we differentiate that from the sign itself. 14 MS. STEEL: But it's really different because 15 historically those signage -- it's been changed so much. 16 So, that used to be putting on the pole with 17 the sign is different than now. It's totally 18 customized. So, we think that that is a fixture. 19 That's what I understood when I was looking at 20 this case, but -- 21 MR. SLEIGH: Ms. Steel -- 22 MS. STEEL: Yes. 23 MR. SLEIGHT: -- may I add something to this? 24 In the written opinion of the Boyd case the 25 court stated in part, in the written opinion, the Board 26 had an expert witness by the last name Yagert. 27 Yagert explained that installation labor of 28 a sign is exempt, but the fabrication labor is taxable. 20 1 Therefore, in reviewing the audit, he looked to see 2 whether a sign was fabricated into the site or whether 3 the sign was prefabricated, either at the job site or in 4 the shop and simply installed or attached at the site in 5 determining whether a tax was due. 6 If the sign was prefabricated and then 7 installed, it is considered a fixture. If the sign is 8 manufactured into the structure or real property, it is 9 considered a material. And that's in the written 10 opinion of the Boyd case. 11 MS. STEEL: Thank you. 12 MR. HORTON: Mr. Runner and then Ms. Mandel. 13 MR. RUNNER: Yeah, just a quick question. Help 14 me -- you have copies, gentlemen, of these pictures? 15 MR. HANKS: Yes. 16 MR. RUNNER: Just tell me again, I'm not 17 that -- just for my own personal background at this 18 point, may not apply to the case -- on these old -- on 19 these older signs, how did we differentiate these? 20 Were these fixtures? A material? How -- if 21 these were built, how were these -- how were these 22 handled? How would they be handled if they're still 23 being built? 24 MR. TUCKER: I would assume that the -- under 25 these circumstance, the sign itself would be regarded as 26 a fixture. 27 However, the structure upon which it's 28 installed is going to be regarded as -- 21 1 MR. RUNNER: The sign itself is being the 2 material that holds up a paper sign or whatever the 3 signs are, vinyl. That's what you are talking about 4 when you say, "the sign itself"? 5 You're not talking about the message board or 6 the paper? 7 MR. TUCKER: Correct. 8 MR. RUNNER: You're talking about the structure 9 that holds the paper? 10 MR. TUCKER: I believe so, yes. 11 MR. RUNNER: So, under our definition those 12 would be fixtures and the poles holding those in this -- 13 in this would be -- would be -- would be materials? 14 MR. TUCKER: Materials, that's correct. 15 MR. RUNNER: Is that -- again, in the industry 16 is that kind of just -- again help me understand. 17 Is that your understanding as to how these have 18 been dealt with in the past? 19 MR. ELMORE: In the past? 20 MR. RUNNER: Yes. 21 MR. ELMORE: Yeah and I worked with CBS for 22 22 years in Los Angeles. And we -- these were regarded as 23 fixtures starting in 1980 something. 24 MR. RUNNER: These were -- 25 MR. ELMORE: These signs, the whole -- 26 MR. RUNNER: -- the whole thing? 27 MR. ELMORE: -- sign was regarded as a fixture 28 because it supported the advertising portion which 22 1 changes out, you know. 2 So, the sign itself is the whole thing, 3 however, prior -- 4 MR. RUNNER: Historically, as you were building 5 these, you were building these -- 6 MR. ELMORE: -- as a sign. 7 MR. RUNNER: -- fixtures? 8 MR. ELMORE: Yeah, as -- 9 MR. RUNNER: As a fixture? 10 However, then what I'm hearing from our -- from 11 the Department is that we would not have agreed with 12 that in terms of the tax treatment. 13 MR. TUCKER: Correct. 14 MR. RUNNER: Now is what you're considering 15 normal -- industry norm? 16 MR. ELMORE: It's -- you know, what I -- what 17 I'm saying is -- I don't -- because I wasn't running the 18 companies at the time, I ran construction at the time in 19 my company, which I started in 1995 -- after I had 20 already departed with them. 21 But we -- these -- these signs here are an 22 illustration of signs that were built pre-'73, okay, and 23 some of them were built in early 70's, they were -- they 24 were actually fabricated on site. 25 MR. RUNNER: Okay. 26 MR. ELMORE: Now with the -- 27 MR. RUNNER: Okay. 28 MR. ELMORE: -- out of material. 23 1 MR. RUNNER: Okay, clearly there seems to be a 2 little -- it would be interesting to see how far this 3 confusion goes out in the industry out there. 4 But let me go back to some other discussion. 5 The contract was -- was halted. What kind of payments 6 were made in the halted contract? 7 MR. ELMORE: The only payments that -- I had a 8 deposit to provide the initial parts of the signs that I 9 could get done within that 35, 45 day window. 10 The rest of them were to be delivered and the 11 rest of the components -- 12 MR. RUNNER: So, you were paid up to -- 13 MR. ELMORE: I was paid for a portion. 14 MR. RUNNER: -- were these materials paid for? 15 MR. ELMORE: No, the materials were not paid 16 for. 17 MR. RUNNER: You never received any money for 18 these materials? 19 MR. ELMORE: I received some money. And then 20 the settlement that you see in the -- in the -- in the 21 paper here that, the -- 22 MR. RUNNER: Uh-huh. 23 MR. ELMORE: -- the settlement was -- I had, 24 you know, I had reached -- tried to reach a settlement 25 with STI, who I signed the contract with -- 26 MR. RUNNER: Right. 27 MR. ELMORE: -- that I would be paid the 28 700,000, which was still due me. 24 1 MR. RUNNER: Right. 2 MR. ELMORE: And based upon the litigation or 3 the outcome of their disagreement with the City and with 4 the other entity, which they went bankrupt and I got 5 zero. 6 MR. RUNNER: So, you did not receive payment? 7 MR. ELMORE: I only received -- not for -- 8 MR. RUNNER: Very small payment? 9 MR. ELMORE: -- I received about 25 percent of 10 what I paid for. 11 MR. RUNNER: Did you have access to this 12 material? 13 MR. ELMORE: No, I didn't. 14 MR. RUNNER: So -- 15 MR. ELMORE: I had access to a small portion, 16 which I -- after four years, I liquidated after they -- 17 after they went bankrupt. 18 And I liquidated it at -- 19 MR. RUNNER: So, you received no -- 20 MR. ELMORE: -- (unintelligible) prices. 21 MR. RUNNER: -- payment or very little payment? 22 MR. ELMORE: Very little, about 100,000 was 23 what it was. 24 MR. RUNNER: And no access then to get the 25 materials back -- 26 MR. ELMORE: No access. 27 MR. RUNNER: -- except for a little bit. 28 MR. ELMORE: Exactly. 25 1 MR. RUNNER: Okay. Let me ask the Department. 2 Doesn't that make any difference in regard to 3 whether somebody owes us tax? 4 MR. TUCKER: Not in these circumstances because 5 it's regarded as materials. They're the consumers of 6 that property. And they owe tax upon their purchase 7 price. 