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 16, 2011 10 11 SALES AND USE TAX APPEAL HEARING 12 LOCAL TAX REALLOCATION HEARING 13 CITY OF FILLMORE 14 NO. 466375 15 16 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 15 Diane G. Olson, Chief 16 Board Proceedings Division 17 18 For Board of David Levine Equalization Staff: Staff Counsel 19 20 Trecia Nienow Staff Counsel 21 22 For Department: Cary C. Huxsoll Tax Counsel 23 Kevin Hanks 24 Chief, Headquarters Operations Division 25 Robert Tucker 26 Legal Department 27 28 2 1 P R E S E N T Continued 2 3 For Petitioner: Joseph Vinatieri Attorney 4 5 Theodore J. Schneider City Attorney 6 7 For Notified Jurisdictions: 8 City of Burbank Robin Sturdivant Representative 9 10 City of Fresno Janis Varney Representative 11 12 Eric Myers Representative 13 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 16, 2011 4 ---oOo--- 5 MS. OLSON: Our next scheduled matter is C5, 6 City of Fillmore. 7 MR. HORTON: Mr. Levine, will you please 8 introduce the issues in this case? 9 MS. NIENOW: Chairman Horton, Members, good 10 morning, Trecia Nienow with the Legal Department, the 11 Appeals Division, here along with David Levine. 12 The issue in this case is whether the sales 13 occurred outside California when the goods were shipped 14 by common carrier from outside the state and, thus, 15 should be reallocated to the countywide pools of the 16 place of usage use tax. 17 We note that, based on our conclusion that the 18 sales occurred outside California, whether a California 19 place of business of the taxpayer participated in the 20 sales is irrelevant. 21 Also as a reminder to the hearing participants, 22 confidential information regarding the taxpayer must not 23 be publicly disclosed. This includes the identity of 24 the taxpayer or any other information that could easily 25 identify the taxpayer. 26 Thank you. 27 MR. HORTON: Thank you very much. Taxpayer 28 will have ten minutes to make their presentation. 4 1 Please commence with your introduction. 2 MR. VINATIERI: Good morning, Joe Vinatieri on 3 behalf of the City of Fillmore. 4 MR. HORTON: Good morning. 5 MR. VINATIERI: I'm accompanied here today by 6 Ted Schneider, who's the City Attorney. 7 We appreciate the opportunity to present the 8 case today and I assume that you have our brief and 9 exhibits in front of you. 10 This local tax allocation matter has been a 11 moving target for us. The proof of allocation bar has 12 been set very high, notwithstanding, we can meet the bar 13 and then some. 14 First is the use tax versus the sales tax. 15 Second, if it turns out to be a sales tax, then we must 16 show a bona fide buying company not formed to redirect 17 local tax. Third, even we're a bona fide buying 18 company, we have to show some activity, such as 19 negotiating a contract, that justifies a permit. 20 Fourth, even though we show the negotiated Master Sales 21 Agreement here, the M. S. A. in Fillmore, we apparently 22 need to show that we have some activity other than the 23 M. S. A. negotiations, such as under the M. S. A. 24 receipt of the purchase order, review of order, fraud 25 review, authorization to release inventory. 26 Fortunately, we can show all four, more than is 27 necessary, actually, to prove the Fillmore allocation. 28 Let's start with the sales tax versus use tax 5 1 and the M. S. A. For all my years of practice here at 2 the State Board of Equalization, one of the things 3 hammered into my consciousness is it's all about the 4 contract. What does the contract say? 5 Well, let's just do that analysis, if we can 6 quickly. You have in front of you the Master Sales 7 Agreement as Exhibit A and -- which was negotiated and 8 signed at the Fillmore office on November 23rd, 2003, 9 which requires delivery of the goods at the buyer's 10 destination California. 11 If you look at page 1 there, we have 12 highlighted "California inventory," where it 13 specifically says that the goods to be delivered to 14 buyer within the State of California. There it's very 15 clear, delivered within the State of California. 16 And if you go to page 2, where it defines 17 "sell, sale, selling," you can see there that it means 18 transfer of title, the second part there, transfer of -- 19 "earlier transfer, possession or any other 20 interest from -- from any other interest or 21 right in or to the goods shall not be a sale 22 from seller to buyer." 23 So, once again it contemplates it has to be in 24 California. 25 But if you go look at the next part here, and 26 that is here on page 6, I didn't highlight it, but this 27 is a requirements contract, it's a requirements contract 28 to provide all of the requirements necessary, in this 6 1 case, uniforms. 2 Last, and possibly, and I think probably most 3 important, is page 7, where it says, 4 "Title and risk of loss. Title to goods 5 delivered to buyer in California shall -- shall 6 pass upon delivery to buyer at buyer's 7 location. Risk of loss shall transfer to buyer 8 upon delivery." 9 So, it's pretty black and white what is 10 contemplated by the parties here in this contract. 11 So, Regulation 1628 (b)(3)(D), the latter 12 portion of the second sentence states that, 13 "If the contract expressly requires 14 delivery at destination, including cases where 15 one of the terms of the contract is FOB place 16 of destination," which we do not have here, 17 "the retailer completes his performance with 18 reference to the physical delivery of the 19 property on tender to the purchaser there." 20 In accord with 1628 is UC -- Commercial Code 21 Section 24012 which says, quote, 22 "But," there's a but, "B, if the contract 23 requires delivery at destination, title passes 24 on tender there." 25 Close quote. So, here we have an explicit 26 title clause which states that title to goods delivered 27 to the buyer in California passes upon delivery to buyer 28 at the buyer's location in California. And risk of loss 7 1 is in accord. 2 Nothing could be clearer or more obvious. In 3 fact, the Appeals Divisions summary at page 4 admits 4 that the M. S. A. provides for shipment of the goods to 5 California, however, the summary then goes on to state, 6 quote, 7 "It does not require taxpayer to deliver 8 the goods at destination." 9 This statement is curious in light of the fact 10 that the M. S. A.'s clear. It says California 11 inventory, it says sale, it talks about title to goods 12 passes only when delivered to the buyer at the buyer's 13 California location. 14 So, really there should be no question that 15 title, risk of loss to the goods, passes to the buyer 16 when physically delivered to the buyer's location in 17 California. This is a sales tax. It's a classic sales 18 tax. So, let's put that aside. 19 Now, let's go to the second point here. Are we 20 entitled to a sales permit as a buying company not 21 formed for the sole purpose of redirecting local tax? 22 And the answer is yes. 23 1699 (h)(1) specifically provides that a buying 24 company not formed for the sole purpose of redirecting 25 local sales tax should be recognized as a separate legal 26 entity. 27 Now, let's look at the regulation, which is 28 Exhibit B, at page 3. And we've highlighted it there. 8 1 It says, 2 "Such a buying company shall be issued a 3 seller's permit and shall be regarded as the 4 seller of tangible personal property it sells 5 or leases." 6 The "shall" is mandatory. 7 And the Board added the buying company language 8 in 2002 and did a specific supplement to the tax 9 information bulletin in September. 10 And if you'll look at Exhibit C -- and I know 11 I'm moving through this fairly quickly, but theres a lot 12 here -- if you look at C, you'll see down there at the 13 bottom, 14 "Such a buying company will be issued a 15 seller's permit and will be regarded as the 16 seller of the TPP it sells or leases." 17 So, that comes right out of the Board's own tax 18 information bulletin. 19 So, it's undisputed and it's clear. The D & R 20 says that it's undisputed that Department Appeals 21 indicate that taxpayer meets the requirements of 22 1699 (h) because we provided evidence of the markup. 23 So, there is no question about that. 24 But Appeals and the Department argue that even 25 if a company qualifies under (h), it must also somehow 26 qualify under 1699 (a). 27 But there's nothing in Section (h) if you look 28 at it, there is nothing in there that states that a 9 1 company qualifying under (h) must also qualify under 2 (a). Nothing is there. 3 The Department's argument is a bit curious, 4 especially in light of the fact the Department's efforts 5 in 2005, which is found in Exhibit D, to change this 6 regulation and delete the "shall" language that we just 7 read. 8 After thorough discussion -- and if you look at 9 page 4 of 8 you'll see there where the -- in the agenda 10 report that the Board attempted -- the staff attempted 11 to knock out the "shall" language. 12 After thorough discussion, this Board 13 specifically rejected the Department's 2005 attempt. 14 And some of you remember all that was going on at that 15 time. 16 Staff today is once again attempting to reject 17 the "shall" language and staff shouldn't be able to do 18 in the context of this case what they weren't able to do 19 in the 2005 regulatory proceeding. 20 And when the staff attempted to delete the 21 "shall" language in 2005, the issue paper drafted by 22 staff provides some interesting insight into whether if 23 a company qualifies under (h), the same company must 24 also qualify under (a), as is being argued here today. 25 In 2005, interested parties -- and that was 26 San Francisco and San Mateo -- pushed for a retroactive 27 change in (h). Interestingly, staff objected to 28 retroactivity and made an important statement in 10 1 Exhibit E, which is the issue paper, 05-010, at page 5 2 of 14, which we provided to you. 3 And just briefly, if you look at it, we have 4 highlighted -- there's a couple of other sentences there 5 where it talks about if they amend 1699 (h), 6 "It is reasonable to assume that some 7 companies will not meet those revised 8 standards. Similarly, if the Board repealed (h) 9 of 1699, it's reasonable to assume that some 10 buying companies could not show that they 11 should hold a seller's permit under the general 12 provisions of subdivision (a) of Regulation 13 1699." 14 And then it goes on to say, just down a 15 sentence further, 16 "In essence, this means that the buying 17 company was not entitled to hold a seller's 18 permit." 19 If you were to take that position. 20 So, if you go to the next page, staff disagrees 21 with San Mateo and San Francisco and recommends 22 prospective application of any revisions. 23 So, in essence, what we here, this leads us to 24 the conclusion that even the staff admits that if 25 a company qualifies under (h), they need not qualify 26 under (a). That's what they said in '05. This is 27 contrary to their position in 2011 today. 