1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 SEPTEMBER 21, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 CHERIE ROSE, INCORPORATED 14 NO. 466880 (GH) 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: Robert Lambert Hearing Representative 20 Kevin Hanks 21 Chief, Headquarters Operations Division 22 Robert Tucker 23 Legal Department 24 For Petitioner: Cherie Rose Taxpayer 25 Carleen Clarke 26 Representative 27 Matt Wheeler Representative 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 SEPTEMBER 21, 2011 4 ---oOo--- 5 MR. HORTON: Miss Olson? 6 MS. OLSON: Our next item is C4, Cherie Rose, 7 Incorporated. 8 Please come forward. 9 MR. HORTON: Mr. Levine, will you please 10 introduce the issues in this case? 11 MR. LEVINE: The issues in this petition of 12 Cherie Rose, Incorporated are whether audit adjustments 13 are warranted and whether Petitioner was negligent. 14 MR. HORTON: Thank you, Mr. Levine. 15 The taxpayers will have ten minutes to make 16 your presentation. And then we'll go to the Department. 17 They will also have ten minutes to make their 18 presentation. And we will return to you and allow you 19 five minutes on rebuttal. 20 Please commence with the -- with your 21 introduction for the record. 22 MS. CLARKE: I'm going to start off with our 23 second audit period where I was given seven invoices and 24 I was not allowed time to get backup for. 25 MR. HORTON: My apologies for interrupting, 26 could you please introduce yourself for the record? 27 MS. CLARKE: Carleen Clarke. 28 MR. HORTON: And why don't we just go ahead -- 3 1 MR. WHEELER: I'm Matt Wheeler, I'm 2 representative for the taxpayer. 3 MR. HORTON: Okay. 4 MS. ROSE: Cherie Rose. 5 MR. HORTON: All right. Miss Olson, please -- 6 MS. CLARKE: So, with the second -- 7 MR. HORTON: -- start their time over. 8 MS. CLARKE: -- with the second audit period, 9 where we weren't allowed the time to get backup because 10 the auditor had to turn in the report the next day and I 11 provided the backup to the invoices in question, which 12 is how the percentage of error was calculated from the 13 2005 sales. 14 And I think everyone has the packets that shows 15 the daily reports along with some proposals. 16 Should I go through each invoice or is that -- 17 MR. HORTON: Excuse me, Madam. 18 The ten minutes can be used in any way -- 19 MS. CLARKE: Okay. 20 MR. HORTON: -- that you would like. 21 MS. CLARKE: Well, I just provided proof of the 22 packets information. 23 I have daily packets that I make every day of 24 sales. So, I provided those packets to show that those 25 invoices were paid on -- in full on those days to the 26 certain invoices, along with any other backup credit 27 memos or proposals are attached there. 28 I wanted to make sure -- the 2003 and 2004 4 1 years were never audited. And in these years I did all 2 sales tax manually. 3 I literally went through each packet of my 4 daily packets and handwrote every single sales tax and 5 sales. So, a percentage of error is put on these years, 6 but it should not be and it was never audited. 7 And they never asked me any information about 8 2003 or 2004. 9 2005 was the first year I was using our 10 brand-new computer system, it's called the Profit 11 System. Many of the sales were billed incorrectly 12 because of the complexity of the business. We are 13 interior design, we are general contractors. We are a 14 furniture store. We also do window treatments, rugs -- 15 you know, we do a variety of all home furnishings. 16 So, it was confusing to me when I first got 17 this brand-new Profit System how everything worked, 18 which is why there is a difference in the 2005 sales. 19 They took this 2005, where there is a 20 difference, because of -- there is inconsistency because 21 I was kind of confused about how this whole new system 22 worked and I didn't fill in everything properly. 23 So, I went back through 2003 did the manual 24 entries to show the difference, which I showed an 25 underpayment of 5,799.68. 