8 They're not retailers of the materials. 9 MR. RUNNER: Right, right. 10 MR. SLEIGH: But if it's fixtures and they were 11 never installed, then there was no incidence of 12 taxation. 13 MR. RUNNER: So -- okay. Actually -- so, if we 14 would have identified these as fixtures, then there 15 would have been no tax due? 16 MR. TUCKER: We would analyze it differently if 17 they were fixtures. 18 MR. RUNNER: Okay. So -- okay, I'm just trying 19 to be fair to the taxpayer here. 20 MR. HANKS: Correct. 21 MR. RUNNER: The taxpayer went out, they bought 22 something. They intended to pay the tax along with -- 23 through this construction process. 24 So, they put their money out. They did that. 25 All of a sudden, out of their control, this project goes 26 sideways. They don't receive any of their money nor do 27 they get control of the materials that they bought. 28 Again, I'm going to overstate because they got 26 1 a little bit and, you know, maybe there were some edges 2 that we could work on. 3 But they didn't get their money, they don't 4 have control of the materials. And we're saying, "Oh, 5 but you still owe us sales tax." 6 And all we need to do to get them off the hook 7 on this is to identify these as fixtures? 8 MR. HANKS: What we're saying is if the 9 treatment for the property would be different, if we 10 regarded this property as fixtures -- 11 MR. RUNNER: Uh-huh. 12 MR. HANKS: -- you're correct, that if they 13 were the retailer of these fixture, they wouldn't owe 14 tax on the purchase price of -- 15 MR. RUNNER: Right, because they were going to 16 sell -- 17 MR. HANKS: -- of the property. 18 MR. RUNNER: Right. 19 MR. HANKS: Right, but given the fact that 20 they're a consumer of this property, an occurrence of 21 the tax occurs when they purchase -- 22 MR. RUNNER: Yeah, I -- yeah, Mr. Hanks, I get 23 all of the nuance here. 24 The problem I'm trying to figure out is 25 fairness. Okay, I am trying to figure out fair 26 treatment and trying to see if we can get to a point 27 where there's fairness that we can help by definition. 28 Because I'm just trying to think -- I mean, 27 1 surely, we could all put ourselves in somebody's shoes 2 where all of a sudden some -- out of our control goes 3 awry, we lose our -- we lose personal money out of it 4 and now, all of a sudden, the government knocks on our 5 door and says, "Oh, by the way, we need some money from 6 you." 7 You know, that just doesn't seem right. And, 8 so, it seems to me that if we could find a way through 9 this to give them a way -- and if it's simply by saying, 10 "Well, maybe in this case these are fixtures," boy, that 11 seems likes and easy win-win solution to a taxpayer who 12 didn't receive any benefit. 13 MR. HANKS: The challenge for us -- 14 MR. RUNNER: Am I -- 15 MR. HANKS: -- would be if we treated this 16 property as fixtures, of course, that would set 17 precedent for our handling this type of property in the 18 future. 19 And, historically, we've -- 20 MR. RUNNER: Wait, if we don't -- 21 MR. HANKS: -- regarded this property as -- 22 MR. RUNNER: -- is it -- let me ask you that. 23 Why does it -- I mean, oftentimes we talked 24 about publishing, not publishing, we are -- we're not 25 intending to publish this, why would that set precedent? 26 MR. TUCKER: It would -- there be would a 27 problem that we weren't necessarily following the law as 28 it applies to those facts. That would be one concern. 28 1 And it appears that it would -- 2 MR. RUNNER: That problem created what? 3 MR. TUCKER: -- it creates unequal treatment, 4 that's -- 5 MR. RUNNER: Unequal treatment? 6 So, paying a tax to the State of California on 7 materials that you never used, you don't have access nor 8 you got paid for -- 9 MR. TUCKER: It's simply -- actually, they were 10 paid something, I mean -- 11 MR. RUNNER: Again, I don't dispute it. I do 12 believe whatever money they did get paid, they should 13 pay the tax on. 14 Whatever -- whatever materials they got control 15 on later, they should pay tax on. I don't have any 16 issue with that. 17 MR. TUCKER: But you -- I will step back one 18 step. 19 You asked about what is the recourse? And I 20 don't know anything about it, I just know what is 21 mentioned in the summary, there was a settlement between 22 Petitioner and their customer. 23 So, there is a legal recourse that is available 24 when they have problems with -- with contractual 25 matters. 26 MR. RUNNER: Well, let me ask you, did you 27 follow legal recourse? 28 MR. ELMORE: Well, I did. We reached a 29 1 settlement with the company -- with the company I signed 2 the contract with. 3 And then, eventually, they -- they filed 4 bankruptcy. I got zero money from them. And they had 5 control of the material. So, I couldn't -- I couldn't 6 access the material to recover it. 7 MR. RUNNER: You know, I get the fact that 8 we're trying -- we got -- you know, we know what the law 9 says and I am just trying to think about how -- you 10 know, getting an idea, why I believe we're here -- we're 11 doing what we do and that is, eventually, though, the 12 law comes against what is just unreasonable treatment of 13 taxpayer and, boy, I'll tell you, this has got to be a 14 great example of unreasonable treatment of a taxpayer -- 15 somebody who has put out their own money, didn't get the 16 -- didn't get any -- get very little money back on that, 17 lost the control of the materials and now for the State 18 to say, "Oh, by the way, you owe us some tax on that," 19 it just seems like an unreasonable reach. 20 So, I think we need to figure out our way 21 through this as far as I'm concerned. 22 MR. SLEIGH: Well -- and we suggest that, you 23 though, it's fair to say when you look at the picture 24 on, I think was page 4, those -- those -- those 25 structures or signs, they're not -- they're not losing 26 their separate identity when they're being installed. 27 And it hasn't come up yet, but it was 28 anticipated, was it not, that there may be like a bike 30 1 trail or a walking trail or something put through in 2 some of these places and these were going to have to be, 3 you know, pulled up out of the ground and relocated to 4 another location. You know, they seem to fit the 5 Regulation 1521 as a fixture, whereas times past, you 6 know, I think that the annotations were reasonable with 7 the construction practices that took place 10, 15, 20, 8 30 years ago. 9 MR. RUNNER: Let me ask if this is a way 10 through this? 11 I am looking at these pictures on page 5, which 12 is the pile of material or fixtures or whatever we call 13 it, the stuff. 