1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 23, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 MAISA, INC. 14 NO. 485794 (EH) 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 2 P R E S E N T 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 15 Diane G. Olson, Chief 16 Board Proceedings Division 17 18 For Board of David Levine Equalization Staff: Staff Counsel 19 20 For Department: Robert Lambert 21 Tax Counsel 22 Kevin Hanks Chief, Headquarters 23 Operations Division 24 Robert Tucker Legal Department 25 26 For Petitioner: Butch Kruse Representative 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 23, 2011 4 ---oOo--- 5 MR. HORTON: Miss Olson? 6 MS. OLSON: Our next item is C1, Maisa, 7 Incorporated. 8 Please come forward. 9 MR. HORTON: Thank you. 10 Mr. Levine, would you please introduce the 11 issues in this case? 12 MR. LEVINE: Good morning, Chairman Horton -- 13 MR. HORTON: Good morning. 14 MR. LEVINE: -- and Members, David Levine for 15 the Appeals Division. 16 The issues in this petition of Maisa, Inc. are 17 whether adjustments are warranted to the audited 18 understated taxable sales and whether Petitioner was 19 negligent. 20 MR. HORTON: Thank you very much. 21 Would the Petitioner please introduce yourself 22 for the record? Representative, you have ten minutes to 23 make your presentation. 24 And please commence with your introduction. 25 MR. KRUSE: My name is Butch Kruse. I'm 26 representing Maisa, Inc. 27 And the taxpayer owned a convenience store, 28 similar to a 7-11 type of store that sells taxable and 3 1 nontaxable goods. 2 The principal shareholder of the corporation 3 operated the business as well and had to move out of the 4 country -- or chose to move out of the country in 2008 5 because his teenage daughter had been involved with the 6 wrong crowd. And in order to get her back on the right 7 track, he left the country. 8 Well, when he left he asked his brother, who is 9 an engineer by trade and had nothing to do with the 10 grocery business or anything like that, if he would just 11 look over the operations while he was out of the 12 country. 13 Shortly after that an auditor contacted the 14 brother and stated that there was going to be a routine 15 sales tax audit. And, so, the brother gathered up the 16 records that were at the market and wherever and 17 provided them and the income tax returns. 18 And, so, the auditor then took those records, 19 as they routinely do, and examined them and went through 20 them. 21 And then the auditor came back to the brother 22 and told him that there was going to be a liability, 23 that the company was going to owe about $20,000. 24 And, so, he was confused by this. And he said, 25 "Can you explain it more?" And she said she had to go 26 back and see her supervisor. 27 So, she went back and then she came back and 28 said, "Well, actually, the number's changed. It's now 4 1 going to be $50,000." 2 And she had done some other calculations. And, 3 so, he said, "I still don't understand. Can I meet with 4 someone?" 5 And she goes, "Well, let me talk to my 6 supervisor again." 7 So, the third time she comes back and she says, 8 "I'm sorry, but we have redone it and it's around 9 $100,000." 10 So, at this time, the gentleman realized he 11 better get some help. And, so, he contacted me in 12 September of 2008 and he asked me if I could help him. 13 I said, "I'm not sure, I have to go through the 14 work papers." And, so, I did. 15 And when I went through the work papers, what I 16 found was that the auditor did not accept the records 17 that she was given for the purchases. She felt they 18 were inaccurate and on the income tax returns and the 19 P & Ls. And, so, what she did was to do what's called a 20 vendor solicitation. 21 I'm sure the Board Members are familiar with 22 that, but, you know, I'll quickly go over it. What you 23 do is you contact the vendors that sell to the business 24 and ask them for their record of their sales to that 25 business to calculate or compute or, you know, record, 26 to come up with what the Board would feel more 27 comfortable with as being accurate. 28 So, they did this for a three-year period. And 5 1 the Board received the information back from the 2 vendors. And that's what the basis -- I would have 3 thought was the audit, but instead what the auditor did 4 was to focus on one year, the year 2006. 5 And we don't feel that that year is 6 representative of the whole three years, primarily 7 because it yields the worst percent of error when you 8 compare those vendor purchases to the recorded 9 purchases. 