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 APRIL 26, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 EAST COAST FOODS, INC. 14 NO. 444779 (AS) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 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 Joann Richmond 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 For Petitioner: Sam L. White Representative 24 John L. Sadd, Jr. 25 Representative 26 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 APRIL 26, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what is the next 6 matter? 7 MS. RICHMOND: Our next item is C18, East Coast 8 Foods -- 9 MR. HORTON: They'll let you know what just 10 happened. 11 MR. ALVAREZ: Okay. Thank you. 12 MS. RICHMOND: Our next item is C18, East Coast 13 Foods. 14 Please come forward. 15 MR. HORTON: Mr. Levine, please introduce the 16 issues in this case. 17 MR. LEVINE: The issues in this petition are 18 whether adjustments are warranted to unreported taxable 19 sales, whether the negligence penalty was properly 20 imposed, and whether relief of the amnesty penalties is 21 warranted. 22 MR. HORTON: Uh, thank you very much. 23 The taxpayer will have 10 minutes to make their 24 presentation. We would ask that you commence with your 25 introduction. 26 After your presentation, we will then go to the 27 Department. They also will have 10 minutes. And we 28 will return to you, allowing you five minutes on 3 1 rebuttal. 2 Please commence. 3 MR. WHITE: Thank you, Chairman Horton and 4 Members of the Board. 5 My name is Sam White. I'm the taxpayer's 6 representative. To my immediate left is John Sadd, 7 Junior, also the taxpayer's representative. 8 MR. HORTON: Welcome. 9 MR. WHITE: We're here today simply -- 10 unlike the prior two that we've -- we've sat through, 11 we're here today to make a simple request to have the 12 case referred to the field office in Norwalk so we can 13 sit down with one person, present them additional 14 merchant card statements on the business during the 15 four-year audit period, and -- and resolve this, 16 hopefully, in a day. 17 We have gone through a long process and 18 presented a sampling of those merchant card process -- 19 statements that we -- we were able to go get from third 20 parties. 21 There were six different vendors. Most of -- 22 five of the six, I believe, were out of business. 23 And so they were -- it's been difficult to obtain 24 those. 25 We have obtained, um, as I'm sitting here right 26 now, we just received some more from one of the vendors, 27 merchant card vendors, and we have 25. 28 We've submitted four or five to the petitions 4 1 group to look at, after the informal, um -- uh, appeals 2 hearing, and so we can agree and move this forward. 3 We have subsequently obtained an additional 25 4 out of 48 total, which -- I mean, almost three quarters 5 now. We are trying to get all 48. Um, and -- and 6 that's where we -- we -- and we can't seem to get it 7 moved to a conversation in a room, with two people, so 8 we can resolve it. We can get this thing resolved. 9 We've agreed -- we've presented a number of 10 pieces of evidence along the way after -- after the 11 audit, um, after I was retained, including restaurant 12 sizes, tables, seats, meals, how they cook the food, why 13 the issues present themselves anyway, physical 14 observations by -- by, um, examination staff, um, 15 documents such as bank statements that tie in cash 16 receipts, merchant statements which tie in credit card 17 receipts, um, invoices, uh, from -- from vendors, um, a 18 discussion of the meal flow, a discuss -- a 19 documentation regarding charitable receipts which they 20 do a lot of, um, and -- and documentation supporting 21 employee meals, which is a significant piece of where 22 the food goes. 23 Um, it -- it -- and so -- and where we sit 24 today is we think we have significant movement to get 25 this resolved if we could simply sit in a room. And -- 26 and we've been try -- we've made written requests to 27 attempt to sit in a room instead of sending the 28 information up to Sacramento. We did that, with the 5 1 sample that was requested, and -- and then it -- and 2 then we don't hear anything. And then we call and we -- 3 we -- we have the conversations, and -- and the 4 frustration grows. 5 And -- and so, again, I -- I think we have a 6 very simple and quick path here. It -- it's not a 7 statutory issue. It is simply let's sit down, look at 8 this, reconcile them to the -- the four-year quarterly 9 returns, and -- and let's move on. 10 And -- and, uh -- again, we don't think it's -- 11 we don't think it should have been a Board matter, but 12 that's the only way that we could see that we could get 13 to our path. 14 And we -- as a matter of fact, we reluctantly 15 postponed -- agreed to a postponement from the last 16 Board hearing. We wanted to meet three months ago even 17 though it was the tax season. And -- and we reluctantly 18 agreed, at the Board's request, the day before the 19 hearing. Um, and -- and thankfully that didn't happen 20 again. 