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 APPEAL OF 13 C6a BLOWFISH, LLC 14 NO. 484932 (BH) 15 C6b BLOWFISH SR, LLC 16 NO. 479540 (GH) 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 19 20 21 22 23 24 25 26 27 Reported by: Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane G. Olson 14 Chief Board Proceedings Division 15 16 For Board of David Levine Equalization Staff: Tax Counsel IV 17 18 For the Department: Scott Lambert Hearing Representative 19 Robert Tucker 20 Tax Counsel IV 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 24 For Petitioner: Nick Momsen Taxpayer, General Manager 25 Jesse McClellan 26 Representative 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 NOVEMBER 16, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson, what's our next matter? 6 MS. OLSON: Our next matter is C6a, Blowfish, 7 LLC and C6b, Blowfish SR, LLC. 8 Board -- 9 MR. HORTON: Thank you very -- 10 MS. OLSON: Board Proceedings has received 11 contribution disclosure forms for this afternoon's 12 hearings from the parties, agents, and participants. 13 All forms were properly completed and signed. All 14 parties, agents, and participants are on the alpha 15 listing provided to your office. 16 Each person sitting at the table will be asked 17 to introduce themselves and, if necessary, their 18 affiliation with the taxpayer for the record. 19 Ten minutes is allocated for the taxpayer's 20 opening presentation, followed by ten minutes for the 21 Department's presentation, and five minutes is allocated 22 to the taxpayer for rebuttal. 23 Mr. Horton. 24 MR. HORTON: Thank you very much. 25 Mr. Levine, would you please introduce the 26 issues in this case. 27 MR. LEVINE: Good afternoon, Chairman Horton, 28 Members. David Levine for the Appeals Division. 3 1 The issues in these petitions are whether the 2 disputed gratuities were taxable mandatory gratuities 3 and whether audit adjustments are warranted. 4 MR. HORTON: Thank you very much. 5 Would the taxpayer please commence their 6 presentation with their introduction for the record. 7 MR. McCLELLAN: Thank you, Chairman. 8 Jesse McClellan on behalf of the taxpayer. And 9 I'm joined by Nick Momsen; he's a general manager of the 10 taxpayer. 11 Um, prior to this hearing, I had an opportunity 12 to discuss a couple of the issues, uh, with the 13 Department. And we do have an agreement that this audit 14 needs to go back for reaudit because there's -- um, 15 there's certain gratuities related to to-go sales that, 16 to the extent those to-go sales are for cold food, uh, 17 the sale would be exempt from tax. And any gratuity, 18 mandatory or otherwise, would also be exempt. 19 MR. HORTON: The Department concurs with that? 20 MR. LAMBERT: Uh, his statement, we would -- we 21 would agree with that. 22 MR. HORTON: Okay. 23 MR. McCLELLAN: So, what I'd like to do is 24 address the issue that we can't seem to agree on, which 25 is whether or not the gratuities charged during the 26 audit period were mandatory, um, and, therefore, 27 taxable. 28 And I understand that this issue came up in a 4 1 case yesterday. Unfortunately, I didn't have the 2 opportunity to review the full proceeding. I did catch 3 a portion of it. 4 But, uh, some of the points that we'll address 5 today, um, are similar to those addressed yesterday. 6 And, uh, one of the things that came out in listening to 7 the closing discussion by the Board is that the 8 regulation has some confusion in it. Um, that, I think 9 we can agree upon. 10 So what I'd like to do, if I could, is really 11 focus on the opening paragraph to the regulation which 12 isn't confusing. And what it says is that a mandatory 13 tip is taxable and an optional tip is exempt from tax. 14 That's consistent with other scenarios, uh, with respect 15 to sales of tangible goods, optional warranties for 16 computers, things of that nature. 17 One of the main issues with respect to 18 determining whether or not the tip is mandatory, uh, is 19 whether or not the menu, of course, indicated that a tip 20 would be added under certain conditions. In this case 21 it's alleged that during the audit period there was a 22 menu in place which stated that for parties of six or 23 more a gratuity would be added. 24 We dispute that assertion. We've, uh, disputed 25 that assertion since I've been involved with this case 26 and have provided various evidence. We have today 27 additional evidence that wasn't provided at the appeals 28 conference level. 5 1 As Exhibit 1 you'll see this menu here that the 2 taxpayer was able to locate, apparently in a drawer, uh, 3 the manager or an owner, um, showed it to Nick today and 4 he can testify that that was a menu in place during the 5 audit period. 6 Now to support that, what we demonstrate is 7 that on this menu there's a reference to San Jose. The 8 taxpayer's San Jose location opened in 2003. So we can 9 be confident that this menu was in place after 2003. 10 It also makes reference to a chef that was 11 employed by the taxpayer through August, uh -- or 12 September of 2006. Um, so with -- within those time 13 frames falls the audit period. 14 Now, uh, more persuasive is the fact that if 15 you look at the menus that were provided to the 16 auditor -- I'm going to back up a bit. The auditor was 17 provided menus by a, uh -- a controller who was hired 18 after the audit process was initiated. She was actually 19 let go before the audit process was completed because 20 she had poorly performed her duties. 21 Uh, now, I couldn't find anywhere within the 22 audit work papers that the auditor actually said that 23 this woman handed me these and indicated to me that 24 these were the menus in place during the audit period. 25 Um, rather than haggle over who said what, um, 26 I think it's important to note that this woman wasn't 27 employed by the taxpayer during the audit period. She 28 wouldn't have personal knowledge of what took place 6 1 during the audit period. And her job duties were that 2 of an accounting, um, and bookkeeping functions. 