14 Let me ask you this, have we -- we defined 15 these then as material because of what their end use is 16 going to be? 17 Because we've kind of -- right? I mean, we 18 know that this going to hold up a sign, so, therefore, 19 it's material? 20 MR. TUCKER: Under these circumstances, yes. 21 It's -- 22 MR. RUNNER: Okay, let me ask this. 23 MR. TUCKER: -- what the property is and then 24 how it's used. 25 MR. RUNNER: Okay. So, but -- so, it's 26 material based upon its use, correct? 27 MR. HANKS: It's -- I believe we could respond 28 too -- 31 1 MR. RUNNER: Okay. 2 MR. HANKS: -- it's material based on its use, 3 but it also -- it's material, based on our review of the 4 Regulation 1521, which defines this type of property as 5 being a material as opposed to a fixture. 6 MS. MANDEL: This type of property, you mean -- 7 MR. HANKS: This type of property -- 8 MS. MANDEL: -- expanding? 9 MR. HANKS: Right. 10 MS. MANDEL: -- it doesn't say -- 11 MR. RUNNER: This type of property being 12 a sign? 13 MS. MANDEL: Yeah, what do you mean? 14 MR. HANKS: Being a pole. 15 MR. RUNNER: A pole? 16 MR. HANKS: A pole, basically. 17 MR. RUNNER: Okay. So that -- so, there is 18 definition of this by its end use? 19 MR. SLEIGH: But that's not a pole. A pole 20 is -- that's a support column that was fabricated. 21 MR. RUNNER: Yeah, here's what I'm am trying to 22 get to, I'm trying to get to are we defining this as 23 material because of its end use, to which it never got 24 to nor can it get to? 25 That's my question. Again, I am through with 26 my -- my follow, but again, I -- 27 MR. HORTON: And this may be an excellent 28 candidate for consideration in changing of the statute 32 1 and the regulation, but, you know, we are at the 2 intersection where we are. 3 Further discussion, Mr. Runner? 4 MR. RUNNER: No, I'm done. 5 MR. HORTON: Ms. Mandel? 6 MS. MANDEL: Sure. I -- I was starting to get 7 a little confused by -- there's so many different 8 references to sign. Sign means so many different 9 things. 10 It can mean the entire thing. It can mean the 11 part that's put on top of the pole or it could mean 12 the -- 13 MR. SLEIGH: Ad copy. 14 MS. MANDEL: -- the ad copy that's put on 15 later. And the Boyd case talks about a sign being a 16 fixture. 17 The taxpayer has made an argument that the 18 nature of outdoor advertising, the vehicle for outdoor 19 advertising -- oh, no, buses are vehicles too -- that 20 the outdoor advertising thing that we commonly like to 21 call billboards, that the way that they've been built 22 and constructed over the years has changed. 23 And that their argument was that when 24 everything was welded with and on site and they were 25 building something on site, that that was -- building 26 some kind of structure and that material treatment was 27 appropriate. 28 And their argument is that once -- once the 33 1 component parts of what makes this billboard thing are 2 prefabricated off site, at some factory somewhere they 3 make these columns, and that you just put part A into 4 part B and, you know, screw them together. 5 And because of -- presumably because of the 6 size, that the fact that it's a pole, just like when 7 you -- I don't know that would not be good, I was going 8 to say build a fence -- but that there is a concrete 9 footing, their argument is that the prefabrication off 10 site and we're just assembling something on the site and 11 that's part of why they say under the new way of 12 fabricating these, that they're fixtures. 13 What I'm hearing is that with the -- with these 14 now single pole structures and I don't know if the -- 15 and the single pole structures, that the position of the 16 Board has been that the pole portion is a constructed 17 something so that what goes into the pole portion is 18 materials and that the sign on top is a fixture. 19 So, I'm trying to visualize this and figure out 20 a couple of things. One, is it the fact that they have 21 to -- that they have to do the concrete footing that is 22 holding them up here from just having, you know, to put 23 part A into part B and screwed them together? Is it the 24 concrete footing that's making the pole material? 25 And when we talk about the sign on top as a 26 fixture, is any part of what they have -- because they 27 had the poles and then they had these things they are 28 putting on top, is any -- is there any part of what they 34 1 have that even under the Department's view that poles 2 are -- that what goes into putting the pole there is 3 material, but that the sign on top is a fixture? 4 Is any part of this this part that's put on 5 top? All reference to sign as a fixture is confusing. 6 So, if you need -- maybe trundle through that? 7 MR. TUCKER: I'll do my best. 8 One of the things that you point out is that as 9 you mentioned, the concrete footing is a critical 10 element. Because in order for this to be a material, it 11 has to be affixed to realty. 12 And that once it becomes affixed to realty, 13 then we have to characterize what type of property this 14 is -- it's tangible personal property. Here it's 15 regarded as -- this pole is regarded as a material. The 16 same for -- and this is consistent throughout a number 17 of types of items. 18 We looked to, for example, windmills. For a 19 windmill the pole is regarded as materials, the windmill 20 itself -- 21 MS. MANDEL: Right. 22 MR. TUCKER: -- is typically regarded as a 23 fixture. 24 MS. MANDEL: Okay. So then, what about the 25 thing they put on top of the pole here, the header or 26 whatever they called it? 27 Where -- where does it turn -- because it 28 sounded like they have a pole and then they put 35 1 something on top. And -- and when you were looking at 2 the pictures with hitching the Verizon ad, you were 3 talking about the top part as being a sign, as being a 4 fixture. 