10 And -- and I believe you have the exhibits that 11 were sent out earlier and that information is contained 12 on Exhibit A, page 4, okay? 13 And, so, as the -- as the Appeal process 14 continued, I went back to the taxpayer's brother and 15 said, "Is there any more information that we can provide 16 to, you know, address this situation?" 17 And he said, "I just hired a new bookkeeper and 18 let me have her go through what the State has done and 19 try to come up with some explanation of, you know, why 20 it isn't accurate." 21 So, the bookkeeper, new on the job, tried to 22 reconcile what the State did. And, anyway, she wasn't 23 real familiar with the process. She ended up with 24 another number. 25 So, at the hearing, the State Board used that 26 number, unaudited, okay, and we don't know if it 27 included, you know, the vendor purchases or not, but it 28 included more than that. And, so, again the Board chose 6 1 to -- to use that larger percent of error. And that 2 comes to about like 69 percent greater taxable 3 purchases, okay. 4 The other error that the auditor made that's 5 significant in this process is that the auditor -- one 6 of the vendors was a company called Sunset Trepco and 7 it's one of those companies that sells taxable 8 merchandise and nontaxable merchandise. 9 So, you take the total invoice, you need to 10 figure out how much was taxable and how much was 11 nontaxable. So, the auditor took two invoices and came 12 up with a 90 percent ratio. 13 So, I went through and I took 11 invoices. And 14 the 11, which I have here, yielded a 77 percent ratio. 15 An, so, I argued that at the earlier hearings, 16 but it was -- it was not adjusted. 17 So, that's another factor in our argument that 18 we are submitting for your consideration, using the 19 three years and the -- the Sunset Trepco were on pages 6 20 and 7 of Exhibit A, for your reference. 21 But we are arguing that we would like you to 22 use the results of the full three-year analysis and that 23 that can be found -- yes, that can be found on page 3 of 24 Exhibit A. And you can see it ranges from 31 percent 25 error to a high of 60, which is the year that the Board 26 is using -- they had calculated 69, but they want to use 27 the 69 across, you know, the first three years. So, we 28 feel that's -- that's not correct. 7 1 Lastly, the Department has assessed a 10 2 percent penalty. We feel that that should be abated. 3 This is the taxpayer's first audit and the permit has 4 now been closed out. They are not going to continue in 5 business. 6 The application of the penalty really provides 7 no incentive to increase the accuracy of the reporting 8 because they are no longer in business. And, also, it 9 was the taxpayer's brother that, in fact, cooperated 10 with the State Board of Equalization, tried to come up 11 with something. He had never been through the process 12 and provide all of the records that he could. And, so, 13 there is still a liability, but we feel that that's the 14 more fair liability because it's based on more accurate 15 purchases that -- to be marked up. 16 There is no argument with the markup percentage 17 that the auditor computed. 18 Thank you. 19 MR. HORTON: Thank you very much. 20 The Department has ten minutes to make their 21 presentation. Please commence with your introduction. 22 And I would ask that you kind of clarify the 23 differential -- how much difference are we talking about 24 between the percentage yield from the taxpayer's method 25 compared to yours. 26 MR. LAMBERT: Good morning, Chairman Horton and 27 Members. My name is Scott Lambert. I'll be 28 representing the Sales and Use Tax Department today. 8 1 To my right is Kevin Hanks, also with the Sales 2 and Use Tax Department. And to Mr. Hanks' right is 3 Robert Tucker with the Legal Department. 4 I'll address each one of the issues that the 5 Petitioner brought up today because I believe those are 6 the main areas of disagreement. 7 When the audit was originally performed the 8 auditor basically looked at the records of the taxpayer 9 and it appeared that the taxpayer had reported properly. 10 By that I mean that the markups looked adequate. 11 One of the problems that was noted through a 12 review process is that the purchases that were being 13 made were on an irregular basis. Generally in this type 14 of business the purchases are delivered on a regular 15 basis. So, subsequently, the auditor polled the vendors 16 and obtained the purchase information. 