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 SEPTEMBER 28, 2017 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 COUNTY OF RIVERSIDE AUDITOR-CONTROLLER 14 NO. 744614 (EH) 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 of Equalization: Diane L. Harkey 3 Chairwoman 4 Sen. George Runner (Ret.) Vice Chair 5 Fiona Ma, CPA 6 Member 7 Jerome E. Horton Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Appeals Bureau: Kim Hee Tax Counsel IV 15 Legal Department 16 For Department of Tax and Fee 17 Administration: Scott Claremon Tax Counsel III 18 Legal Department 19 Kevin Hanks Chief 20 Business Tax and Fee Department 21 Robert Tucker 22 Assistant Chief Counsel Legal Department 23 For Petitioner: Jim Voss 24 Representative 25 Jacob Bholat Representative 26 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 SEPTEMBER 28, 2017 4 ---oOo--- 5 MS. HARKEY: Okay. Next item. 6 MS. RICHMOND: Our next item is C16 County 7 of Riverside Auditor-Controller. 8 Please come forward. 9 MR. TUCKER: We would like to request a 10 five-minute recess. 11 We have -- I know, you'll love this. Based 12 on last night, we have a revised recommendation, and 13 we'd like a chance and the opportunity to discuss it 14 with both petitioner and Appeals so we can make sure 15 that it's better explained to the Members. 16 And this literally happened last night, 17 so -- 18 MS. HARKEY: Okay. 19 MR. TUCKER: -- there was no other 20 opportunity. 21 MS. HARKEY: They want a five-minute -- 22 MR. TUCKER: It'll be brief. 23 MR. RUNNER: Five minutes? 24 MR. TUCKER: Yeah, just brief. Just so we 25 can provide an explanation. 26 MS. HARKEY: Yeah. For this next case. 27 MR. TUCKER: Yes. Thank you. 28 MS. HARKEY: Sure. 3 1 (Recess taken.) 2 MS. HARKEY: I think we're back here. 3 Here he comes. Signed, sealed, delivered. 4 Okay. Now, thank you. 5 So the case number we're dealing with is 6 what, Members? 7 MS. RICHMOND: Item C16. 8 MS. HARKEY: C16. 9 MS. RICHMOND: County of Riverside 10 Auditor-Controller. 11 MS. HARKEY: Okay, thank you. Thank you 12 very much. 13 Welcome to the State Board of 14 Equalization. 15 Appeals, would you please introduce the 16 items for consideration. 17 MS. KIM: Madam Chair, Members, the appeal 18 before you involves one unresolved issue, which is 19 whether additional adjustments to unreported taxable 20 purchases of supplies and fixed assets are 21 warranted. 22 And the Department does have a revised 23 recommendation in this matter. The Department wants 24 to reduce the taxable measure by $49,200. 25 MR. HORTON: Why? 26 MS. KIM: I'd have to let the Department 27 explain the basis for that. 28 MS. HARKEY: It's not going to work for me 4 1 anyway. We need to hear the case. 2 MR. CLAREMON: It's based on comparing the 3 audits of some of the claimant's vendors and noting 4 where the use tax owed by claimant was picked up in 5 those audits, based on those vendors' use tax 6 collection liability, based on them being retailers 7 doing business in California. And so where there's 8 overlap between the audits, we reduced the measure 9 when it was already assessed against the vendor. 10 MS. HARKEY: It was already paid. 11 MR. CLAREMON: Yeah. 12 MS. HARKEY: Okay. 13 MR. HORTON: Thank you. 14 MS. HARKEY: Thank you. 15 Okay. Welcome to the State Board of 16 Equalization. And hello, neighbors. 17 You have ten minutes to present your case, 18 then the Department will have ten minutes, and then 19 you will have five minutes on rebuttal. And there 20 will be questions, I'm sure. 21 So please introduce yourself for the 22 record. 23 MR. BHOLAT: Hello, everyone. Thank you 24 for the time to present this matter in front of the 25 Board. 26 My name is Jacob Bholat and I'm with Equity 27 Recovery Solutions. Next to me I have Jim Voss from 28 the County of Riverside Auditor-Controller's office. 5 1 So, the County of Riverside was audited and 2 assessed use tax, using a statistical sample. 3 Several transactions were deemed to be subject to 4 use tax in the sample that we believe were 5 incorrectly assessed. 6 There's two primary areas within this 7 section. First we have chemicals used to treat 8 potable water. The Department staff determined that 9 the use of the chemical product did not meet the 10 exemption provided under Revenue and Taxation Code 11 6353 for the treatment of drinking water delivered 12 to consumers through mains, lines and pipes. The 13 Riverside County Service Area Department, which 14 delivers the actual drinking water, confirmed the 15 product treats the potable water to adjust the pH 16 level. 17 We've provided Exhibit A in our 18 information, which provides the information that I'm 19 going to go over. 20 The product is injected into the water to 21 lower the pH concentration with the purpose of 22 adjusting the taste, while also improving the 23 effectiveness of chlorination. In addition, higher 24 pH levels can corrode pipes and ultimately impact 25 the quality and taste of the final product. 26 The staff performed their own Internet 27 research during the audit and they found that the 28 same chemical has other potential uses. We don't 6 1 deny the other potential uses; however, provided by 2 the county's technical staff, they clearly indicated 3 that these chemicals were used to treat potable 4 water to adjust the water and remained in the water. 5 There's a direct annotation that relates to a 6 product that's very similar. The annotation number 7 is 440.2340. 8 During the audit no evidence was ever given 9 by the audit staff to refute the taxpayer's support 10 on their application of this product. They just 11 made a decision that they're going to look at only 12 one side. 13 The second area relates to -- and it's a 14 larger area -- it relates to consignment invoices 15 that we believe are subject to sales tax. 16 Stryker Instruments and Howmedica, which is 17 a division of Stryker, delivered consignment 18 inventory of instruments and implants to the 19 Riverside County Hospital from an out-of-state 20 location into local consignment inventory located on 21 the hospital premises. 22 We again have provided several exhibits 23 that I'd like to quickly kind of overview. 24 Exhibit B are sample invoices that clearly 25 state that the product originally was sent in on 26 consignment. So these are all consignment invoices. 27 Exhibit C supports that the original 28 agreement -- so there was an original agreement 7 1 between the county and the vendor -- has been 2 misplaced. Both sides, the vendor and the taxpayer, 3 have looked for it, we've not been able to locate 4 the original agreement. 5 Exhibit D are two published agreements from 6 other county hospitals -- these are published 7 through the Internet -- that support the agreement 8 language. 9 Exhibit E, the vendor's standard agreement 10 from other -- the vendor's standard agreement and 11 confirmation of terms and conditions, and a 12 confirmation from the sales rep. that the terms and 13 conditions remained in effect during the audit 14 period. 15 Finally we have Exhibit F, which is an 16 e-mail from the sales representative responding to 17 several questions about managing this consignment 18 inventory. In that e-mail we posed several 19 questions. And the responses were that the Stryker 20 employee can remove inventory from the consignment 21 inventory without the customer's knowledge or 22 approval. All obsolete, recalled, removed inventory 23 costs is managed and paid by the vendor. A bill is 24 never issued to the hospital. And also, the 25 consignment inventory is managed by the Stryker 26 employee. 