1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 15, 2011 10 11 12 SALES AND USE TAX APPEAL HEARING 13 APPEAL OF 14 C2a GMRI, INC. 15 NO. 433701 (OH) 16 C2b GMRI, INC. 17 NO. 434928 (OH) 18 AGAINST PROPOSED ASSESSMENT OF 19 SALES AND USE TAX 20 21 22 23 24 25 26 27 Reported by: KATHLEEN SKIDGEL 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 Michelle Steel 4 Vice-Chairwoman 5 Betty T. Yee Member 6 George Runner 7 Member 8 Marcy Jo Mandel Appearing for John 9 Chiang, State Controller (per Government Code 10 Section 7.9) 11 Diane G. Olson Chief 12 Board Proceedings Division 13 For Board of 14 Equalization Staff: David Levine Staff Counsel 15 16 For Department: Cary Huxsoll Tax Counsel 17 Legal Department 18 Robert Tucker Tax Counsel 19 Legal Department 20 Kevin Hanks Chief, Headquarters 21 Operations Division 22 23 For Petitioner: Craig B. Fields Attorney 24 Carley A. Roberts 25 Attorney 26 Trudy Blakeman Representative 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 15, 2011 4 ---oOo--- 5 MR. HORTON: Thank you. Ms. Olson. 6 MS. OLSON: Our next item is G2a and b, GMRI, 7 Incorporated. 8 Please come forward. 9 MR. HORTON: Mr. Levine. 10 MR. LEVINE: Good morning, Chairman Horton, 11 Members. 12 MR. HORTON: Good morning. 13 MR. LEVINE: David Levine for the Board, for 14 the Appeals Division. 15 The issues in these petitions of GMRI, Inc. are 16 whether gratuities added by Petitioners to the bills of 17 large parties as specified by menus were mandatory, and 18 thus, subject to tax, and whether the amnesty interest 19 penalty should be relieved. 20 MR. HORTON: Thank you very much. 21 The taxpayer has 10 minutes to introduce 22 themselves and make their presentation. Please commence 23 with your introduction. 24 MR. FIELDS: Good morning, Mr. Chairman. 25 MR. HORTON: Good morning. 26 MR. FIELDS: Members of the Board. 27 My name is Craig Fields. I'm with Morrison and 28 Forester. And with me, to my left, is my partner Carley 3 1 Roberts. We're representing GMRI today. And to 2 Ms. Roberts' left is Ms. Trudy Blakeman who is the 3 Director of Property and Sales Tax of Darden 4 Restaurants, Inc., the parent company of GMRI. 5 MR. HORTON: Welcome. 6 MS. ROBERTS: Good morning. 7 MR. FIELDS: Thank you. 8 The issue here today for the Board for this 9 matter is whether the gratuities that are included on 10 checks of parties of eight or more customers are 11 mandatory and subject to sales tax when the menus 12 specifically refer to the gratuities as optional and 13 where there is documentary evidence demonstrating that 14 the company's intent and policy is that gratuities are 15 optional, and there's further documentary evidence 16 demonstrating that on approximately one-third of the 17 instances, either the suggested gratuity is not added to 18 the bill or is changed. 19 GMRI operates restaurants around the country, 20 including in California. And the restaurants at issue 21 are the Red Lobster and the Olive Garden restaurants. 22 And at the end of the meal, GMRI provides its 23 customers with a check. And the check will have the 24 total amount due and there will be a line for the tip. 25 And the customary gratuity is 15 to 18 percent. Some 26 customers will add more, some less, some just double the 27 tax. But it is up to the customer how much of gratuity 28 they want to leave. There is no requirement that they 4 1 leave anything. 2 For larger parties, where the servers are 3 required to do more work, to increase the likelihood 4 that the receiver -- that the server will receive the 5 customary gratuity, GMRI, at times, will provide a 6 suggested gratuity on the bill. 7 The menus state -- and there is Exhibit D for 8 Olive Garden, Exhibit C to the brief for Red Lobster. 9 And the menus for Red Lobster state, quote, "For your 10 convenience, an optional 15 percent gratuity will be 11 added to parties of eight or more." Closed quote. 12 For the Olive Garden it provides, "An optional 13 18 percent gratuity will be added to parties of eight or 14 more." So both of the menus provide that the gratuities 15 are optional. 16 We were recently asked what the customers saw 17 after the meal. And we have as Exhibits 8 and 9, which 18 I believe are before you, our guest checks for Red 19 Lobster and Olive Garden. And these guest checks are 20 the itemized menu items that the guest receives. And 21 you'll see there's highlighted language on the bottom, 22 and the language is the same language that appears on 23 the menu. 24 And for these -- these are current. These are 25 what the guests ordinarily get and discard after the 26 meal. But it's the same language on the menu. And for 27 Red Lobster, again, for your convenience an optional -- 28 now it's 18 percent. It was 15 percent, gratuity will 5 1 be added for parties of eight or more. And so both 2 before and after the meal the customer is informed that 3 these gratuities are optional. 4 And the gratuities are not always added. 5 Unlike some restaurants where gratuities are always 6 added at the end of the meal for large parties, in this 7 instance, with GMRI, they are not always added. 8 The manager must affirmatively make a 9 determination to add the gratuity and does so by swiping 10 his card through the register, the Point of Sale system. 11 And often times the manager will not do that. It's up 12 to the manager's discretion. And if the manager feels 13 the restaurant is busy and service isn't up to par, the 14 manager will not add it. If a customer complains, the 15 manager will not add it. 16 And even if the manager does add it, it's 17 entirely up to the customer whether or not they want to 18 pay it. They have the ability to alter it in any way 19 they want. They can raise it, decrease it, or have it 20 eliminated entirely. There's no legal obligation for 21 them to pay it at all. 22 Exhibit E to our brief is our POS report, our 23 Point of Sale report. And that shows all of the large 24 parties for all of the restaurants in California during 25 the relevant period. And what that shows is that 26 12-and-a-half percent of the time the suggested gratuity 27 is not on the invoice. So either the manager did not 28 put it on, or the manager did put it on and it was 6 1 removed because the customer so requested. 2 In Exhibit 5, we have examples of physical 3 guest receipts which show instances where there was no 4 POS gratuity added. We've redacted confidential 5 information of the customer on these. 6 In addition to 12-and-a-half percent of the 7 time there not being any gratuity added, another 16.4 8 percent of the time the manager has added the gratuity 9 and the customer has changed it. And in example six we 10 have examples of physical guest receipts where this has 11 occurred. And there's one for each of the restaurants. 12 And so what this demonstrates is that the POS 13 report has established that almost 29 percent of the 14 time, 28.9 percent of the time either no suggested 15 gratuity was added or it was added and it was removed or 16 changed. 17 We have Exhibit 7, which is up on our Power 18 Point here, which shows the calculation of how we got 19 there. It shows the 12.5 percent where nothing was 20 added, and then the 16.4 percent which gives us 28.9 21 percent of the time that the bill reflects a different 22 amount from what is stated as a suggested gratuity, 23 where it's neither the 15 nor the 18 percent, and that 24 the gratuity varies and the suggested gratuity is 25 consistent with GMRI's policy and intent that the 26 gratuity is optional. 27 Exhibit I to our brief is the written policy of 28 GMRI that provides that if a -- if the gratuity is added 7 1 to a bill and the customer expresses concern, the 2 manager is instructed to either remove it or alter it in 3 any way that the customer so requests. 