1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 27, 2013 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 BENALEX WINDOWS & DOORS CORPORATION 14 NO. 446664(AA) 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 Equalization Staff: Jeff Angeja 17 Tax Counsel IV 18 For the Department: Scott Lambert 19 Hearing Representative 20 Kevin Hanks Chief, Headquarters 21 Operations Division 22 Lawrence Mendel Tax Counsel III 23 For Petitioner: Elliott Speiser 24 Attorney 25 William Chu Enrolled Agent 26 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 27, 2013 4 ---oOo--- 5 MR. HORTON: Members, let us reconvene the 6 meeting of the Board of Equalization. 7 Ms. Richmond, what is our next item? 8 MS. RICHMOND: Our next item is C2, Benalex 9 Windows and Doors Corporation. 10 Please come forward. 11 MR. HORTON: Mr. Angeja, would you please 12 introduce the issues in this case -- 13 MR. ANGEJA: Mr. Chairman -- 14 MR. HORTON: -- as the taxpayer comes. 15 MR. ANGEJA: Mr. Chairman and Members, the 16 issues in this appeal are whether additional 17 adjustments are warranted to the amount of disallowed 18 claimed and netted nontaxable sales; whether 19 adjustments are warranted to the unreported taxable; 20 sales, and whether petitioner was negligent. 21 And I would also like to remind the Board 22 that this appeal is covered by Section 40. 23 MR. HORTON: As the taxpayer settles in, I 24 would advise them that they will have ten minutes to 25 make their presentation. We would ask that you 26 commence with your introduction. Then we'll then go 27 to the Department for their presentation and return 28 and allow you five minutes on rebuttal. 3 1 MR. CHU: Good morning, Chairman and Board 2 Members. William Chu on behalf of Benalex Windows 3 and Doors. 4 MR. SPEISER: Good morning. Elliot Speiser 5 on behalf of Benalex Windows and Doors as well. 6 MR. CHU: This taxpayer, um, is primarily a 7 wholesale manufacturer of windows and window framing. 8 There's no storefront. There's no advertising. He 9 is located in an industrial part of town. 10 Ninety to ninety-five percent of this 11 taxpayer's business is predicated upon customers who 12 are in the business, uh, including windsale -- window 13 retailers as well as, uh, other building and 14 construction companies. 15 During the audit period, there are 12 16 quarters, uh, covered. 17 MR. HORTON: Mr. -- could you please, uh, 18 pull the microphone closer? 19 MR. CHU: Sure. 20 During the audit period there are 12 21 quarters covered. Uh, the -- the sample taken was 22 the first quarter, which was third quarter 2004. 23 Based upon the auditor's review of the 24 records, this was clearly the worst record-keeping 25 period, uh, during the audit period. The auditor has 26 indicated in his audit report that the -- the 27 record-keeping of the company became much better 28 during the course of the audit and that, uh, the 4 1 discrepancies were substantially reduced. 2 Our contention is that the error rate 3 derived from that one quarter, which was also applied 4 to every other quarter, uh, both for the gross sales 5 as well as the, uh, allowable nontaxable sales was 6 inappropriate to be applied for every quarter as it 7 was nonrepresentative of the business itself. 8 The quarter used, uh -- this taxpayer had 9 immigrated to the United States and started this 10 business on his own. He was unfamiliar with regular 11 business practices and was in the process of 12 developing this business during this time period. It 13 is a very unsophisticated business, uh, and primarily 14 just a manufacturing shop. 15 During the first two quarters under this 16 audit, the taxpayer's records for sales were kept on 17 carbon copy, handwritten invoices. The subsequent 18 ten quarters for the audit period then became 19 automated. The period selected was one of the two 20 quarters where invoices were handwritten and there 21 were no automation whatsoever in record-keeping. 22 In addition, the, uh -- the retail -- the 23 sales that were -- that the taxpayer believes as to 24 be exempt because of resale certificates in 25 subsequent quarters had retail certificates 26 printed -- or retail certificate numbers printed on 27 the invoices themselves once they became automated. 