BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JULY 26, 2011 FINAL ACTIONS Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 Michelle Steel 6 Vice-Chairwoman 7 Betty T. Yee Member 8 George Runner 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson, Chief Board Proceedings Division 14 Board of Equalization 15 Staff: David Levine Appeals Division 16 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 ITEM B1 2 Sacramento, California 3 JULY 26, 2011 4 ---oOo--- 5 MR. HORTON: Members, we're back from recess. 6 MS. OLSON: Our first item is B1, Max D. Price. 7 MR. HORTON: Is there a motion, Members? 8 MS. YEE: Uh-huh. Move to sustain the 9 Franchise Tax Board and impose a frivolous appeal 10 penalty of $750. 11 MR. HORTON: Okay. There's been a motion to 12 sustain the FTB and -- and impose a frivolous penalty of 13 $750. 14 Is there a second? 15 MS. MANDEL: second. 16 MR. HORTON: It's been seconded by Ms. Mandel. 17 Discussion, Members? 18 MS. STEEL: I just have a question. Is the 19 frivolous penalty -- 20 MS. YEE: Uh-huh. 21 MS. STEEL: -- do we always start 750? 22 MR. HORTON: Well, the -- 23 MS. STEEL: I think I'm asking same -- same 24 questions over and over. 25 MS. YEE: Generally, yeah. 26 MS. STEEL: 750 and then -- 27 MS. YEE: That's been -- 28 MS. STEEL: okay. 3 1 MS. YEE: That's been our practice. 2 MR. HORTON: Yeah, the taxpayer thought it was 3 5,000, by the way, Members. So -- 4 MS. YEE: Okay. 5 MR. RUNNER: He just saved some money. 6 MR. HORTON: Yeah. Such is the case. 7 Without objection, such will be the order. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 ITEM C1. 2 MR. HORTON: Ms. Olson. 3 MS. OLSON: The next item is C1, Paul Glasson. 4 MR. HORTON: Discussion, Members? 5 MS. MANDEL: Was -- was there a suggestion, Mr. 6 Chair, about something on looking at the -- his 7 consignment records or -- 8 MR. HORTON: There was. Mr. -- Mr. Levine is 9 here -- 10 MS. MANDEL: Oh. 11 MR. HORTON: -- hopefully to -- 12 MR. LEVINE: He -- he I guess was in contact 13 with his wife. We're waiting to hear if he was going to 14 be able to get any information today, and he can't get 15 anything today. All he could have -- all he was trying 16 to find out was whether they could separately list the 17 consignment sales, as I understand it. 18 So we don't know if they'll be able to provide 19 it. If they could it would require a 30-30-30 to 20 investigate. 21 I have trouble believing it will make any 22 difference. But, anyway, if you want the Department to 23 look further I would ask for a 30-30 because it -- 24 you'll -- they would have to examine whether it seemed 25 like his list was complete and whether it was reported 26 on returns or not reported on returns and what type of 27 verification he could provide. 28 MR. HORTON: Yeah. Members, based on the 5 1 conversation it appeared that the consignment sales were 2 unique to some extent and that that was not the nature 3 of his business. 4 And so theoretically it would help the 5 taxpayer. But mindful that assisting the taxpayer 6 requires the taxpayer's participation and such that they 7 have made an assessment not -- seems -- seems to have 8 not concluded that they want the -- to look at this, is 9 that what you're sharing with us? 10 MR. LEVINE: No, that's not what I understand. 11 It's just they could not get the list -- 12 MS. MANDEL: They couldn't get it done today. 13 MR. LEVINE: Yes. So I don't want to imply 14 that I got the impression that he doesn't -- won't 15 cooperate. I don't know but I think it would take -- 16 MR. HORTON: Okay. 17 MR. LEVINE: -- cooperation to do any -- get 18 any good understanding whether this is a unique 19 aberrational error or representative of everything in 20 the request of the population. 21 MR. HORTON: Yeah. Okay. 22 MR. RUNNER: I have a question, too, after 23 that. 24 MR. HORTON: Mr. Runner. 