4 And the suggested gratuity is treated by GMRI 5 the same as all other gratuities. All the gratuities at 6 the end of the shift go to the server. It's not 7 incorporated or co-mingled with any of the cash of the 8 restaurants, and there's no economic benefit to GMRI. 9 The regulation at issue here, Regulation 1603, 10 it contains a presumption that if a restaurant, the 11 retailer, adds an amount to the bill, there's a 12 presumption that it's mandatory. And the regulation 13 distinguishes between optional payments and mandatory 14 payments. It says: 15 "Optional payments are not subject to tax, 16 but mandatory payments are considered part of 17 the meal and subject to tax." 18 And since it's a presumption, presumptions can 19 be overcome, and the regulation provides ways in which 20 the presumption can be overcome. And we think we fall 21 squarely within one of them; and that is Regulation 22 1603(g)(2)(C)(2). And that provides: 23 "Guests receipts and payments showing that 24 the percentage of tips paid by large groups 25 varies from the percentage stated on the menu." 26 And we think our Exhibit E does exactly that. 27 It shows that 12-and-a-half percent of the time, 281 28 times, the suggested gratuity is not on the bill. And 8 1 16.4 percent of the time, another 371 times, the 2 customer changes it. 3 So a total of 652 times there is a variance 4 between what is on the bill and the suggested gratuity. 5 And we think that just falls squarely within this 6 regulation, that we overcome the presumption. And we -- 7 that's different from other cases that have not been 8 able to do that. 9 We also believe that the written policy of the 10 company, Exhibit I, along with the differences in the 11 amounts being charged, is a second way to overcome this 12 document -- this presumption. 13 And the definitions also in the regulation 14 establish that they're not a mandatory payment. The 15 regulation has a definition of an optional payment as an 16 amount that the customer leaves, over and above the 17 actual amount due for the food. 18 And a mandatory payment is an amount negotiated 19 between the retailer and the customer in advance of the 20 meal. And here, there are no negotiations with respect 21 to the gratuities before the meal. 22 The price of the food and drink, those are 23 negotiated and those are mandatory. If you look at 24 Exhibit L, the Red Lobster menu, there's a jumbo shrimp 25 cocktail for $7.75. And if a large group comes in and 26 somebody orders that shrimp cocktail and they eat the 27 shrimp cocktail, they formed an agreement to pay that 28 $7.75. That is what they would pay. They can't say 9 1 they want to pay more or they want to pay less 2 afterwards. 3 But, the suggested gratuities are different. 4 The menu states they are optional, and that's how they 5 are treated in fact and in law. The customer is not 6 legally obligated to pay them. The manager may or may 7 not put them on. If the manager does put them on, the 8 customer has the ability to have it taken off, increased 9 or decreased. There is no agreement with respect to 10 suggested -- the suggested gratuities. And I submit 11 that these gratuities are not mandatory under any 12 definition; definition in the regs, any other 13 definition -- common definition of the word mandatory. 14 These gratuities are just not mandatory. 15 Finally, I would say that these suggested 16 gratuities do not constitute a taxable gross receipt 17 under the statute, which is Revenue and Taxation Code 18 Section 6012, because these gratuities are not part of 19 the price of the meal. 20 GMRI charges all of its customers the same 21 price for the food. It doesn't charge different 22 customers different amounts. Here the suggested 23 gratuities are like all other gratuities; they're a 24 payment by the customer to the server for a nontaxable 25 service, and they're not a payment by the customer to 26 GMRI for a meal. 27 Thank you. 28 MR. HORTON: Thank you very much. 10 1 The Department have 10 minutes to make their 2 presentation. Please commence with your introduction. 3 MR. HUXSOLL: Good morning, Mr. Chairman, 4 Members of the Board. 5 MR. HORTON: Good morning. 6 MR. HUXSOLL: I'm Cary Huxsoll from the Legal 7 Department, along with Robert Tucker and Kevin Hanks 8 representing staff. 9 The amounts Petitioner added as gratuities to 10 its customers' bills were mandatory and, therefore, part 11 of Petitioner's taxable receipts. 12 Petitioner operates the Olive Garden and Red 13 Lobster restaurant chains. The menu for each restaurant 14 indicates that an optional 15 or 18 percent gratuity 15 will be added for parties of eight or more. Petitioner 16 did not include the amounts collected in its reported 17 taxable sales. 18 Under Regulation 1603(g)(2)(B), when a menu 19 contains statements such as the ones Petitioners -- on 20 Petitioner's menus, notifying customers that tips, 21 gratuities or service charges will or may be added to 22 the customer's bill, an amount automatically added to 23 the bill presented to and paid by the customer, is a 24 mandatory charge and subject to tax. 25 An amount is considered automatically added 26 when the retailer adds the tip to the bill without first 27 conferring with the customer after service of the meal 28 and receiving approval to add the tip or without 11 1 providing the customer with the option to write in the 2 tip. 3 As I stated earlier, Petitioner's menu did 4 contain statements the gratuities will be added to 5 customer's bills. These amounts were automatically 6 added to the customer's bills. 7 Petitioner has stated that the amounts were 8 added when the manager, at his or her discretion, 9 determined it was appropriate to add the gratuity. 10 These amounts are added without first consulting with 11 the customers. 12 Petitioner's guest conversations, which are 13 attached as Exhibit 1 to the D&R, confirmed this. These 14 conversations include the quote, "I understand why you 15 are concerned since you might have wanted to add the tip 16 yourself." The amount is added without first conferring 17 with the customer, thus, it is automatically added to 18 the bill. 19 Petitioner's menu informs customers that 20 amounts designated as gratuities will be added to the 21 customer's bills. These amounts are then automatically 22 added to the customer's bills. Therefore, these amounts 23 are mandatory and subject to tax. 24 We concur with the recommendation of the 25 Appeals Division. 26 Thank you. 27 MR. HORTON: On rebuttal, please. 28 MR. FIELDS: Thank you, Mr. Chairman. 12 1 The regulation provides that if the retailer 2 puts on the gratuity, that there is a presumption, not 3 that it is an irrebuttable presumption, but that there 4 is a presumption that it is mandatory. And then it 5 provides instances how that presumption can be overcome. 6 And one of the ways to overcome the presumption 7 is to have guest receipts and payments showing that the 8 percentage of tips charged varies from the percentage 9 stated on the menu. And I believe we have done that; 10 28.9 percent, almost a third of the time, it varies from 11 the amount stated on the menu. And I think we're square 12 under this regulation that we have overcome the 13 presumption. 14 And I would like Ms. Roberts to read some -- 15 some things into the record with respect to what the 16 staff has previously said is required to overcome a 17 presumption and to establish that a payment put on by 18 the retailer is not a mandatory payment and is not 19 subject to tax. 20 MS. ROBERTS: Attached as Exhibit 10 that you 21 have there in front of you is a, uh, copy of select 22 pages from the Main Street hearing which was before your 23 Board on August 25th, 2010. The pertinent portions that 24 I'll be reading are highlighted in yellow, starting with 25 a question between Ms. Yee and Mr. Huxsoll. 26 "MS. YEE: ... I don't believe the 27 declarations are sufficient to corroborate the 28 policy that was in place, but what would be 13 1 sufficient evidence on the part of the 2 Petitioner that would satisfy the requirement?" 3 "MR. HUXSOLL: ... you would see a variance 4 ... in the amounts that's paid in the ... tips 5 by large parties ... in terms of the guest 6 checks. You wouldn't have one consistent 7 amount being charged to a large party. 8 "... but in a sense when they're voluntary 9 we would expect to see variance[s] amongst 10 different customers of the Petitioner." 11 Skipping further down, there's another 12 statement on the next page by Mr. Huxsoll. 13 "No, we asked Petitioner's previous 14 representative for any records of variance in 15 these amounts and the previous representative 16 stated that none was available." 17 Skipping to the next page. This is 18 Mr. Tuckel -- Mr. Tucker, uh, co-counsel to Mr. Huxsoll 19 at the time. 20 "... I think the answer you're looking 21 for" -- 22 And this is an exchange between Ms. Steel and 23 Mr. Tucker. 24 "... I think the answer you're looking for, 25 we would look at the invoices, themselves, and 26 it would show that there's some sort of 27 variance," that's -- "that it's not 15 percent 28 every time." 14 1 MR. FIELDS: And I think that during this 2 hearing the Department had agreed that there can be 3 variances. And if you do have a variance, you can show 4 that it is not mandatory. 