27 We believe that these transactions meet the 28 requirement of the sale on approval under sections 8 1 UCC 2326 and 2327. 2 How do we get to this conclusion? All 3 three agreements clearly state that the title to the 4 consignment inventory remains with the seller, while 5 it's in consignment inventory. All of the 6 agreement's terms clearly state that the title 7 transfers to the hospital when the property is 8 removed from that consignment inventory and appeal 9 is issued. All of this occurs in the State of 10 California. 11 Stryker maintains the right to remove or 12 replace items placed in the consignment inventory 13 without the hospital's consent; they're managing the 14 inventory. The inventory, even though it's 15 conforming to the contract, can be removed and 16 returned by the hospital and no invoice is ever 17 issued. 18 The inventory is not billed until the 19 property is removed from the consignment inventory 20 and a purchase order has issued. 21 If -- in the case of a seller doing an 22 audit of the inventory, if the inventory surplus is 23 found -- so they actually billed more than there was 24 originally removed -- the customers automatically do 25 a refund, which again further states that they owned 26 the inventory. Upon termination or expiration of 27 the agreement, all of the inventory has to be 28 returned back to Stryker. 9 1 Recently, the Department responded to our 2 opening brief, suggesting that the only type -- 3 possible type of sale on approval under the UCC 4 relates to testing. They state that since no trial 5 period exists, this is not a sale on approval 6 because it is not for testing purposes and the buyer 7 has some risk of loss. 8 Also, they take the position that the 9 removal of one item means the acceptance of all 10 items in the consignment inventory. Their analysis 11 incorrectly limits the application of the UCC 12 definition of a sale on approval. 13 We cite two separate law reviews that 14 performed a more in-depth analysis on consignment 15 sales, particularly dealing with sale on approval 16 and sale on return. And we've also provided 17 Exhibits G and H. 18 The analysis to determine if a sale on 19 approval exists requires a more detailed examination 20 than the simplistic analysis provided by the 21 Department's reply brief. 22 Legal scholarly analysis provides numerous 23 examples of sales that qualify as a sale on 24 approval. The key factor looks at all -- looks at 25 the overall transaction to determine the true 26 intent. 27 In the SMU Law Review they provide an 28 example of a sale on approval occurs when the buyer 10 1 has a right to return the item even if the full -- 2 even if the seller fully complies with the contract 3 description. 4 The consignment contract in question is 5 structured with the following conditions: 6 Consignment inventory can be returned at any time 7 without exception; Stryker employees can remove or 8 move inventory from consignment inventory without 9 hospital approval; Stryker sales representative 10 managed the inventory and can modify the contents of 11 the inventory; inventory can be transferred to a 12 different buyer. They can take it from one 13 hospital, one customer who isn't using it, and move 14 it to a different customer who may use that 15 product. 16 The title clause in the sales agreement 17 clearly states that the title passes upon removal of 18 inventory from consignment inventory. 19 Furthermore, the Boston College Law Review 20 provides a detailed -- provides details of the 21 commonly used tests that fits the facts and 22 circumstances of this particular transaction. 23 The example illustrates that the consignor, 24 Stryker, wants to obtain market, but the dealer, the 25 hospital, is unwilling to risk the acquisition of 26 the goods. The consignment structure can be used to 27 create a sale on approval or a sale on return with 28 the following terms: 11 1 The consignor -- consignor delivers the 2 goods to the buyer; the buyer fails to use the 3 goods, then they may return the goods without 4 reservation. We have that here; 5 The buyer does not pay for the goods until 6 used; 7 The seller gives up possession without 8 receiving security of payment; 9 The consignor retains a title of the goods 10 and assumes the risk of not selling the product. 11 We have all of these situations in this 12 particular -- or in these particular transactions. 13 The seller utilizes this type of structured 14 transaction with the hope of increasing market 15 share. The seller takes a gamble or a risk the 16 buyer will use inventory and not use a competitor's 17 product. The seller's inventory remains easy to 18 access and readily available, and future needs of 19 the buyer can be predicted based on historical 20 sales. 21 The hospital makes no guarantee that the 22 product will be purchased. The hospital protects 23 the seller from loss, stolen or missing inventory, 24 but provides no other assurances. 25 The agreement further states additional 26 inventory which was previously billed mistakenly can 27 be credited -- will be credited if found at a later 28 date, which further supports inventory ownership by 12 1 the seller. 2 The overall structure of the consignment 3 inventory sales by Stryker clearly demonstrates a 4 sale on approval. The ultimate motivation of 5 Stryker to place their inventory on the premises of 6 the hospital is to increase market share, increase 7 sales, with minimal risk to the buyer. This 8 approach increases competitive market advantage for 9 Stryker. 10 When the inventory ships from -- to 11 California from the out-of-state location, the buyer 12 does not provide a purchase order, the buyer does 13 not pay for the inventory until it's removed from 14 the California location, the buyer does not accept 15 title until it's in California. 16 The auditor incorrectly assessed these 17 transactions as use tax when the sale was clearly a 18 sale on approval. 19 We respectfully request that these items be 20 removed as errors from the statistical sample and 21 that the staff modify the percentages of error and 22 extrapolated measure. 23 Thank you. 24 MS. HARKEY: Thank you very much. 25 The Department, you have ten minutes. 26 Please introduce yourself for the record. 27 MR. CLAREMON: Thank you. Good morning, 28 Chairwoman Harkey, Members of the Board. I'm Scott 13 1 Claremon with the Department of Tax and Fee 2 Administration. With me are Robert Tucker and Kevin 3 Hanks. 4 We concur with the recommendation of the 5 Appeals Bureau that the transactions at issue are 6 subject to use tax and we agree with the revised 7 recommendation. 8 The items in dispute are ex tax purchases 9 for which claimant is liable for use tax, surgical 10 supplies and sulfuric acid for the purpose of water 11 treatment. 12 With regard to the surgical supplies, they 13 were purchased pursuant to a requirements contract 14 from a single vendor. Claimant has not provided a 15 copy of the relevant contract but has provided 16 several example agreements and claims that the 17 property was delivered on what it refers to as a 18 consignment basis, pursuant to which title to the 19 property did not transfer until it removed the 20 property from inventory. 