1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 30, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 FENCE AMERICA, INC. 14 NO. 479354 (KH) 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 Joann Richmond Chief 14 Board Proceedings Division 15 16 For Board of David Levine Equalization Staff: Staff Counsel 17 18 For Department: Scott Lambert Tax Counsel 19 Dario Roman 20 Sales and Use Tax Department 21 22 Robert Tucker Legal Department 23 24 For Petitioner: Scott Wiggen 25 Representative 26 Tom Razzano Owner 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 30, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next item is C, Sales and 7 Use Tax Appeals Hearings, C2, Fence America, 8 Incorporated. 9 Please come forward. 10 MR. HORTON: Mr. Levine, as they come, would 11 you please introduce the issues in this case? 12 MR. LEVINE: Good afternoon, Chairman Horton -- 13 MR. HORTON: Good afternoon. 14 MR. LEVINE: -- Members. 15 David Levine for the Appeals Division. 16 MR. HORTON: Something's missing, Mr. Levine. 17 MR. LEVINE: Something's extra. 18 MR. HORTON: I thought we had that in common. 19 MR. LEVINE: The issue in this petition of 20 Fence America, Inc. is whether adjustments are warranted 21 to the unreported taxable measure. 22 MR. HORTON: Thank you very much. 23 When the taxpayer is settled, I would ask that 24 they introduce themselves for the record and share that 25 you have ten minutes to make your presentation. 26 Upon completion of your presentation, we will 27 go to the Department and return to allow you an 28 additional five minutes to make your your presentation. 3 1 MR. WIGGEN: Hello, my name is Scott Wiggen. 2 Sitting to my left is Mr. Tom Razzano, owner of Fence 3 America, Inc. 4 I want to thank the Chairman and the Board for 5 this opportunity to hear our case. 6 MR. HORTON: Welcome. 7 MR. WIGGEN: I believe we were granted an extra 8 five minutes, so we have 15 minutes for this case. But 9 if that's not -- 10 MR. HORTON: Ms. Richmond. 11 MS. RICHMOND: That is correct. 12 MR. WIGGEN: Okay, good enough. 13 Do the Board Members have the documents that we 14 submitted? 15 MR. HORTON: We do. 16 MR. WIGGEN: Okay. Good, then -- 17 MS. MANDEL: I'm sorry, sir, could you speak up 18 a little louder and move the mike so we can hear you and 19 the reporters can make sure they hear you too? 20 MR. WIGGEN: Is this is better? 21 MS. MANDEL: That's good. Thank you. 22 MR. WIGGEN: Sometimes I'm just a very quiet 23 person. 24 What I'd like to do is start out by addressing 25 some of the items in the -- the Department's decision 26 and recommendation. 27 For one thing, you'll be happy to know that the 28 taxpayer, Fence America, Inc., is actually still in 4 1 business -- despite the statements to the contrary and 2 the Department's decision and recommendation. 3 In fact, there are so many misstatements or 4 misleading statements or erroneous statements or even 5 fabricated statements that it would take me well over my 6 15 minutes just to address each of these. 7 So, I can give you some samples of that. 8 There's -- the Department has mentioned that we didn't 9 provide them certain information, like job costing 10 information. But Fence America provides bids that they 11 use, which is very supportive of the cost -- job 12 costing. And they also submitted to the Department a 13 very detailed materials consumption list, it's about 14 40,000 Excel lines on the spreadsheet. And the analysis 15 of that spreadsheet pretty much supports the amount that 16 we have contended all along that was consumed. 17 We're going to go to a couple of different 18 issues. The first issue is whether or not there is any 19 type of exempt freight that the taxpayer's entitled to. 20 So, if I could have you turn to Exhibit C? 21 Exhibit C contains three different letters from three 22 different vendors. And they pretty much state that -- 23 what the negotiating price of -- the procedure for 24 negotiating price of lumber. In short, these are 25 negotiated prices. They are not fixed prices or 26 delivered prices. 27 It states that the buyer is responsible for the 28 cost and the variance in shipping, that title passes 5 1 prior to shipping and that the risk of loss is on the 2 the buyer -- contrary to what is in the Department's 3 D & R, the D & R states that title passes after 4 shipping, which is incorrect. And they also say that 5 it's for a delivered price, which is also incorrect. 6 It's going to be difficult for the Board to 7 actually derive the correct conclusion if they do not 8 have the right facts. 9 The last document in Exhibit C is actually just 10 the back of one of the invoices. And items 7, 8 and 9 11 pretty much confirms that title passes at the yard, 12 prior to shipping, and risk of loss is on the buyer. 13 So, when we go to the regulation that the 14 Department has gone through, I think it's 1628, which 15 is -- there's requirements that need to be met. And 16 those requirements include separately stated freight; 17 that it transferred -- if it's sold for a delivered 18 price, that it transfers prior to shipping; that title 19 transfers prior to shipping. 20 And that -- anyway, if we go to Exhibit D, what 21 we have here is sample invoices. And the first one is a 22 little tricky because it's a photocopy. But if you go 23 to the -- well, if -- the first one has Joe Costa 24 Trucking, 594, that's cost of the freight, okay. The 25 freight is on this invoice. 26 You turn it to the next vendor, the freight is 27 on the next invoice. And, in fact, the freight is 28 identified on all of these invoices. 6 1 The Department's position is that these are not 2 separately stated because they are not a separate line 3 item subtotal. Nowhere in the Code or the regulation is 4 there a requirement that says it needs to be a separate 5 line item subtotal. 6 In fact, the regulation even goes so far as to 7 say that it doesn't even have to be in the same 8 document, it could be on another document that is 9 related to the sale. 10 So, if we have the amount of freight that's on 11 the document in memo, there's ambiguity here, we know 12 the cost of freight. We have met the intent of the law. 13 We haven't played with the numbers saying, you know, 14 materials are $10 and exempt freight is $1,000. It's 15 been identified. 16 Now -- excuse me -- now, in addition, we have a 17 court case, which is Exhibit E. I think I gave you the 18 abbreviated version of it, but this is an Appellate 19 Court decision in Dell, Inc. And the gist of it is that 20 Dell invoiced customers one lump sum amount for the 21 computer, that included, in some cases, service 22 contracts. 23 The result of the court case was that the 24 invoice does not have to have a separate line item 25 subtotal for the invoice. In fact, it doesn't even have 26 to be stated on the invoice so long as it could be 27 supported elsewhere. 28 Therefore, what we have is we have met the 7 1 conditions for exempt freight here. Title has passed 2 prior to shipping, whether it's by facilities of the 3 retailer or by common carrier, it's separately stated. 4 Risk of loss on the buyer and this is the whole reason 5 you have the exemption. 6 The next issue we're going to address revolves 7 around whether or not Fence America is a retailer. 