26 So, what -- after I -- after I did all the 27 manual entries, then I was able to find where the 28 difference occurred. But because of doing things 5 1 incorrectly in the system and using those financials for 2 the year ends for 2005 and 2006, it made, you know, the 3 prior year tax returns off as well. 4 So -- it's -- I mean, I got trained on the 5 system starting in 2005, where he's been -- he has 2005, 6 2006, 2007, he's come out every year. It's a very 7 complex system. 8 So, it was just in that one year that it was 9 really confusing for me. So, that's why the 10 understatement. 11 But I just wanted to stress that, that because 12 I did these manually in 2003 and 2004, we should not 13 have a percentage of error on those years and they were 14 never looked at by the auditor. 15 And as well as 2006, once I had the main person 16 from Profit System come and help me, I was able to 17 determine where the errors occurred and fix them. 18 But I -- I wasn't, you know, it just took me a 19 while to get the whole system down. And once I got the 20 system down, I could, you know, have an accurate account 21 of everything. 22 But I just wanted to say that I think that her 23 -- to do a whole audit based on seven invoices, to get a 24 whole percentage of error on seven invoices when we do 25 200 to 300 invoices a month, I think is very unfair. 26 MR. HORTON: Thank you very much for your 27 presentation. 28 Would the Department please commence with their 6 1 presentation as well, commencing with your introduction 2 for the record? 3 MR. LAMBERT: Good morning, Chairman Horton -- 4 MR. HORTON: Good morning. 5 MR. LAMBERT: -- and Members. My name is Scott 6 Lambert. I'll be representing the Sales and Use Tax 7 Department today. 8 To my right is Kevin Hanks, also with the Sales 9 and Use Tax Department. And to Mr. Hanks' right is 10 Robert Tucker with the Legal department. 11 In this particular case the Department looked 12 at several different ways to calculate the audited 13 taxable measure. They looked to the income tax returns 14 and noted there was a $1.1 million difference between 15 sales on the returns and sales on the Sales and Use Tax 16 returns. 17 They also took a look at the bank statements, 18 making adjustments for exempt sales, non sales, 19 et cetera, and realized the difference of $1.5 million 20 between bank deposits and sales that were reported to 21 the State. 22 Ultimately, the Department decided to use the 23 markup method and using that method with a 120 percent 24 markup and established taxable -- a taxable difference 25 of 1.6 million. 26 At the Appeals conference the Petitioner 27 provided a sales journal. And the Department decided -- 28 just to step back, provided a revised sales journal for 7 1 the year 2005. 2 Based on that, the Department decided to use 3 that one year to establish the taxable measure and, in 4 particular, tested February of 2005 and came up with a 5 percentage of error and applied it accordingly. 6 The -- what I'll note is that the difference 7 now is $1.1 million, which is below the markup method 8 but is still consistent with the difference in the 9 federal income tax returns and on the bank statements. 10 In reviewing the taxpayer's exhibits here, the 11 Department has provided exhibits of their own and I 12 believe the Members have that exhibit? 13 MS. MANDEL: It says "Department Exhibit." 14 MR. LAMBERT: Okay. 15 MS. MANDEL: We've got so many exhibits in the 16 last bit that I just assumed -- 17 MR. LAMBERT: And I apologize for the late 18 minute on there -- it's difficult to go through 300 19 items. 20 But if you take a look -- and I'll just walk 21 you through it, so, it should be easier to go through. 22 If you take a look at Exhibit 1, page 2, what 23 you'll -- there will be an underlined towards the top. 24 This is a sale that the taxpayer is showing the tax is 25 being basically included in the sales journal. And this 26 is the sales journal that they provided in their exhibit 27 for this hearing. 