5 And I've heard nothing today to say otherwise. 6 And the regulation specifically does say that the 7 presumption can be overcome, and I think we've overcome 8 the presumption. 9 Thank you. 10 MR. HORTON: Thank you very much. 11 Discussion? 12 Member Yee. 13 MS. YEE: Thank you, Mr. Chairman. 14 I want to focus on this last point that the, 15 um, Petitioners made. And, uh, I guess the question for 16 the Department, uh, in terms of looking at the receipts, 17 um, did we, um, look at how many actually varied from 18 the stated policy on the menus? 19 And I guess before you answer that question, 20 um, does it matter? 21 MR. HORTON: Yeah. 22 MR. HUXSOLL: Um, in -- in examining the 23 receipts, uh, the Department picked up, um, the amounts 24 that were -- the 15 percent that was the, uh -- the 25 amount automatically added by the POS system in this 26 case. 27 They -- in terms of looking at -- looking for 28 variance, um, the presumption that's discussed in 15 1 Subdivision C does not apply in this case because of the 2 fact that, unlike in the case that Ms. Roberts read 3 from, Petitioners here acknowledged that the amount is 4 automatically added based on their description of the 5 facts; that is, that the manager adds the amount without 6 first conferring with the customer. 7 Um, and so, uh, it -- it -- we don't think that 8 it matters in this particular case. 9 MS. YEE: Okay. Then maybe a question then to, 10 uh, Ms. Roberts -- or, well -- 11 MS. MANDEL: Um, can -- well, I'll follow up -- 12 I can follow up later. 13 MS. YEE: Okay. 14 MS. MANDEL: Because I don't think that's what 15 the regulation says. But I can follow up now if you 16 like, ask them about it. 17 MS. HORTON: Member Yee. 18 MS. YEE: Let -- let me ask the Petitioners, if 19 I could. 20 So, um, in terms of receipts, are there 21 receipts in which, um, the customers actually altered 22 the tip that was placed, um, on the receipt by the 23 manager used in the POS system? 24 MS. ROBERTS: Meaning on the physical receipts? 25 MS. YEE: Yes. I mean, are there receipts that 26 so indicate? 27 MS. ROBERTS: Yes. From the -- from the data 28 that's in the POS report, you would see in each 16 1 transaction where from the original receipt that you 2 would see, the itemized receipt that's at 8 and 9, you 3 would see the variance between what's on that original 4 receipt and then what actually shows up that the 5 taxpayer actually pays for. 6 So we have all the physical receipts, which we 7 didn't put in the record because you would have to 8 redact all of them for -- 9 MS. YEE: And from that -- so you're saying 10 from that, that would indicate where the, um -- those 11 instances in which the customer changed the amount of 12 the tip? 13 MS. ROBERTS: Correct. 14 MS. YEE: Okay. Um, and, I guess just in terms 15 of a general policy that you have in instances where 16 that happens, um -- I mean, how does a customer know to 17 do that? I mean, when you talk about the expectation of 18 a tip being assessed, um, whether it's stated on the 19 menu, whether you're conferring with a customer, what's 20 the policy that would guide a customer to move in that 21 direction? 22 MR. FIELDS: Well, the menu itself says it is 23 an optional gratuity. And then when they get the guest 24 check afterwards, again, it confirms it is an optional 25 gratuity. 26 And the way the company has enforced the 27 gratuity, it is optional. The managers are required to 28 change the gratuity if the customer so asks. And the 17 1 manager does not always add it. 2 And so it is just an optional gratuity that 3 will appear on some bills, but the customer is not 4 required to pay that gratuity at all. 5 MS. YEE: Okay. I guess I'm still not sure how 6 a customer would know to do that. Certainly from a 7 manager's standpoint, I would think you'd want to 8 collect the gratuity. So how would a customer know that 9 it could alter it? 10 And I -- and I -- and I'll just say this at the 11 outset, I -- this reg is very, very, uh, confusing, I 12 think. I think we try to clarify it in terms of, uh, 13 providing examples. But I think just the use of the 14 terms "optional" and "mandatory" really create a lot 15 more confusion than it helps to clarify. And certainly 16 in practice I think that's been the case. 17 But, um, what I was looking for was just kind 18 of whether there was a stated overall policy about when 19 a customer could actually go in and alter, um, the 20 amount of the gratuity. But -- 21 MR. FIELDS: Well, the customer can alter it at 22 any time. There's no requirement that the customer 23 leave that gratuity. 24 MS. YEE: Well, from your perspective because 25 it's optional as it's stated on the menu. But it seems 26 counter-intuitive in terms of what the manager would 27 want to recover. 28 MR. FIELDS: But I guess in this instance we 18 1 have almost a third of time where it is different. 2 Almost a third of the time it is different from the 15 3 percent or the 18 percent that is stated. 4 MS. YEE: Okay. And I'm not disputing that you 5 have -- 6 MR. FIELDS: Right. 7 MS. YEE: -- documentation to that effect. 8 So to the Department, with respect to the 9 receipts that Ms. Roberts was, uh, referring to, um, do 10 we not view those as variances in terms of the gratuity 11 amounts, even though it was, uh -- even though they are 12 using the POS system, uh, in terms of how it's 13 indicated, in terms of what's paid, um, how do we view 14 that? 15 MR. TUCKER: On an individual transaction by 16 transaction basis, we looked at those receipts. 17 However, as far as a general variance -- 18 MS. YEE: Uh-huh. 19 MR. TUCKER: I mean, we would probably -- it 20 would probably be safe to say that if, um, over 50 21 percent of the transactions paid the stated amount, we 22 would not regard that as a significant variance. 23 And I think in here, according to the 24 information we have, it was over 70 percent. But, in 25 essence, for those bills, we did look on a transaction 26 by transaction basis. 27 MS. YEE: Okay. 28 Thank you, Mr. Chairman. Let me stop there for 19 1 now. 2 MR. HORTON: Thank you. 3 Miss -- Member Mandel. 4 MS. MANDEL: Um, I think that I may have -- I 5 mean, maybe I heard you wrong as to the regulation, and 6 you were making a distinction between the prior case 7 that Ms. Roberts read from. And in the prior case they 8 were arguing that they had never -- that they went to 9 the tables before they added anything. 10 But the regulation, um, you know, for a long, 11 long time, it was always, oh, it's on the menu, you 12 know, end of story. But the regulation -- and, of 13 course, these people would still argue that their menu 14 said "optional". And we used to have those kind of 15 fights about what does it say, actually say, on the 16 menu. 17 But the regulation, as it finally got adopted, 18 um, seems to require two things before the presumption 19 arises. And one is the -- a statement on the menu. And 20 the second thing is the automatically added, um, which 21 is defined in the regulation as the retailer adding it 22 without first talking to the customer after service of 23 the meal. That's the part that was at issue in the 24 other case where they tried -- where they were arguing 25 we always go. 26 Here, the taxpayer has admitted that the 27 manager, although in its discretion, um, adds it before 28 they go to the table. Uh, I don't think there's a 20 1 dispute that it's added before it goes to the table. 2 And it's that second piece that causes the presumption 3 to arise under the regulation. 4 Um, what they're arguing here is that the 5 presumption's not a conclusive presumption; that that's, 6 um -- that that is in fact a mandatory, um -- uh, tip or 7 mandatory gratuity. And they are looking at the part of 8 the regulation to say that by their, um -- their 9 practice and the facts of how everything played out in 10 their restaurants as to what people did or didn't do 11 with respect to that gratuity, um, that they have 12 rebutted the presumption that would generally arise from 13 the statement on the menu and the fact that a manager 14 will add it before that credit card bill goes over -- 15 before the bill goes over to, um -- to the table. 