28 Lastly, if the Board had wanted to make 11 1 Section (h) buying company subject to (a), they could 2 have done so, but chose not to do so. 3 Why? Because 1699 (i), if you look at that, 4 it's Exhibit B on page 3 again, specifically provides 5 that in the context of a website, 6 "The location of the computer server on 7 which the website resides may not be issued a 8 seller's permit except when the retailer has a 9 proprietary interest in the server and," here's 10 the language, "the activities at that location 11 otherwise qualify for a seller's permit under 12 this regulation." 13 Please note there is no similar provision in 14 (h), is there? (h) and (i) were promulgated at the same 15 time in 2002. And if you go to next page you will see 16 there that they were were done in -- are effective 17 June 14th, 2002. 18 If the Board had wanted the activities language 19 that we find in (i) in (h), they could have done so. 20 But the Board specifically did not include this 21 language. 22 So, contrary to the Department's positions, 23 once it's determined that a buying company was not 24 formed for the sole purple of redirecting local sales 25 tax, the seller shall issue a seller permit and shall be 26 regarded as a seller of the TPP. 27 There is no other requirement. As such, the 28 Department's position is incorrect and the allocation 12 1 belongs with Fillmore. This should settle the matter. 2 We should be done right now. This is a sales tax. The 3 permit was properly issued for the Fillmore location. 4 But, apparently, there is a third bar that we've been 5 told. 6 So, let's look at this third bar. The -- 7 MS. OLSON: Time has expired. 8 MR. HORTON: Is it possible to wrap it up in a 9 few minutes, in a minute or so? 10 MR. VINATIERI: I have probably about three 11 minutes. 12 MR. HORTON: You know, I am going allow that 13 because on the other side I'm going to allow some 14 additional time as well, given the necessity for the 15 City of Burbank to share their thoughts. 16 So, please go ahead. 17 MR. VINATIERI: Thank you. 18 The D & R acknowledges that the M. S. A. under 19 which all subsequent sales here -- because this is a 20 requirements contract -- was negotiated and signed in 21 the Fillmore office. 22 And we provided evidence to show that there was 23 a three to four hour meeting among the parties at which 24 that M. S. A. was negotiated, redrafted, drafted, 25 redrafted, then signed. 26 Further, it's undisputed that the principal 27 terms of the subsequent sales between the buyer and the 28 seller, including, among other things, delivery terms, 13 1 quantities, et cetera, were established in that M. S. A. 2 -- all of which took place in Fillmore. 3 So, this negotiations activity in of itself 4 further buttresses the fact that in addition to (h), 5 Fillmore's the proper place for allocation. 6 But there is even further activity at the 7 Fillmore office -- and let me highlight some of this 8 fourth bar activity. 9 If the buyer did not have stock on hand to fill 10 an order, the buyer ordered stock from the seller in the 11 following manner: The buyer faxed the purchase order, a 12 P. O., to seller's Fillmore facility seeking approval to 13 obtain stock under the terms of the very M. S. A. we're 14 talking about, which capped the total amount of 15 inventory that buyer was entitled to purchase each 16 month. 17 Seller's Fillmore facility received the 18 purchase order. And in the earlier years they actually 19 did a fraud detection check. They would review and then 20 they'd process the P. O. 21 And then to evidence this acceptance of the P. 22 O., they faxed an authorization to release the inventory 23 to one of seller's three warehouses where the inventory 24 was kept. 25 Because of the proximity to California, the 26 authorization to release was -- for use in California -- 27 usually went to the Reno, Nevada warehouse. And seller 28 either owned or leased these warehouses and owned the 14 1 inventory in them. 2 After the authorization to release inventory 3 was issued, then the buyer provided specifics, such as 4 the uniform type, the needed color, et cetera, via 5 computerized system. 6 Seller's warehouse employees accessed the 7 system, assembled the required inventory. Seller 8 shipped the inventory via common carrier to buyer in 9 California as required by the M. S. A. that we just 10 read. 11 Under the terms of the bills of lading these 12 shipments are not designated as F. O. B. to either the 13 buyer or the seller. However, under the terms, once 14 again of the M. S. A., seller maintained risk of loss on 15 those goods until they were accepted by buyer in 16 California. 17 Buyer received the goods at his production 18 center in California, where it cross-checked those goods 19 received against the specs submitted to make sure the 20 order had been properly fulfilled. Buyer then sorted 21 the inventory and distributed the inventory. 22 So -- so, in sum, there is no question this is 23 a sales tax based upon the M. S. A. with the specific 24 intent of the parties, what does the contract say? It's 25 undisputed that taxpayer is not a buying company formed 26 for the sole purpose redirecting sales tax and shall, 27 mandatory language, be issued the permit. 28 And the fact that Fillmore's a proper permit 15 1 location should be dispositive here, we should be done, 2 notwithstanding -- and as found by Appeals, the 3 negotiations took place in Fillmore, which led to the 4 M. S. A., which led to all the requirements sales 5 thereafter. And, furthermore, there was a purchase 6 review authorization practice of release of inventory 7 activity in Fillmore. 8 So, in point of fact, all the foregoing 9 discussion points to but one conclusion, Fillmore has 10 met the dictates of the law and this allocation must go 11 to Fillmore. 12 Thank you. 13 MR. HORTON: Thank you very much. I'm going to 14 ask the Department to make their presentation and give 15 you ten minutes to make your presentation, then go to 16 Miss Robin Sturdivant to allow her additional time to 17 share her presentation as well. 18 The reason being, Members, is that I believe 19 the two will be similar in nature. 20 Would the Department please commence with your 21 introductions? 22 MR. HUXSOLL: Good morning, Mr. Chairman, 23 Members of the Board. I am Cary Huxsoll from the Legal 24 Department, along with Robert Tucker and Kevin Hanks 25 representing staff. 26 We concur with the analysis and the Appeals 27 Division's decision and recommendation. The sales at 28 issue occur outside California and are thus subject to 16 1 state and local use tax. Amounts reported by taxpayer 2 should be reallocated to the countywide pools of the 3 places of use. 4 In order for State and local sales tax to apply 5 to a transaction, the sale must take place in 6 California. And there must be participation in the sale 7 by a California place of business of the retailer. 8 In determining whether the sales take place in 9 California, Regulation 1628, subdivision (b)(3)(D), 10 applying the rules of the Uniform Commercial Code, 11 explains that unless explicitly agreed, that title will 12 pass at a prior time, the sale occurs at the time and 13 place at which the retailer completes his physical -- 14 completes his performance with reference to the physical 15 delivery of the property. 16 If the contract requires or authorizes the 17 retailer to send the property to the purchaser, but does 18 not require him to deliver it at destination, the 19 retailer completes his performance with reference to 20 physical delivery at the time and place of shipment. 21 But if the contract expressly requires delivery 22 at destination, such as one of the contract terms is 23 F. O. B. destination, the retailer completes his 24 performance with respect to physical delivery on tender 25 of purchase -- on tender to the purchaser there. 26 Under the Uniform Commercial Code, the 27 shipment -- a shipment contract is regarded as the 28 normal one and the destination contract is the variant 17 1 type. 2 The Master Sales Agreement's delivery provision 3 states that, 4 "Delivery shall be made from seller's 5 inventory point closest to the delivery 6 location or from such other location as 7 determined solely at seller's discretion. 8 Seller shall make a commercially reasonable 9 effort to effect delivery by or before the 10 delivery date requested by buyer in the 11 delivery order." 12 This provision only states from where and when 13 delivery should be made. There is no term expressly 14 requiring delivery at destination, such as through an 15 F. O. B. destination term. 16 Since the Master Sales Agreement does not 17 expressly require taxpayer to deliver the goods to its 18 customer in California, all sales occurred at the time 19 and place of shipment outside California. 20 The title and risk of loss clause in the 21 contract does not change this analysis. The title 22 clause allows for retention of security interest in the 23 goods by taxpayer. 24 Further, whether the seller or buyer assumes 25 the risk of loss during shipment is not dispositive as 26 to when and where the sales take place. The 27 transactions at issue are subject to use tax and the tax 28 should be allocated in accordance with the D & R's 18 1 recommendations. 2 Thank you. 3 MR. HORTON: Thank you very much. 4 We're going to to to Miss Sturdivant. Please 5 commence with your introduction. We'll allow you five 6 minutes to share your thoughts. 7 MS. STURDIVANT: Thank you. Good morning, 8 Chair and Members, my name is Robin Sturdivant with the 9 HdL Companies. I am here representing the City of 10 Burbank. 11 This will be a little bit repetitive from what 12 Mr. Huxsoll said. Regulation 1628 (b)(3)(D) applies the 13 rules that are set forth in the Uniform Commercial Code, 14 Section 2401. 15 "Unless the contract expressly requires 16 delivery at destination, the retailer completes 17 his performance with reference to physical 18 delivery at the time and place the property's 19 delivered to the common carrier, even though a 20 document of title is to be delivered at another 21 time or place." 22 There is no requirement in the Master Sales 23 Agreement that requires a seller to deliver the goods at 24 destination. Neither the delivery clause, which is 25 Section 8 in Master Sales Agreement, or the title 26 clause, which is Section 11, expressly requires delivery 27 at destination. 28 Item 4 is not a contract term, it's a 19 1 definition and also can't govern the contract. The 2 regulation is clear. The contract must expressly 3 require. The definition of "expressly" is explicit or 4 specifically. That requirement can not be satisfied by 5 interpreting or implying that nonspecific terms mean 6 certain things. 7 Since the M. S. A. does not expressly, 8 explicitly or specifically state that delivery is 9 required at destination, the sale occurs and the tax is 10 applicable where the goods are handed over to the common 11 carrier out of state and, therefore, use tax applies. 