8 Related to this is an amount for spoilage deduction, 9 which, due to the economic situation, was very sizeable, 10 but very well documented. 11 And you have to understand the flow of the 12 audit. At one point the question was what is the size 13 of the spoilage deduction -- because it is exceptionally 14 large. But it's well documented. 15 Once we finally were able to document that, 16 "Here is our spoilage deduction. It's well supported. 17 You can follow the numbers." In addition, there is a 18 number for consumption. These are the amount board feet 19 actually consumed we paid use tax on. 20 At that point, just when we thought we had the 21 Department convinced, they decided to say that we're not 22 a retailer and we're not entitled to buy lumber using 23 the resale certificate. 24 The only problem with this is that the Tax Code 25 says that we are a retailer. You can go to Section, was 26 it 6014, okay, it says, 27 "Seller includes every person engaged in 28 the business selling tangible personal property 8 1 of a kind --" 2 It goes on, okay. Section 6019 states that 3 every individual, firm, corporate, partnership, so on 4 and so forth with more than two retail sales of tangible 5 personal property during any 12-month period, including 6 sales made with capacity such and such, they are a 7 retailer. 8 So, we have the Code that says that Fence 9 America is a retailer. Is it a contractor? Yes, it is. 10 It's also a retailer and had over $600,000 in sales at 11 retail/wholesale sales. 12 I'm sure that there are many license holders 13 that would love to have that much in a three-year period 14 and you certainly wouldn't call them not a retailer. 15 But, in addition to the Code stating that Fence 16 America's a retailer and the regulations that Fence 17 America's a retailer, you have the Exhibit H, which is 18 just an excerpt out of the auditor's binder -- manual 19 and highlighted should be under "Use of resale 20 certificates by construction contractors," it says, 21 "They're not allowed purchase supplies and 22 tools for resale unless they're actually 23 engaged in the business of selling such 24 property without having properly -- previously 25 used it." 26 Okay. Next, Exhibit I, this is "Construction 27 Contractor Tips," issued by the State. And if you look 28 at page 12, what you're going to do is you're going to 9 1 see that method of purchasing, 2 "Usually contractors will find it easier to 3 set up their purchasing on the basis of the 4 preponderance of the type of operations that 5 they conduct." 6 And it goes on, 7 "Whatever method is used, great care must 8 be exercised in the reporting of purchases." 9 The gist of this is that while it's a 10 recommendation, it is certainly not a requirement that a 11 qualified retailer buy his materials with tax paid. And 12 that is what Fence America is. They bought their 13 materials ex tax. 14 Now they certainly had a business reason for 15 doing so. They were in the business of increasing the 16 retail sales. They had, actually, doubled the retail 17 sales from 2003 to 2004. They had increased their 18 advertising. 19 If you look in Exhibit J, you'll see some 20 samples of advertising. And you'll see that the first 21 two are actually under lumber, contrary to what the 22 Department says. The taxpayer spends a fair amount of 23 money advertising its lumber sales. 24 It should be noted that 84 Lumber, which is 25 listed right above the taxpayer, it closed down their 26 locations in 2007 -- not one, but two locations. 27 Sacramento is the only location, only city, to have two 28 of 84 Lumber stores close, such were the conditions of 10 1 the housing market. 2 It's not difficult to imagine trying to buy 3 lumber to increase your retail sales. There's lots of 4 business reasons for it -- lower unit price, a chance to 5 capture the backlog of smaller contractors. There's 6 numerous reasons. 7 But when the housing market fell out, it fell 8 out in the building industry first. And the contractors 9 that Fence America would have sold to, they went out of 10 business. The homeowners that he would have sold to, 11 they're more worried about making their mortgage 12 payment. 13 So, what we have is Fence America is a 14 retailer. They're a contractor, but they're a retailer. 15 They're allowed to buy their materials with -- you know, 16 ex tax. 17 The Department is going to say, well, it needs 18 to be a certain percentage or certain dollar amount -- 19 that's nowhere in the Code. In fact, if you want to 20 find a dollar amount or percentage, you can look at one 21 of the Code Sections, I think it's -- let me take a 22 quick look here -- it's 618.8 (verbatim). And what it 23 does is it defines when a garment alterer is a retailer 24 and when it is a consumer. And that's, again, Code 25 Section 6018.6. 26 And the thing is that if two sales doesn't 27 define the retailer, then the Code should put in a 28 number -- whether it's a percentage or dollar amount. 11 1 Okay, how much would he have had to sell in 2 order to be a retailer? Is it two sales? No, he did 3 much more than that. It is $600,000 worth of sales. 4 Now, in addition to all the evidence, if you 5 look at Exhibit K, what you have here is a Better 6 Business Bureau business review. This business has been 7 going on -- they have produced -- this is from 2001, so, 8 we're talking 11 years -- not a single complaint. 9 My point to bringing this up is that the 10 integrity of the taxpayer here matters. If he says he 11 bought the materials to resell, as well as consume for 12 contract, then that is, indeed, what he did buy them 13 for. He couldn't possibly have used all these materials 14 in his contracting. He didn't have the manpower, didn't 15 have the trucks. 16 Okay. Next, I'm going to kind of gloss over 17 the spoilage deduction. That is Exhibit L. And what 18 the spoilage deduction does is it simply gives you a 19 number. It's supported as to how it's calculated and 20 that deduction here is $2.6 million, in round figures. 21 We also have in Exhibit M what's called the 22 reasonableness test. And what it says is is what the 23 taxpayer saying happens with its consumption, with its 24 spoilage, is it possible? Is it reasonable? 25 It's tied to financials and you find that all 26 the numbers fit, I whether you do it from a revenue, 27 whether you do it from cost of goods sold, whether you 28 do it from labor and you go on. 12 1 But when you apply that same analysis to the 2 auditor's numbers, they don't hold water, okay. In 3 order for Fence America to have done what the auditors 4 say, they would have had to have done 17,000 fences or 5 13,000 fences -- some enormous number of fences that 6 they couldn't possibly do or the labor would have to be 7 cut to some ridiculous amount. Again, the gist of the 8 reasonableness test is to show that the auditor's 9 numbers are simply just not possible. 10 The next exhibit, N, is the consumption of 11 materials. And this is simply a summary. And what it 12 does is it shows that there is 5.2 million board feet 13 for roughly 2.3 million in costs. 14 That actually understates what we were saying, 15 but this is the documentation that the auditors had 16 wanted. 17 Okay. Is Fence America entitled to spoilage? 