1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 NOVEMBER 15, 2011 9 10 FINAL ACTIONS 11 12 13 14 15 16 17 18 19 20 21 Reported by: Juli Price Jackson 22 No. CSR 5214 23 24 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Diane G. Olson Chief, Board 16 Proceedings Division 17 For the Board: Mai Tran Tax Counsel 18 David Levine 19 Tax Counsel 20 21 22 ---oOo--- 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 15, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson? 6 MS. OLSON: Our next matters are those items 7 that have been taken under submission. 8 Our first item is B2 -- 9 MR. HORTON: One second, Ms. Olson, if you 10 will? 11 Ms. Olson? 12 MS. OLSON: Our next item is B2, Kent H. Baker. 13 ---o0o--- 14 B2 KENT H. BAKER 15 NO. 551816 16 ---o0o--- 17 MR. HORTON: Is there a motion, Members? 18 MS. YEE: Move to sustain the Franchise Tax 19 Board. 20 MR. HORTON: Moved by Member Yee to sustain the 21 Franchise Tax Board. 22 Is there a second? 23 MS. MANDEL: Second. 24 MR. HORTON: Second by Member Mandel. 25 Discussion? Object -- 26 MS. STEEL: Objection. 27 MR. HORTON: Objection. Objection noted. 28 MS. STEEL: Well -- 3 1 MR. HORTON: Discussion? 2 MR. RUNNER: Yeah, let me -- can we -- 3 MS. SLRHTT: Well, there was a delay in 4 assigning the employee at Franchise Tax Board for more 5 than ten months. So, I think we should abate the 6 interest payment, at least from September 1st, 2009 to 7 when protest was received and July 6th, 2010, when 8 Franchise Tax Board assigned the employee there. 9 So, I can -- there's a first motion and second, 10 right? 11 So, I cannot change it, but -- 12 MR. RUNNER: You want to -- are you amending 13 the motion -- 14 MS. STEEL: There's a second. 15 MR. RUNNER: -- to that? 16 MS. STEEL: Second already done, right? 17 So, can I still amend the motion? 18 MR. RUNNER: Sure, uh-huh. 19 MS. STEEL: All right, I want to sustain the 20 Franchise Tax Board but abate the interest, allow 21 interest abatement from September 1st, 2009 to July 6th, 22 2010, when Franchise Tax Board assigned the employee for 23 this case. 24 MR. RUNNER: I would second. 25 MR. HORTON: Okay. On the subsequent motion, 26 Members, is there objections? 27 MS. MANDEL: Yeah. 28 MS. YEE: Objection. 4 1 MR. HORTON: So noted. 2 MR. RUNNER: Can we -- can we speak to that 3 just for a moment? 4 MR. HORTON: Sure. Mr. Runner. 5 MR. RUNNER: I mean I think that even the 6 Franchise Tax Board admitted that they had a more 7 expedited process. 8 They had identified the fact that I think it 9 was ten months, now they backed that up to six months 10 now. I think they've clearly -- have looked at their 11 notification process as problematic. 12 And it seems for me a reasonable issue then, in 13 light of the recognition that ten months is not even -- 14 is not acceptable to them, that we just give a little 15 bit of break to this taxpayer who ended up being caught 16 up at that time in a difficult -- seems a difficult time 17 when FTB was trying to notify and get its stuff together 18 there. 19 So, I would certainly think it's a fair way to 20 deal with the taxpayer at that point. 21 MS. MANDEL: I think they had workload issues. 22 Wasn't that -- and the workload issues have subsided 23 somewhat. 24 MR. HORTON: A question of the Appeals. 25 As far as the documentation that the taxpayers 26 received, what is the timeline that's allowed under the 27 Taxpayers' Bill of Rights? 28 MS. TRAN: Actually, the Bill of Rights doesn't 5 1 really address the specific -- 2 MS. MANDEL: Can you talk louder? 3 MS. TRAN: -- the Taxpayer Bill of Rights does 4 not have a specific timeline in terms of -- 5 MR. HORTON: Is there any document -- 6 MS. TRAN: -- like 60 days. 7 MR. HORTON: -- that goes forth to the public 8 that has a timeline? 9 MS. TRAN: The statute which governs the Notice 10 of Proposed Assessment states that you have to give the 11 taxpayer 60 days to respond to that Notice. 12 MR. HORTON: No -- no timeline on the 13 Department side? 14 MS. TRAN: No. 15 MS. STEEL: How about Section 19104? 16 MS. TRAN: You're referring to the interest 17 abatement -- 18 MS. STEEL: Right. 19 MS. TRAN: -- statute? 20 MS. STEEL: For -- no, actually for the delay. 21 MS. TRAN: Okay. Well, Rev. and Tax 22 Section 19104 -- 23 MS. STEEL: It has to be reasonable. 