28 In addition, these, uh -- we have provided a 5 1 sampling of the invoices to the Board, uh, of the 2 quarter under audit, which is represented by the 3 handwritten invoices. There's a second set of 4 invoices that are automated that also have resale 5 certificate numbers printed in the lower left-hand 6 corner for each of these customers. Each of these 7 customers were disallowed by the auditor in his audit 8 report. 9 Uh, in his sampling of the third quarter 10 2004, there were a substantial number of repeat 11 customers; in excess of ninety percent of his 12 customers appeared in that three-month period more 13 than once and often times in excess of a half dozen 14 times. Uh, they were often custom-made windows in 15 addition to -- they were, uh -- the sales volumes 16 themselves were not for single panes or for a single 17 window. Uh, they were clearly designed for either 18 resale, and the sales were in, often times, in the 19 thousands of dollars. 20 The taxpayer's business is predicated upon 21 resale and these sales were clearly to be -- to be 22 made for resale in fact. 23 MR. SPEISER: Essentially what we'd like to 24 emphasize, and this is what we have been emphasizing 25 to the State Board of Equalization, is, as my 26 colleague indicated, the sample mischaracterizes the 27 true set of the records. 28 They've used the first quarter. And in 6 1 their report they acknowledge that these records got 2 substantially better. What we have essentially asked 3 for is to take any other quarter, especially a 4 quarter when the taxpayer became automated. 5 We were entitled to a re-audit. We went 6 back to a re-audit, although we never got to 7 participate in the re-audit. In the re-audit they 8 never addressed this issue. 9 We are still maintaining that the error rate 10 miscalculates -- or mischaracterizes the true error 11 rate. Because if you look at essentially what -- 12 we've given two different sets of examples or 13 exhibits. What we'd like the Board to focus in on is 14 when they became automated. 15 Essentially it prints out the resale 16 certificate number. A lot of these retailers have 17 been disallowed, even though -- and it's because in 18 the first quarter that they base their error rate on, 19 their invoices didn't contain resale numbers. They 20 X -- they didn't respond to an XYZ letter. Many 21 different factors. 22 Based upon that, we maintain that the error 23 rate mischaracterizes the true error rate. All we 24 would really like -- and the Board has all the 25 records. We would just like them to pick any other 26 quarter, because this is essentially going to put 27 this taxpayer out of business and it's not reflective 28 of the true operations of the taxpayer. 7 1 We maintain that if they went back to any 2 other quarter except the first period, or go to any 3 quarter that's automated, there's additional 4 safeguards within his system now to prevent any type 5 of errors occurring. But early on, that wasn't the 6 case. 7 So we maintain that even with the 8 re-audit -- and my colleague Mr. Chu will discuss the 9 re-audit -- there wasn't even a re-audit. They 10 essentially just went back and recalculated, not 11 going to actual records. I mean, you can -- 12 MR. CHU: The re-audit itself, the auditor 13 only spent, I think, less than ten hours on it. 14 There was no adjustment to the -- to either initial 15 base error rate. What he did was recalculate how he 16 applied that rate. But the actual error rates he 17 derived from that first quarter, third quarter of 18 2004, which he applied to every other quarter, did 19 not change. 20 So our contention is that the initial base 21 error rates are what are incorrect. Because, in 22 addition to the factors, that every invoice that we 23 have, uh, in January 2005 that was automated, has a 24 resale certificate number printed on the invoice. 25 Each of these customers was disallowed in that 26 sampling of the third quarter 2004. 27 In addition, in the -- in the auditor's 28 report, there is, uh -- there are customers including 8 1 Oscar Corona who the auditor, based upon his own 2 research, indicated that Mr. Corona did not respond 3 to the XYZ letter. And although he had a resale 4 certificate that he received in May 2005, because he 5 did not have it in 2004, he was disallowing 6 everything relating to Mr. Corona. However, that 7 means, although it should be disallowed for four 8 quarters, there were other eight quarters for which, 9 uh -- for which sales to Mr. Corona should have been 10 allowed as nontaxable sales because he did in fact 11 have a resale certificate. 