25 MR. RUNNER: Yeah, the -- can you tell me, Mr. 26 Levine, if -- I'm getting -- I -- and I don't -- maybe 27 you may not know. I'm hoping because I should have 28 asked earlier, or at least have gotten this information 6 1 since then -- if the -- the shipping -- the shipped car 2 to Massachusetts was in the four vehicle -- was one of 3 the anomalies of the four vehicles? 4 MR. LEVINE: Yes. 5 MR. RUNNER: Okay, it was? 6 MR. LEVINE: Yes. 7 MR. RUNNER: Okay. Okay. I'm prepared to make 8 a motion then that -- that we recalculate the -- the tax 9 by taking out the consignment sale issue in regards to 10 the test and the car that was shipped, and use that -- 11 the new figure then as the application for the test to 12 be applied then throughout the -- the time. 13 Does that make sense? 14 MR. LEVINE: Two of the four -- 15 MR. RUNNER: Yes. 16 MR. LEVINE: -- in the test? 17 MR. RUNNER: Right. Right. So I would make 18 that motion. 19 MR. HORTON: Mr. Levine, can you clarify your 20 understanding of that motion? 21 MR. LEVINE: Well, my understanding, there are 22 four errors in the test for the two quarters that were 23 projected to the entire audit period. My understanding 24 is the motion is to take out the consignment sale that 25 was -- he pretty much admitted it was driven to Oregon, 26 which is why it was not accepted as an interstate 27 sale -- and the one that was purchased and registered in 28 Massachusetts and had the bill of lading that had some 7 1 problems. 2 MR. RUNNER: Yeah, those would be the two. So 3 therefore recalculate the exp -- the -- the tax due with 4 those two anomalies taken out. 5 MR. LEVINE: And I don't know how much that is. 6 MR. RUNNER: So -- 7 MR. LEVINE: But if we were going by numbers 8 that would reduce the -- if it was -- if they were all 9 even it would reduce the test portion by about half. 10 MR. RUNNER: Right, but I don't know -- 11 MR. LEVINE: And I don't know -- 12 MR. RUNNER: -- the values that cost, so it's 13 whatever it is. 14 MR. LEVINE: Right. 15 MR. HORTON: But are -- are we -- is the motion 16 implying that the consignment sales are not subject to 17 sales tax? 18 MR. RUNNER: No, no, the motion -- 19 MR. HORTON: And therefore excluded from the 20 test? 21 MR. RUNNER: No, therefore -- no, I think the 22 issue was the -- they -- it appeared to be -- both of 23 those appeared to be anomalies and it was a very small 24 test group that we had done, four vehicles, and they 25 appear to be anomalies at that point and then those 26 anomalies were applied over the whole period. 27 So for that reason I think it's a reasonable 28 issue in regards to addressing that in terms of dropping 8 1 down the -- the -- the amount proposed. 2 MR. HORTON: But -- 3 MS. MANDEL: Can I just ask a clarification 4 that might be the clarification? 5 MR. HORTON: Yes, ma'am. 6 MS. MANDEL: So, Mr. Runner, you're talking 7 about dropping them out of the test for the projection. 8 And you then also -- when you say that they're anomalies 9 are you then also saying, well, those two should be 10 treated on an actual basis as taxable? 11 MR. RUNNER: No, I think that what we're -- I 12 think -- well, first of all, I think that they're being 13 treated as taxable and then applied, right? 14 MS. MANDEL: No, I understand. 15 MR. RUNNER: Right? 16 MS. MANDEL: It was a projection -- I mean 17 sometimes what I've heard before here is that someone 18 says something shouldn't be in the projection but it was 19 an error -- because it was unusual circumstance so it 20 shouldn't be applied to the entire population, and throw 21 something at me, Mr. Levine, if I'm getting this -- 22 MR. RUNNER: And that -- 23 MS. MANDEL: -- but that would -- 24 MR. RUNNER: And that would be the point -- 25 MS. MANDEL: But then -- but then -- but 26 then -- but that the -- the anomaly was still an error 27 and the error -- 28 MR. RUNNER: Oh. 9 1 MS. MANDEL: -- should be recognized on the 2 actual basis. 