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 SALES AND USE TAX APPEAL HEARING 11 APPEAL OF 12 BAY AREA FENCE & DECK, INC. 13 NO. 443761 (GH) 14 AGAINST PROPOSED ASSESSMENT OF 15 SALES AND USE TAX 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 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 Assistant Chief Counsel 21 Dario Romano Business Taxes 22 Administrator III 23 For Petitioner: Michael E. Haynes 24 Taxpayer 25 Julia C. Haynes Taxpayer 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 30, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, our next item. 6 MS. RICHMOND: Our next item is C3, Bay Area 7 Fence and Deck, Inc. 8 Please come forward. 9 MR. HORTON: Mr. Levine, as the taxpayer comes, 10 would you please introduce the issues in this case. 11 MR. LEVINE: The issue in this petition of Bay 12 Area Fence and Deck, Inc. is whether adjustments are 13 warranted for the unreportable taxable measure. 14 MR. HAYNES: Thank you. 15 MR. HORTON: Thank you. 16 I will share with the taxpayer, as they take 17 their time and settle in, that they will have ten 18 minutes to make their presentation. We would ask that 19 you commence with your introductions for the record. 20 And then we will go to the Department and allow them ten 21 minutes to make their presentation. And then we will 22 return to you and allow you an additional five minutes 23 for rebuttal. 24 At your convenience. 25 MR. HAYNES: Well, Members of the Board, thank 26 you for taking your time to hear our case today. We do 27 appreciate it. I know you have lots on your plate and 28 we certainly appreciate the time you've allocated to 3 1 our -- our case. 2 My name is Michael Haynes. This is my wife 3 Julia Haynes. We're the owners of Bay Area Fence and 4 Deck, Incorporated. We've been in business for 5 approximately 21 years, operating as a lumber yard, 6 milling facility and a fencing contractor. We are an 7 amalgam of all three activities basically. 8 We have been a lumber yard, as I say, for 20 9 years. We've advertised in the Yellow Pages as a lumber 10 yard. We have advertised on the Internet as a lumber 11 yard. 12 We have bought lumber from many of the same 13 distributors that you just heard spoken of in the 14 previous case, Redwood Empire, AllWeather, and many of 15 the others. They have recognized that we are a lumber 16 yard. In fact, they have visited our facility to ensure 17 that we were a lumber yard, a reputable, legitimate 18 retail lumber yard. 19 If they had found that we were not a retail 20 lumber yard, they would not have sold to us. They would 21 have refused. In fact, in the early days, in one 22 instance, one of the distributors did refuse to sell to 23 us because we were not a legitimate retail lumber 24 yard. 25 We formed that retail lumber yard and that same 26 company has been now a vendor of ours for approximately 27 20 years, two decades. 28 When you enter our facility, there is adequate 4 1 retail parking out front. You come in the front door, 2 there's a retail counter. Uh, when you -- when you look 3 at the building, you see a sign. And part of that sign 4 reads: "Bay Area Lumber." 5 We are definitely a lumber company. We always 6 have been and hopefully we always will be. 7 It's true that we're also a milling facility. 8 We take raw material, in this case lumber, and 9 manufacture it into a finished product, which is then 10 incorporated into a finished product; in this case, it's 11 fences and decks. 12 A substantial amount of the space of our three 13 big warehouses is dedicated to the milling facility. 14 It's not just an adjunct, it's -- it's a major part of 15 our operation. 16 We take lumber in the form of random length of 17 2-by-8 and we chop it to length. We rip it in half so 18 that it's the right thickness. Sometimes we'll cut a 19 2-by-8 into a 2-by-4, um, and then we have to dado it 20 and rabbit it, to make sure that it's good for a top 21 rail and a bottom rail. 22 We have a lattice manufacturing facility as 23 well. There are many saws, lots of equipment, lots of 24 investment, um, in terms of time and labor and money 25 that have gone into making this manufacturing facility 26 what it is. We also, uh, devote substantial, uh, space 27 to the lumber yard itself. 