18 Yes, they are. You know, there is lots of examples, but 19 Exhibit O is -- it's an example of a spoilage of film. 20 And if the vendor is a retailer and he hasn't allocated 21 it to a job or for use, then he would, indeed, be able 22 to deduct the spoilage. 23 MS. RICHMOND: Time's expired. 24 MR. HORTON: Okay. Is it possible to conclude 25 quickly? 26 MR. WIGGEN: Yes, I can conclude in a couple 27 more minutes. 28 MR. HORTON: Not -- we will return to you and 13 1 allow you an additional five minutes and then the 2 Members will probably have some questions. 3 MR. WIGGEN: I can go three more seconds, if I 4 may? 5 MR. HORTON: Sure. 6 MR. WIGGEN: Okay. If you go to Exhibit Q, 7 Exhibit Q is a redetermination. 8 And it also has the auditors concluding that 9 the taxpayer is, indeed, qualified as a retailer and 10 that they're going to allow an exemption -- or a 11 deduction on the total amount of cost of goods sold and 12 that's going to be area 3. And there's the work-up 13 behind that. 14 So, in summary, Fence America's a retailer by 15 Code, by regulation, by Audit Manual, by taxpayer 16 guidance and by the auditors. 17 It wasn't until they pretty much lost the issue 18 on consumption and spoilage that they decided that, no, 19 Fence America's not a retailer. So -- 20 MR. HORTON: Okay, thank you very much. 21 We'll now go to the Department, who will have 22 ten minutes to make their presentation. 23 We would ask that you commence with your 24 introductions for the record. 25 MR. LAMBERT: Good afternoon, Chairman Horton 26 and Members. My name is Scott Lambert. And I'll be 27 representing the Sales and Use Tax Department today. 28 To my right is Robert Tucker with the Legal 14 1 Department. And to Mr. Tucker's right is Dario Romano 2 also with the Sales and Use Tax Department. 3 I'll address some of the issues that were 4 brought up that are relevant to the -- to this 5 particular case. 6 The first item that I'll address will be the 7 use of the resale certificate. In this audit the 8 taxpayer was purchasing their inventory without -- 9 without sales or use tax. In effect, it was an ex tax 10 inventory or an inventory that did not include sales 11 tax. 12 The audit uses Audit Manual Section 1206.1 in 13 the justification for saying that the taxpayer should 14 have purchased their inventory on a tax paid basis. So, 15 in other words, they should not have issued a resale 16 certificate. 17 Under that section of the Audit Manual it 18 states, 19 "If a contractor is making substantial 20 retail sales of materials used on construction 21 contracts, he or she may make purchases for 22 resale." 23 In this particular case the taxpayer consumes 24 over 90 percent of the materials on lump sum 25 construction contracts. Their retail sales account for 26 about 5 percent; with exempt resales, it would come up 27 to 7 percent. But, in any case, the purchases are over 28 90 percent used for the construction industry in which 15 1 the taxpayer would be the consumer because they bill 2 their customer on a lump sum basis. So, therefore, they 3 owe the tax on the cost of the material. 4 So, there's no question that the taxpayer is, 5 in fact, a retailer. They make retail sales. 6 The question is whether the taxpayer is allowed 7 to issue a resale certificate for the purchase of 8 inventory. 9 Our authority is the audit manual, which says 10 the taxpayer is not able to do that, which is also 11 supported by the law and regulation. 12 In terms of the advertising, the taxpayer did 13 advertise that they made over-the-counter sales, but 14 that was a small amount of their sales. If you look on 15 their advertising, it indicates that the taxpayer has 16 over 25 crews making installation. That's a substantial 17 amount of people that are -- that are performing the 18 construction contracts. 19 If you also take a look at the retail sales, 20 you don't see them increasing from year to year. If 21 anything, they stay either lower or consistent with 22 2004. 23 In terms of the exempt freight, the 24 Department's position is that the transportation charges 25 are separately stated, so, there's no issue in that 26 regard. 27 In fact, under the first two qualifications 28 under Regulation 1628, at least in terms of the 16 1 suppliers listed on the decision and recommendation, 2 it's our position that all of those -- all of those 3 vendors qualified for the first two -- for the first two 4 areas of Regulation 1628. The only issue is the third, 5 which is the transfer of title. It was found in one 6 case -- or one vendor, Redwood Empire, that, in fact, 7 they met all three areas of the qualification and the 8 delivery charges for that vendor were accepted. 9 In the other issues there was either a term FOB 10 Sacramento, FOB delivered, and with no title clause that 11 was involved with those. And, therefore, without a 12 contemporaneous transfer of title, the -- where the 13 material has transferred to the buyer before the 14 transportation takes place, if that doesn't happen, then 15 the delivery charges are going to be subject to tax. 16 And I would also state that in these cases all 17 of the vendors that are listed on the D & R are, in 18 fact, delivered price contracts. The delivery is 19 included in the sale of the lumber. So, although it's 20 separately stated on there and it can be exempt from 21 tax, these are delivered price contracts because the 22 delivery is included in the sales price and not 23 separately itemized. 24 In terms of the cost accountability test, the 25 Department used purchases in this particular case. And 26 I'd like to point out that the beginning inventory that 27 did not include tax, there's some dispute as to what the 28 beginning inventory was, that those beginning 17 1 inventories were not were not taken into account in the 2 material accountability test and the Department 3 believes, at a minimum, they should have been offset 4 against the tax paid purchases resold credit given for 5 over-the-counter sales. 6 And although the Department is not 7 recommending -- or can't, actually -- recommend an 8 adjustment, it -- it wants to point out that, in fact, 9 that's the case and would be open to answering any 10 questions that the Members might have in that particular 11 area. 12 Even though the adjustment was sizable in 13 amount, due to the circumstances, the negligence penalty 14 was not added in this particular case. I note this is 15 the taxpayer's first audit. 16 With that, the Department concurs with Appeals 17 Division's decision and recommendation. 18 MR. HORTON: Thank you. On rebuttal, please. 19 MR. WIGGEN: Sure. I'll start out with the 20 easy one, transportation. Exhibit B is pretty much a 21 schedule of all of the dollar amounts that the taxpayer 22 represents and one of the ones on the second page is the 23 $535,000 for transportation. 24 This is one of the reasons why we're here. We 25 have letters from the vendors that says that title 26 transfers prior to shipment. It goes through. You've 27 got industry standard and custom. 28 If you go to the doctor, you don't tell your 18 1 doctor that you've got two kidneys, that's expected. 2 You tell him if you've got one kidney. So, in this 3 industry, title transfers at the plant, before shipping. 4 Okay, we have the documentation that's on the 5 back of the invoices. Auditors just don't accept it, 6 okay. We've got $535,000 worth of deductions. 