24 MS. TRAN: Right. 25 MS. STEEL: Yeah. 26 MS. TRAN: So, if that -- well, the statute 27 says that interest may be abated if the -- there is an 28 unreasonable delay -- 6 1 MS. STEEL: Correct. 2 MS. TRAN: -- or error in the performance of 3 administerial or managerial act by the Respondent. 4 MS. STEEL: So, if workload constraints caused 5 every delay for that period for more than ten months for 6 each taxpayers, do you think it was reasonable then? 7 MS. TRAN: Uhmm -- 8 MS. STEEL: And this law -- this regulation, 9 it -- it doesn't really even need it there -- to be 10 there, because that's -- try to protect the taxpayers 11 and move everything fast, that's why that regulation's 12 there. 13 If, you know, ten months is reasonable to 14 Franchise Tax Board, then that law is totally, you know, 15 null and void. That's the way I think. 16 That's why their timeline is getting shorter 17 and they're working hard. But ten months because of 18 work constraints, I don't think that's really reasonable 19 for the taxpayers. 20 MS. TRAN: That's a good point. 21 In the Treasury regulations, the definition of 22 a managerial act states that it's an administrative act 23 that occurs during the processing of a taxpayer's case. 24 And it usually involves like loss of records or maybe 25 like the management of personnel. 26 And it also states that a general 27 administrative decision, such as deciding to take one 28 case over another due to like a statute of limitations 7 1 issue, is not considered a basis for interest abatement. 2 The FTB contends that workload constraints is 3 more like a general administration decision, but that's 4 up to the Board to decide 5 MR. HORTON: Okay. Further discussion, 6 Members? 7 On the subsequent motion, Members, it is moved 8 by Member Steel, second by Member Runner to abate the 9 interest September 14th, my birthday, thus, I'm voting 10 for it -- maybe that changes my mind. 11 Restate the law -- just kidding. 12 Objection, Members? 13 MS. YEE: Yes. 14 MS. MANDEL: Yes. 15 MR. HORTON: So noted. 16 Ms. Olson? 17 MS. OLSON: Mr. Horton? 18 MR. HORTON: No. 19 MS. OLSON: Ms. Steel? 20 MS. STEEL: Aye. 21 MS. OLSON: Mr. Runner? 22 MR. RUNNER: Aye. 23 MS. OLSON: Ms. Yee? 24 MS. YEE: No. 25 MS. OLSON: Ms. Mandel? 26 MS. MANDEL: No. 27 MS. OLSON: Motion fails. 28 MR. HORTON: On the original motion, objection, 8 1 Members? 2 MS. STEEL: Objection. 3 MR. HORTON: So noted. 4 Ms. Olson. 5 MS. OLSON: Mr. Horton? 6 MR. HORTON: Aye. 7 MS. OLSON: Ms. Steel? 8 MS. STEEL: No. 9 MS. OLSON: Mr. Runner? 10 MR. RUNNER: No. 11 MS. OLSON: Ms. Yee? 12 MS. YEE: Aye. 13 MS. OLSON: Ms. Mandel? 14 MS. MANDEL: Aye. 15 MS. OLSON: Motion carries. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 9 1 MR. HORTON: Ms. Olson. 2 MS. OLSON: Our next item is C1, William M. 3 Buchanan. 4 This was a no appearance. 5 ---o0o--- 6 C1 WILLIAM M. BUCHANAN 7 NO. 458690 (CH) 8 ---o0o--- 9 MR. HORTON: Members? 10 MS. YEE: Movr to adopt the staff 11 recommendation. 12 MR. HORTON: Moved by Member Yee. 13 Second by Member Mandel. 14 Objection, Members? 15 Hearing none such will be the order. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 10 1 MS. OLSON: Our next item is C2a and b, GMRI, 2 Incorporated.. 3 ---o0o--- 4 C2a GMRI, INC. 5 NO. 433701 (OH) 6 C2b GMRI, INC. 7 NO. 434928 (OH) 8 ---o0o--- 9 MR. HORTON: Is there a motion? 10 MS. STEEL: Move to grant the petition. 11 MR. RUNNER: Second. 12 MR. HORTON: Discussion, Members? 13 Move to grant the petition, Member Steel, 14 second by Mr. Runner. 15 Discussion, Members. 16 MR. RUNNER: Yeah, just real quick, it seems to 17 me that -- that there certainly was a lot of discussion 18 about interpretation of that -- of the -- of the whole 19 concept as to whether or not something was trying to 20 rebut the presumption. 21 You know, as I look at that, if we -- if we 22 can't go through that with some kind of clarity in 23 regards to what the regulation is in the interest of 24 trying to create regulation and law for taxpayers to 25 make it easy for them to comply, it seems to me that we 26 have created part of the problem for the taxpayer. 