28 It's true that we're also a lump sum 5 1 contractor, and a modicum of space is devoted to that 2 activity as well. 3 So, if anyone tries to convince you that we're 4 not a lumber yard, uh, let them speak to me and I'll 5 them him exactly what -- what we are. 6 The auditor who conducted this audit did not, 7 in fact, visit our facility to see what our operation 8 was like. It was all done off-site. So nobody who 9 represented the State ever came and looked at our 10 facility. 11 Um, I know that the State, uh, believes that we 12 are a lump sum contractor, principally, because of the 13 relatively small amount of retail sales. Those retail 14 sales, by the way, are about five percent of our total 15 sales. 16 And I'll point to you, as did the previous 17 person who was sitting in this chair, that nowhere in 18 the regulations is there a percentage of sales that 19 qualifies a business as being a retail lumber yard or 20 disqualifies it. There's nothing in the regulations 21 that says it has to have 10 percent of its total sales 22 or 20 percent or five percent or one percent. In fact, 23 the regulations are silent. 24 I believe we are a lumber yard, and I hope I've 25 proved it briefly. 26 Uh, the question today is whether or not tax is 27 due on a small portion of our total sales; that portion 28 being wastage created in the manufacture of a finished 6 1 product, and also defective product or spoilage as 2 you've heard in the previous case. 3 Bay Area Fence and Deck does not dispute its 4 requirement to pay sales tax on sales made to retail 5 customers at its lumber yard. Nor does it dispute the 6 fact that it should pay taxes on material used in its 7 lump sum contracts. 8 However, Bay Area Fence and Deck does believe 9 that it is not obligated to pay taxes on the wastage 10 created by the processing of a raw material for 11 incorporation later into a finished product. 12 I'll point to the California Supreme Court. 13 The California Supreme Court has consistently and 14 clearly held that sales tax does not apply to wastage 15 created in the processing of a raw material for the 16 purpose of incorporating it into a finished product for 17 later resale. See Kaiser Steel Corporation versus State 18 Board of Equalization; the year was 1979. 19 In Kaiser Steel, the court reasoned that 20 permitting an exemption when materials are incorporated 21 into a finished product is rational since the material 22 enhances the value of the product which will eventually 23 be resold and taxed at its highest value. 24 The court in Kaiser Steel relies heavily on 25 Regulation 1525 which states, quote: 26 "Tax does not apply to sales of tangible 27 personal property to persons who purchase it 28 for the purpose of incorporating it into the 7 1 manufactured article to be sold as, for 2 example, any raw material becoming an 3 ingredient or component part of the 4 manufactured article. 5 "The court, as is consistent with its prior 6 decisions pertaining to whether or not a sale 7 is taxable as a retail sale or exempt as a sale 8 for resale, explicitly expressed its preference 9 for the primary purpose test." 10 And you can see many cases; People versus 11 Puritan Ice Company, 1944; Good Humor Company versus 12 State Board of Equalization, 1957; Am. Distilling 13 Company versus State Board of Equalization, 1942; Kirk 14 versus Johnson, 1940, and others. 15 In utilizing a primary purpose analysis, the 16 court in Kaiser Steel found that waste slag resulting 17 from steel production was subject to sales tax because 18 the primary purpose of the materials composing the slag 19 was to assist in the manufacturing of steel and not for 20 the production of the excess slag. 21 The court went further, however, and reasoned 22 that if the property is purchased for incorporation as a 23 component of the finished product, it is not taxable, 24 despite the fact that some portion may be lost or 25 otherwise dissipated in the manufacturing process. 26 As in Kaiser Steel, Bay Area Fence and Deck's 27 lumber usage has the primary purpose of being an 28 incorporated part; in this case, an incorporated part of 8 1 fences and decks which it manufactures in it's milling 2 facility. 3 Accordingly, although the waste lumber was 4 neither sold nor transferred to customers, because the 5 primary purpose of the lumber was to be an incorporated 6 component within the final product, the court found that 7 the waste lumber was exempt from sales tax. 8 In Kaiser Steel, the court discussed two 9 distinct uses of aluminum; one which was exempt and one 10 which was not exempt. 