21 Regulation 1628 subdivision (b)(3)(D) 22 explains that a sale occurs when and where the 23 retailer completes its performance with respect to 24 the physical delivery of the property. Generally 25 any retention or reservation of title in the seller 26 after physical delivery is limited in effect to a 27 reservation of a security interest, pursuant to UCC 28 section 2401. When such is the case, it constitutes 14 1 a conditional sale as defined in RTC, Revenue and 2 Taxation Code 6006 subdivision (e), and it follows 3 the general rule that the sale occurs upon delivery. 4 Here, the vendor completed its physical 5 performance via deliveries to common carriers 6 outside of California. Accordingly, the sales took 7 place outside of California and are subject to use 8 tax, notwithstanding the retention of a security 9 interest based on the ostensible retention of title. 10 The sample agreements provided by claimant 11 reserved the vendor's right to file UCC financing 12 statements to protect its interest in the property. 13 This term is wholly consistent with the vendor's 14 retention of a security interest rather than title 15 itself. 16 Claimant contends that these transactions 17 constitute sales on approval as defined under UCC 18 sections 2326 and 2327. However, a sale on approval 19 is a distinctive form of contract in which the buyer 20 can use the goods for the purpose of trial prior to 21 acceptance. That is not the case here where payment 22 is immediately due upon removal of the property from 23 the inventory. 24 Moreover, UCC section 2327 sets forth a 25 number of elements for sales on approval, none of 26 which are present here. The vendor does not 27 maintain risk of loss after delivery. Acceptance is 28 not automatic, absence a notice of rejection. And 15 1 acceptance of one item did not constitute acceptance 2 of all like items. 3 In sum, these transactions do not conform 4 to the essential characteristic of a sale on 5 approval, which is related to the use of property 6 for purposes of trial, nor do they meet the specific 7 elements of a sale on approval as stated under UCC 8 2327. 9 With regard to this point, we note that the 10 California Court of Appeals in Wilson v. Brawn 132 11 Cal. App. 4th 549 gives examples, three examples of 12 a sale on approval: 13 The first one, it's based on the fact that 14 a purchaser was given the right to use the copier in 15 its business without an obligation to purchase. 16 Again, it's based on use for trial; 17 The second example notes a 30-day trial 18 period prior to acceptance; 19 And the final example says that a sale on 20 approval contemplates a transaction allowing the 21 buyer to inspect or test the goods after delivery. 22 Turning to the law review articles that 23 claimant has provided, we note that these are 24 secondary sources. They don't have the same effect 25 that the UCC does or that a decision of the 26 California Court of Appeals does. But, we also note 27 that they say essentially what we're saying. 28 The second sentence of the article provided 16 1 states, in a sale on approval, the buyer in a sale 2 on approval takes goods primarily for use. 3 The next thing is, B, the buyer on approval 4 may return the goods after trial. 5 C, the sale on approval is subject to the 6 special incidents set out in section 2327. That's 7 exactly what we're saying, the basic characteristic 8 is trial and it must meet the elements of 2327. 9 So this article says the exact same thing 10 that we're saying. 11 Later on in this article it notes examples 12 of where there is a trial period or where it's 13 actually being used by the purchaser. 14 The second article, I believe claimant 15 mentioned sale or return. That's what the second 16 article's about. A sale or return is a different 17 type of transaction than a sale on approval. A sale 18 on return is a consignment where the purchaser is 19 reselling the property. Those are two different 20 transactions, it's two different subdivisions of the 21 UCC. That second article says nothing about sales 22 on approval, so it's irrelevant to this discussion. 23 Turning to the purchase of sulfuric acid. 24 Regulation 1525 subdivision (a) states that tax 25 applies to the sale of materials used in producing 26 tangible personal property. It's correct -- excuse 27 me for one second -- that there's a exemption for 28 the sale of water, but the section says nothing 17 1 about chemicals used to treat the water. 2 So the question is, under Regulation 1525, 3 were the chemicals used to treat the water as a 4 manufacturing aid or did they become part of the 5 water and were they resold with the water? 6 Subdivision (a) of Regulation 1525 states 7 that tax applies to the sale of materials used in 8 producing tangible personal property, including 9 those used to produce a chemical or physical 10 reaction or to remove impurities. 11 As explained by the Court of Appeals in 12 Kaiser Steel, it is not enough for the property to 13 simply be present in the finished product; rather, 14 the property must, as its primary purpose, be an 15 active ingredient in or provide a primary beneficial 16 effect as a result of its physical presence in the 17 final product. 18 Here, as the vendor itself explained via 19 e-mail to audit staff, the purpose of the sulfuric 20 acid was to remove impurities and to lower the pH of 21 the water by a chemical reaction. The vendor also 22 explained that the continued presence of sulfuric 23 acid after the reaction would result in a pH far 24 below what is allowable for potable water. 25 Accordingly, the primary purpose of the sulfuric 26 acid was for use in producing drinking water, not to 27 be an ingredient thereof, and therefore its purchase 28 is subject to tax. 18 1 Thank you. 2 MS. HARKEY: Thank you. 3 You have five minutes on rebuttal. 4 MR. BHOLAT: Thank you. 5 Let's start with the potable water. 6 Regulation 1525 relates to a manufacturing aid. 7 When we look at this particular product, it is 8 governed and regulated under the Revenue and 9 Taxation Code 6353, which relates to utilities, and 10 water is a utility. 11 In that regulation -- and there's many 12 rulings if you can go through the regulations 13 related to the water delivery. There are many 14 chemicals in the previous rulings that determined 15 that when a chemical is added into potable water, if 16 it adjusts the pH, if it adjusts certain 17 characteristics of that water, that it is exempt 18 under Regulation 6353, which is a much broader 19 exemption than what is allowed under the 1525 20 manufacturing aid. 21 Related to the consignment sales, when we 22 look at the information of the law reviews, the 23 Department's approach is to say that the only option 24 of a condition of sale on approval if it's used for 25 testing. And when we look at the analysis -- and 26 within those articles there's also significant 27 discussion about previous court cases and how there 28 is not a consistent application of the sale on 19 1 approval because it is a very difficult thing to 2 apply. 3 In this particular case, in this particular 4 scenario there is a specific example in one of 5 those -- in the law review that covers the exact set 6 of facts and circumstances related to this case. 7 And that is, that the seller is placing the 8 inventory -- the seller is out of state. They're 9 placing the inventory located on the hospital 10 premises with certain objectives, and their 11 objective is to try to get their customers to use 12 more of their product versus their competitor's 13 product. 