12 MR. HORTON: Does that conclude your -- 13 MR. SPEISER: Yes. 14 MR. HORTON: All right. 15 We'll now go to the Department. The 16 Department will have ten minutes to make their 17 presentation. 18 I would ask that the Department respond to 19 the concerns relative to the re-audit and, uh, the 20 distinguishing periods and the change in their record 21 formatting -- keeping. 22 MR. LAMBERT: Good morning, Chairman Horton 23 and Members. 24 My name is Scott Lambert and I'll be 25 representing the Sales and Use Tax Department today. 26 To my right is Kevin Hanks, also with the Sales and 27 Use Tax Department; and to Mr. Hanks' right is 28 Lawrence Mendel with the Legal Department. 9 1 In this particular case the taxpayer 2 manufactures and sells windows. Upon audit, the 3 records were in such a state that it was difficult 4 for the auditor to conduct the audit. Initially, the 5 first period of the audit, which was the third 6 quarter of 2004, was the most complete. Therefore, 7 the auditor decided to use that period as a test 8 period for nontaxable sales. 9 I will point out that the taxpayer started 10 operations in 1992 as a sole proprietor and then 11 became incorporated in August of 2000. So the fact 12 of this being -- the first period of the audit being 13 the third quarter of 2004, at that particular point 14 the taxpayer had already been in business for 12 and 15 a half years. So it was by no means the first return 16 that had been filed by this taxpayer. 17 Subsequent to our audit the taxpayer hired 18 an accounting firm to go through and add up the 19 taxable sales, and they provided that to us for the 20 majority of the audit period, 2005 through the first 21 quarter of 2007. 22 Comparing the taxable sales to the reported 23 sales, there was a difference of $2.2 million in 24 taxable sales. Because of the state of the record, a 25 percentage of error was applied to the first two 26 periods of the audit. 27 The auditor does not state that the records 28 became better over time or the reporting became 10 1 better. Um, what he does say is that in the second 2 quarter of 2007, it appears that the recording became 3 better at that particular time. The taxpayer had 4 been notified of the audit before filing the second 5 quarter of 2007, and that return does appear to be 6 fairly accurate in the terms of collected -- or 7 recorded taxable sales versus reported taxable sales 8 and also claimed resales. So, in that -- in that 9 sense, the second quarter of 2007 does appear to have 10 been reported better. 11 After the resale was conducted, the test, 12 the taxpayer was given the opportunity to -- to audit 13 additional periods, in fact was encouraged to select 14 different quarters to conduct a test. Uh, and they 15 were given the time to do that, and apparently 16 they -- they didn't do it. And I'm not sure of the 17 exact reason. But they didn't follow through on -- 18 on conducting an additional test, even though the 19 district principal auditor had encouraged them to do 20 that. 21 In terms of the resales, it was difficult 22 from the invoices to determine sometimes who the 23 customers were. There weren't addresses on it. 24 Sometimes the names were, um -- difficult to tell who 25 the customer was from it. But in any case, the 26 auditor did allow sales to known customers that were 27 other retailers of window products if they were able 28 to determine that the taxpayer or the customer -- 11 1 excuse me -- had a seller's permit. 2 So they allowed those. They also allowed 3 some repair labor, and there were some XYZ letters 4 that were sent out, and those were accepted as well. 5 The -- the packet of invoices that are given 6 in the exhibit, I did go through and trace them to 7 the -- the test. And what I note, in the majority of 8 the cases the -- the customers were allowed as, um -- 9 as nontaxable, in a majority of -- of these cases. 10 Now, they did provide other invoices for 11 periods outside of the test. And I do note that 12 there is seller's permits at the bottom of these. 