7 As to beginning inventory, Fence America, Inc. 8 was incorporated in 2001. Its beginning and ending 9 inventory in 2001, 2 an 3, was zero. Its beginning 10 inventory in 2004 was, indeed, zero. Its federal income 11 tax return says zero. 12 There is a contribution of inventory. Not all 13 the inventory was good. We worked up a number that's 14 roughly -- it was 570 some thousand, okay, that's the 15 amount that ought to owe tax. We agree there should 16 have been adjustment. Taxpayer made a little bit of on 17 error 'cause he took it right off his federal income tax 18 return, but it's -- there's no way you actually carry 19 over book value of inventory into a new entity. It's 20 just not worth that much. 21 So, we'd propose a value and that is the 22 adjustment we'd like to see happen, okay. 23 As far as -- well, I'm glad the Department 24 finally realizes or agrees that Fence America's a 25 retailer. Keep in mind that this lumber that spoiled 26 wasn't intended to be sold, okay. We saw a wonderful 27 opportunity here and got burned by the tanking economy. 28 If the amount of lumber had sold instead of 19 1 spoiled, okay, we're talking revenues of probably 50-50 2 or even better, okay. But that didn't happen. But the 3 Code doesn't say that you have to sell it, the Code 4 Section, what is it, 6014, says tangible personal 5 property and it goes on and says, "whether or not it is 6 sold," okay. 7 Believe me, taxpayer would have been much 8 happier selling that and paying the sales tax on that 9 eating $2.6 million. Okay, he's not trying to do 10 anything shady, it just didn't work out, okay. 11 As for -- you know, there are some things 12 that -- well, I will just leave it at that. 13 Just to summarize, transportation has been 14 covered, it's exempt. Taxpayer is a retailer as well as 15 a construction contractor. He is entitled to buy lumber 16 ex tax. There is no limitation in the Code. And if he 17 had sold this material, instead of it going spoiled, we 18 wouldn't be having this discussion, but that's not what 19 happened, okay. 20 As for the other deductions, there's one more, 21 there is a letter in Exhibit S, which is dated 2007, 22 asking the auditor to correct a mathematical error to 23 give us the deduction for the wholesale sales. This is 24 one of the things in the D & R. They're saying that 25 these are bits and pieces. That's absolutely false. 26 This is not spoiled lumber that was sold. 27 What happens is a truckload of lumber comes in, 28 it gets inspected. Things that have like splits, knots, 20 1 little bit of breakage, whatever, it gets put into a 2 separate pile. Maybe we'll use that later. While, as 3 it turned out, we found a buyer for it, you know. It's 4 not like we didn't try to sell these things. We even 5 contacted national parks and supermarket chains to see 6 if we could sell it as firewood. It just couldn't sell. 7 So, I guess that will be it then. 8 MR. HORTON: Thank you very much. 9 Discussion? Member Mandel. 10 MS. MANDEL: Sure. Just on the -- on the 11 freight charges -- 12 MR. WIGGEN: Uh-huh. 13 MS. MANDEL: -- just one question for you about 14 your exhibit, then I want to clarify some things with 15 the Department. 16 MR. WIGGEN: Sure. 17 MS. MANDEL: On your Exhibit D, the very last 18 page, terms and condition of sale, is that the back side 19 of the invoice that's right before it, which is an All 20 Weather invoice? 21 MR. WIGGEN: Yes, it is. 22 MS. MANDEL: Okay. 23 MR. WIGGEN: It also says, "FOB All Weather 24 yard" -- 25 MS. MANDEL: Okay. 26 MR. WIGGEN: -- on the front of the invoice. 27 MS. MANDEL: Okay. I wanted to make sure I 28 knew which one it -- what it belonged to. 21 1 MR. WIGGEN: Yeah. 2 MS. MANDEL: Now I'm looking at your Exhibit B, 3 the page that you said had the $535,000 of freight 4 difference, 535,878. 5 So, for the Department, my understanding from 6 the D & R was that on the freight charges what was left 7 in dispute was from five companies. He's got eight 8 companies here that have numbers next to them. If I 9 drew the line straight across, he has All Weather, 10 California Cascade, Capital Lumber, Cascade Forest, 11 Green Hill Lumber, Redwood Empire, Sierra Pacific and 12 Siskiyou. 13 My understanding from the D & R is that Redwood 14 Empire has been allowed through the Appeals section 15 D & R, Redwood Empire. So, the 41,193 that he has is 16 the difference between on the audit that's been allowed 17 as recommended -- I mean, it's as recommended by Appeals 18 Section to allow that, right? Is that -- 19 MR. LAMBERT: Correct. 20 MS. MANDEL: Okay. Then All Weather, which he 21 was just showing us that he said that that -- that was 22 the one that had the back side in his exhibit, All 23 Weather is not mentioned in the D & R. So, have they 24 been allowed the freight for the All Weather? 25 MR. LAMBERT: The only transportation charges 26 that were allowed was for Redwood Empire, so -- 27 MS. MANDEL: Okay. Well, the D & R -- maybe 28 I'm confused, 'cause I only had listed California 22 1 Cascade, Capital Lumber, Cascade Forest, Green Hill 2 Lumber and Sierra Pacific and this is showing also 3 Siskiyou and All Weather on the gentleman's chart as 4 though it was disputed. So, I just want to make sure 5 I'm looking at the -- 6 MR. LEVINE: You stated it the way I understand 7 it. As I understand from the D & Rs, we were provided 8 six invoices from six companies. Those are the ones 9 that we examined. 10 We did not have any invoice from All Weather, 11 nor is there one in this packet. 12 MS. MANDEL: Well, I have another place that I 13 didn't point to. 14 MR. LEVINE: Okay. 15 MS. MANDEL: Okay. The other place that I 16 didn't point to -- All Weather, well, that's what the 17 gentleman was saying, he was saying the back side of the 18 All -- of an All Weather, you know, the normal terms and 19 conditions, is his last page in Exhibit D, his terms and 20 conditions of sale, which he says is an All Weather one, 21 this one says between Evergreen Forest Products, 22 actually. Is that a different company than All 23 Weather? 24 MR. WIGGEN: No, that is All Weather. 25 MS. MANDEL: That's All Weather. 26 Okay, he's saying that's the back side of an 27 All Weather invoice and that's why I was -- because I 28 didn't have the name All Weather in the D & R, I was 23 1 thinking he was giving me something that had already 2 been allowed because this -- he's saying this is the 3 back side of an All Weather. 4 And then my question on Siskiyou was, he has a 5 Siskiyou, that's under Exhibit C, behind the letter, 6 terms and conditions of Siskiyou Lumber Products. So, 7 was this the -- where did that come from, sir? 8 MR. WIGGEN: Okay. The vendor letters and the 9 the backs of the invoice were provided to the auditors a 10 long time ago. 11 All Weather and Siskiyou were added as a result 12 of the Dell case that says that the amount of freight 13 does not need to be separately stated on the invoice. 14 MS. MANDEL: When you -- I'm sorry, let me just 15 back up and clarify. 16 When you say they were added, what do you mean 17 "They were added."? 18 MR. WIGGEN: In other words, we originally 19 proposed this and we conceded the issue because we 20 didn't have a separately stated amount, otherwise, it 21 met all of the other items. 