28 The next page, which is Exhibit 1, page 3, is 8 1 another invoice and again it shows that tax has been 2 reported on that particular sale. 3 If you look at Department Exhibit 2, page 3, 4 there is an underline and what it will show is this is 5 the -- this is the sales journal that we received at the 6 Appeals conference. And it's for a deposit, but you 7 don't see where the sale is included as a taxable sale. 8 And it's the same thing with page 5 is the 9 other sale. And again that shows it's a deposit and 10 that it's not being recorded as a taxable sale. 11 There's -- there's some backup in the other 12 exhibits, but if you turn to Exhibit 5, page 3, it's the 13 fifth line down from the top, third column over, it has 14 the invoice number 16503. 15 Again this doesn't -- 16 MR. HORTON: One second, let me just make sure 17 that we're all on -- 18 MR. LAMBERT: Exhibit 5, page 3. 19 MR. RUNNER: Yes. 20 MR. HORTON: Questions, Members? 21 Am I. -- 22 MS. YEE: Mr. Chairman? 23 MR. HORTON: Sure. 24 MS. YEE: I just want to be sure I'm looking at 25 the right thing. 26 So, the exhibit that you've given us that 27 you're walking us through now, right, is going to match 28 up to what Petitioner may have provided us? 9 1 So, the -- we have seen invoices from the 2 Petitioner that -- are these -- what are these called, 3 the cash receipts edit list? Is that what you're 4 referring to as the sales journal? 5 MR. LAMBERT: No. 6 MS. YEE: Okay, what -- 7 MR. LAMBERT: The Exhibit 5? 8 MS. YEE: No, no, I'm trying to -- 9 MR. LAMBERT: Oh, match it up to theirs? 10 MS. YEE: Right. 11 MR. LAMBERT: You know, I couldn't match it up 12 to theirs. So, I don't know -- 13 MS. YEE: Okay. 14 MR. LAMBERT: -- exactly -- on this particular 15 one I don't know where the sale got included -- 16 MS. YEE: Okay, all right. 17 MR. LAMBERT: -- in there. 18 MS. YEE: I'll wait to -- to ask them. 19 MR. LAMBERT: What I -- the point that I'm 20 trying to make is the sales journal that we got at 21 Appeals conference is this Exhibit 5. 22 MS. YEE: Okay. 23 MR. LAMBERT: For February -- for February of 24 2005. 25 MS. YEE: Okay. 26 MR. LAMBERT: And on that exhibit, you don't 27 show that sale as a taxable sale, it shows it as a 28 deposit. 10 1 MS. YEE: Okay. 2 MR. LAMBERT: So, whether they're showing it 3 now in their records, I don't know because I couldn't -- 4 MS. YEE: Okay. 5 MR. LAMBERT: -- I couldn't find it. 6 MS. YEE: Yeah. 7 MR. HORTON: Please continue. 8 MR. LAMBERT: The next item is Exhibit 7, 9 page 1. And what this this is -- is a credit memo. And 10 the taxpayer's arguing that there were a couple invoices 11 that were being reversed out. 12 And I can't tell from this particular invoice 13 that the sales that are in question, whether they 14 were -- the sale was actually rescinded. It appears to 15 me that just deposits are being applied to an invoice 16 1002550, which is noted above the comments. 17 MR. HORTON: Okay. One second, are you 18 tracking with this as well? 19 MS. CLARKE: Yes. 20 MR. HORTON: Okay. 21 MR. LAMBERT: And the last item that I want to 22 bring to your attention is the -- is Exhibit 8, page 1. 23 And this appears to be a quotation that -- a purchase 24 from one of their vendors where sales tax is included 25 and the only thing I'll point out is that it appears to 26 be a quotation instead of a purchase invoice and the 27 Department's unaware of whether tax was actually paid to 28 the supplier or how the billing actually took place. 11 1 And that -- that concludes my comments in 2 regards the Department's exhibits. 3 The last area that I want to discuss is the 4 penalty. I will note that the -- the auditor -- I am 5 sorry, the taxpayer went through a prior audit on this 6 account and there was a minimal change. It was due to 7 freight in not being taxed. 8 And then three permits ago for the period 1985 9 through 1992, the taxpayer was -- was audited under a 10 company called Hangups (verbatim). And it was found 11 that $3.3 million was unreported during that period. 12 And there was a 25 percent penalty applied. 13 So, based on that, the Department concurs with 14 the Appeals decision and recommendation -- the Appeals 15 Division's decision and recommendation. 16 And we're available for questions. 17 MR. HORTON: Thank you very much. 18 The taxpayers have five minutes on rebuttal. 19 MS. ROSE: Just to that issue that he had 20 from -- the previous issue that he said we owed 21 3 million, we actually went all the way to the Supreme 22 Court. And we had an attorney, David Kirsch. And we 23 actually won and all that money was rebated because they 24 actually liened my account, took the money from my 25 house. 