1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 22, 2012 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 NORTHBAY WELLNESS GROUP 14 NO. 526954 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 26 27 Reported by: Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Michelle Steel Vice-Chairwoman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief Board Proceedings Division 15 16 For Board of David Levine Equalization Staff: Tax Counsel IV 17 18 For the Department: Scott Claremon Tax Counsel 19 Bradley Heller 20 Tax Counsel IV 21 Kevin Hanks Chief, Headquarters 22 Operations Division 23 For Petitioner: Dona Frank Witness 24 James Carroll 25 Representative 26 Lisa Gygax Attorney 27 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 22, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, our next item. 6 MS. RICHMOND: Our next item is C7, Northbay 7 Wellness Group. 8 Please come forward. 9 MR. HORTON: Mr. Levine, as the taxpayer comes, 10 would you introduce the issues in this case? 11 MR. LEVINE: The issues in this petition are 12 whether petitioner's sales of medical marijuana were 13 subject to sales tax; whether petitioner can avoid that 14 tax by shifting the liability to its former attorney and 15 board member; and whether the tax should be relieved 16 based on oral advice petitioner alleges it received from 17 the Board. 18 I note also that a failure-to-file penalty has 19 been imposed, but no request for relief has been 20 submitted. 21 MR. HORTON: Okay. Uh, would the petitioner 22 please introduce themselves for the record? You will 23 have ten minutes to make your presentation. 24 Please note that Mr. Levine has indicated that 25 the -- we've yet to receive any position on the 26 negligence penalty. 27 MS. GYGAX: Actually, we got a call two days 28 ago that we were going to get 20 minutes. So I don't 3 1 know why that didn't get to you. 2 MR. HORTON: Okay. Um -- 3 MS. GYGAX: But we will try to be brief because 4 I think we can shorten it. 5 My name's Lisa Gygax. I represent Dona Frank, 6 uh, who is a former member of Northbay Wellness Group. 7 Beside me is Jim Carroll, a representative for Northbay 8 Wellness Group who's going to cover, uh, two issues. 9 And, uh, Dona Frank, my client, who's a former member of 10 Northbay Wellness Group is here also. 11 And the reason I think we can make it shorter 12 is, um, we have placed many things in our initial 13 petition, because under Preston we don't want to waive 14 anything because we didn't present it at a hearing or 15 argument. 16 I, uh, spoke with counsel, and he assures me 17 the scope of this is simply the amount of the tax as 18 audited, and these issues Mr. Levine talked about which 19 are whether it's taxable, notice, uh, whether it 20 shift -- it shifts to Mr. Beyries. And we'll just limit 21 it to that as long as we're not waiving any other issues 22 that were put in our initial petition. 23 Am I correct? 24 MR. HORTON: You're -- 25 MS. GYGAX: And I'm going to turn it over to 26 Mr. Carroll for the first two issues. Thank you. 27 MR. HORTON: You are correct. 28 MR. CARROLL: Thank you, Mr. Chairman, Members 4 1 of the Board. 2 One of the main issues for Northbay Wellness 3 Group was the -- the notice given to taxpayers of the 4 taxation under the sales and use tax of medical 5 marijuana. 6 Medical marijuana was not taxed prior to -- or 7 when they became organized as a collective. Medical 8 marijuana was designed by the tax -- by the initiative 9 process to be a medical use, referred by a doctor. And 10 it is my understanding that the word "prescription" was 11 not used in order to avoid trouble with the federal DEA 12 and the -- the federal regulations of prescribing drugs. 13 That's why the only reason the word "recommendation" is 14 used. But it is still a written recommendation from a 15 doctor to use marijuana as a medicine. 16 The policy change occurred when the BOE 17 determined and started taxing it. And they don't even 18 call it a sales tax. They call it a use tax because of 19 the wording of the -- the voter initiative and the 20 subsequent legislation that was passed. 21 Um, this -- this policy change was never 22 noticed to the taxpayer. Uh, our taxpayer in our case 23 had gone to the Board and requested a seller's permit 24 and was denied. There was no notice that the -- that 25 the BOE changed its policy and was issuing permits. Um, 26 and so that is one of the main issues for us. 27 The -- the issue with Mr. Beyries and -- 28 becomes so convoluted to that point because not only was 5 1 he the attorney for the Northbay Wellness, he was a 2 board member and he had lied to the board and he had 3 said that they were a nonprofit organization when he 4 didn't file the paperwork. 5 He incorporated the business; he lied on the 6 incorporation papers. He signed the documents. None of 7 the other board members were aware of this. They did 8 not authorize him to sign their signature and they 9 obtained a malpractice judgment against him, and the Bar 10 is currently investigating him and has filed charges 11 against him. 12 And so these are the issues why our taxpayer 13 and Northbay Wellness was not aware of the change in 14 policy. They had done their diligence. They had gone 15 to the Board. They were denied the permit. They were 16 told they couldn't collect the tax. 17 They didn't -- they kept impeccable records. 18 There's no denying that the sales occurred. There's no 19 denying -- they're not challenging the amount of the 20 assessment. They're just challenging whether they were 21 noticed they had to collect this on behalf of the 22 purchasers. 