22 MS. MANDEL: Oh. 23 MR. WIGGEN: And then with the issuance of the 24 Dell case, that means that these invoice amounts are now 25 relevant again. 26 MS. MANDEL: Because the -- let me just make 27 sure I understand that one. 28 Because -- you're saying, that the -- that the 24 1 Siskiyou and All Weather were ones where there wasn't on 2 the face of the invoice a dollar figure for the freight? 3 Is that what you're saying? 4 MR. WIGGEN: That is correct. They can run a 5 report and tell us how much the freight is. We did that 6 with the other -- 7 MS. MANDEL: Now I understand why they weren't 8 part of the D & R discussion on that. 9 Okay, that was -- and the -- the invoices that 10 were attached to the D & R, the ones that they have 11 issues with, California Cascade and Capital Lumber, did 12 you have the generic back side terms and conditions of 13 those? 14 MR. WIGGEN: Let me take a look. 15 MS. MANDEL: Because I think that's -- those 16 are the ones we have the letter. And at least what the 17 D & R is saying is it's saying the invoice, which I take 18 to be the face of the invoice, didn't have a title or 19 shipment. 20 Is that correct, Department, as you understand 21 it? Or do you have -- have you seen that back? 22 MR. LAMBERT: I have not seen the back. It's 23 my understanding that there was not a title clause in 24 those particular transactions. 25 But, if there -- 26 MS. MANDEL: Could just -- 27 MR. LAMBER: -- if there were. 28 MS. MANDEL: -- if there were -- 25 1 MR. LAMBERT: If there were, then -- 2 MS. MANDEL: Yeah. 3 MR. LAMBERT: -- yeah, I think Section 9 -- at 4 least in this terms and conditions, 9 -- and I don't 5 know what it says on the front of the invoice, that 6 might matter too -- but in terms of Section 9, it seems 7 to be transferring title to -- 8 MS. MANDEL: That's on the Siskiyou one that 9 you're looking at? 10 MR. LAMBERT: That's correct. 11 MR. LEVINE: It's not title, it's delivery. 12 So, if there's no specific title provision and nothing 13 on the invoice contrary on Siskiyou, except for the 14 separate statement problem, I'd agree that that would be 15 enough, if not countered in the invoice for delivery 16 to -- for the seller's duties with respect to physical 17 delivery being complete upon delivery to the carrier. 18 This is talking about a carrier. So, we're 19 talking about if they don't deliver it themselves. 20 MS. MANDEL: So, if the front of the Siskiyou 21 invoice was not in conflict with this delivery, then his 22 only issue is a separate statement? 23 And then he's claiming -- 24 MR. LEVINE: I'd agree with common carrier 25 because this is talking about common carrier, not 26 delivery -- 27 MS. MANDEL: I don't want to -- 28 MR. LEVINE: -- facilities. 26 1 MS. MANDEL: Yeah. 2 Do you -- do you have the back side of the 3 invoices on California Cascade and Capital Lumber some 4 place? 5 MR. WIGGEN: Yes, I do. I do not have them 6 with me. But I could certainly submit that in a 7 supplemental package, if you'd like. 8 MS. MANDEL: Okay. There's a Cascade Forest, 9 which -- where the front of the invoice said, "FOB 10 Sacramento," which they took to be your client's 11 location, so -- 12 MR. WIGGEN: Again, it's the matter of 13 terminology, okay. It is industry standard that title 14 passes at the place of sale of -- the mill, the 15 warehouse, whatever it is -- and risk of loss would be 16 on the buyer. 17 And you wouldn't say something unless there was 18 a different term saying that, "Well, we're going to take 19 risk of loss." 20 Okay, if you you need another letter from those 21 vendors, we can certainly do that. I thought three 22 would be sufficient. I thought the backs of invoices 23 would be sufficient. But, you know, the -- the auditors 24 are making an assumption that title transferred after 25 delivery. That assumption is wrong. They haven't done 26 anything to substantiate that. 27 I've provided you letters and backs of invoices 28 to substantiation our position. 27 1 MS. MANDEL: And FOB is typically a -- what 2 kind of term is that? 3 MR. LEVINE: It's a delivery term. So, if 4 there isn't an explicit title -- if there's an explicit 5 title passage -- 6 MS. MANDEL: The delivery term doesn't matter? 7 MR. LEVINE: -- if it passes it sooner. So, 8 here, if there was a specific title passage that said, 9 "Title passes at point of shipment," it would be no 10 issue. 11 Where it's silent on title passage or it passes 12 that -- 13 MS. MANDEL: Right. And all we've seen -- all 14 we've seen in the D & R is the front side of particular 15 invoices? 16 MR. LEVINE: That's correct. 17 MS. MANDEL: And it appears that the terms and 18 conditions that might apply to a particular invoice is 19 typically adhesion contract on the back side? 20 MR. LEVINE: Yes. 21 MS. MANDEL: Thank you. 22 MR. WIGGEN: So, it -- I'm sorry. 23 MR. HORTON: Ms. Mandel. 24 MS. MANDEL: No, it's -- it's -- without -- 25 without the -- I mean, I understand having the letters 26 and that that's what they say their standard practice 27 is, but -- and the gentleman's saying that Department 28 saw the -- all of the back sides of the invoices, the 28 1 Department doesn't seem to -- but it looks like they're 2 contracts of adhesion and if they all had these terms 3 and conditions, then those would be useful for the ones 4 that are issue to see the actual ones that are at issue. 5 That's -- that was my only -- that's what I was 6 thinking. 7 MR. HORTON: Okay. 8 MS. MANDEL: Thank you, I'm done. 9 MR. HORTON: Member Steel. 10 MS. STEEL: I want to do the follow-up 11 questions regarding the freight in charges that Capital 12 Lumber that we got the letter from the vendor stating 13 that it's FOB mill, why we didn't give them a credit for 14 that? 15 MR. LAMBERT: Because there was not an explicit 16 transfer. The title to it didn't transfer before the 17 delivery took place. And, so -- 18 MS. STEEL: Then there's letter stating that. 19 MR. LAMBERT: It did, right. 20 MS. STEEL: So, why -- what -- 21 MR. LAMBERT: Because it has to be done 22 contemporaneously and -- 23 MS. STEEL: Then -- 24 MR. LAMBERT: -- in this case, it wasn't. 25 MS. STEEL: -- what taxpayer can do more to 26 prove, you know, when title passed? 27 MR. LAMBERT: You're right. There needs to be 28 an explicit statement transferring the title to it or an 29 1 FOB clause that -- FOB the seller's yard. 2 If they had those type of statements on there, 3 then it would express -- 4 MS. STEEL: A letter saying that, you know, 5 when title was passed. I just don't understand because 6 how much taxpayer has to prove that, you know, when they 7 get the letter from the vendors. 8 But I guess I'm not really getting the answer 9 from the Department. 10 Let me ask taxpayer that, you know, those 11 defective materials that you are setting aside and 12 trying to sell it and you're not doing anything and you 13 couldn't sell it, have you ever tried to return those to 14 the vendors and get the credit and your -- or when you 15 do the tax return, that -- did you use the credit or you 16 just -- what -- what do you do with it? 17 MR. WIGGEN: To answer your question directly, 18 no, no credit was ever obtained. We're talking, you 19 know, a lot of truckloads. And, you know, some -- some 20 percentage, but they're -- when I say they're of a lower 21 quality. 22 In other words, if you were picking this board 23 out to put into your back yard, you would prefer to have 24 a better board. 