26 And then we continued to try that case and won 27 it. And, so, you refunded all of that money on that 28 case to us. 12 1 And you're right, we had one other previously 2 where we didn't know we had to charge sales tax on 3 freight. 4 And we learned that and we've always charged 5 sales tax on freight. 6 MR. HORTON: Okay. 7 MS. ROSE: We admitted that, but we actually 8 won and it's like case law now. It's a big deal for my 9 attorney. 10 MR. HORTON: Okay. 11 MS. CLARKE: And then as far as the invoicing, 12 there was a few mistakes on the manual. But if you 13 look, I provided copies of the actual daily sales of the 14 days that I do every day. And in there it shows that 15 that was paid on that date. 16 And as far as the credit memo, Sue B. Sims 17 (verbatim) was credited that amount for that invoice. 18 She -- that credit was applied for invoice No. -- 19 invoice No. 10026050. It was applied towards that. And 20 the actual sales tax wasn't -- wasn't posted until 21 5-3-06 because that's when the credit memo occurred. 22 And we did have to credit it back for both -- 23 there's two invoices -- because of the length of time of 24 the back order. She was one of our long time clients. 25 So, we -- because she was a good client, we 26 did -- you know, it was taking a back ordered piece that 27 was taking a long time. So, that invoice was credited 28 to her. 13 1 MR. HORTON: Okay. Anything else? 2 MS. CLARKE: Oh, and the Viking Door, the 3 proposal -- I can't find the 2005 Viking Door file to 4 show the exact amount that was paid on this. 5 But this proposal was attached to the back of 6 Tuler (verbatim) invoices. And Tuler is also another 7 big construction job that we did. And we always paid 8 Viking Door sales tax. 9 But I can't find the files from that long ago. 10 And, it's just from so long -- I didn't have the Viking 11 Door for 2005. I couldn't find it under miscellaneous, 12 but this quote was on the back and we did pay sales tax 13 to Viking Door. 14 MR. HORTON: Okay. 15 MR. WHEELER: Part of the hearing summary 16 talked about how they weren't paying sales tax when the 17 sales occurred. But on a lot of their invoices they get 18 a deposit up front. Like a lot of these ones in 19 February, you see here they got a deposit and they 20 collected the rest of the money on COD when they 21 delivered the furniture. And that's when they complete 22 the sale and sales tax was paid. 23 So, I mean, at most what we're talking about is 24 a timing difference there, the sales tax was still paid, 25 but a lot of it is deposits up front. 26 MS. CLARKE: We get 50 percent at the time of 27 purchase. And then once we deliver, you collect the 28 balance, which includes the sales tax. 14 1 MR. HORTON: Okay. Member Steel. 2 Mr. Levine, could you, at some point -- we're 3 probably going to ask about the case, the Supreme Court 4 case. 5 MS. STEEL: I will now hear from the taxpayer 6 that the income tax report was different numbers, over a 7 million dollars and deposit was different (indicating) 8 $1.5 million. 9 That's a lot of difference. 10 MS. CLARKE: Well, those weren't the -- the 1.5 11 was the cost of goods sold report that they did. 12 I don't have any record showing that the bank 13 deposits were different. The only record I have of 14 1.5 million is that cost of goods sold, which was the 15 first audit. 16 And that's -- I provided all cost of goods sold 17 reports to show that their -- their numbers are 18 overstated for our cost of goods. And I have our actual 19 numbers from the reports. 20 But I don't have any records of the bank 21 statements. I just said -- it says because of the sales 22 by markup, the cost of goods sold was 1.5. I don't have 23 anything for the bank statements for 1.5. 24 MS. STEEL: Different than what you deposited? 25 MS. CLARKE: Right. 26 MS. STEEL: What you reported? 