11 "Where aluminum is sold for the purposes of 12 removing oxygen from the molten steel and the 13 greater part thereof is skimmed from the ladle 14 as slag, it is not sold for resale and sales 15 tax applies. 16 "On the other hand" -- 17 And this is in italics. 18 "On the other hand, if the sole purpose of 19 purchasing aluminum is to incorporate it into 20 the finished product ultimately sold, the sale 21 of the aluminum will be treated as a sale for 22 resale and no tax will be due, even with 23 respect to that portion lost or wasted in the 24 manufacturing process." 25 Because Bay Area Fence and Deck's use of lumber 26 is unquestionably more similar to the latter tax exempt 27 use of aluminum since the lumber is cut for the primary 28 purpose of being incorporated into the final product, we 9 1 feel the Board should similarly find that Bay Area Fence 2 and Deck's waste lumber, even without being sold or 3 transferred, is exempt from state sales tax. 4 And in conclusion, the evidence is clear as to 5 primary purpose and that Bay Area Fence and Deck 6 purchases raw material, in this case lumber, for the 7 purpose of incorporating it into a finished product, in 8 this case fences. It is consistent with case law and it 9 is overwhelming in kind -- we produced 12 different 10 kinds of exhibits for the State to look at -- and in 11 amount -- we had 41 separate exhibits -- and the Board, 12 we believe, should find that Bay Area Fence and Deck is 13 not liable for the taxes in question. 14 We're talking about an amount equaling 15 approximately six and a half percent of total sales. 16 MS. RICHMOND: Time as expired. 17 MR. HAYNES: In other words we had six and a 18 half percent wastage, uh, or defective product out of a 19 hundred percent of product that we -- that we 20 purchased. 21 MR. HORTON: Thank you very much. 22 We'll now go to the Department. The Department 23 will have ten minutes to make their presentation as 24 well, and we would ask that you commence with your 25 introductions for the record. 26 MR. LAMBERT: Thank you, Chairman Horton and 27 Members. My name is Scott Lambert. To my right is 28 Robert Tucker, and to his right is Dario Romano, all 10 1 representing staff. 2 In this particular case, uh, it is similar to 3 the one, uh, that you heard just before this in that, 4 uh, the taxpayer's mainly a, um, contractor of wood 5 fences. They also purchased inventory without the 6 payment of tax. 7 The amount of retail sales, uh, in the audit 8 was about three percent. The taxpayer provided actual 9 resale numbers. It was about 4, 4.3 something percent. 10 But in any case the vast majority, over 95 percent of 11 the material was used for lump sum construction 12 contracts in which we contend the taxpayer was a 13 consumer. 14 The taxpayer did receive a couple breaks in the 15 audit. Uh, due to the procedure that was made we used 16 cost goods sold instead of purchases, and it was about a 17 30 -- 30 something thousand dollar advantage to the 18 taxpayer. 19 The inventory was also -- the beginning 20 inventory was not included in the -- the audit as well. 21 Uh, the cost accountability test was performed 22 for two years; fiscal year '04-'05 and fiscal year 23 '05-'06. The percentage of error from the two were very 24 similar. And the combined percentage of error was 15 25 percent, which is, uh, relatively low, but there was 26 material that was not reported as taxable. 27 I'll refer to the taxpayer's exhibit. And 28 although he didn't mention it, I -- I just wanted to 11 1 bring a few points out of this. From my understanding 2 from reading this, his contention is is that he wants a 3 spoilage deduction for the retail sales portion of it. 4 So, in other words, if you took all your spoilage, he 5 would want five percent. 6 We believe the percentage would be 4.3 percent 7 which his retail sales were. But in any event, the 8 Department doesn't agree with this, uh, interpretation. 9 But I want to go over the individuals of it in case you 10 do consider it. 11 In -- in terms of the figures that were used, 12 I'll point out that there were four years' worth of 13 defective material that were provided. The audit was 14 only for three years; it was from July of '04 through 15 June 30th of '07. So the fiscal year '07-'08 should not 16 be taken into consideration in, uh -- in this 17 adjustment. 