1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 31, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 FIDELITY ASSET MANAGEMENT, INC. 14 NO. 358657 (OH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 14 Diane G. Olson, Chief 15 Board Proceedings Division 16 17 For Board of David Levine Equalization Staff: Staff Counsel 18 19 For Department: Cary Huxsoll Tax Counsel 20 Kevin Hanks 21 Chief, Headquarters Operations Division 22 Robert Tucker 23 Legal Department 24 25 For Petitioner: Joseph A. Vinatieri Attorney 26 Jim Fier 27 Representative 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 JANUARY 31, 2012 4 ---oOo--- 5 MR. HORTON: Good morning. Let us call today's 6 Board of Equalization meeting to order. 7 Ms. Olson, our first item. 8 MS. OLSON: Our first item is C1, Fidelity 9 Asset Management. 10 Please come forward. Board Proceedings has 11 received contribution disclosure forms for this 12 morning's hearings from the parties, agents and 13 participants. All forms were been properly completed 14 and signed. All parties, agents and parties are on the 15 alpha listings 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. Ten 19 minutes is allocated for the taxpayer's opening 20 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. Mr. Levine, will you 25 please introduce the issues in this case? 26 MR. LEVINE: Good morning, Chairman Horton, 27 Members, David Levine for the Appeals Division. 28 The issue in this claim for refund of Fidelity 3 1 Asset Management, Inc. is whether Claimant's leases -- 2 lease of tangible personal property to an insurance 3 company was exempt from sales tax, as well as from use 4 tax. 5 MR. HORTON: Good morning. Could the taxpayer 6 please commence their presentation with their 7 introductions for the record? 8 MR. VINATIERI: Yes. Good morning, Members of 9 the Board. Joe Vinatieri on behalf of the Claimant. 10 MR. FIER: Good morning, Jim Fier, 11 representative for the taxpayer. 12 MR. HORTON: Welcome. 13 MR. VINATIERI: Thank you. 14 Initially I would indicate that I disagree with 15 the statement of issue as set forth by Mr. Levine, but 16 we'll get into that in a minute. 17 Thank you for the opportunity to be heard. 18 And, trust -- and, trust me, we really appreciate being 19 first on a long day of cases. 20 Before we get started I do want to confirm that 21 all of the Board Members have been given a copy of the 22 Board hearing brief? I assume you have that? 23 MR. HORTON: Yes. 24 MR. VINATIERI: I want to make sure it's part 25 of the record this morning. 26 The brief does set forth our position in this 27 that and I'm not going to read the brief, but I want to 28 emphasize some of the points that are made in that 4 1 brief, as well as several other points. 2 Let me briefly just state the facts. The 3 Claimant, Fidelity Asset Management, otherwise known as 4 FAMI, you'll hear me use the word "FAMI," is a 5 wholly-other purchasing company of Fidelity National 6 Financial, Inc. 7 Claimant's role in the overall Fidelity family 8 is to purchase furniture, fixtures and equipment, FF and 9 E, tangible personal property, and sell or lease same to 10 its affiliates so as to gain economies of scale for the 11 Fidelity National family. 12 Claimant itself is not an insurance company, 13 but sells or leases to the other insurance company 14 entities in the Fidelity family. The Claimant has a 15 personal property lease with the lessee that provides 16 that the lessee pay to lessor any amount of tax assessed 17 the lessor. That's an important point. 18 Here the Claimant purchased, among other items, 19 computer equipment, and turned around and leased the 20 same to one of the Fidelity Insurance companies. Tax 21 was not paid on the cost of the equipment nor was tax 22 paid on the lease stream. 23 As part of a voluntary disclosure, Claimant was 24 permitized and paid tax on the lease amount to the other 25 Fidelity Insurance companies and claimed refund of the 26 taxes on the those lease receipts. 27 Now, as we all know, if a lessor elects to not 28 pay tax on the cost of tangible personal property, the 5 1 tangible personal property leased to the lessee is 2 subject to use tax on the lessee with a collection 3 obligation being on the lessor. 4 Once again I emphasize, it is a use tax. It's 5 a use tax. And this applies to all types of tangible 6 personal property and all types of companies, with the 7 exception, a little bit of mobile transportation 8 equipment. However, in only one circumstance that we're 9 aware of does the use tax on the lessee flip to become a 10 sales tax on the lessor. And that is where the lessee 11 is an insurance company. In all other cases, once again 12 that we're aware of, the tax on the lease receipts is a 13 use tax on the lessee. 