27 MS. CLARKE: Yeah, it was just cost of goods -- 28 MS. STEEL: Mr. Lambert -- 15 1 MS. CLARKE: -- they did that markup for that 2 was an incorrect markup, which I provided all of those 3 costs of goods reports 'cause that was the first audit 4 that they did. 5 MS. STEEL: So, Mr. Lambert, that's what 6 taxpayer's saying about the deposits -- bank deposits 7 about $1.5 million difference. 8 MR. LAMBERT: There was. 9 MS. STEEL: That's what you told us. 10 MR. LAMBERT: That's -- that's right. If 11 that's what I said, I have the schedule here that shows 12 that difference. 13 MS. STEEL: Okay. Did you hear what taxpayer 14 just told us? 15 MR. LAMBERT: Not completely. 16 MS. STEEL: Okay. Could you explain? 17 MS. CLARKE: I just -- I never had the bank 18 deposits, the only thing I have is the cost of goods 19 markup and that was a difference of 1.596815. 20 MR. LAMBERT: Well, I have on Schedule 12B, a 21 bank deposit analysis, it shows a by month cash 22 deposits, credit card deposits and has a total -- totals 23 it quarterly and then it subtracts labor sales reported, 24 resales, adjustment for check reversal, adjusted bank 25 deposits, sales tax included. 26 And it comes up with an adjusted figure of 27 $4.9 million and it compares to reported taxable sales 28 of $3.3 million, for a difference of $1,557,000. 16 1 MS. STEEL: To taxpayer, that, you know, the 2 exhibit that we got from the Department and they were 3 like deposits that you didn't charge sales tax on the 4 deposit. 5 MS. CLARKE: Right. 6 MS. STEEL: And the gentleman just said that 7 you charge it when you ship it out. 8 MS. CLARKE: Right. 9 MS. STEEL: So, do you have any of those 10 receipts that you charged and it was deposited? 11 MS. CLARKE: They're in the packets of -- the 12 packets I gave for the daily sales packets. 13 MS. STEEL: Right. 14 MS. CLARKE: There's a lot of delivered sales 15 in there. 16 MS. STEEL: So, did we check those delivery 17 receipts and then found out that that deposit was 18 deposit -- I mean, deposit, actually they charged sales 19 tax on the total amount? 20 MR. LAMBERT: I guess I'm not tracking 21 completely. 22 Are you referring to the bank -- 23 MS. STEEL: Yeah. 24 MR. LAMBERT: -- bank statements? 25 MS. STEEL: Your exhibit here (indicating), 26 that what you are saying is those deposits that they 27 never charged, you know, 1350 that you -- 28 MR. LAMBERT: Okay. 17 1 MS. STEEL: -- on the line -- 2 MR. LAMBERT: Yes, yes. 3 MS. STEEL: -- you showed me, those deposits 4 never charged -- you know, sales tax was never charged 5 on those deposits. 6 That's what I heard from you. 7 MR. LAMBERT: Well, I'll clarify. 8 MS. STEEL: Okay. 9 MR. LAMBERT: The tax was charged on those 10 sales. 11 MS. STEEL: Okay. 12 MR. LAMBERT: All right. When it went -- when 13 the figures went into the sales journal -- 14 MS. STEEL: Uhm-hmm. 15 MR. LAMBERT: -- at least the revised sales 16 journal, when they gave us the journal, it just showed a 17 deposit. 18 We couldn't find anywhere on the sales journal 19 for 2005 where they reported those sales or recorded 20 those sales as taxable. 21 MS. STEEL: But when you see the invoice that 22 that send it out when they shipped out those merchandise 23 and then they charge the sales tax. 24 So, this one that -- this deposit doesn't mean 25 that they didn't charge sales tax on those deposits if 26 they did the total amount on the invoice, right? 27 MR. LAMBERT: If -- I agree. What we're 28 showing -- what the sales journal shows is that they put 18 1 in an amount for a deposit. And I agree, they charged 2 tax on the invoices, there's no question about that. 3 MS. STEEL: Okay. 4 MR. LAMBERT: They charged the tax on the 5 invoice. But we can't find where they ever recorded it 6 on that sales journal, where they put it in the taxable 7 column with the sales tax. 8 We show that they collected the first deposit 9 and there's just a second deposit. It never shows up on 10 there. And that -- 11 MS. STEEL: I see. So, you saw the deposit was 12 deposited here without charging sales taxes, but on the 13 invoice you couldn't find that that matching amount was 14 as a deposit and you didn't see the total amount? 15 Is that what you are saying? 16 MR. LAMBERT: Well, kind of. I mean, we -- we 17 didn't see where -- instead of a deposit, what I would 18 say is we didn't see where it was recorded in the sales 19 journal, where it showed that it was the taxable sale. 20 It just -- all that shows up are the deposits. 