18 Also, I believe, when you have defective 19 material -- he calls it defective material and waste 20 material, and I'm going to interpret what I think they 21 mean and he can tell me if -- if it's wrong. But I 22 believe the defective material is for the material that 23 goes bad in the yard, and the waste material was the 24 material that's either left over or bad from when you 25 have removed it from inventory to be installed. 26 So, I'd consider that more trim, um, short 27 ends, things of that nature which, in any case, 28 should -- should not be taken into consideration, uh, by 12 1 any interpretation of the regulation. 2 So, therefore, when you come up with a 3 subtotal, it really should only be the defective 4 material for the three years, which would be $450,000. 5 Um, and if you do consider the waste as well, there is a 6 clerical error. Uh, it doesn't add up to 674. There's 7 a $4,000 difference. 8 The -- uh, if you take a look at the percentage 9 of cost or defective materials versus purchases, for 10 fiscal year '05 it would be 12-and-a-half percent. And 11 for fiscal year '06 it's 10 percent. Just as a 12 percentage of what he's claiming his defective 13 material. 14 Um, this was the taxpayer's first audit. There 15 was no penalty in that regard. It's a minor, relatively 16 low percentage of error. 17 With that, the Department concurs with Appeals 18 Division's decision and recommendation. 19 MR. HORTON: Thank you. 20 On rebuttal, please. 21 MR. HAYNES: Well, the gentleman has made at 22 least one mistake in his statement. And, uh, that is, 23 he says that 95 percent of our material purchases were 24 used in lump sum contracts. That simply is not true. 25 When you take a hundred percent of materials, 26 hundred percent of purchases, subtract from that a 27 percentage for waste and defective material. He says it 28 was 10 or 12 percent. Well, that would reduce it to 88 13 1 percent now. 2 Well, I say that 95 percent of the 88 percent 3 was used in lump sum contracts, yes. But not 95 4 percent. It's 95 percent of 88 percent, we'll say. So 5 that's how much was actually used in lump sum contracts 6 and on which sales tax does apply, in addition to the 7 retail sales we have. 8 Our contention is simply, that we should not 9 have to pay tax on the wastage. The wastage is created 10 in the manufacturing process. Uh, when you -- when you 11 manufacture the finished product from the raw material, 12 there's a certain amount of material which doesn't get 13 processed; it's -- it's waste. Um, you can't use 14 every -- every inch of material that you get in from the 15 truck, that you buy, in a finished product. 16 There's wastage involved when the saws saw the 17 equipment -- saw the material. Then there's defective 18 material as well. Much, as in the previous case, 19 there's material that we get that just doesn't meet our 20 standard. Maybe the board has a big hole in it. Well, 21 no customer is going -- at a retail lumber yard, is 22 going to buy a piece of wood with a hole in it. Or 23 maybe it has a split or maybe it has what we call shake, 24 something else that makes it defective. 25 You can't sell every piece of material that you 26 get into the yard, even if you didn't remanufacture it. 27 You simply couldn't sell it all. Some will be spoilage 28 or defective material. 14 1 But in our case we have a milling facility and 2 we do produce a certain amount of waste. It's not a 3 lot, but we feel that we should not have to pay tax on 4 it. And the California Supreme Court agrees with us, 5 clearly and consistently over many decades; back in the 6 40s up through 1979 or so in the cases cited. 7 So, that's -- that's about all I have to say I 8 suppose. 9 There -- regardless of what you decide, 10 apparently there should be no objection from the State 11 about our receiving a, uh -- a credit for the five 12 percent of legitimate retail sales that we had. We have 13 five percent -- in other words, five percent of our 14 wastage and defective material should at least be 15 counted and there should be a deduction in the amount of 16 tax owed. We calculate it as being around $2800. 