14 So, one has to ask, well, why would the use tax 15 flip to a sales tax in the one situation relating to 16 insurance companies only? Well, you know, let's be 17 candid here, this Board, when it promulgated the flip in 18 1660 (c)(1) -- it was a long time ago -- specifically 19 called out insurance companies, we believe, knowing that 20 an insurance company as not subject to the use tax as 21 insurance companies pay the in-lieu gross premiums tax 22 as found in the constitution, Article 13, Section 28. 23 And, in point of fact, the only tax paid by 24 insurance companies is a tax on real property and a tax 25 on motor vehicles. The gross premiums tax is in lieu -- 26 specifically in lieu of all other taxes, including use 27 tax. As stated by the California Supreme Court in the 28 Mutual of New York case, quote, 6 1 "In other words, doing business -- doing 2 insurance business that is subject to the gross 3 premiums tax confers upon the insurer a status 4 that entitles it to the broad exemption from 5 paying State and local taxes of any kind -- any 6 kind, including use taxes, except real property 7 and motor vehicle taxes and fees." 8 So, this broadest language is peppered 9 throughout this 1990 Supreme Court decision. So if the 10 very same computer equipment were leased to a 11 non-insurance company, that same equipment would be 12 subject to the use tax. And the tax obligation would be 13 that of the non-insurance company lessee. 14 Now I would posit that the Board very well knew 15 this technicality of the sales and use tax law with 16 respect to leases and wanted to make sure the tangible 17 personal property leased to an insurance company did not 18 escape taxation under the sales and use tax law. 19 So, what did the Board do? The Board in this 20 situation only flipped what would otherwise be a use tax 21 and deemed the tax, in this situation only, a sales tax, 22 thereby putting the tax on the leasor, who, under the 23 lease agreement, will seek, under our personal property 24 lease here, reimbursement of the sales tax from the 25 insurance company lessee. 26 In other words, this Board will get the tax 27 whether it's deemed a use tax or sales tax in all lease 28 situations. 7 1 So then, the question to be asked is whether 2 treating leases of TPP to an insurance company's 3 different from any other type of company is legally 4 appropriate or is treating a lessor subject to sales tax 5 in this one situation only an arbitrary or invidious 6 classification which is violative of the equal 7 protections clause? 8 What could be the reason, other than making 9 sure that the either sales tax or the use tax is not 10 lost on a lease transaction with an insurance company 11 for specifically calling out leases to insurance 12 companies for disparate treatment? What is the rational 13 basis for treating leases to insurance companies 14 differently than any other lease to any other business? 15 I would indicate we don't believe there is any other 16 rational basis. 17 Because there is no rational basis for treating 18 leases to insurance companies different than any other 19 lease of tangible personal property, but for the in-lieu 20 provision, the Board exceeded its authority in the 21 promulgation of this section of the regulation because 22 the section specifically undercuts the voter -- 23 voter-adopted constitutional provision for the in-lieu 24 tax many, many years ago. 25 And this Board-adopted regulation defeats the 26 broad language of the Supreme Court decision in Mutual 27 by not allowing what would otherwise be an exempt 28 transaction if the Board only followed how it treats all 8 1 other similar transactions where an insurance company is 2 not involved. 3 In another Supreme Court decision, 1952, where 4 the legislature sought to narrow a constitutional right 5 the Court stated, quote, 6 "There must not be any particular attempt 7 to narrow or embarrass a constitutional 8 provision in the furtherance of its purpose." 9 And the same type of special deference to the 10 constitution and the electorate is found in the more 11 recent 2008 Supreme Court decision of Silicon Valley 12 Taxpayers, where a provision of Prop. 218 and the 13 administrative construction of same was reviewed. 14 There the Supreme Court reprimanded the local 15 open space authority in its interpretation of Prop. 218, 16 quote, 17 "Thus, a local agency acting in a 18 legislative capacity," 19 legislative capacity, which is exactly what the 20 Board has done here in promulgating 1660 (c)(1) and the 21 flip, 22 "has no authority to exercise this 23 discretion in a way that violates 24 constitutional provisions or undermines their 25 effect." 26 And that is precisely what has happened here 27 with the flip. The constitutionally mandated benefit to 28 the insurance company, because it's already paying a 9 1 gross, not a net, but a gross tax, is lost. 2 In other words, the in-lieu benefit is lost by 3 this regulation. Shifting the use tax to the sales tax 4 for the lessor only if the lessee is an exempt insurance 5 company is nothing more than a subterfuge intended to, 6 nonetheless, impose the burden of the tax on the 7 insurance company. 