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 FEBRUARY 1, 2012 10 11 SPECIAL TAXES APPEAL HEARING 12 APPEAL OF 13 ERIC ANTHONY GUIDICE 14 NO. 380212 (ET) 15 AGAINST PROPOSED ASSESSMENT OF TAXES 16 17 18 19 20 21 22 23 24 25 26 Reported by: Kathleen Skidgel 27 CSR No. 9039 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 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: Pamela Mash Tax Counsel 19 Stephen Smith 20 Legal Department 21 Bill Kimsey Business Taxes 22 Administrator III 23 For Petitioner: James Han 24 Representative 25 Eric Anthony Guidice Taxpayer 26 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 1, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Olson. 6 MS. OLSON: Our next item is D1, Eric Anthony 7 Guidice. 8 Please come forward. 9 MR. HORTON: Mr. Levine, would you please 10 introduce the issues in this case. 11 MR. LEVINE: The issues in this petition are 12 whether Petitioner's liable for tax on his purchasers -- 13 purchases and distribution of untaxed tobacco products 14 and whether relief of the failure to file penalty is 15 warranted. 16 MR. HORTON: Thank you. 17 Would the Petitioner please introduce 18 themselves for the record. You have ten minutes to make 19 your presentation afterwards. 20 MR. HAN: Hi. My name is James Han. I'm the 21 representive. And to my right is Mr. Eric Anthony 22 Guidice, the taxpayer. 23 MR. HORTON: Welcome. 24 MR. HAN: Chairman Horton, Members of the 25 Board, thank you very much for the opportunity to 26 present our case. 27 We've been anxiously waiting to present our 28 case to the Board with hopes that people with broader 3 1 scope and responsibilities to the State of California 2 evaluate and make the right decision. 3 As evident in the Sales and Use Tax Audit 4 Report dated July 13, 2001 that recommends no changes to 5 the reported taxes, Mr. Guidice is a hard-working person 6 that tries to comply with all the rules and unlike 7 vendors in question. 8 I believe the focus and direction of the audit 9 was mismanaged. The main issue we should -- we should 10 be addressing is whether the in-state activities of the 11 out-of-state vendor -- making exchanges, accepting 12 returns of tobacco products -- is distribution according 13 to the Section 30008 of the Cigarette and Tobacco Tax 14 Law. 15 If we determine that these activities and 16 dis -- activities are distributions, this makes the 17 out-of-state vendors distributors according to Section 18 30011. Then this creates a reporting obligation for the 19 out-of-state vendors. Plus, does this create reporting 20 obligation on all sales to California or just those that 21 take place in California for the out-of-state vendors? 22 We believe the tax reporting responsibilities 23 are not on a transaction-by-transaction basis but on a 24 vendor-by-vendor basis. 25 These vendors have planned and designed their 26 sales stream so all shipments originate from points 27 outside of California. However, when it came to 28 exchange and returns, this practice was not followed 100 4 1 percent of the time. The sales rep made exchanges of 2 tobacco products in Mr. Guidice's store, and sales reps 3 accepted returns at Mr. Guidice's store. 4 We have multiple mini-Amazons operating and 5 taking advantage of California markets without complying 6 with our tax rules. 7 Beginning with the registration process back in 8 May of 2000, there appears to be equal confusion on the 9 Board's part as well as Mr. Guidice. 10 Mr. Guidice went into the Van Nuys district 11 office, relied on the clerk at the field office for the 12 required permits. The field office issued a seller's 13 permit with the business name Big Easy Cigars, and the 14 business was entered as cigar seller. However, there 15 was no mention of any other license requirements at the 16 time, and no subsequent notices were sent out to 17 Mr. Guidice until the fall of 2002 when the Cigarette 18 and Tobacco Tax Product Licensing Act of 2003 was being 19 enacted. 20 The audit is divided into two parts. Part one 21 is the part where Mr. Guidice was an unlicensed 22 distributor covering the years 2000, 2001 and 2002. 23 Part two, the license part covers the years 2003, four 24 and five. 25 Our contention in part one of the audit is as 26 follows: Cigarette and Tobacco Tax Law Section 30019 27 defines an importer to mean anyone in the United States 28 that purchases tobacco products manufactured outside of 5 1 the United States for the purpose of making distribution 2 within the United States. This covers all of the 3 out-of-state vendors we've outlined. 4 Section 30011 defines a distributor as anyone 5 that sells or accepts orders of tobacco products to be 6 shipped to California from points outside -- outside to 7 an in-state consumer. Mr. Guidice has never issued a 8 resale certificate to any of the out-of-state vendors, 9 or he -- nor was he a licensed distributor for the 10 periods 2000 through 2002. 11 Mr. Guidice was either a consumer or unlicensed 12 distributor for this part of the audit period. If he 13 was a consumer, Section 30011(c) should apply and make 14 the out-of-state vendors distributors. If he was an 15 unlicensed distributor, Section 30108(a) applies. In 16 either case, the responsible party for the taxes is 17 distributor and not the buyer. 18 According to the tobacco tax -- distribution 19 tax return instructions, all sales made by an importer 20 to an unlicensed distributor, which includes consumers, 21 are includable in the importer's return and subject to 22 tax. 23 Most important issue at hand for both audit 24 periods is whether the out-of-state vendor meet the 25 definition of "distributor" according to Section 30011. 