5 So, I want to know if -- you know, if the whole 6 thing's a fixture, you know, everybody goes home. If -- 7 but I want to know if part of what they are -- you would 8 call it constructing, they call it assembling -- the 9 part of it is -- of what they're doing is the fixtures, 10 the top part is a fixture, but the pole's not. 11 You know, the argument's been set up so that 12 you guys are all materials and they are like, "Hey, the 13 end result's a fixture, so, we go home." 14 And I'm wondering if -- from this discussion, 15 if part of what they've got, at least even under the way 16 you've explained how you would treat and how the court 17 treated signs, these outdoor advertising things, with a 18 part of its -- did I talk enough so you've thought 19 through it? 20 MR. TUCKER: Well, I'm am trying to -- to 21 confirm whether or not -- my understanding is that yes, 22 we're going to have a sign mounted on this pole. I'm 23 not sure -- 24 MR. SLEIGHT: I think we're really stretching 25 things. I mean, this is what a pole is (indicating) and 26 in the specifications the fabricator used very, very 27 large pipes or poles, if you will. But what they did 28 was they welded end caps on them and onto those end caps 36 1 they drilled a number of holes. On some of the end caps 2 they had cut little pieces of metal fillets -- to 3 fillets and welded them around onto that end cap. 4 And, so, that's a lot more than a pole. The 5 fabricator started with a very large pole, but they did 6 an awful lot of fabrication to that pole in their plant 7 before they brought it out to the field and it was no 8 longer just a pole, it was a column. It was part of an 9 integrated sign that, you know, that column is worthless 10 without the top piece attached to it. It's not a head 11 structure attached to a pole, it's the top of the sign 12 attached to the supporting column of the sign. 13 It's all one integrated unit. 14 MR. ELMORE: Could I -- could I trust just a 15 comment, Ms. Mandel, to tell you the -- and the 16 gentleman over here that talked about the concrete is a 17 very important factor in these -- well, the concrete is 18 an important factor and it holds the sign up. 19 But the footings were designed for these and 20 approved by the City of Los Angeles to be different 21 types of footings, you could have solid concrete with 22 J-bolts and that column that had a prefabricated, welded 23 cap plate bolted right to those J-bolts and/or it -- or 24 you put another -- 25 MS. MANDEL: I'm sorry, what I hear you 26 saying -- is the cap plate the bottom part of it? 27 MR. ELMORE: There's a -- that's a cap plate 28 for that -- for that section. 37 1 MS. MANDEL: Right. And then that's -- 2 MR. ELMORE: Yes, I'm sorry. 3 MS. MANDEL: -- what you screwed down? 4 MR. ELMORE: Yes, I'm sorry. 5 MS. MANDEL: Okay, I'm not -- 6 MR. ELMORE: Those are prefabricated and 7 drilled in fabrication shop according to the drawings 8 and then welded -- 9 MS. MANDEL: -- okay. 10 MR. ELMORE: -- to that pipe, that raw material 11 but then -- or if you wanted, rather than putting that 12 column down in concrete, directly embedding it, you 13 know, that was one way to do it, or you take it and 14 put -- pour concrete with J-bolts which you bolt it to 15 it. 16 MS. MANDEL: But the J-bolts -- 17 MR. ELMORE: So, that -- the J-bolts are -- 18 MS. MANDEL: -- connected to the -- 19 MR. ELMORE: To the -- 20 MS. MANDEL: -- the J-bolts were in the 21 concrete. 22 MR. ELMORE: In the concrete. 23 MS. MANDEL: And then you stuck the column in 24 between and screwed -- 25 MR. ELMORE: Yeah, they're all put -- yeah. 26 MS. MANDEL: All right. 27 MR. ELMORE: But these particular ones were 28 a -- that was fabricated to match. Each one of those 38 1 were to match the next plate. The plates were drilled 2 together in a shop, fabricated in the shop to match that 3 plate. So, they couldn't be -- that's what supported 4 the sign and it was shipped out as a -- as a unit, 5 complete unit, completely fabricated. 6 MR. SLEIGH: I'd like to just -- I may have 7 misheard, but the use of materials in the installation 8 of a fixture doesn't take -- doesn't make a fixture a 9 material. 10 A bathroom soap dispenser is a fixture. You 11 know, they may use some cement or some glue to affix it 12 in the public restroom. They -- you know, that cement 13 or that glue would be a material. They may take some 14 grouting and put around that soap dispenser, but the use 15 of those materials doesn't change that fixture, that 16 soap dispenser into all of a sudden being a material. 17 The concrete was taxed -- that was a separate 18 subcontractor and the concrete was tax paid. That was 19 that particular subcontractors's responsibility. 20 So, I'm not sure how I see where the use of the 21 concrete in any way at all changes whether or not the 22 essential character of this property changed. You know, 23 I think it retained its separate identity whether it was 24 stuck in the ground or laying on the ground or later on 25 in the yard, you know, becoming spoiled inventory. 26 MR. TUCKER: If that's what I said, that's not 27 what I intended. What -- the reason it's critical that 28 it's attached is because at that point it becomes 39 1 realty. 2 The fact that it's a -- it becomes realty does 3 not -- is not going change a fixture into material or 4 vice versa. It is simply one or the other. Until it's 5 attached to realty, it's simply tangible personal 6 property. 7 MR. HANKS: So, let's say that these -- these 8 billboard signs were triangular in shape and that 9 they're freestanding, we'd probably have a different 10 analysis -- well, we would have a different analysis 11 with respect to that property than we do for property 12 that's anchored and cast in a concrete foundation. 13 MS. MANDEL: Well, I understand that. 14 But fixtures -- fixtures are realty. I mean, 15 fixtures are realty. 16 MR. TUCKER: Correct. 17 MS. MANDEL: And, so, that's why they're 18 arguing that at the end of the day the thing that they 19 would put out there, if it was completed, is a fixture 20 because they want to get under the -- when it would have 21 become -- when you would have had tax. 22 Because if they were selling fixtures to -- it 23 wasn't MTA, but whoever the person that was that they 24 actually contracted with -- if they were selling 25 fixtures, then that tax occurs when they transfer the 26 fixture on the fixture. And if they never -- not on 27 what it takes to make the fixture. 28 And if they're building a building, then 40 1 whatever they use, you know, as they build the building 2 is materials. But that's -- or -- and, so, you're 3 saying, well, it's a structure -- which is sort of like 4 a building? 5 MR. TUCKER: We regard -- 6 MS. MANDEL: You regard it as a structure? 7 MR. TUCKER: Correct. 8 MS. MANDEL: So, why is it a -- I have sort of 9 lost my possibility of an answer about the thing that 10 goes on top. 11 MR. TUCKER: We would regard the sign that is 12 attached to the pole -- 13 MS. MANDEL: Okay, which part's the sign? 14 That's -- it sounds like some of -- okay, he has these 15 nice pictures here (indicating), sounds like -- I don't 16 know, maybe you can help me out. 17 The picture on top of the stuff laying on the 18 ground, to my, you know, know nothing mind, I don't 19 know -- is that the thing that went on the top of the 20 pole? 21 No, he would know. 22 MR. TUCKER: He would know. 23 MS. MANDEL: It's his picture. 