8 And because of the Board regulation and the 9 personal property lease, the real probability of double 10 taxation occurs because the lessee, under the lease, 11 will end up paying sales tax reimbursement and paying 12 the gross premiums tax. 13 There's one last matter that needs to be 14 presented. I don't believe the staff has reviewed this 15 issue previously, so, we wanted to set it forth today. 16 Several transactions included in this assessment, 17 primarily the first lease payment for property delivery, 18 involved shipments from out of state into California and 19 don't meet, we believe, the statutory requirements to 20 assess sales tax. 21 As we know, Reg 1620 states that for interstate 22 shipment of goods to be taxed in the state, two 23 requirements have to be met. First of all, title must 24 pass in state and there must be local participation by 25 the seller. 26 Accordingly, if the first payment of the lease 27 involves property shipped from a point outside 28 California, which some of this does, sales tax cannot 10 1 apply since the above two requirements have not been met 2 and we'd appreciate it if staff would look into this 3 matter. 4 In closing, I'm glad I'm closing, I am sure I 5 can see on your faces, we're aware that this Board has, 6 for many years, taxed transactions between a lessor and 7 an insurance company lessee. We know that. 8 However, based upon the law, based upon the 9 cases cited, it's time to right what has been wrong for 10 many years and to provide the requested refund herein. 11 Thank you. 12 MR. HORTON: Thank you very much. You will be 13 allowed five minutes on rebuttal once we hear from the 14 Department. 15 Department will commence with their 16 introductions for the record. 17 MR. HUXSOLL: Good morning, Mr. Chairman, 18 Members of the Board. I'm Cary Huxsoll from the Legal 19 Department, along with Robert Tucker and Kevin Hanks 20 representing staff. 21 Claimant is not entitled to a refund of sales 22 tax it paid on leases of tangible personal property to 23 an insurance company. Claimant asserted in its claim 24 for refund that, quote, 25 "The statutes do not support the 26 application of sales tax to leases of tangible 27 personal property." 28 Claimant purchased tangible personal property, 11 1 such as computers, without payment of tax and leased the 2 property to an insurance company. Because Claimant 3 purchased these items without payment of tax, the lease 4 is a continuing sale under Sections 6006.1 and a 5 continuing purchase under 6 -- 6010.1. 6 The application of tax to the transactions at 7 issue is addressed by Regulation 1660, subdivision 8 (c)(1), which states that when a lease is a sale and a 9 purchase, quote, 10 "When the lessee is not subject to use tax, 11 for example, insurance companies, the sales tax 12 applies. The sales tax is upon the lessor and 13 is measured by the rentals payable." 14 This provision is directly on point. 15 Regulation 1660 is a valid regulation. 16 As discussed in the Appeals Division Board 17 hearing summary, under the sales and use tax law, the 18 lease is a continuing sale and a continuing purchase. 19 The applicable tax under the law could either be sales 20 tax or use tax. There is nothing in the sales and use 21 tax law that precludes treating the leases in question 22 as being subject to sales tax. 23 Claimant has asserted the regulation violates 24 the equal protection clause of the United States 25 constitution. In its opening brief, Claimant cited the 26 case of Allied Stores versus Bowers. In this case, 27 which upheld the tax in question as not violating the 28 equal protection clause, the court stated that the 12 1 states have, quote, 2 "A very wide discretion in allaying of 3 their taxes." 4 Furthermore, the equal protection clause, 5 quote, 6 "Imposes no rule -- iron rule of equality 7 prohibiting the flexibility and variety that 8 are appropriate to reasonable schemes of state 9 taxation. The state may impose different 10 specific taxes upon different trades and 11 professions." End quote. 12 Regulation 1660's provisions do not violate the 13 equal protection clause. 14 Claimant has asserted that the taxes in 15 question violate the intent of Article 13, Section 28 of 16 the State constitution, which provides for the in-lieu 17 tax. 18 As discussed in the D & R, "Occidental Life 19 Insurance Company versus -- of California, versus The 20 State Board of Equalization upheld the Board's denial of 21 an insurance company's claims for refund of sales taxes 22 paid to retailers on their purchases. The Court held 23 that imposition of sales tax on sales to insurance 24 companies is not forbidden by the California 25 constitution because the legal incident of the tax and 26 the economic burden of the tax are two separate and 27 distinct concepts. 