3 Nonetheless, the -- the menu provided by her to 4 the auditor, if you look at the guest receipts that I 5 provided in Exhibit 6 and 7 -- um, and those were 6 provided for a different purpose, but they correlate 7 here -- what you'll see is that the menu that is 8 included in the audit, the prices listed in that menu 9 consistently exceed the prices charged, uh, during the 10 audit period. 11 I think that fact is dispositive on whether or 12 not there was a statement indicating to the purchasers, 13 um, that a gratuity would be added for a certain party 14 size. 15 Nonetheless, we -- we do have four 16 declarations, signed under penalty of perjury, which 17 were signed by four different managers of the taxpayer 18 during the audit period. All of them state that, to the 19 best of their recollection, there was no gratuity 20 statement added prior to -- uh, I think the date is June 21 or July of 2007. Nick Momsen also signed one of those 22 statements and he's here with us today. 23 Um, the California Supreme Court -- um, to jump 24 to what I see as being the controlling law in this, if 25 you will, with respect to whether or not it was 26 mandatory, uh, in Beatrice v. State Board of 27 Equalization held that the identification of a taxable 28 sales is much one of contract law as it is tax law. 7 1 So, in other words, I think it's important that 2 we look at what the agreement was between the taxpayer 3 and their customers during this time period. If there's 4 no statement on the menu, um, and if we accept that the 5 menu constitutes an open offer and that when a customer 6 comes into the location and they identify what items 7 they want to order, that it's an acceptance of that open 8 offer. And that if there's no indication within that 9 offer that, uh, any type of tip would be charged, then 10 ultimately there's no obligation to pay a tip. 11 And if we -- if we take the meaning of the word 12 "mandatory", which is in -- defined in part in Black's 13 Law Dictionary as a command or required -- it's not 14 defined in the regulation -- and we accept that, okay, a 15 mandatory -- a mandatory tip that is indeed required is 16 taxable, if it's not required, it's not mandatory. And 17 if it's not mandatory, it's optional. And if it's 18 optional to the customer, then ultimately it's not 19 taxable. 20 To go a step further, uh, we've also provided 21 documentation in the form of sales slips from throughout 22 the period. The presentation was not intended to be 23 exhaustive. Um, the purpose was really to address the 24 presumption that, uh, is established within the 25 regulation and the evidence that's stated to be 26 available to overcome that presumption. And that's 27 presented in Exhibit 6 and 7 of our opening brief. 28 Um, those guest receipts are receipts, again, 8 1 from various months or quarters throughout the audit 2 period. They all consist of, um, guest checks where the 3 parties present were greater than six and the tips 4 provided on those guest receipts all varied from, uh, 5 the alleged mandatory percentage, which is, uh, 18 6 percent. They're either less or over. And I think 7 there's a handful where there's actually no tip left. 8 Um, again, if -- if we can't come to a 9 conclusion that these charges were mandatory, um, then 10 we believe that the -- the charges should not be held to 11 be subject to tax. I believe that the evidence clearly 12 demonstrates that the menus in place during the audit 13 period did not have a statement which mandated or 14 required a tip be paid by the customer. 15 And on that, I'll turn it over to the 16 Department. 17 MR. HORTON: Thank you very much. 18 Department has ten minutes to make their 19 presentation. Please commence with your 20 introductions. 21 MR. LAMBERT: Good afternoon, Chairman Horton 22 and Members. 23 MR. HORTON: Good afternoon. 24 MR. LAMBERT: My name is Scott Lambert, and 25 I'll be representing the Sales and Use Tax Department 26 today. To my right is Kevin Hanks, also with the Sales 27 and Use Tax Department. And to Mr. Hanks' right is 28 Robert Tucker with the Legal Department. 9 1 In this particular case, uh, before us, the 2 issue involves mandatory gratuities. There's two 3 different types: Ten percent to-go mandatory gratuity; 4 so if someone calls in for an order, comes to pick it 5 up, they're charged 10 percent gratuity. There's also 6 an 18 percent gratuity; that is for dine-in purposes 7 on -- on groups of six or more. 8 During the audit, the auditor met with the 9 controller at the time and she filled out a restaurant 10 questionnaire. Uh, the -- the date on the questionnaire 11 is June 12th of 2007. Uh, it appears the auditor wrote 12 that date in. 13 The controller filled out the information and 14 faxed it out -- or faxed it back to the auditor, 15 sometime before the end of June. There's a fax date of 16 June 27th of '07. 17 At that time the controller stated that there 18 was a mandatory tip, mentioned both the 10 percent and 19 the 18 percent. Uh, so it appeared that the controller 20 was -- was aware of both of those, uh -- those -- both 21 of those mandatory tips, and also provided a menu at 22 that time, um, or -- or thereabouts, sometime in the, 23 uh, June to July area. 24 In the start of August of '07, the auditor 25 comes up with their 30 days test period and tests that. 26 So there's a difference between when the two 27 audits were started. The audit I've been referring to 28 is the San Jose location. There was a subsequent audit 10 1 on the San Francisco location. 2 So in June of '07, the controller's saying that 3 we charge a mandatory tip, uh, and that's within the -- 4 inside the period of the San Francisco audit. 