17 Even if you go by with what the State has to 18 say and you side with them, we have five percent 19 legitimate retail sales. And a -- and a lumber yard 20 does have spoilage and it does have wastage. So I don't 21 see how they can get around that. 22 But we say, in conclusion, that we should not 23 have to pay this tax because it results from, uh, 24 incorporation of a product into a finished product for 25 later resale. It's a manufacturing process basically. 26 MR. HORTON: Thank you. 27 Discussion, Members? 28 Member Runner. 15 1 MR. RUNNER: Yeah, I'm just -- I'm trying to 2 figure out this issue in regards to a hundred percent of 3 the lumber delivered that -- that you acquire and then 4 how that flows out between, um, what goes to retail, 5 what goes to, um -- what goes then to the construction 6 aspect of what your business does and where -- and where 7 then to figure in the spoilage and the defective issue. 8 MR. HAYNES: Well -- 9 MR. RUNNER: Can you -- can you take -- can we 10 take from a hundred percent of the lumber coming in, how 11 you would believe that should be divided up? 12 MR. HAYNES: Well, let's see if I have those 13 figures at hand. Uh, the company takes in product on 14 tandem trailers; it's, as I say, random length 2-by-8. 15 From there it's off-loaded with fork-lifts and 16 brought back to the -- to the mill. Not to the -- the 17 contracting department up front, uh, but back to the 18 mill which is in -- which is in the back, two warehouses 19 of the three that we have. 20 Uh, it's then decided, uh, whether the 21 material's defective or not. Some of it is defective 22 right off the bat. 23 MR. RUNNER: What percentage do you believe is 24 defective? 25 MR. HAYNES: Do you have that figure, Julia? 26 Just a moment -- 27 MR. RUNNER: Okay. 28 MR. HAYNES: -- Mr. Runner. We'll have that 16 1 figure for you. 2 MS. HAYNES: Around five and a quarter percent, 3 five percent. 4 MR. RUNNER: 5.25 percent is defective. Of 5 that truck that came in, 5 point -- five and a quarter 6 percent defective. 7 MR. HAYNES: Right. 8 MR. RUNNER: Can't be used. 9 MR. HAYNES: We do attempt to mitigate our 10 losses by using some of the defective material, uh, for 11 use in lattice. We have a lattice-making facility. 12 MR. RUNNER: Okay. So a little bit of -- of 13 the 5.5 percent gets used. 14 MR. HAYNES: A little bit. 15 MR. RUNNER: Okay. 16 MR. HAYNES: Basically we'll call it five 17 percent. 18 MR. RUNNER: Okay. Okay. So a hundred percent 19 came in. Five percent can't be used. 20 MR. HAYNES: Right. 21 MR. RUNNER: So then what happens? 22 MR. HAYNES: Well, then it, uh, begins to 23 undergo the manufacturing process, the milling process. 24 Um, let's say we get a 20-foot length of 2-by-8 25 in. We'll decide that that'll make a very nicely four 26 five-foot fence boards, so we'll chop it into five-foot 27 lengths. It's now five foot long, eight inches wide, 28 but it's about one-and-three-quarters inches thick. 17 1 We can't use it as a fence board yet. It has 2 to go back to another part of the facility in the very 3 back warehouse where we have resaws. We have two 4 resaws. Costs a lot of money for these resaws and it 5 costs a lot of money to man them. Our -- our payroll 6 will reflect that. 7 MR. RUNNER: Okay. So this is -- this is the 8 reshaper to make it fit or make it work for its intended 9 use. 10 MR. HAYNES: For its intended use. 11 MR. RUNNER: And how much of the loss of your 12 hundred percent lumber that came in goes out to that -- 13 is lost at that point? 14 MR. HAYNES: How much is wastage? 15 MR. RUNNER: And you would define that as 16 waste? 17 MR. HAYNES: Waste or wastage, uh-huh. 18 MS. HAYNES: Well, sometimes, because you cut 19 the piece of wood sometimes on the job site, you don't 20 need the full length. You only needed seven, so you cut 21 off. 22 MR. RUNNER: Yeah. 23 MS. HAYNES: So we lose the one foot. And that 24 number is about -- 25 MR. HAYNES: This is wastage in the 26 manufacturing process. 27 MS. HAYNES: -- around -- probably around 1.1 28 percent. 18 1 MR. RUNNER: Okay. About one percent. 2 MS. MANDEL: That sounds like a different -- it 3 sounds like she's -- 4 I'm sorry, Mr. Runner. It sounds like she's 5 talking about a different wastage point, sir, than you 6 were taking about. 7 MS. HAYNES: Yeah, I talk about the other 8 one. 9 MS. MANDEL: Okay. So I think right now you're 10 at the wastage point where you have the -- the cut 11 lumber going to be resawn to make it, I guess, skinnier 12 than it is. 13 MR. HAYNES: That's correct. 