28 The legal incident of the tax was on the seller 13 1 and not the insurance company. Imposing sales tax on 2 retailers for sales made to insurance companies is not 3 forbidden by the California constitution. 4 Claimant has argued that the California Supreme 5 Court has undercut the reasoning of the Occidental Life 6 decision in Mutual Life Insurance Company of New York 7 versus the City of Los Angeles. That decision does not 8 undercut in any way the decision in Occidental Life that 9 the legal incidence of the tax, of the sales tax, is on 10 the seller and not the insurance company. 11 In that particular case, an insurance company 12 sought refunds of parking lot fee taxes, taxes on rental 13 revenue and utility users taxes paid to Los Angeles 14 under provisions of the Los Angeles Municipal Code. The 15 issue was whether the insurance company was exempt from 16 these taxes based on Article 13, Section 28. The Court 17 analyzed the history of Article 13, Section 28 and 18 stated, 19 "The electorate intended the broadest 20 possible exemption for insurance companies." 21 The court affirmed the judgment in favor of the 22 insurance companies. Claimant argues that this analysis 23 undercuts Occidental Life. However, no matter how broad 24 the exemption for insurance companies is, no exemption 25 is applicable in this case. Again the legal incidence 26 of the tax is not on the insurance company, but on the 27 retailer. Nothing in this opinion undercuts Occidental 28 Life. 14 1 Again Regulation 1660 is a valid regulation and 2 is directly on point as the application of tax to the 3 transactions in question. The claim for refund should 4 be denied. 5 Thank you. 6 MR. HORTON: Thank you. 7 On rebuttal, please? 8 MR. VINATIERI: Thank you. 9 In listening to Counsel, several issues pop up. 10 First of all, that 1660 is a valid reg. This Board has 11 great discretion to promulgate regulations that fall 12 within the parameters of the -- the jurisdiction given 13 to you in the Government Code by the legislature. 14 However, when this Board promulgates a 15 regulation, it has to be consistent with and not 16 inconsistent with the statutory authority given to you. 17 To the extent that this Board promulgates a regulation 18 that specifically calls out a differential treatment for 19 one type of industry, one type of business, everyone 20 else is treated the same except for one, I would posit 21 that that goes far beyond the authority delegated to 22 you. 23 And there is no question -- Counsel just 24 indicated, just read 1660 (c)(1) -- where insurance 25 companies are treated differently. I said that in the 26 opening and I say it again. 27 Secondly, with respect to the equal protection 28 clause, equal protection clause, indeed, is given -- 15 1 governmental agencies are given wide latitude in putting 2 together pronouncements that are consistent with the 3 law. However, in doing their wide discretion, that wide 4 discretion is limited. It's not unfettered discretion, 5 it's wide discretion. But it's limited in the context 6 where there is no rational basis for the underlying 7 governmental or the governmental purpose for putting 8 together that particular regulation. 9 Here, specifically, this regulation 10 discriminates against lessors of tangible personal 11 property who are leasing to insurance company lessees. 12 No other lessor has -- is discriminated against in that 13 methodology because, as has been indicated, the law is 14 very clear if someone does not choose to purchase an 15 item upfront and pay tax upon cost, then it becomes a 16 continuing sale. It's a use tax obligation on each of 17 those rental receipts for the period of time that the 18 lease is in effect against the lessee. It is a use tax. 19 Section 6401 is very clear, it talks about 20 sales tax applicable. And it's in our brief, it says, 21 "Storage, use or other consumption," 22 -- et cetera, et cetera, talks about the charge 23 upfront. 24 However -- 25 "Provided, however, that this exemption 26 does not extend to the possession of or the 27 exercise of any right, power over TPP by a 28 lessee under a lease." 16 1 So, specifically, if tax is not paid upfront on 2 the tangible personal property, it is a use tax on the 3 purchaser, lessee in this case, except when it's an 4 insurance company under this Board's reg. 5 And I would just say to you that that's a 6 discrimination that's been set up in this regulation. 7 And as I said earlier, only for purposes of capturing 8 tax in a lease situation where this Board knows that the 9 insurance company is not subject to a use tax or any 10 other tax other than real property tax or DMV taxes 11 because of the in-lieu provision. 