13 And I don't believe we were -- or have been aware of 14 these, from -- from what I can tell. I don't believe 15 we've been aware of these or the particular, um, 16 numbers, whether we were able to -- to find those or 17 not through -- through our searching. 18 Uh, in regards to the penalty, a penalty was 19 applied because there was such a large difference 20 between recorded and reported; uh, the net effect is 21 $2.6 million in sales, between taxable sales made and 22 reported, which is a 348 percent of error. 23 No resale certificates were retained. And 24 I'd also point out that there was a subsequent audit 25 that was performed. And, additionally, the taxpayer 26 did not keep resale certificates or did not retain or 27 obtain resale certificates during that period of 28 time. And there was a 42 percent of error in that 12 1 subsequent audit in terms of nontaxable sales. 2 Um, the -- the business had been in -- had 3 been operating for a significant period of time 4 before this particular audit, and there were no 5 resale certificates that were obtained. 6 Um, so with that, the Department concurs 7 with the Appeals Division's Decision and 8 Recommendation. 9 MR. HORTON: Thank you. 10 On rebuttal. 11 MR. SPEISER: With respect to rebuttal, the 12 taxpayer was represented by a, for lack of a better 13 term, an accounting firm. They are basically 14 bookkeepers. It's our understanding they are not 15 Certified Public Accountants, but basically 16 bookkeepers, well-intentioned, and our taxpayer 17 relied upon them. But in no sense did they provide 18 the actual records. It's our understanding that the 19 representatives prepared summaries based upon their 20 own information. 21 When we were -- when we discussed that with 22 the taxpayer, taxpayer says I don't believe this is 23 accurate. 24 We went to the district principal auditor 25 and discussed that issue with him, uh, and informed 26 him that, again, we concede that early on records are 27 cluttered. They are not as organized as they should 28 be. But the records are there. 13 1 Our offices possess the subsequent quarters 2 for all the years. We have stressed to the -- to the 3 auditor, just take a look at any other period, 4 especially the periods when it's automated. It's 5 much more organized. We see -- you're going to see a 6 much less error rate. Based upon those computations, 7 we believe it -- it will reflect a better error rate. 8 We acknowledge that the taxpayer's records 9 previously were not the best. They have improved. 10 But to take the worst quarter and extrapolate that to 11 the entire audit period, we maintain mischaracterizes 12 the true -- the true measure that should be applied. 13 So, with respect to the -- the sales tax 14 permits, we possess them. We also have records, and 15 we maintain they're contemporaneous records. This is 16 not prepared for the audit. Uh, we don't understand 17 why -- you know, counsel's been informed that they 18 were not provided. We have always been -- we've 19 always had these available. 20 We got involved at the re-audit essentially. 21 But we never got to participate in a re-audit. There 22 was no re-audit. They essentially went ahead and 23 fine-tuned some calculations but never went -- went 24 to the actual source documents. 25 Taxpayer maintains today, and we've 26 maintained this from the re-audit, that records are 27 in his possession. We maintain the State has the 28 same records. We've got 'em for complete periods. 14 1 We would just like the State to examine a different 2 period to get a better reflection of what's really 3 going on. To take the worst and to extrapolate it 4 over the entire audit, uh, we believe is unfair. 5 And -- and although we differ with respect 6 to our interpretation of the report, there is a 7 statement in the report that acknowledges, we 8 maintain, clearly that the records got a whole lot 9 better. And then also, in subsequent periods there 10 are no variances between reported and, uh, audited. 11 I believe that's the end of '07. 12 So, we just feel that an adjustment is 13 warranted, but this adjustment is not supported by 14 the records because its using erroneous error 15 rates. 16 MR. HORTON: Okay. Discussion, Members? 17 For the Members, can you distinguish the 18 period of time in which the records allegedly got 19 better or changed? 