24 MR. TUCKER: Yes. 25 MR. ELMORE: These were all -- 26 MS. MANDEL: This is -- 27 MR. ELMORE: -- prefabricated components to 28 make that sign. Some of them were catwalks where they 41 1 -- the men would work up on to hang the advertising 2 copy. MS. MANDEL: Okay. 3 MR. ELMORE: And some of them were -- some of 4 them were just part of the upright assembly to make 5 the -- 6 MS. MANDEL: Okay, so -- 7 MR. ELMORE: -- the sign. 8 MS. MANDEL: -- so, in what you were going to 9 produce under this contract -- were all of the -- let's 10 just call them in general billboards -- were all of the 11 billboards going to be ones that had a catwalk thing? 12 MR. ELMORE: (Inaudible response.) 13 MS. MANDEL: Yes? 14 MR. ELMORE: Yes. 15 MS. MANDEL: Okay. So, that's the piece that's 16 put on top and then the advertising copy is laid on -- 17 up on it with guys with the big whatever they do to put 18 the advertising up? 19 MR. SLEIGH: The catwalk is what they stand on. 20 MS. MANDEL: That's what they stand on, but 21 then there's -- there's some flat thing up there that 22 they can put it -- 23 MR. ELMORE: It's a substructure. 24 MS. MANDEL: -- up on there. I'm sure we've 25 all been one that's been empty once in a blue moon. 26 So, that's the thing I'm talking about, that 27 gets put on top of the pole. 28 Because you said earlier that you regard -- the 42 1 Department regards the pole as structure? 2 MR. TUCKER: Correct. 3 MS. MANDEL: And the sign, which you called the 4 top part, as a fixture. 5 So, now I'm trying to figure out, if -- if we 6 went with the Department's view, is some of what you're 7 asking for tax on is for this top part that's going on 8 the pole. Is that the sign? 9 MR. LEVINE: You had asked about the head unit. 10 MS. MANDEL: Right. 11 MR. LEVINE: Perhaps -- is the head unit 12 apparent in this picture? 13 Can you point? 14 MS. MANDEL: I don't know if they have it or 15 not. 16 MR. ELMORE: This is part (indicating) -- this 17 is a -- 18 MS. MANDEL: That's the top picture? 19 MR. ELMORE: -- simple head unit that is 20 prefabricated and shipped out. 21 And then this would be assembled and put up on 22 the support column. 23 MS. MANDEL: That's what I thought. 24 MR. ELMORE: That's all one -- it's a unit. 25 MS. MANDEL: That's what -- right, we 26 understand your argument about unit. 27 MR. ELMORE: Yeah and exactly. 28 MS. MANDEL: Right, I understand your argument 43 1 about unit. 2 But they've made a statement that -- that there 3 might be two -- under their view of life there might be 4 two -- two different things. 5 And what I'm trying to figure out is whether 6 part of what they are tagging you for is -- is -- even 7 under their theory -- not going to be materials. 8 So that even if -- so that -- so that there 9 might be a partial victory. 10 So, hang on a second. 11 MR. TUCKER: Just to explain, my understanding, 12 the way the audit was conducted, they looked at the base 13 column and the head sections. Those were regarded as 14 materials. 15 To that head section they attached the sign 16 itself. 17 MS. MANDEL: The sign itself -- what is the 18 sign itself? Do you mean these things laying here that 19 he has just described as the -- 20 MR. TUCKER: He -- 21 MR. SLEIGH: The notion of the head section and 22 whatnot, we had had a 79A conference with the District 23 Principal Auditor in Riverside. And, you know, there 24 may have been some misunderstanding, but my 25 understanding was that we were each going to come up 26 with a description of what it was in terms of the facts 27 of the case. And then we were going to submit this up 28 to Sacramento headquarters to get some kind of a ruling 44 1 on it, maybe based on that misunderstanding. 2 But the District office went ahead and they 3 sent the request for information without our having had 4 a chance to review it so that we could have agreement at 5 that District level. 6 They -- you know, they used terms that I think 7 created confusion from the outset, you know, started 8 describing, you know, head sections when -- when, you 9 know, we've already made the point that we don't think 10 there are separate head sections. 11 They also brought up points saying that they -- 12 terms that apparently were made up. "I-beam pipe 13 structure" was a term that the District office used that 14 the Headquarters unit relied on in trying to make their 15 initial determination as to what they thought this was. 16 There's no such thing as a -- that exists of an 17 I-beam pipe structure, it just flat out doesn't exist. 18 The District staff had also in that 19 correspondence indicated that there was going to be 20 welding in the field. But the specifications 21 specifically say there will be no welding in the field. 22 So, there was a lot of confusion that was 23 created from the outset that just has been carried on. 24 We keep hearing talk about poles and head structures and 25 those are what are in that old picture. 26 This is something different. 27 MS. MANDEL: Well, that's -- that's -- 28 MR. HORTON: Ms. Mandel, if I may? 45 1 MS. MANDEL: Okay, go ahead. 2 MR. HORTON: I don't want to -- I don't know 3 who to ask this, but either the Department or 4 Mr. Levine, can you differentiate the pole from the item 5 which is attached to the pole -- whatever you want to 6 call it, and whether or not -- at what point does this 7 unit not become integral part of realty and, therefore, 8 classified as material? 9 It seems that by virtue of the discussion 10 that -- I mean, there are a lot of variables here 11 whether or not it is pre-fab, not pre-fab and so forth, 12 but I don't know if that really gets to the crust of the 13 law. 14 And traditionally it's actually in the 15 industry's favor for this to be treated as material. 16 However, this is a different sort of circumstances, so, 17 if the body treated this as a fixture, then that would 18 be going contrary to the benefit of the industry as it 19 is currently treated as material. 20 But there seems to be a delineation at some 21 point where this -- as Ms. Mandel has indicated -- 22 that -- that the fixture could take place. The welding 23 and all of that, I don't know that that really matters. 24 But Mr. -- 25 MR. LEVINE: I'd be happy -- 26 MR. HORTON: -- I'd rather the Department 27 actually do it, Mr. Levine, if they can. 28 But if not, please provide them some 46 1 assistance. 