25 MS. STEEL: So, this taxpayer is still running 26 the business? Those defective items are still -- I 27 mean, it must be taking whole yard or, you know, half of 28 the company for you keep bringing those -- how you get 30 1 rid of it? 2 MR. WIGGEN: It gets disposed. If there's no 3 use and no sale of it, after a while it does become 4 spoiled. It does become warped. 5 MS. STEEL: So, you never get any credit or you 6 never really complain to the vendor or you never return 7 it and get the credit for extra stuffs that you get? 8 No? 9 MR. WIGGEN: No, but, on the other hand, you 10 know, Fence America had been negotiating large volume 11 deals. So, they were getting, you know, 70 percent list 12 price, you know, as much is 70 percent list price, okay. 13 So, there's going to be some material, but Fence America 14 has their own quality standards. And, so, they're going 15 to weed out any below grade board. And they're not 16 going to sell it and they're not going to put it into 17 one of their fences. 18 And, so, these materials do accumulate, okay. 19 Sometimes they're sold, some of them got sold. Now, 20 roughly a quarter of a million dollars of cost, you 21 know, got sold. 22 MS. STEEL: In -- okay. I'm not really getting 23 answers from both sides. 24 So, what do you do after those accumulation of 25 all those defective materials, what do you do with it? 26 MR. WIGGEN: If they can't be sold, they get 27 put into a dumpster as spoiled lumber. 28 MS. STEEL: So, you just throw it away? 31 1 MR. WIGGEN: They're hauled away by Atlas 2 Disposal. They were brought to one of two facilities 3 that basically processed the word -- the wood and sell 4 to bioenergy plants. So, this is basically fuel for 5 local, you know, green energy plants. 6 MS. STEEL: Okay, thank you. I'm done. 7 MR. HORTON: Mr. Runner. 8 MR. RUNNER: Just again trying to clarify this 9 issue on the freight. What the Department is saying, 10 see if I've got this correct, is that what you're 11 looking for is clarity on the invoice itself as to how 12 and where delivery took place. 13 Is that -- 14 MR. HORTON: Title. 15 MR. RUNNER: -- yeah, or title was passed? 16 MR. LAMBERT: It could be -- it could be 17 another document, but -- 18 MR. RUNNER: Okay. 19 MR. LAMBERT: -- typically -- 20 MR. RUNNER: It could be another document? 21 MR. LAMBERT: Yeah. 22 MR. RUNNER: Okay. So -- and, so, what the 23 taxpayer has provided are some letters of clarification. 24 These letters are not -- were not done at the 25 time of the sale, these were done to clarify the 26 policies of title transfer by these various sellers, the 27 mills or whatever, right? 28 MR. LAMBERT: Right. 32 1 MR. RUNNER: And, so, what we're saying is even 2 though the mills or these -- you know, some of them are 3 mills, some of them must be wholesalers or whatever -- 4 have clarified for us that, for instance, in this one 5 from Capital, all of our sales are FOB warehouse or 6 mill, meaning that our customers take title to shipping 7 and bear the risk of -- during transit, even though they 8 say, "This is our policy, this is what we do, not just 9 for this customer, but for all customers," we're saying 10 this is not enough? 11 MR. LAMBERT: What we're saying is is that it 12 needs to be contemporaneous with the sale that took 13 place. And when they refer to -- 14 MR. RUNNER: Why wouldn't this be -- even 15 though this letter isn't, isn't this -- isn't this a 16 policy statement contemporaneous to when that event took 17 place? 18 MR. LAMBERT: I believe this is after the fact. 19 MR. RUNNER: Well, it is, it is. But it's -- 20 it's reflecting back on the policy that was always in 21 place at that time of the sale. 22 The document's not, I get that. 23 MR. LAMBERT: Right. 24 MR. RUNNER: But it is stating the policy that 25 was in place at that time. 26 MR. LAMBERT: Right. But they're going to need 27 to have it expressly in the contract at the time of the 28 transaction in order for it to be exempt from tax. 33 1 This is -- in terms of -- 2 MR. RUNNER: We think -- do we think that -- 3 that -- where do we think -- where do we think right now 4 that that title took -- changed for Capital? 5 MR. LAMBERT: What's our belief? 6 MR. RUNNER: Uh-huh. 7 MR. LAMBERT: Well -- 8 MR. RUNNER: What's your belief? What's our 9 belief? Based upon all the stuff we have, what's our 10 belief where this took place? 11 MR. LAMBERT: By law, it's our belief that it 12 took place in California. 13 MR. RUNNER: Okay. But where in California? 14 MR. LAMBERT: At the yard where it was 15 delivered to the taxpayer. 16 MR. RUNNER: Even though that's contrary to 17 the sales -- the seller's statement in regards to how -- 18 what their business practice is? 19 MR. LAMBERT: Correct. 20 MR. RUNNER: So, we think we know what took 21 place, even though the people who actually do the sales 22 in their policy say it took place this way? 23 MR. LAMBERT: They -- 24 MR. RUNNER: Okay, right? I mean -- 25 MR. LAMBERT: They have written it down. 26 MR. RUNNER: Right. 27 MR. LAMBERT: This has been a long 28 established -- I mean, this is not a new issue. 34 1 And in terms of the industry, that's the norms 2 of it, it always transfers, that's not our experience 3 with this. And, in fact -- 4 MR. RUNNER: But the letter says that it is. 5 The letter from this -- 6 MR. LAMBERT: What the letter -- 7 MR. RUNNER: -- particular one says this is the 8 way we do our business. 9 MR. LAMBERT: -- that's correct. 10 MR. RUNNER: So, is it that we don't believe 11 don't what this letter says? 12 MR. LAMBERT: No, it's not that. It's that -- 13 it had -- in order for it to be exempt from tax, it has 14 to be expressly stated at the time of the transaction. 15 MR. RUNNER: And at this point -- to go back to 16 the taxpayer -- you believe you have some of those at 17 that time, that have not been provided? 18 Or have you provided the ones that you think 19 you can provide? 20 MR. WIGGEN: We just contacted -- we just 21 contacted three vendors. We provided copies of backs of 22 invoices of two invoices. Not all invoices have 23 something on the back. 24 MR. RUNNER: Okay. So, you, as the taxpayer, 25 believe that if you just provided the statement of how 26 it is that the -- the normal operating practice of your 27 supplier was that that would suffice for documenting how 28 it is and where it is delivery took place? 35 1 MR. WIGGEN: Yes. And, again, if you're in the 2 business, you know how the business runs. You know how 3 the customs and the standards of the business -- and 4 like they acknowledge you. 5 You go in to a doctor, you don't tell them 6 you've got two kidneys. 7 MR. RUNNER: Yeah. 8 MR. WIGGEN: You tell him you got one. So -- 9 MR. RUNNER: Let me go -- let me -- let me ask 10 Mr. Levine, do we -- let's see, I guess -- are we 11 dealing with a regulation or statute? 12 Is it that clear that it has to be on a written 13 statement at the time of the delivery? Is that -- are 14 we dealing with a -- how clear is -- 15 MR. LEVINE: The contract is the contract. And 16 not only that, as far as the industry, if the industry 17 was always FOB shipping, we wouldn't have the invoices 18 that say, "FOB destination." 19 But I'd like to point out something. This only 20 matters if delivery is by common carrier, 'cause -- 21 MR. RUNNER: Right. 