26 The staff has taken the position that the sales of 27 tobacco products are taking place, but these vendors do 28 not meet the definition of "distributor" because they do 6 1 not make in-state distribution. We completely disagree. 2 Under section -- under California Revenue and 3 Taxation Code Section 6006 -- 6006, a sale is defined to 4 include any exchanges, any transfer of possession, which 5 includes returns. 6 When these sales reps make exchanges of tobacco 7 products and accepts returns, they are conducting 8 sale -- they are conducting sales in California and meet 9 the requirements of in-state distribution, or in this 10 case the sale of tobacco products. 11 A classic example would be 12 Barnes-and-Nobles-dot-com. What was designed and what 13 was actually executed are two different things. 14 These sales reps live and work in California. 15 There's no doubt they have sales and use tax nexus in 16 California. However, for excise tax purposes, due to 17 accepting returns and making exchanges create excise tax 18 reporting obligations in California for these 19 out-of-state vendors. 20 Is the excise tax and tobacco products 21 reportable on a transaction-by-transaction basis or on a 22 vendor-by-vendor basis? Can a company like Amazon 23 create a reporting obligation in California and report 24 only those sales that take place in California and 25 exclude other sales that are shipped from points outside 26 of California? 27 We do not believe this to be the case. Once 28 your reporting obligation begins, either as an importer 7 1 or a distributor, you are required to report all your 2 sales to California. In addition to the distributor tax 3 return instructions mentioned earlier, under Section 4 30109 the presumption of distribution in-state, all 5 tax -- all untaxed tobacco products to be transported 6 into California are assumed to be distributed in 7 California. This makes the out-of-state vendor the 8 first distributor prior to Mr. Guidice placing the 9 tobacco products in his retail stock. According to 10 Publication 93, the person making the first distribution 11 is the responsible party for the taxes. 12 The Department knows well that the out-of-state 13 vendors are large multi-million-dollar importers of 14 cigars. They have permitted sales reps in California. 15 We have provided printouts of out-of-state vendors' 16 websites showing these sales reps with local phone 17 numbers and their order forms clearly showing local 18 addresses. We have -- we have provided exchange 19 invoices, return invoices where the sales reps 20 transported tobacco products in-state. 21 Uh, with so much involved, we can't help but 22 question the Department's motives when -- when staff 23 asks us questions such as, Do you have their payroll 24 data showing paychecks to the California sales rep? Or 25 another staff asked that -- stated that they have phoned 26 each of the out-of-state vendor to ask their attorney 27 whether they made any in-state distribution. I was told 28 by the same staff that the vendors' attorneys all 8 1 promptly answered no. 2 The excise tax amount in question for these 3 vendors are in millions, if not in tens of millions, of 4 dollars. The Board has the responsibility to the people 5 of California to bring these vendors into compliance. 6 Plus, the weight of administering auditing approximately 7 1,000 in-state distributors versus less than twenty very 8 large out-of-state vendors for more accurate and 9 complete compliance is a great opportunity for the Board 10 to exercise this mission to fairly, efficiently and 11 effectively administer the California taxes. 12 In the most recent, uh, Department's reply 13 dated January 11, 2012, the Department states, whether 14 Mr. Guidice is deemed a consumer or whether the 15 out-of-state vendors are deemed distributors was 16 irrelevant; Mr. Guidice would still owe the tax anyway 17 per Section 30107 as a consumer. 18 Department has changed and now they're -- 19 they're considering Mr. Guidice as a consumer. Then are 20 the out-of-state vendors, making sales to consumers in 21 California, distributors? 22 The out-of-state vendor distributor defintion 23 under Section 30011, by definition, make anyone making 24 sales to a consumer in California a distributor. 25 If this conclusion -- we don't believe this 26 conclusion to be correct. But if this is true, uh, we 27 ask that you relieve any taxes for Mr. Guidice based on 28 6596, reliance on written advice. Mr. Guidice has 9 1 relied on Publication 93, tobacco products distribution 2 tax return instructions for his reporting of taxes. He 3 relied on the Board identifying him as a distributor. 4 All correspondence from the Board telling him he was a 5 distributor were in error, the whole audit it would be 6 in error. 7 MR. HORTON: Thank you very much. 8 To the Department, you have ten minutes to make 9 your presentation, commencing with your introduction. 10 I would ask that you address the two specific 11 issues in your presentation. 12 MS. MASH: Thank you, Mr. Chairman, Members of 13 the Board. 14 I'm Pamela Mash from the Board's Legal 15 Department, along with Steve Smith and Bill Kimsey 16 representing staff. 