21 We just -- we just want -- we'd like to meet 22 within a reasonable period, 30 days, 45 days, 60 days. 23 Any of that's fine. And -- and that's why we're 24 sitting here today fairly simply, just to -- to request 25 that. 26 MR. HORTON: Okay. 27 MR. WHITE: And then we can move forward. 28 Thank you. 6 1 MR. HORTON: Thank you very much. 2 I'm going to go to the Department, but I ask 3 the Department just to address the request, uh, giving 4 light to the additional documentation, uh, that may, uh, 5 alter the Department's position. Please. 6 MR. LAMBERT: Thank you, Chairman Horton and 7 Members. 8 My name is Scott Lambert. I'll be representing 9 the Sales and Use Tax Department today. To my right is 10 Kevin Hanks, also with the Sales and Use Tax Department. 11 And to Mr. Hanks' right is Robert Tucker with the Legal 12 Department. 13 Uh, I -- I can address the credit card issue in 14 this particular case. Uh, I do have some, uh, issues 15 that I would like to -- 16 MR. HORTON: Sure. Sure. Please. 17 MR. LAMBERT: -- um, just -- just to set a 18 background for exactly how we're here. 19 Um, there was an initial audit that was 20 conducted back -- and I don't have the exact period. I 21 had it with me. But just from my head, it was somewhere 22 in '97 to 2000. 23 Uh, during that time period, uh, there were 24 limited records that were provided during that period 25 and there were bank statements. 26 Uh, accordingly, uh, those were used. And it 27 came up with an adjustment of, uh, I believe, about 28 $1.8 million in -- in taxable sales. So the bank 7 1 deposits were higher than what was reported. 2 There were no sales journals presented. Uh, 3 there was no sales information, or limited amounts of 4 that. Basically the taxpayer was put on record that 5 they need to retain, uh, keep and retain the sales 6 information. 7 And the -- the -- later this -- this audit 8 that's before us, uh, came to them. And it was October 9 of 2004, and the Department asked for records. And they 10 were not provided, other than we did receive bank 11 statements, sales and use tax returns, and there may be 12 one other item that, uh -- that I'm not remembering. 13 But there were no purchase information provided, there 14 was no sales journals provided, there weren't any daily 15 sales reports that were given to us. And this was 16 October of 2004. 17 The taxpayer claims that there was water damage 18 sometime in the year 2004 and damaged, uh, their 19 records. 20 Again, uh, there was no records provided. Uh, 21 the Department asked, in June of 2005, keep records for 22 July of 2005, for the month. Uh, that was not done. 23 So the period between October 2004 and June of 24 2005, there were no sales records, purchase records 25 provided to us. There were, um -- there were bank 26 statements that -- that were provided. 27 Uh, the problem with the bank statements and 28 the income tax returns is that, on the income tax 8 1 returns for the two years that we received -- well, 2 actually we received three years. But on two of the 3 years, 2003 -- or 2002 and 2003, the markup was less 4 than 100 percent. 5 Uh, in our experience, uh -- and based on the 6 prior audit -- the markup was higher than that. In 7 the year 1998, using the bank statements, the markup 8 was 240 percent. In 2002/2003 you've got a markup, 9 overall markup of 96 percent. So there appeared to be 10 problems. 11 Uh, I won't go into how we established the 12 liability, uh, because it -- it may be a moot point when 13 we move to this next issue, uh, the credit card ratio. 14 But I just wanted to get the -- the records part of it 15 out there. 16 Uh, subsequently, we've selected the taxpayer 17 again for a new audit. Uh, and that's been going on for 18 quite some time. A -- it's gotten to the point where 19 we've issued a subpoena for the records. They were 20 subpoenaed on March 15th of this particular year. They 21 were to provide records on April 23rd. Uh, that -- 22 those records have not been provided, uh, to the Board 23 as the subpoena demanded. 24 So, to -- one -- one other issue just on the 25 penalty. Uh, the Department did consider adding a fraud 26 penalty in this particular case, uh -- and that was 27 the -- the recommendation after further review by the 28 district principal auditor. Uh, the taxpayer said we're 9 1 keeping records now, so -- and it's going to be better 2 in the future, so we just reduced the penalty to a 10 3 percent. And now we're to the point where we don't have 4 the records again. 5 But, addressing the credit card issue, it 6 would -- it would be the Department's opinion that if we 7 did receive the bank statements with all the credit card 8 receipts on them and we were able to verify that in fact 9 we had all the credit card receipts, uh, I do believe 10 that would be a more accurate method, uh, than what 11 we're doing here. 12 Uh, you have claims in this particular audit of 13 42 percent spoilage or donations, or whatever you want 14 to call it, of chicken, which is a substantial amount. 