17 Upon looking at that information, it was the 18 Department's opinion that 2006 -- the year of 2006 19 looked the most complete. And the reason -- there are 20 several reasons for that, but one of them was that some 21 of the vendors had not provided information in regards 22 to the purchases, they couldn't go back that far. 23 There are also -- if you do take a look at the 24 Petitioner's schedule, Exhibit A, page 8 -- I'm sorry, 25 that's just the one period -- I am sorry, it's 26 Schedule A, page 5. And what you'll see on there is 27 some of the main vendors that you would purchase from 28 year to year are fairly consistent. 9 1 If you see Anheuser Busch and what you have to 2 remember in column D, 2004, that's only for half a year 3 and also in column G, that that's also for a half a year 4 also, so, you'd have to double those figures in order to 5 get a yearly figure. But when you look at Anheuser 6 Busch for 2005 and compared to 2006, it -- it has gone 7 up a little bit, approximately 10 percent. You look at 8 Coca-Cola, that is fairly constant between those two 9 years. When you take a look at Southern Wine, that is 10 consistent between the years. 11 But when you take look at the bottom, the total 12 purchases, you see that there is a discrepancy between 13 2005 and 2006. In other words, 2005 purchases, taxable 14 purchases, show 576,000 where column F shows 692 and 15 I'll just note that these are the Petitioner's numbers 16 that they want to use and ours would be slightly 17 different from that. 18 But based on that, you can see the comparison 19 between 2005 and 2006 in terms of some of the main 20 vendors are consistent. And yet when you look at some 21 of other ones, such Sunset Wholesale, Harbor 22 Distributing, you see a large difference between the 23 two. And it's the Department's opinion that we don't 24 have all of the purchases for 2004 and 2005. 25 In terms of the 2006 purchase schedule that -- 26 that was provided by the taxpayer that the Board relied 27 upon, upon review of the taxpayer's schedules, we're of 28 the opinion that the bookkeeper made mistakes and it's 10 1 appropriate -- more appropriate to use the actual 2 information from the vendors. The difference there is 3 about $5,000 of measure, or so. 4 In terms -- or in regards to Sunset Wholesale, 5 the Department used 90 percent and the reason -- and 6 that was based on two invoices that we had that were in 7 the audit period. And the reason why we used only two 8 is that those were the only two that were provided to 9 us. 10 When we had asked the taxpayer for some -- or 11 for all purchase records for four months, only two 12 Sunset invoices were provided and we used that 90 13 percent. 14 The Department's somewhat concerned or is 15 concerned with the fact that the taxpayer has taken 16 Sunset purchases from outside the audit period and has 17 used that and also notes that the business did -- was 18 originally Sunset, it was purchased by Trepco, which is 19 also in the business of servicing convenience stores. 20 And they mainly sell taxable-type items such as tobacco 21 products and cigarettes. 22 So, the Department does have concerns with the 23 fact that the invoices that were obtained or used or 24 provided here by the Petitioner may not be 25 representative. 26 The Department believes that the invoices that 27 were provided are more the low dollar invoices and that 28 if you looked at the higher dollar invoices generally 11 1 means that you're purchasing more cigarettes and the 2 taxable percentage would be higher. 3 In regards to the penalty, we note that this -- 4 that the corporate officer that -- involved here has 5 been involved in the grocery business for a significant 6 length of time. The father and other family members 7 have owned similar types of businesses. In fact, at one 8 time this business was owned by the father and it has 9 migrated down. 10 And also the taxpayer has owned seven other 11 businesses, six of which were these types of stores. 12 And it's -- I guess it's been the practice where the 13 business has been passed between family members. 14 In fact, at the time of this audit the 15 Petitioner closed out and transferred three businesses 16 to, apparently, his brother. And we note that there was 17 an audit liability in each one of those. In fact, the 18 business was gifted to the individual, even though on 19 the other transactions between family members 20 previously, there was a dollar amount that was paid for 21 it. 22 Other corporate officers are also involved in 23 numerous businesses. The records were considered to be 24 inadequate and incomplete. The taxable purchases were 25 higher than the reported taxable sales. And the taxable 26 sales were understated by 79 percent based on this. 27 And to answer, Mr. Horton, your question as to 28 the difference that we're talking about, I'm not exactly 12 1 sure because it depends on what criteria you use to come 2 up with the differences. 