16 So I think we're all -- you know, from history, 17 we're kind of used to, oh, well, if it's on the menu, 18 it's on the menu, but that you actually need both things 19 to happen before the presumption arises. 20 Yes? 21 MR. LEVINE: Well, I -- 22 MS. MANDEL: You disagree? 23 MR. LEVINE: Yes. 24 MS. MANDEL: You disagree when the regulation 25 says automatically -- will be considered automatically 26 added when the retailer adds it without first conferring 27 with the customer, that that -- that is what 28 "automatically added" means? 21 1 MR. LEVINE: Oh, I agree with that. 2 MS. MANDEL: Okay. 3 MR. LEVINE: I think that the presumption 4 arises by the retailer adding the tip to the bill. 5 MS. MANDEL: Right. And nobody disagrees that 6 there's a presumption here. 7 MR. LEVINE: Well, the reg says if it's 8 automatically added, then it's mandatory. There is no 9 presumption. 10 It's kind of a presumption of -- you're proving 11 the presumption to decide if the presumption is there. 12 It's -- but if they add it, then you have a presumption 13 that it's an automatic. And the tests are to see if 14 it's automatic. 15 MS. MANDEL: Right. And it's -- 16 MR. LEVINE: The reg says if they don't go to 17 the table -- 18 MS. MANDEL: Well -- 19 MR. LEVEIN: -- in advance, it's automatic. 20 And then it's mandatory. 21 MS. MANDEL: But then the -- but it's a 22 presumption. I mean, why are we talking about a 23 presumption that can be controverted if it doesn't 24 simply establish presumption? 25 You're trying to say it establishes as a 26 conclusive matter of fact that it is mandatory. 27 MR. LEVINE: The presumption -- 28 MS. MANDEL: But the entire regulation goes to 22 1 rebutting the presumption about it being mandatory or 2 not. 3 MR. LEVINE: I agree. And it relates -- 4 because we don't know all the facts. When the retailer 5 adds it to the check, the presumption goes to, what are 6 the other facts? 7 MS. MANDEL: Right. And the other -- I mean, 8 the only thing I was trying to indicate was that it's 9 not simply the menu that sets up the presumption. 10 And the other facts that they have here, now I 11 did not see these before today, these, um -- these are 12 the detail that comes to your table afterwards, this 13 Exhibit 8 and 9? Um, the detail of what you ordered? 14 MS. ROBERTS: Correct. 15 MS. MANDEL: That includes the same statement 16 of for your convenience, an optional will be added. Um, 17 that was on the menu. That's the same statement. 18 So it's on the detail of what I ordered that 19 comes to my table. And then the sales tax amount on it 20 is, um -- presumably, because they didn't collect sales 21 tax on any of these -- is presumably, uh, based on the 22 subtotal amount of what I ordered. 23 MS. ROBERTS: That's correct. 24 MS. MANDEL: Is that correct? 25 Okay. So then that's a guest check presented 26 to the customer that shows sales tax reimbursement in an 27 amount on which it was computed. Um, now it does have 28 the -- one of them has the gratuity and one of them 23 1 doesn't. But they both show the statement of an 2 optional. And then they have all of the guest receipts 3 with the percentages. 4 I mean, I guess what's confusing to me is that 5 it seems like the regulation sets up a general 6 presumption of how things work in the restaurant, if 7 these things happen. And then there are ways to rebut 8 the presumption. And the last one, uh, is what was -- 9 what was at issue in the prior case, whether you had a 10 policy that you didn't do it beforehand. Um, or that -- 11 yeah, that you didn't do it beforehand, that you went 12 and talked to people at their tables. 13 But these guys kind of have a little bit of -- 14 a little bit of number one, um, and they have guest 15 receipts. So at what -- showing that almost 30 percent 16 of the time people either changed it by adding more or 17 it wasn't on there, either because it wasn't on there in 18 the first instance or because someone said, you know, 19 take it off. And they may have, in fact, left, on 20 those, as much or more than the 15 or 18 percent as a 21 tip. You know, somebody might have left 20, I think 22 it's in the paperwork. 23 But at what -- where is there -- is there no 24 tipping point to rebutting the presumption? Or is your 25 position just that it's a -- it's a, um, individual 26 table by individual table, um, rebutting? 27 MR. TUCKER: Here we have the case where the 28 menu indicates that there is an amount that will be 24 1 added or may be added, which as the regulation refers 2 to. And the amount was added prior to, um, the bill 3 coming to the table. 4 So at that point we do not see it as a 5 presumption that is rebutted. We know that for a fact 6 there was a service charge added. And it was 7 automatically -- pardon me, automatically added and paid 8 by the customers. And so -- 9 MS. MANDEL: Well, then -- then there's 10 never -- then there's -- then there's never a 11 presumption to -- I don't understand then, because then 12 there's never a presumption to be rebutted. If those 13 two facts don't set up a presumption that then can be 14 rebutted, what presumption is the regulation talking 15 about rebutting? 16 It's all about rebutting the presumption that's 17 established when I have a menu that says X and I do it 18 before I come talk to you. But -- but -- but it can be 19 rebutted. 20 So, you're making it sound like it's absolutely 21 conclusive once those two things happen that -- that, 22 um -- that it's mandatory. And that -- that doesn't 23 make sense to me in the context of a regulation that 24 talks about we're going to presume it and you can rebut 25 it. 26 MR. TUCKER: One possible way that we could see 27 this that would differ from that is if we see a stack of 28 guest checks that simply show, for large parties, 25 1 there's a -- for example, a 15 percent gratuity to each 2 of those large parties. Then we've got the presumption, 3 and then we would look to rebut the presumption. 4 Here, um, because we have a situation which it 5 says it will be added, and according to the regulation 6 staff has always interpreted this to mean that it's a 7 mandatory charge and, therefore, subject to tax. 8 MS. MANDEL: It says: "Any amount added by the 9 retailer is presumed to be mandatory." It's presumed to 10 be mandatory. "This presumption may be overcome as 11 discussed below." 12 And it's presumed that it's mandatory doesn't 13 change the mandatory nature. This presumption may be 14 controverted by below. That's why we have these cases, 15 because people are trying to rebut the presumption. 16 So, I don't know. I mean I'm -- it sounds like 17 you're saying it can't ever be rebutted, but don't worry 18 because we don't tax when people don't have it on there. 19 We don't tax on the bit that they add on top to change 20 the amount, you know, but we're only taxing the amount 21 that's added. 22 It's -- you've got me really confused now. 23 What -- what is it that -- that restaurants are supposed 24 to come in and rebut if it's not to rebut the 25 presumption that it's mandatory because it was on their 26 menu and they added it? What other presumption -- 27 there's no other presumption -- or you're saying -- 28 I don't know. You have me really confused now. 26 1 MR. HUXSOLL: The -- the presumption kicks 2 in -- well, like Mr. Tucker said earlier, when you have 3 those two elements -- that is, a statement on the menu 4 and the fact that it's automatically added -- it is a 5 mandatory charge and subject to tax. 6 During the interested parties process, uh, in 7 discussing this with, um, the various interested 8 parties, the point came about that sometimes amounts are 9 added to bills for parties where it's not separately -- 10 where it's not stated on the menu, or parties are 11 contesting the fact that it is automatically added. And 12 if you look at the evidence that controverts the 13 presumption it says: 14 "This presumption may be controverted by 15 documentary evidence showing that the customer 16 specifically requested and authorized that the 17 gratuity be added to the amount billed." 18 In other words, they're trying to overcome the 19 concept that the amount's been automatically added. And 20 each of these three types of evidence would -- could 21 indicate that an amount has not been automatically 22 added. 23 But the concept of the presumption was to cover 24 situations where amounts on the guest checks, but it 25 might not be on the bill, or a retailer's stating that 26 it's there but we do not automatically add it to the 27 bill. 28 Here, the Petitioners have acknowledged, based 27 1 on their description of the facts, that the amount is 2 automatically added. And thus, we would view it as 3 mandatory. 