14 So they place the inventory in the location 15 on the hospital. It's a separate area of the 16 warehouse. It's marked off. It's cordoned off. 17 And that inventory allows the seller to be able to 18 react to the buyer's needs in a quick situation. 19 When we're dealing with a hospital, they 20 are dealing with emergency surgeries, that's 21 primarily what this stuff is. And when they have 22 emergency surgeries, they need to have the 23 availability of what they need. And if by the 24 seller allowing and placing the inventory on the 25 premises of the hospital, it gives them a 26 competitive market advantage by saying we can have 27 that product for you when you need it quicker than 28 anybody else. 20 1 And that's the primary objective of the 2 structure. And when the property's located -- and 3 the agreement that -- the sample agreement, which 4 was confirmed by the sales rep. as being -- the one 5 as being utilized and active during the audit 6 period, clearly on that agreement it states that the 7 title of the property remains with the seller. 8 Stryker owns that property. And it states clearly 9 that the title transfers when the hospital removes 10 the inventory from that -- from that consignment 11 inventory and issues a purchase order. 12 All of those activities, that transfer of 13 title, occurs in the State of California. Therefore 14 we believe it's subject to sales tax. 15 Thank you. 16 MS. HARKEY: Thank you. I just -- just for 17 edification here, Members, I have a copy of audit 18 working papers that were completed in 2010 that held 19 that the supplier was responsible for the sales tax. 20 That's Stryker. 21 This is a Stryker audit. And it is 22 confidential information. I won't share it with the 23 taxpayers, but I will share it with the Department 24 and this Board. 25 And so Stryker was treated as though they 26 were responsible for the sales tax. And today's 27 case we are holding that Riverside, as the user, is 28 responsible for the use tax. 21 1 So I'm -- I think it's the same. It's 2 Chicago did both of these audits, and so I just want 3 to avail the Department to that information. 4 MR. RUNNER: Do you want to respond to 5 that? 6 MS. HARKEY: I'll be happy to share it with 7 you. 8 MR. CLAREMON: As I understand it, in the 9 audit of the vendors some of it was determined to be 10 sales tax and some was determined to be use tax. So 11 there were use tax transactions that they still 12 would have been liable for as a person doing 13 business in California. And that is also the 14 adjustment we made was to make sure it wasn't -- 15 MS. HARKEY: This is -- this is just one 16 more piece to -- also, all the contracts and the 17 back and forth that we just heard from the taxpayer. 18 So I just want to be sure this is 19 considered because it appears we're doing one thing 20 with Stryker in an audit and we're doing another 21 thing with the County of Riverside. 22 So anyway, Members, do we have questions? 23 Okay. I -- I have some questions here. I 24 heard that it was your -- your consideration or that 25 your assertion that the property was located in the 26 hospital, but it's property of the vendor and no 27 title transfer or sale had occurred, that it was 28 consignment. 22 1 So Stryker maintains the consignment 2 inventory; is that what you're stating, that's your 3 assertion? 4 MR. BHOLAT: Correct. That was confirmed 5 by the sales representative who actually manages 6 their inventory. 7 MS. HARKEY: Okay. With regard to the 8 sulfuric acid, I'm not as -- not as clear on that. 9 I think -- I think that's the problem. 10 To the Department -- 11 MR. BHOLAT: Let me -- 12 MS. HARKEY: Oh, I'm sorry. 13 MR. BHOLAT: No, go ahead. Sorry. 14 MS. HARKEY: To the Department, my staff in 15 doing their research found that similar transactions 16 between vendor and -- and Riverside County Regional 17 Medical Center were treated as sales tax 18 transactions and disallowed as sales for resale in a 19 prior audit to the vendor. Yet the audit of 20 Riverside County, the transactions are treated as 21 use tax. 22 Can you explain why these would be 23 different? 24 MR. CLAREMON: Without having the facts of 25 those other cases, I don't know where the delivery 26 of that product took place. If the delivery took 27 place in California and there's participation by an 28 in-state place of business, it would have been a 23 1 sales tax transaction in those other instances. 2 MS. HARKEY: Okay. Are you totally 3 negating all of the information that they provided 4 you on assignment -- on consignment, that it was 5 consignment inventory? 6 I don't -- I don't -- 7 MR. CLAREMON: Are we talking -- I thought 8 we were talking about the sulfuric acid still. No? 9 MS. HARKEY: No, no. I'm not talking -- 10 I'm talking about the -- I'm talking about the 11 particular vendor that is of question here, that the 12 taxpayer mentioned was Stryker. That there were 13 similar transactions with Riverside County Medical 14 Center that were treated as the taxpayer's saying 15 this should've been treated. 16 In other words, I'm believing these are 17 consignment inventories. I do believe they were 18 consignment inventories. 19 I'm not -- I'm not as supportive of the 20 sulfuric acid piece. I think that that definitely 21 is a reaction. It can't be -- I think it's subject 22 to use tax. But I am very concerned with these 23 sales for resale. 24 MR. HORTON: Okay. 25 MS. HARKEY: Does anyone else have any -- 26 any specific questions regard to this? This is 27 a -- 28 MR. BHOLAT: Can I make an adjustment to 24 1 your -- 2 MS. HARKEY: Sure. 3 MR. BHOLAT: -- chemicals? 4 MS. HARKEY: You sure may. 5 MR. BHOLAT: So when you read Revenue and 6 Taxation Code 6353 -- I'm going to read it out to 7 you so you understand the language and you hear it. 8 It said -- and this relates to utilities. 9 It says they are exempted from the taxes 10 imposed by this part, the gross receipts derived 11 from the sales, furnishing, service of, and the 12 storage, use or other consumption in this state of 13 all of the following: Gas, electricity, water, 14 including steam -- and it goes into other utilities. 15 So when you look at that language, there is 16 a -- there is a separate and distinct exemption that 17 the legislator provided for utilities. And when you 18 look at the rulings that have historically been made 19 related to water, potable drinking water delivered 20 to a consumer through mains, lines and pipes, you 21 can't look at regulations, or 1525 as a 22 manufacturing aid because that's related to a 23 manufacturing aid that's related to a resale. 24 Here we're talking about a product that is 25 a public utility. And the exemption, this is the 26 only place in the entire Revenue and Taxation Code 27 where the exempt -- the exemption and language is 28 this broad. And when you look at the historical 25 1 application of the -- of this law section, they have 2 included many products that are injected into the 3 water to create and modify the contents of what the 4 ultimate product is delivered to the customer. 5 In fact, there is a similar product that 6 does the exact same process of adjusting the pH, and 7 it works exactly the same way, it's just a different 8 product name. And previously, that product was 9 deemed to be exempt, in the annotations I cited. 10 MS. STOWERS: Madam Chair? 11 MS. HARKEY: Yes. 12 MS. STOWERS: I just want to ask the 13 Department to kind of clarify this treatment between 14 the vendor being subject to tax and the proposed 15 treatment to the County of Riverside. It seems 16 like, based on what the Chair is saying, that the 17 vendor has been assessed as well; and is it for the 18 same period, is it for the same transactions? 