27 It's -- I would certainly be supportive of -- 28 of two things, No. 1, granting this for the taxpayer, 11 1 but, secondly, also take another step, which was 2 certainly talked about and that is going back and seeing 3 if we can brighten up those lines so that we can remove 4 some of that haziness that seems to be in the current 5 regulation scheme. 6 And, again, I just -- I just feel for taxpayers 7 out there as they're trying to do their business. I 8 don't think anybody in this process was trying to cheat 9 California out of anything. I think it was an honest 10 discussion in regards to what the -- how they saw the 11 regulation and how we even discussed that. And I think 12 even staff talked about the fact that the lines were not 13 very bright and the need to make it more clear. 14 MR. HORTON: Thank you, Mr. Runner. 15 Member Yee. 16 MS. YEE: Thank you, Mr. Chairman. 17 I think -- I'm going to oppose the motion, but 18 I do want to suggest that this may be an issue that we 19 ought to look at again with respect to the Business 20 Taxes Committee process. 21 The last time that we re-visited this 22 regulation it was really in response to trying to 23 articulate in the regulation the type of documentation 24 that would be sufficient to back up when gratuities are 25 added to bills that involve large parties at restaurant 26 establishments. 27 I know that there were alternatives that were 28 provided by the industry. But I think staff had a hard 12 1 time reconciling with the underlying authority and it 2 may be time to look at that again. 3 I was taken by Mr. Levine's suggestion about 4 moving towards a bright line test, which I think -- it 5 may have the unintended consequence of not providing a 6 lot of flexibility for the restaurant establishments, 7 so, I'm not quite there yet. 8 But I do think that this may warrant a further 9 look through the formal BTC process. 10 But it also appeared that the case that we had 11 before us today really hinged on what the restaurant 12 intended relative to gratuities, that the -- that the 13 restaurants -- that the restaurants involved here 14 intended that the gratuities be optional and not focused 15 on the customer's intention to add the gratuities to the 16 final bill. 17 I think there's a distinction there. And, so, 18 I am going to oppose the motion. 19 MR. HORTON: Further dicussion? 20 MS. YEE: But suggest that we -- we do take 21 another look in the rulemaking process -- rule amendment 22 process. 23 MR. HORTON: So noted. 24 Further discussion, Members? 25 Objection noted. 26 Ms. Olson, please call the roll. 27 MS. OLSON: Mr. Horton? 28 MR. HORTON: No. 13 1 MS. OLSON: Ms. Steel? 2 MS. STEEL: Aye. 3 MS. OLSON: Mr. Runner? 4 MR. RUNNER: Aye. 5 MS. OLSON: Ms. Yee? 6 MS. YEE: No. 7 MS. OLSON: Ms. Mandel? 8 MS. MANDEL: No. 9 MS. OLSON: Motion fails. 10 MR. HORTON: Subsequent motion, Members? 11 MS. YEE: Move to -- 12 MR. HORTON: Members, I don't know if we have 13 enough information, but it seems to me that just 14 under -- if we apply contract law and as that is 15 interpreted whether or not a contract has been 16 established between the parties by virtue of a statement 17 in the menu and then a subsequent action of actually 18 following through with that statement by providing a 19 document that sort of codifies that understanding, in 20 this case a receipt, the modification of that to any 21 degree is a modification of the original agreement. 22 And, so, that, in and of itself, negates, if 23 you will, the original agreement that was established as 24 a result of those two actions on the part of the 25 restaurant in this case. And it is a bilateral action. 26 I mean, both parties are actually negotiating. 27 Now, we can certainly get into the minds of -- 28 or attempt to get into the minds of the seller and the 14 1 customer, but if we make a conclusion that the reduction 2 of the -- of the tip indicates that the presumption has 3 been rebutted, then, in fact, the increase should be as 4 well. 5 So, I had a question of Mr. Levine -- I guess I 6 can't ask the Department at this point -- what did the 7 Department allow? 8 MR. LEVINE: The Department -- if -- if a 9 customer reduced the tip, that was entirely nontaxable. 10 Of course, if no tip -- if the manager didn't 11 add it -- if a customer added it later that was 12 optional. 