2 MR. HANKS: Mr. Horton, it's my understanding 3 that what we're discussing today is the taxability of 4 the support columns and the headers, as I understood it, 5 are the schematic copies of the support beams that go 6 across -- 7 MR. RUNNER: What are you pointing at? 8 MR. HANKS: -- the top. 9 MR. TUCKER: They may not have this. 10 MR. HANKS: So, this is actually from the audit 11 working papers. 12 MR. RUNNER: Can you point it out back there? 13 MR. HANKS: Yeah, yeah, absolutely. 14 As I understand the case, what we're talking 15 about -- 16 MS. MANDEL: Louder, Kevin, please? 17 MR. HANKS: As I understand it, what we're 18 talking about are this support structure (indicating), 19 this beam (indicating). And it's this beam (indicating) 20 -- thank you -- and it's this beam (indicating) then 21 that is put into a foundation, a concrete foundation. 22 That's one of the elements that we're saying is 23 critical to making this a material product and part of 24 realty after it's installed. 25 As we understand it, we're talking about the 26 cost related to all of these -- all of these items as 27 well as this cross structure here (indicating) that is 28 integral to the support columns. 47 1 And it's those items that we're saying 2 constitute materials. 3 You know, it's my understanding -- 4 MR. RUNNER: What -- what was the last part? 5 What else? 6 MR. HANKS: This support structure here 7 (indicating), which -- which is designed to hold the 8 sign, as I understand it, this is called a sign panel. 9 MS. MANDEL: And is that -- 10 MR. HANKS: I think that's the sign panel. 11 MS. MANDEL: -- is that what's in this top 12 picture? 13 MR. SLEIGH: Our position is that's -- 14 MR. HORTON: Whoa, whoa, whoa. 15 MR. SLEIGH: -- that's the sign, not the 16 advertising copy. 17 MR. HORTON: Excuse me, sir. 18 MS. MANDEL: Okay, is that what's in the top 19 picture? 20 MR. ELMORE: That is a disassembled -- 21 MS. MANDEL: Right. 22 MR. ELMORE: -- sign. 23 MS. MANDEL: That's the -- what he called that 24 top piece? 25 MR. ELMORE: That is -- 26 MS. MANDEL: Okay, thank you. 27 MR. ELMORE: -- that's it, that's the whole 28 sign. 48 1 MS. MANDEL: Okay. 2 MR. HANKS: Excellent. So, that's -- that's 3 what we're looking at and that's what we're categorizing 4 as a material because it's embedded in -- in realty, 5 because of its -- its affixedness (verbatim) and also 6 because of our classic treatment of this type of 7 property as a material versus a fixture. 8 Now as we understand further -- 9 MR. HORTON: Mr. Hawks, (verbatim) can I 10 interrupt you and just ask the question and can the 11 taxpayer make sure that I'm asking the question that is 12 true to what you do? 13 Once the pole is installed, prior to affixation 14 is the sign attached to this catwalk or the structure 15 and then placed onto the pole? Or is the process by 16 which this occurs, the pole is set up, the -- that extra 17 unit is attached and the function of that extra unit 18 becomes a -- for the purpose of support, so, it's part 19 of the realty and then a sign is attached? 20 MR. ELMORE: If I could go over and -- 21 MR. HORTON: Sure. 22 MR. ELMORE: -- I think it would help. 23 MR. HORTON: Mr. Hawks, you'll lend him the 24 mike? 25 MR. ELMORE: Thank you. 26 Thank you. Yes, it's -- this is -- this is 27 what is fabricated now and called a billboard sign 28 (indicating). 49 1 What you are looked at on the exhibits there 2 was -- 3 MR. HORTON: When you say fabricated -- 4 MR. ELMORE: Prefabricated. 5 MR. HORTON: -- it's prior to attaching it to 6 the -- 7 MR. ELMORE: Yeah, it's prefabricated. 8 MR. HORTON: -- realty? 9 MR. ELMORE: This whole unit is prefabricated 10 according to -- if you look on your drawings, those are 11 issued standard plans by the City of Los Angeles and 12 this is one unit (indicating). 13 It's to be able to -- the reason those are 14 standard plans is so that you can take this unit, if 15 need be -- 16 MR. HORTON: Well, can you -- 17 MR. ELMORE: -- and move it to another 18 location. 19 MR. RUNNER: When you say, "that unit" -- 20 MR. HORTON: Can you separate and just speak to 21 the sign? 22 MR. ELMORE: Yeah. 23 MR. HORTON: And that's what is attached to the 24 sign first? 25 MR. ELMORE: Well, I mean, the sign, it -- the 26 sign is -- this is the sign, the whole thing 27 (indicating). 28 The advertisement is what you see on -- 50 1 MR. HORTON: I know, just for my -- 2 MR. ELMORE: This is assembled -- this all 3 assembled on site. This is prefabricated, taken apart, 4 packaged up and shipped out. 5 These are prefabricated, shipped out to the 6 site where the -- and then you put it together, just 7 like an erector set. And you put it in -- you put the 8 footing in here (indicating). And you pour the concrete 9 around it. 10 And you notice there's cap plats that were 11 designed at a certain level. So that these cap plates 12 allow you to be able to, 1, add height and also to 13 remove and move to another location. 14 The MTA required this in the contract because 15 the -- their property around LA County said that if they 16 were to put bike paths in or they were to put something 17 else in that they wanted this sign removed, taken to 18 another location so they didn't lose the revenue from 19 it. And it could be reused at another location, in 20 another site. 21 So, it is a -- it was fabricated to fit this 22 unit. Now whether the concrete is integral -- and we 23 paid -- that was a contractor I had him come out. They 24 poured it, they dug the hole, paid taxes on it, had the 25 crane, paid that. They paid taxes on their services. 26 But this is all one unit and it's meant to be 27 one unit when it's fabricated. That's -- 28 MR. SLEIGH: I'd like to just real quick add in 51 1 that, you know, in the same way we have a couple of 2 pictures of -- we have light pictures down below there, 3 a light fixture is a light fixture, regardless of 4 whether or not there's a light bulb attached to it. 5 We would say that that's a sign regardless 6 of -- 7 MR. HORTON: I don't know if that's -- 8 MR. SLEIGH: -- whether there's advertising 9 copy attached. 10 MR. HORTON: -- that's a similar analogy. 11 MR. SLEIGH: But the advertising copy -- 12 MR. HORTON: That's not under dispute whether 13 the light bulb's attached to the sign is part of the 14 fixture or not. 15 MR. SLEIGH: But we're -- 16 MR. HORTON: I would say -- 17 MR. SLEIGH: -- the point just being that the 18 advertising copy is -- 19 MR. HORTON: -- I would venture to say that the 20 Department probably concurs with that analogy relative 21 to the light bulb. 22 Mr. Levine, can you help us out here? 23 And this discussion -- I think it's a good 24 discussion for future consideration as we sort of 25 liberate this. But I think it's pretty clear the 26 distinction here from my perspective, but -- 27 MR. LEVINE: I think the critical aspect is 28 what you noted is in most cases -- there are exceptions, 52 1 this is one -- in most cases, industry wants as much as 2 possible to be material. 