19 Can you just kind of speak to that, please? 20 MR. HANKS: So, Ms. Stowers, if I could 21 make a state -- 22 MR. CLAREMON: So, if these are use tax 23 transactions, the customer would be liable but the 24 vendor would also be responsible for -- would have a 25 collection obligation as a retailer doing business 26 in California. 27 So it could be, either party could be 28 liable. So that's why either party could be billed 26 1 for the tax on these transactions. And the 2 adjustment we made was to make sure that that 3 doesn't ultimately happen. There is some overlap of 4 the audits, two quarters, but the vendor audit does 5 not cover the other ten quarters of this audit. 6 MS. HARKEY: Doesn't cover the exact same 7 time period. But there is some overlap and an 8 indication. 9 MS. STOWERS: There's some overlap, a 10 few -- 11 MR. CLAREMON: There's a two-quarter 12 overlap -- 13 MS. STOWERS: Two quarter overlap. 14 MR. CLAREMON: -- between the two audits. 15 MS. STOWERS: And you said that they both 16 could be liable, one for sales, one for use tax. 17 MR. CLAREMON: They would both be liable 18 for use tax. 19 MS. STOWERS: For use tax. 20 MR. CLAREMON: The customer, because 21 they're liable for use, the customer's always liable 22 for use tax, responsible for use tax. The retailer 23 doing business in California had an obligation to 24 collect that use tax and remit it to the Board under 25 Revenue and Taxation Code 6203. 26 MS. HARKEY: Okay. I just -- I just want 27 to go through though. There -- you know, there's a 28 product pricing agreement that says that the 27 1 hospital will identify the property as Stryker's 2 inventory and maintain a separate location for the 3 property. 4 It says that -- and it also says it will 5 identify all consigned inventory as being the 6 property of Stryker. Separate consignment inventory 7 from other property of hospital. The hospital must 8 provide appropriate space to store and safeguard the 9 product. And the sale of the product does not take 10 place until it's removed from consignment inventory. 11 All of this is in the agreement, 12 Attachment A that I've got here, and I'll be glad to 13 share that. But I think it's all part -- I know 14 it's all part of the file. 15 MS. STOWERS: Yes. I wasn't actually 16 finished, Ms. Harkey. I did see that, too. 17 So my other part of the question to the 18 Department is because -- based on what she just read 19 in the agreement. Can you go over again on why 20 you're still saying that this is not basically a 21 sale on approval, that it does not come under -- 22 MR. CLAREMON: Yes. 23 MS. STOWERS: -- the rules. 24 MR. CLAREMON: So before I get to that, I 25 do note that there are two requirements for sales 26 tax to apply to a transaction. The first is what 27 we're talking about here, which is that the sale has 28 to take place in California. The second requirement 28 1 would be under Regulation 1620 that the -- an 2 in-state place of business of the retailer 3 participated in the sale. And that's noted in the 4 Appeals hearing summary. 5 So we would also need to see evidence that 6 an in-state place of business of the retailer 7 participated in these sales, even if these were 8 sales on approval, for sales tax to apply. 9 Turning to your question, essentially the 10 UCC states under section 2401 that even when the 11 parties state, ostensibly state, that title is 12 retained after the transfer of possession, that that 13 title is limited -- that -- that statement is 14 limited, in effect, to a security interest. 15 So it does seem like a somewhat strange 16 result, but that is what the law says, that even 17 though the parties say that title transferred, title 18 didn't actually transfer. The only exception 19 being -- the exception being in a sale on approval, 20 and though this does have some of that -- the broad 21 characteristics of a sale on approval, which is this 22 intention to not have the sale take place. When we 23 look at all the other requirements under the UCC, we 24 don't see them being met. 25 MS. STOWERS: Thank you. 26 MS. HARKEY: Thank you. 27 You -- you have something to say? 28 MR. BHOLAT: There's a couple things. 29 1 Related to the in-state participation, they have a 2 local sales representative who lives and resides in 3 the State of California, manages the inventory, who 4 visits the site, who is in charge of tracking 5 inventory, who does all of those -- and actually 6 probably accepts purchase orders as well. So I 7 don't think that there's any question whether 8 there's participation by Stryker in the State of 9 California. 10 The second point that I'd like to -- in 11 the -- in the agreement that's presented or 12 that's -- the sales representative confirmed as what 13 he's operating under, it says in here clearly that 14 as a product is withdrawn from the consigned 15 inventory, the product shall be deemed to have been 16 purchased by the customer. Title in the product 17 shall pass to the customer and the title in the sale 18 proceeds shall vest in the belonging to the company. 19 Within two days from the withdrawal from the 20 consignment of any consigned inventory, customer 21 must issue a hardcopy purchase order for items 22 withdrawn. 23 So, clearly they're stating in there, in 24 their agreement they're stating we own this 25 property, it's sitting in -- on your premises, but 26 we own this property. We own the title of it. It's 27 all laid out in this agreement, and it doesn't pass 28 to you until you withdraw it and you issue a 30 1 purchase order. And that all occurs in the State of 2 California. 3 MR. HORTON: Question. 4 MS. HARKEY: Yes, Member Horton. 5 MR. HORTON: Question of the Department. 6 The Department has concluded that title passed 7 outside of the State of California? 8 MR. CLAREMON: That's correct. 9 MR. HORTON: Based on what? 10 MR. CLAREMON: Based on UCC 2401 and 11 Regulation 1628. 12 MR. HORTON: What activity? 13 MR. CLAREMON: The delivery to the common 14 carrier FOB point of shipping. Or there's no -- no 15 FOB destination. So it's -- that's where it is. 16 MR. HORTON: Are you familiar with the City 17 of Bris- -- I think it's Brisbane case? 18 MR. CLAREMON: What particularly? 19 MR. HORTON: Take a look at it, you know, 20 while we're going through this process. But 21 basically in the City of Brisbane, the Department -- 22 I mean the conclusion was, is that that language in 23 and of itself does not supercede possession language 24 within the contract. That that in itself is -- is 25 assuming a risk of loss, that they -- they can 26 assume the risk of loss. They can transfer title, 27 assume the risk of loss and, still, possession not 28 be transferred. 31 1 And so I don't know that that condition in 2 and of itself overturns the language in the contract 3 where title is not transferred until there's certain 4 conditions that have to be met. 5 I'm really asking for your thoughts. 6 MR. CLAREMON: Under UCC 2401 -- 7 MR. HORTON: I mean, you're going back to 8 the same thing. The bearing of loss, when the 9 vendor decides to bear the loss, in and of itself in 10 any other case, is not sufficient when there is 11 language that deals with title passage. 12 In fact, the Board has consistently held 13 when there's -- that the title passage language 14 governs, irrespective of the bearing of loss. I'm 15 just trying to figure out how do we reconcile those 16 two different legal logics? 