20 MR. SPEISER: Well, it's the first -- 21 they're using -- is it the first quarter? 22 MR. CHU: Yeah. Uh, third quarter 2004, 23 fourth quarter 2004 were handwritten invoices. 24 Beginning January 1st, 2005 through the rest of the 25 audit period, which is second quarter 2007, 26 everything was automated. 27 MR. HORTON: And the Department did not look 28 at the subsequent period why? 15 1 MR. LAMBERT: In terms of these testing of 2 resales? 3 MR. HORTON: Mm-hmm. 4 MR. LAMBERT: Because they were incomplete 5 at the time that we started the audit. The third 6 quarter of 2004 had a complete -- had the complete 7 sales invoices. After that time, the auditor states 8 that the information came in in piecemeal and that he 9 didn't feel that he had complete records for periods 10 after that in terms of the resales. 11 MR. HORTON: What's the period of time when 12 the auditor started and was there? 13 MR. LAMBERT: Started the -- 14 MR. HORTON: The auditor started conducting 15 the audit, or the test. 16 Members, I just want to get the timelines 17 out. 18 MR. RUNNER: Sure. 19 MR. LAMBERT: Uh, he drafts an engagement 20 letter on April 11th, 2007. 21 MR. HORTON: Okay. 22 MR. RUNNER: Question. 23 MR. HORTON: Mr. Runner. 24 MR. RUNNER: The, um -- the auditor -- at 25 least let me see if I understood what was said. Um, 26 what we have here, I guess, are examples. This would 27 be examples of what was used as the, uh -- 28 MR. CHU: Sample period. 16 1 MR. RUNNER: -- the recordkeeping method 2 during the sample period. 3 MR. CHU: Correct. 4 MR. RUNNER: And this would be the 5 recordkeeping sample -- or examples after starting 6 in, what'd you say, in 2000 and -- 7 MR. CHU: January 1st, 2005. 8 MR. RUNNER: 2005. Uh, these two -- so 9 that's what you're trying, that's -- 10 MR. CHU: Correct. 11 MR. RUNNER: -- what the purpose of these 12 are to show? 13 MR. RUNNER: Correct. 14 MR. RUNNER: Okay. Um, did I understand 15 that you said that the auditor didn't choose to use 16 these because they were incomplete? 17 MR. LAMBERT: That -- that's correct. 18 MR. RUNNER: Now, how about during the 19 subsequent -- subsequent requested re-audit? Were 20 they found incomplete at that time? 21 MR. LAMBERT: During the re-audit, they -- 22 the direction from the Appeals in terms of the D&R 23 didn't direct us to go back out to take a look at the 24 records. The invoices, the auditor never saw 25 complete resale invoices for periods other than the 26 third quarter of 2004. 27 MR. RUNNER: So you don't believe that 28 during the re-audit the directions were specific 17 1 enough to go back and look at the automated records. 2 MR. LAMBERT: That's correct. The -- 3 MR. RUNNER: Were they -- during -- let me 4 go back to the taxpayer. 5 During the re-audit were these audit -- were 6 these records available? 7 MR. SPEISER: Yes. 8 MR. CHU: Yes, during the re-audit they 9 were. 10 MR. SPEISER: And we stressed to have them 11 reviewed. 12 MR. RUNNER: But we -- okay. But we didn't 13 believe that the auditor had the authority to go back 14 and look at these? 15 MR. LAMBERT: Well, what I would say is is 16 that this information, as far as I'm aware, was not 17 provided at the appeals conference. Uh, there was 18 not -- 19 When the appeals conference was held, there 20 wasn't any specific disallowed resales where they 21 said that here's the information in terms of this 22 should be allowed. Um, so there -- there wasn't any 23 reason for us to go back out to take a look at the 24 information because it -- it had not been presented 25 to us. 26 MR. RUNNER: Let me go back to the taxpayer. 27 Any -- any particular reason why these weren't 28 available? 18 1 MR. SPEISER: The -- 2 MR. CHU: Our -- our discussion during that 3 period was that we wanted them to examine another 4 period because the recordkeeping was better because 5 he did have resale certificate numbers. Uh, during 6 that time period, we -- we informed the State that we 7 had everything. 8 MR. RUNNER: And they never requested it? 9 MR. CHU: No. During the re-audit, it was a 10 mere adjustment -- 11 MR. RUNNER: No, no. How about the first 12 audit? How about the first audit? 13 MR. CHU: No, during the first audit we 14 weren't involved. 15 MR. RUNNER: Oh, you -- okay. So you 16 weren't involved. 