12 Our argument is supported by the UCC, 13 Section 2401, by Regulation 1628 and the Rev. and Tax 14 Code Section 6006. Fillmore and the taxpayer cannot 15 contract their way around the law by suggesting that the 16 terms are implied in their contract. 17 And now on to the question of permit. No one 18 has argued that this taxpayer shouldn't hold a permit. 19 But Fillmore and the taxpayer seem to be under the 20 impression that because the taxpayer is a buying 21 company, they get to choose where the permit is issued 22 and where the local tax is allocated. 23 At best, the Fillmore office may have been a 24 place of sale during the three or four hour period when 25 the Master Sales Agreement was allegedly negotiated. 26 Seller's permits are issued to places where 27 sales are customarily negotiated. A three or four hour 28 visit in 2003 does not translate into "customarily." 20 1 Permits are also issued to places where branch offices 2 where orders are customarily taken or locations where 3 merchandise are stored. The Fillmore office doesn't 4 satisfy any of those requirements. 5 Furthermore, Regulation 1802 (a)(2)(B) says, 6 "An employee's activities will be 7 attributable to the place out of which he or 8 she works." 9 The two men that signed the Master Sales 10 Agreement on behalf of the taxpayer and the parent 11 worked out of the Burbank office, not Fillmore. We have 12 one visit seven years ago to an office that has remained 13 virtually empty ever since. That's not sufficient 14 activity to warrant a seller's permit. 15 And, briefly, just to address the purchase 16 orders and the authorizations to release inventory that 17 Mr. Vinatieri discussed, these are extra steps that were 18 added in order to satisfy the Master Sales Agreement and 19 the tax sharing agreement that the parties entered into. 20 At the Appeals conference it was made clear 21 that these steps in no way are incorporated into the 22 electronic online ordering system that the taxpayer and 23 the parent company share. They're independent and that 24 the Fillmore office doesn't have access to the online 25 ordering system and it's clear from the dates of some of 26 the purchase orders and authorizations to release 27 inventory that the online ordering system activities 28 would take place and would go forward, regardless of 21 1 when those authorizations or P. O.'s were received. 2 The purchase orders were also faxed to Fillmore 3 by a representative in the Tax -- the Tax Department of 4 the taxpayer, not someone who customarily would place 5 orders. Again it was done to support the sharing 6 agreement. 7 Thank you. 8 MR. HORTON: Thank you very much. 9 On rebuttal we'll allow you seven minutes to 10 balance it out. 11 Please commence. 12 MR. VINATIERI: Thank you. Let me point out a 13 couple of things to you, first of all. 14 With respect to the -- I didn't have time to 15 get into it, but there is an annotation that's in our 16 brief that is very close to being on point to this 17 situation. And that is this annotation 7 -- 715.0518, 18 which was a buying company situation with respect to 19 sale of fuels. The question was does the -- is the 20 San Francisco location the proper place? 21 And what's really interesting about it is -- I 22 passed it out to you and hopefully you have it in front 23 of you, it was not in this packet, it was an add-on -- 24 but if you go ahead and you look at that particular 25 exhibit, you will note, if you go to the -- to the 26 second page, page 2, it says, "You also write," and then 27 it says, 28 "My second question pertains to the 22 1 establishment of a location in California. As 2 indicated earlier, written documentation 3 appears to support that the sub maintains a 4 location in San Francisco." 5 This was a -- this was a buying company 6 situation, very similar to the one here. 7 "However, it's been brought to my 8 attention," 9 And this is being written by a person trying to 10 get further information as to are we doing this right? 11 "It's been brought to my attention that the 12 only evidence supporting the existence of the 13 San Francisco location's on paper. In other 14 words, there appears to be no functioning, 15 physical presence in the San Francisco office. 16 "To present the appearance that the sub's 17 San Francisco office does exist, rental 18 payments for office space is made to the 19 airline from the subsidiary and a management 20 agreement, copy attached, is entered into. The 21 agreement provides for the services of various 22 airline personnel to perform the business 23 functions of the sub." 24 Very interesting. Go to the next -- to the 25 last page, page 4, second paragraph, and this is from -- 26 you'll note this is from John Abbott, who's since 27 retired. Many of us used to work with John when he was 28 here and he did a lot of local tax. 23 1 "Our opinion is that if there are facts 2 which indicate that U employees, acting as 3 agents on behalf of E in U's San Francisco 4 office," in the same office, not a separate 5 office, the same office, "take any part -- any 6 part in negotiations for the sale of fuel by E 7 to U (including, for example, taking orders for 8 quantities of fuel to be delivered), then those 9 facts would be sufficient to establish that E 10 has a place of business in San Francisco for 11 Bradley-Burns purposes. It would not matter 12 whether the principal negotiations for the 13 sales occurred in Chicago." 14 Well, what do we have going on here? We have 15 the negotiations took place here in Fillmore. We have 16 the fact that we had the requirements contract, remember 17 what a requirements contract is, if you look again, once 18 again, at Exhibit -- Exhibit A, on page 6, it's a 19 requirements contract. This one is a requirements 20 contract like that one. 21 This says that basically -- the Abbott letter 22 says that if you're doing anything, because they 23 understand the informality of buying companies, then it 24 will -- it will -- that will be person -- the place for 25 purposes of the allocation. 26 So, what we have here is we have the 27 requirements contract I just showed you, page 6. We 28 have this annotation that talks specifically about 24 1 requirements contract. We have the fact that the 2 Fillmore office took the P. O.s. You have the 3 annotation talking about taking orders. 4 So, the question is why is this case, the 5 Fillmore case, any different than the Abbott letter? In 6 fact, I think our case is stronger than the Abbott 7 letter. 8 Why shouldn't the annotation be dispositive of 9 our case? The problem I have here is that I think 10 there's been some -- some overlay of some innuendo -- 11 I'm not going to get into it. 12 But the fact of the matter is, when this Board 13 did (h), they could have done various things. They 14 didn't back in 2002. 15 When this Board heard (h) in '05, the staff 16 even said, hey, we want to change this "shall" language. 17 The Board said no. There were reasons for that. And 18 some of you were here. 19 My point is that maybe people don't like the 20 way things work with buying companies and that, but 21 there is a longstanding precedent here at this Board 22 relative to (h), relative to the Abbott letter, relative 23 to some other things that I haven't even given to you 24 that uphold these situations. 25 And if people don't like the way it is, I 26 understand that. Then they need to change the 27 regulation. They need to change the law. But don't -- 28 don't hurt Fillmore. Don't cause a problem for 25 1 Fillmore, who is -- basically went and did this 2 predicated on the longstanding existence of the letter 3 of (h), et cetera. 4 And that's the long -- kind of the long and the 5 short of it. And the fact that -- that Miss Sturdivant 6 talked about customarily negotiated and actively engaged 7 in, that's all language from (a), but (h) trumps (a). 8 If the Board doesn't want -- doesn't like that, 9 then the Board can change it. But that's the law as it 10 exists today. That's the law existing as of the time 11 that this was done. Fillmore should receive this 12 allocation. 13 MR. HORTON: Thank you very much. 14 Discussion, Members? 15 Hearing none, is there a motion? 16 MR. RUNNER: No, I think, we're -- 17 MR. HORTON: All right. 18 MR. RUNNER: -- thinking about what the 19 question is. 20 MR. HORTON: All right. 21 MS. YEE: I'll start. 22 MR. HORTON: All right, Member Yee. 23 MS. YEE: Thank you. 24 Maybe this is a question for the Appeals 25 Division. I'm trying to reconcile some of the terms of 26 the contract and particularly the provision that speaks 27 to the -- wait a second -- the title and risk of loss. 28 And I'm trying to reconcile that with the Uniform 26 1 Commercial Code provisions. 2 I guess what I'm looking for is what's the 3 context in which we ought to be looking at the UCC 4 provisions? Because I thought that that also speaks to, 5 you know, what happens during the course of the 6 transaction should there be loss along the way. 7 And, so, I'm just trying to reconcile the two. 8 MR. LEVINE: One of the purposes of the UCC in 9 this area was to take risk of loss out of the equation 10 about when the sale occurs. 11 Risk of loss is still important as between the 12 parties in determining who has the risk of loss and who 13 is going to bear the cost of damage to the property in 14 shipment. 15 MS. YEE: Uh-huh. 16 MR. LEVINE: But the UCC is explicit that once 17 the seller's duties with respect to physical delivery of 18 the property is complete, any retention of title after 19 that point is solely a security. Risk of loss is 20 irrelevant. 21 It is the responsibility for delivery. And the 22 UCC intended to get risk of loss out of the equation on 23 that element. 24 And risk of loss gets confused because prior 25 law, it was very important. And even those of us who 26 went to law school well after the Commercial Code was 27 adopted were still dealing with cases that were 28 addressing prior law. And, so, you get recently 27 1 admitted attorneys confused on that point because 2 they've been reading old cases that are no longer 3 relevant on this point. 4 MS. YEE: Okay, all right. 5 So, with respect to this Provision 11, that's - 6 in the contract, in the Master Agreement, it speaks to 7 title of goods trans -- delivered to the buyer in 8 California shall pass upon delivery to buyer at buyer's 9 location. 10 What about the other portion of this title, 11 which suggests retention of security interest, that in 12 relationship to the UCC? 13 MR. LEVINE: It seems counterintuitive, but the 14 retention of title after delivery is irrelevant. But 15 retention of delivery obligations is very relevant. 16 The parties can pass title sooner, as long as 17 the property is identified to the contract, that it 18 exists and they can point to it. They can pass title as 19 soon as they can point to the property, but they can't 20 pass title for purposes of sale after delivery 21 obligations are completed. 22 So, if the contract retains delivery 23 obligations, normally by F. O. B. destination, and they 24 pass title sooner, that title passes provision would 25 apply because they can do that. They can pass title 26 sooner. 