3 In here, if you are using the taxpayer's 4 information, there is going to be a significant 5 difference because they're going back to use the 6 purchases for 2004 and 2005 that we believe are 7 understated. And, so, therefore, that would make an 8 adjustment. If you are just using 2006 purchases, it 9 may not be so great. 10 And I would just add one thing, the Department 11 submitted an exhibit, which we just recently became 12 aware of, is that they had another supplier which was a 13 tobacco supplier named Cig and Tobacco Wholesale. This 14 invoice was obtained during an ID inspection. And they 15 presented this to support the purchases of product in 16 their store. 17 We would note that the owner of Cigarette and 18 Tobacco Wholesale is Zaid Rahman, which appears to be 19 related to the Petitioner in this particular case or the 20 corporate officer involved. 21 The other item we would note is that on the 22 inspection report it indicates that purchases are made 23 weekly. If that $800 is extrapolated on a weekly basis, 24 in fact, the audit results would be understated. So, 25 accordingly, the Department concurs with the Appeals 26 Division's decision and recommendation. 27 We are available for any questions. 28 MR. HORTON: Thank you very much. 13 1 On rebuttal, please? 2 MR. KRUSE: Thank you very much, I appreciate 3 that. 4 First of all, let me address his last point. I 5 had a contractor that I hired to help me out with this 6 thing who lived closer to the taxpayer's place of 7 business. 8 And just yesterday afternoon I was notified 9 that he would not be allowed to present -- last minute 10 surprise, okay. 11 Then at 5:45 p.m. last night, I received a 12 phone call from this gentleman, telling me, "Oh, last 13 minute, we have something that you have to see. I'll 14 send it to your home, send back a confirmation that you 15 received it." 16 I mean, here I am at home, entertaining guests, 17 but notwithstanding, I didn't feel like that was very 18 professional behavior last minute surprises. 19 But, anyway, to that point and his invoice that 20 he just talked about, we haven't -- you know, I just got 21 it last night at almost 6 o'clock p.m., so, I haven't 22 been able to find out if that's valid, if it's, you know 23 relevant, and all of that. 24 So, I just wanted to make the Board aware of 25 that development, if you will. And the contractor cost 26 me because he had previously been authorized to present 27 at the Board hearing, signed all of the disclosure 28 agreements, okay. 14 1 So, my other point would be -- a number of 2 them. One of them was Mr. Lambert's comment about the 3 percentage of the Sunset Trepco sales. And he made the 4 comment that -- one of his points that was everything 5 was consistent. You know, if you looked at this year, 6 pretty much the same and that year and that year. 7 And if you look at those purchases, yeah, the 8 2006 are a little bit more than the 2005 and 2007, if 9 you project it, it would be more than the 2006. So, I 10 don't see that argument. 11 The other thing was he didn't mention the 12 dollar amount of the two invoices that his auditor used, 13 okay? Those two invoices totaled to approximately 14 $8,000. The 11 invoices that I used totaled to $36,000. 15 So, I don't really see where that's a big -- a big 16 difference. 17 I also would like to address his comment about 18 the taxpayer having been in the business for a long time 19 and his family and this is Zaid, whom I never heard of, 20 is a relative. 21 In the Middle East the name -- the last name 22 Rahman, R-A-H-M-A-N, is a common name, much the same as 23 Smith or Jones. And, so, because this guy's last name 24 is Rahman, I'm not sure that he is related to the 25 principal taxpayer, okay, which is a corporation and did 26 not own any other markets, just this one market. 27 So, other than that, I -- I still submit that 28 using the three years yields a more fair decision. And 15 1 our purchases show the same thing, if you'll look at 2 them, that they've increased just like the cost of 3 living has increased. 4 And if you look at Exhibit A, page 1 -- and 5 Mr. Horton's question was what's the difference between 6 what we're proposing and what the Department is 7 proposing -- well, you can see our measure is $993,920 8 additional. So, the tax rate times that. So, roughly. 