3 When Gannett makes a sign in its own shop and 4 does all this stuff rather than buying from a third 5 person, if it's a material, it's only paying tax on 6 cost. 7 If it's a fixture, it has to pay tax on the 8 fabricated -- on the cost value, the sale price. 9 So, unless you have a decision that is 10 specifically counter to what you want us to do other 11 cases, which would cause you trouble in the future, you 12 need to be consistent. 13 And the reason this is all a -- the annotation 14 1902190 explains that when the sign is built, it's a 15 structure, that the pole unit is a structure. And when 16 it's built as a single thing with that, I guess what the 17 Department called the head unit, that is part of the 18 same thing, it's all regarded as the structure. 19 And a structure is comprised of materials. If 20 you build a house prefabricated and drop it on the 21 ground, we don't tax that as a fixture, we tax that as a 22 consumable, even though it's prefabricated, it's ready 23 to go. And they just drop it in on top of the 24 foundation. 25 MS. MANDEL: Then can you tell me -- I'm sorry 26 Mr. Horton. 27 MR. HORTON: No. 28 MS. MANDEL: Then can you tell me, in Boyd what 53 1 was the sign that was a fixture and when -- give me an 2 example of a sign where the top part is a fixture but 3 the pole is material? 4 Because that was -- the Department said there 5 was a distinction and I'm trying to still figure out 6 about this head unit as compared to these other things 7 that have been decided that the top part is a fixture. 8 MR. LEVINE: I don't remember the specifics of 9 Boyd. I think the Department can address that. 10 But there would be a distinction for, I think, 11 a sign that is completely separate, that whole unit 12 that's dropped on as a fixture onto the -- 13 MS. MANDEL: Okay, well -- 14 MR. LEVINE: -- the pole. 15 MS. MANDEL: -- okay. Well, they have the 16 whole -- you know, what's the -- they have the whole 17 head unit which -- well, we called it the head unit -- 18 which maybe requires some assembly to make a head unit 19 because it's big and probably can't just come on a truck 20 on the highway in one piece. 21 Is it the one piece aspect or could I have two 22 pieces that I put together and then, you know, drop on 23 the pole here, you know, because they hang out to the 24 side they're going to screw it onto the pole? I mean -- 25 MR. LEVINE: I think the main focus of sign has 26 been the message. 27 MS. MANDEL: Okay. So, the one that keeps 28 popping into my head is the Shell sign on the highway -- 54 1 what do they call them here, freeways. 2 So, if it was a prefabricated, you know, it 3 lights up from the inside Shell sign, and it was the 4 little clam shell and they bring that out and they put 5 it on top of the pole, that little prefabricated thing 6 is a sign because in itself it's -- 7 MR. LEVINE: I think so. 8 MS. MANDEL: But that here we don't have a sign 9 for the purposes of the way the word sign has been used 10 when you say a sign's a fixture until -- so, here you're 11 really talking about the advertising copy is the sign 12 and not the -- 13 MR. HANKS: Correct. 14 MS. MANDEL: -- the head structure? 15 MR. TUCKER: Correct. 16 MR. HANKS: That's how we'd interpret it. 17 MS. MANDEL: So, I'm kind of interested in what 18 was going on in Boyd because they're telling me Boyd 19 said the sign was a fixture. 20 Why -- so then why is -- why is there not what 21 was -- was it just use of the word sign that is getting 22 everything all confused? 23 Why is Boyd a sign and the top part of this 24 head unit is not -- you know, at least the head unit is 25 not a sign? 26 MR. HUXSOLL: My understanding of Boyd is it's 27 a sign that was -- it was a complete -- it was a 28 prefabricated sign that was put on a building. I can 55 1 see -- 2 MS. MANDEL: So, more like "Joe's Hamburgers" 3 put on the outside of the building? Is that what you 4 think it was? 5 MR. TUCKER: If it were put on the outside of a 6 building, then we would regard it as a fixture. 7 So, the sign that's installed or affixed to a 8 building -- 9 MR. HANKS: And that would be somewhat 10 analogous then to what we're looking at here because you 11 would have a fixture being applied to the side of a 12 building, much like you could have a fixture -- a sign 13 applied to this structure. 14 MS. MANDEL: Okay. So -- 15 MR. SLEIGH: The Boyd case included both 16 buildings and lands in its opinion to say that if you're 17 attaching it to either a building or land. 18 And then it even cites a case as part of the 19 written opinion, People versus Church, where it said, 20 (reading), 21 "That a fixture is anything of an accessory 22 character annexed to houses and lands so as to 23 legally constitute a part thereof, often called 24 an immovable fixture." 25 And it goes on and talks, but, I mean, the Boyd 26 case addresses -- I think the court was -- it appears as 27 though the court was trying to say, "Look, you know, we 28 want this decision to apply whether you're putting it to 56 1 land or to a fixture." 2 What they were relying on was the expert Board 3 testimony of their witness Yagert, who was saying that, 4 you know, they were looking to see how much fabrication 5 was taking place, either on the job site or before it 6 got to the job site. 7 That was in the written opinion that they 8 actually wrote out the witnesses' statements and put 9 them in the opinion. 10 MS. MANDEL: I don't think I'm going to get 11 those confused about the top part. 12 MR. SLEIGH: (Inaudible.) 13 MR. HORTON: One second. Ms. Mandel? 14 MS. MANDEL: Unless Mr. Levine can help me, I'm 15 not -- 16 MR. LEVINE: I have to honestly tell you that I 17 did not -- I don't think we recognized how this was 18 built. 19 And when I read it and thought header -- not 20 that my opinion is necessarily different than the 21 Department -- but I didn't think of this type of 22 construction. I was thinking a piece on top of the 23 pole. 24 And just to say we're say describing, I was 25 still thinking that because we never got that clear 26 explanation. 27 So, I don't think we analyzed that -- not that 28 our opinion would be different, but I don't think we 57 1 ever analyzed whether the construction on top of the 2 pole should be regarded as a sign or as part of the 3 structure. 4 MR. HORTON: Okay. Ms. Mandel? 5 MS. MANDEL: Thank you, that's it. 6 MR. RUNNER: Just -- 7 MR. HORTON: Mr. Runner? 