17 Petitioner is liable for the excise tax on his 18 distribution of untaxed tobacco products purchased from 19 out-of-state suppliers. There is no dispute that 20 Petitioner made these purchases. Petitioner's only 21 contention is that the suppliers, and not Petitioner, 22 are responsible for the tax. 23 As you know, tax is imposed on the first 24 distribution of tobacco products in California. For the 25 period when Petitioner didn't have a distributor's 26 license, Petitioner purchased untaxed product as a 27 retailer and then, um -- and the first distribution 28 occurred when the Petitioner placed that product in 10 1 retail stock, in his store. 2 So Petitioner made the first distribution of 3 untaxed product in California. And as an unlicensed 4 distributor, he's responsible for that tax. 5 For the period when Petitioner did have a 6 distributor's license, he purchased untaxed product as a 7 licensed distributor. And as a licensed distributor, 8 he's the only person responsible for the tax. 9 The suppliers from whom Petitioner purchased 10 the product are not distributors because they didn't 11 make any distributions of the product in California, the 12 sales occurred outside of California, the suppliers 13 completed the physical delivery of the product by 14 delivering the product to common carriers outside 15 California for shipment to Petitioner in California. 16 And if the Petitioner was an in-state consumer 17 and if the suppliers -- the out-of-state suppliers were 18 engaged in business in California -- neither of which is 19 supported by facts in this case -- the suppliers might 20 have a collection obligation in that case. So -- but 21 the tax would be owed by the Petitioner, not the 22 out-of-state suppliers. 23 So even if the Board agrees that in this case 24 the suppliers had a collection obligation, they never 25 collected or reported any tax from this Petitioner. So 26 Petitioner is not relieved of his obligation to pay the 27 tax. As the purchaser, he's the only person who remains 28 liable. Therefore, we concur with the Appeals 11 1 Division's recommendations. 2 Thank you 3 MR. HORTON: On -- okay. 4 On rebuttal, please. 5 MR. HAN: Yeah. Um, I don't think that it was 6 addressed whether the activities of the out-of-state 7 vendors -- they're permanent sales rep living and 8 working in California. They come to his stores to make 9 exchanges and accept returns. 10 We gave them invoices showing these returns. 11 We showed, um -- and that part of -- whether that meets 12 the definition of "distribution" -- I understand by 13 design these out-of-state vendors design their sales 14 system so that initially all the shipments originate 15 from Florida, Virginia, New York, or wherever they -- 16 wherever these vendors are located. But the after-sales 17 service, um, when they are at his store, when the 18 salesman comes and there's -- out of a box there's two 19 bad cigars, there's a wrong -- wrong shipment of cigars 20 and he happens to have it in his car. They would make 21 the exchanges. He would take the return -- uh, the 22 damaged cigars and destroy them. 23 That return and those exchanges meet the 24 definition of a sale, and that is absolutely occurring 25 in California. So that, I think the Department's 26 contention that no sales are taking place or they don't 27 meet the definition of distribution in-state is not 28 correct. 12 1 And our contention that once you create that 2 sale in California, the reporting obligation falls to 3 the distributor. You can't have one distributor come up 4 and say, Oh, yeah, for those two cigars, I'll report the 5 tax; but the other shipments that we shipped from 6 Virginia, we're not going to ship -- we're not going to 7 tax, we're not going to collect the tax or report it to 8 the State of California. I don't think it works that 9 way. 10 And I don't think that was the intention of 11 what they meant. If you look at the law sections, 12 there's several sections that states when these 13 out-of-state vendors sell to a consumer or an unlicensed 14 distributor, they, by definition, are distributors for 15 California excise tax purposes. 16 And this is my belief. I don't have the legal 17 history on this, but I believe the reason why they made 18 those rules is because, okay, fine, if you want to ship 19 things from out-of-state, we won't bother you. But if 20 you ship to -- just sell to just the licensed 21 distributor, if he makes any other sales to a consumer 22 or an unlicensed distributor, then you're done. You're 23 a distributor and anything you sell is distribution in 24 California. 25 I believe there's a Section 30109 that says -- 26 I think that's the section where it says "presumption of 27 distribution." It states, if you make distribution -- 28 if you sell tobacco products or ship tobacco products to 13 1 California, everything is assumed to be distributed in 2 California. And I think that's the background for those 3 two rules. 4 You could cite one little rule that says, hey, 5 you -- you -- you made purchases and you don't have 6 proof that you didn't -- you paid the taxes or the 7 sellers paid the taxes, then you owe it. I'm not saying 8 that doesn't exist in the law. But the design of that 9 is, once these guys make sales to unlicensed distributor 10 or consumers, their -- their rights and their -- that 11 protection is gone. And you can't have a vendor and 12 select what he's going to report on and what he's not 13 going to report on. 14 MR. HORTON: Thank you very much. 15 Member Steel. 16 MS. STEEL: Um, so the salesperson comes to the 17 store and sell it. 18 MR. HAN: No. He -- he -- his primary duties 19 are to accept orders. 20 MS. STEEL: Mm-hmm. 21 MR. HAN: And manage a customer. 22 MS. STEEL: So take all the orders from -- at 23 the store. 