17 MR. CHU: Right. 18 MR. RUNNER: So now you're talking about the 19 re-audit portion. 20 MR. CHU: Right. During the re-audit it was 21 a recalculation applied to the base error rate. 22 MR. RUNNER: And you requested that they go 23 ahead and look at the new automated -- 24 MR. CHU: Another period. 25 MR. RUNNER: -- recordkeeping in another 26 period. 27 MR. CHU: To adjust the base error rate. 28 Because everything else applied to every other 19 1 quarter is predicated upon that. 2 MR. RUNNER: And what -- let me see if I'm 3 getting this clear. What the Department is saying 4 you didn't -- the auditor didn't believe they had the 5 authority to go do that? That was not what 6 they're -- that that's not what the request of 7 Appeals was? 8 MR. LAMBERT: Well, I wouldn't say they 9 didn't have the authority. Um, there wasn't the 10 direction. They had also been allowed the 11 opportunity to conduct another -- or other periods to 12 be tested. 13 MR. RUNNER: Who's the "they"? 14 MR. LAMBERT: Who's "they"? The taxpayer 15 had been allowed, and their representative, uh, which 16 was a different representative than the one that's 17 here today. 18 MR. RUNNER: Now -- now -- now we're talking 19 about after -- we're talking now after the re-audit, 20 right? He's talking about after the re-audit or 21 during the re-audit. 22 MR. SPEISER: During the re-audit. 23 MR. RUNNER: During the re-audit. SO 24 this -- during the re-audit we're dealing with these 25 guys. 26 MR. LAMBERT: Right. 27 MR. RUNNER: Okay. 28 MR. LAMBERT: And their argument -- 20 1 MR. RUNNER: Okay. 2 MR. LAMBERT: -- at the appeals conference, 3 they did not provide any information in terms of why 4 any -- any sale that was disallowed in the test 5 was -- or should be allowed, and they didn't provide 6 any information in terms of other -- or complete 7 resale information. 8 MR. RUNNER: Okay. 9 MR. LAMBERT: And that's why the auditor 10 didn't go back out. 11 MR. RUNNER: Okay, hold on. But -- but it 12 seems they -- they -- they admitted -- it seemed to 13 me that the taxpayer knew that the records were bad 14 during the -- during the audit period. Were poor, I 15 should say, let me say. Were poorly kept, let me say 16 that. 17 MR. SPEISER: Certain quarters. 18 MR. RUNNER: Certain -- for the -- for 19 the -- during the test period. 20 MR. CHU: Well, for summary purposes, uh, I 21 believe the auditor himself and -- and the taxpayer 22 believes the source documents are complete. 23 MR. RUNNER: Right. 24 MR. CHU: There -- there -- I don't believe 25 there's any issue there. 26 MR. RUNNER: Okay. 27 MR. CHU: It's just that he didn't have a 28 summary of it. 21 1 MR. RUNNER: Okay. 2 MR. CHU: Or, uh, you know, he didn't have a 3 general ledger of it. 4 MR. RUNNER: So -- well, let me get down to 5 the issue here. So, at least what I'm hearing from 6 the Department is they -- they didn't -- well, let me 7 ask it -- let me phrase it this way -- 8 Well, let me ask the Department first. So 9 what you're saying is you don't believe that the -- 10 during the -- during the appeal -- during -- after 11 the re-audit, or during the re-audit, that the 12 auditors nor the Department knew that these records 13 were available? 14 MR. LAMBERT: Uh, knew -- I -- I'm unaware 15 that they were made aware of that, so I'm -- 16 MR. RUNNER: Okay. Let me go to the 17 taxpayer. 18 When did you make -- when did you feel like 19 you communicated to the BOE, hey, we've got the 20 automated records now, we'd like you to go ahead and 21 use them? 22 MR. CHU: At the appeals conference. But 23 also, if the State's position was that the other 24 periods were incomplete, they would have had to 25 review those records and would have seen these to 26 realize that they were incomplete for other 27 quarters. 28 MR. RUNNER: Okay. Let me ask you this, 22 1 given -- given the fact that you -- given the fact 2 that we know that these are the kind of records -- if 3 these are typical of the kind of records that they 4 have starting in 2005, knowing that now, seeing the 5 nature of the records, do you believe that it might 6 be -- would -- that there might be some wisdom in 7 taking a look to see if these are more representative 8 of the way the business was conducted rather than the 9 quarter that was used? 10 MR. LAMBERT: I would say it -- at this 11 particular time, we're unaware that there is 12 additional information. I understand what they're 13 saying. 