21 We don't see where the -- 22 MS. STEEL: So, you don't know that all these 23 on the line that you show -- showed us from the exhibit, 24 so, those are all taxable or not? 25 MR. LAMBERT: No, they are taxable because -- 26 MS. STEEL: It is taxable, but you are not 27 seeing that on the invoices -- 28 MR. LAMBERT: We're not -- 19 1 MS. STEEL: -- that -- 2 MR. LAMBERT: -- we're not seeing it on the 3 sales journal. 4 MS. STEEL: Sales journal. 5 MR. LAMBERT: Yeah, 'cause we see it on the 6 sales invoices. 7 MS. STEEL: Okay. 8 MR. HANKS: Ms. Steel, just to clarify too, I 9 think what -- what we're trying to say is that these 10 transactions were recorded as deposits. They weren't 11 recorded as taxable transactions. 12 And this would have been the records that they 13 would have used to report these transactions to the 14 Board. 15 So, it didn't appear in the columns where they 16 identified them as taxable sales. So, though they 17 charged tax on the sale, no question about that, those 18 transactions appear not to have been reported to us 19 because they weren't journaled. 20 MS. MANDEL: Question? 21 MS. STEEL: So, if they charged it on the sales 22 tax -- I mean, the -- each invoice means they charged 23 sales tax on it and then they received and they reported 24 it? 25 MR. LAMBERT: Well, that's the problem is we're 26 okay up to the point until we see "reported." 27 They charged it. They collected it. We don't 28 see where it was -- 20 1 MS. STEEL: So, what happened those -- 2 MR. LAMBERT: -- reported and that's -- 3 MS. STEEL: -- invoices then? 4 MR. LAMBERT: What happened? 5 MS. STEEL: Those seven invoices and then three 6 we found that and two additional that, you know, we 7 found that they charged sales tax on it -- so, did we 8 count those invoices and new one that they provided us, 9 all those documents that later on that they provided? 10 MR. LAMBERT: There were seven invoice in 11 question. 12 MS. STEEL: Right. 13 MR. LAMBERT: And are you referring to the two 14 where they paid tax to their supplier? 15 MS. STEEL: Right. 16 MR. LAMBERT: No, that wasn't taken -- we 17 didn't have that information before. 18 It wasn't taken into consideration. 19 MS. STEEL: So, we going to -- we are going to? 20 MR. LAMBERT: Well, we don't recommend that. 21 MS. STEEL: Why is that? 22 MR. LAMBERT: And the reason is is because we 23 still believe we're -- we're conservative in the figure 24 that we've arrived at and there's no verification that, 25 in fact, that tax has been paid to the supplier. 26 MS. STEEL: But you found those invoices that 27 they paid the taxes? Out of those seven, how many did 28 you find that? 21 1 MR. LAMBERT: They paid taxes on? 2 MS. STEEL: Yeah? 3 MR. LAMBERT: None. 4 MS. STEEL: None? So, what did you find from 5 those seven new invoices? 6 MR. LAMBERT: What did we find? 7 We found that they col -- they charged and 8 collected the tax, but they didn't remit it. 9 MS. STEEL: Oh, I see. 10 Thank you. 11 MR. HORTON: Thank you. Mr. Runner, then 12 Miss Mandel. 13 MR. RUNNER: Just real quickly, I want to -- I 14 want to follow up a little bit on this little issue with 15 the negligence penalty justified by a court issue in 16 terms of that. 17 I -- somebody want to -- Mr. Levine, you want 18 to give us a little back view? Can you give me the 19 background on the -- I mean, I assume, simply stated, I 20 guess as I had heard it, is they were -- they had been 21 penalized before. They appealed it through the court 22 process. They won at the Supreme Court. 23 MS. ROSE: Yes. 24 MR. RUNNER: Is it -- and, so, they beat the 25 BOE at the Supreme Court; is that correct? 26 MR. LEVINE: The Board of Equalization, I'm not 27 aware -- 28 MR. RUNNER: Is that us? 22 1 MR. LEVINE: -- of the case. 2 MR. RUNNER: Was that our case? 3 MR. LAMBERT: I'm unaware of it. 4 MS. MANDEL: Well -- 5 MR. TUCKER: I believe it's In Re Renovisers 6 (verbatim) and it established -- 7 MS. MANDEL: I'm sorry? 8 MR. TUCKER: -- I'm sorry, this is Robert 9 Tucker of the Legal Department. 