3 MR. RUNNER: Well, I guess I -- I guess I 4 would be -- 5 MS. MANDEL: So I was trying to figure out 6 the -- 7 MR. RUNNER: -- bold -- ambivalent to that 8 because it seems to me the biggest exposure is probably 9 on the error that was applied then across the -- the 10 sample across the whole. 11 So my motion right now is to go ahead and -- 12 and take it out in terms of the sample, therefore reduce 13 the exposure by the two errors and, you know, if indeed 14 the thought is by the Board that maybe those two, even 15 though they were anomalies should still be individually 16 applied, I don't have a big issue with that. 17 I just don't like the fact that they were 18 applied across the -- the sample or the -- across the -- 19 the whole audit. 20 MR. HORTON: Members, that might cloud the 21 integrity of the test in and of itself. If we believe 22 that those two tests -- I mean those consignment sales 23 are unique to the universe then you pull out all of the 24 consignment sales and you test them separately, either 25 on an actual basis or you presume that that test that 26 was done is sufficient and you compute a percentage of 27 error and you apply it. 28 That is something that I would be supportive 10 1 of, which I think would reduce the liability, but to 2 what extent I have no idea. I'm pretty confident that 3 it will -- 4 MR. RUNNER: So are you suggesting that the 5 actual -- the consignments all be done on an actual 6 basis? 7 MR. HORTON: No, I'm not. I'm suggesting that 8 if the body believes that the consignment sales are 9 reflected of an error and -- but yet still it is unique 10 to the universe that that -- that subset of the universe 11 be isolated and treated separately. 12 MS. MANDEL: Yeah, separately tested. 13 MR. HORTON: Separately tested. And to the 14 extent that the -- the agency believes that the test 15 conducted is sufficient to reflect that, those two 16 errors, then that would be -- 17 MR. RUNNER: Okay. 18 MR. HORTON: -- computed and extrapolated on 19 that subset of the universe. And so it's almost like 20 saying that we're going to test everything from -- 21 MR. RUNNER: Okay. 22 MR. HORTON: -- $1,000 to a million and then 23 everything from a million to three million we'll test, 24 as well, and then everything from five million and above 25 we'll look at on an actual basis. 26 So you're segregating your test. And so 27 we're -- I'm prepared to support that because I think 28 that's fair. It -- 11 1 MR. RUNNER: I -- I'm -- 2 MR. HORTON: Because it seems -- 3 MR. RUNNER: I'm prepared to go ahead and amend 4 or not -- since it wasn't seconded, to restate the 5 motion. However, I think it would be -- it would -- it 6 would include that -- that discussion in regards to 7 the -- taking the subset of consignments separately and 8 doing -- and applying the -- the -- the test to the -- 9 to the subset of -- of the consignment. However, I 10 would still then add in there the dropping of the -- 11 the -- the one vehicle which was the shipped vehicle, 12 which clearly did not -- was not in California. 13 It was an issue in regards to the -- the vehicle was -- 14 was shipped. Sales tax was apparently all paid in -- in 15 Massachusetts. 16 And I would just feel like that -- it seemed to 17 me if anything that is an anomaly from -- from a -- from 18 a business and therefore to apply that anomaly across 19 the whole test -- or the whole inventory I think would 20 be wrong. 21 So I will -- my motion then would be to do that 22 with the consignment but then drop out the -- the -- the 23 shipped vehicle. 24 MR. HORTON: Yeah, I don't -- I don't -- I 25 couldn't support that. I mean, it's a Sales Tax 26 transaction. The fact that he paid Use Tax in another 27 state, is what we would presume, or he paid Sales Tax in 28 another State, it's a transactional tax that's due here 12 1 taking title, even though -- you know, and it's one of 2 those -- it was registered out of state. Obviously it 3 went out of state. 