14 MR. RUNNER: Make it the right product. 15 MS. MANDEL: And that's the wastage you're at 16 right now. 17 MR. HAYNES: That's correct, Ms. Mandel. 18 MS. MANDEL: So what -- do you have a number on 19 that? 20 MR. RUNNER: What percentage would that be? 21 MS. HAYNES: Oh, I could get it. With the one 22 he's saying, I add to it. 23 MR. RUNNER: Uh-huh. 24 MS. HAYNES: All add together, 1.1 percent. 25 MS. MANDEL: Oh, okay. 26 MR. RUNNER: Okay, 1.1 percent. 27 Okay. So now we've come down to 1.1 percent 28 on -- on wastage. Now what do you have? 19 1 MR. HAYNES: Well, we have, uh -- 2 MS. HAYNES: No more. 3 MR. HAYNES: Is that it? 4 We just have two categories -- 5 MR. RUNNER: Okay. 6 MR. HAYNES: -- wastage and defective 7 materials. 8 MR. RUNNER: Okay. When does something go to 9 retail? 10 MR. HAYNES: It goes to -- it all goes to 11 retail in the retail lumber yard once the manufacturing 12 process, uh, is accomplished. It all goes into the 13 retail lumber yard. 14 MR. RUNNER: And then how much then gets moved 15 from retail then over to your manufacturing for your 16 decks and your fences? 17 MR. HAYNES: Okay. Um, I think that that's 18 probably around 88 percent, I think. About 88 percent 19 of the total amount that we -- that we bought gets moved 20 over to, uh -- 21 MR. RUNNER: That you bought or that you ended 22 up with? Because -- 23 MR. HAYNES: Uh, I think that we -- that we 24 bought, I think is what I'm talking about. 25 MR. RUNNER: Okay. Okay. 26 Um, again, how does that -- how -- in terms of 27 that follow -- that flow chart of materials and usage 28 and movement differ from our perspective, from the 20 1 Department's perspective, of what -- of how things were 2 taxed and what was given for -- for wastage and for -- 3 for, uh -- uh, defective? 4 MR. TUCKER: If you don't mind, Mr. Runner, I'm 5 going to start. And then I'll let Mr. Lambert finish. 6 MR. RUNNER: Okay. 7 MR. TUCKER: Were this -- as he explained, he 8 talked about the Kaiser Steel case. If this were truly 9 a Kaiser Steel case where he was purchasing this for, 10 um, subsequent sale, then we would be looking at proper 11 allowance for the defective merchandise and the waste. 12 MR. RUNNER: Mm-hmm. 13 MR. TUCKER: There's no doubt about that. 14 MR. RUNNER: Okay. 15 MR. TUCKER: If he had been making purchases, 16 specifically to resell that property, then I don't think 17 we would have any question whatsoever and we wouldn't be 18 here. 19 The complication is, as he says it was 88 20 percent, we would say it's probably 95 percent, 21 somewhere in that range. Ninety-five percent of those 22 purchases were for consumption on, uh, lump sum 23 construction contracts. And on those lump sum -- pardon 24 me -- lump sum construction contracts, there would be no 25 allowance for waste or defective merchandise. 26 But if they had been targeted, if these were 27 purchases specifically to be re sold, um, then we would 28 not be arguing with this. 21 1 MR. HAYNES: Well, let -- let me say -- 2 MR. RUNNER: Okay, go ahead. 3 MR. HAYNES: That the figure is closer to 88 4 percent, not 95. It can't be 95. We've already 5 identified five percent out of the total is legitimate 6 retail sales. Plus the six and a quarter percent or so 7 that we have in wastage and spoilage, we're already down 8 11-and-a-half percent and 88-and-a-half -- we're down to 9 88-and-a-half percent already. 10 It can't be 95 percent. That's -- that's 11 obvious. It's more like 88 percent went to lump sum 12 contracts. 13 MR. RUNNER: Okay. Thank you. 14 MR. HAYNES: We feel that we should pay the tax 15 on that. 16 MR. RUNNER: Okay. Thank you. 17 MR. HORTON: Further discussion, Members? 18 Ms. Mandel. 19 MS. MANDEL: I just want to -- just want to 20 clarify since we have you all here right now. 21 One of the last things that the gentleman said 22 before the questioning started was that even with 23 respect to, um, where the Department's at 95 five, that 24 if there's five percent retail, why don't I get wastage 25 and spoilage on the five percent retail? 26 And now you've just said, I thought, that the 27 Kaiser Steel concept applies to the retail side. 28 So, did he get wastage and spoilage on the five 22 1 percent that you say is retail or didn't he? And if you 2 think he shouldn't, what's your response? 