13 Where the customer added something on top, just 14 added a figure, the Department treated the amount added 15 by the manager as mandatory, but the additional amount 16 added by the customer as not. 17 Based on their discussion, I think that when 18 they -- when the customer just crossed it out and added 19 a whole new number that they didn't regard that as 20 taxable. That was the one that the Department said they 21 would have -- they should have regarded as taxable, but 22 they didn't. 23 So, I think that in the area I think you're 24 talking about, what the Department picked up was where 25 there was a figure added by the manager and that figure 26 stayed, the Department regarded it as taxable. 27 But if the customer added something on top, 28 they didn't regard that additional amount as taxable. 15 1 MR. HORTON: So, they did not allow the entire 2 28 percent that was presented by the taxpayer, I guess? 3 MR. LEVINE: Yeah, I don't think the 28 percent 4 was dollar, I think that was incidence. So, it's not a 5 figure that would directly associate with what you're 6 talking about. 7 MR. HORTON: We can correlate to those two? 8 Okay. 9 Members, I would be supportive of directing the 10 Department to adjust whether there was any modification 11 to the contract, upward or downward. So, in addition to 12 what they have already allowed, to allow those 13 situations as well. 14 The other thing that kind of concerned me, but 15 is an afterthought, that's typically in the cases before 16 us is only reflected on the invoice. If, in fact, they 17 actually decided to leave a cash tip, that may have -- 18 may not be reflected on the invoice. 19 Because I know when I -- I often leave the cash 20 tip 'cause I, for some reason, think that's in the best 21 interests of the server as opposed to writing it on the 22 credit card statement for whatever reason. 23 So, I would make a motion to -- to allow both 24 situations as optionals -- contracts, whether it was a 25 reduction in the amount that was previously agreed to or 26 an increase in the amount that was previously agreed to. 27 MR. RUNNER: I'll second that for the sake of a 28 discussion. 16 1 MR. HORTON: Sure. 2 MR. RUNNER: Just a quick question then just to 3 clarify then. 4 And I will just use the number, because at 5 least what I heard staff say was a little bit different 6 than I think what I'm hearing the Chair say. 7 So, let's say in a case where the individual -- 8 the gratuity was the 18 percent and the credit card was 9 then -- some additional dollars were added onto that to, 10 say, to get it to 20 percent. 11 Is the Chair's intent to make that whole 20 12 percent then a change of that contract and, therefore, 13 nontaxable? 14 MR. HORTON: Yes, given the -- given the set of 15 facts that's in -- 16 MR. RUNNER: Okay. 17 MR. HORTON: -- this particular case, it's not 18 something that I would consistently -- necessarily 19 consistently apply. 20 But in this particular -- 21 MR. RUNNER: Right. Okay, that's fine. 22 MR. HORTON: -- but take -- 23 MR. RUNNER: I just wanted to clarify. 24 MR. HORTON: -- a whole set of criteria for 25 re-negotiating. 26 MR. RUNNER: So, not -- not just the delta is 27 what I'm trying to say then, it's just -- it's the whole 28 amount then? 17 1 I just want to clarify. 2 MR. HORTON: Yes. 3 MR. RUNNER: Okay. 4 MR. RUNNER: I certainly would be supportive. 5 MR. HORTON: How do we do it? 6 So, it's been moved and second -- 7 MS. YEE: Mr. Chairman? 8 MR. HORTON: -- discussion? 9 Member Yee. 10 MS. YEE: Can you restate the motion again? I 11 just want to -- 12 MR. HORTON: That's the challenge, Member 13 Yee. 14 MS. YEE: Okay. 15 MR. HORTON: To -- to -- the motion is to 16 direct the staff to treat the under -- the variance, 17 whether it's an under -- a variance that is lower than 18 the amount stipulated on the -- on the menu and the 19 subsequent invoice or the variance is higher, to treat 20 both of those as optional and, therefore, allow -- 21 MS. MANDEL: To the full extent of whatever? 22 MR. HORTON: -- to the full extent of the 23 amount. 24 It's a renegotiation of the contract based on 25 the facts that are here. There -- there's clearly some 26 dialogue, mutual dialogue and discussions there, that 27 took place. 