1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JUNE 26, 2012 10 11 12 ITEM H 13 TAX PROGRAM NONAPPEARANCE MATTERS - ADJUDICATORY 14 H1 Legal Appeals Matters 15 1. Eric Anthony Guidice, No. 380212 (ET) 16 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 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings Division 16 17 For Staff: David Levine Tax Counsel IV 18 19 For Petitioner: Eric Guidice 20 Taxpayer 21 James Han, CPA Representative 22 23 ---oOo--- 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JUNE 26, 2012 4 ---oOo--- 5 MS. RICHMOND: Our next item is H1, Legal 6 Appeals Matters. 7 These items may be taken up separately. 8 We do have a speaker for H1.1. 9 MR. HORTON: Oh, okay. There we go. Um -- 10 MR. HAN: Hi. My name is James Han. I'm the 11 representative for Mr. Eric Guidice. 12 MR. HORTON: Welcome. 13 MR. HAN: Thank you. 14 MR. HORTON: Mr. Guidice, would you please 15 introduce yourself for the record. 16 MR. GUIDICE: I'm Eric -- 17 MR. HORTON: Thank you, Mr. Han, for the 18 introduction. 19 MR. GUIDICE: Thank you, Chairman Horton. 20 My name's Eric Guidice. 21 MR. HORTON: Thank you very much. 22 Mr. Han. 23 MR. HAN: Okay. Um, yes, I have three minutes, 24 so I'm going to try to make it as quick as possible. 25 Thank you. 26 Uh, thank you very much for allowing us to 27 address the Board once again. Uh, we'd like to take 28 these three minutes to point out some flaws in the 3 1 appeals process. 2 Uh, we've been trying to make the case that the 3 out-of-state vendors of these tobacco products are 4 distributors for California tax purposes, uh, because 5 they made in-state distribution; therefore, any and all 6 subsequent sales made by these out-of-state distributors 7 into California are presumed to be distributed in 8 California under Section 30109, making them the first 9 distributor, and therefore, responsible for the tax. 10 Um, we wanted to establish this fact and have a 11 discussion with Appeals and with the staff, but we are 12 unable to do so because they would not address this 13 issue in any of their D&R's, their summaries, or even at 14 the hearing when we had our initial hearing back on 15 February 1st. 16 Um, my client has been, um, deemed to be a 17 consumer in one D&R, a retailer in another D&R. Um, 18 however, when we tried to get a decision on the 19 out-of-state vendors, we are unable to get one. 20 Um, in one of the write-ups by the appeals, uh, 21 we discovered kind of their intent in that they stated 22 this case is not about nexus or the reporting 23 obligations of the out-of-state vendors. It is about 24 distributor having untaxed tobacco products. 25 Um, we very strongly disagree with this 26 interpretation of Section 30109. 27 If -- if their interpretation is correct, um, I 28 don't understand why the Section 30109 would address 4 1 shipments of tobacco products into California if -- as 2 interpreted by Appeals, if this particular, uh, section 3 of the law addresses in-state distributors having 4 untaxed tobacco products, there would be no need for 5 the, uh, law to address the fact that any tobacco 6 products to be transported into California are deemed to 7 be distributed, according to the law. 8 Um, I believe the purpose of the Appeals 9 Division is to, uh, hear cases and make an unbiased 10 recommendation to the Board. But we can't help but to 11 feel that, you know, they're siding with the Department 12 and, in fact, almost supporting their decision to make, 13 uh, Mr. Guidice the first distributor in the series of 14 distribution that took place from out of state to 15 in-state. 16 And I wrote up several additional briefs -- or 17 I don't know if they're briefs, but -- and requested 18 that Appeals address this issue, making a determination 19 as to whether these out-of-state vendors are 20 distributors by definition or not. But we haven't heard 21 back from them. 22 MR. HORTON: Okay. Um, you're just requesting 23 a, uh -- whether or not, by definition, not necessarily 24 verifying the out-of-state vendors themselves 25 individually, just by definition as an out-of-state 26 vendor, a distributor? 27 MR. HAN: For California tax purposes, yes. 28 MR. HORTON: California tax purpose. 5 1 Mr. Levine. 2 MR. LEVINE: As we said before, it's 3 irrelevant. 4 Petitioner is a distributor. We have 5 recommended an adjustment for the distribution -- the 6 exchanges in this state, which are regarded as a 7 distribution. And the first distribution was by the 8 supplier because those happened in the state. But when 9 they ship them from outside California, the distribution 10 cannot occur until it comes into California. 11 Petitioner was a distributor. He can hold 12 untaxed cigarettes and tobacco products as a 13 distributor. And then when he places them into retail 14 stock or sells them, that's the distribution. 15 Even if he were the consumer and the 16 out-of-state supplier were -- had nexus in California 17 and was obligated to collect the tax, it's just like 18 sales and use tax, Petitioner would still be liable for 19 the use tax, so that wouldn't matter. 