27 But a retention of title after delivery 28 obligations is solely for security and is not relevant 28 1 for our purposes. So, the focus here is did they retain 2 delivery obligations until destination? If so, because 3 they didn't have an early title passage provision, 4 obviously, they tried to obtain it later, title would 5 pass at destination in California. If they did not 6 retain delivery obligations within the meaning of that 7 term, then the sale occurred out of state. 8 MS. YEE: All right. I appreciate that 9 clarification. 10 Let me ask then the -- Mr. Vinatieri, given 11 that, as the agreement was being developed, what was the 12 thought process there, knowing -- 13 MR. VINATIERI: There was a discussion of this 14 at the Appeals conference. I went back and looked at 15 the transcript earlier today. 16 And apparently the largest problem, the largest 17 portion of the issue related to this very thing and, 18 that is, who had risk of loss? Was it going to be the 19 seller or was it going to be the buyer? 20 And in the transcript it's discussed that there 21 was quite a -- I don't want to say -- what was the word 22 here that was used? It was -- it wasn't heated 23 because -- it was "hotly debated," quote, unquote, 24 because each party, obviously, if you have risk of loss, 25 you don't want to have that risk of loss. 26 They ended up agreeing that the risk of loss 27 would take place once the goods transferred in 28 California. 29 1 Also in accord was that the transfer of title 2 would then take place also upon delivery of those goods 3 in California. And that's -- that was the testimony at 4 the Appeals conference. 5 That's why this provision is so black and 6 white. And I would just indicate to you that I just got 7 a copy of the California Commercial Code and I think in 8 accord with what Mr. Levine is saying is that the 9 default position on transfer of title is that once you 10 give it to the common carrier, that's transfer of title 11 unless -- unless the parties, as it says here in (b), it 12 says, 13 "Unless, but if the contract requires 14 delivery at destination, title passes on tender 15 there." 16 So, that's a specific carve out. The default 17 is you give it to the common carrier, title passes, risk 18 of loss passes. However, if the contract between the 19 parties specifically sets forth something other than 20 that, then, as it says, title passes on tender when the 21 contract requires delivery at destination. 22 And here, this contract, I didn't give you the 23 whole contract because there's confidential information 24 in it, but I believe the word "California" is in there 25 15, 16, 17 times. It's clear what the parties were 26 intending. They wanted delivery in California to the 27 buyer. 28 MS. YEE: Okay. I'm going to go back to 30 1 Mr. Levine. 2 Can you elaborate on the context with which we 3 should be looking at that default provision in the UCC? 4 MR. LEVINE: Every contract that has a 5 shipping -- when you order from Amazon and pay the tax 6 on your returns, there -- in common parlance, Amazon is 7 required to ship it to you because if you don't get it, 8 you're not going to pay it and that's the deal. 9 But if the contract is silent, then it's 10 regarded as a shipment contract. And there are -- I 11 don't have them right in front of me -- but there are 12 comments -- in the official comments, the UCC explained 13 that relationship, that just having to ship it to the 14 destination does not make it a destination contract 15 because all shipment contracts require shipment to a 16 specific place, or almost all. There could some where 17 the customer sends a common carrier, but we don't see 18 too often, although they happen. 19 Just because you have to ship it to the 20 customer doesn't make it a destination contract. There 21 has to be a provision in there that is normally F. O. B. 22 and that's what our regulation says. 23 Which our regulation -- which is our 24 interpretation of how the UCC applies to our sale, our - 25 sales and use tax law covers that and says, 26 ""Delivery of the property to a carrier for 27 delivery by the carrier to the purchaser" -- 28 I'm sorry. 31 1 "If the contract requires or authorizes the 2 retailer to send the property to the purchaser, 3 but does not require him to deliver it at 4 destination, the retailer completes performance 5 at shipping." 6 And then it goes on to say, 7 "If a contract expressly requires delivery 8 at destination, including cases where one of 9 the terms of the contract is F. O. B. place of 10 destination." 11 It requires more than just, "We're going to 12 ship it to you." 13 MS. YEE: Okay. 14 MR. VINATIERI: Might I respond to that? 15 MS. YEE: Yeah. And, actually, maybe you 16 believe you complied with the regulation, Mr. Vinatieri? 17 MR. VINATIERI: Uh -- 18 MS. YEE: With the provisions of the contract? 19 MR. VINATIERI: -- clearly. Let me just point 20 out a couple of things -- 21 MS. YEE: Yeah. 22 MR. VINATIERI: -- to retort Mr. Levine. 23 He said if the contract is silent. He is 24 correct. 25 Here there's nothing silent about this 26 contract. It cries out "California, California, 27 California," 15, 16, 17 times. 28 Secondly, go back to Reg 1628, 32 1 "But if the contract expressly requires 2 delivery at destination," California, 3 California, California, "including cases where 4 one of the terms of the contract is F. O. B. 5 place of destination, including --" 6 Not, not -- not excluding, including -- so, 7 it's an example. It's not dispositive, it's but an 8 example, 9 "Including cases where one of the terms of 10 the is contract is F. O. B. place of 11 destination, the retailer completes his 12 performance with reference to the physical 13 delivery of the property on tender to the 14 purchaser there." 15 Which is exactly what the carve out, nondefault 16 position is I just read to you in 2401, California 17 Commercial Code -- the UCC here in California. 18 That's exactly what's going on here 19 MS. YEE: And I guess I don't -- all I see in 20 terms of references to California in the agreement is a 21 definition, obviously, the goods purchased for use in 22 California and the location of the -- well, of the agent 23 in Fillmore. 24 Let me look at this further, Mr. Chairman. 25 Thank you. 26 MR. HORTON: Mr. Runner. 27 MR. RUNNER: Just a follow-up. 28 Can -- can I have Appeals go through again and 33 1 the -- the reciting that you just did in regards to the 2 language of the F. O. B., can you read that one more 3 time for me? 4 MR. LEVINE: The entire provision is, 5 "If the contract requires or authorizes the 6 retailer to send the property to the purchaser 7 but does not require him to deliver it at 8 destination, the retailer completes his 9 performance with reference to the physical 10 delivery of the property at the time and place 11 of shipment. For example, delivery of the 12 property to a carrier for delivery by the 13 carrier to the purchaser. But if the contract 14 expressly requires delivery at destination, 15 including cases where one of the terms of the 16 contract is F. O. B. place of destination, the 17 retailer completes his performance with 18 reference to the physical delivery of the 19 property on tender to the delivery of the 20 property there." 21 MR. RUNNER: Okay. Let me -- let me just 22 follow up on that because again I'm trying -- what I am 23 at least hearing, maybe in this discussion somebody can 24 help me understand, that it must include F. O. B. 25 But what -- what it seems to me I just heard 26 that F. O. B. is just used as an example of one of the 27 things that it could include. 28 Is that -- am I -- is that -- 34 1 MR. LEVINE: That's it says. 2 We -- we have interpreted this to require a 3 specific provision of destination delivery and the big 4 ticket one is F. O. B. place of destination. That is 5 how the parties generally seek to come within this 6 provision. 7 MR. RUNNER: Okay. But, again, I'm just trying 8 to read -- I mean, I guess it's interesting in terms of 9 what we generally try to do. 10 But I'm just trying to think here and it says, 11 "Including cases where one of the express 12 -- contract expressly requires delivery to the 13 state, including cases where one of the terms 14 of the contract is F. O. B. place -- is 15 F. O. B." 16 Doesn't that leave open other issues, including 17 cases? So, that means if you are including cases, that 18 means you are also excluding cases, right? 19 You're saying that there's these cases that 20 include that particular provision, but that may -- that, 21 by the assumption, means that there's some that don't 22 include that provision that may qualify. 23 MR. LEVINE: Well, if you were writing a 24 contract trying to shift sales tax to your location, 25 wouldn't you put in that provision to avoid any 26 argument? 27 MR. RUNNER: Well, there's a lot of things 28 people would like to do once they're questioned that 35 1 they wish they would have done. That's really -- it 2 seems to me not the issue before us. 3 The issue is, I believe -- at least what I'm 4 hearing -- is that they feel like they satisfied it 5 without that, I think is -- I think is what their answer 6 would be. But I'll let them answer that. 7 But, again, I just want to -- so, there is no 8 requirement that you must have F. O. B.? 9 MR. LEVINE: No. 10 MR. RUNNER: Okay. 11 MR. LEVINE: You must have a destination 12 contract and -- 13 MR. RUNNER: Okay. 14 MR. LEVINE: -- again, we split the baby that 15 way because how else do you tell the difference between 16 -- as I say, when you order something, in common 17 parlance, we would say to the retailer, "You're required 18 to get it delivered to me." 19 MR. RUNNER: Well, that -- 20 MR. LEVINE: If I don't get it, I'm not 21 going -- I'm going to complain. 22 MR. RUNNER: Okay. And again I -- again, that 23 being said, F. O. B. -- other kinds -- well, let me ask 24 you this, let me ask this, what other kinds of things 25 would then satisfy if somebody chose to do something 26 other than F. O. B.? 27 MS. STURDIVANT: If the seller delivered the 28 property in their own vehicles. 36 1 MS. MANDEL: That's a -- that's a separate part 2 of the regulation. 3 MR. RUNNER: That's different, though, right. 4 So, what other things could -- if it wasn't 5 F. O. B., what else could it be? 6 Because clearly it could be other things 7 according to the regulation. 8 MS. NIENOW: Mr. Runner, the provision prior to 9 that including statement indicates, 10 "But if the contract expressly requires 11 delivery at destination." 12 So, if the contract specifically stated that 13 delivery was required, using the word "required at 14 destination," I think we would accept a clause like 15 that. 16 This contract -- 17 MR. RUNNER: Well, then maybe -- 18 MS. NIENOW: -- does not express that. 19 MR. RUNNER: Going to that issue then, why 20 doesn't the title issue -- title of goods -- 21 "Title to goods delivered to buyers in 22 California shall pass upon delivery of the 23 buyer at buyer's location." 