23 It goes into the whole other issue of whether 24 this was sales or not because it is a collective. These 25 are members. By law, they cannot sell their product. 26 These are members that are exchanging. There's cost 27 recovery, and so there's those issues as well that have 28 been briefed. 6 1 But because of the -- the taxpayers have done 2 everything they could do, in -- the Appeals Division 3 says that they filed tax returns showing that they owed 4 the taxes. But what they failed to notice, these tax 5 returns were amended three years after the fact because 6 of the liability to the federal government. They didn't 7 acknowledge it until after they had already been audited 8 and these determinations were made. They had no choice 9 but to list them as a possible -- just because they 10 listed them on a tax return, they're listing them as a 11 possible liability. They're not admitting that they 12 owed the tax at that point. They had never not said 13 that they -- they've never agreed to the tax. 14 The, uh -- the Board -- the Appeals Division 15 also says that the permit was effective on October 1st. 16 But what they don't put in their -- in their response is 17 that was retroactively assigned in 2009, I believe. And 18 it wasn't signed by anybody by Northbay Wellness. It 19 was just an arbitrary seller's permit that the Board 20 assigned to them. 21 They had attempted to get a seller's permit and 22 were denied. They never -- Northbay Wellness doesn't 23 even exist at this point except to wind up its affairs. 24 It -- it can't dissolve while there are liabilities. 25 MS. GYGAX: Thank you. I'm going to cover some 26 procedural issues. 27 Um, in dealing with the BOE, we've had a number 28 of issues. One is we've, twice now, subpoenaed a 7 1 witness to show. And I don't believe he's here; Michael 2 Kenneth Beyries. 3 Michael Kenneth Beyries is highly significant. 4 He signed all the incorporation papers. Now, there's a 5 disk that's been presented because I've learned that 6 you're paperless. There were nine turned in this 7 morning. 8 We actually asked for an entire copy of the 9 file. First we asked by letter. Then we came here. 10 Then we did it by a form that we were given, to the 11 Disclosure Department. We got that seven weeks later; 12 it didn't contain the whole file. 13 The disks that you have today has that which we 14 were given -- which includes a very strange, sinister 15 magazine cover which I have no idea why that's in 16 there -- it's missing all the audio files, and it's 17 missing portions of Mr. Beyries' deposition. 18 So on this disk today, I've given you 19 Mr. Beyries' deposition where he both admits that he 20 signed the names of these other people to form that 21 corporation Northbay Wellness Group. He kept all the 22 records and received all the mail. 23 Northbay Wellness Group fell apart when he 24 resigned. He resigned in June of 2006 but didn't give 25 them any records until after they ceased. They ceased 26 in December of 2006. 27 He admits in the deposition provided to -- and 28 it's excerpts so you wouldn't have to read the whole 8 1 thing -- uh, that he admits that in late January 2007 he 2 turned over some of the records. That's when they 3 discovered the forgeries. That's when they discovered 4 they're not a 501(c)(3) as he had told them. That's 5 when they discover many things about Mr. Beyries and 6 start looking around. 7 When the Board sent out Special Notices in 8 February of 2007, they were then concerned about the tax 9 returns they had filed. 10 On the disks that you were given this morning 11 are the 990s. These are very, very significant because 12 990s are tax returns only for nonprofit corporations 13 that are tax exempt. That's how much these people 14 believed they were doing every step as directed. And 15 now they have to amend. And now they have a CPA 16 sending -- now you owe federal income tax. Now you owe 17 all these other federal fees. Now you owe all these 18 other state fees. And, by the way, the BOE Special 19 Notice, you better write that down as a payable because 20 they've now sent you a Special Notice. 21 Those are the amended returns that get filed 22 in, uh, I believe late 2007/2008, that your staff is 23 referring to. So, when you look at the history and the 24 procedure, your file is either incomplete or we were 25 never provided the whole file, which is -- disturbs me. 26 I think that there's so much professional about 27 the BOE -- uh, I must admit this is the first time I've 28 dealt with your agency -- but there's one large thing 9 1 missing; you have no endorsement procedure so that when 2 someone files something, they can show they filed it. 3 Every time we go to file something, we wait in 4 Santa Rosa and they go, "Well, we don't know if we're 5 going to take this. Maybe you need to send it to Santa 6 Rosa -- to Sacramento, but we don't know who to send it 7 to in Sacramento." And we send stuff into the grand 8 abyss. 9 We've presented stuff at hearing and hundreds 10 of pages are not in their file. And if they are, they 11 didn't turn that file over to us. 12 There's no docket, to show what's in a file, 13 that anybody can get ahold of. And it really ends up 14 wasting your time and the staff's time because now 15 you're going to review stuff that might already be in 16 the file that you reviewed; but I'm so concerned you 17 don't have it, I've had to give it to you again. And I 18 still have no way to prove, even today, that I gave it 19 to you because there's no way to get anything 20 endorse-filed. 