24 MR. HAN: Right. 25 MS. STEEL: Okay. So when you have anything 26 you want to return or destroyed or wrong, uh, products 27 that they take, the salesman is responsible to take 28 everything. Or sometimes. 14 1 MR. HAN: Officially, no. This is what's going 2 on. We have -- 3 MS. STEEL: He carried -- okay. I just heard 4 from you that so he carries some of the cigarettes 5 around, inside of his car? 6 MR. HAN: The cigars. We're talking tobacco. 7 MS. STEEL: Cigars. 8 MR. HAN: Not cigarettes. Yes. 9 MS. STEEL: Sorry about that. 10 MR. HAN: Yes, he does. 11 MS. STEEL: So cigars. 12 So he carries around. If he has the same items 13 that this taxpayer wants it, then -- 14 MR. HAN: He can make an exchange. 15 MS. STEEL: He can make an exchange. 16 MR. HAN: And one thing I learned recently is 17 that, um, I guess there's bad cigars. Cigars go bad or 18 something. 19 MS. STEEL: Right. Right. Yeah. 20 MR. HAN: And when -- and what they do -- he 21 gets credit for them. 22 MS. STEEL: Okay. 23 MR. HAN: But when he let's them know, the 24 salesman comes and authorizes. And then he takes it 25 back and they destroy it. 26 MS. STEEL: Okay. Let me ask, um, the 27 Department that, in this case the out-of-state vendors 28 can be a distributor, too, when salesperson is in the 15 1 state and they're the one actually handles all -- handle 2 all the process here. 3 MR. SMITH: That would make them a retailer 4 engaged in -- uh, that would make them engaged in 5 business in the state. And if they're -- 6 MS. STEEL: So they are distributors. 7 MR. SMITH: -- engaged in business in-state and 8 they sell to someone other than a licensed distributor, 9 that would make them a distributor. 10 But the tax is imposed on the distribution. 11 And the problem in this case is that the distribution -- 12 that the out-of-state seller isn't making a distribution 13 in the state when they sell from outside of the state. 14 The person who's making the first distribution in the 15 state is Petitioner. 16 MS. STEEL: But how can you explain that the 17 salesperson comes in and he can even carry cigars and 18 exchange it there, and he does all the process of buying 19 and selling there. So how can you not saying that that 20 company is not the distributor here? 21 MR. SMITH: If -- if they were making the sale 22 in the state, they would -- 23 MS. STEEL: And they are. 24 MR. SMITH: -- be both the distributor and 25 making a distribution. 26 MS. STEEL: For this case. 27 MR. SMITH: But we haven't seen evidence that 28 the cigars were in the state at the time of sale. 16 1 MS. STEEL: Okay. Okay. I -- I'm totally 2 confused, Mr. Levine, here. Because if the salesperson 3 carries it around and if they have a same cigar or they 4 have a right cigar they can even give to this taxpayer 5 or to the store, so how can not be distributor at this 6 point? Because they're the one actually carrying it 7 around, too. 8 MR. LEVINE: And I think Mr. Smith agreed if -- 9 Petitioner argues that they accepted returns 10 and they made exchanges. Returns, accepting something 11 back, that doesn't count. That's a back. 12 MS. STEEL: But he's bringing. 13 MR. LEVINE: If the -- I don't think the 14 Department -- I haven't seen it. Appeals hasn't seen 15 that. The Department hasn't seen that. But, yes, if 16 the rep in this state had the cigars, went into the 17 store and hands it to them in this state, then I think 18 the Department agrees that's a liability of the 19 seller -- 20 MS. STEEL: Right. 21 MR. LEVINE: -- because it's occurred in the 22 state. But, as of yet, I don't think the Department is 23 convinced. Appeals isn't convinced that that 24 happened. 25 MS. MANDEL: Question. 26 MR. LEVINE: We haven't seen that evidence. 27 MS. STEEL: Well, that's -- that's exactly what 28 this taxpayer is saying, that, yes, they're the one 17 1 destroying it. So you said destroying is not because 2 when they take it back. But they're bringing inside of 3 their truck. Actually they're delivering some of the 4 merchandise, not all of them. So, as long as you 5 deliver one thing, then that's distribution -- that's -- 6 they are distributors. 7 MR. LEVINE: For that. 8 MS. STEEL: For that. 9 MR. LEVINE: For that. If they really -- 10 MS. STEEL: But you cannot really say just only 11 for that. When they're exchanging it, they're carrying 12 it around, then they are distributors here. 13 MR. LEVINE: If they're going and actually 14 exchange -- carrying product into the store, then they 15 are a distributor in the state. But they're not a 16 distributor for every single thing that happens. 17 They're a distributor for everything that they 18 distribute in this state. And they certainly would 19 have -- would be engaged in business in this state and 20 would be required to collect any applicable tax that's 21 owed by the purchaser. 22 In that case, when they send it from out of 23 state, they would probably be obligated to collect the 24 tax, but that wouldn't -- but, again, it would be a 25 liability of the purchaser on this -- the deliveries 26 from outside the state. 27 So unless this taxpayer could show that they 28 literally paid the money to a licensed distributor, they 18 1 would still be -- he would still be on the hook for the 2 tax because that's like a use tax liability. 3 MS. STEEL: We don't have to go that far. What 4 I'm saying is, here, that they are the one actually have 5 a problem merchandise, or the past -- what they call -- 6 the old merchandise and then exchange it, and they 7 actually carries -- the salesman carry things around and 8 they are exchanging it, and they're replacing it means 9 they are the distributor. They are working as a 10 distributor, that's what I'm saying here. 11 MR. LEVINE: I agree. 