4 MR. RUNNER: And the proper form was -- 5 MR. HORTON: And the proper -- 6 MR. RUNNER: -- the 447 was accomplished here 7 in the State. 8 MR. HORTON: So -- 9 MR. LEVINE: That was -- if I can clarify, 10 because -- 11 MR. RUNNER: Okay, go ahead. 12 MR. LEVINE: -- I think Mr. Tucker explained 13 it, but perhaps the -- he didn't want to state the 14 obvious, and I'm big on stating the obvious. 15 MR. RUNNER: Uh-huh. 16 MR. LEVINE: The first question is, is it 17 subject to Sales Tax? The 447 is irrelevant. We first 18 have to decide if it's subject to Sales Tax, which would 19 be -- in these cases when they -- if the purchaser took 20 the vehicle in California from the dealer and drove it 21 out never to come back we would say to the dealer, 22 "Didn't you read the materials? Don't do that." It's 23 taxable. It's already too late; it's taxable. 24 MR. RUNNER: That who drove it off? 25 MR. LEVINE: If the -- the purchaser takes 26 possession in this State -- 27 MR. RUNNER: Yes. 28 MR. LEVINE: -- and drives it -- 13 1 MR. RUNNER: Okay, that didn't -- 2 MR. LEVINE: -- wherever -- 3 MR. RUNNER: -- that didn't take place with 4 this vehicle. 5 MR. LEVINE: That's what the retailer's 6 position is. 7 MR. RUNNER: Right. 8 MR. LEVINE: If that had happened that would be 9 Sales Tax. It would not matter that the purchaser took 10 it outside the State, registered it in Massachusetts, 11 paid the tax because our tax would have been imposed 12 first. 13 MR. RUNNER: Right. But the driver did not 14 drive it off the -- off -- 15 MR. LEVINE: So if -- 16 MR. RUNNER: The driver did not drive it off 17 the sales lot. 18 MR. LEVINE: When it satisfies the requirements 19 for either it's delivered by the retailer out of state, 20 which means the sale doesn't even occur here -- 21 MR. RUNNER: Right. 22 MR. LEVINE: -- or it's handed to a common 23 carrier -- 24 MR. RUNNER: Right. 25 MR. LEVINE: -- and shipped out per the 26 contract then it's exempt from Sales Tax -- 27 MR. RUNNER: Right. 28 MR. LEVINE: -- then we get to the question of 14 1 Use Tax. And we only look at the 447 -- the -- a 2 retailer only needs a 447 if there's evidence that the 3 retailer knew the purchaser was a California resident. 4 That's when the presumption arises that this California 5 resident, who's having you deliver it outside the State, 6 is really buying it for use in California. And we tell 7 the retailer, you got to collect the Use Tax unless you 8 prove that's not true. 9 447 is how they do that; the easiest way. 10 So we only look at 447s if it's exempt from 11 Sales Tax -- 12 MR. RUNNER: Right. 13 MR. LEVINE: -- or a sale occurs outside 14 California and the retailer knows the purchaser is a 15 California resident. 16 Here the 447 is irrelevant. I -- I don't think 17 the purchaser was a California resident. 18 So, if the retailer established that it was 19 exempt from Sales Tax, if you -- 20 MR. RUNNER: We don't think he was or we don't 21 know he was? 22 MR. LEVINE: I don't know. But I -- i -- 23 MR. RUNNER: Okay. Okay, so you don't know 24 that for a fact? 25 MR. LEVINE: I don't personally -- 26 MR. RUNNER: So you don't know whether or not 27 the 447 was -- 28 MR. LEVINE: I -- I believe that it was a -- 15 1 MR. RUNNER: -- appropriate or not? 2 MR. LEVINE: -- Massachusetts resident. 3 MR. HORTON: Members. 4 MR. RUNNER: Okay. Well, the motion has been 5 made and that -- 6 MR. HORTON: The -- 7 MR. RUNNER: -- you know, it's fine if it -- 8 MR. LEVINE: The Department is not arguing that 9 it came back and was purchased for use in California. 10 So the only question is the Sales Tax question. 11 MR. RUNNER: Yeah. Okay. 12 MR. HORTON: Mr. Levine, next time state the 13 obvious. 14 MR. LEVINE: Okay. 15 MR. HORTON: Okay. There's a motion on the 16 floor -- 17 MS. MANDEL: What -- what's the motion? 