20 But in any event, he did not buy this product 21 as a consumer. He bought it to sell it. He was the 22 distributor, and he is liable for that. 23 MR. HORTON: That was a roundabout way of 24 answering it. But -- 25 MR. HAN: No, I don't -- I don't think he did. 26 Because if you look at the instructions on the tax 27 return for a distributor, if -- if Appeals is saying 28 these out-of-state vendors are distributors, um, they 6 1 are required to report sales made to a retailer. We 2 have D&R written by the Appeals section where they 3 declare Mr. Guidice to be a retailer. 4 If we're going to judge these out-of-state 5 vendors on the basis of whether they had a distributor 6 license or did not have a distributor's license, we 7 should treat Mr. Guidice the same way. 8 From year 2000 to end of 2002, he didn't have a 9 distributor's license. From end of 2002 to end of 2005 10 when the audit ended, he was a licensed distributor. 11 The Appeals section -- this is the -- I don't 12 know, beef or whatever, my complaint, that when it comes 13 to dealing with Mr. Guidice, Appeals section is going by 14 what the definition of a distributor is. He's treating 15 him, whether he had a license or not, the same way. 16 But when it comes to the out-of-state vendors, 17 we wanted them to be declared a distributor for tax 18 purposes. Because once we have a distributor making 19 sales to California, how they report their sales and 20 what -- what their obligation is versus what 21 Mr. Guidice's obligation, it differs. 22 If they are considered distributors for tax 23 purposes, their tax return states that they cannot take 24 anything out of their tax return that is sold to an 25 unlicensed distributor, whether he's a consumer, 26 retailer, wholesaler, um -- yeah, right here. I mean I 27 submitted this in several times, if somebody would 28 address that issue. 7 1 Pamphlet 93 specifically states, "the first 2 distributor in series of distribution" -- I guess you 3 could have a distribution where there's several 4 distributors involved, such as in the case. I 5 personally believe these out-of-state vendors are 6 distributors. So we have more than one distributor 7 involved here. 8 If you have two unlicensed distributors making 9 sales to each other, who is the responsible party? Like 10 pamphlet 93 states, "the first distributor," which is 11 the out-of-state distributors. And if you take those 12 two considerations -- two -- two of those facts together 13 and read Section 30109 again, it makes sense. That's 14 why they address the issue. Any items that are to be 15 shipped to California is deemed to be distributed. 16 MR. HORTON: Okay. 17 MS. STEEL: Mr. Chairman. 18 MR. HORTON: Member Steel. 19 MS. STEEL: Mr. Levine, can you make it clearer 20 here that from tax period 2000 to 2005, according to the 21 taxpayer's rep, uh, saying that didn't have 22 distributor's license from 2000 to 2004. So if -- 23 MR. LEVINE: I think it was before 2002. 24 MR. HORTON: Mm-hmm. 25 MR. HAN: I think he -- the audit starts 26 from -- 27 MS. STEEL: 2000 to 2005, okay. 28 MR. LEVINE: He was licensed in 2002. 8 1 MS. STEEL: Two. 2 MR. LEVINE: The audit -- 3 MS. STEEL: So there's two years period, and 4 then those three years after they got the license; how 5 we can look at the difference there then? 6 MR. LEVINE: As -- my understanding is 7 Petitioner held untaxed tobacco products. That's pretty 8 much the end of it. 9 Should he have been licensed? Yes. Should 10 out-of-state -- licensed out-of-state distributors have 11 sold to him if he was unlicensed? Probably not. That 12 is not something that I've, uh, investigated. 13 MS. STEEL: Mm-hmm. 14 MR. LEVINE: But if tax had been paid, he would 15 be entitled to a credit. But there's no evidence that 16 tax was paid. He was -- he held -- before he was 17 licensed, he was not entitled to hold untaxed product. 18 But that doesn't mean he gets off the hook for it. 19 MS. STEEL: Right. Right. 20 MR. LEVINE: He held untaxed product, purchased 21 from out-of-state. 22 And I think there's a little confusion -- and 23 I'm not familiar with the returns -- but I think there's 24 probably a little confusion about events happening in 25 California versus being shipped from out-of-state. If 26 all these events happened in California, we'd have -- 27 MR. HORTON: Different story. 28 MR. LEVINE: -- some different events, 9 1 different results here. 2 MS. STEEL: Thank you. 3 MS. MANDEL: Mr. Horton? 4 MR. HORTON: Yes. 5 MS. MANDEL: So, my understanding is that the 6 concern of the Petitioner is over the product that is 7 shipped from out of state into California, shipped from 8 out of state by the out-of-state companies sending the 9 stuff into California. Um, the out-of-state company had 10 some types of agents or representatives here who made 11 some exchanges, and so those exchanges that were made in 12 California were treated as distributions, I think, by 13 the company, the out-of-state company. 