4 MS. MANDEL: So you're -- so you're -- let me 5 just sum up to make sure I understand what you're 6 saying. 7 So you're saying whenever it shows 8 "automatically added", if a customer -- and I guess this 9 goes to a question that was being asked over here a 10 little bit. If a customer wanted to leave more, if I 11 was that customer, I would effectively, if I -- if they 12 had 15 percent and I think that the server really should 13 get 20 instead of 15, I have to cross out the 15 and do 14 my own math and write in an amount that's 20 percent, if 15 I want to do it on my credit card, and change -- you 16 know, and change the underlying total, um, or, you know, 17 add it up. 18 But if I just add an additional five percent, 19 you'd still tag them on 15 but not on the additional 20 five. But if I crossed it off and then wrote my own 20 21 percent number in -- or if I said I want to leave, you 22 know, the tip in cash, you -- you know, just put -- just 23 put the bill on my credit card and I'll leave all the 24 tip in cash. I mean, what happens with those ones where 25 people have added? You still think whatever is on the 26 credit card receipt as auto is -- 27 MR. HUXSOLL: Yes. Whatever's been added by 28 the retailer and paid by the customer, up to that amount 28 1 added by the retailer. 2 MS. MANDEL: Okay. So even if I crossed it out 3 and wrote my own 20 percent because I'm smart and can do 4 the math? 5 MR. TUCKER: We would have -- we believe that 6 we should have simply assessed tax on that 15 percent 7 and then, um, treated the other portion as optional. 8 My understanding, there were very few of those 9 transactions. However, those -- the very few that were 10 here were regarded as optional by the auditor. 11 MS. MANDEL: Those are the ones -- he's talking 12 about the ones where there was nothing. 13 MS. ROBERTS: The 12-and-a-half percent. 14 MS. MANDEL: The 12-and-a-half percent, where 15 people left more than the amount on the menu, right? 16 That's what you're talking about, Mr. Tucker? 17 MR. TUCKER: Um -- 18 MS. MANDEL: Where I was talking about the ones 19 where they added it and I crossed it out and -- 20 MR. TUCKER: Actually, I believe that's what I 21 was talking about -- 22 MS. MANDEL: Yeah. 23 MR. TUCKER: -- as well. But my understanding 24 is there were very, very few of those. 25 MS. MANDEL: Few of which? 26 MR. TUCKER: The -- where they crossed it out 27 and then made a larger-sized tip. 28 MS. MANDEL: So you didn't pick it up, but you 29 1 are saying you think you should have picked up the 15 2 percent even if I was smart enough to do the math 3 myself? 4 MR. TUCKER: Correct, because it was an amount 5 that was initially added and paid. 6 MS. MANDEL: Wow. I'm just having a hard time 7 figuring out what -- what restaurants are supposed to be 8 doing. Because we have these cases, and people are 9 looking at the reg and think that they're rebutting what 10 is a -- perceived to be a general presumption of -- of 11 practice, a general presumption that is establishing 12 that if I go to that restaurant and have that many 13 people at my table, I got to pay it. 14 You know, that's -- that's the idea that I 15 have -- I -- I -- that it's essentially a contract. 16 It's a -- it's a, uh -- it's a proxy for the contract 17 that I would have if I, you know, was throwing a wedding 18 or something and I signed a document that said I was 19 going to pay. The menu and everything else is really a 20 proxy for that. You're trying to establish that I come 21 into that restaurant with 10 people at my table, that I 22 have contracted with that restaurant at some level, 23 agreed that, you know, before I -- you know, have my 24 first bite, that that's what I'm going to pay. And 25 everybody's trying to rebut that as a generalized 26 presumption. And that's what I'm having a little 27 trouble with. 28 MR. TUCKER: I -- I suppose the way that 30 1 staff's interpretation has been that we look to see that 2 amounts are negotiated in advance. 3 And under the scenario that you're referring 4 to, whether it's been crossed out or not, we would not 5 regard that as any different. Because typically we look 6 to see what the menu says. And because it's on the 7 menu -- speaking hypothetically, if it's on the menu 8 then it's regarded as having been negotiated in advance. 9 And so it was an amount that was negotiated in advance, 10 an amount that was paid. And if there was an additional 11 amount that was paid, then we would regard that as an 12 optional amount. 13 MS. MANDEL: And is -- and -- and, um -- and 14 you would always do this on a guest check by guest check 15 basis, so that even if -- even if these guys came in 16 here and -- I can't -- I mis -- I may have misheard you 17 earlier when you talked about over 50 percent, which 18 over 50 percent you were talking about. 19 I mean, is there -- even in your world, is 20 there a tipping point at which there are so many, um, 21 guest checks where the amount is different from, um, the 22 amount stated on the menu that -- that overall, it just 23 looks like a mish-mash at the restaurant and it's not a 24 man -- they're not mandatory? 25 MR. TUCKER: I -- I suppose we would -- I don't 26 think we've, um, ever spoken on this or written on this. 27 But I would imagine that if we saw fewer than 50 28 percent, then we would regard that as -- 31 1 MS. MANDEL: Fewer than 50 percent? 2 MR. TUCKER: Of the stated amount. 3 For example, if 48 percent only paid the 15 4 percent, then we would say that was a significant 5 variance and that was variance enough to rebut the 6 presumption. 7 MR. HANKS: Ms. Mandel, actually -- I mean, 8 just looking at it from -- from the other standpoint, 9 um, from the perspective of -- of looking at each of the 10 individual tickets, which is what we've done in this 11 case to conduct our test, I think let's -- let's say 12 we've got a hypothetical restaurant where the service is 13 just outstanding. Um, there is a policy that you pay 15 14 percent on parties of eight people or more. Uh, but 15 let's say, because the service is so exceptional at this 16 restaurant, no one pays 15 percent; everyone wants to 17 leave 25 percent. And everyone does that. Hundred 18 percent pay an amount that exceeds the amount that's 19 charged. 20 I think in that case what the Department would 21 look at is, is was the charge mandatory? Is it included 22 in the menus? Is a mandatory POS charge being made? We 23 would -- we would say that that does constitute a 24 mandatory charge. Any amounts paid in excess of that, 25 however, for the remainder of all the -- the gratuity 26 amounts paid, we'd regard as -- as optional. 27 So I don't know that you can look at just the 28 percentage of people paying outside of this 15 percent 32 1 gratuity charge as an indicator whether or not we're -- 2 we're going to treat these charges as -- as mandatory 3 or -- or optional. 4 Um, just looking at that, that example as a 5 hypothetical in extreme, I could see something like that 6 happening. But we'd still regard the 15 percent as a 7 mandatory charge and subject to tax, irrespective that 8 everyone else paid an amount far in excess of the 15 9 percent that was automatically charged. 10 MS. MANDEL: I think I understand what their 11 position is. 12 MR. HORTON: Okay. 13 MS. MANDEL: I don't know if the taxpayer has a 14 comment since I let them ramble on so long. But I now 15 understand what their position is. 16 MR. FIELDS: I'd like to make one comment, Ms. 17 Mandel, just following up on the example that was given 18 by the Department. 19 So if a hundred percent of the time there as a 20 variance, if that doesn't qualify under their 21 interpretation, then the regulation would never apply. 22 And we think 30 percent is a significant variance, and 23 that that is significant, and that that is enough. It 24 shouldn't be more than 50 percent. 25 And if a hundred percent doesn't work, we 26 believe if you have guest receipts and payments showing 27 that there is a variance from the stated amount, and we 28 do, that we do satisfy this regulation. And that the 33 1 regulation, it's not a conclusive presumption. The 2 regulation states, in (b), that nonetheless any amount 3 added by the retailer is presumed to be mandatory, not 4 is absolutely required to be and deemed to be mandatory. 