17 MR. CLAREMON: The original question was 18 about when delivery took place? 19 MR. HORTON: No. The original question was 20 about a particular case. 21 The -- the -- the delivery clause -- the 22 reason we look at the delivery clause is to try to 23 determine when possession took place. And so, in 24 and of itself, delivery clause is not sufficient 25 enough to supercede a contractual agreement between 26 two parties on the transfer of position -- of 27 possession when it has been established. 28 And we've taken that position time and time 32 1 again, and I'm trying to reconcile -- or I'm trying 2 to ask if there's anything else that the Department 3 has that would say that -- that would supercede 4 title passage language. 5 MR. CLAREMON: Well, the UCC, and again, 6 this isn't 2401, but it's the preamble to 2401 7 states that each provision of the division with 8 regards to the rights, obligation, or remedies of 9 the sellers applies irrespective of title. So under 10 the UCC you look at delivery, risk of loss and title 11 separately. 12 So here we would look at delivery -- 13 MR. HORTON: Yeah, but the UCC code also 14 tells us -- I mean, we know that we have to look at 15 things in a totality, in its collective basis, to 16 try to determine the title passage. 17 And so then you get down to trying to -- 18 where do you put the emphasis? And from a UCC code 19 perspective, contractual law, you would say that an 20 agreement between the parties sort of supercedes the 21 notion of assuming risk, which is delivery. 22 Delivery says, well, who's going to assume 23 the risk here? And under the circumstances, it 24 would seem sort of logical that if I'm going to let 25 you hold my property, I'm not going to assume risk 26 for it. I mean, you know, I'm not -- just not 27 gonna. 28 Do you -- UCC Code in and of itself, you 33 1 can't just pluck out that little section. I mean 2 you've got to look at it in its entirety. And so 3 when you've got a transfer of title clause, clear 4 transfer of title clause -- I mean how do you take a 5 delivery statement to supercede a contractual 6 agreement between two parties? Can you do that? 7 MR. CLAREMON: Again, the UCC says that 8 after delivery, the retention of title is limited in 9 effect to a retention of a security interest. 10 MR. HORTON: Okay. 11 MS. HARKEY: Okay. I -- I have something 12 that was a part of the file. 13 MR. HORTON: Well -- 14 MS. HARKEY: Oh, are you finished? 15 MR. HORTON: Let me finish, Madam Chair. 16 MS. HARKEY: I'm sorry. I thought you were 17 finished. 18 MR. BHOLAT: Can I -- 19 MR. HORTON: I'm going to go back and look 20 at that. Maybe -- I want to read it myself. 21 MR. BHOLAT: There's a distinction in this 22 particular transaction. 23 MR. HORTON: Let me -- let me continue -- 24 MR. BHOLAT: Sorry. 25 MR. HORTON: -- my line of questioning. 26 And I'm going from memory here, and I 27 apologize because I don't think this motion under 28 UCC code is briefed, but -- not. Sorry, it was. 34 1 But let me go back and take a look at it. 2 I'll tell you my thinking -- maybe you can 3 help bring some clarity here -- is that the title 4 clause occurred well before the transfer of title. 5 I mean, before the delivery. So had it occurred 6 subsequent to the delivery, I might say okay, you've 7 got a point. They delivered it. Then later on they 8 decided to come up with some title provisions. 9 But they came up with title provisions, 10 transfer of title provisions before they did 11 anything. It was part of the contractual agreement. 12 And then the other activity is subsequent to. 13 So maybe Appeals can kind of look at what 14 happened in the City of Brisbane case since that 15 wasn't briefed by any of the parties. I don't know, 16 I just -- I just looked it up on the Internet and 17 read it real quick. 18 MS. HARKEY: Yes, Member Runner. 19 MR. RUNNER: Yeah, I -- I -- given the 20 facts that I see in this case, it seems to me that I 21 would believe that these were actual items that were 22 placed in consignment, and therefore sales tax is 23 due and not a use tax. 24 And I'm -- at this point, again, I'm -- 25 Well, if everybody's leaving I won't make a 26 motion. 27 MS. HARKEY: I think -- I think -- yeah. 28 MR. RUNNER: But I'll, uh -- let me -- let 35 1 me skip to the next one a little bit and have a 2 little discussion in regards to the -- to the water 3 issue. I'm less convinced on that one. But maybe 4 you can help me in that -- in that discussion, and 5 go to the staff on that, too. 6 Tell me a little bit more about the similar 7 item that was -- item that was used in water that -- 8 by -- and is it -- and then deemed as not taxable, 9 and tell me where it is that that -- was that an 10 annotation? What was that? 11 MR. BHOLAT: Yeah. The annotation 44.2340, 12 says -- 13 MR. RUNNER: 44 point -- 14 MR. BHOLAT: 2340, and I can read it to 15 you, I have it in front of me. 16 MR. RUNNER: Okay. Go ahead. 17 MR. BHOLAT: It says caustic soda, which is 18 also called sodium hydroxide -- 19 MR. RUNNER: Uh-huh. 20 MR. BHOLAT: -- which is the technical 21 definition of the product, used in treating water. 22 Caustic soda is purchased by a city water 23 department to control pH of the water. Its 24 constitutes remains in the water which is sold. 25 Accordingly the sale of caustic soda to the water 26 department is exempt sale for resale. 27 So this product is being injected into the 28 water -- 36 1 MR. RUNNER: Right. 2 MR. BHOLAT: -- to do the same thing, 3 basically adjusting the Ph. Some portion of it is 4 left in the water -- 5 MR. RUNNER: Is it -- 6 MR. BHOLAT: -- some amount. 7 MR. RUNNER: Okay. Let me go back to the 8 Department then. 9 Is that the key issue, and that is the 10 difference is that whether something is left in the 11 water or not? I mean if the purpose is exactly the 12 same, the annotation is there, what makes this 13 particular issue different? 14 MR. CLAREMON: As stated in the Appeals' 15 D&R, that annotation predated the Kaiser Steel case 16 that clarified the primary purpose test. And 17 frankly, it was invalidated by Kaiser Steel based on 18 just what it says. And it shouldn't be relied on. 19 It should be looked at at being removed basically. 20 MR. RUNNER: So they're responding, they're 21 basically saying it's a bad annotation. Which is 22 always good for taxpayers to know that we've got 23 stuff in the books that they can't rely on. 24 MR. BHOLAT: I would disagree with that 25 assertion. And the reason why I go back to 6353 is 26 because that is a different section that relates to 27 water and utilities. And this particular annotation 28 is directly related to potable drinking water. 37 1 MR. RUNNER: You think the -- you believe 2 that the issue of the Kaiser issue was -- was -- 3 was -- did not apply. 4 MR. BHOLAT: Correct, does not apply. 5 MR. RUNNER: Because you believe this 6 was -- that the annotation here, or else the 7 application of the annotation, is a more specific 8 issue in regards to the potable water? 9 MR. BHOLAT: Correct. 10 MR. RUNNER: And you -- and what was -- 11 what was it that you believe gave potable water also 12 protection? 13 MR. BHOLAT: The law section has a much 14 broader listing or a description of the exemption. 15 And when you look at the Kaiser decision, it's 16 related to manufacturing a normal product. And the 17 Board's position has been, and we agree with, if it 18 becomes incorporated into the product of something 19 that I'm normally making, then it receives the 20 exemption. 