12 So, in essence, by doing what this Board has 13 done, it is, it -- it basically cuts out, does away with 14 the ability of the full benefit of that particular 15 in-lieu provision in this one situation only. 16 I just say that, yes, there is wide discretion, 17 but not to -- to undermine what is a constitutional 18 provision that has been voted upon by the electorate. 19 With respect to the Occidental case, we do talk 20 about that in our brief. And let me just point out a 21 couple of things about Occidental that are incorrect in 22 terms of Counsel's representation. 23 First of all, the Occidental case was a case in 24 1980 -- 1980, long time ago. It was a DCA case. The 25 Mutual of New York case was a California Supreme Court 26 case in 1992 -- excuse me, Occi was 1982, Mutual of New 27 York was in 1990. 28 So, you have a California Supreme Court making 17 1 -- of the broad pronouncements about the word 2 "broadest," giving the broadest leeway, okay. 3 Then you have the District Court of Appeal 4 that's under the Supreme Court eight years earlier 5 talking about a different set of circumstances. And 6 that set of circumstances is there the lessee, who is an 7 insurance company, brought the action against the State 8 Board of Equalization, the lessee brought it. 9 Here it's the lessor bringing the action. 10 MS. OLSON: Time has expired. 11 MR. HORTON: Thank you. Can you wrap it up in 12 a few minutes? 13 MR. VINATIERI: Yes, I'm almost done. 14 So, there is a distinction between the Occi 15 case and this situation. 16 And, lastly, that was a case all about economic 17 incidence. In other words, the tax is paid by the -- 18 the insurance company lessee. 19 Here -- and the legal incidence is on the 20 lessor -- here what we're talking about is we are, in 21 fact, the lessor, but we have a very real situation 22 where we have a personal property lease that passes this 23 back through, contractually, to the lessee. 24 So, yeah, it's -- is it close? It's somewhat 25 close. But -- but nobody in the Occidental case argued 26 that this particular regulation, (c)(1), was illegal or 27 unconstitutional as violative of the equal protection 28 clause, a major basis for the difference between this 18 1 case and that situation. 2 MR. HORTON: Thank you. Discussion, Members? 3 Member Yee. 4 MS. YEE: Thank you very much, Mr. Chairman. 5 I -- let me start with this question to the 6 Petitioner, your -- one of your opening statements, I 7 think, was an attempt to clarify the nature of the 8 business of the Petitioner. 9 Fidelity Asset Management is an insurance 10 company? 11 MR. VINATIERI: No, it is a regular company. 12 It's a subsidiary of the corporate parent that acquires 13 tangible personal property and then leases it or sells 14 it to all of the insurance company subsidiaries. 15 MR. FIER: To Fidelity's affiliates. 16 MS. YEE: Okay. 17 MR. FIER: I do happen to be -- 18 MS. YEE: But Fidelity Asset Management is not 19 an insurance company? 20 MR. FIER: No. 21 MS. YEE: Okay, all right. 22 Seems to me the Occidental case is actually 23 quite on point, but let me just try to piece it together 24 because I think it is somewhat confusing. 25 I think with the Occidental case, at least 26 suggested to me, was that that there was no prohibition 27 on the incidence -- on the imposition of sales tax on 28 retail sales of personal property to insurance 19 1 companies, even with the in-lieu gross premiums tax in 2 place. 3 And here we have a situation where this 4 particular corporation, Fidelity Asset Management, is 5 leasing property to its insurance affiliates. It is, at 6 least from the sales tax perspective, the retailer. And 7 the leases that are entered into with the insurance 8 affiliates do then seem to be continuing sales. 9 And, so, I'm just trying to see where you think 10 that argument has holes. 11 MR. VINATIERI: It has holes from the 12 standpoint that in the -- in the Occidental case, as I 13 indicated, it was the lessee who brought the action, not 14 the lessor who we have here. 15 There was no discussion whatsoever of the fact 16 that there is a specific culling out or carving out for 17 insurance companies in this one situation only as 18 related to any other lease of tangible personal 19 property. There was no discussion of that whatsoever. 20 We're not here today arguing and saying the 21 legal incidence is not on the lessor, on FAMI. We agree 22 with that. That is the law. 23 What we are saying, however is that but for the 24 action of the Board of Equalization in specifically 25 carving out a situation here where insurance 26 companies -- this insurance company that we lease to -- 27 is subject to the sales tax and not the use tax, as in 28 every other situation, that's very different than what 20 1 was brought up in Occidental. That was not raised 2 whatsoever in Occidental. 3 And -- and, you know, we can sit here and say 4 that hindsight's 20-20, but we don't know the scenario 5 that was going on there, but no one raised the fact that 6 under 1660 (c)(1) the only reason that the lessor here 7 today in front of you is because of that one provision. 