5 The controller's information appeared to be 6 accurate based on the records that we reviewed. Uh, 7 when you take a look at the 10 percent charge, it -- it 8 shows up as an auto gratuity. And there's two different 9 gratuity types; there's auto gratuity and there's an 10 additional gratuity. And from what we can tell from the 11 audit, that 10 percent was being put into an auto 12 gratuity, um, category. Uh, it's -- it was stated by 13 the Petitioner that, um -- 14 Gain my train of thought. Um -- 15 MR. HORTON: Just say "Oops." 16 MR. LAMBERT: Oops. Yeah, I remember the first 17 two. The third one threw me. 18 The -- oh, okay. The, uh, tax -- the 19 Petitioner's argued that the software, uh, wasn't -- 20 wasn't made so -- or wasn't prepared or wasn't set up 21 where it would automatically charge a mandatory 22 gratuity, that you would have to do it, uh, manually. 23 Uh, and that appears to be what is being done here, that 24 it is in fact being entered manually. 25 And that's why on the 18 percent that you'll 26 find that some of the parties of six or more are not 27 being charged a gratuity. And the taxpayer or 28 Petitioner came up with, uh, examples of that. And I 11 1 think there was less than 50. But what it appears to 2 the Department is, is that the servers are not entering 3 in the information into the computer in order to get 4 that, uh, into the system. 5 There's no doubt that a majority of the orders 6 or transactions with parties of over six or more have a 7 18 percent mandatory gratuity. And when you take a look 8 at the individual, um -- the individual billing, what 9 you'll see is, is you'll see the itemized plates or 10 items that are being purchased, a total, then you'll see 11 a tax, a total, and then a gratuity. Uh, and that 12 gratuity ends up being shown as an auto gratuity. 13 The Department hasn't seen any examples of 14 where there was a gratuity that was an auto gratuity 15 that was different than 18 percent. And were -- other 16 than the 10 percent on the to-go. But for the dine-in, 17 there wasn't anything different than the 18 percent. 18 With that said, the Department, since we are 19 willing -- or recommend that we go back out to do a 20 reaudit of the to-go orders because there may be cold 21 food there, that the Department is willing to take a 22 look at any information that the Petitioner provides in 23 regards to gratuities that were of the auto variety, 24 that were different than 18 percent. 25 And at this point we would -- the Department 26 would ask for the Board's, um, direction in order to -- 27 uh, how we would handle whether a gratuity was either 28 higher or lower than that 18 percent on parties of six. 12 1 So, accordingly, the Department would agree 2 that the, uh, case needs to go back out to the field to 3 look at additional information and to prepare a reaudit. 4 Thank you. 5 MR. HORTON: On rebuttal. 6 MR. McCLELLAN: Thank you. 7 Um, it -- well, I should first point out that 8 it sounds like we're in agreement on the system facts. 9 That ultimately there was a function at the 10 San Francisco location that had the capability of 11 triggering a gratuity, either from a dollar amount 12 threshold or from a number of customers threshold. It 13 wasn't set up in that manner. 14 We've had discussions with the restaurant 15 manager representative, and I provided a, uh -- probably 16 not very useful because it was 790 pages -- manual that 17 explains, at least to a layman like myself, in terms 18 that seems to support our understanding. 19 Um, as far as the questionnaire, um, I think 20 the Department is alluding to the questionnaire that 21 pertains to the San, um -- San Jose location. The San 22 Francisco location questionnaire actually came back in 23 the negative, that there was no mandatory gratuities. 24 And that's something that we had submitted in our 25 response brief. 26 Um, the -- uh, the San Jose questionnaire was 27 actually completed by Mr. Momsen, the general manager of 28 the location. And he did indicate that there was some 13 1 mandatory gratuities, and he was indicating that because 2 of the 10 percent charges on to-go. 3 Um, really the -- the focus is not the 10 4 percent charges; it's the 18 percent gratuities, um, 5 that we concede were charged. Uh, the practice of the 6 taxpayer was to, uh, have the servers, at their option 7 really, if there was a large group, speak with the table 8 and establish whether or not a gratuity should be 9 charged, or added to the bill I should say. And that 10 did occur. 11 It didn't occur on all of them. Not all the 12 servers would do that. Um, and in some of the instances 13 the tip would vary. The, uh, exhibit that we provided, 14 uh, number six, is an analysis of the auto gratuities. 15 And the purpose of that was to show, look, the auditor's 16 saying there's $112, for example, of auto gratuities. 17 But when you go through and you look at the individual 18 transactions, it adds up to, I want to say, $62. So 19 it's -- it's not all 18 percent. It sounds like we'll 20 resolve that issue in the reaudit. 21 The -- what I'm requesting of the Board is to 22 make a decision where there's not a statement on a menu 23 which says that a customer will, or there may be, or 24 even that there shall be a gratuity added. And where 25 that's not on the menu, how does it become mandatory? 26 If it wasn't paid by the customer, uh, would 27 the restaurant have a remedy? I would say no. Now if 28 there is a statement on there, uh, then I would concede 14 1 that if it put the customer on notification and that 2 customer accepted that open offer presented in the menu, 3 that the restaurant would have a remedy if it wasn't 4 paid. They would be able to enforce that agreement by 5 their own performance to what amounts to be a unilateral 6 contract. 7 Here, without the statement, there's no 8 obligation for the customer to pay, notwithstanding 9 whether or not it shows up on a bill at some point. 