21 One thing is new on the disk, brand new; and 22 that is that the Bar has brought charges against 23 Mr. Beyries for his actions against this group, this 24 collective. And this Board has been faced with many 25 municipalities in many parts of this state, cities, 26 counties, with the fact that there was no state-wide 27 law. 28 The voters passed medical marijuana with the 10 1 purpose of medicine. I mean, you can play with meanings 2 of words and try to pretend it's a remedy. Go to the -- 3 the store. There's not a single thing that you can buy 4 over the counter that's called a "medicine." It's a 5 medicine. 6 Marijuana is a medicine. Even the DEA calls it 7 a drug, and they give out Marinol because it's a 8 medicine. 9 The problem is, is that the BOE, like the 10 cities, like the states, and like the brave people who 11 are actually trying to do everything right and 12 aboveboard, the law has been totally unsettled from its 13 inception in 1996 when the voters passed it. The BOE 14 did nothing as far as a policy that anyone can find 15 until October 2005, unfortunately for these taxpayers. 16 They went to the Board in March and April of 2005 and 17 asked for a permit and there were none available. 18 Of course the -- the BOE admits this. One of 19 the things on the disk is a recording of the January 20 13th meeting where two BOE auditors came to a meeting, 21 that they asked for, and tried to get Ms. Frank to sign 22 a retroactive application for a permit, for a business 23 that was already closed, that never collected the tax, 24 to shift the responsible party to her. Of course they 25 didn't quite say it that way. Listen to the tape 26 yourself; it's 16 minutes long. But you will hear, they 27 admit that they would not give her a permit at that 28 time. 11 1 MS. RICHMOND: Time has expired. 2 MS. GYGAX: The twenty minutes has expired? 3 MR. HORTON: No, the ten minutes has expired. 4 MS. GYGAX: We -- I have the audio message here 5 that we were granted ten more minutes. The BOE called 6 me. 7 MR. HORTON: I'm not conscious of that. But 8 why don't we allow you additional time to finish. 9 MS. GYGAX: I -- I will move it on. I will 10 move it on. 11 Please read the Bar charges. They're highly 12 significant. It supports the position that we've had 13 all the time. 14 Also, Northbay Wellness has had no assets, and 15 we've been trying to settle. Without any assets, it's 16 hard. We now have an asset, and because we're beyond 17 the time to settle with the 45-day rule, we couldn't try 18 to work that out. 19 The Bar is -- when the disbarment occurs, 20 Northbay Wellness is going to be in charge -- entitled 21 to the funds from the, uh, wronged client fund. And 22 they have been wanting to assign the judgment for 23 $349,000 against Mr. Beyries from March of 2010 and the 24 trade secret theft judgment from July of 2010 against 25 Mr. Beyries and his group Green Coast Care Group, 26 another dispensary he started, and the BOE hasn't wanted 27 the assignments. But they have been making every 28 effort. Those judgments are on that disk, and I brought 12 1 certified copies if you want to verify those for any 2 reason today. 3 So, look at the history of when things happened 4 because these people made every effort. They did 5 exactly what you really want a taxpayer to do. They 6 hired a professional. They went to your Board. They 7 tried to follow every rule. Their reporting is 8 impeccable. Look at the report. Not a dime off. 9 Nothing. 10 And yet, unfortunately, in the meeting in 11 Jan -- in January of 2009, two years after they shut, 12 they had already predetermined the conclusion of the 13 audit before it happened for successor interest and 14 responsible party? And they're already trying to get 15 Ms. Frank to sign an application for a closed entity. 16 It is really hard to work under those 17 circumstances for taxpayers who are trying to follow 18 rules and feel pretty shook down. Ms. Frank has been 19 honorable in everything that she has done. 20 The 990s show that there was no admission that 21 the tax was owed. It was discovered long after they 22 were closed and amended returns had to recognize your 23 2007 February notice. 24 These people have done, really, an exemplary 25 job of trying to bring the will of the taxpayers who 26 were the voters who prop -- who passed Prop 215 into 27 being. And they really should be respected in 28 the equitably. 13 1 The nonfiling penalty, I am going to ask that 2 it be relieved, because the nonfiling really has to do 3 with the Board not having a way. The Board's policy now 4 is still -- completely controverts and is in opposition 5 to the Health and Safety Code that says you can't sell 6 marijuana. 7 When you look at plain language use of law that 8 sales are not permitted, you need a waiver in order to 9 give the permits. You're kind of announcing that 10 they're medical marijuana people, even if they were 11 using a different name. 12 I remember in the Army -- I was in the Army for 13 23 years. And every time we filled out a -- a -- an 14 excuse for physical training for a woman and we put 15 "unstated reason," that meant she was pregnant because 16 there was no other reason to have a unstated reason. 17 The same is through your permit process where 18 they have the waiver. There's no other waiver. We all 19 know what's going on, a federal/state conflict that's 20 cracking down, that's raiding, that's tearing people 21 apart and even taking the State's money. 