24 Why doesn't that satisfy that issue? 25 MS. NIENOW: Because it's not specifically, 26 expressly requiring delivery at destination. 27 We think expressly requires -- 28 MR. RUNNER: Well, if they -- if they delivered 37 1 it somewhere else, wouldn't that be out of the contract? 2 MS. NIENOW: -- if they delivered it somewhere 3 else? 4 MR. RUNNER: Somewhere else? I mean, it -- it 5 seems to me if you -- it seems to me here they're 6 saying, "You've got to deliver it to the buyer or to the 7 -- yeah, to the buyer. 8 MS. NIENOW: But that's a standard ship to sort 9 of language. 10 MR. LEVINE: It would be the same thing as if 11 Amazon misaddresses your package. It's still not a 12 destination contract, even though they've -- they're in 13 breach of the contract because they shipped it wrong. 14 MR. RUNNER: I guess -- is this about shipping 15 or this is about title, though? 16 MR. LEVINE: This is about shipping. 17 MR. RUNNER: But title -- 18 MR. LEVINE: You cannot control destination by 19 a title passage provision. That's the whole point that 20 UCC took retention of title out of the equation. It is 21 a shipping and destination issue. 22 MR. RUNNER: Let me go back to the -- to the 23 taxpayer at that point. 24 Obviously, this is an interesting, nuanced 25 discussion in regards to what the application of -- of 26 the -- of -- of the Code is. 27 Clearly, there's other provisions available in 28 regards to F. O. B. that are yet to be -- that somehow I 38 1 don't know if we've discovered yet. 2 Let me go back to the intent of the contract. 3 What was the intent of the contract, interpreting the 4 language that was before us? 5 MR. VINATIERI: The intent of the contract is 6 very clear, page 1, 7 "California inventory shall mean goods 8 belonging to seller located in the State of 9 California, or to be delivered to buyer -- 10 delivered to buyer, physical delivery within, 11 where, the State of California." 12 It's black and white. And then if we go once 13 again back to 17, 14 "Sale, sell or selling shall mean the 15 transfer of title and ownership from seller to 16 buyer, together with the receipt by seller of 17 the full consideration due from buyer." 18 Get this, 19 "The earlier transfer of possession or any 20 other interest or right in or to the goods 21 shall not be a sale from seller to buyer and 22 shall be fully revocable by seller until such 23 time as the sale occurs." 24 The contemplation being that somehow, even if 25 the buyer received those goods at an earlier time, it 26 wasn't going to be a sale because the sale had to take 27 place in California per the definition of California 28 inventory. 39 1 And the other thing that -- that militates in 2 this direction is the fact that the title and risk of 3 loss, title to goods delivered to buyer in California -- 4 in California shall pass upon delivery to buyer. Where? 5 At buyer's location in California, per the first clause. 6 And then the thing that caps this whole 7 thing -- and I feel like this is Alice in Wonderland, 8 risk of loss, which was an important part of the 9 negotiation, risk of loss shall transfer. When? To 10 buyer upon delivery. Where? In California. 11 The only thing we're missing, according to the 12 staff's very narrow and exclusive interpretation, is 13 something that says, "F. O. B. destination." 14 But their own regulation provides that there's 15 other ways of proving that, in fact, title passes in a 16 way other than the default mechanism. 17 I would posit to this Board that they have gone 18 out of their way in the context of this contract to make 19 sure that title does pass in California. There is no 20 security interest here. This was one of the important 21 negotiating parts of the contract. And that is in the 22 transcript of the Appeals conference. 23 MR. RUNNER: Okay, thank you. 24 MR. HORTON: Further discussion, Members? 25 MS. MANDEL: Yeah. 26 MR. HORTON: Ms. Mandel. 27 MS. MANDEL: A follow-up question on that. 28 In looking at the contract in the definition of 40 1 California inventory is to be goods delivered -- to be 2 delivered to buyer within the State of California. 3 If I'm looking at page 6 of the contract, and 4 this is a requirements contract, what the buyer is -- 5 your point is that what the buyer is ordering is 6 California inventory. That's how you tie in the 7 definition back to -- there was an assertion that those 8 are just definitions, they are not the contract, but -- 9 but the -- you're not the taxpayer -- Fillmore's view of 10 the taxpayer's contract is that the -- what is being 11 purchased is specifically California inventory? 12 MR. VINATIERI: For use -- 13 MS. MANDEL: And, so, it's only California 14 inventory if it's either already stored here by the 15 taxpayer or it's to be delivered to the buyer in 16 California. 17 And because it's a requirements contract and 18 what it is that they say they're buying, that's where 19 you tie it back to they are required -- the stuff that 20 they are selling, they are required to deliver it to the 21 buyer in California. 22 MR. VINATIERI: -- in California. And that's 23 why it's titled, "California inventory" under this 24 section of the requirements contract. That's correct. 25 MS. MANDEL: And it's -- it's -- it's been a 26 long time, but I remember a lot of discussion of risk of 27 loss in cases at the Board where there was not an 28 F. O. B. clause and the Board was trying to determine 41 1 where or when title passed. So -- 2 MR. VINATIERI: Absolutely. 3 That's why we always say what does the contract 4 say? 5 And it was during that period of time, 6 Ms. Mandel, that you're talking about, because I 7 remember it specifically, everyone kept saying, "Well, 8 what does the contract say?" 9 And the problem was in most of those situations 10 there was no contract. All you had was a purchase order 11 or something like that. And the question was, did that 12 rise to the level of contract? 13 Today -- that's what I don't get here. We have 14 a contract. We finally have a contract. I had one of 15 those cases. And it was very frustrating. 16 But here we have a contract. And it's black 17 and white -- or colored yellow, I should say. 18 MS. YEE: Mr. Chair? 19 MR. HORTON: Member Yee. 20 MS. YEE: I guess I don't want to move off of 21 this matter 'til I ask maybe the second tier level of 22 questions. 23 And that is, what activities actually took 24 place in Fillmore, if I could? I know the agreement -- 25 well, I guess there's statements made about the 26 agreement having been negotiated in Fillmore. Can you 27 describe, Mr. Vinatieri, the exact activities that took 28 place in the Fillmore location? 42 1 MR. VINATIERI: Yes. Let me -- let me go to 2 the transcript. 3 MS. YEE: Well, that -- 4 MR. VINATIERI: And I gave you verbally kind of 5 a breakdown of what's in the transcript. And this is 6 covered in the transcript, in a shortened version, on 7 pages 23 through 26. 8 MS. YEE: Actually, I -- if you could, just 9 kind of speak to the nature of the activity took that 10 took place in the office. 11 I'm am aware of what's been provided 12 previously, but I want to just, kind of in my head, get 13 a mental picture of what actually took place. 14 MR. VINATIERI: Yeah, my -- my understanding -- 15 and it's as we indicated, the taxpayer is not here, but 16 this was covered pretty much at the -- at the Appeals 17 conference. 18 There was the -- in the early days, the -- per 19 the M. S. A., a P. O. would come in. It would be 20 reviewed. 21 And in the early days there was a proprietary 22 fraud detection system that had been set up to make sure 23 that -- remember, these -- there is literally thousands 24 of apparel items that are being ordered on an ongoing 25 basis. This had been set up. There was apparently no 26 issue relative to this allocation. This had been going 27 on for approximately, as I understand, four years before 28 someone said, "Oh, we think we have a concern about the 43 1 allocation in Fillmore." 2 And, so, during that period of time there 3 was -- the P. O. would come in per the M. S. A. It 4 would be reviewed. They had a proprietary fraud 5 detection system. They would check to make sure that it 6 was a legitimate P. O. and order. 7 It would then be reviewed against the 8 requirements. Remember, this a requirements contract, 9 and there was only a certain amount of inventory up to a 10 certain dollar amount that could be approved on a 11 monthly basis. 12 So, they wanted to make sure -- and that was a 13 negotiating -- that was another part of the negotiation 14 between the buyer and the seller. They went ahead and 15 checked that, made sure there was no fraud. They 16 checked to see where it stood relative to the dollar 17 amounts. 18 Once it was -- it was -- it checked, passed 19 muster, then they did this authorization. They sent out 20 this authorization. 21 And then, of course, it went to the -- it went 22 to the warehouses and it went to all three. It 23 primarily went, I understand, to the Reno warehouse, but 24 then it went to the other two warehouses just in case 25 the Reno warehouse, my understanding was, didn't have 26 it. 27 Then it would be pulled at the Reno warehouse 28 based upon this ordering system that they had, it was an 44 1 electronic ordering system. They didn't do this all on 2 paper because there were literally thousands of items of 3 apparel we're talking about. 4 And, so, the access -- the ordering system, 5 which was a proprietary ordering system, they then 6 fulfill, picked those items at the warehouse and then 7 put them on a common carrier and they shipped them to 8 the buyer's location in California. 9 The buyer in California, when they checked to 10 make sure that they got what they were supposed to have 11 gotten, and then once you that was done, the deal -- the 12 order was finished. And it was consummated. 13 That's my understanding from -- from my 14 recollection and reading the transcript and some -- some 15 post Appeals conference submissions 16 MS. YEE: And how many people -- how many 17 people worked out of the Fillmore location? 18 MR. VINATIERI: There -- my understanding was 19 that -- that the consultant here had one employee who 20 was acting on behalf -- doing this particular activity. 21 And it's a little fuzzy in my mind. I know 22 it's at least -- it was happening at least one time a 23 month. I think it might have been twice a month, but I 24 -- now I'm just giving you a vague recollection, which I 25 shouldn't do 26 MS. YEE: So, let me see if I can square up the 27 agreement -- the provisions of the agreement with what 28 actually took place in Fillmore. 45 1 So, regarding the various responsibilities that 2 are spelled out in the agreement, all of those were 3 performed out of the Fillmore location? 4 MR. VINATIERI: Yes. Well, the -- in terms of 5 reviewing the P. O. and the like, yes. 6 I mean, obviously, the other portion came out 7 of the Reno warehouse or the Illinois or Georgia 8 warehouse. 