8 MR. RUNNER: -- just real quick again, trying 9 to -- I guess I'm sensitive to the issue in regards to 10 what we're trying to do to avoid a precedent and yet I 11 understand the fact that, again, at least my 12 understanding is that oftentimes previous decisions are 13 not precedent and that's why we choose to publish some 14 and not publish most of them, in order to give 15 flexibility and so that they can't be applied just 16 indiscriminately at that point. 17 And, so, I'm wondering again, just in terms of 18 it -- just in terms of just sheer fairness discussion, 19 going back to a taxpayer, asking them to pay a tax on 20 material that they couldn't even use nor did they get 21 paid for, it seems to me that this is such a narrow 22 issue that we could be deciding here. 23 This includes -- this -- this would -- if 24 you're concerned about a precedent, this precedent is so 25 narrow -- it includes materials that are laying on the 26 ground, the contractor didn't have access to, that he 27 didn't get paid for. 28 Now, I guess in -- I guess, yeah, maybe in the 58 1 future if we have a bunch of those, we ought to consider 2 this as the precedent. 3 But I guess that that's -- I'm just trying to 4 figure out then -- this is so far from what normally 5 would come to us, I would assume, in regards to an issue 6 of taxation, an issue in regards to payment, you know, 7 where the material starts, where it ends and what the 8 sign looks like, when you don't really even have a sign, 9 there is no sign here. It's just a bunch of material 10 laying on the ground. 11 MR. LEVINE: Okay. 12 MR. RUNNER: Mr. Levine? 13 MR. LEVINE: The problem here is that -- and I 14 don't think the Petitioner was trying to do anything 15 wrong, what they should have done is pay tax when they 16 bought it. 17 Had the tax been paid upon the purchase price 18 as soon as it entered into California, then you'd be 19 talking about a refund situation and then the question 20 would be would you feel the same way if you were taking 21 money that was properly paid to paid the State and 22 refund it because their plans didn't go through? 23 It's an unfortunate situation, there's no doubt 24 about it. We see these -- otherwise I have trouble 25 seeing how you could distinguish this other than just 26 saying, "We're going to conclude they're fixtures here. 27 It's not precedential." 28 Now, if you say that, we'll certainly apply 59 1 that, but we'll ignore the decision. And we try and 2 discern from the Board's decisions, non precedential 3 decisions, the flow of the Board. We try and interpret 4 things correctly. 5 MR. RUNNER: Sure, sure. 6 MR. LEVINE: We try and take -- 7 MR. RUNNER: I get it. 8 MR. LEVINE: -- into consideration the 9 directions we're getting from the -- of course, when you 10 give us a pointblank direction, then it's easy for us. 11 MR. RUNNER: Right. 12 MR. LEVINE: Otherwise, when you just make 13 decisions, we try and do the right thing. 14 If you said it's not precedential then -- 15 precedential, or we just conclude it wasn't, we wouldn't 16 apply it when someone comes up and has a case where 17 fixtures is going to help them, they're going to argue 18 this case and we're going to say, "No, it's not 19 precedential, we're not going to look at that. There 20 must be other factors." 21 And especially if you said that, but that 22 doesn't mean you're not going to be faced with the 23 argument and then when they sue us for refund, I think 24 the Lit group much harder problem defending that when 25 you don't follow the regulations. 26 MR. RUNNER: Let me go back to the taxpayer 27 real quick then in regards to this issue. 28 Once again, the reason why you chose not to pay 60 1 the tax when you purchased the materials that come into 2 the State of California was? 3 MR. ELMORE: We regarded it as a fixture, 4 that's how we -- we were going to pay -- that's why 5 paid -- in the end, we were going to be paying tax on 6 the product as it was finished and brought in and 7 delivered over to the -- to my -- to the STI and MTA. 8 MR. RUNNER: Thank you. 9 MR. HORTON: Okay. You know, I have got one 10 stretch and I was trying to pull up the law, but I'm 11 going to just, in the essence of time, ask the question. 12 At what point is the tax triggered -- at the 13 acquisition of the material or the attachment of the 14 material? 15 And the reason I ask that included in your 16 response would be is if there was a settlement amount 17 there may, in fact, be less than the actual cost of the 18 material, I don't know, which could be construed as a 19 sale and that the attachment never occurred and the 20 materials were transferred without ever attaching it to 21 realty. 22 And, so, if the tax implication occurs at 23 acquisition, everything's the same; if it occurs at 24 affixation, then we could have a different outcome. 25 MR. LEVINE: The purchase -- when a 26 construction contractor purchases materials that it's 27 going to furnish and install and those are known to be 28 materials it will furnish and install, it's taxable. 61 1 MR. HORTON: They were under the presumption 2 that they were going to sell it. 3 MR. LEVINE: They had reported correctly if 4 their understanding had been correct. They thought they 5 were fixtures. 6 When you buy properties that is actually 7 materials and it's for the purpose of furnishing and 8 installing into -- for a construction contract, tax is 9 due upon the sale or if it's from outside California 10 upon entry into California at the beginning. 11 The only exception is not applicable here is 12 when you're buying mixed inventory -- 13 MR. HORTON: Yeah. 14 MR. LEVINE: -- and you don't have an 15 incidental resale but a significant amount for resale 16 and you don't know which is which, commingled, you can 17 buy them for resale. 18 MR. HORTON: Thank you very much. 19 Further discussion, Members? 20 Hearing none, is there a motion? 21 MS. MANDEL: Take it under submission. 22 MR. HORTON: Moved by Ms. Mandel -- 23 MS. YEE: Second. 24 MR. HORTON: -- second by Ms. Yee to take the 25 matter under submission. 26 Such will be the order, without objection. 27 Thank you much for appearing before us. It's 28 been a very, very, very interesting discussion. 62 1 The Board will take your matter under 2 consideration later on this evening and send you a 3 written report of our decision. 4 MR. SLEIGH: Thank you. 5 ---o0o--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 63 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 63 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 18, 2011 17 18 ____________________________ 19 JULI PRICE JACKSON 20 Hearing Reporter 21 22 23 24 25 26 27 28 64