15 Uh, the Department's allowed 17 percent. Uh, so there's 16 a wide variance between the two. And the 17 percent is, 17 quite frankly, 13 percent higher than what the audit -- 18 uh, the audit manual allows the Department. 19 This business probably is a little bit 20 different than -- than your normal business. But still, 21 even allowing 17 percent is substantial. 22 So, to go to the credit card. If the 23 Petitioner is able to provide that information, um, at 24 least for a period of time, I believe that can be used 25 to, um -- establish a, uh -- maybe a more accurate 26 determination of liability. 27 Accordingly, uh -- well, I guess the -- the D&R 28 did recommend the credit card receipts. So the 10 1 Department would concur with the Appeals Division's 2 decision and recommendation. 3 MR. WHITE: I just want to make a few comments 4 on this. Um, just -- 5 MR. HORTON: On rebuttal. 6 MR. WHITE: On rebuttal. Yes, to -- to clarify 7 the facts here. Um, to clarify the facts, and let me 8 just hit on a few of them. 9 The merch -- we're simply wanting to sit down 10 with the documents that we've painstakingly went through 11 four generations of closed and bankrupt merchant 12 processors to get it. 13 The taxpayer has taken the financial burden 14 to -- to do it and turned us loose. We went and did it, 15 and it was difficult. It took time. But we have them. 16 So we can talk about what happened before, you know, 10 17 years ago, or we can try to resolve this thing. 18 Two other -- two other points. We provided 19 daily sales records, in this case specifically, 30 days 20 after I was retained. Because when I became aware of 21 that one of the months -- that they didn't provide them, 22 I said -- I went to the auditor and said, What do you -- 23 What would you like? How can we solve this? Get me the 24 daily sales records. 25 That's how we came up with a -- an estimate of 26 cash versus credit. So everybody can live with. 27 So -- so we did many, many things along the 28 way. And I know -- I've been involved in this thing for 11 1 quite a while and -- and -- and know more. I'm just 2 trying to communicate that. That's number one. 3 Number two, we provided the purchase 4 information. We authorized it and provided it. Those 5 are -- that's a fact. 6 The -- the water damage, I walked the agent 7 through where it was. It's unfortunate, but we went 8 around it and didn't treat it is a hurdle that we can't 9 solve. So we figured out a way to get around it. Let's 10 go get these guys. It's going to be hard, but let's do 11 it. And -- and -- and it was agreed upon. 12 The markup, I need to address that briefly. 13 The markup -- for the record, the markup at a hundred 14 percent or one -- 200 percent or 300 percent, that is 15 far and away short of the almost 1,000 percent markup in 16 the audit. 17 We've asked somebody to look at this thing from 18 40,000 feet. What -- what -- how many do you sell? 19 Let's look at the chicken. You can't sell what you 20 don't buy. And we've said, What do you need? All 21 along, What do you need? 22 We think we're here with what you need. It's 23 been hard. We presented it almost eight months ago, 24 nine months ago. And what we get back is, Oh, that's 25 okay, but give us another one. Great. And all I've 26 asked, and I'm asking today, How many do you need? Tell 27 me what you need. 28 We're going to try to get the 48. And we're 12 1 still trying. But at some point in time, we need to put 2 a fence around this. That's all we're asking. We're 3 just asking that respectfully. 4 Um, the new audit, we respectfully asked four 5 times in writing to put the new audits, please, in 6 abeyance while resolving this issue specifically, on 7 this case, because I'm only one guy that can do it. 8 Please. We've asked that. 9 And for a -- for a period of time it was, 10 That's okay. And then I -- then I hear about, well, 11 we're not -- you're not presenting. We've asked. We're 12 asking that. So if somebody's saying we're not 13 approving that and we're going forward with it, we will 14 be there. I will be there, and so, to -- to solve that 15 one. 16 The penalty was waived, not because somebody 17 wanted to do a favor for anybody. The penalty was 18 waived because the facts don't warrant it. That's why 19 it was waived on appeal, because it doesn't warrant 20 it. 21 So, again, you know, without even getting into 22 the 17 versus 42, because that is a very, very difficult 23 discussion, but that -- we don't even need to get there. 24 What we need -- what I think we need to do, get into an 25 office, sit across the table, get the merchant card 26 statements, and let's go through and do them for the 27 four years for this audit period, and we can get this 28 thing wrapped up. 13 1 Thank you. 2 MR. HORTON: Okay. Thank you very much. 3 Question of the Department. Any exposure to 4 the State in delaying this? 5 MR. LAMBERT: In delaying, uh, this particular? 