10 And -- and again, the taxpayer's policy was to confer 11 with the, uh -- to confer with the customer -- that the 12 servers were advised to confer with the customer. And 13 at that point there had to be a manual entry to add it. 14 Again, it wasn't done all the time. And at times 15 customers would say no tip at all in that manner, or add 16 this higher tip. 17 Because there wasn't a requirement for the 18 customers to pay in the sense that if they ordered a 19 dish of food, a sushi roll for $12, they would -- they 20 would have an obligation to pay that. Now granted the 21 restaurant may not enforce that obligation if they were 22 dissatisfied with it for some reason. But if there was 23 a larger bill -- let's just say a very large party came 24 in and what was presented to that party was a bill for 25 all of the food that it ordered and consumed throughout 26 the night, they would certainly have an obligation, an 27 enforceable obligation, to pay that amount. 28 Um, where there's, uh, a gratuity added without 15 1 notification that it will be added, ultimately it's not 2 enforceable under the law and, therefore, we don't 3 believe that it would be mandatory. 4 MR. HORTON: Thank you very much. 5 Discussion, Members. 6 Member Yee -- I mean, strike that. My 7 apologies. 8 Member Steel. 9 MS. STEEL: To the taxpayer's side, that the 10 auto gratuity, what does that mean exactly? 11 MR. McCLELLAN: It's -- I'll explain this the 12 best I can. 13 MS. STEEL: Right. 14 MR. McCLELLAN: But what it pertains to is, 15 number one, it only pertain to the San Francisco 16 location. We are dealing with two separate -- 17 MS. STEEL: Right. 18 MR. McCLELLAN: -- locations. Actually two 19 separate entities, but they are related. It's more or 20 less the -- the same restaurant chain by the same 21 owners. 22 At the San Francisco location they use -- 23 Do you still use Restaurant Manager there? 24 MR. MOMSEN: No. 25 MR. McCLELLAN: Okay. During -- during the 26 audit period they used a system called Restaurant 27 Manager. Um, it's a operating system for the 28 restaurant. It enables the -- the -- the servers to go 16 1 up to a touch screen computer, type in orders, type in 2 the table. Those orders are sent to the bartender where 3 a -- a slip spits out. 4 Now the -- the system is capable of, um, 5 treating the auto gratuity in a couple of different 6 ways. The manual explains that it can be treated in a 7 basic way, which, by my understanding from reading the 8 manual, is -- is the way that would permit the system to 9 trigger -- 10 MS. STEEL: Excuse -- can you just make it 11 simple here? So is it manual or it's automatic after -- 12 MR. McCLELLAN: The way it was used during the 13 audit period is it was manual. And from what I heard 14 from -- 15 MS. STEEL: So you just punch the button, then 16 gratuity's been added? 17 MR. McCLELLAN: Yes. 18 MS. STEEL: Okay. Um, and then in parties of 19 six or more, how often was gratuity of 18 percent? 20 Because yesterday exactly same case came -- you know, 21 came up. 22 MR. McCLELLAN: Mm-hmm. 23 MS. STEEL: And seems like we can be very much 24 expert here. And then -- 25 MR. McCLELLAN: Mm-hmm. 26 MS. STEEL: -- they raised the bar for 50 27 percent of the variance then it's not, uh, mandatory. 28 So I want to hear that how many percent of 17 1 those receipts were different than 18 percent? 2 MR. McCLELLAN: Um, you know what, Ms. Steel, I 3 actually can't speak to that. That's not something that 4 we were advised of that was relevant, um, by anyone 5 really, to -- to -- with respect to whether or not it 6 would be treated mandatory or optional. 7 We did go through, um -- my reading of the 8 regulation says that where there's not information 9 available -- 10 MS. STEEL: Could you just answer my 11 question. 12 MR. McCLELLAN: I don't know. I don't know the 13 percentage. 14 MS. STEEL: You don't know, okay. 15 To the Department, that, um, Mr. Lambert just 16 told us regarding that servers were not charging it. 17 But somebody who was looking at -- I mean who was 18 handling the cash register added the automatic 18 19 percent. I think that's the way I heard from your -- 20 uh, you know, statement. So, is that true? 21 MR. LAMBERT: I don't know that to be true. I 22 was under the impression the server was doing it. 23 MS. STEEL: Server was doing it. 24 MR. LAMBERT: Yeah. 25 MS. STEEL: Okay. And then that you said 26 there's just you don't have any doubt -- you have no 27 doubt that majority of, uh, customers who were charged 28 18 percent. So you just -- is it assumption or it's the 18 1 number really you look at all those receipts and then 2 you found out that it was 18 percent? 3 MR. LAMBERT: Well, we -- we took a look at 30 4 days. 5 MS. STEEL: Mm-hmm. 6 MR. LAMBERT: And we didn't go into -- my 7 understanding, we didn't look into the detail of each 8 one of them, um, in total for each one of those days. 9 MS. STEEL: Mm-hmm. 10 MR. LAMBERT: But we did sample them. 11 MS. STEEL: Right. 12 MR. LAMBERT: And it was my understanding that 13 they found that it was 18 percent on -- 14 MS. STEEL: Most of? 15 MR. LAMBERT: -- all the parties of -- of, uh, 16 six or more. 17 But what I would say is that when they 18 didn't -- when they did not add an auto gratuity -- 19 MS. STEEL: Mm-hmm. 20 MR. LAMBERT: -- that wasn't on our radar. In 21 other words, it didn't show up as an auto gratuity. It 22 would just show up as an additional, um -- an 23 additional -- 24 MS. STEEL: Just tip? 25 MR. LAMBERT: -- gratuity. Additional tip. 26 So -- 27 MS. STEEL: Addition to another 18 percent or 28 just that 18 percent itself? 19 1 MR. LAMBERT: No, that 18 percent was never put 2 on -- on the examples that the Petitioner provided at 3 the appeals conference -- 4 MS. STEEL: Mm-hmm. 5 MR. LAMBERT: -- from what it appears, the 18 6 percent gratuity was never initially put on those. 7 MS. STEEL: So if it was not automatically put 8 it on, then it was not mandatory. 9 MR. LAMBERT: Well, we have a difference of 10 opinion in that regard. Our -- 11 MS. STEEL: Yeah, we've been having a lot of 12 different opinions here since, you know last, last case. 13 So -- 14 MR. LAMBERT: Right. 