9 MS. YEE: Okay. 10 MS. STURDIVANT: Actually, that's not correct. 11 The Master Sales Agreement says that the 12 Fillmore office will be responsible or have a part in 13 setting the price. 14 And at the Appeals conference they admitted 15 they had no part in that whatsoever, that it was done by 16 a committee at the headquarters office of the taxpayer 17 in Burbank. 18 MS. YEE: Okay. 19 MR. VINATIERI: I would point out to you that 20 it also states in the M. S. A. that the principal could 21 also establish the price. And that's also in the M. S. 22 A. on paragraph 5. 23 MS. YEE: All right. Thank you, Mr. Chairman. 24 I will stop there. 25 MR. HORTON: Further discussion, Members? 26 Question of the Department, I think part of the 27 challenge here is that you have -- I want to preface 28 this by saying I actually disagree with the regulation, 46 1 but that's that's a different -- and I disagree with it 2 because of the inconsistency in the interpretation when 3 you look at -- when the agency is looking at trying to 4 determine gross receipts as it relates to transportation 5 charges, the perception is different and the premise is 6 different relative to the law. 7 MR. VINATIERI: Uh-huh. 8 MR. HORTON: And then when you combine the 9 UCC's efforts to exclude, if you will, the passage of 10 title from the interpretation of actually possession, 11 when possession passes, that seems to be 12 counterintuitive as well, which was part of the 13 challenge that I was having with this. 14 And then the notion of delivery possession, 15 when does the purchaser take possession of the goods? 16 And that the title clause, apparently pursuant, 17 has little to do with the determination of when the 18 customer takes possession. 19 And we narrow it down to this notion of whether 20 or not we have a shipment contract versus a destination 21 contract, even when the intent of the taxpayer is to 22 only use the property in California, as stipulated in 23 the agreement, have the property delivered to 24 California. 25 So, I'm going to ask the Department if they 26 could distinguish those three different areas and kind 27 of speak to us as to where they're similar and where 28 they're different and which governs in this particular 47 1 case. 2 And then I'm going to go back to the taxpayer 3 and ask that they argue not title passage and argue 4 delivery -- and given that they're not necessarily one 5 of the same. 6 And then I would ask in the documents called 7 for in the contract, is there any -- there's a -- 8 there's a shipment document that indicates F. O. B. It 9 actually gives the seller and purchaser an opportunity 10 to check off F. O. B., freight on board, and destination 11 and so forth. 12 Was there any -- did you review those? And are 13 there any situations where you actually checked off 14 F. O. B. on those subsequent documents? 15 And in the trail you have a number of 16 documents, you have the purchase order, delivery order 17 and then you have the shipping document. On any of 18 those are you actually creating a destination delivery, 19 if you will? 20 Starting with the Department. 21 MR. HUXSOLL: Chairman Horton, I think what you 22 looked through in the beginning was the confusion in 23 applying the UCC to the sales and use tax law and -- 24 MR. HORTON: I didn't say I was confused. 25 MR. HUXSOLL: Not confusion, but the -- 26 MR. HORTON: I'm clear. I'm trying to bring 27 clarity. 28 MR. HUXSOLL: The UCC is important in 48 1 determining where a sale has taken place 'cause under 2 Regulation 1620 a sale must take place in California and 3 there must be participation by a local place of business 4 of the retailer in order for sales tax to apply. 5 The Department does not contest that these 6 items are ending up being used in California but the 7 nature of why we go to the UCC is determining the 8 character of the task, whether it is sales tax or use 9 tax. And that's where these provisions play a prevalent 10 role. 11 And, so, we -- we analyzed the terms of 12 Section 2401, as we've discussed at length here. And 13 the -- and we looked to where the sale has taken place. 14 And under 2401 a sale takes place at the point where a 15 seller completes his obligations with reference to 16 physical delivery of the property, notwithstanding the 17 fact that the contract may say that title transfers at a 18 later point. 19 That transfer of title is just retention of -- 20 that later transfer of title is just a retention -- a 21 security interest. But under the law these -- the 22 essential thing we're looking at in Section -- using 23 Section 2401 is where the sale has taken place. 24 And -- and that's why these terms need to be 25 examined throughout the contract to determine if there 26 is a delivery clause. 27 MR. HORTON: Any distinction if that occurred 28 in California, both seller and purchaser were in 49 1 California, and it was clearly a sales tax transaction 2 and use tax was not under consideration? Where 3 would -- where would possession take place. 4 MR. HUXSOLL: It would depend on the contract, 5 but it -- the title would transfer in California. The 6 sales would take place in California, but if it was a 7 shipment contract, it would be at the point at which the 8 retailer tendered the goods to the common carrier for 9 shipment to the purchaser. 10 If it were a destination contract, the sale 11 would take place upon delivery to the purchaser's 12 location or wherever the destination was elaborated in 13 the contract. 14 MR. HORTON: Okay. Mr. Vinatieri. 15 MR. VINATIERI: Yes. First of all, there is, 16 indeed, a problem with 1628, the very thing that the 17 Chair indicated is absolutely an issue. 18 It's been a problem, at least from my 19 perspective, and I have talked to other members of the 20 tax bar, that two different concepts get bollixed up 21 together and that is 1628 is all about transportation 22 charges and whether, in fact, a transportation charge is 23 part of gross receipts or whether it's not. 24 And, as you know, it's a part of gross receipts 25 if title transfers after the transportation and the 26 actual physical delivery takes place, then it's part of 27 gross receipts. 28 A lot of people, because they don't want their 50 1 transportation charges taxed, will set up that title 2 passes upon delivery to the common carrier, which is 3 usually shipment point. That's a different concept. 4 And this has come up I don't know how many 5 times over the years I've been involved with matters 6 with the State Board. That's a different situation than 7 what we're talking about today. 8 So, the problem is, we're using something -- if 9 you look at 1628, it's entitled what? Transportation 10 charges. So, we're using something that relates to the 11 arcane subject of transportation charges and trying to 12 use it in this context here. 13 And I would tell you that this particular 14 paragraph D, other sales, there's probably about four or 15 five sentences here that are -- that need to be broken 16 up into a different -- different paragraphs because each 17 one is different and means something different. 18 And what I did earlier, I tried to indicate 19 that basically the UCC 2401 says that the default 20 provision is that title passes upon delivery to the 21 common carrier, unless you can specifically show you 22 have an obligation to give physical delivery of the 23 goods to the purchaser at destination. 24 The problem we have here is that the staff 25 looks at this word -- and I think Mr. Runner brought it 26 out -- it says, 27 "Including cases where it says F. O. B. 28 place of destination." 51 1 The staff takes the default and says, well, 2 unless we see F. O. B. destination, we're going to 3 figure that title passes at the time it's given to the 4 common carrier. That's a way too narrow reading of not 5 only this language here, but the UCC. 6 Now, what happened here? We went and checked 7 to see if there were some invoices where there were some 8 bills of lading, whether we had some kind of shipment 9 documents. There is lots of shipment documents. 10 Nothing says, "F. O. B. place of shipment, F. O. B. 11 destination." It was silent. 12 Now I can't tell you why. I wish -- if we had 13 this to do all over again, we would have done, but you 14 know what, we have a pretty clear contract -- not a 15 pretty clear, it's a clear contract. 16 And the point is, as you just brought up, it's 17 in paragraph 11 because it says, 18 "Title to goods delivered to buyer in 19 California shall pass upon delivery." 20 Delivery means physical receipt of the goods. 21 Where? To buyer at buyer's location. Where is the 22 buyer located? In California. 23 And in accord with that is risk of loss, risk 24 of loss passes to the buyer once the buyer has the 25 physical goods in their hands. It's all consistent. 26 It's all very consistent. 27 MS. STEEL: Mr. Chairman? 28 MR. HORTON: Yes, Member Steel. 52 1 MS. STEEL: Just -- is there a buying company 2 in Fillmore? And what kind of activity is done in 3 Fillmore office? 4 MR. VINATIERI: The Fillmore office was the -- 5 the specific place for the seller. And then the 6 Fillmore office was done, as we said in the transcript 7 and the fax, was done by the -- the agent for the 8 seller. And they went through and did the process that 9 I gave to Ms. Yee. 10 Additionally -- and we don't want to forget 11 this -- where was the M. S. A. negotiated? Where did 12 the parties, the buyer and the seller, where did they 13 come together? They came together at that location in 14 Fillmore. 15 So, going back to what I said earlier, I think 16 once -- once you determine it's a sales tax, once you 17 determine it's an (h) situation, the case is done. 18 We have the right to the permit -- shall, shall 19 shall, shall, shall, shall. But even on top of that we 20 did the negotiations. And the other side tried to show 21 that somehow they weren't at arm's length and all that, 22 but there's no evidence and even the Appeals attorney 23 indicated in her D & R that you can make inuation -- 24 insinuation, but -- or innuendo, but the fact of the 25 matter is there's nothing in the record to show that it 26 wasn't anything but arm's length. And we have testimony 27 that they had debate relative to risk of loss. So -- 28 so, that took place there. 53 1 So, what I'm saying to you is I don't even 2 think you need to go to that. I mean I think it's good 3 that we have it, but I don't think we need to go to it 4 because that relates to what Ms. Sturdivant was talking 5 about earlier, and that is this issue of customarily 6 negotiated, that language of "customarily negotiated." 7 A person, activity so engaged. Where does that come 8 from? That comes from Section (a). 9 Well, Section (a) is all well and good, but 10 it's trumped by Section (h). And as I said earlier, I 11 gave you documentation that showed you in 2005 that it 12 seemed that the staff agreed at that point in time that, 13 in fact, once you have an (h) document, you're there. 14 You're there. 