9 70, $80,000, depending upon the rate. 10 And currently I think it's somewhere around 11 $100,000, based on that one year. And those purchases 12 weren't solely -- weren't solely the vendor solicited 13 purchases, okay. They were -- they were what this 14 bookkeeper had created and were not audited, but that's 15 what they used to develop their 69 percent that they 16 applied throughout the audit period instead of -- you'll 17 see the percentage of error we came up with and we 18 acknowledge that 62 percent in the -- in the year 2006, 19 it was the worst year, granted, sorry. And it should 20 be, you know, assessed. 21 But it's not fair to say that that 62 -- or, in 22 their case, 69 percent -- should be applied for the 23 whole three years. 24 MR. HORTON: Thank you very much. 25 Mr. Levine, can you speak to the prohibition of 26 the testimony? 27 MR. LEVINE: Well, the contractor was a former 28 Board employee who was directly involved in this case. 16 1 And I believe it's a lifetime ban of involvement. 2 And that was discovered late in the process. 3 The employee knew, but we didn't -- the former employee 4 knew and as soon as we knew, we notified him that he 5 could not participate. And that happened in the last 6 couple days. 7 MR. HORTON: Thank you very much, just wanted 8 that for clarity. 9 MS. STEEL: What was that, former employee can 10 not participate? Is that the regulation? Is it a rule? 11 MR. LEVINE: It's under the ethics rules, 12 the -- 13 MS. MANDEL: State law, isn't it? 14 MR. LEVINE: Yeah, regulated by the -- 15 MS. MANDEL: FWC? 16 MS. STEEL: This is somebody that had handled 17 that case, okay. 18 MR. LEVINE: He was directly involved in this 19 case. 20 MR. HORTON: Okay. With that said, discussion, 21 Members? 22 Member Yee? 23 MS. YEE: Thank you very much, Mr. Chairman. 24 I feel a little bit like we're in let's make a 25 deal mode and I want to just see if I can kind of get 26 clear about the different elements of this audit. 27 But it sounds like the Department is willing to 28 entertain some potential adjustments, but I just wanted 17 1 to see if I can track what those are. 2 But my first question relates to -- I would 3 like to hear from both sides about this -- but what 4 would be the cause of the discrepancy between the vendor 5 surveys and the Petitioner's provided purchase summary? 6 I'm -- 7 MR. LAMBERT: I don't believe there -- I didn't 8 know where some of the numbers came from, but I don't 9 believe there is really a discrepancy in terms of -- 10 MS. YEE: But didn't the Petitioner's purchase 11 summary kind of show that there was kind of 12 consistent -- 13 MR. LAMBERT: Well, if you're talking about 14 2006? 15 MS. YEE: 6, yes? 16 MR. LAMBERT: Yeah, okay. That -- the 17 difference there is -- what happened is we got the 18 information from the vendors. 19 MS. YEE: Uh-huh. 20 MR. LAMBERT: And we used that in the audit. 21 When it came to the Appeals process, the 22 Petitioner provided their own schedule prepared by their 23 bookkeeper, which basically -- what they were trying to 24 show is that -- in my understanding -- is that the 25 figures that we came up with were overstated, right. 26 In effect what it did is it -- it indicated 27 that the purchases that we had were understated. 28 MS. YEE: Right. 18 1 MR. LAMBERT: And, so, we ended up using the 2 higher figures. The -- and the Department -- actually, 3 Appeals asked the Petitioner to provide an explanation 4 what the difference is. It wasn't provided. Therefore, 5 it was included in the audit -- in the audit 6 calculation. 7 Upon review of the Petitioner's submission, it 8 looks like there was just an error on the bookkeeper. 9 When they were adding up things, they made -- they left 10 some things off. They left off purchases. They left 11 off credits. They made calculation errors in it. 12 And, so, I believe that the purchase 13 information that we obtained for 2006 from the vendors 14 is more accurate than what the Petitioner has provided 15 to us. And the result of that is about 5 to $6,000 in 16 measure. 17 MS. YEE: Okay. Mr. Kruse, do you concur with 18 that observation? 19 MR. KRUSE: I do not. 20 And here's why: No. 1, when they did use -- 21 so, let's say if they're going to agree to use the 22 vendor -- well, first of all, to answer your question, 23 the thing you're after, I believe, is a reconciliation 24 between the purchases that we're recommending and the 25 purchases that they used. 26 MS. YEE: Yeah, I mean -- 27 MR. KRUSE: Okay, good. 28 MS. YEE: -- to the extent that were 19 1 significant jumps in the purchases between 2005-2006, 2 what would account for that? 3 MR. KRUSE: I would say business conditions, 4 that business -- 5 MS. YEE: I mean those -- and the jump was 6 evidenced in the surveys and yet your reporting kind of 7 stayed consistent throughout. 