15 MS. STEEL: Yeah. 16 MR. LAMBERT: And our position -- our position 17 is that because the server had to, um, manually trigger 18 that 18 percent, that there were occasions where that 19 did not happen and the tax was -- or the gratuity was 20 not charged on those particular sales. Therefore -- 21 MS. STEEL: So now, what you just told me was 22 all of the receipts, that not to-go one, but over six or 23 more, that you said that there was 18 percent was 24 included on the receipt automatically. But now when you 25 are saying that during the audit period it didn't really 26 happen. 27 MR. LAMBERT: Okay. Let me -- 28 MS. STEEL: So -- 20 1 MR. LAMBERT: I'll clarify that. 2 MS. STEEL: Okay. Could you? 3 MR. LAMBERT: Yeah. 4 What my statement was referring to is the 5 amounts that were in the auto gratuity -- 6 MS. STEEL: Mm-hmm. 7 MR. LAMBERT: -- that when we went back to take 8 a look at the sales that are associated with that, they 9 were of parties of six or more and the tax was 10 calculated at 18 percent -- or the gratuity was 11 calculated at 18 percent. That's what that comment was 12 meant to state. 13 MS. STEEL: Okay. 14 Um, you were talking about reaudit. Is a 15 reaudit only for the sales part? Or reaudit for -- 16 MR. LAMBERT: The -- for the gratuity part. 17 MS. STEEL: Gratuity part. 18 MR. LAMBERT: Yeah. And it would be broken up 19 into two different -- my understanding is that it's 20 broken up into two different areas. You have the 10 21 percent gratuity and -- and I will add it appears that 22 the taxpayer has charged tax on -- on all their sales. 23 And whether they're under the 8080 rule or not. 24 I'm -- I'm not sure. I think they're pretty close to 25 that, but I think it's really a moot point because what 26 the Petitioner has told me is that they're able to 27 provide the actual detail information regarding those 28 to-go sales where a 10 percent gratuity was charged. 21 1 But if that's the case, if it was actually cold 2 food, the fact that they collected that -- 3 MS. STEEL: All the sushis are cold. 4 MR. LAMBERT: But they don't -- right. 5 MS. STEEL: Yeah. 6 MR. LAMBERT: But they don't always sell sushi, 7 that they sell other items. And from the menu it 8 appears that probably over 50 percent is, but maybe a 9 little bit over 50 percent. But not everything that is 10 sold is cold. 11 MS. STEEL: Okay. 12 To the taxpayer, if this taxpayer get 13 reaudited, do you think you can provide receipts that 14 it's -- there's over 50 percent of variance? 15 MR. McCLELLAN: The -- the information would be 16 available to make that determination, yes. 17 MS. STEEL: So -- 18 MR. McCLELLAN: How the percentage falls -- 19 MS. STEEL: -- you'll have it at reaudit? 20 MR. McCLELLAN: I can't say. Um, I don't know 21 if Nick would have a better feel for whether or not the 22 percentage would fall on the side of -- if I understand 23 your question correctly, that it would be the 18 percent 24 would equate to less than 50 percent of the time. That 25 information is available. 26 MS. STEEL: But if you go to the customer and 27 then it was added for 18 percent, when customer was 28 complaining or they want to add more, what happened? 22 1 MR. McCLELLAN: Um, if -- would you like to 2 hear from -- 3 MS. STEEL: Sure. 4 MR. McCLELLAN: -- from Nick? 5 MR. MOMSEN: If a customer had a complaint on 6 service, the gratuity was always taken off. If a 7 customer wanted to add more, they could always do so. 8 MS. STEEL: So even it was on the menu, but 9 when customer -- it was not on the menu. 10 MR. McCLELLAN: Not on the menu during the 11 audit period. 12 MS. STEEL: Oh, during the audit period. 13 MR. McCLELLAN: Right. 14 MS. STEEL: Okay. So when customer complains 15 about that 18 percent, then you just take everything 16 off? 17 MR. MOMSEN: Yes. 18 MS. STEEL: Okay. And then customer wants to 19 put more, then you added more. That's why it was not 20 all -- every receipts have 18 percent, but, um, there 21 is, um, different. 22 MR. MOMSEN: Yes. 23 MS. STEEL: Okay. Okay. That's -- thank you. 24 MR. HORTON: Thank you very much. 25 Mr. Runner. 26 MR. RUNNER: Um, again, we're talking about the 27 operations of the two different restaurants? 28 MR. McCLELLAN: Correct. 23 1 MR. RUNNER: That are a little bit different? 2 MR. McCLELLAN: Yes. 3 MR. RUNNER: Okay. So help me -- let's see, 4 and, uh, you had San Jose and San Francisco. 5 MR. McCLELLAN: Correct. 6 MR. RUNNER: Okay. Um, operationally, how did 7 that take place? Tell me the difference between how 8 that happened between those two different restaurants. 9 MR. McCLELLAN: Um, I'll provide my explanation 10 and then perhaps Nick can add anything that I've missed. 11 But, um, as far as -- number one, they're two 12 separate entities, but they did share, um, some common 13 management. My understanding is that the controller 14 that I've worked with throughout this process more or 15 less has duties for both locations. I think the -- the 16 relevant differences for gratuity purposes -- 17 MR. RUNNER: Mm-hmm. 18 MR. McCLELLAN: -- I would suppose go to the 19 system, if will you, because there's -- I'm hearing 20 something a little bit different from the Department 21 today, because initially there was a claim that this -- 22 this auto gratuity was automatically, um, triggering the 23 gratuity. It sounds like they -- they now recognize -- 24 MR. RUNNER: You're -- you're -- you're 25 confusing me. All's I need to know is the difference 26 between how the two were operated, between the two 27 different restaurants. 28 MR. McCLELLAN: With respect to gratuities, 24 1 there was two different computer systems. 2 MR. RUNNER: Okay. 3 MR. McCLELLAN: Two different programs. 4 MR. RUNNER: Tell me how they work. 5 MR. McCLELLAN: Um, the San 6 Francisco location -- well, they -- they really work the 7 same way. 8 MR. RUNNER: Okay. 9 MR. McCLELLAN: They worked -- 10 MR. RUNNER: Oh, I'm sorry. I thought I heard 11 you say that San Francisco had some kind of an auto -- 12 MR. McCLELLAN: It had a capability. It -- it 13 had a capability which apparently the, um, the system at 14 the San Jose location didn't have. 15 So it -- so it had that capability. In order 16 to, um, trigger a gratuity, it could be programmed, for 17 example, where there was a hundred dollar charge or 18 higher, trigger gratuity. 