12 MS. STEEL: Yeah. 13 MR. LEVINE: If they show that they are a 14 distributor, they are a distributor in this state with 15 respect to anything that they physically transfer in 16 this state, and -- 17 MS. STEEL: And then salesperson is in the 18 state, too. 19 MR. LEVINE: Right. 20 MS. STEEL: So that's another thing. 21 MR. LEVINE: That's what the -- that's -- 22 that's the argument. 23 MS. STEEL: Right. 24 MR. LEVINE: That's not the facts, at least as 25 far as Appeals understands them. 26 MS. STEEL: How they going to prove the facts 27 here? 28 MR. KIMSEY: I'll tell you what we did is we 19 1 contacted these out-of-state manufact -- or 2 distributors, out-of-state. And basically they have 3 sales reps in California, and their only job is to take 4 orders. 5 They take the orders. The order's completed. 6 They send it to the parent company who then approves it. 7 So that's how the orders occur. 8 As far as return merchandise, on the invoice it 9 says "Return products are not allowed unless authorized 10 by a sales rep." So the sales rep does come and he 11 authorizes those returns. 12 He does not take the product. He does not 13 carry any untaxed product in California. These 14 out-of-state companies know they're not -- you know, not 15 to do that and they don't. 16 MS. STEEL: That's not what this taxpayer's 17 saying. So if we can -- 18 MR. KIMSEY: All these companies -- 19 MS. STEEL: -- they can prove that they have -- 20 they are bringing the truck with merchandise in it, then 21 you call them as a distributor then. 22 MR. KIMSEY: Yeah, but I've contacted every one 23 of these companies, and none of them were bringing 24 untaxed product into this state. 25 MS. STEEL: Okay. Can you prove that? I 26 mean -- 27 MR. HORTON: I -- I -- 28 MS. STEEL: -- do you have a picture of that 20 1 big white truck that, you know, brings all these 2 merchandise? 3 MR. HAN: First of all, these are their 4 personal cars. 5 But before I answer, um, the Department's 6 question, I want to just address what Mr. Levine said. 7 And I want to make sure we establish this fact or this 8 rule. 9 Um, it's not just about the salesman coming 10 into his store with a brand new box of cigars and asking 11 Mr. Guidice, Hey, you want to buy this? That's not the 12 only -- that's not the only criteria that meets a sale 13 in the state. 14 If he makes an exchange or he accepts a 15 return -- because when you accept a return, there's a 16 transfer of possession. The definition of 6006, a sale 17 includes all exchanges, barters, for whatever you have a 18 transaction with, that's it, you're done. That's a 19 sale. Return counts. Exchanges count. I want to make 20 sure we get that -- 21 MS. STEEL: Okay. 22 MR. HAN: -- understood before we move on. 23 MR. LEVINE: If the salesman goes in, collects 24 the old stuff, takes it away and then they send new 25 stuff from out of state, that's not a distribution in 26 this state. 27 MS. STEEL: That's -- 28 MR. LEVINE: It's a return in the state, and 21 1 return is not a sale. 2 MS. STEEL: Return is not sales, but they have 3 a position of that return the merchandise on 4 salesperson. So it can go both ways. They're bringing 5 and they're taking. So both of them are on the same 6 rule. 7 MR. LEVINE: We're only -- I'm sorry. We're 8 only taxing the movement from the seller to the 9 purchaser. And if that occurs in California, that's the 10 distribution. We're not taxing -- 11 MS. STEEL: Okay. Then let's keep it that way. 12 If you interpret law that way and Mr. Han interprets his 13 own way, okay, let's have proof that what they are 14 delivering to the store when they have to exchange it. 15 MR. HAN: You want to introduce this, Eric? 16 But, you know, I think what Mr. Levine -- I 17 respect him greatly because I -- I -- I used to work 18 here a long time. But I think you answered what a 19 distribution is. That's not what I'm talking about. 20 I'm trying to have a more basic conversation 21 about what a sale is. Are you -- are you saying when 22 they make an exchange or accept a return, that's not a 23 sale? 24 MS. STEEL: Mr. Han, you know what, okay. That 25 depends on who's going to interpret the law. But I just 26 want to see that. So show me that why this white truck 27 comes in and then, you know, brings some of the 28 merchandise and they exchange it and they bring it. 22 1 That's -- if you can prove that, then it really doesn't 2 matter who's going to interpret the, you know -- the -- 3 the law. 4 MR. HAN: I think my client, something happened 5 yesterday -- 6 MS. STEEL: Okay. 7 MR. HAN: And he got a -- he received a box. 8 MS. STEEL: Okay. 9 MR. HAN: So if you -- you want to introduce 10 this? 11 MR. GUIDICE: Yes. Um, yesterday I received 12 this package. 13 MS. STEEL: Okay. 14 MR. GUIDICE: This package contains a box of 15 cigars. 16 MS. STEEL: Okay. 17 MR. GUIDICE: This box of cigars, I noticed I 18 was reconciling my -- my -- my American Express card 19 because that's how I reconcile my books. I pay 20 everything pretty much on my credit card. I have a box 21 coming in from General Cigar, and I've got this package 22 that just came in yesterday. 23 MS. STEEL: Okay. 24 MR. GUIDICE: Oddly enough, maybe it's a God 25 shock for what's going on. I don't know if it's going 26 to be relevant. But, I get this package and I call up 27 the national or the west coast sales manager for General 28 Cigar. They came in, and they took roughly -- basically 23 1 what happens -- 2 MS. STEEL: Salesman came in? 3 MR. GUIDICE: Right. 