10 I believe it's In Re Renovisers and it 11 establishes a clear and convincing standard for fraud 12 cases. 13 And it was used to confirm that that's what 14 used here. 15 MR. LEVINE: I believe that's Ninth Circuit. 16 MR. TUCKER: Yes. I believe that's the case to 17 which she's referring. It's the first I have heard of 18 it today, so, I apologize if I have misstated. 19 But I believe that is it. 20 MR. RUNNER: Okay. I mean, I'm just a little 21 confused then, because we used it as our justification 22 for a negligence penalty. 23 MR. LAMBERT: Well, let me -- 24 MR. RUNNER: Well, I thought I heard that's 25 what was -- 26 MR. LAMBERT: -- I used the fact that they had 27 been audited twice before, once under this permit and 28 once previously. 23 1 Whether they had been charged a negligence 2 penalty or a fraud penalty is kind of beside the point 3 in the fact that they had been audited. They should be 4 aware to keep proper records. 5 The reason why they were given a 10 percent 6 negligence penalty was because of the condition of the 7 records and -- 8 MR. RUNNER: I believe that you were the one 9 who brought up the issue of that case. 10 MR. LAMBERT: I did. 11 MR. RUNNER: And that -- and it was in the 12 context of the negligence penalty? 13 MR. LAMBERT: That's correct. 14 MR. RUNNER: Okay. I just -- 15 MR. LAMBERT: Yeah. 16 MR. RUNNER: That's -- okay. So, I mean 17 basically we're trying to justify, which is fine, the 18 issues for why the 10 percent negligence penalty is. 19 You used two issues. One was the previous 20 audit -- actually, the two previous audits then? 21 MR. LAMBERT: That's correct. 22 MR. RUNNER: And that's how you -- that was 23 your justification for the negligence penalty? 24 MR. LAMBERT: That is correct. 25 MR. RUNNER: Okay. Let me go back to the 26 taxpayer then real quick. 27 So, in one of those cases, then tell me a 28 little bit about what -- quickly, what that was about 24 1 and if, indeed, in that case you were -- you had won 2 your case against then the BOE? 3 Is that -- 4 MS. ROSE: That's correct. 5 MR. RUNNER: -- just tell me -- you tell me. 6 MS. ROSE: Yes, that's correct. It was -- it 7 was a long time coming. It was like probably seven 8 years of our attorney going back and forth and back and 9 forth. 10 But we took it all the way to the Supreme 11 Court. And you're right, it was the -- what was that, 12 Ninth Court of Appeal or whatever. 13 Anyway -- and we won. And all of the money 14 that they took from the sale of my house and wiping out 15 my bank account all came back to me. 16 MR. RUNNER: Okay. 17 MS. ROSE: All of it. 18 MR. RUNNER: So, it wasn't the Supreme Court, 19 it was the Ninth Circuit that actually -- 20 MS. ROSE: Yeah. 21 MR. RUNNER: -- made that decision? 22 MR. LEVINE: That was a fraud case and I don't 23 remember the details. 24 But if they got a refund because of fraud, it 25 would have been statute of limitations. But you 26 understand that when someone -- when the Department 27 asserts fraud and doesn't meet the standard, in almost 28 every case there's negligence. 25 1 But I don't think that the Appeals Division 2 relied on any prior audit of a related company to uphold 3 the negligence penalty. 4 MR. RUNNER: Well, that may be the case, then 5 it -- I guess it shouldn't have been given as an 6 example? 7 MR. LEVINE: I have no comment. 8 MR. RUNNER: Okay. I guess that -- 9 MR. LEVINE: The Department has to decide -- 10 MR. RUNNER: -- I guess that's what I'm 11 struggling with. If it doesn't have anything to do with 12 the negligence penalty, don't bring it up to us. 13 Okay, does that make sense, to me? I mean, 14 I -- 15 MR. LAMBERT: It does. I'll tell you -- I 16 could tell you the reason why I brought it up, but -- 17 MS. MANDEL: Well, then don't. 18 MR. RUNNER: Don't. Okay, I am just -- 19 MR. LAMBERT: I understand. 20 MR. RUNNER: I'm just a little concerned that 21 all of a sudden we -- again, in the simplest form, we 22 believe justification for a negligence penalty is A and 23 B and all of a sudden I find out that B was actually -- 24 I am not sure how to phrase this -- overturned or 25 whatever. 