8 MR. KRUSE: What we're suggesting is no, that 9 it did increase, and that -- that's borne out in our -- 10 if you look at Exhibit A, page 2, where we come up 11 with -- at line 1, okay, 2005 is 576120, 2006 is 692. 12 So, it did increase. 13 But -- but the thing I really want to answer 14 that you asked was the difference between what the -- 15 what the Department used to come up with that 69 percent 16 error in 2006 and what we're suggesting is used, which 17 is the vendor solicited purchases, not just for 2006, 18 but the other years. 19 But I did a reconciliation for '06 and it's 20 more than $4,000. 21 MS. YEE: Yeah, actually my question was much 22 simpler than that, it was just that -- in terms of what 23 the vendor surveys showed and it sounded like you were 24 just acknowledging that your reported sales kind of 25 picked up the variations, you know, between the years. 26 But I don't know that that's necessarily true. 27 It seemed like your reported sales stayed 28 consistent throughout the whole period, regardless of 20 1 what the vendors' surveys indicated with respect to a 2 jump. 3 MR. KRUSE: Yeah, the reconciliation is 4 Exhibit A, page 9, that shows the differences between 5 what the Department used and what the vendor survey 6 says. 7 And the reference on column D, where it says 8 "page" is the vendor survey that the auditor performed, 9 which is hundreds of pages. But we went to that kind of 10 detail to show in this exhibit that, you know, these are 11 the differences that we found, that the errors that the 12 bookkeeper made, but were not adjusted for. 13 MS. YEE: Okay. Stop right there. 14 So, to the Department, if we are now placing a 15 reliance on the vendor surveys for 2006, what does that 16 do to the taxable measure? 17 MR. LAMBERT: Well, if you -- if you look at 18 page 9 and you add up all those differences, it 19 basically comes to $6,334 when you take them all into 20 consideration. 21 And that's exactly what I was referring to, I 22 believe I said 5 to 6,000, but it's 6,334 -- 23 MS. YEE: Okay. 24 MR. LAMBERT: -- is the difference in that 25 year. 26 And if I could just add one thing in regards to 27 your comment to regarding the taxable purchases? 28 MS. YEE: Yes. 21 1 MR. LAMBERT: I can read you off by quarter the 2 taxable measure, just by -- and this will be in 3 thousands of dollars -- starting with the third quarter 4 of 2004. 5 MS. YEE: Uh-huh. 6 MR. LAMBERT: 123, 124, 125, 125, 125, 125, 7 125, 127, 128, 130, 131, 132, 133, 133, 133. 8 So, what you see is is that over the -- from 9 the first quarter of -- third quarter of 2004 was 10 123,000 and the taxable sales reported for the first 11 quarter of '08 was 133,000. 12 So, there is a gradual increase during that 13 time period, but there was nothing in there that showed 14 a significant increase between 2004-2005 compared to 15 2006. 16 MS. YEE: Okay, okay. And then with respect to 17 this issue about -- that established the percentage of 18 taxable sales, the Department's contention that we need 19 to include this large entity, the Sunset Wholesale, 20 where are we on that? 21 I guess in terms of -- there wasn't a lot of 22 documentation with respect to Sunset Wholesale, so, what 23 are we -- what are you looking at now with regard to -- 24 MR. LAMBERT: How we came up with it? 25 MS. YEE: Yeah? 26 MR. LAMBERT: As I stated, we had two 27 invoices. 28 MS. YEE: So, it's still the two invoices? 22 1 MR. LAMBERT: They just had -- in our audit we 2 used those two invoices and it rounds off to 90 percent, 3 but it's 89.66. 4 MS. YEE: Okay. 5 MR. LAMBERT: But we used 90 percent. 6 MS. YEE: Okay. 7 MR. LAMBERT: That -- those are the two that we 8 used. We only had access to one other invoice from 9 Sunset during the audit. It was outside the audit 10 period, in May -- April 2004. And the taxable 11 percentage for that one was 88 percent, but we didn't 12 use it because it was outside the period. 13 And I'd also note that when the Petitioner used 14 their calculations that it doesn't appear that they took 15 our two invoices into account when they came up with 16 their 77 percent. 17 MS. YEE: Okay, I see. 18 And, Mr. Kruse, what were you relying on? 19 MR. KRUSE: I was relying on these 11 invoices 20 that we found in the records. 21 MS. YEE: Okay. 22 MR. KRUSE: I think that -- 23 MS. YEE: Okay, I got it. 24 MR. KRUSE: -- okay. 25 MS. YEE: I just wanted to be sure that we're 26 looking at the same thing. 27 And then is there still an issue with respect 28 to the tobacco purchases? 