14 I have not seen some of these resale 15 certificates. Or -- I shouldn't -- I'm sorry. 16 Permit numbers that are on the -- the sales invoices. 17 The Department has -- had given the taxpayer an 18 opportunity to send out, uh, or test additional 19 quarters. 20 If it is the Board's, um, decision that an 21 additional quarter or quarters should be tested, that 22 it would be the Department's position that although 23 the Department would oversee the testing, that it 24 would be the taxpayer that's responsible for sending 25 out, uh, and receiving back the XYZ letters. 26 MR. RUNNER: Well, let me ask you, go back 27 to -- do you believe that the -- that the records 28 that are being kept now are such that the XYZ letters 23 1 could be -- are a part of it, but the records 2 themselves are better and therefore are, um -- give 3 enough information in regards to the fact that these 4 were indeed sales for resale by the -- by the level 5 of recordkeeping that is now available? 6 MR. CHU: Yes, assuming the -- the customer 7 has -- is still in business, yes. 8 MR. RUNNER: Okay. 9 MR. CHU: But we are going back to 2004, 10 so -- 11 MR. RUNNER: Okay. Thank you. 12 MR. HORTON: Is there a reason that the 13 taxpayer didn't conduct their own test at the time of 14 inquiry and present that in dispute to the auditor's 15 test? 16 MR. CHU: One of our contentions was that 17 during the sample period that these sales were for 18 resale, and our contentions were that a lot of these 19 customers had resale certificates but were 20 disallowed. 21 Uh, the auditor would not budge on that 22 issue and said that the taxpayer had already been 23 afforded that opportunity with XYZ letters. And 24 based upon his search in IRIS, uh, if he was unable 25 to locate them, that's all he was willing to do. 26 MR. HORTON: Sounds like -- sounds as if 27 though he's speaking to the test period in which he 28 conducted. If I understand your testimony correctly, 24 1 uh, it is that subsequent periods the accounting 2 records had been reconstructed, uh, to provide a 3 summary, and that those reconstructed records, uh, 4 more accurately reflect the percentage of error. 5 And so of the reconstructed records, is 6 there a reason the taxpayer didn't conduct the 7 examination during the audit period, present it to 8 the Department in dispute of theirs and -- and seek 9 an adjustment? 10 MR. CHU: Well, during the audit period -- 11 or during the audit, we were not the 12 representatives. 13 MR. HORTON: Any point. I mean from the 14 time at any point. 15 MR. CHU: Uh, it was discussed. Our 16 contention is -- our -- our dispute arises from the 17 error rate. And a lot of that arises from whether or 18 not, uh, certain sales were -- were allowed to be 19 non -- nontaxable. 20 Uh, even if we did a separate quarter but 21 applied the logic used by the auditor, we would have 22 an overstated amount; we would have an overstated 23 error rate because he would be disallowing those 24 customers. Even though, uh, they -- even though we 25 have records saying that this is what the resale 26 number they gave us, he had disallowed them in this 27 quarter. 28 MR. HORTON: So you have two arguments. One 25 1 argument is is that -- well, the second argument that 2 I'm hearing, and correct me or share with me, uh, if 3 I'm not hearing you correctly, is that the -- the 4 test period in question, the items that were 5 disallowed should not have been disallowed because 6 they're a valid sales for resale. 7 MR. CHU: Correct. 8 MR. HORTON: And what evidence do you have 9 to support that they were valid sales for resale? 10 MR. CHU: Uh, in addition to the -- some of 11 the invoices that we've provided here for a 12 subsequent quarter, they have resale certificate 13 numbers printed on the lower left-hand corner. All 14 of these customers are in that third quarter '04 15 sample and were disallowed. 16 MR. HORTON: Who -- who printed it on 17 the -- this statement? 18 MR. CHU: Uh, this was printed as part of 19 the invoice. 20 MR. HORTON: The taxpayer -- 21 MR. CHU: So the taxpayer printed it. It's 22 automated in their system. So if there -- it's 23 essentially coded in the system as a nontaxable 24 wholesale transaction, there is no tax charged. 