26 But, anyhow, the taxpayer won in the Ninth 27 Circuit and got their money back? 28 MS. ROSE: Yes. 26 1 MR. RUNNER: So, I just -- that's all. 2 That's fine, I'm done. 3 MR. HORTON: I feel a little compelled just to 4 clarify. 5 It doesn't sound as if the Supreme Court or the 6 Appellate Court ruled in favor of the taxpayer relative 7 to the issue, but more relative to the fraud and the 8 statute of limitations. 9 And, so, therefore, what would have happened is 10 in the fraud they could have gone back to inception, or 11 eight years or whatever. 12 And, so, you would have gotten a huge refund if 13 they said fraud didn't exist. Because what the courts 14 would have said is that, "Board of Equalization, you 15 could have only gone back two years or three years." 16 And, so, unless they actually overturned the 17 liability itself, the essence of the liability aside 18 from the fraud, liability would have been held up. 19 So, that seems to be the interpretation. 20 Ms. Mandel. 21 MS. MANDEL: No, I think you guys all covered 22 it. 23 MR. HORTON: Okay. 24 MS. MANDEL: But -- the only thing -- but it 25 would come up later -- was there were so many exhibits 26 that came in in the last week from the taxpayer, just 27 some them turned out to be so huge they had to be cut in 28 three parts to e-mail it through the pipeline to me from 27 1 Board Proceedings. 2 And I kept hearing Mr. Lambert say he couldn't, 3 you know, find things or couldn't connect things. And 4 there's the issue of the deposits, where they say, 5 "Well, those were just deposits. And when we 6 finalized the sale by actually delivering the 7 product, that's when we got the sales tax and 8 reported the sales tax." 9 So, to me it almost sounds like -- and she's 10 got her box of documents and she thinks she can show 11 them where every little thing is and it almost sounded 12 like they needed to have a little confab to trace the 13 paperwork. 14 That's what it sounded like to me at certain 15 points. 16 MR. HORTON: Okay. 17 MS. MANDEL: So, I don't know if -- 18 MR. HORTON: Maybe that's a question of the 19 taxpayer, if I may? 20 Of the seven transactions that the Board took 21 exception to, is it your belief that those were 22 ultimately reported? 23 MS. CLARKE: Yes. 24 MR. HORTON: And you have documents to support 25 that they were ultimately reported? 26 MS. CLARKE: Yes. 27 MR. HORTON: And have you made those documents 28 available to the Board? 28 1 MS. CLARKE: Yes. Those were in the packets of 2 dailies. 3 MR. HORTON: That's the information that you 4 provided to -- 5 MS. CLARKE: Yes. 6 MR. HORTON: -- to us and the Board? 7 MS. CLARKE: Yes. 8 MR. HORTON: Of the Department, have you had an 9 opportunity to review those? 10 MR. LAMBERT: Yes. 11 MR. HORTON: And you've traced them through the 12 system and believe they were or were not subsequently 13 reported? 14 MR. LAMBERT: We couldn't tell that they were 15 reported. 16 MS. MANDEL: So, he -- that means you can't 17 figure out their paperwork? 18 MR. LAMBERT: No. 19 MS. MANDEL: Or -- 20 MR. LAMBERT: No, it means I traced it. It was 21 not in the sales journals that were provided to us at 22 the Appeals conference. 23 The sales were there, the deposits were 24 there. 25 MS. CLARKE: I wasn't allowed to give those. 26 MR. LAMBERT: But the sales -- the sales 27 doesn't -- it does not show up. It's -- the sales 28 journal that we have, that they just presented us with 29 1 the 303 pages is -- has been changed from what it was at 2 the Appeals conference. 3 MR. HORTON: Okay. Further discussion, 4 Members? 5 Is there a motion? 6 MS. YEE: Move to to take the matter under 7 submission. 8 MR. HORTON: It's been moved by Member Yee to 9 take the matter under submission. Second by Ms. Mandel. 10 Without objection, Members? Such will be the 11 order. 12 Thank you very much for coming before us. The 13 Board will discuss your matter later on today and send 14 you a written report of our decision. 15 MR. WHEELER: Thank you. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 30 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 SEPTEMBER 21, 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 30 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: October 21, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 31