5 It is just presumed. And it says: "This presumption 6 may be overcome." And we think, under the regulation, 7 we have overcome it. 8 Thank you. 9 MS. STEEL: I have just -- 10 MR. HORTON: Mr. Runner. 11 MR. RUNNER: Mm-hmm. Yeah, just -- I mean, I 12 think, uh, Member Mandel went through that, I think in 13 terms of the discussion, some of my concerns in trying 14 to get definition. 15 But let me just -- let me just hit a couple of 16 items in regards to, again, the issue in regards to 17 particularly number -- again, number two in that subset, 18 or in the -- yeah, subset under (c). Um, and I'm 19 struggling with the issue of all of a sudden we're 20 creating, trying to find varies with a definition of 21 like over 50 percent. Um, I'm -- I'm just -- is that -- 22 I mean, did I misunderstand that, that if it was over 50 23 percent, then all of a sudden -- 24 MR. HORTON: Mr. Runner, we may want to go to 25 Mr. Levine to just get some clarification. And maybe in 26 that clarification you can sort of structure -- uh, help 27 us understand the flow as it relates to the -- 28 MR. RUNNER: Well, it's their answer, though, 34 1 is what I'm trying to get it, is that they were defining 2 varies as like if it was over 50 percent then that would 3 almost be defined as varies. 4 So I guess that was my point, the question 5 there. I don't know if Mr. Levine can define -- 6 MR. HORTON: I mean -- 7 MR. RUNNER: -- can tell me what they were 8 thinking about when they were trying to define 9 "varies". 10 MR. HORTON: The Department's comments may or 11 may not be consistent with law. And at the end of the 12 day, that's going to govern. 13 MR. RUNNER: Okay. Well, let me ask 14 Mr. Levine, does the "varies" then mean over 50 percent? 15 MR. LEVINE: I wouldn't apply a 50 percent test 16 there. 17 I don't think these -- these examples -- it's 18 not just -- again, my view of the presumption is the 19 presumption relates to whether the amount was 20 automatically added and these things are to help us 21 figure it out. And just because there is some variance 22 doesn't prove that there was -- that it wasn't 23 automatically added. Excuse me. But if there's no 24 variance, that almost certainly proves it. 25 MR. RUNNER: Yeah. 26 MR. LEVEIN: You just don't see that. 27 MR. RUNNER: That would make sense. 28 MR. LEVINE: And you also have to view this -- 35 1 think about sitting in a restaurant, getting a bill. 2 Not everyone is as vocal as -- as maybe attorneys and 3 Board Members. Even I would not normally protest 4 getting an amount that was -- I was advised in advance, 5 unless I was really upset. And that's what this 6 principle is aimed towards, is the normal person. 7 It's the same type of thing as if you have a 8 mandatory/optional -- a mandatory warrantee that a big 9 customer refuses to pay and the seller still sells the 10 product without the otherwise mandatory warrantee. That 11 doesn't mean that when you or I go and pay the mandatory 12 warrantee, it's not mandatory. 13 So if someone is upset with the service and 14 says I'm not going to take it and I'm not going to leave 15 that tip, and crosses it out, that doesn't mean the 16 other people -- the other person who's a little more 17 meek -- 18 MR. RUNNER: We don't know if that's the case 19 here. 20 MR. LEVINE: And that's what these are going 21 to. 22 MR. RUNNER: Right. We don't know if that -- 23 we don't know if those tips weren't paid because they 24 were responding to poor service. 25 MR. LEVINE: Again, my point is we know here 26 that the decision to add it was made by the manager. 27 And I assume that a manager might say, I walked by the 28 table and they complained a couple times. We're not 36 1 charging -- we're not adding an 18 percent tip here. We 2 want them to come back. So -- but that's still the 3 manager's decision, not the customer's. The customer is 4 forced to reject the amount on the invoice. 5 MR. RUNNER: And -- and -- and we have -- and 6 we have evidence of that taking place. 7 MR. LEVINE: Yes. 8 MR. RUNNER: Okay. 9 MR. LEVINE: And for any customer that rejected 10 it -- and the Department's already done it, and we would 11 agree -- and no one disputes that's optional. 12 MR. RUNNER: But let me ask you there. It 13 doesn't speak to the issue of just rejecting it. It 14 just says they could actually give more -- do more, 15 correct? 16 MR. LEVINE: But then the original amount was 17 still mandatory. The fact that you can give more means 18 that the more -- a bad example, but if you have a 19 hammer, you pay $10 and it's so good you want to pay 15, 20 um -- 21 MR. RUNNER: But the price on that hammer 22 wasn't -- wasn't optional. 23 MR. LEVINE: Well, that's what you're 24 deciding. 25 MR. RUNNER: And again -- well, right. And 26 again, that's a poor -- I mean I think -- 27 MR. LEVINE: The reg says -- 28 MR. RUNNER: Well, there's a poor example in 37 1 both directions, uh, I think, because again, there's 2 no -- we don't have another subset of items to define 3 how to rebut the presumption here when I buy a hammer. 4 So, you know, it's -- so I'm struggling here. 5 Again, I'm trying to get through this idea that on 6 subset two there where it talks -- the whole -- the 7 whole construction of that is that it's printed on the 8 material, right? I mean, it says right here in 9 brochure, advertisement, or other printed materials, uh, 10 it varies from the percentage stated on the menu 11 brochure. 12 So it's -- the whole idea is that it is indeed 13 printed on the menu. And it is -- whether it's, you 14 know, and again in this case it's stated as optional. 15 But that's really not the point. The point of number 16 two is it's stated on the menu, but yet, there's 17 enough -- there's -- there's -- there's, um, payments 18 and receipts that show that it wasn't always applied at 19 that given printed percentage. 20 MR. LEVINE: That's right. 21 MR. RUNNER: Correct? 22 MR. LEVINE: And the more of that there is, the 23 less likely, if we don't know, that the manager just 24 added it. It could be a blank ticket -- 25 MR. RUNNER: Okay. So, again, as you said, the 26 more of that that's added. So my question is -- 27 MR. LEVINE: If we don't know the facts. 28 MR. RUNNER: -- what is the line? 38 1 MR. LEVINE: What I'm saying is if we don't 2 know the -- the -- if the taxpayer is arguing, we don't 3 even put it on the checks, we don't even put it on the 4 checks, then we have the question of do we believe them 5 or not? 6 MR. RUNNER: But that's not what they're 7 arguing. 8 MR. LEVINE: I know. 9 MR. RUNNER: Okay. 10 MR. LEVINE: And that's why -- once they say 11 they add it to the checks, as I read the reg, it's 12 mandatory. 13 MR. RUNNER: Man, I am having difficulty -- 14 MR. LEVINE: That's what the reg says. 15 MR. RUNNER: -- with this discussion. Because, 16 again, the whole -- the whole issue of number two 17 assumes that it's written on the check. It assumes so. 18 It says it's stated on the -- 19 MR. LEVINE: Written on the check raises the 20 presumption, the -- the -- I'm sorry. It's that -- the 21 mandatory is when it's written on the check without the 22 customer's approval in advance. That's what this goes 23 to. 24 When the manager goes to the table, and if we 25 know this, the manager goes to the table and says are -- 26 we'd like to add 18 percent. Can I add 18 percent? 27 That's optional. 28 MR. RUNNER: Okay. I guess the point I 39 1 guess -- again, I'm looking through this and struggling 2 with the idea of when we even have then these -- these, 3 uh -- these, uh, presumptions. 4 MR. LEVINE: This is not the best example of 5 writing in our regulations. 6 MR. RUNNER: Yeah. And I -- and I guess at 7 that point then I guess is where it is I think we, as a 8 Board, need to then say what do -- and how are we 9 communicating out there to this industry? And are we 10 indeed, in the process, creating enough confusion that 11 we on the dais are struggling with some of the language. 12 And at the same time we expect the taxpayer to do it 13 right, and we struggle with the language. 14 MS. MANDEL: Okay. I -- 15 MR. HORTON: Member Steel. 16 MS. STEEL: Well, I just want to make a 17 statement. Because, um, last case that we had here at 18 the Board hearing we were talking about variance, that, 19 you know, how many receipts they have and there's so 20 many different, you know, tips, the amount added or not. 21 And then now that the Legal Department is saying that it 22 has to be over 50 percent. 