8 MR. FIER: Ms. Yee, I'd like to add also 9 briefly? 10 MS. YEE: Okay. 11 MR. FIER: I think -- we feel as though use tax 12 should apply to the transaction, not sales tax because 13 if you look at 6390, it says in part A, 14 "Excluded from sales tax are -- when 15 rentals are required to be included in measure, 16 the use tax." 17 And we'd say this is an ex-tax lease of 18 tangible property, so, therefore, it is required to be 19 included in the measure. But, because of the in-lieu 20 provision, insurance companies aren't subject to the use 21 tax. 22 MS. YEE: Okay. 23 MR. FIER: And if you go to 6401, it says that 24 when you have a lease of tangible property, use tax 25 applies, it can't be exempt from use tax. 26 And the other question I have, or more of a 27 clarification, I've heard that tax applies because this 28 is a continuing sale or purchase, we can apply either 21 1 one. 2 So, my question is, are we saying that tax 3 applies because it's a continuing sale? If so, if you 4 look at the definition of a continuing sale, it says the 5 granting of possession. 6 Continuing purchase is the use of the property, 7 while the granting of possession did not occur in 8 California. It occurred outside the state. 9 So, how are we imposing a sales tax on that 10 transaction? 11 MS. YEE: Okay. That -- you raised a couple of 12 things, but let me ask Mr. Levine. 13 It seems to me that with respect to what the 14 constitution provides in the in-lieu tax, that the 15 exemption -- there is an exemption for use tax on 16 insurance companies, yes? 17 MR. LEVINE: Yes. 18 MS. YEE: Okay. 19 MR. LEVINE: There's an exemption for any tax 20 imposed on the insurance company except as specified in 21 the constitution. 22 MS. YEE: Right, okay. And then -- I mean, I 23 think the question that really needs to be answered is 24 where the legal incidence of the tax falls. 25 And I think that's where the regulation comes 26 in and really places it back on the lessor in this case, 27 but this -- is that the question? 28 MR. LEVINE: Well, yes and no. I don't think 22 1 there's any doubt that the legal incidence of the use 2 tax is on the user and the legal incidence of the sales 3 tax on the seller. 4 And I doubt that Joe would -- would dispute 5 that. 6 MR. VINATIERI: One of the few times I agree 7 with Mr. Levine. 8 MS. YEE: Okay, all right. 9 MR. LEVINE: For the last 25 years. 10 MS. YEE: This is history, this is great. 11 MR. LEVINE: Uhm -- 12 MR. FIER: Mark it down. 13 MR. LEVINE: We have a couple things here. 14 No. 1, you have to remember that the use tax 15 applies to every purchase for use in California, every 16 single one, except there is an in-lieu-type provision 17 for use tax, it says, "Except if it's included in the 18 measure of sales tax." 19 And when we apply that, we look to see 20 literally whether sales tax was imposed or should have 21 been imposed, not if -- if the sales tax is exempt, then 22 the use tax remains. 23 That's the very reason an insurance company 24 making sales is exempt from use -- from sales tax, but 25 still has to collect the use tax because use tax is the 26 overriding tax applicable to everything. Even though 27 it's a second tax, really, it's the master tax and we 28 pull out the sales tax when the sales tax applies. 23 1 When the Board had the lease issue before, as 2 has been discussed, there's nothing in the law that says 3 the tax on a lease has to be in the statutes. It says 4 the tax on the lease has to be sales tax or use tax. By 5 definition it's a continuing sale and purchase. The 6 Board can impose either tax. And many years ago, for 7 whatever reason -- even before my time -- the Board 8 decided that the general rule would be to impose use tax 9 on leases, I think because they wanted to be able to 10 collect from the user and that it would only impose 11 sales tax if it could not impose use tax. That's what 12 the reg says. 13 While I agree with Joe that I'm not aware of 14 any other industry where the sales tax would apply, the 15 reg is written so that if the statute -- if the 16 legislature or the people adopt something that exempts 17 something else from sales -- from use tax but not sales 18 tax, we would impose sales tax on the leases. 19 MS. YEE: Okay. And that's your allegation 20 that we've got got discriminatory treatment? 21 MR. VINATIERI: Yes. 22 MS. YEE: Okay, I got it. Thank you. 23 MR. VINATIERI: Yes. 24 MS. YEE: Thank you, Mr. Chairman. 25 MR. VINATIERI: May I also respond? 26 MS. YEE: Yes. 27 MR. VINATIERI: This -- what we're talking 28 about here, just to give some history, this is shades of 24 1 Gary Jugum. Some of us remember Mr. Jugum. And I 2 remember right when I was outside the womb, back in 3 about 19 -- what was it, '78 or '79, when I was on -- 4 just had gone on staff with Mr. Dronenberg, there was a 5 series of cases with the United States government called 6 Diamond National and at that time there were two 7 exclusions from the -- from the use tax, insurance 8 companies and the federal government. 