22 MR. LEVINE: -- what we're looking for is when 23 a seller completes his duties with reference to physical 24 delivery of the property and if the retailer delivers it 25 in its own facilities, whether it's FOB destination or 26 not, the seller's not done delivering until he dumps it 27 off his trucks. And I don't know if all these 28 deliveries are common carrier. 36 1 MR. RUNNER: Let me ask, what are -- what are 2 the nature of these deliveries, are they common carrier? 3 MR. WIGGEN: Almost all of them are common 4 carrier. 5 MR. RUNNER: Let me specifically say this one, 6 Capital? 7 MR. WIGGEN: Capital provided us with a 8 scheduled common carrier. 9 MR. RUNNER: Okay. 10 MR. WIGGEN: Actually, let me -- it was either 11 Capital or Cascade. So, I would need to double-check 12 that. 13 But we actually had provided the auditors with 14 schedules of delivery charges from the vendors 15 themselves that they created from their documents, okay, 16 which, you know, again I go back to the Dell case. 17 What more do you want the taxpayer to do here? 18 So -- 19 MR. RUNNER: Yeah, I guess that's where I 20 struggle. I get -- I get the fact that we're trying to 21 figure out exactly how it -- you know, is it clear on 22 the invoice and those issues of delivery? 23 But at the same time I don't know what else the 24 taxpayer could do to demonstrate where he believed and 25 where he operated and his procedures and where his 26 suppliers operated with the assumption as to where title 27 passed. 28 And I guess -- I guess what we're telling him 37 1 is you just need the right kind of paper, right? 2 MR. LAMBERT: You need to transfer. But with 3 that comes risks involved with it because once it comes 4 on that truck, if it does deliver to you, in Oregon or 5 where it is, and something happens to it on the way, 6 it's -- it's your product. 7 MR. RUNNER: That's -- that's how you operate. 8 Isn't that -- isn't that the philosophy for which -- how 9 you take this -- this -- these -- this material, with 10 that understanding? 11 MR. WIGGEN: That the risk of loss is on us? 12 MR. RUNNER: Yes. 13 MR. WIGGEN: Yes. And, actually, I do have one 14 of those invoices, I didn't put it in the binder, I just 15 had it in mind for information, but it is five 16 facilities of the seller -- but it says, "FOB mill." 17 MR. RUNNER: And which one is that one? 18 MR. WIGGEN: Redwood Empire. 19 MS. MANDEL: That's the one that they allowed, 20 right, Redwood Empire? 21 EMR. RUNNER: Oh, they've already allowed it, 22 okay. 23 MR. WIGGEN: What I'm just saying is you wanted 24 an example. 25 MR. RUNNER: Okay. 26 MR. WIGGEN: There is an example - -- 27 MR. RUNNER: Gotcha, one that's allowed too. 28 Okay. I think our problem is the ones that 38 1 they haven't allowed -- 2 MS. MANDEL: Right. 3 MR. RUNNER: -- trying to get to. 4 Okay, thank you. 5 MR. HORTON: Okay. The unfortunate reality is 6 that title passes by operation of law, which makes this 7 sort of complex not -- but yet still somewhat simple. 8 It's the contractual relationship between the buyer and 9 the seller at the time the transaction is consummated, 10 which kind of -- is counter intuitive to some of our 11 other laws, such as sales for resale, where you're able 12 to get that subsequent document. 13 In this case, we're not. But maybe there is 14 something that be able to help do you have any other -- 15 any situations where there was a loss? And, for 16 example, the product fell off a bridge and you paid the 17 retailer -- I mean the distributor for -- you assumed 18 the loss? 19 MR. WIGGEN: No. 20 MR. HORTON: No? You indicated you only looked 21 at three vendors in your test. Do you feel that if you 22 were go to back and look at every one there might be 23 some documentation to support the contractual 24 relationship as it relates to title passage at the time? 25 MR. WIGGEN: Well, I just -- as part of this -- 26 thought three letters would be enough. 27 If you want me to contact -- 28 MR. HORTON: No, not -- not letters. 39 1 MR. WIGGEN: Okay. 2 MR. HORTON: It's pretty -- I want to say it's 3 pretty clear, but it's not clear. But with title 4 passage being an operation of law, the subsequent 5 letters won't matter. 6 And the policy won't -- even if the policy was 7 established at the time of the transaction, they had a 8 written policy, but yet the contractual relationship was 9 different, that contractual document is going to govern. 10 MR. WIGGEN: Well, I -- 11 MR. HORTON: So, but maybe the -- there is a 12 document itself, aside from the third party confirmation 13 from the -- 14 MR. WIGGEN: Well, I'm not an attorney. But 15 it's my understanding that contract law you have to have 16 a meeting of the minds. 17 And if the buyer thinks it transferred and the 18 seller thinks it transferred prior to shipment, that 19 would be appear to be a meeting of the minds and -- 20 MR. HORTON: Okay. I'm done trying, okay. 21 To the Department, on the spoilage issue, we've 22 established that 10 percent of their sales were retail 23 sales; is that correct? 24 MR. LAMBERT: A little less. 25 MR. HORTON: 7 percent? 26 MR. LAMBERT: It was 5 percent retail, with the 27 wholesale sales thrown in there, it comes up to about 7 28 percent. 40 1 MR. HORTON: In that regulation it doesn't 2 really specifically say that there has to be a 3 substantial amount of retail sales in order to purchase 4 materials for resale. But that is the result of an 5 annotation, the result of policy and trying to 6 differentiate, if you will. 7 But in light of the fact that 7 percent was 8 retail, is there any justification in allowing 7 percent 9 of the spoilage? 10 MR. LAMBERT: In theory, no, because you are 11 basically saying that you're the consumer of that 12 product. 13 MR. HORTON: Why couldn't -- of the commingled 14 inventory, why couldn't a percentage of that be 15 reflective of what was available for resale? 16 MR. LAMBERT: If you could -- if you knew what 17 was going to be resold, you could issue a specific 18 resale certificate for that to go into the 19 over-the-counter sales of that lumber. 20 And in that particular case, you would be able 21 to -- you would be allowed -- 22 MR. HORTON: So -- 23 MR. LAMBERT: -- spoilage, if, basically, you 24 didn't sell it. 25 MR. HORTON: So, the Appellant, in ordering 26 your materials, you presumed that a percentage of it was 27 going to be resold? 28 Yes or no? 41 1 MR. WIGGEN: Yes. 2 MR. HORTON: And when you purchased that 3 material do you purchase enough to resell? Or are you 4 basically reselling the leftover product? 5 MR. WIGGEN: Oh, no, inventory ratios to sales 6 grew from like 17 percent from the predecessor to up to 7 32 percent. He was definitely buying a lot of excess -- 8 well over the construction needs -- because he planned 9 on selling it. That's why there's so much. 10 MR. RUNNER: Anything to document that? 11 MR. WIGGEN: His purchases. We can do some 12 math, show you ratios. 13 But -- in other words, let's say that you have 14 a fence and it's going to cost you a thousand board 15 feet. If the Department said, "We're buying 1100 board 16 feet and then installing it," okay, then the other -- 17 there might be some -- some merit to your point. 