4 MS. STEEL: Okay. 5 MR. GUIDICE: We have -- I keep all my damaged 6 cigars, or sometimes cigars get bugs in them, and they 7 come out. 8 MS. STEEL: Right. 9 MR. GUIDICE: I keep those. And when the sales 10 rep comes in, I say this is what I have to return. 11 MS. STEEL: Right. 12 MR. GUIDICE: And he comes -- he'll make a 13 note. And typically they will put it down to credit and 14 credit my account. 15 MS. STEEL: Right. 16 MR. GUIDICE: And, you know, previously I've 17 had -- I have had sales reps come in and sell out of 18 their cars. 19 MS. STEEL: Right. 20 MR. GUIDICE: They won't -- they'll say they 21 won't, you know. And I really don't want to throw 22 anybody under the bus to make myself better here because 23 I want to stay in the business because it's not going to 24 be good for me if I continue to do that. 25 MS. STEEL: Those are same salesmen from the 26 same company you're talking about? 27 MR. GUIDICE: That's happened in the past. And 28 they come in. If they've got samples to hand out or 24 1 floor -- you know, they have what they call car stock. 2 MS. STEEL: Right. 3 MR. GUIDICE: You know, some people don't want 4 to say that. And they come in and they'll replace it, 5 which is great. You know, these guys are doing me a 6 favor, helping me out, great, you know. 7 In this case here, back to here -- sorry, I got 8 off track. This came in yesterday. He came in, I told 9 him, we figured out whatever it was, $130 wholesale cost 10 of damaged merchandise. And he said, what we'll do is 11 we'll send you a box of 50 cigars. 12 MS. STEEL: Mm-hmm. 13 MR. GUIDICE: Well, typically they'll credit 14 and it will come out, you know. But not always. It'll 15 come out of New Jersey or, you know, wherever they're 16 at. This one came out, from him, oh, I've got a box at 17 home. He happens to live in Sacramento. 18 MS. STEEL: Mm-hmm. 19 MR. GUIDICE: I don't know if this is relevant 20 or not, but this distribution here, I would think -- you 21 know, his name's here. It's out of Sacramento, 22 California. That's the national -- or the west coast 23 sales rep for General Cigar. That can be all looked up 24 and proven. 25 MS. STEEL: Can I look at the box? 26 MR. GUIDICE: And I don't think he would deny 27 it. I don't think he would deny it. 28 So that being said, I called him up yesterday 25 1 morning and I said, I received this box and I thought it 2 might be the other box that I was supposed to get. And 3 he goes, yes, I sent it in from my house. 4 And I asked him -- I said, well, I can't bring 5 a box in -- if the State Board comes in and wants to 6 take an inspection of my business, I carry -- this is a 7 Maduro. I carry a Double Maduro. I don't carry this 8 exact cigar. So if you guys come in and want to inspect 9 my shop, happened to just get lucky and pull this box, 10 and you say, I need an invoice for this box. Well, I'm 11 going to say I don't have it, I got it from the sales 12 rep. 13 So, he said -- I said, I need to get some 14 documentation on this box. And he said, well, I've 15 never been asked that. I go, well, I have to pay 16 taxes -- he goes, if I do that, I have to go through 17 General Cigar and you'll have to pay tax on it. I go, 18 of course I'm going to pay tax for it. I'm going to -- 19 I'm going to -- the -- the cigars you took, I'm going to 20 get credit from the State for a return of tobacco 21 products, and then I'm going to be taxed on -- you know, 22 put this in my inventory the way I do in my spreadsheet 23 saying that I owe my, you know -- roughly 30 percent 24 tobacco tax. 25 So he says he's going to call, you know, and 26 get that all done. So, I mean, I don't know if this, 27 again, makes it distribution in California, but that's 28 pretty obvious, I think, in that case. 26 1 MS. STEEL: Okay. 2 MR. GUIDICE: But in the past, you know, 3 absolutely, just about every cigar vendor in the area 4 has car stock and they replace it. And, you know, I 5 have -- I have a couple people that I know that have 6 said that they've -- you know, they ask how my audit's 7 going, blah, blah, blah. And I said to them -- they 8 asked me -- or they had said that, yeah, that we were -- 9 that we're trying to, um -- the State wants us to 10 file -- get a license in-state. You know, because -- 11 because supposedly they have nexus -- they're saying we 12 do have nexus because I live here and we're making 13 distribution. 14 So I know as things keep going on and on that 15 everybody's really cleaning up their act, so to speak, 16 on how things have been -- been, um, going in our 17 business. 18 MS. STEEL: Okay. Thank you. 19 I'm done. 20 MR. KIMSEY: Can I answer something on General 21 Cigar? They do have a license with us, and they do have 22 a cigarette tobacco products license. So what they did 23 and the way they handled it was proper. 24 None of the other people that he's bought 25 from -- 26 MS. STEEL: Is it proper things that they 27 exchange it -- 28 MR. KIMSEY: Well, yeah -- 27 1 MS. STEEL: -- from them, and then it comes out 2 from the Sacramento? 3 MR. KIMSEY: Because the person -- 4 MS. STEEL: The cigar? 5 MR. KIMSEY: Well, there was a question that 6 you had asked earlier about if someone had product -- 7 MS. STEEL: Right. 8 MR. KIMSEY: -- and they transferred it to 9 them, would they owe the tax? Would General Cigar owe 10 the tax and be required to have a licence? And the 11 answer is yes. And General Cigar does have a license. 