23 So we keep raising bars for this law. I mean, 24 it's not really clear, but you are really raising bars. 25 And then I heard that it's not optional because added 26 for 18 percent, but manager can add and actually they 27 can totally take it out from those tips then. 28 And then Mr. Hanks was talking about, well, if 40 1 it was over 25 percent of all the tips and they're 2 added, then we can say it's optional. But it doesn't 3 really -- it's not really fair for the taxpayer because 4 most of normal practice of tips are actually 15 percent. 5 So I really don't understand that where to draw 6 the line and, you know, where -- how we going to ask 7 taxpayers to come up and then they can argue about this 8 law, that on the menu very clearly they are saying 9 optional. And manager even added they can take -- they 10 can put more and they can take it out. And they have 11 all the variances. And then, now they say no, still, 12 that, you know, they add it before it went out to table, 13 so that's mandatory. 14 I really don't know where to draw line -- draw 15 the line here, you know, for the taxpayers to argue 16 about their case. 17 That's my comment. 18 MS. MANDEL: Mr. Horton. 19 MR. HORTON: Ms. Mandel. 20 MS. MANDEL: Okay. I just -- I just want to 21 make sure I understand, uh, where the argument is. 22 So, um -- so, Mr. Levine, I suppose you would 23 say I read very fast, which I do. And you would say I 24 read too fast because I guess what you're saying is that 25 the regulation establish -- that the regulation says 26 will be considered automatically added when it's added 27 without first conferring with the customer, end of 28 point. 41 1 MR. LEVINE: That's correct. 2 MS. MANDEL: And that the regulation then says, 3 nonetheless, any amount added is presumed mandatory and 4 then sets up that the presumption can be rebutted. 5 So what you're saying is that the admission, 6 uh, that the managers add it before talking to anyone at 7 the table is fatal, that's your -- is that -- 8 MR. LEVINE: Yes, that's my first thing. 9 My second point is if it were up to me, we'd 10 make this clearer and we'd just have a bright line rule 11 and we'd skip the presumptions. But -- 12 MS. MANDEL: Well, I understand what -- I think 13 I understand what, uh, you're saying. Um, and the 14 taxpayer has focused on rebutting a presumption. And 15 you're saying that this isn't a case where the 16 presumption comes into play. That's your -- 17 MR. LEVINE: That's my reading of the reg, 18 yes. 19 MS. MANDEL: Your reading of the reg. 20 MR. HORTON: Certainly this confusion, um, 21 plays out in the minds of the taxpayers as well. And it 22 would be nice to have a bright line, um, but we don't. 23 And -- but the Department sort of alluded to, 24 um, some sort of threshold, some sort of bright line 25 that seems to be, uh, in the minds of the Department in 26 the auditing process. And I'm curious if that's their 27 intent, or is that the case, or is that how the 28 taxpayers are treated, how this taxpayer was 42 1 interpreted? 2 So, is there a threshold at all? And let me 3 qualify that by asking that, can we look at the 4 preponderance of the transactions to make the 5 determination? Or at that point are we looking at it 6 transaction by transaction? So once the -- once the, 7 uh -- once the presumption has been established by these 8 two criterias, one being a contractual relationship, uh, 9 established virtually by the language being within the 10 menu and subsequently on the guest check and it being 11 added automatically without the participation of the 12 customer and any other subsequent action of reducing 13 that is a unilateral action and not on both parts of the 14 customer doesn't participate in that. And that in and 15 of itself, once that presumption is created, can we in 16 fact say that if there is a variance, at all, to any 17 degree, and what that degree might be in your minds, uh, 18 does that convert the entire presumption that mandatory 19 tips exist? 20 MR. TUCKER: I'll try and answer this in a 21 couple different, um -- couple different parts. 22 Um, first, we don't believe, as Mr. Levine 23 pointed out, that the presumption applies to these 24 facts. The presumption is created, um, in -- I guess 25 it's (g)(2)(C), it talks about being able to show that 26 the customer specifically requests that and authorized 27 the gratuity. 28 Here, as was stated earlier, we have an 43 1 admission from the Petitioners that they automatically 2 added this, prior to conferring with the, uh, customers. 3 If they had conferred with the customers, then we would 4 be looking at ways to show and demonstrate that the 5 presumption didn't apply. But because it was 6 automatically added, we do not believe it applies to 7 this case and this Petitioner, or at least the 8 presumption does not. 9 MR. HORTON: Then why would the tax -- I mean 10 why would the Department adjust when the variance 11 existed and -- but it wasn't the exact amount that was 12 agreed upon? 13 MR. TUCKER: Because the regulation states 14 earlier that it's a mandatory charge that is added and 15 paid. And if it's not paid, then we would not regard it 16 as a mandatory -- as a mandatory charge. I mean, we're 17 not going to tax 15 percent if they pay zero. 18 MR. HORTON: Oh, let's not say zero. Let's say 19 that the mandatory tip was -- or let's say that the 20 established amount that should be or could be optionally 21 applied, given that you need the second condition in 22 order to make it mandatory, that it's automatically 23 applied prior to the customer receiving the bill and the 24 customer's not participating in that decision-making 25 process, that's a unilateral decision, um, given that 26 that's the case, let's say that that amount is 18 27 percent, but they actually paid 15 percent -- 28 MR. TUCKER: Under those circumstances, it's my 44 1 understanding that they regarded that as an optional 2 charge. 3 MR. HORTON: So -- so the Department has 4 concluded that a variance on a particular transaction 5 may in fact rebut the presumption or alter the mandatory 6 conditions that were established by the first two 7 conditions. 8 MR. TUCKER: I think I would say that it 9 doesn't -- the presumption doesn't come into play. It 10 may have -- they -- my understanding is they would not 11 have regarded that as a mandatory charge under those 12 circumstances, where they paid a lesser amount. 13 MR. HORTON: That -- that -- that's my point. 14 My point is, is that initially you have the menu, it 15 says 18 percent. 16 MR. TUCKER: Mm-hmm. 17 MR. HORTON: The customer enjoys the meal, 18 whatever service is there. They make a calculation on 19 the bill. They put the 18 percent on the bill. So now 20 you have the two conditions that establish a mandatory 21 tip. 22 MR. TUCKER: Correct. 23 MR. HORTON: And you're sharing with us, you're 24 testifying that if the customer at that point, 25 subsequent to that mandatory tip being established, 26 let's say, the customer decides, well, you know what, I 27 don't agree with that original agreement that I entered 28 into at the onset of this transaction. And I'm going to 45 1 void that. And now I'm going to give you 15 percent. 2 Now, you have a -- a mutual agreement, both 3 parties are now adjusting that original contract, that 4 original mandatory contract, according to what you're 5 testifying, has been voided, doesn't exists anymore. 6 And now we're in an optional contract environment where 7 both parties are now renegotiating their original 8 contract. 9 MR. TUCKER: For those amounts that were paid 10 that were less than the stated amount, that's how staff 11 viewed them. 12 MR. HORTON: Okay. So, you know, I mean if -- 13 it has to cut both ways. I mean if the interpretation 14 is, is that you have now voided the original contract by 15 virtue of not complying with what was originally agreed 16 upon, the 18 percent -- if they paid 40 percent, that's 17 a bilateral discussion that occurred and a new agreement 18 has been created. 19 MR. TUCKER: Staff did not view it that way 20 because -- well, and say -- no, I understand. I just -- 21 MR. HORTON: Let's take it away from staff. 22 Let's just say if it's good for the gander, it's got to 23 be good for the goose. So if it happens on the back 24 end, on the reduction, irrespective of the amounts, it 25 is the activity, it is the action of the parties that 26 creates the contractual agreement. 