18 What's -- 19 MR. LEVINE: Can I just ask for a 20 clarification? If I understand correctly the -- the 21 consignment issue was basically what the Chairman -- 22 MR. RUNNER: That's correct. 23 MR. LEVINE: -- sent them back. So that would 24 be if they give us the information we would segregate it 25 out? 26 MR. RUNNER: That would be correct. 27 MR. LEVINE: Okay. 28 MR. RUNNER: And the second part of that motion 16 1 then would be the -- removal of the shipped car from -- 2 MR. LEVINE: Just pull Massachusetts out? 3 MR. RUNNER: Right. That would be the motion. 4 MR. HORTON: Okay. Object -- I object to that. 5 Members -- 6 MS. STEEL: I second the motion. I second. 7 MR. HORTON: There's a motion; there's a 8 second. 9 MS. STEEL: Just that -- 10 MR. HORTON: Ms. Olson -- further discussion, 11 Members? 12 Please call the roll. 13 MS. OLSON: Mr. Horton. 14 MR. HORTON: No. 15 MS. OLSON: Ms. Steel. 16 MS. STEEL: Aye. 17 MS. OLSON: Mr. Runner. 18 MR. RUNNER: Aye. 19 MS. OLSON: Ms. Yee. 20 MS. YEE: No. 21 MS. OLSON: Ms. Mandel. 22 MS. MANDEL: No. 23 MS. OLSON: Motion fails. 24 MR. HORTON: Now, I would make a motion to 25 segregate the two tests, consignment sales projected 26 accordingly and the normal sales projected accordingly 27 may -- contingent upon taxpayer providing the 28 information. 17 1 And I would imagine if the taxpayer would 2 probably examine his records prior to providing 3 information, and make a decision accordingly. 4 MS. YEE: Okay, I'll second that. 5 MR. HORTON: So, moved by -- 6 MS. YEE: You. 7 MR. HORTON: -- me. I got to figure how to 8 refer to it. Okay. Second by Member -- excuse me, by 9 Member Yee. 10 Objection, Members? 11 Hearing none, such will be the order. 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 ITEM C2. 2 MR. HORTON: Ms. Olson. 3 MS. OLSON: Our next item is C2, La Mordida, 4 Incorporated. 5 MR. HORTON: Is there a motion, Members? 6 MS. YEE: I move to adopt the staff 7 recommendation. 8 MR. HORTON: It's been moved by Member Yee to 9 adoppt staff -- staff recommendation. 10 Is there a second? 11 MS. MANDEL: Second. 12 MR. HORTON: Second by Ms. Mandel. Is there 13 objection? 14 MS. STEEL: I think we should waive the 15 negligence penalty. It's a first audit and Z tape shows 16 all the total numbers there. And then fourth quarter of 17 2006 substantially correct report. 18 So I think we should give little -- little 19 thing for this taxpayer so we can just adopt the staff 20 recommendations but waive the negligence penalty. 21 Is that going to be -- 22 MR. HORTON: Further discussion, Members? 23 MR. RUNNER: Let me -- let me just clarify. 24 The motion before us is -- is with the negligence 25 penalty, correct? 26 MS. YEE: Correct, yes. 27 MR. RUNNER: So, are you -- are you -- are 28 you -- 19 1 MS. STEEL: I am -- 2 MR. RUNNER: -- doing a substitute motion? 3 MS. STEEL: -- substitute motion, yeah. 4 MR. RUNNER: Okay. I would second the 5 substitute motion. 6 MR. HORTON: Members, discussion? 7 On the substitute motion, Ms. Olson please call 8 the roll. 9 MS. OLSON: Mr. Horton. 10 MR. HORTON: No. 11 MS. OLSON: Ms. Steel. 12 MS. STEEL: Aye. 13 MS. OLSON: Mr. Runner. 14 MR. RUNNER: Aye. 15 MS. OLSON: Ms. Yee. 16 MS. YEE: No. 17 MS. OLSON: Ms. Mandel. 18 MS. MANDEL: No. 19 MS. OLSON: Motion fails. 20 MR. HORTON: On the primary motion -- 21 MS. YEE: I'll so move. 22 Ms. Olson, please call the roll. 23 MS. OLSON: Mr. Horton. 24 MR. HORTON: Aye. 25 MS. OLSON: Ms. Steel. 26 MS. STEEL: No. 27 MS. OLSON: Mr. Runner. 28 MR. RUNNER: No. 20 1 MS. OLSON: Ms. Yee. 2 MS. YEE: Aye. 3 MS. OLSON: Ms. Mandel. 4 MS. YEE: Aye. 5 MS. OLSON: Motion carries. 6 ---oOo--- 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 1 REPORTER'SCERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 July 26, 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 21 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: August 5, 2011. 17 18 19 ____________________________ 20 BEVERLY D. TOMS 21 Hearing Reporter 22 23 24 25 26 27 28 22