3 MR. TUCKER: If there had been purchases 4 targeted -- if they had made specific purchase for 5 resale, then it would have been appropriate. That 6 wasn't -- 7 MS. MANDEL: Okay. Okay. So what -- what is 8 that? Is that not where we're at the 95 five? Or are 9 you saying -- a com -- somebody who does that much 10 business on a lump sum can't be making any specified 11 purchases for resale? I just -- 12 Or, Mr. Levine, maybe can you -- I just want 13 to -- you know, if they -- if they -- if the Department, 14 uh, is successful on sort of everything, the gentleman 15 still said, How come I don't get the spoilage and 16 wastage on the five percent that they say I did have 17 retail sales of that I was able to show I had retail 18 sales of? 19 I just want to -- 20 MR. LEVINE: Petitioner was making commingled 21 purchases. 22 MS. MANDEL: Okay. 23 MR. LEVINE: It was either entitled to buy all 24 for resale or it was not. 25 What Mr. Tucker is saying is -- I think, is if 26 on a particular purchase it was specifically for resale, 27 that was not for -- someone had to special purchase 28 requirement, wanted a certain type of wood that they 23 1 were going to buy at retail and petitioner made a 2 purchase of that knowing it would be for resale, not for 3 the construction side, then certainly it would be 4 entitled to purchase that for resale. Any -- any, uh, 5 waste that, if -- if -- if they were milling it -- 6 MS. MANDEL: Right. 7 MR. LEVINE: -- for sale as fence boards at 8 retail, it would be -- there would be no adjustment for 9 that. They would just owe tax on the retail sales. 10 The question here is, could they buy it for -- 11 all for resale when the vast majority of the business 12 was construction contracts, lump sum materials, buying 13 as a consumer. And the Department regarded petitioner 14 as buying it as a consumer, and the Appeals Division 15 agreed. 16 MR. HAYNES: Mrs. Mandel, I think the State's 17 reasoning is circular. They're calling me a lump sum 18 contractor and dismissing, totally, all of the evidence 19 that I've ever presented to them, all of the many 20 exhibits, 41 different exhibits, that showed that we 21 were a retail lumber company. They dismissed that 22 entirely. And they want you to dismiss it as well. You 23 just can't do that. 24 Anybody could pay a visit to my facility and 25 see that we're a resale lumber yard. When we purchased 26 that material, we purchased it all for -- for resale at 27 the lumber yard. We had no idea how much we would 28 resell, but it was all intended for resale. 24 1 It is also true that we took a portion of that, 2 a large portion of it and used it in our own lump sales 3 contracts, but that doesn't mean that we intended to do 4 it in the first place. 5 We intended to remanufacture all of it, all of 6 it, and put it into the lumber yard, which is exactly 7 what we did. And from our inventory, we then took, uh, 8 material that we needed to build fences for lump sum 9 contracts that we'd established customers. 10 Their reasoning is simply circular. They call 11 us a lump sum contractor and they have no reason for 12 doing it, except to say that most of our retail sales 13 were small. Well, the -- the regulations don't say 14 exactly what percentage of retail sales you have to have 15 in order to be called a retail lumber yard and not a 16 lump sum contractor. There's no ruling on that. 17 There's no word about it. The Supreme Court doesn't 18 address it, and probably wisely so. 19 MS. MANDEL: Thank you. 20 MR. HORTON: Further discussion, Members? 21 Hearing none, is there a motion? 22 MS. YEE: Move to take the matter under 23 submission. 24 MR. HORTON: Moved by Member Yee to take the 25 matter under submission. Second by Member Mandel. 26 Without objection, such will be the order. 27 Thank you so very much for appearing before us 28 today. The board will take your matter under 25 1 consideration later on this evening and send you a 2 written report of our decision. 3 MR. HAYNES: Thank you, Mr. Horton. 4 MR. HORTON: Thank you. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 26 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 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 26 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: January 11, 2013 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 27