21 MR. RUNNER: Let me go back to the 22 Department in regards to this -- this -- this issue 23 of the difference between and the uniqueness of the 24 application of this annotation regarding the potable 25 water. 26 MR. CLAREMON: So there is a exemption for 27 water, but we don't think in terms of determining 28 what's a ingredient in the water versus what is 38 1 being used to treat the water, that there's any 2 special test other than the normal Regulation 1525 3 test. That annotation was -- is under -- was 4 applying Regulation 1525. And we think it was 5 applied incorrectly based on the subsequent Kaiser 6 Steel case. And we don't think there's a special 7 test for water. 8 MR. RUNNER: So the issue of a gradient 9 water slash -- versus -- 10 MR. CLAREMON: Versus something used to 11 treat it. 12 MR. RUNNER: -- versus a treatment of 13 water? 14 MR. CLAREMON: Something that's used to, 15 uh, process it. 16 MR. RUNNER: Ingredient of water would not 17 be taxable? 18 MR. CLAREMON: Because then it would be 19 being resold as part of the water. 20 MR. RUNNER: But treating of water 21 therefore -- 22 MR. CLAREMON: -- is processing it by -- 23 MR. RUNNER: So it goes back to the idea of 24 whether something is left in the water? 25 MR. CLAREMON: Well, it's the -- and that's 26 what Kaiser Steel says, is it's not enough that it's 27 left in the water. 28 MR. RUNNER: Okay. 39 1 MR. CLAREMON: Its primary purpose must be 2 that it's supposed to be there when it's sold. 3 MR. BHOLAT: So the question that I have 4 and -- 5 MR. RUNNER: Go ahead. 6 MR. BHOLAT: The question I have is why did 7 the legislator write 6353 with such broad language? 8 MR. RUNNER: I oftentimes wonder why the 9 Legislature does what they do. 10 MR. BHOLAT: And so, so when you look -- 11 and you have -- and you look at the history of the 12 application of potable water chemicals, when you 13 look at that history of application of chemicals for 14 potable water, there is a distinction, clear 15 distinction beyond what Kaiser or other -- or 1525 16 provides. 17 And when you look at this partic -- and 18 this application is very specific. It's only 19 dealing with one specific type of problem. It's not 20 dealing with a broad application of a general 21 product that's made for resale. 22 MR. RUNNER: Okay. 23 I'm going to make a motion to bifurcate the 24 issue, because I'm not sure where we are on some 25 different parts of it. But I would find that the 26 Stryker instruments are indeed a item to be held in 27 consignment, and therefore sales tax would be 28 responsible for those. 40 1 MR. HORTON: Members, I'd like to ask a 2 couple questions. 3 MS. HARKEY: I will -- 4 MR. RUNNER: I'm sorry? 5 MS. HARKEY: I will second. 6 Do you have questions of the taxpayer? 7 MR. HORTON: Mm-hmm. 8 MS. HARKEY: Oh, okay. 9 MR. RUNNER: Then I'll withhold, continue 10 some discussion. 11 MS. HARKEY: We'll hold on that for a 12 moment. Sure. 13 MR. HORTON: Mm. 14 MR. RUNNER: Swallow. 15 MS. HARKEY: Swallow. 16 MR. BHOLAT: We're all hungry watching 17 you. 18 MS. HARKEY: Well, it's not to be envied. 19 It's one of those kind of -- 20 MR. HORTON: Yeah, believe me. 21 MS. HARKEY: -- store cookies. It's not 22 exciting. 23 MR. HORTON: You're welcome to it. 24 I just want to try to get this in my mind 25 sort of legally. 26 Under 2401, it's a general rule, correct? 27 And that general rule, the exception to the rule is 28 the, um -- you know, the sale on approval. So if 41 1 you have a sale on approval where there's certain 2 conditions subsequent to the sale that has to take 3 place, that's a sale on approval. 4 So 2401, in that case, wouldn't necessarily 5 apply because you've got this exception. And so now 6 that you've got the exception to the rule, you then 7 want to take a look at, well, okay, if it's -- if it 8 is in fact a sale on approval. And irrespective of 9 the -- of the -- of the -- of the delivery clauses 10 and delivery language, the contract governs whether 11 or not it's a sale on approval. Two parties agree 12 when does sale take place; when -- when can I use 13 this? When can I exercise rights and control over 14 this? 15 And in the contract that I see, they have 16 no authority. County of Riverside has no authority 17 to exercise any rights and control over this, based 18 on the contract; unless there's some language that 19 the Department has different than the language 20 that -- or maybe I'm reading it wrong. 21 Maybe you can answer that. Is there any 22 language in there that gives them rights and control 23 over the property, irrespective of this delivery 24 clause? Did they take any action to show that they 25 took rights and control prior to withdrawing 26 inventory. Did they use it? Was it their 27 inventory? Did they have legal rights? 28 MR. CLAREMON: I mean, again, the rights 42 1 and obligations that we're talking about are those 2 set forth under the UCC, so -- 3 MR. HORTON: You're going back to 2401 -- 4 MR. CLAREMON: Well, I -- 5 MR. HORTON: -- and not to the exception. 6 MR. CLAREMON: Delivery was made to them 7 and it was in their possession. So yes, it was in 8 their possession. 9 MS. HARKEY: Okay. Can I read something 10 for the record here? This is from our file. There 11 is a, um -- 12 MR. HORTON: Uh -- yeah, go ahead. 13 MS. HARKEY: Yeah. I just -- this is 14 between the audit of the vendor and -- and the audit 15 of the -- of the appellant here. And it says the 16 vendor auditor says, you know, in the current audit 17 of the CAS and I are still in the process of 18 selecting samples. Blah, blah, blah. 19 Okay. However, I looked at the prior audit 20 which I recently completed and we see that sales to 21 Riverside County Regional Medical Center in Moreno 22 Valley were disallowed since Stryker was not able to 23 provide a resale certificate. 24 So Stryker was not able -- so they weren't 25 able to supply on another audit either. So they are 26 responsible for the sales tax. 27 MR. HORTON: Well, I think the Department's 28 asked and answered that. 43 1 But if I can go back to, how is -- I mean, 2 is the Department saying that the delivery clause is 3 dispositive when you have in a sale on approval as 4 to when the sale took place? 5 MR. CLAREMON: We're saying that these do 6 not meet the definition of a sale on approval. 7 MR. HORTON: Okay. And based on what? 8 Based on the delivery cost, which is subsequent to 9 the contract. 10 MR. CLAREMON: Based on the elements of 11 2326 and 2327. 12 MR. HORTON: Okay. Specifically? 13 MR. CLAREMON: There was -- it was not -- 14 there was no ability by Riverside to use it for 15 trial. Title -- or, excuse me, risk of loss passed 16 upon delivery. There was no provision that 17 acceptance of one, which would be consistent with 18 trial if you use one and it's okay, then all the 19 other like items are acceptable and are accepted. 20 That's another element of 2327. 21 MR. HORTON: Right. 22 MR. CLAREMON: And the other element of 23 2327 is that if you don't notify them, if it sits in 24 your inventory for a seasonable time, then it's 25 automatically accepted. 26 MR. HORTON: In your inventory? 27 MR. CLAREMON: In the -- in the hospital's 28 inventory. 44 1 MR. HORTON: City of Riverside, did you 2 claim this as part of your inventory? 3 MR. VOSS: No, we did not. 4 MS. HARKEY: Speak into the microphone. 