12 So the way they handled that transaction, it was 13 proper. 14 MS. STEEL: Then they have to pay taxes? 15 MR. KIMSEY: Well, it just -- well, he's a 16 licensed distributor now, so General Cigar -- 17 MS. STEEL: From now on he has to pay, right? 18 MR. KIMSEY: So now he'll pay the tax. But 19 General Cigar can have unstamped product in California 20 because they do have a license with us. But none of the 21 other out-of-state companies he bought from does have a 22 license with us, a cigarette and tobacco products 23 license. 24 So that transaction was handled proper. 25 MS. STEEL: Okay. 26 MR. HORTON: Mr. Runner. 27 MR. RUNNER: Yeah, let me just, um, see if I 28 have the right question here, or see what I'm trying to 28 1 get around here. 2 Um, okay. So we know that's at least -- that, 3 for an example, in regards to your, uh, transactions, 4 this particular supplier then is kind of different than 5 the rest of them, I guess. Is that a fair -- is that -- 6 MR. HAN: No, because since when did they have 7 a distributor's license? 8 MR. KIMSEY: Since January of 1989. 9 MR. HAN: And if they were making the first 10 distribution in California, why is my tax -- my client 11 being taxed? 12 MR. RUNNER: Okay. Hang -- let me -- let me -- 13 you believe since they have a license, that he -- your 14 taxpayer shouldn't be taxed? 15 MR. HAN: On this box. If we take this 16 example, that box -- 17 MR. RUNNER: Yes. 18 MR. HAN: That brand new box of cigar -- 19 MR. RUNNER: Yes. 20 MR. HAN: -- was first distributed, not by my 21 client when he put that box in his shelf -- 22 MR. RUNNER: Right. 23 MR. HAN: -- for retail stock. It was first 24 distributed when they sent it from Sacramento to him. 25 MR. RUNNER: Well, let me ask that. I think 26 what I heard was that because he has a distributor's 27 license, that that's why it is that they can send it to 28 him, and your taxpayer/client there is responsible for 29 1 collecting the tax. Is that -- is that a fair -- 2 MR. KIMSEY: That -- that's fair. But the 3 other question that Ms. Steel had asked is could they 4 have unstamped -- untaxed product in California? And 5 the answer is yes, because he is a cigarette 6 distributor. 7 MR. RUNNER: Okay. 8 MR. KIMSEY: Okay. 9 MR. RUNNER: Okay. So, again, at least that's 10 I think the -- that's the -- that's the discussion, I 11 guess, as is understood here. 12 Um, in regards to the -- is there anything -- 13 if these -- if he was receiving anything from, um -- 14 from these distributors, and they were in-state -- I 15 guess I'm kind of going to this example. Is there any 16 point to where he is not responsible for the collection 17 of that tax and these other distributors are as long as 18 he has a distributor's license? 19 MR. KIMSEY: Well, now that he has a 20 distributor's license, he's the one that would be 21 reporting the tax. 22 MR. RUNNER: No matter what. 23 MR. KIMSEY: No matter what. He's making the 24 first distribution in California. 25 MR. HAN: What happened when these were shipped 26 from Sacramento to here? 27 MR. RUNNER: Well -- okay. Well, I think we've 28 at least clarified that, maybe not to satisfaction. But 30 1 I think at least we've clarified that in the discussion. 2 Okay. So no matter what then, he is 3 responsible for then the -- the paying of the -- then 4 that excise tax? 5 MR. KIMSEY: That's correct. 6 MR. RUNNER: No matter how they came, all this 7 discussion in regards to who's in state, who's out of 8 state, really is kind of an interesting discussion, and 9 maybe there's some issue there for us to deal with. But 10 not -- not necessarily in conclusion to his liability? 11 MR. KIMSEY: That's correct. 12 MR. RUNNER: Okay. Thank you. 13 MS. STEEL: I just want to ask, when did you 14 get the distributor's license? 15 MR. GUIDICE: Uh, I believe it was in third 16 quarter of 2002. 17 MR. KIMSEY: He -- he got it in September -- 18 MR. HORTON: Sir. 19 MR. KIMSEY: -- of 2002. 20 MR. HORTON: Sir. 21 MR. KIMSEY: Oh, sorry. 22 MR. HORTON: Question of the taxpayer. 23 MS. STEEL: Okay. Thank you. 24 MR. HORTON: Ms. Mandel. 25 MS. MANDEL: Um, my -- my note says that he -- 26 this Petitioner, um, got the distributor's license -- I 27 have a note that says it was on BOE request that he got 28 a distributor's license. 31 1 MR. KIMSEY: Okay. 2 MS. MANDEL: Um, so now he's been holding a 3 distributor's license since he got one. Because, I 4 guess, if someone said get one, you would keep it. 5 So, um, did he get it because BOE went in 6 and -- 7 MR. KIMSEY: Yeah, a couple things happened. 8 For whatever reason, in January of '01 he did apply for 9 a license with us. But then he was required to fill in 10 the rest of the paperwork like -- 11 MS. MANDEL: He -- he -- he -- which kind of 12 license? 13 MR. KIMSEY: Cigarette -- a CP, a cigarette -- 14 a tobacco products distributor license. 15 So he turned in an application with us in 16 January of '01. Um -- 17 MS. MANDEL: He's looking like he doesn't know 18 what you're talking about, okay. 19 MR. KIMSEY: I have all the documents here. 20 MS. MANDEL: Okay. 21 MR. KIMSEY: But -- so then, because he didn't 22 complete the application, which means you to have post 23 security and everything, in May of '01 the license was 24 closed out. 25 Then in September of '01 he requested again. 26 And then later, in December -- I mean, sorry, in May of 27 '01 he requested again. And then again it was closed 28 out because he didn't complete the application process. 