19 MR. RUNNER: Uh-huh. 20 MR. McCLELLAN: Whether it was four, six, 21 eight, 10, whatever the number you wanted to put in 22 there, um, it could trigger a gratuity under those 23 circumstances. 24 MR. RUNNER: But they never did. 25 MR. McCLELLAN: They do now. They do now. 26 MR. RUNNER: During the audit period. 27 MR. McCLELLAN: They did not. 28 MR. RUNNER: Okay. During the audit -- during 25 1 the audit period, they did not put in -- they would 2 all -- that's why those are blank there? 3 MR. McCLELLAN: Um -- 4 MR. RUNNER: In our receipts that we have. 5 MR. McCLELLAN: I'm not sure what receipts 6 you're referring to. 7 MR. RUNNER: I think in some of our material we 8 show -- we show some receipts, right? 9 MR. McCLELLAN: Well, that -- that -- exactly. 10 That would be why, um, where there's a large party, it 11 would be blank, because -- 12 MR. RUNNER: Right. Because they wouldn't put 13 anything in there. 14 MR. McCLELLAN: Exactly. 15 MR. RUNNER: Okay. And the other -- and the 16 other location just didn't have the capability? 17 MR. McCLELLAN: It couldn't even be programmed 18 that way. But for -- in effect, it was -- it was the 19 same. 20 MR. RUNNER: Okay. 21 MR. McCLELLAN: Because they would go in and, 22 um, on tables, uh, where it would be added, they would 23 do it manually as well. 24 MR. RUNNER: Okay. So in those restaurants 25 then I would go ahead and -- and -- and, uh -- 26 How did we inform the customer about the 18 27 percent? 28 MR. McCLELLAN: My understanding -- and, again, 26 1 Nick can expand on this -- is that the server, where 2 there was a large party, they had the option. 3 MR. RUNNER: Okay. 4 MR. McCLELLAN: It was essentially up to, if 5 you will, the server to discuss it with the table or 6 not. 7 MR. RUNNER: So the customer -- so the -- so 8 the server would walk up to a table, there's seven 9 people sitting there, and they would say what? 10 MR. McCLELLAN: I don't think it would come up 11 at that point. The service would be provided. 12 MR. RUNNER: Okay. 13 MR. McCLELLAN: And then it would be at that 14 point, uh, that they would raise whether or not the 15 gratuity should be added. As Nick indicated, if they 16 said no, it wouldn't be. If they said, well, go ahead 17 and add more, they would. Of course if they said, well, 18 no, we don't agree to that, well, then it wouldn't be. 19 MR. RUNNER: The server would walk up at the 20 end of the dinner, when the -- when the -- before the 21 ticket is presented to them. 22 MR. McCLELLAN: When they essentially say we're 23 done with our meal. 24 MR. RUNNER: And the server would say what to 25 the table of seven? 26 MR. McCLELLAN: I can't say verbatim. But, 27 uh -- 28 What was the -- did you guys have some sort of 27 1 standard language? 2 MR. MOMSEN: It wasn't standard language, uh, 3 but the server would -- 4 MR. HORTON: Policy? 5 MR. RUNNER: Yeah, do you have any -- well, how 6 did you inform -- how did you train your servers to talk 7 to the people, telling them about the potential for an 8 18 percent gratuity? 9 MR. MOMSEN: Upon the customer requesting the 10 receipt, uh, for a party of six or more -- 11 MR. RUNNER: Okay. 12 MR. MOMSEN: -- the server would let them know 13 that, uh, for a party of six or more we -- we can 14 auto -- excuse me, not auto grat., but add an 18 percent 15 gratuity. 16 Uh, you know, as I said before, there are 17 instances where the table would not agree to that and we 18 would not add it on. And, furthermore, uh, we wouldn't 19 do it sometimes because they wanted to leave more. 20 MR. RUNNER: So at no time would the server 21 automatically put on an 18 percent gratuity on the check 22 before the customer had conversation? 23 MR. MOMSEN: No. The server had no control 24 over that. 25 MR. RUNNER: Okay. Thank you. 26 MR. HORTON: Further discussion, Members? 27 MR. RUNNER: Let me -- let me -- let me follow 28 up -- 28 1 MR. HORTON: Mr. Runner. 2 MR. RUNNER: -- with the staff. 3 Uh, yesterday part of our discussions in 4 regards to this issue was the ability to, I think 5 somebody called, confer with the customer. Um, it 6 sounds to me, in that the description, that there was 7 clear, uh -- number one, there's nothing printed in the 8 menu. And, number two, then that there was -- the issue 9 that there was conferring with the customer at that 10 point prior then to the tip being added. 11 Um, and at least as I was thinking back in 12 yesterday's conversation one of the elements that was 13 missing in the -- in the -- in the staff's opinion was 14 this ability to confer with the customer. 15 Does that -- why would not that discussion then 16 at that point meet the idea of a -- a, uh -- the 17 customer conferring with the restaurant in establishing 18 then a voluntary amount for gratuity? 19 MR. LAMBERT: Uh, I think it would. Um, I 20 think the problem that you run into is -- this is the 21 first time that I've heard this particular, um, 22 statement. 23 MR. RUNNER: Okay. 24 MR. LAMBERT: That during -- at least from 25 reading the D&R -- and I wasn't at the appeals 26 conference -- but it doesn't state that they do that. 27 It basically said that the customer would ask them to 28 add on a gratuity of 18 percent. 29 1 So if you take a look at the Department's 2 handouts, there's comments in the -- from the Yelp 3 website where you have several customers complaining 4 about being charged an 18 percent gratuity when they 5 were not happy with the service they were receiving. 6 Now, we don't know what was said between the, 7 um -- the taxpayer and their customer at the table. Um, 8 what we can say is that we haven't heard that particular 9 argument before and that it's not consistent with what 10 the -- the independent information that we got. 11 MR. RUNNER: And the independent information is 12 what? 13 MR. LAMBERT: The website from the Yelp. Those 14 were customers that were there. 15 MR. RUNNER: So the extent of our independent 16 is some Yelp comments? 