22 But if you don't see the equity and the 23 unfairness that they tried to get the permit and were 24 given the wrongful information, and that they had hired 25 professionals and -- and you crucify them for that time 26 period where they happen to be in the middle of a policy 27 flip, of a change -- not a change in law by the 28 legislature but by the Board -- you drive people 14 1 underground and they don't want to follow your rules 2 anymore. And I think the ramifications are much bigger 3 than just the people in this room. 4 Thank you for your time. 5 MR. HORTON: We'll now go to the Department. 6 The Department will have, uh, an equivalent amount of 7 time -- we would encourage the ten minutes -- uh, to 8 make your presentation. 9 Please commence with your introductions. 10 MR. CLAREMON: Thank you. 11 Good morning, Chairman Horton, Members of the 12 Board. 13 MR. HORTON: Good morning. 14 MR. CLAREMON: I'm Scott Claremon with the 15 Legal Department. With me are Bradley Heller and Kevin 16 Hanks representing staff. 17 We concur with the recommendation of the 18 Appeals Division that petitioner's sales of medical 19 marijuana are subject to tax and are not exempt as sales 20 of medicine. 21 Uh, petitioner operated a medical marijuana 22 dispensary during the audit period and made sales in 23 medical marijuana without, uh, reporting or paying tax. 24 As sales of tangible personal -- tangible personal 25 property taking place in California, these sales are 26 subject to sales tax. They do not qualify as exempt 27 sales of medicine pursuant to either Section 6369 or 28 Regulation 1591 because the marijuana was not dispensed 15 1 by a licensed pharmacist or furnished by a licensed 2 doctor, dentist, podiatrist, or health facility. Um, so 3 those sales are subject to tax. 4 To address a couple of the other issues that 5 have been discussed, um, primarily what -- and what I 6 did discuss briefly with, um, petitioner's 7 representative earlier was that this hearing is solely 8 regarding the tax liability of the corporation, um, 9 Northbay Wellness Group. And it's not regarding any 10 other entity or any individual. At this time, it's the 11 only determination that exists for this liability. 12 Um, also, there's never been any allegation or 13 any contention by the Board that, um, petitioners 14 applied -- or that the seller's permit that's at issue 15 here is what petitioners applied for. We recognized 16 that that was signed after the fact, just as an 17 administrative tool, to assign the liabilities during 18 the audit. 19 Thank you. 20 MR. HORTON: On rebuttal, please. 21 MS. GYGAX: Really briefly, two things. Uh, 22 one, remember, this wasn't really a passed law, the 23 sales tax policy change. It appears for the first time 24 that we could find it in Annotation 410.0178 which is 25 provided on the disk. And we only found that in 2010, 26 uh, when the trial of Mr. Beyries happened in civil 27 court. 28 Uh, last thing that I would like to bring to 16 1 your attention is: There were no filings; there was no 2 permit; there was no knowledge; and there was no 3 collection of the tax in taking. This is clearly a case 4 where there was no knowledge and an attempt made, and 5 that's really where the issue lies here. 6 I really appreciate your attention. Have a 7 good day. 8 MR. HORTON: Uh, further testimony? 9 MR. CARROLL: No, Mr. Chairman. 10 MR. HORTON: Okay. 11 Discussion, Members? 12 Member Yee. 13 MS. YEE: Thank you, Mr. Chairman. 14 Um, I wanted to understand a little bit better, 15 uh, what was reflected in the, uh, federal tax returns, 16 if I could. Uh, I think, uh, you had stated that, um, 17 the Northbay Wellness Group does file 990s or did file 18 990s? 19 MS. GYGAX: It did originally because they 20 believed they were a 501(c)(3) organization. 21 MS. YEE: Okay. And for what periods did they 22 file? 23 MS. GYGAX: 2005 and 2006, the only two years 24 that they existed. 25 MS. YEE: Okay. And then, um, the amended 26 returns, the -- the corporate returns, I guess, that 27 were filed subsequently. 28 MS. GYGAX: Over a year later. 17 1 MS. YEE: Okay. And I see the dates of that. 2 Explain to me the rationale why that change 3 took place? 4 MS. GYGAX: Well, after Mr. Beyries finally 5 handed them their file in late January of 2007 and they 6 realized that the -- the corporate documents had all 7 been forged, and they started looking to see if they 8 were really a 501(c)(3), they learned from the IRS 9 subsequently that no Form 1023 had even been filed by 10 Mr. Beyries, and that the likelihood of getting any kind 11 of a -- a way to file it late -- there's a special 12 waiver for late filing of it -- didn't justify under 13 their rules. And so that meant that, even though it 14 said "501(c)(3)" in the forged document corporate filing 15 of Northbay Wellness Group on July 12th of 2005 that 16 Mr. Beyries did file, um, they really weren't. 17 And so, once you are aware that you're not 18 tax-exempt, you have a real duty to the IRS, you have 19 all these other agencies coming at you, uh, including 20 federal unemployment and everything that -- that 21 tax-exempt organizations don't normally pay that you now 22 must do. And believe me, because we alerted the IRS 23 about the 1023, they alerted us that we had to amend. 24 MS. YEE: Mm-hmm. 25 MS. GYGAX: So that's when all of this comes 26 down. Mr. Beyries is gone. The place is closed. 27 Everything's dissolved. All the mail -- Mr. Beyries had 28 all the mail forwarded to Ms. Frank, and that's why 18 1 she's been showing up, responsibly, trying to deal with 2 things. 