14 But the question is about the product that is 15 shipped from out of state to Petitioner. And my 16 impression was that the Petitioner was basically saying 17 that's a distribution by the out-of-state company. But 18 it's being shipped from out of state into -- I mean, 19 that's what I took them to be saying is they think 20 that's the first distribution of this product that's at 21 issue. 22 MR. LEVINE: 30008 distribution includes the 23 sale in this state, the use in this state, or placing of 24 the product in a vending machine or retail stock for 25 sale to consumers. 26 So we're talking about events in the state. 27 When you ship it from outside the state, it cannot be -- 28 with the normal title passage, you cannot have a 10 1 distribution in this state when the event that would be 2 the distribution occurred out of state. 3 On those -- in those circumstances, when the 4 shipment is to a consumer and the shipment is by a 5 licensed seller, that licensed seller has to collect the 6 applicable tax from the consumer -- 7 MS. MANDEL: Mm-hmm. 8 MR. LEVINE: -- and remit it to the Board. The 9 consumer doesn't get off the hook until it's paid to a 10 licensed vendor -- 11 MS. MANDEL: Right. 12 MR. LEVINE: -- or the Board, just like sales 13 and use tax. 14 So -- 15 MS. MANDEL: And that -- that's my 16 understanding. So what you're saying is if -- if 17 it's -- out-of-state company is a licensed distributor, 18 treated as a distributor, that anything they ship into 19 the state, you're thinking, is the first distribution. 20 That's how I understood it. 21 And what staff's explaining is distribution is 22 an act that takes place in the State of California, 23 either using, selling -- ooh -- well, we are talking, 24 kind of, a drug. Using, selling, or, um, placing it 25 into your retail stock is the act of distribution, not 26 the shipping into the state by the out-of-state guy. 27 MR. HAN: I do not disagree with Mr. Levine. 28 MR. HORTON: Or the distributor. 11 1 MR. HAN: Uh, James Han. 2 MR. HORTON: No, my apologies. 3 MR. HAN: Do I get to answer, or -- 4 MR. HORTON: Yeah, sure. 5 MR. HAN: Okay. 6 MR. HORTON: I just wanted to add to that 7 caveat. 8 MR. HAN: I do not disagree with Mr. Levine's 9 interpretation of 30008. The distribution -- that law 10 specifically state everything in-state, in-state, 11 in-state. 12 I disagree with Mr. Levine that defining these 13 out-of-state vendors as distributors for tax purposes 14 are irrelevant. I strongly disagree because not only 15 does Section 30008 define what a distribution is, if you 16 are a distributor, there's certain obligations you have 17 under the law, instructions in the tax return, in 18 accordance to the pamphlet. Because if they are a 19 distributor, we wouldn't be having this discussion. 20 That's my -- what my complaint about this process -- the 21 audit process is. 22 Staff taking the position of Mr. Levine right 23 now, telling us, "Hey, this is what it says. You owe 24 the tax. I'm done." That -- that, I can accept. But I 25 believe the job of Appeals is addressing the issues 26 that's brought up. 27 If these people -- or -- these out-of-state 28 vendors are deemed to be distributor, we need to have a 12 1 discussion with those people defined as a distributor. 2 Because then we can have a discussion as to what 3 Mr. Guidice's obligation is and what their obligation 4 is. But every time we try to have that discussion, he 5 just brings it back to 30008. 6 MS. MANDEL: That -- that sounds like a future 7 discussion at some level in terms of what -- how you've 8 expressed it, Mr. Levine. Because, as I understand it, 9 how you've expressed it, is that even if the 10 out-of-state guy's a distributor, um, and may have, you 11 know, filed his return however he may have filed his 12 return, that when the product is being sent into 13 California to someone who's allowed to hold it, or maybe 14 even not allowed to hold it, and they do whatever they 15 do with it in California, that person in California has 16 a tax obligation that arises. And that it's only if 17 they can show that they paid it or that the product was 18 paid, that their tax obligation goes away. That there's 19 sort of a -- maybe the guy from out of state should have 20 reported something and collected something. But if he 21 didn't do it, you're basically saying the Petitioner, 22 um, even on a go-forward basis from an out-of-state 23 distributor would be on the hook. 24 MR. LEVINE: That's correct. 25 MR. HORTON: Yeah. 26 MS. MANDEL: Okay. 27 MR. HORTON: I mean -- 28 MS. MANDEL: I just wanted to make it clear 13 1 because there was so much, uh, confusion. At least, you 2 know, discussion. Maybe not confusion, but I want them 3 to under -- I want everybody to understand what 4 everybody else is saying. 5 MR. HORTON: Yeah. 6 The, um, Commerce Act first sort of prohibits 7 us from controlling out-of-state activity where the 8 transaction took place out of state, which is part of 9 the logic and -- and the thought process of trying to 10 define what happens here in the State of California. 