17 MR. LAMBERT: Yes. 18 MR. RUNNER: I mean I -- I -- I think that 19 could be valid if it had some other things attached it 20 to it, you know, some other independent -- 21 MR. LAMBERT: And what I'll say is the 22 controller provided the information that they charge 23 mandatory tips on there, um, and provided us with the 24 menus at the time, which is -- which was before the end 25 of the audit period on the San Francisco location. 26 So, in other words, we have -- at about the 27 time of the San Francisco, end of that audit period, we 28 had menus that showed that there was a statement on 30 1 there that said tips will be added to parties of six or 2 more. 3 MR. RUNNER: So -- so during the audit 4 period -- 5 MR. LAMBERT: Of the San Francisco. 6 MR. RUNNER: -- in San Francisco -- 7 MR. LAMBERT: Right. 8 MR. RUNNER: -- there were menus that had the 9 18 percent? 10 MR. LAMBERT: There were menus that had the 18 11 percent. 12 Their argument was, is that it wasn't added 13 until -- and this is my understanding from reading the 14 D&R, is that after 1603 was modified for gratuities, at 15 that point the taxpayer talked to some other members in 16 their industry and decided we have to add this on -- we 17 have to add that statement onto our menu. 18 It appears that that statement isn't correct 19 based on us obtaining the menus in the June/July 20 period. 21 MR. RUNNER: Okay. Let me ask taxpayer real 22 quick. 23 Tell me about the menus during this -- 24 during -- between the two different locations and during 25 this period. 26 MR. McCLELLAN: Absolutely. Um, number one, I 27 looked at the audit myself, and I can't determine when 28 Ms. Aguilar provided these menus to, uh -- to the 31 1 auditor. But we don't really need to go there. We 2 don't really need to get into he said/she said. 3 Frankly, we can't because she's no longer locatable. 4 She's either on the east coast or South America. 5 There's been attempts. 6 The prices are different. Look at the checks; 7 they're in front of us today. The Department can look 8 at them right now. In my Exhibit 6 and 7, you have 9 checks that itemize California rolls, is an easily 10 identified -- identifiable product. 11 And, in fact, in the exhibits that I submitted 12 yesterday, Exhibit 9A and 9B is a page from the menu in 13 the audit period. Those prices magically comport with 14 the, um, with the sales slips in the audit period. 15 Forgive -- forgive the sarcasm. 16 Um, and then if you look at the menu included 17 in the audit which is represented to be in place during 18 the audit period, those prices are higher than what's 19 being charged for the menu items. 20 So again, that information -- 21 MR. RUNNER: So you would say that the -- that 22 the -- that the menus of use would be dem -- and, again, 23 without the -- without the statement -- 24 MR. McCLELLAN: Mm-hmm. 25 MR. RUNNER: -- would be demonstrated by the 26 fact that the sales receipts reflected the menu prices 27 of the menus without the statement on it? 28 MR. McCLELLAN: Exactly. And it's itemized. 32 1 MR. RUNNER: Okay. Let me go back to the 2 Department real quick. 3 What did we find in that? Did we compare the 4 prices of the menus? When we said we found a menu that 5 had a -- that statement on it, did we check to see if 6 those were indeed the prices that were being paid in 7 order to see if that was the correct menu at the time of 8 the audit? 9 MR. LAMBERT: Uh, the problem is we've received 10 several different menus. Uh, and some of them have 11 turned out not to be, um, the dine-in menus that were 12 purported to be the dine-in. 13 Uh, the problem is, is you can't tell when this 14 menu was in effect. In other words, was it before the 15 beginning of the audit period? At the end? 16 We -- we have -- in June, we have the menus 17 that have the statement on them. So we know at that 18 point that there was the statement on it. 19 We don't know exactly the other menus that 20 they're providing us where they came from -- when they 21 came from. 22 MR. RUNNER: Okay. You believe that we have -- 23 we have a menu with a statement on it that happened 24 during the audit period? 25 MR. LAMBERT: During the San Francisco audit 26 period. 27 MR. RUNNER: Okay. 28 MR. LAMBERT: Yeah. 33 1 MR. RUNNER: And we would -- and the taxpayer 2 says that we -- we don't have that. 3 MR. McCLELLAN: Yeah. If I may just, uh -- to 4 back up. In fact, I failed to address it last time. He 5 indicated that these, um -- this argument is new. It's 6 not. This is the same argument that we made at the 7 appeals conference. 8 The decision and recommendation came out -- 9 MR. RUNNER: Just tell me about the menu 10 issue. 11 MR. McCLELLAN: Okay. Um, the menu issue, 12 again, look -- we don't need to argue about it, in my 13 opinion. They're going to go back out there and do a 14 reaudit. 15 MR. RUNNER: Okay. 16 MR. McCLELLAN: Look at the guest receipts. If 17 the guest receipt for June of 2005 comports with the 18 prices that are on the menu that they include -- 19 included in the audit, I will concede that that menu was 20 in place as of June 2005. 21 MR. RUNNER: Okay. Let me just real quickly 22 say something -- or ask about the reaudit. I thought 23 the reaudit was focusing on -- on the take-out. 24 MR. McCLELLAN: It is. Uh, my understanding is 25 it will also focus on these gratuities, uh, to at least 26 the extent that they're less than 18 percent. To the 27 extent that they're higher than 18 percent, my 28 understanding is the Department's deferring to the 34 1 Board. 2 But if we need to get additional facts here, we 3 can. The thing is that this has been -- 4 MR. RUNNER: I just want to make sure we're 5 clear on what this reaudit is that we've just agreed on, 6 because it doesn't sound like we're talking about the 7 same reaudit. 8 MR. LAMBERT: No, I think that what he said -- 9 MR. RUNNER: Is that correct? 10 MR. LAMBERT: Yeah. 11 MR. RUNNER: Okay. 12 MR. McCLELLAN: We have the information in 13 front of us today. If you want to take the time to go 14 through these exhibits, I can point you to the exact 15 menu page. I can show you the price of a sushi roll, 16 and then I can show you a guest check from, say -- well, 17 from 12 -- uh, 12/8 of 2006 which will comport. And I 18 can show you guest checks back in 3/19 of 2004 which 19 will comport. 