6 MR. HORTON: Yes. 7 MR. LAMBERT: Uh, well, there's -- yeah, there 8 is an exposure, the collection activity, sure. U, yeah. 9 MR. HORTON: This business is how many 10 different locations? 11 MR. LAMBERT: Well, in this -- this permit, 12 there's four locations. 13 MR. HORTON: Any indication of dissipation of 14 assets, anything like that? 15 MR. LAMBERT: There's none that I'm aware of. 16 They've been -- well, the first one, the first location 17 opened in 1976 is my understanding. 18 So they have been around for a while. I mean, 19 not to say that that means you stay around, but, uh -- 20 MR. HORTON: The Board has, uh -- I mean, the 21 Board has a couple options in order to adhere to the 22 taxpayer's request to provide additional documentation; 23 30/30/30, uh, re-audit. 24 Any thoughts on that? 25 MR. LAMBERT: Uh, I don't think -- I'm not sure 26 if we can do it in a 30/30/30. A re-audit would 27 probably be more likely. Um -- 28 MR. HORTON: Okay. 14 1 MR. LAMBERT: There was some -- 2 MR. HORTON: Go ahead. 3 MR. LAMBERT: There was some concern -- I just 4 want to note that there was some concern by the appeals 5 conference holder that when they did look at the bank 6 statements that were provided, that they had concerns 7 that all the credit card receipts were accounted for. 8 So I just -- I just want to throw that out that that is 9 a concern of the Department's as well. 10 Uh, but without taking a look at all the 11 information that's provided, I couldn't make a comment 12 as to whether that could be accepted or not. 13 MR. HORTON: Thank you very much. 14 MR. HANKS: Mr. Chairman, if -- if I could add. 15 MR. HORTON: Yes. 16 MR. HANKS: I -- I think, the major concern the 17 Department has with -- with the taxpayer is -- is their 18 unwillingness really to cooperate with the staff and 19 provide the -- the books and records that we'd 20 ordinarily request in any sales and use tax review that 21 we conduct. 22 We've recently been in communication with them, 23 asking for additional documentation related to a 24 following audit. Uh, Petitioner was -- was not 25 responsive to those inquiries. 26 A subpoena was subsequently issued, again, 27 relative to the audit period that follows the one that 28 we're talking about today. And the Petitioner's been 15 1 totally unresponsive to that subpoena request. 2 They were requested to provide books and 3 records three days ago, um, at 10:00 o'clock in the 4 morning, is -- is what I understand. They failed to 5 produce one record. 6 Um, and -- and so I think that's the -- the 7 large difficulty the Department has with the taxpayer 8 is, is just their unwillingness to supply the books and 9 records that they're now indicating that -- that they 10 want to supply for a re-audit. 11 MR. HORTON: Okay. Thank you very much. 12 Mr. Runner. 13 MR. RUNNER: Just a quick question in regards 14 to procedure, um, re-audit versus a 30/30/30. 15 Is typically a 30/30 handled then -- a 30/30/30 16 handled by Sacramento staff to review the issues, or 17 does that actually go back to the original audit? 18 Just -- just tell me under -- kind of understand how 19 that process is. 20 MR. LEVINE: It goes -- the Department decides 21 whether they need the district intervention. 22 On a re-audit, headquarters could do it. It's 23 up to the Department. 24 MR. RUNNER: Either way never -- either way 25 does not designate -- 26 MR. LEVINE: No, it's more -- 27 MR. RUNNER: -- responsibility at that point. 28 MR. LEVINE: It's more a function -- 16 1 MR. RUNNER: It's still a function assigned by 2 Sacramento as to who's going to do a re-audit -- 3 MR. LEVINE: Right. 4 MR. RUNNER: -- or who's going to do a 30/30/30 5 review. 6 MR. LEVINE: The main thing is you give us a 7 little leeway to bring it back. Because if you do 8 30/30/30, we got to get it back. 9 MR. RUNNER: A re-audit gives a little more 10 flexibility. 11 MR. LEVINE: Unless you give us extra 12 direction, which we hope you won't -- 13 MR. RUNNER: Yeah. 14 MR. LEVINE: -- we bring it back when it's 15 ready. And we ask for that when it looks like it will 16 take more time, like this one does. 17 MR. RUNNER: Okay. 18 Move -- move for a re-audit. 19 MR. HORTON: Uh, moved by Mr. Runner to grant a 20 re-audit to the taxpayer. 21 Second by Member Yee. 22 Without objection, such will be the order. 23 I want to caution the taxpayer to be as 24 cooperative as possible with the Department, and that 25 all parties look at this perspectively. 26 Sounds like there's some history here. Uh, put 27 the history behind you and move forward and let's make 28 this -- make -- then resolve the issues. 17 1 MR. WHITE: Thank you. 2 ---oOo--- 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 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 April 26, 2012 I recorded verbatim, in shorthand, to the 10 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 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: May 9, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 19