3 MS. YEE: Mm-hmm. 4 MS. GYGAX: That's when the accountant said, 5 "When you have a payable -- when you have an agency that 6 says you have a payable, you'd better list it with IRS." 7 Because when all of this hits, that's where all the 8 facts have to be. Even if you dispute that tax, you 9 must list it as -- as a payable. That's how it ends up 10 there. That's where you see that. Not initially. 11 The 990s are on the disk that I gave you today. 12 And hopefully you'll take this under submission and look 13 at some of that material and listen to that tape. But 14 you'll see the 990s for yourself there. 15 MS. YEE: Okay. Um, you see kind of the 16 discrepancy that we -- we're are looking at? 17 MS. GYGAX: I do. It's not a simple 18 situation. 19 MS. YEE: No, I -- I understand that. And I'm 20 just, um -- 21 MS. GYGAX: I mean, it's even worse because the 22 IRS has a superior lien. And it has a superior lien, in 23 their own words, in the cases -- there's a case in the 24 listing of research cases that I've provided you on that 25 disk, and it's a 2007 IRS court case that even sales tax 26 from the BOE are not considered a business expense under 27 IRS Code 280E. 28 MS. YEE: Right. I'm aware of that. 19 1 MS. GYGAX: And so what you have is these -- 2 these kind of conflicts that, while there's one federal 3 state conflict, the intertwining, and the number of 4 conflicts that you keep hitting is amazing. 5 MS. YEE: No, I'm fully aware of what we're 6 dealing with, with the Feds. I'm -- what I'm trying to 7 get at is, um, in terms of how you represented the, uh, 8 sales tax treatment in the federal returns, um -- 9 MS. GYGAX: As a payable. As a tax paid 10 payable. 11 MS. YEE: Yes. So, um -- so claimed deductions 12 for sales tax not including gross receipts. 13 MS. GYGAX: Right. 14 MS. YEE: And then you also had the, um -- the 15 payments as accrued liabilities. And yet, um -- I mean, 16 certainly sitting here, the conflict obviously is that, 17 um, you know, there were no payments and no tax 18 collected, it sounded like. So -- 19 MS. GYGAX: No tax ever collected or known 20 about. And so with the, uh -- the CPA's that came in, 21 that's where we went. And then, of course, if we would 22 prevail at any level, then we could file for a special 23 petition to the IRS to amend those returns late. 24 MS. YEE: Okay. I -- I understand what you're 25 trying to do in terms of covering your bases. But it 26 really doesn't help our situation here in terms of how 27 to treat the liability for state tax purposes. 28 Uh, I -- I do want to just mention, uh, I will 20 1 acknowledge that there was a lot of confusion with 2 respect to the application of tax for, uh, medicinal 3 marijuana, uh, that was provided to clients at 4 dispensaries. But I will also say that the Board did a 5 tremendous amount of outreach, uh, and I personally did 6 a tremendous amount of outreach on this issue. 7 And there were dispensaries who really were 8 willing to come and understand what the rules were. And 9 there were others who really chose to remain underground 10 about what the rules were. And it was a very, very 11 difficult time. And I don't, uh, put it upon any, uh, 12 dispensary owner in terms of what they chose to do at 13 that time. But, uh, this Board did do a tremendous 14 amount of outreach because we recognize that, uh, there 15 had been some disparate treatment prior to that time. 16 MS. GYGAX: One of things we tried to do in 17 getting the whole file is we wanted the list of all the 18 dispensary outreach addresses, because we wanted to give 19 that to the State Bar because you may have outreached to 20 Mr. Beyries. He got all their mail. 21 MS. YEE: Well -- 22 MS. GYGAX: I mean, that's kind of how the 23 fraud works. 24 MS. YEE: -- that was one of the difficulties 25 in the outreach is that we worked through some of the 26 major associations. And the ones who were obviously 27 identifying themselves, uh, we did reach out to. But, 28 uh, it was a very challenging time at that point, as you 21 1 well remember. 2 MS. GYGAX: But the unsettled nature of that, 3 when you think about vagueness of law and due process, 4 is that the taxpayer uses plain language and they have 5 to use the advice of -- of going to the agency. And 6 that's what these people did. 7 And I can see, after 2007 when -- when I myself 8 saw your outreach and outreach Special Notices of the 9 Board, um, and actually saw counties that were posting 10 them by then. But before that February two seven -- 11 2007 Special Notice and that incredible mailing effort 12 and -- and dissemination, there really was nothing 13 settled. People had really still no idea. 14 MS. YEE: Um, I guess what I'd say, I'd be more 15 sympathetic if the sales tax had been treated 16 differently, um, with respect to the federal return. 17 Um, I just, uh -- 18 MS. GYGAX: I'm sorry. I have no answer for 19 you -- 20 MS. YEE: I know. 21 MS. GYGAX: -- because I'm not a CPA. 22 MS. YEE: But I understand the motivation in 23 terms of why, um -- uh, they were reflected as such 24 on -- on the, uh, amended returns. 25 Um, to the Department if I could. Um, could 26 you just, uh, enlighten us a little bit about the 27 history, about the seller's permit and, um, when it was 28 issued and why it was issued at the time it was? 22 1 MR. CLAREMON: Um, the seller's permit was -- 2 was issued during -- while the audit was ongoing. Um, I 3 don't have the exact date in front of me, but that 4 was -- the audit was, um -- I think the audit report was 5 issued in November of '09. 