9 And the federal government got involved 10 basically and brought suit against the Board of 11 Equalization and Reg 1660 (c)(1), with respect to 12 nationally-chartered banks, was deemed to be 13 unconstitutional by the US Supreme Court. 14 And, so, as a result, the legal staff at that 15 time -- that was about 19, I believe, 76 or 77, I just 16 remember hearing a little bit about it at the time -- 17 that the Board amended (c)(1) and took the banks or any 18 federally chartered institution out of that little 19 parenthetical phrase in (c)(1), but left the words, 20 "such as insurance companies." 21 So, that's how this all came about. The Board 22 at that time chose not to pull them out at that point in 23 time. So, here we are today, a couple years later, to 24 discuss the same situation. So, that's -- that's the 25 background. 26 And I would just indicate that I would disagree 27 with Mr. Levine from the standpoint of Section 6390, as 28 pointed out by Mr. Fier as well as -- 25 1 MR. HORTON: Had to disagree? 2 MR. VINATIERI: -- yeah, I'm going to have to 3 disagree. From the beginning, I -- there was a specific 4 short carve out, didn't last long -- that the talks 5 about when such rentals are required to be included in 6 the measure of the use tax, that's 6390, specifically 7 rentals. And then 6401, which I indicated earlier, 8 where it talks about personal property by a lessee under 9 a lease. 10 So -- so, the Board -- the problem with the 11 statute is not only does it -- is it illegal from the 12 standpoint that it is discriminatory, but we believe it 13 flies right in the face of the specific Revenue and 14 Taxation Code at 6390 and 6401. 15 So, as I indicated, we know that the Board has 16 interpreted this for many, many years in the manner that 17 you've done it here to FAMI, but we just believe it's -- 18 it flies in the face of the constitution, the in-lieu 19 provisions as well as these sections of the R and T 20 Code. 21 MR. HORTON: Thank you very much. 22 Further discussion, Members? 23 MS. MANDEL: Yeah. 24 MR. HORTON: Member Mandel. 25 MS. MANDEL: Thank you. I remember some of it 26 a little differently, but -- 27 MR. VINATIERI: No, you don't, you weren't 28 around, Ms. Mandel. 26 1 MS. MANDEL: Oh, yeah, well, only my 2 hairdresser knows for sure. 3 The -- but I had a question because you sort of 4 raised the issue about whether it's sort of too smart 5 for its own good, which was that even if the Board has a 6 regulation, you've fallen under the regulation, you want 7 the regulation tossed by the Board in this case -- which 8 is, you know, not something the Board's ever done in a 9 case -- but -- but you said, well, okay, even -- even 10 if, even if, then it's a sales tax, you're saying 11 that -- that the sales were outside the State because 12 it'd be the granting of possession. 13 And, so, you're saying so you get nothing 14 because the sales were outside the State. Is that what 15 I heard you say? 16 MR. FIER: We're not saying that tax -- there 17 wouldn't be a tax that would apply, we're just saying, 18 how could it be a sales tax, if the granting of 19 possession occurs outside the State or if you have -- 20 MR. VINATIERI: And then it's brought into the 21 State. 22 MR FIER: -- or if you have the first payment 23 on the lease where the property's coming into the State, 24 if you have an interstate shipment of goods, for a sales 25 tax to apply, you have to have two events occur, you 26 have to have title transfer in the State, you have to 27 have in-state participation by the seller. 28 So, how does -- how does a use tax apply -- I'm 27 1 sorry, how does a sales tax apply in that situation? 2 MS. MANDEL: And I didn't hear staff respond to 3 that portion of the argument because it was new to them 4 this morning. 5 And when it was raised on the intro, I thought 6 that meant that you might be suggesting that there was 7 some documents that would show that even if you 8 applied -- even if the reg was applied that there 9 wouldn't be a tax in this situation -- wouldn't be a 10 sale -- that the -- 11 MR. FIER: That a sales tax -- 12 MS. MANDEL: -- that a sales tax -- 13 MR. FIER: -- not that tax couldn't -- a use 14 tax -- 15 MS. MANDEL: -- right, that the sales tax -- 16 MR. FIER: -- would apply. 17 MS. MANDEL: -- couldn't apply. So, if -- if 18 the -- if the regulation is applied, so it's a sales tax 19 under the reg, then you're saying some or all of the 20 transactions would be exempt transactions for sales tax 21 purposes, but might be use tax transactions under the -- 22 might then be a use tax under the normal world of sales 23 versus use tax, normal world leaving aside the reg for a 24 moment. 