23 1 MR. LAMBERT: Tobacco, well, we looked -- we 2 located that one purchase, which was from Cigarette 3 Tobacco Wholesale. 4 MS. YEE: Uh-huh. 5 MR. LAMBERT: That vendor was not -- we were 6 unaware of that vendor. It was not included in our 7 audit. 8 And it -- it appears, and, of course, we only 9 have one invoice, but they generally purchased on a 10 consistent basis. 11 And I'll note on here that there is the 12 purchase of Copenhagen. And generally with that 13 particular product, it's generally delivered on a 14 Monday. And the reason is because it's date sensitive 15 and people -- users of that particular product are not 16 going to buy old product. And it only comes out Sunday 17 night and it's available to the retailers on Monday. 18 MS. YEE: Okay, okay. And then my last 19 question, could you just summarize then what -- beyond 20 what we've seen so far and what we've been provided, are 21 you recommending any potential adjustments? 22 MR. LAMBERT: Well, am I recommending? 23 MS. YEE: Before -- okay. 24 MR. LAMBERT: No. Before -- just with the 25 caveat that basically it -- we're not recommending any, 26 it's basically, I mean, your decision as to whether you 27 feel that that tobacco purchase would offset the other 28 because otherwise an adjustment should be made for -- 24 1 MS. YEE: Uh-huh. 2 MR. LAMBERT: -- for the higher figures that we 3 used that should not have been used for 2006. 4 MS. YEE: And can you talk about the amounts? 5 MR. LAMBERT: Well, it was at $6,000, so, you 6 would reduce that. 7 And I haven't run the numbers -- 8 MS. YEE: Okay. 9 MR. LAMBERT: -- but I don't know if you 10 extrapolate it over, say, each year with $6,000, you're 11 talking about 8 -- 19,000, 20,000. 12 MS. YEE: Okay. 13 MR. LAMBERT: Maybe more, because I believe 14 these are purchases. So, maybe there is a markup -- 15 MS. YEE: Markup, right. 16 MR. LAMBERT: -- involved with it, so, you're 17 maybe looking at another 20 percent on top of that, 18 so -- 19 MS. YEE: All right. 20 MR. LAMBERT: -- you're looking at maybe 21 25,000 -- 22 MS. YEE: Okay. 23 MR. LAMBERT: -- measure. 24 MS. YEE: All right, thank you very much. 25 Thank you, Mr. Chairman. 26 MR. HORTON: Mr. Runner? 27 MR. RUNNER: Just to follow up on a couple of 28 these -- a couple of this -- some of the issues that 25 1 have been brought up. 2 The issue of the vendor survey, obviously, the 3 taxpayer believes that the whole survey time should be 4 in the calculation. And staff is concerned about the 5 early years in that survey being incomplete. 6 Is that fair a summary as to -- 7 MR. LAMBERT: Yes, it is. 8 MR. RUNNER: -- let me go to -- specifically to 9 the 2007 part of the survey, because if, indeed -- let 10 me ask, it seems to me that we're concerned about 11 invoices in the 2004-2005, are we concerned about 12 invoices in the 2007 part of the survey? 13 MR. LAMBERT: I don't think so. I think we're 14 okay with 2007. 15 MR. RUNNER: So -- so, wouldn't -- again if our 16 discussion is that the newest is the most accurate, why 17 wouldn't we use, say, an 18-month time that would 18 include 2007 and 2006 -- 19 MR. LAMBERT: Right. 20 MR. RUNNER: -- as a more accurate survey 21 period? Would that seem reasonable? 22 MR. LAMBERT: I believe so. 23 MR. RUNNER: Okay. 24 MR. LAMBERT: Yeah. 25 MR. RUNNER: Let me ask the taxpayer 26 representative -- again, I know you'd like -- your 27 taxpayer would like the whole item, but it seems to me 28 that including the 2007 does create a little less 26 1 exposure. 2 MR. KRUSE: I would agree that it's more 3 accurate than the 2006. And, again, the audit is 4 predicated on the 2006 bookkeeper error. 5 MR. RUNNER: Right. 6 MR. KRUSE: So, if you convert it to the -- I 7 would agree, sir, that it's more accurate than what it 8 is now. 9 MR. RUNNER: So, you're saying the 2006 with 10 the errors -- 11 MR. KRUSE: Adjusted. 12 MR. RUNNER: -- adjusted and the inclusion of 13 2007? 14 MR. KRUSE: It is more accurate than what is 15 now. I still contend, as you stated, that the whole -- 16 MR. RUNNER: We should go back, all of the way 17 back? 18 MR. KRUSE: Yes, sir. 19 MR. RUNNER: Okay, okay. Okay, so, again, I -- 20 I -- it seems to me that if we're -- we think the newest 21 records are the most accurate, then we ought to go ahead 22 and go with the -- to the most recent time and then -- 23 and create that and that seems to be a reasonable issue. 24 Let me just ask in regards to the issue of 25 the -- of the negligence penalty. Mr. Lambert, you went 26 through a long history of experiences that the owner or 27 family members of the owner had in this -- in these 28 businesses, correct? 