32 1 And then in '02 he did finally take out a 2 license. Now, the reason he took out a license was 3 because we got a referral from our Investigation 4 Division that complaints were made that he was selling 5 product less than his competitors, the licensed 6 distributors in California. So that's what kind of 7 triggered this whole thing. 8 So he was able to sell product cheaper than the 9 licensed distributors in California. And they will call 10 us and report that to us. And that's how he ended up 11 ultimately getting a license. That's how it was brought 12 to our attention. 13 MS. MANDEL: Okay. But now, um -- all right. 14 On the, um -- on the -- I understand the basic 15 argument about even if the out-of-state sellers have -- 16 are engaged in business in California, that we'll give 17 them a collection obligation, assuming he doesn't have a 18 distributor's license, we'll give them a collection 19 obligation that it would still -- that -- that for 20 product coming into the state from out of state, he 21 would still be the first distributor. 22 Petitioner's sort of overriding policy 23 argument -- and this may not go to his particular case 24 right now that you guys have been dealing with for 25 however many years -- his overriding assertion from his 26 rep is we've been giving you information about these 27 out-of-state guys and their in-state reps and how they 28 really operate. Not like what they say they do when you 33 1 call them on the phone in Florida or wherever they are, 2 but how their reps really are operating. 3 And I guess it turns out this one company is 4 registered. Um, but their overriding theme has been if 5 we've given you information, um, you know, then you 6 should be -- maybe not in conjunction -- you know, so 7 focused on this case, but investigating, conducting an 8 investigation of that. And, of course, you know, we 9 would refer it to Investigations to look into. And I 10 would think a phone call to the guys in Florida, or 11 wherever they are, they're going to say no. 12 But looking at the documentation to see if you 13 can find which other companies out of state that perhaps 14 are not registered as distributors that should be 15 registered as distributors. And then, um, you know, 16 getting them in -- in -- in compliance. And then if you 17 had those -- you know, assuming they in fact were 18 engaged in business in the state, uh, and were still 19 shipping some stuff in from out of state, if they were 20 really in compliance, they would be collecting the tax. 21 Maybe not him if he's still registered as a distributor, 22 but they would be collecting the tax from whatever shops 23 there are out there who may be ordering from them out of 24 state. And you'd be having the tax collected at the 25 level of the company, that make big -- big cigar-selling 26 company rather than every single individual shop. 27 That's the -- that's the focus of their, um, 28 overriding argument about -- about these out-of-state 34 1 companies really have reps that are really causing them 2 to be doing business here. No matter what they say on 3 the phone, we've shown you stuff. And I don't know what 4 it is and how Investigations does its investigation. 5 And, of course, you can't really tell us because it 6 would be an investigation. 7 Um, but -- but that's the sort of overriding 8 policy question that came out of the paperwork, to me. 9 Uh, and I was a little concerned about whether the 10 whole, as it went through the dispute process, was so 11 focused on, well, this taxpayer, and besides he -- he 12 owes the tax and so it doesn't really matter. And I 13 just don't want that other piece, if in fact there are 14 out-of-state companies that have reps here that are 15 doing more than the company would like to admit or 16 perhaps, you know, knows -- I don't know -- that that's 17 being looked into in the overall grand scheme of things. 18 And I, with that little lecture, will assume 19 that it has been or will be investigated. And I 20 understand about how you can't sort of tell us whether 21 you are investigating or not or what the results might 22 be on an individual tax potential basis, but it was a 23 concern. It wasn't a question, I guess, in the end. 24 MR. HORTON: Ms. Mandel? 25 MS. MANDEL: No. Go ahead. 26 MR. HORTON: Just a general question. 27 MR. HAN: Yeah, because I think what -- what, 28 uh, the staff said is factually incorrect. 35 1 This particular -- 2 MR. HORTON: Sir, sir. 3 MR. HAN: -- box that -- 4 MR. HORTON: I would ask that you direct your 5 response to us. 6 MR. HAN: Okay. The box that was shipped -- 7 MR. HORTON: You have your finger -- this 8 way. 9 MR. HAN: Oh, the box that was shipped from 10 Sacramento to Mr. Guidice's store in Studio City, that 11 is a distribution. That's the first distribution. 12 So how can General Cigars not be responsible 13 for the tax on that particular distribution of that 14 cigar, that box right here? 15 MR. HORTON: Okay. 16 Further discussion, Members? 17 Hearing none, is there a motion? 18 MS. YEE: Move to take the matter under 19 submission. 20 MR. HORTON: Moved by Member Yee to take the 21 matter under submission. Second by Member Mandel. 22 Without objection, Members, such will be the 23 order. 24 Thank you very much for appearing before the 25 Board. The Board will take your matter under 26 consideration later on this evening and send you a 27 written report of our decision. 28 ---oOo-- 36 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 February 1, 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 36 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: March 29, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 37