28 And, of course, you know, we could actually 18 1 find subsequent to this that the facts didn't support 2 that there appeared to be some type of interaction 3 between the parties that would have negated the original 4 contract. 5 The -- the regulation, as it's written, I 6 wasn't necessarily part of the intent so I can's speak 7 to the intent, but as it's written, it speaks to the 8 consent and the participation of the -- of the customer. 9 And whenever that occurs if you -- from a -- just a 10 contract law perspective, if I was into negotiating the 11 purchase of a home -- which I know it's different to 12 some degree -- and both seller and buyer got together 13 and changed the price, that's a whole new contract to 14 change any terms of that agreement, it's a whole new 15 contract. 16 So, if the original contract was conceived as a 17 mandatory contract and the provisions -- and the 18 provsions and circumstances of the subsequent contract 19 is such that it meets the criteria of the regulation to 20 be optional, then the entire contract is optional. 21 If the customer participates, the customer's 22 engaged in the process, in the decisionmaking process 23 relative to the tip, it's an optional -- it's an 24 optional tip. 25 Further discussion, Members? 26 Hearing none, is there any -- it's moved and 27 second, objection, Members? 28 MS. STEEL: Objection. 19 1 MR. HORTON: So noted. Ms. Olson -- 2 MS. OLSON: Mr. Horton? 3 MR. HORTON: -- please call the roll. 4 MS. OLSON: Mr. Horton? 5 MR. HORTON: Aye. 6 MS. OLSON: Ms. Steel? 7 MS. STEEL: No. 8 MS. OLSON: Mr. Runner? 9 MR. RUNNER: Aye. 10 MS. OLSON: Ms. Yee? 11 MS. YEE: No. 12 MS. OLSON: Ms. Mandel? 13 MS. MANDEL: Aye. 14 MS. OLSON: Motion carries. 15 MR. HORTON: Ms. Olson? 16 MS. YEE: Mr. Chairman? 17 MR. HORTON: Sure. 18 MS. YEE: I think I still would like to see 19 this issue revisited on the regulation. 20 MR. HORTON: Okay. 21 MS. YEE: It's an area that is subject to 22 almost every restaurant and I really don't want to have 23 us be inconsistent with ourselves. 24 MR. HORTON: No, I would agree. I mean even to 25 the extent of just reaching out to the entire industry 26 and engaging them in the dialogue. 27 I mean, what was presented by -- the argument 28 that was presented by the taxpayer, the premise in which 20 1 they started on, based on their premise, they were 2 correct. 3 And, so, it is the premise of the -- of the 4 argument is where the confusion took place. 5 And, so, if we were to -- and my concern, of 6 course, is historically the Board has said that you, you 7 know, the -- historically the Board has not established 8 a threshold whatsoever, even though the Department sort 9 of arbitrarily came up with a 50 percent threshold, if 10 it was 48 percent, that sort of added to the -- to the 11 confusion, I'm sure unintentionally, but if that exists 12 and then truly we need to deal this. 13 So, I would be very supportive of that in any 14 that I can to help make that happen. 15 MS. YEE: Okay. 16 MR. HORTON: I think the entire body's such -- 17 MS. YEE: Okay. We'll -- 18 MS. STEEL: I totally agree with Ms. Yee that 19 we going to make it very clear about regulations and, 20 you know, for this case it's actually stronger than what 21 we had for last time that it didn't have much of a 22 receipt at that time. 23 And raising bar, instead of that, everything 24 has to be consistent from the Department side and I'm 25 very disappointed. 26 MR. HORTON: Okay, so noted. I'm sure staff is 27 paying close attention to us. 28 ---o0o--- 21 1 MR. HORTON: Ms. Olson? 2 MS. OLSON: Our next item is C3, Pretty-Pretty 3 Props., Incorporated. 4 This was a waived appearance. 5 ---o0o--- 6 C3 PRETTY-PRETTY PROPS, INC. 7 NO. 487570 (BH) 8 ---o0o--- 9 MR. HORTON: Members? 10 MS. YEE: Move to adopt the staff 11 recommendation. 12 MR. HORTON: Move to adopt by Member Yee, 13 second by Mr. Runner. 14 Objection? 15 Hearing none, such will be the order. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 22 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 NOVEMBER 15, 2011 I recorded verbatim, in shorthand, to 11 the best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 22 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: NOVEMBER 21, 2011 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 23