15 And they said you don't have to go to (a). I 16 mean, that's implication of what they said in the issue 17 paper in 2005. 18 We've got to be consistent here. 19 MR. HORTON: Okay. Member Yee. 20 MS. YEE: I'm sorry, I was listening to 21 Mr. Vinatieri and I may not have completed the thought 22 in my own head. 23 So, principal negotiations, we keep talking 24 about principal negotiations or negotiation of the 25 agreement. And I guess I am going to put that aside. 26 But in terms of principal negotiations that 27 took place after the agreement was signed onto by the 28 parties, did that continue to take place in Fillmore, to 54 1 fulfill -- 2 MR. VINATIERI: Well, no, it was a requirements 3 contract. And, so, what was going on in the 4 requirements contract, they had to go up -- they could 5 only go up to a certain amount per month that could be 6 purchased for a certain amount of money. 7 And, so, what happened was that there wasn't 8 really any negotiations, so to speak, the buyer would 9 say, we need X number of uniforms. And they'd go 10 through and determine that because they had, as we -- as 11 explained, they had this production center concept. 12 And, so, they would determine what had worn 13 out, what needed to be replaced, what needed to be new. 14 So, they would then enter into the proprietary data 15 system, the computer system, and they would put that 16 into the system. And then it would be determined 17 whether the seller had those types of items that they 18 needed in the quantities that they needed. 19 MS. YEE: Okay. So, what you're saying is even 20 though, I guess, how we would normally envision 21 principal negotiations, even if those took place 22 elsewhere, that the Fillmore location was still entitled 23 to be permitized? 24 MR. VINATIERI: Right. Because the principal 25 negotiation here is the M. S. A. Everything that 26 happened thereafter, and, remember, this was going on 27 for four years before the staff came in and said, oh, 28 there's something wrong here. 55 1 So -- so, this had been going on for quite 2 sometime. And -- and that's the way it worked. And 3 that's why I wanted to show you the John Abbott letter 4 because that's exactly, as I understand it from just 5 reading the letter, that's what was going on in the John 6 Abbott letter where he was giving advice to that 7 particular taxpayer, which I think was even -- was 8 somewhat of a loose situation, to be candid with you, 9 but it met the requirements. 10 MS. YEE: Okay. And to the Department, can you 11 comment about that? 12 I mean I'm kind of having a little -- kind of 13 stuck in my own mind about how to view these principal 14 negotiations under this type of contract, if they, 15 indeed, happened in a location other than Fillmore and 16 the requirement for a permit. 17 Can you -- 18 MR. HUXSOLL: The orders would be placed 19 through the taxpayer's direct order entry system from 20 the customer's location to the warehouse. 21 What took place in Fillmore was the faxing of 22 what's been referred to as a purchase order, but it 23 doesn't -- it doesn't list any specific quantities of 24 goods or prices for goods. 25 And the one employee in Fillmore, who was there 26 one to four days a month, would subsequently fax an 27 authorization to release inventory to the various 28 warehouses. 56 1 Interestingly, though, the authorizations would 2 be written in terms of -- there are several 3 authorizations in the file where -- ones -- they would 4 be issued mid-month for the month that they're 5 authorizing. 6 Like on August 14th of 2008, the authorization 7 was issued for August of 2008. And if this truly was an 8 authorization to release inventory for that month, then 9 it would indicate that no sales were allowed to take 10 place between these parties up until that point. 11 But that's not our understanding of the facts 12 here. It's our understanding that the orders continued 13 to go through same process they had before the Master 14 Sales Agreement had been entered into. 15 MS. STURDIVANT: I'd also like to add to that 16 that the Fillmore office, through the employee that was 17 located there, didn't have access to the taxpayer's 18 daily or direct ordering entry system. 19 And at the Appeals conference the taxpayer 20 admitted that those documents really didn't play a part 21 in the process. They were more for reminders. And it 22 was also revealed that the signatures on the 23 authorizations to release inventory had been -- several 24 of them had been falsified. And on some of the 25 documents the dates had been altered. 26 MS. STEEL: Mr. Huxsoll, the authorization was 27 delivered from where? Is that -- is that was done in 28 Fillmore? Is that what you said? 57 1 MR. HUXSOLL: The authorization was issued 2 from -- 3 MS. STEEL: Issued from -- 4 MR. HUXSOLL: -- Fillmore -- 5 MS. STEEL: -- Fillmore office.. 6 MR. HUXSOLL: -- to the taxpayer, the -- 7 MS. STEEL: So, main negotiation was done in 8 Fillmore office, at the Fillmore office? Is that what 9 you are saying? 10 Because authorization came from Fillmore office 11 means that buying was done from Fillmore office. 12 MR. HUXSOLL: No. The orders were placed from 13 the taxpayer's -- or the from the customer's location 14 directly to the warehouse. 15 The -- as Ms. Sturdivant said, the 16 authorizations were admitted to just as -- being akin to 17 a reminder to make these purchases that these companies 18 had been making between each other for many years prior 19 to this contract being entered into. 20 And we know that the authorization to release 21 inventory wasn't truly an authorization to do so because 22 it wasn't issued prior to the timing for which it 23 allowed authorization -- that being, there are many 24 occasions where at different periods during a month the 25 authorization would be issued to the warehouse -- to the 26 various warehouses. 27 MS. STEEL: Mr. Vinatieri? 28 MR. VINATIERI: Yes. 58 1 MS. STEEL: Sorry, I cut you off. 2 MS. YEE: No, no, you didn't. I'm -- 3 MS. STEEL: Can you answer that? 4 MR. VINATIERI: Yes. 5 MS. STEEL: Because my question was very 6 simple, is the buying company was in Fillmore or not? 7 So, you know, you were talking about other 8 stuffs that, you know, just -- I just want to have yes 9 or no. 10 And if authorization was issued from the 11 Fillmore, then they had authorization from Fillmore came 12 out. So, that's what I want to know here. 13 MR. VINATIERI: Yes. 14 MS. STEEL: Okay. 15 MR. VINATIERI: It came from the Fillmore 16 office. 17 MS. STEEL: Okay. 18 MR. VINATIERI: It came from the Fillmore 19 office. 20 But I need to -- I need to respond, I'm sorry. 21 I heard this word "falsified," that's a very 22 strong, strong word. Let me -- let's be clear about 23 what happened, all right? 24 This was a very -- 25 MR. HORTON: Mr. VINATIERI, before you -- not 26 anticipating what you might say, I don't want to do 27 that, but I want to encourage you not to deal with the 28 debate over falsifying or not, just state the facts, as 59 1 you see them -- 2 MR. VINATIERI: Uhm -- 3 MR. HORTON: -- which should give you the -- 4 MR. VINATIERI: -- yeah, falsification is a 5 very loaded word. 6 MR. HORTON: Okay, you didn't falsify. 7 MR. VINATIERI: That's correct. 8 MR. HORTON: All right. 9 MR. VINATIERI: That's correct. 10 There was the employee who was there, who was 11 there, you know, at least once, twice, maybe three, four 12 times, whatever it was. There is a huge amount of 13 inventory that's being done, okay? 14 And there's a flow to this. There's a flow to 15 how it's being done to make sure they're meeting the 16 needs because it's a requirements contract. 17 There is one occasion where there was a 18 situation where the employee, as I understand it her 19 husband was there and was -- was at the same location 20 and was doing the review and apparently -- you know 21 what, let's just put it this way, we had a substitute on 22 at least one occasion maybe, we know it's one occasion, 23 we had a substitute person doing the review and did it 24 in a way -- wrote the employee's name off. That's why 25 you have a different signature. 26 Another time we had the husband of the employee 27 was there also and looked at some of these records and 28 wrote her name down, but she was using her maiden name 60 1 and he wrote down their married name. 2 So, my understanding -- this is all hearsay, 3 obviously -- but we have a strong word that's been used, 4 that's my understanding as to what took place. And this 5 was not something that happened every day. 6 I mean, the flow was the flow was the flow. We 7 had these -- we had a couple of these situations. 8 MS. STURDIVANT: If I am writing someone else's 9 name -- 10 MR. HORTON: Excuse me. Member Steel. 11 MS. STEEL: I am done, thank you. 12 MR. HORTON: Member Yee. 13 MS. YEE: I am concluded, thank you. 14 MR. HORTON: Okay. Does the -- question of the 15 Department, does the M. S. A. agreement control all of 16 the subsequent transactions relative to the place of 17 sale or -- and would it be interpreted by the Department 18 as the principal place of negotiation of all subsequent 19 transactions as well? 20 MR. HUXSOLL: The location where the 21 negotiations took place in the contract would be the 22 principal negotiations on that particular contract. 23 If the taxpayer had continued to have a place 24 of business at the location where the contract was 25 negotiated initially, because of that initial 26 negotiation, future transactions made under that 27 contract would have a place of sale of the location 28 where the contract was executed. 61 1 MR. HORTON: That's good enough. 2 MR. HUXSOLL: Okay. 3 MR. HORTON: So, the -- it's the Department's 4 position that the Fillmore location was not a -- not -- 5 not permitized, not a place of sale? 6 MR. HUXSOLL: Yes, it's the Department's 7 position that after -- that the only activity that the 8 taxpayer -- 9 MR. HORTON: Not the subsequent activity, based 10 on the activity during the negotiation of the 11 transaction, what would be the Department's 12 determination as to whether or not that was a place of 13 business requiring a permit at that particular point in 14 time, given that your most recent testimony was that 15 subsequent relocation, subsequent activity doesn't 16 matter -- as long as they continue to operate there. 17 MR. HUXSOLL: I would state that they did not 18 continue to operate there because the activities of the 19 agent at that location weren't participation within the 20 subsequent sales. 21 What was done subsequently to that is the 22 authorization to release inventory that I discussed 23 prior. 24 But as I'd also mentioned that -- that the 25 orders were actually placed through the direct order 26 entry system. And the activities that were taking place 27 in Fillmore, as far as authorizing the release of 28 inventory, do not indicate that they were truly 62 1 authorizing the release of inventory such that they're 2 involved in the sale in any way after that negotiation 3 had taken place. 