6 Um, and basically when -- you can't do -- you 7 can't assign, um, liabilities to specific reporting 8 periods under just an arbitrary account number -- 9 MS. YEE: Mm-hmm. 10 MR. CLAREMON: -- like you would for a 6829 11 liability where you already have a lump sum and you can 12 just add it as a lump sum. 13 Here they were actually going back using the 14 taxpayer's records to assign the liabilities to each 15 reporting period. And to do that they needed -- they 16 actually needed a seller's account number. 17 MS. YEE: Okay. And what was the period of 18 time prior to this where there was an attempt to apply 19 for a seller's permit and it was rejected? The 20 application was rejected. 21 MS. GYGAX: They applied, um, in March and 22 April, two different attempts, of 2005. 23 MS. YEE: And are we aware of that? 24 MR. CLAREMON: Um, we don't have any -- there's 25 no record that there was actually an application 26 filed. 27 MS. GYGAX: The audio shows that they were 28 aware that they would have been rejected though. In 23 1 that meeting they acknowledge that absolutely none would 2 have been given and then they had no materials to hand 3 out at that time, at the Santa Rosa office. 4 MS. YEE: Okay. 5 MS. GYGAX: And that's Mr. Mark Noack and 6 Mr. Gabriel Green on that audio. They announce 7 themselves very clearly. 8 MS. YEE: So that's March or April of 2005? 9 MS. GYGAX: Yes. 10 MS. YEE: Okay. 11 MS. GYGAX: That's when they made those 12 attempts. The audio meeting is from January 13th, 13 2009. 14 MS. YEE: Right. I understand. Okay. 15 All right. Thank you. 16 MS. GYGAX: They wouldn't even hand them an 17 application for it because they said it would be 18 rejected. 19 MS. YEE: Thank you, Mr. Chairman. 20 MR. HORTON: Sure. 21 Mr. Runner, please. 22 MR. RUNNER: Yeah, just to -- to -- just to 23 clarify a couple of issues. Um, I'm kind of -- this -- 24 this discussion in regards to the -- the corporate 25 filing, the nonprofit versus -- just to clarify, the 26 status of the corporation, whether it's nonprofit or 27 not, what -- what -- what determination would that have 28 made in regards to the, um, the -- the po -- the tax 24 1 liability, if you will? 2 MR. CLAREMON: Uh, it -- regardless of whether 3 it's a for-profit or nonprofit corporation, it wouldn't 4 have made a difference to the taxability of the sales. 5 MR. RUNNER: Okay. Uh -- 6 MS. GYGAX: I can tell you why 7 it's significant, though. 8 MR. RUNNER: Okay. Go ahead. Why do you think 9 it's significant? 10 MS. GYGAX: Well, if one is sitting here 11 telling you that they didn't know, you would look for 12 any kind of evidence, important, substantial evidence, 13 that's material that shows they didn't know. 14 When you file 990s because you think you're a 15 nonprofit, you're pretty serious. You're sending it to 16 the IRS and you're a cannabis dispensary in direct 17 conflict of all of their laws, you're trying to do 18 everything perfect. You've got accountants, you've got 19 lawyers. 20 They were doing everything perfect. And, of 21 course, what happens when the disaster comes out that 22 they're not and they all -- their tax liability changes 23 greatly with the federal government. So every single 24 resource has to go to them because they're facing 25 arrest. 26 So, if you look at intent and you look at 27 timeline, those 990s show perfect integrity and perfect 28 attempt to comply with all rules. 25 1 MR. RUNNER: Well, I guess what I'm confused 2 though is that it does not then create any exemption for 3 the responsibility of the collection of the tax. 4 MS. GYGAX: No, it just shows consistent, uh, 5 ignorance of that rule and that they didn't claim in 6 that -- 7 MR. RUNNER: Did they believe that as a 8 nonprofit they wouldn't be responsible for collection? 9 MS. GYGAX: No, they believed from the BOE's 10 advice that they weren't responsible for the sales tax 11 and collection and because they hired an attorney and an 12 accountant. 13 MR. RUNNER: Let me ask, back to -- to -- to 14 kind of that, on that vein, what else is it -- is -- is 15 the only thing that was sold, uh, or exchanged at 16 that -- at that facility, um, the medical marijuana? 17 MS. GYGAX: Yes, sir. 18 MR. RUNNER: No other equipment, no other 19 tools, no other -- 20 MS. GYGAX: They don't let you. When you go -- 21 MR. RUNNER: I -- 22 MS. GYGAX: -- to get the permit -- 23 MR. RUNNER: What they let you doesn't -- I'm 24 just interested in regards to what it is you did, not 25 what people let you do or not. 26 MS. GYGAX: It's a medical marijuana clinic for 27 a collective. And collective is a closed organization 28 where only the members exist to obtain the benefit of 26 1 the medicine and grow the medicine. It's not a public 2 business. It's not a retail model. And to get a permit 3 to be a dispensary, they limit it, so they can watch 4 what you're doing, to just cannabis. 5 MR. RUNNER: Mm-hmm. Okay. 6 MS. GYGAX: Which, of course, is a nightmare in 7 every other respect. 8 MR. RUNNER: Right. Um -- the issue of the 9 notification, can -- remind me what our notification 10 process was? Because there was a time of ambiguity, 11 obviously. Uh, just -- can you walk through the notice 12 process that we had gone through and the dates of those? 13 MR. CLAREMON: Uh, yeah. Um, the BTC process 14 where we changed our policy with regard to issuing 15 seller's permits was in October of 2005. So there was, 16 um, an interested parties. There were significant 17 number of interested parties from the medical marijuana 18 community involved in that process in the first place. 19 And then between that and February 2007, which 20 was when the first Special Notice went out regarding the 21 change in policy, um, there was significant outreach 22 done -- informal outreach done with those communities as 23 well as this compiling of, uh, the list of people to 24 send the notice to. But the first Special Notice that 25 she -- that, uh, petitioner's representative has 26 referred to went out in February of 2007. 