11 Unless one can establish some nexus here in the State of 12 California where an out-of-state distributor in fact 13 distribute -- transferred it to his California base, uh, 14 company or warehouse or something like that and then 15 transferred it to your -- to your client, you might 16 have -- your argument at that point would have some 17 merit. 18 I think what they're trying to -- or what they 19 have sort of articulated is that, uh, the 20 out-of-state -- the transaction took place out of state, 21 title passed out of state; not that that's significant, 22 but it did. And therefore, the distributor here in 23 California is the one that's held liable. 24 MR. HAN: Well, Chairman, we have a combination 25 of the two. We have the same entity having sales -- 26 in-state sales reps selling, accepting orders, making 27 exchanges, authorizing returns, accepting returns. Next 28 week, when the next order goes in, that particular 14 1 shipment is shipped from FOB shipping point, New Jersey, 2 Florida, wherever that point is. 3 So we have a combination of the two. And where 4 we differ with Appeals is that when you have that 5 combination of the two, once you declare that 6 out-of-state vendor as a distributor, then those 7 transactions where the Department is trying to segregate 8 transaction-by-transaction basis -- that one is taxable 9 to you, this one's taxable to you, and they're going 10 back and forth -- if you declare the out-of-state vendor 11 as distributor for California tax purposes -- 12 MR. HORTON: Oh, I see your argument. 13 MR. HAN: -- then the answer is a different 14 conclusion. 15 MR. HORTON: Not that I agree, but I see it. 16 I -- I'm -- 17 MR. HAN: Yeah. I -- I -- I just hope you 18 understand our point in that, our frustration. Because 19 that kind of discussion we should -- we should have been 20 having, we never got to it. 21 MR. HORTON: So -- I -- I don't want to, uh, 22 try to speak for you, but are you arguing that, um, by 23 virtue, that they have the California salespeople, that 24 that somehow establishes nexus, and therefore, the 25 out-of-state vendor is actually operating in California? 26 And therefore -- 27 MR. HAN: I think the distinction between -- 28 MR. HORTON: -- a distributor in California? 15 1 Is that -- 2 MR. HAN: Sort of, in that there's a 3 distinction between sales and use tax and excise tax. 4 Sales -- sales and use tax you have physical presence. 5 You have salesperson. You're done. 6 MR. HORTON: Right. 7 MR. HAN: Everything subsequent to it is you 8 got to report tax. You're responsible for it. 9 On the excise tax, I think what Mr. Levine and 10 the Department is saying all this long is that not only 11 do you need nexus but you need the actual transaction to 12 take place in California. And that's what I think 13 they're trying to say all the time. 14 I agree, to some degree. But if these people 15 are licensed distributors with reporting obligations, 16 there are elements in the return in the pamphlet where 17 it makes them the responsible party, not the purchaser 18 here, especially when he was not a licensed 19 distributor. 20 The case in point -- I wanted -- I know he 21 wants to say something. But see, back in May of 2010 -- 22 MR. HORTON: Aw, he doesn't want to -- he's 23 just calm and relaxed. 24 MR. HAN: Back in May of 2010, after we had 25 our initial hearing, uh, one of the members of the 26 Appeals section, uh, requested a legal opinion on this 27 matter. This is more than two years ago, this memo. 28 Okay. Requesting, with this nexus what are we supposed 16 1 to do? 2 Because, like you said, Appeals, for two years, 3 was telling us, it's irrelevant, it's irrelevant. We're 4 saying it's not irrelevant. That's the -- we need it 5 answered before we can move on. But they just keep on 6 going back to the basic -- it's like telling a 7 photographer, hey, that's -- or a photographer telling 8 people that's not tangible personal property, it's not 9 taxable or something -- that kind of an argument. I 10 don't want to have that argument. I want to just move 11 on to the next level, but we can't. 12 MR. HORTON: Yeah. Unfortunately, we probably 13 have to, uh, change the -- not only the federal law, uh, 14 in order to -- for you to be -- your argument to be able 15 to stand here in California -- and believe me, there are 16 a lot of people that would like to -- I mean, to say 17 that that holds true. 18 Further discussion, Members? 19 Hearing none, um, is there a motion? 20 MS. YEE: Want to take this under submission? 21 MR. HORTON: Take it under submission? 22 MS. YEE: Yeah. 23 MR. HORTON: Uh, Member Yee moves to take the 24 matter under submission. Member Steel seconds. 25 Without objection, Members, the Board will take 26 your matter under consideration, and, uh -- 27 MR. HAN: Thank you. 28 MR. HORTON: -- we'll share with you the 17 1 results of our decision later on, uh, in written form. 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 June 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: July 13, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 19