27 1 MR. LAMBERT: Uh-huh, that's correct. 2 MR. RUNNER: And, again, I think the taxpayer 3 representative disputes -- thought -- doesn't know 4 whether these people are related or not. 5 But let me ask you this, with that long 6 history, have any of these -- have any of these 7 businesses owned by these individuals been before us or 8 been in dispute with audits before? 9 MR. LAMBERT: Before you, I don't -- I do not 10 believe so. 11 But I believe there are two audits that are 12 currently in process. 13 MR. RUNNER: Okay. But nothing -- nothing has 14 been in the past -- 15 MR. LAMBERT: That's correct. 16 MR. RUNNER: Okay. So, now -- so, I guess I'm 17 a bit confused because oftentimes we use the negligence 18 penalty as a reason for creating a negligence penalty 19 because of previous problems that have been had. 20 It seems to me in this setting we're using the 21 negligence penalty because there's a long history 22 without any problem. 23 Is that -- I mean -- 24 MR. LAMBERT: Well -- 25 MR. RUNNER: -- is that fair? I mean, 26 oftentimes when we talk about negligence penalty, we say 27 this taxpayer has been before us before, you know, had 28 this discrepancy, and -- 28 1 MR. LAMBERT: Right. 2 MR. RUNNER: -- therefore, should know. 3 MR. LAMBERT: Right. 4 MR. RUNNER: And, therefore, negligence 5 penalty. 6 Again in this case it seems to me that we've 7 got -- what we've -- what you've articulated, is a long 8 history of experience in this business without any 9 problem in the past. 10 MR. LAMBERT: That is correct. 11 And -- but I have the reasons why I used that 12 particular -- the experience in order to apply the 13 penalty. 14 It's basically from the field audit manual. 15 MR. RUNNER: Okay. 16 MR. LAMBERT: And I can read you just some -- 17 MR. RUNNER: Okay. 18 MR. LAMBERT: -- experts (verbatim) from it. 19 MR. RUNNER: Sure. 20 MR. LAMBERT: Generally in a first audit -- it 21 says, 22 "Generally a penalty should not be 23 recommended." 24 And that's where we get the discussion about -- 25 MR. RUNNER: Uh-huh. 26 MR. LAMBERT: -- penalty shouldn't be on the 27 first audit. 28 MR. RUNNER: Right, right. 29 1 MR. LAMBERT: However, there are circumstances 2 where a penalty would be appropriate. 3 (Reading), 4 "Criteria that should be considered, among 5 others, are: The taxpayer's prior business 6 experience, the nature and state of the records 7 provided and whether the taxpayer used an 8 outside accountant or bookkeeper to compile and 9 maintain the records and/or to prepare the 10 sales and use tax return. 11 A penalty may be an appropriate in any of the 12 following circumstances:" 13 It says, (reading), 14 "The taxpayer has no records of any kind." 15 They did have records -- 16 MR. RUNNER: Okay. 17 MR. LAMBERT: (Reading), 18 "The taxpayer has a history or prior permits or 19 business experience." 20 They do. 21 "Analysis shows that purchases have exceeded 22 reported sales." 23 It does. 24 MR. RUNNER: Okay. 25 MR. LAMBERT: And then there is whether there 26 is two sets of books. 27 MR. RUNNER: Okay. 28 MR. LAMBERT: Which there -- 30 1 MR. RUNNER: Thank you. 2 Okay, again, I think we ought to, you know, in 3 further discussion, it seems to me that, again, I -- 4 I -- I think that there is some room, maybe in this 5 issue, to -- to find some -- some common ground. 6 And it seems to me again losing the most -- the 7 most -- again removing the error that's been identified 8 in 2006 and then using the newest year, that half of 9 2007, using that 18-month period, seems to me to be an 10 equitable way in order to get the fairest amount 11 determination. 12 Thank you. 13 MR. HORTON: Further discussion, Members? 14 Hearing none, is there a motion? 15 MS. YEE: Move to take the matter under 16 submission. 17 MR. HORTON: It's moved by Miss Yee to take the 18 matter under submission, second by Mr. Runner. 19 I would ask the Department to consider the 20 testimony here and determine if there -- if they can 21 make some miracle recommendations. 22 Without objection, Members, such will be the 23 order. 24 Thank you very much for appearing before us 25 today. The Board will take your matter under 26 consideration later on this evening and send you a 27 written report -- 28 MR. KRUSE: Thank you. 31 1 MR. HORTON: -- of our decision. 2 MR. KRUSE: Thank you. 3 MR. HORTON: Thank you. 4 ---o0o--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 32 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 AUGUST 23, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 32 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 8, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 33