4 The -- further, the Fillmore location is a 5 place of business, not of the taxpayer, but of its 6 agent. 7 MR. HORTON: Uh-huh. 8 MR. HUXSOLL: And, so, we would not view that 9 as the location where the taxpayer should get a seller's 10 permit. 11 MR. HORTON: So, is there a -- is there a 12 location that you believe should have a seller's permit 13 or did have a seller's permit based on the evidence that 14 you've observed? 15 MR. HUXSOLL: No, because I don't believe 16 there's a location where sales were customarily 17 negotiated by this particular taxpayer. I don't know 18 what place of business would be permitted. 19 MR. HORTON: Okay. Ms. Mandel. 20 MS. MANDEL: Now -- now you have me confused 21 because I feel like you went in a giant circle. 22 MR. HUXSOLL: I might have. 23 MS. MANDEL: But, you know, I was reading 24 something at the beginning of the circle, so -- the 25 beginning of the circle that I heard was that -- that if 26 the contract -- the contract being negotiated and signed 27 in a place, that the future activities, if that place 28 was the place of sale under that contract, the future 63 1 activities -- the future activities didn't matter 2 because everything sold under that contract. 3 That's what I heard you say at the beginning 4 before Mr. Horton asked his question -- which I thought 5 you didn't really answer, but we'll get to that. 6 So, can you go through that bit again where 7 you -- excuse me -- where you said that the -- where 8 the -- where the contract was that everything goes back 9 to where the contract was? 10 MR. HUXSOLL: It goes back to where the 11 contract was provided that the location of the contract 12 was -- continues to be a place of business of the 13 taxpayer. 14 MS. MANDEL: You think it has to continue to be 15 a place of business, that's the part that I didn't hear 16 the first time you said it. 17 And the question that I heard asked was whether 18 at the time that the contract was signed, whether at 19 that time Fillmore -- I don't know how to say it 20 right -- Fillmore should have had a -- that the permit 21 should have been at Fillmore at that time. 22 Because I thought the question was asked, you 23 know, forgetting about everything that happened later, 24 at that time was the question, whether Fillmore was a 25 proper place for a permit. 26 MR. HUXSOLL: Uhm -- 27 MS. MANDEL: Because the contract was 28 negotiated and signed there. 64 1 MR. HUXSOLL: -- well -- 2 MS. MANDEL: I thought that was the question, 3 to try to figure out whether there was a dispute from 4 the Department on that point. 5 MR. HUXSOLL: -- uhm -- 6 MS. MANDEL: Because you're so focused on, you 7 know, ordering under the contract, but -- 8 MR. HUXSOLL: I don't know that I would view a 9 -- ignoring what's going on subsequent to that, if I 10 would view the one time negotiation of a contract as 11 justifying the issuance -- or requiring the issuance of 12 a seller's permit. 13 I'm going a little back and forth because in 14 this case I believe the location stopped being a place 15 of business of the taxpayer, such that -- 16 MS. MANDEL: The taxpayer can't -- cannot act 17 through agents. 18 MR. HUXSOLL: -- no, I'm saying the agents, in 19 this case, were not participating in the sales. 20 MS. MANDEL: That's the subsequent, 'cause my 21 understanding is that it was clearly employees of the 22 taxpayer and its customer that signed the -- went -- 23 that were in Fillmore and -- and, you know, at least 24 fought over risk of loss, if nothing else, and signed a 25 contract in Fillmore. 26 But that the agent issue is a question with 27 respect to what was happening later as the orders were 28 being handled. 65 1 MR. HUXSOLL: That's -- 2 MS. MANDEL: And so then, you're essentially 3 saying that a company can't act through agents and only 4 through true employees? 5 And I'm not sure if that's -- 6 MR. HUXSOLL: What I'm trying to say -- 7 MS. MANDEL: -- true. 8 MR. HUXSOLL: -- is the activities of the 9 agents in this case would not justify -- would not lead 10 to categorizing this as a place of business -- 11 MS. MANDEL: Even if -- 12 MR. HUXSOLL: -- of the retailer. 13 MS. MANDEL: -- even if they had an employee 14 sitting there doing the same stuff, then you'd come to 15 this same conclusion, presumably, if -- if a company can 16 act through agents as well as employees, unless you want 17 to say they can't act through agents? 18 MR. HUXSOLL: Correct. If they had an employee 19 doing the same activities, I would still view it the 20 same way, it's -- the activities aren't participation in 21 the -- sufficient participation in the sales. 22 MS. MANDEL: Mr. Vinatieri, can you explain 23 what it is that is happening with respect to the orders 24 which, you know, in the normal course of life when 25 you're -- have a retail location, you know, lots of 26 people come in and buy stuff and so you have all this 27 sort of continuing sales activity 'cause you've got a 28 storefront and you're selling to whoever walks through 66 1 the door that at least is wearing a shirt and shoes, if 2 that's what the sign says outside your off -- outside 3 your door. 4 But here you're saying you have a requirements 5 contract, so everything that the customer needs for its 6 business operations in California, it has to buy from -- 7 up to the limits in that contract -- from the taxpayer, 8 the contract that was signed in Fillmore. 9 And I understand about the buying company and 10 agent. And I remember the fights about the buying 11 companies. 12 But they're now -- they're saying that what was 13 happening in Fillmore through an agent with respect to 14 particular monthly orders that are going out, if I need, 15 you know, X hundred of things this month, that what was 16 happening in Fillmore was not -- I don't know what word 17 to use -- significant enough to constitute actually any 18 kind of participation in the order -- order and sale on 19 a monthly -- monthly basis. 20 I mean, I don't recall if it was a single order 21 every month or if it was, you know, weekly or what. But 22 that's -- the assertion is that the -- what was going on 23 in Fillmore was essentially a big nothing, I guess, if I 24 could characterize their kind of generalized view. 25 MR. VINATIERI: Well -- 26 MS. MANDEL: Or, you know, in a pejorative 27 sense characterize their general view. 28 MR. VINATIERI: -- let's step back. 67 1 Once again, if you meet (h), the word is shall. 2 It's determined that they shall be given a permit, 3 therefore, that should take care of it. 4 Second argument behind that, what should be 5 done is that notwithstanding that should take care of 6 it, it's dispositive, we did the M. S. A. there. There 7 is no question about that. 8 The D & R says specifically -- finds that way. 9 We find that Fillmore was a place of business of 10 taxpayer for purposes of 7205, at least during the 11 period the Master Sales Agreement was negotiated -- at 12 least during the period the Master Sales Agreement was 13 negotiated -- whatever period that was. 14 I mean, are we talking three months? Are we 15 talking six months? That's what it says, it's unclear. 16 So, we have a Master Sales Agreement. 17 MS. MANDEL: It's clear, I think you meant to 18 say. 19 MR. VINATIERI: Yes, it's -- thank you. It's 20 been a long hearing. I forgot to bring my water. 21 So -- so, we have that, all right? 22 So, now -- 23 MS. MANDEL: Right. 24 MR. VINATIERI: -- now we go to the Master 25 Sales Agreement and the Master Sales Agreement, because 26 it's a requirements contract, was negotiated there. 27 Therefore, everything that happened thereafter relative 28 to ordering has to harken back to what took place in 68 1 Fillmore because it's a requirements contract, just like 2 the John Abbott letter -- just like the John Abbott 3 letter. 4 But, no, what did they do here? They went one 5 step further and they did this P. O. authorization 6 release -- thank you -- process. 7 I don't even think they needed to do it, but 8 they did it, I think in the spirit of making sure they 9 were complying. 10 The problem that the staff has, once again, is 11 if you use those words -- and we are going in a circle 12 now -- negotiations, the way it was laid out -- the way 13 it was laid out is "customarily negotiated." 14 Well, customarily negotiated that's in (a), 15 we're talking (h). But notwithstanding, they were still 16 involved in the process, even if you want to call the 17 process a big nothing -- I don't think it was a big 18 nothing because they were doing what they were doing, 19 they were doing the fraud thing and all that until a 20 later point in time. 21 MS. MANDEL: They were doing the what? 22 MR. HORTON: They were doing the what? 23 MR. VINATIERI: The fraud check. 24 MS. MANDEL: Oh, fraud check, okay. 25 MR. VINATIERI: The fraud thing, oh, that's why 26 I heard the word -- never mind, this is being broadcast, 27 yes. 28 They were doing the fraud checks. So -- and 69 1 the fact that -- and I'm looking at the D & R here, 2 "Here the argument the taxpayer maintained 3 an office in Fillmore is almost entirely 4 dependent upon the -- inspires receipt of the 5 monthly purchase order," blah, blah, blah. 6 "The fact that they're performing these 7 activities on taxpayer's behalf at the office 8 does not, by itself, make that an office of 9 taxpayer." 10 There is no citation for that. That's just a 11 conclusion. 12 By the way, they were paying $100 a month to 13 the agent, per the agency agreement between the seller 14 and the -- and the agent, they were doing that. 15 So, I guess the long and short of it is at this 16 point in time they did everything they were supposed to 17 do. 18 And I'll say it again, and if people don't like 19 the way that the reg is set up, if people don't like the 20 way 1628 is set up, if you don't like the way the Abbott 21 letter is set up, then we should do something about it. 22 But don't go back retroactively and injure 23 Fillmore for doing what they thought was appropriate 24 under the law as the law even stands today as we sit 25 here and we do this case. 26 MR. HORTON: Further discussion Members? 27 Okay, hearing none, is there a motion? 28 MS. YEE: Move to take the matter under 70 1 submission. 2 MR. HORTON: Moved by Member Yee to take the 3 matter under submission. 4 Second by Member Steel. 5 Objection, Members? 6 Hearing none, such will be the order. 7 Thank you very much for appearing before us 8 today. The Board will take your matter under 9 consideration later on this evening and send you a 10 written report of our decision. 11 It's been an excellent debate. Thank you. 12 MR. VINATIERI: Thank you. 13 MS. STURDIVANT: Thank you. 14 MR. HORTON: It's an opportunity, appreciate 15 it. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 71 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 16, 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 71 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: December 5, 2011 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 72