25 And then as a use tax, it's an insurance 26 company, so, never mind. 27 So, when you first mentioned that I thought 28 that you might be suggesting -- and you said staff 28 1 should look at that -- that you might be suggesting that 2 there was some documentation or something that would 3 show that accepting the reg as is you can't impose a 4 sales tax on some or all of the transactions. 5 And I didn't hear staff responding to that. I 6 can tell Mr. Levine has a response, so -- but -- but 7 staff didn't -- you didn't have a response to that 8 portion. 9 Do you have one? Have you thought about it -- 10 in the moments that I've wasted while giving you an 11 opportunity to think? 12 MR. TUCKER: We note that these are continuing 13 sales, but without knowing the facts and without knowing 14 the specifics, we would want to take a look at what 15 they're referring to. 16 These are continuing sales that would take 17 place on a going forward basis. 18 MS. MANDEL: You have thought about it? 19 MR. LEVINE: Yes, in the couple of moments you 20 gave us. 21 I think Mr. Tucker needs to have more 22 confidence in his statements. These are continuing 23 sales. By definition, there is no interstate commerce 24 component to a continuing sale. What we're taxing is 25 the continuing sale in this state, which is why 6390 26 provides that once the property moves outside the state, 27 unlike MPE, which we won't get into, once the property 28 moves outside the State during the lease, we don't 29 1 continue taxing the lease because it's not happening in 2 California. 3 When it's in California what we're taxing is 4 the continuing sale or the continuing use. We have no 5 interstate component. It's just taxable under the law, 6 under the statute. 7 MS. MANDEL: Well, what -- what about the 8 first -- the first payment? 9 MR. LEVINE: The first payment is for the 10 continuing sale and continuing use that will occur. 11 If they're paying in advance, the payment is 12 still for the continuing sale or continuing use in 13 California. It does -- the payment is irrelevant. 14 You know we don't decide when the sale occurs 15 based on payment, it's based on transfer of possession. 16 If it's coming in from out of State directly to the 17 lessee, under -- whether it's sales tax, use tax, we're 18 not taxing it until the lessee gets it and starts to use 19 it unless the lease started outside the state, in which 20 case we still would not tax it until it hits the 21 border. 22 MR. FIER: Can I just ask clarification on 23 that? 24 So, are we saying the tax is due because it's a 25 continuing sale? Are you saying the tax would apply 26 because it's a continuing sale? 27 MS. MANDEL: That's what -- that's what I 28 heard. 30 1 MR. FIER: Okay. Then if you look at the 2 definition of a continuing sale under 6006.1, it says, 3 "The granting of possession of tangible 4 personal property by a lessor to a lessee." 5 How is the granting occurring in California in 6 a situation where the property's coming from outside the 7 State and, let's say, the contractor agreement is signed 8 outside the State? 9 And if we go to the definition of a continuing 10 purchase, I would agree with you that, okay, that's the 11 possession of -- if you look at the definition under 12 6010.1, the possession of tangible personal property by 13 a lessee. 14 MS. MANDEL: I hear the difference that 15 you're -- 16 MR. FIER: Okay. 17 MS. MANDEL: -- citing in the statutory 18 language. 19 Do you have a response? 20 MR. LEVINE: Yes, it's a continuing granting. 21 It's granting of possession. 22 It makes -- and I understand the argument and 23 it's a good argument from -- from the taxpayer's 24 perspective -- but it does -- it would render this whole 25 thing -- make no sense at all if it's a continuing 26 granting. Once the granting stops, the lease stops. 27 MS. MANDEL: Okay, thank you. 28 MR. HORTON: Further discussion, Members? 31 1 Is there a motion? 2 MS. YEE: Move to take the matter under 3 submission. 4 MR. HORTON: Member Yee moves to take the 5 matter under submission. Second by Member Mandel. 6 Without objection, such will be the order. 7 Thank you very much for appearing before us. 8 The Board will take your matter under consideration 9 about 1 o'clock this morning -- just kidding. 10 We'll take the matter under consideration and 11 send you a written report of our decision. 12 Thank you so very much. 13 MR. VINATIERI: We're hopeful that we got 14 everybody awakened this early in the morning with a very 15 stimulating -- this is tax Disneyland kind of case. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 32 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 JANUARY 31, 2012 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 32 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: February 22, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 33