27 MR. RUNNER: Okay. Um -- the, um -- well, 28 back to -- back to the taxpayer and representative. 27 1 Uh, are you -- is -- is -- is -- is that 2 particular organization -- were you part of any other 3 larger organization? You're just an independent -- tell 4 me about your relationship with other -- 5 MS. GYGAX: Northbay Wellness Group was simply 6 a collective of members. They are not -- they don't 7 have dispensary associations. 8 I think what Commissioner Yee and what counsel 9 are referring to is that there are a couple of 10 organizations that exist -- 11 MR. RUNNER: Mm-hmm. 12 MS. GYGAX: -- like the Marijuana Policy 13 Project, uh, NORML, which is a national organization 14 towards marijuana law reform. Uh, there's a couple 15 other organizations. And if you happen to be members of 16 those, perhaps they had outreach. But startup 17 collectives, they're really out in the chaos of the 18 world independently. They're not connected in. They're 19 not trade associations. There's not monthly magazines 20 and newsletters coming to them. 21 You know, like me, as a lawyer, I can't get rid 22 of all that mail. That's not how it works. They're not 23 part of large organizations. They're not connected to 24 each other, clearly, because the whole argument against 25 dispensaries is that they'll get too big and they're a 26 business model. 27 And even SB 420 -- Senate Bill 420 which 28 created the codification of Proposition 215 and then 28 1 later on Health and Safety Code 11377.775 which created 2 collectives and cooperatives to exist as not for 3 profit -- you can't make any profit. There's no 4 shareholders. There's no big giant stacks of money 5 somewhere. There can't be connected to one another 6 because you have to work within your closed cooperative 7 collective. You have to help cultivate; you have to 8 help run it; you have to take the people to the 9 doctor's, or you're not valid. And then we don't really 10 get that defined until the Attorney General guidelines 11 that Jerry Brown put out in 2008. And then he's 12 ambiguous about it still. 13 MR. RUNNER: How -- how -- how many members 14 were in this cooperative? 15 MS. GYGAX: Well I don't have -- 16 MR. RUNNER: At the time of the audit? 17 MS. GYGAX: -- that list. But you have to 18 understand when you say a member, that can be a person 19 who -- who was on chemotherapy for two weeks and became 20 a member, or that could be a person with MS who was a 21 member for the entire time. 22 So when you say numbers, I know that the 23 numbers were over 1600. 24 MR. RUNNER: Okay. 25 Uh, in regards to the material that was brought 26 today, anything -- um, again, I'm -- um, I'm not sure 27 about this. I -- I -- I understand that we have this 28 policy in regards to paperless, but normally we would 29 1 instruct people to bring us copies of things that 2 they're going to present to the Board. 3 Um, so -- 4 MS. GYGAX: We've already filed all of those 5 before. But -- 6 MR. RUNNER: Okay. 7 MS. GYGAX: -- because when I ordered the file, 8 they weren't there, that's why -- 9 MR. RUNNER: Well, my question is, is -- is 10 there anything new in this material that we have not 11 seen before? 12 MR. CLAREMON: Um -- 13 MS. GYGAX: Yes. 14 MR. RUNNER: Well, I'm -- I'm asking -- 15 MR. CLAREMON: As she's described -- as 16 petitioner's described it, the only thing new is the -- 17 I guess, the Bar complaint against -- the Bar action 18 against, uh, Mr. Beyries. Uh, that would be the only 19 thing I haven't seen before. 20 MR. RUNNER: Um, the taxpayer said, "Hey, I 21 asked for the file and I didn't get all the material." 22 MR. CLAREMON: Um -- 23 MR. RUNNER: Tell me how that would work. 24 MR. CLAREMON: There is a -- that would go to 25 our Disclosure, um, Department and they would review the 26 request for information and then produce the file. 27 I've reviewed both the request and the 28 disclosure and the entire file, um -- all the -- all the 30 1 files are in there. There is -- the -- the disk of the 2 January 13th, 2009 meeting was not included in the -- 3 that the taxpayer, uh, gave to us was not reproduced 4 back to them. Um, that's the only thing that I know of 5 that would be in that file that wasn't, uh, given back 6 to the taxpayer in that. 7 MR. RUNNER: And just to make clear, the 2009 8 meeting was a meeting of recollection? Of what they 9 would have done back in 2000 and -- what year -- seven? 10 MR. CLAREMON: That -- that was a meeting 11 between the petitioner and the audit staff -- 12 MR. RUNNER: Oh, okay. 13 MR. CLAREMON: -- during the audit. 14 MR. RUNNER: Okay. Okay. 15 MS. GYGAX: Oh, no, that was way before the 16 audit. 17 MR. CLAREMON: Oh. 18 MS. GYGAX: They called and said, "We want to 19 meet with you." And they didn't tell us why. So they 20 came and met with us and said, "We want you to sign this 21 retroactive permit. We want you to sign a seller's 22 permit." They asked Ms. Frank -- 23 MR. RUNNER: That was -- that outside the 24 audit? That was prior to the audit? 25 MS. GYGAX: They announced that they were going 26 to audit her because she didn't do that. And they gave 27 a conclusion that they were going to assign all the 28 liability to her personally as a successor. 31 1 That was way before the audits. The audits 2 didn't happen for another ten -- nine months. 