25 MR. HORTON: I know, but of -- in the 26 audit -- in test period, the auditor disallowed 27 certain sales for resale. 28 MR. CHU: Correct. 26 1 MR. HORTON: And I'm assuming they provided 2 you a list of those. 3 What documentation do you have to support 4 that those were in fact sales for resale? 5 MR. CHU: Uh, the transactions themselves. 6 I mean, a vast majority of these were to glass -- 7 glass retailers. So Joe's Glass, uh, ATZ Glass, who 8 would -- I believe, ATZ Glass has over a dozen 9 transactions in the sampled quarter. 10 MR. HORTON: So it's -- so I'm just trying 11 to get -- so your argument is is that the items in 12 question in the audit period -- test period were 13 resales in fact, irrespective of the fact that they 14 may or may not have had resale certificates? 15 MR. CHU: Right. And we also -- 16 MR. HORTON: Let me go to the Department on 17 that. 18 Um, did you examine the questioned sales for 19 resale to determine if they could have been resales 20 in fact? 21 MR. LAMBERT: Yes. We went -- 22 MR. HORTON: By the nature of the 23 transaction? 24 MR. LAMBERT: Right. So what we did is we 25 took a look at the -- the invoice itself. We sent 26 out XYZ letters to the ones that could be sent out. 27 A lot of them didn't have addresses, but the ones we 28 could. The other ones we ran them through the Board 27 1 of Equalization's -- 2 MR. HORTON: IRIS. 3 MR. LAMBERT: -- uh, computer system. And 4 if we were able to determine that they were a gas -- 5 glass retailer, we removed those from the audit. If 6 it was determined that they were a construction 7 contractor because glass is materials -- 8 MR. HORTON: Okay. 9 MR. LAMBERT: -- then -- then it was -- 10 MR. HORTON: So if they were coded as a 11 retailer of glass, you allowed it? 12 MR. LAMBERT: That's correct. 13 MR. SPEISER: Respectfully, I maintain that. 14 Because during the re-audit, this was an issue. And 15 essentially the auditor was just relying on the XYZ 16 responses. He's got a very detailed spreadsheet. 17 And in your -- in your exhibits -- 18 MR. HORTON: That's not their testimony, 19 sir. I mean, unless we have something to dispute 20 what they just said. 21 MR. SPEISER: Right, right, right. We do 22 because we -- we were showing them -- one example is 23 ATZ Glass. It's my understanding from the work 24 papers that ATZ Glass is not being allowed as a, uh, 25 reseller. 26 MR. HORTON: Valid reseller. 27 MR. SPEISER: ATZ Glass, the frequency of 28 purchases, the nature of their purchases, they're 28 1 buying in volume, these are not for personal use. 2 Uh, it's our understanding that the auditor 3 did not get a response on the XYZ letter from ATZ, 4 disallowed it. We later on went and basically got 5 all the information to demonstrate the character of 6 ATZ Glass is everything that you have basically been 7 informing us that we need to prove up. 8 MR. HORTON: Did you -- were you able to 9 verify that they are -- ATZ Glass is not a 10 contractor, and is actually a retailer? 11 MR. SPEISER: Uh, I'd to have go back to -- 12 MR. CHU: Actually, I checked yesterday. 13 They have a web presence and website. I believe it's 14 ATZGlassDesign.com. Uh, they only sell windows as 15 all the services they provide on their website. 16 MR. HORTON: Okay. Discussion, Members? 17 Is there a motion? 18 MS. YEE: Move to take the matter under 19 submission. 20 MR. HORTON: Moved by Member Yee to take the 21 matter under submission. Second by Member Steel. 22 Without objection, Members, such will be the 23 order. 24 Thank you very much for appearing before us 25 today. The Board will take your matter under 26 consideration and send you a written report of our 27 decision. 28 ---oOo--- 29 1 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, KATHLEEN SKIDGEL, Hearing Reporter for 9 the California State Board of Equalization certify 10 that on February 27, 2013 I recorded verbatim, in 11 shorthand, to the best of my ability, the proceedings 12 in the above-entitled hearing; that I transcribed the 13 shorthand writing into typewriting; and that the 14 preceding pages 1 through 29 constitute a complete 15 and accurate transcription of the shorthand writing. 16 17 Dated: April 15, 2013 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 30