27 So in the -- initially, the argument is, is 28 that the -- the, uh, menu establishes an 18 percent. 46 1 MR. TUCKER: Mm-hmm. 2 MR. HORTON: The automatic placement of the 18 3 percent establishes a predisposed agreement between the 4 parties. And all of a sudden it changed, and now you 5 have both parties renegotiating that transaction. And 6 because it varied from the original amount, it's no 7 longer mandatory. 8 MR. TUCKER: We don't see that as a 9 renegotiation. We simply see that as leaving an 10 optional tip, in addition to the amount that was 11 required by the original contract. So the -- 12 MR. HORTON: I mean, the regulation 13 specifically says without providing, conferring with the 14 customer and receiving approval for the service of the 15 meal. So if it changes, there's some discussion with 16 the taxpayer -- I mean with the customer. 17 MR. TUCKER: Well -- 18 MR. HORTON: Unless we presume that it 19 automatically happened, and that's a presumption on our 20 part. 21 MR. TUCKER: I think what -- 22 MR. HORTON: Or the Department's part. 23 Sorry. 24 MR. TUCKER: My understanding, um, Mr. Horton, 25 is that what we see is a case where you're given a bill 26 for -- I'm just going to use hypothetical numbers -- 27 $100 and then they add an 18 percent gratuity. So 28 you've got $118. Somebody decides the service was so 47 1 good they're going to leave $130. 2 I don't believe there's any negotiation going 3 on with the restaurant and the customer. They're simply 4 saying that this service was so good I want to leave an 5 additional amount for my server. We had a great meal. 6 We had a great time. It's -- and that's why, much like 7 at any other meal that you -- 8 MR. HORTON: I think the reg -- not to 9 interrupt you. My apologies. 10 MR. TUCKER: Okay. 11 MR. HORTON: I think that's where we may need a 12 little clarification. Because the regulation doesn't 13 say -- it says "variance", and it doesn't really say up 14 or down, you know. 15 MR. TUCKER: Mm-hmm. 16 MR. HORTON: And so if we make a presumption 17 when it's lower that, uh, some negotiations took place, 18 it seems to me that -- that if it's higher, the same 19 activity should have taken place. We can't have it both 20 ways. 21 MR. TUCKER: I won't argue that it could be 22 clearer, I think. 23 MR. HORTON: Yes. And that it could be 24 different. I mean -- 25 MR. TUCKER: Mm-hmm. Absolutely. 26 MR. HORTON: -- in each case it could be -- 27 often times the customer could have said, well, you 28 know, I really like this server. They really did a 48 1 fabulous job. 2 MR. TUCKER: Mm-hmm. 3 MR. HORTON: And, you know what, I know I'm 4 only supposed to give 18 percent, but I want to give 20. 5 MR. TUCKER: Right. 6 MR. HORTON: And they have specific examples 7 where that occurred. 8 MR. TUCKER: Mm-hmm. 9 MR. HANKS: Mm-hmm. 10 MR. HORTON: So it seems to me that that 11 variance also would be considered a subsequent 12 negotiation of the previous contract -- agreement. 13 MR. TUCKER: I agree that that's how it could 14 be viewed. That's not how staff viewed it though. It's 15 just that -- 16 MR. HORTON: All right. 17 To the -- to the -- to the -- looking at the -- 18 the exhibits, which I seem to have -- 19 Question. Would the Department view the fact 20 that they have the term on the invoice, add tips -- and 21 I'm looking at Exhibit 1 in this case. It says 22 "gratuities" and then "add tips". Would that language 23 imply that the customer now has an option to modify the 24 original agreed-upon amount? 25 MR. HUXSOLL: No. We would view this as the 26 customer leaving an optional amount, above and beyond 27 the agreed-upon amount. Similar to if no mandatory tip 28 were charged and I got a bill for $10 just for my food. 49 1 If I left $15, including that $5 optional tip, that 2 would not be considered renegotiating the terms of the 3 contract to purchase the food. You're leaving an amount 4 above and beyond what you've been charged, uh, for that 5 particular meal. 6 And so we would -- we would view this 7 additional tip as an optional payment under the 8 regulation, as opposed to a renegotiation of the 9 contract. 10 MR. HORTON: Does the regulation provide the 11 Department the authority to create an artificial 12 threshold, um, if in fact the Department is viewing this 13 as that the regulation so states that if there is a 14 variance, that's an indication that could convert the 15 original presumption? 16 And so if we look at this from a holistic 17 perspective, so if we're saying, okay, if there's a 18 variance, no one's ever determined that variance -- 19 which I believe is the reason that Mr. Levine says we 20 need to do a little more work on this regulation to make 21 sure it's clear -- but is it the Department's position 22 that, um, they have the authority or somewhere in law 23 that allows them to determine that, in this case, 28 24 percent variance is not sufficient to rebut the 25 presumption? Or is it the Department's position that 26 the presumption is established and then subsequent 27 action is looked -- viewed at individually, or 28 collectively? Can you help me understand that? Because 50 1 your comments earlier -- 2 MR. TUCKER: Right. We don't -- 3 MR. HORTON: -- were a little confusing. 4 MR. TUCKER: We don't look to the presumption 5 at all for these facts. We don't think the presumption 6 comes into play. 7 The presumption is used to show that there was 8 a discussion between the customer and the, um, 9 restaurant, whether it be the manager, whoever, someone 10 acting on behalf of the restaurant. 11 Here, we don't get to the presumption because 12 we already have an admission that states there was an 13 amount that was automatically added. So for these 14 facts, we don't believe the presumption is -- is 15 necessary. 16 MR. HORTON: Do you believe that the 17 presumption comes into play on a transaction by 18 transaction basis? 19 MR. TUCKER: For these facts? No. Then it 20 comes down to the interpretation of whether it was -- 21 MR. HORTON: Then why not allow the 15 percent 22 as mandatory? Why not take the position that the 23 original 15 percent is mandatory? Once they've 24 established 18 percent -- I mean, the arguments have to 25 be consistent, that's all I'm really asking for. 26 So once they establish, uh, an 18 percent 27 gratuity, and then they only pay 15 percent, 28 irrespective of what went on between the parties, but 51 1 based on the Department's position, that's a mutual, uh, 2 re-evaluation or renegotiation of the transaction, then 3 that's rebutting the original presumption. 4 MR. TUCKER: It's -- we don't look at it as 5 rebutting the original presumption. We look at it as 6 changing the terms. The distinction is that -- 7 MR. HORTON: So the -- so the taxpayer can 8 change the terms? 9 MR. TUCKER: Well, it appears that they did. 10 MR. HORTON: Oh. 11 MR. TUCKER: There was a mandatory charge that 12 was billed to the customer, and then the customer simply 13 didn't pay it. 14 MR. HORTON: So on an individual by individual 15 basis, the taxpayer can change the terms? 16 MR. TUCKER: Evidently they did. The customers 17 changed the terms. Um, we don't believe that impacts 18 the other mandatory charges as was earlier stated. 19 MR. HORTON: All right. 20 Further discussion, Members? 21 Hearing none, is there a motion? 22 MS. YEE: Move to take the matter under 23 submission. 24 MR. HORTON: It's been moved to take the matter 25 under submission. Second by -- by Member Yee. 26 Second by Member Steel. 27 Objection, Members? 28 Without objection, such will be the order. 52 1 Thank you very much for appearing before us. 2 Obviously your testimony has been very, very helpful. 3 And we will make our decision and send you a written 4 report of our decision later on this evening. 5 MS. ROBERTS: Thank you. 6 MR. FIELDS: Thank you. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 53 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for th 8 California State Board of Equalization certify 9 that on November 15, 2011 I recorded verbatim, in 10 shorthand, to the best of my ability, the proceedings in 11 the above-entitled hearing; that I transcribed the 12 shorthand writing into typewriting; and that the 13 preceding pages 1 through 53 constitute a complete and 14 accurate transcription of the shorthand writing. 15 16 Dated: November 28, 2011 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 54