20 The prices increase. If you look at the menus 21 in the, um -- if you look at the menus that were 22 provided -- 23 MR. RUNNER: You made that point. 24 MR. McCLELLAN: Okay. 25 MR. RUNNER: That's good. I'm fine with that. 26 MR. McCLELLAN: Okay. 27 MR. RUNNER: Thank you. 28 MR. HORTON: Further discussion, Members? 35 1 Is there a motion? 2 MS. MANDEL: I'm just a little confused about 3 what we're being asked to decide, because it's going 4 back for reaudit. 5 MR. HANKS: Ms. Mandel. 6 MS. MANDEL: And I'm just confused about 7 what -- 8 MR. HANKS: Right. 9 MS. MANDEL: What piece is there for us to 10 be deciding? 11 MR. LEVINE: I would suggest you send it back 12 for a reaudit and leave it at that, all things being 13 open. Let the parties see what they can agree to. 14 MR. RUNNER: Then we've just practiced all this 15 discussion for the next time. 16 MS. MANDEL: One of the things that I heard 17 where Mr. McClellan said it and then they said oh, no, 18 no, no, yeah, we agree with how he's describing the 19 reaudit, has to do with if what's in the auto gratuity 20 column -- because that's all you looked at, right, the 21 auto gratuity column? 22 MR. LAMBERT: That's correct. 23 MR. TUCKER: Correct. 24 MR. LAMBERT: That's all that was taxed. 25 MS. MANDEL: That's all that was taxed. 26 MR. LAMBERT: Yeah. 27 MS. MANDEL: And is there a dispute that 28 sometimes that number might be more than 18 percent? 36 1 MR. LAMBERT: There, um -- I believe the 2 Petitioner -- 3 MS. MANDEL: Or that -- 4 MR. LAMBERT: I believe they're arguing that 5 sometimes it is different. 6 MS. MANDEL: That sometimes it is different. 7 MR. LAMBERT: Uh-huh. 8 MS. MANDEL: Or together with more tip on the 9 same bill, is that part of it? 10 MR. LAMBERT: Right. And we haven't seen any 11 evidence of that. But not to say that it hasn't 12 happened. 13 MS. MANDEL: Okay. 14 MR. LAMBERT: But they're saying that it did. 15 And we're saying, well, since we're out there for a 16 reaudit, if you want to provide us with that 17 information, we'll take a look at it. 18 MS. MANDEL: Okay. But you could put all that 19 together on the reaudit. Mr. Levine, they could put all 20 of that together. If they found some, they could put 21 that together, then say here's a bunch of money 22 that's -- whatever. 23 I mean, do we have to tell them what to do with 24 different bunches of money that they may or may not 25 find? I'm confused. 26 MR. LEVEIN: That's -- I think if the Board has 27 specific directions they want the Department to follow, 28 then by all means you should tell them. But you can 37 1 also reserve your decision until after the reaudit comes 2 back. To the extent they don't agree, Appeals -- 3 chances are good we're going to accept anything they 4 agree with. And then we may recommend something 5 further, and then the Board will have it. We'll try and 6 explain it as well as possible, and you'll make the 7 decision. 8 MS. MANDEL: It doesn't make a difference to 9 make a finding -- factual finding or not as to whether 10 or not -- I'm not even clear that it matters anymore 11 whether or not the menu had something on it during that 12 time period. 13 MR. LEVINE: I personally don't think it does 14 because -- 15 MS. MANDEL: Because -- 16 MR. LEVINE: -- most normal restaurants that 17 have a statement on the menu, if they don't tell 18 reservations on the phone that, "By the way, we add a 19 gratuity on big parties," they come in, see it on the 20 menu and say, "Why didn't you tell me?" So I think -- 21 MS. MANDEL: Well, I don't know. Maybe that's 22 why they got the Welp (sic) complaints -- Yelp 23 complaints. 24 MR. LEVINE: But I mean, if they tell them in 25 advance on the phone, "We add a tip to large parties," 26 that's the same thing as having it on the menu. The 27 menu is a -- a smoking gun, so to speak. 28 MS. MANDEL: Right. 38 1 MR. LEVINE: Eighteen percent on every -- every 2 single thing. 3 MS. MANDEL: Yeah, but I don't know how things 4 happen at the restaurant. It could be a bunch of 5 people -- kids walk in, you know, six or eight of them, 6 and sit at one table, and there's an issue of whether 7 it's on the menu or not. 8 But I'm just trying to figure out what -- if 9 there's anything to do besides go to reaudit. 10 MR. McCLELLAN: I could try to tell you what we 11 would like you to decide. 12 MR. RUNNER: I think we're going talk about 13 this again later. 14 MS. MANDEL: Okay. All right. That's it. 15 Okay. Thank you. 16 MR. HORTON: Okay. In the reaudit environment, 17 we should probably let the facts sort of govern the 18 decisions that the parties ultimately make. 19 And I would share that, in response to the 20 Department's request for direction relative to over and 21 under discrepancies and the variance on the amounts, it 22 all is predicated on what the set of facts are in 23 looking to whether or not there was a subsequent 24 negotiation of the previous contractual agreement 25 between the parties, established by whatever set of 26 facts establishes that that mandatory tip existed. 27 Members? 28 MS. MANDEL: Take it under submission then, I 39 1 guess. 2 MS. YEE: Mm-hmm. Second. 3 MR. HORTON: Move to take the matter under 4 submission by Member Mandel. Second by Member Yee. 5 Without objection, such will be the order. 6 Thank you very much for appearing before us 7 today. The Board will take your matter under 8 consideration later on this evening and send you a 9 written report of our decision. Thank you. 10 MR. McCLELLAN: Great. Thank you. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 40 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 November 16, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 40 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: December 5, 2011 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 41