18 But we weren't doing that, okay? We know that 19 we'll probably have a job with, you know, 1000 board 20 feet next month, but we're buying 2000 board feet 21 because we want to sell this. We can't get to all the 22 jobs in Sacramento. Business is booming, okay. 23 MR. HORTON: What was your floating inventory? 24 I mean, what was your average inventory at the end of 25 the year? 26 MR. WIGGEN: Average inventory? 27 Well, at the end of the audit period it was, I 28 think, 2.1 million, okay, which was significantly higher 42 1 than, you know, well over double of, you know, what 2 could have been the ending inventory of the 3 predecessor. 4 MR. HORTON: So, in the -- in the material 5 accountability test we adjusted for what we perceived to 6 be retail sales? 7 MR. LAMBERT: That's correct. 8 MR. HORTON: And the cost as well? 9 MR. LAMBERT: That's correct. 10 The cost of the retail sales? 11 MR. HORTON: Right. 12 MR. LAMBERT: Yes. 13 MR. HORTON: In order to pull it out? 14 MR. LAMBERT: Yes. 15 MR. WIGGEN: Wow. Actually, no, they didn't 16 they disallowed it all. 17 MR. HORTON: Sir -- 18 Don't, please. 19 MR. WIGGEN: I'm sorry. 20 MR. HORTON: All right. Thank you very much. 21 Further discussion, Members? 22 MR. RUNNER: Just real quick question. 23 MR. HORTON: Mr. Runner. 24 MR. RUNNER: If, indeed, I mean, if this -- if 25 the discussion is about the issue or the transportation 26 at issue of contract, in the absence of the historical 27 document of contract, you know, the contract -- you 28 can't find the document itself, but yet you have both 43 1 parties that were party to that agreement and that 2 contract agreeing on what the intent and the -- and the 3 agreement was in that contract, doesn't that clarify 4 then what the intent was enough without having 5 the specific paper of that contract? 6 Mr. Levine? 7 MR. LEVINE: What the contents of a missing 8 contract were is a question of fact that -- if you had 9 to decide -- 10 MR. RUNNER: If both parties agree on what 11 those facts are? 12 MR. LEVINE: Yes, perhaps. But that would be 13 the case -- if you have a lawsuit, for example, between 14 the two parties and they agree -- 15 MR. RUNNER: Uh-huh. 16 MS. MANDEL: -- I'm going to accept that in 17 almost every case. 18 But where the parties agree against a third 19 party, maybe they share an interest and that doesn't 20 mean that they're not saying it the way it -- the way 21 they think it was, but maybe the way they think it was 22 is kind of shaped by the way things are today. 23 MR. RUNNER: Right, and I can understand that 24 if it was a unique contract. 25 But since it's not a unique contract, it's how 26 they do business -- 27 MR. LEVINE: Title passes based on either an 28 explicit title provision -- this is under law -- 44 1 MR. RUNNER: Uh-huh, okay. 2 MS. MANDEL: -- Mr. Horton said it. 3 It's by operation of law -- 4 MR. RUNNER: Right. 5 MR. LEVINE: -- that either you have an 6 explicit title passage provision that -- that cannot 7 have -- that cannot pass title any later than when the 8 seller completes its duties with -- 9 MR. RUNNER: Right. 10 MR. LEVINE: -- respect to physical delivery or 11 we look at that point. 12 Yes, I would agree that the way the parties 13 intended the delivery obligations, if we didn't have a 14 contract is relevant. But we have the contract. So, we 15 have the invoice. 16 Just to back up a step? 17 MR. RUNNER: But the -- 18 MR. LEVINE: If this is -- on the two examples 19 that we have, and assuming that they are valid examples, 20 from those two companies where there's no FOB 21 provision -- 22 MS. MANDEL: That -- that's -- which companies 23 are you talking about Siskiyou and All Weather, the two 24 new ones? 25 MR. LEVINE: No, those don't qualify. 26 MS. MANDEL: Well, you just -- 27 MR. LEVINE: The Dell doesn't apply. 28 MS. MANDEL: Can we make -- can we make sure 45 1 we're talking about -- 2 MR. LEVINE: Yes. 3 MR. RUNNER: Let's use Capital. 4 MR. LEVINE: With Capital, I think it's the two 5 -- the two -- 6 MS. MANDEL: The two with -- 7 MR. LEVINE: -- with Capital in the name. 8 MS. MANDEL: California Cascade and 9 California -- 10 MR. LEVINE: California Cascade and Capital 11 Trade. 12 MR. RUNNER: Right, right. 13 MR. LEVINE: Those are the two that don't have 14 any provision on the one invoice we have. 15 MS. MANDEL: Okay. 16 MR. LEVINE: If those were delivered by -- if 17 those were delivered by the seller's own facilities, it 18 doesn't matter what's on the agreement. 19 And if they were delivered by common carrier, 20 since there's no FOB destination, those would qualify. 21 So, if Petitioner can establish that those two 22 were delivered by common carrier in every case, we'd 23 recommend you accept -- 24 MR. RUNNER: So -- 25 MR. LEVINE: -- that as nontaxable. 26 MR. RUNNER: But we're not -- we're not willing 27 to accept then the letter that was written by Capital 28 that says, 46 1 "Capital Lumber uses common carriers on all 2 Fence America lumber purchases." 3 That does not meet that? 4 MR. LEVINE: If -- one thing, don't think folks 5 weren't focused on the correct inquiry there because the 6 inquiry really is common carrier or not. 7 MR. RUNNER: Okay. So -- 8 MR. LEVINE: If they were all common carrier, 9 then I'd accept that. 10 MR. RUNNER: Okay, so -- so, let's go -- let's 11 do this one at a time. 12 Not that we're going to do them all, but, for 13 instance, this one, this letter (indicating), where they 14 state, 15 "Capital Lumber uses common carrier on all 16 Fence America lumber purchases." 17 MR. HORTON: "This one," Mr. Runner? 18 MR. RUNNER: This is the Cap -- this is the -- 19 MS. MANDEL: Capital. 20 MR. RUNNER: -- the Capital, that's what it 21 says in the letter. 22 Does that meet the criteria then, or our 23 understanding of a common carrier? 24 MR. LEVINE: If I were holding a conference 25 right now, I'd ask the Department to contact them to 26 confirm. But if that's true, yes, I'd accept it. 27 If that is sufficient for you, then I'd 28 recommend that you accept -- 47 1 MR. RUNNER: Not yet. 2 MR. LEVINE: -- those charges as nontaxable. 3 MR. RUNNER: Okay, thanks. 4 MR. HORTON: One last question. 5 Do you have insurance to cover the risk of 6 loss? 7 MR. RAZZANO: Yes. 8 MR. HORTON: In the event the product is 9 damaged? 10 MR. RAZZANO: We do. We always have a minimum 11 of a $2 million liability policy that I'm quite certain 12 covers that loss. 13 MR. HORTON: Okay. In the event you're allowed 14 additional time to provide that, I'd like to see that -- 15 MR. RAZZANO: Okay. 16 MR. HORTON: -- policy. 17 Further discussion, Members? 18 Is there a motion? 19 Moved by Member Yee to adopt staff -- ooh, take 20 the matter under submission. 21 MR. RUNNER: Lost your head there for a moment. 22 MR. HORTON: I did, let's keep moving. 23 Second by Member Steel. 24 Without objection, Members, such will be the 25 order. 26 Thank you very much for appearing before us 27 today. The Board will take your matter under 28 consideration later on this evening and send you a 48 1 written report of our decision. 2 Thank you. 3 MR. WIGGEN: Thank you very much for your time. 4 ---o0o--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 49 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 MAY 30, 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 49 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: JUNE 13, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 50