3 MR. RUNNER: Let me ask, is that -- is that -- 4 is that, um -- are we getting in a definition of terms 5 in terms of when an audit starts and when an audit 6 concludes? Um, was that the beginning of an audit? Was 7 that a -- 8 Tell me how that -- that first -- that contact 9 was made -- 10 MR. HANKS: Right. 11 MR. RUNNER: -- or the reason. 12 MR. HANKS: I'm just looking at a copy of the 13 audit report which is dated November of -- of 2009. And 14 typically it -- it takes several months for us to 15 initiate an audit and to conclude it. And I'm looking 16 for the 414-Z comments that identify the first contact. 17 Have you seen that? 18 MR. CLAREMON: No. 19 MS. GYGAX: There was no notice of an audit 20 prior to that meeting, sir. 21 MR. HANKS: Um, and I found that, the comment 22 that I was looking for. 23 So it looks like, actually, our first, uh, 24 contacts with them were in October of 2009. That's -- 25 that's when I've -- I've got identification of our first 26 field visit being made by, um, our audit staff. 27 MR. RUNNER: Okay. So -- and -- and this 28 meeting that's on the tape was when? 32 1 MS. GYGAX: October 13th, 2009. 2 MR. HANKS: October 13th, 2009. 3 MR. RUNNER: So -- so indeed then, this meeting 4 was -- was done prior to any audit, right? Am I getting 5 that -- those dates right, or am I -- would you -- when 6 did you say the first meeting of the audit was? 7 MR. HANKS: We made our first field visit, um, 8 October 5th -- 9 MR. RUNNER: Oh. 10 MR. HANKS: -- 2009. So we actually visited -- 11 MR. RUNNER: So, in theory, are we talking 12 about the same meeting? 13 MS. GYGAX: No. 14 MR. RUNNER: I'm sorry. Didn't you say the 15 meeting was in October? 16 MS. GYGAX: No. I said it's January -- 17 MR. RUNNER: Oh. 18 MS. GYGAX: -- 13th, 2009. 19 MR. RUNNER: Okay. January. 20 MS. FRANK: You said "October." 21 MS. GYGAX: And October was the audit. 22 MR. RUNNER: Okay. Okay. Okay. I thought I 23 heard "October." 24 So -- so do we have any record -- do we have 25 any record of the -- of the meeting that took place in 26 January? 27 MR. CLAREMON: I mean, I've listened to the -- 28 the audiotape. 33 1 MR. RUNNER: And when did that -- and -- and is 2 the audiotape reflective of a date? 3 MR. CLAREMON: Um, I just know how it was 4 labelled, as January of 2009. 5 MR. RUNNER: Okay. Thank you. 6 MS. GYGAX: The tape itself says they're going 7 to send a notice of audit. 8 MR. RUNNER: Okay. 9 MS. GYGAX: So you can hear that for yourself, 10 sir. 11 MR. RUNNER: Okay. Thank you. 12 MS. GYGAX: Thank you. 13 MR. HORTON: Member Yee. 14 MS. YEE: Uh, I just wanted to revisit the, uh, 15 990s that you filed. Did you, uh, obtain an IRS 16 501(c)(3) exemption letter? 17 MS. GYGAX: No. It never was -- it never was 18 acquired. You have 24 months to apply for a 1023, and 19 you may act as a tax-exempt organization while you await 20 determination by the IRS. But they fell apart, uh, 21 before 24 months. And after they fell apart in 2006 22 they discovered, you know, in January of 2007 a 1093 -- 23 a 1023 had never even been put in for the process. 24 MS. YEE: Okay. 25 MS. GYGAX: And that was pretty impossible 26 because then the IRS had started discovering 27 dispensaries trying to apply. And Mr. Beyries had -- 28 had, uh -- it was like a nuclear bomb. It just was so 34 1 badly, everything that had not happened that should 2 have, that should -- while these people were trusting a 3 professional. 4 It's really the greatest nightmare and that's 5 why the Bar is going after disbarment. 6 MS. YEE: Okay. 7 MR. CARROLL: Ms. Yee, that -- that is why the 8 tax returns were amended. It wasn't because there was 9 any errors, other than that it was improper to file the 10 990s since it was determined they were not a nonprofit. 11 They filed -- when they filed the returns, they 12 thought they were nonprofit. When they discovered they 13 weren't, had to refile -- 14 MS. YEE: Okay. 15 MR. CARROLL: -- the correct return. 16 MS. YEE: No, I understand. I was just trying 17 to take you -- take myself back to what motivated the, 18 uh, filing of the 990s, um -- and whether, uh -- uh, 19 your own determination that perhaps you were a nonprofit 20 was driven by SB 420 or whether other -- I mean, what -- 21 MR. CARROLL: It was determined by the 22 attorney. It said he filed the appropriate paperwork. 23 MS. YEE: Okay. 24 MR. CARROLL: Told the accountant that he had 25 filed the paperwork, but then it was determined later 26 that he had not. 27 MS. GYGAX: Even what he did file on July 12th 28 of 2005 at the Secretary of State's office calls it a 35 1 501(c)(3) -- 2 MS. YEE: Mm-hmm. 3 MS. GYGAX: -- even though he forged 4 everybody's signatures and he did it wrong. 5 MS. YEE: Yeah. Okay. 6 All right. Thank you. 7 MR. HORTON: Further discussion, Members? 8 Hearing none, is there a motion? 9 MS. YEE: Move to take the matter under 10 submission, please. 11 MR. HORTON: Moved by Member Yee to take the 12 matter under submission. Second by Member Runner. 13 Without objection, Members, such will be the 14 order. 15 Thank you very much for appearing before us 16 today. The Board will take your matter under 17 consideration and send you a written report of our 18 decision. 19 MS. GYGAX: Thank you for your attention. 20 MR. CARROLL: Thank you. 21 ---oOo--- 22 23 24 25 26 27 28 36 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, KATHLEEN SKIDGEL, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 August 22, 2012 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 36 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: September 10, 2012 17 18 19 ____________________________ 20 KATHLEEN SKIDGEL, CSR #9039 21 Hearing Reporter 22 23 24 25 26 27 28 37