5 MR. VOSS: I'm sorry. No, we did not. As 6 far as the -- I work in the auditor/controller's 7 office and so I file the returns and do the 8 calculations for the returns. But the Department 9 has stated that they do not. When I say "the 10 Department," that is the medical center. 11 MR. HORTON: So, to the Department, what 12 evidence do you have that they recorded this as part 13 of their inventory? They treated this as part of 14 their inventory? 15 MR. CLAREMON: I don't know if we have any 16 evidence that they treated it. 17 MR. HORTON: How can you say it is? You 18 got to have evidence to say it is. 19 MR. CLAREMON: Because the UCC states that 20 it was part -- that it was the -- the sale took 21 place. 22 MR. HORTON: Part of the inventory by 23 virtue of what? 24 MR. CLAREMON: This is actually discussed 25 in the law review article that was provided by 26 claimant. It states the use of the law, the UCC -- 27 this is on page 835 -- is eager to protect the 28 creditors of a person who has ostensible ownership 45 1 of goods by virtue of possession of them. 2 So essentially, the UCC wants the creditors 3 of -- in this case the hospital, is generally eager 4 to let those creditors attach to those goods. 5 And that's why the sale on approval is such 6 a unique exception. 'Cause it's the one time where 7 the creditors of the possessor cannot reach the 8 property. 9 But the default rule under the UCC is if 10 you have possession of it, if it's in your hospital, 11 then the creditors -- your creditors can attach it. 12 So whether or not they treat it as such, doesn't -- 13 doesn't trump what UCC says. 14 MR. HORTON: All right, okay. All right. 15 MS. HARKEY: I have -- I have a comment to 16 that. 17 Stryker -- who maintained the risk of 18 obsolescence or inventory recall? 19 MR. BHOLAT: The sales representative 20 clearly stated in his response to our questions that 21 Stryker does. So if an item is recalled, obsolete, 22 they pull it back, they ship it back, and they take 23 care of everything. And the hospital never even 24 knows about it. 25 MS. HARKEY: Thank you. 26 MR. RUNNER: Can I go back to my -- 27 MR. HORTON: Yeah, you can. 28 MR. RUNNER: -- my original motion that -- 46 1 which is we would find that the item from Stryker 2 was indeed sale on consignment, and therefore sales 3 tax should be applied. 4 MS. HARKEY: I'll second that. 5 MR. HORTON: Sale on approval, I would -- 6 MS. STOWERS: Objection. 7 MS. MA: One more time. 8 MR. RUNNER: That Stryker -- 9 MS. MA: Stryker's responsible for the 10 sales tax -- 11 MR. RUNNER: Yes. 12 MS. MA: On? 13 MR. RUNNER: On the instruments. 14 MS. MA: On instruments. 15 MR. RUNNER: Yeah. We're not doing 16 water. 17 MS. MA: Okay. 18 MR. HORTON: I mean, if you augment that as 19 a sale on approval. 20 MS. HARKEY: As a sale on approval, we 21 can -- 22 MR. RUNNER: That's fine. 23 MS. HARKEY: That's fine. Consignment or 24 approval. 25 Okay. There's a motion and a second. 26 Is there any objection? 27 MS. STOWERS: Objection. 28 MS. HARKEY: Okay. Objection so noted. 47 1 Will you call the roll, please. 2 MS. RICHMOND: Chairwoman Harkey. 3 MS. HARKEY: Aye. 4 MS. RICHMOND: Mr. Runner. 5 MR. RUNNER: Aye. 6 MS. RICHMOND: Mr. Horton. 7 MR. HORTON: Aye. 8 MS. RICHMOND: Ms. Ma. 9 MS. MA: Aye. 10 MS. RICHMOND: Ms. Stowers. 11 MS. STOWERS: No. 12 MS. RICHMOND: Motion carries. 13 MS. HARKEY: It's 4-1 on that. 14 Now we get to the chemicals or not. Water 15 or not. 16 MR. HORTON: Question, Madam Chair. 17 MS. HARKEY: Yes. 18 MR. HORTON: I'm not a scientist, so I 19 really don't know. I took a couple of science 20 classes, enjoyed them, loved them, got, you know, 21 3.5 in it. But -- 22 So, in sulfuric acid, doesn't it evaporate, 23 or after it's done its chemical reaction? 24 MR. BHOLAT: When you stepped out earlier, 25 I -- 26 MR. HORTON: This is the first time I said 27 it. Mr. Runner? 28 MR. BHOLAT: Mr. Runner, Board Member 48 1 Runner asked some questions. 2 MR. RUNNER: I knew you were going to ask 3 later, so I asked it earlier. Go ahead. Go for 4 it. 5 MR. HORTON: All right. 6 MR. BHOLAT: So my response to that 7 question is, is that when you -- the legislator 8 wrote section 6353. And in that section they 9 provided a very broad exemption. 10 When you look at the historical application 11 of that exemption, when it relates only to utilities 12 and potable water in specifics, there is a much 13 broader application of the chemicals used to treat 14 the water for delivery to consumers. 15 When they're looking at their Kaiser's case 16 and Regulation 1525, they're looking at a general 17 resale. And they're saying, okay, this particular 18 product doesn't become incorporated into the 19 product, therefore it is taxable as a manufacturing 20 aid. If some portion of it remains inside the 21 water, it's used for some purpose of the be -- or, 22 sorry. Some portion remains inside of the property, 23 it's used for some benefit of that property, then 24 it's incorporated as a sale for resale. 25 Here, we're saying this particular -- and 26 the annotation, specifically the 44 annotation that 27 I read earlier, specifically cites the exact same 28 problem. And it says caustic soda, which is 49 1 purchased by the city water department to control 2 the pH of the water. Some portion of it remains in 3 the water. They don't know how much, but some 4 portion may remain in the water, and therefore they 5 allowed the exemption. 6 And they allowed it as a sale for resale, 7 but they still allowed the exemption. And there's a 8 consistent application of that same logic. 9 MR. HORTON: That doesn't necessarily 10 answer my question, but -- 11 Department, the sulfuric acid, did you find 12 that it -- it caused the chemical reaction, and that 13 subsequent to that action taking place it was 14 necessary for the sulfuric acid to continue, and 15 only in a different chemical form, but it was still 16 there, in order to assure that whatever action that 17 took place didn't reverse? 18 MR. CLAREMON: We were informed by the 19 vendor that it causes a chemical reaction and that 20 it removes impurities -- or, excuse me, contaminants 21 from the water, which mirrors the language of 1525. 22 When asked whether it remained in the finished 23 product, the answer was no, the presence of 24 untreated sulfuric acid in a finished product would 25 result in a pH far below what is allowable for 26 public drinking water. 27 MR. HORTON: Yeah. My question is more 28 along the lines of -- I think you answered it, but 50 1 just -- just going to be a little redundant here. 2 When you -- when you have a chemical 3 reaction, you often can -- can -- can combine two 4 different chemicals and form another one. And 5 they're both, all three are still there, they're 6 just now taking on a different chemical 7 configuration. 8 And so, is that what's happening here or 9 not? It's just -- it's speeding up the ions, 10 microns, whatever, so they can now evaporate and 11 then it's finished, it evaporates as well. 12 MR. CLAREMON: From the information we 13 received and the other research that we've done, the 14 chem -- after the chemical reaction, there is no 15 more sulfuric acid in the water. 16 MR. HORTON: In any form whatsoever. 17 MR. CLAREMON: It combines with the base 18 that's making the pH too high -- 19 MR. HORTON: Right. 20 MR. CLAREMON: -- to form water. And if, 21 for instance, the base was sodium hydroxide, it 22 would turn into something else. 23 MR. RUNNER: So, in essence, it changes. 24 MR. CLAREMON: It is not sulfuric acid 25 anymore. 26 MR. RUNNER: It changes. 27 MR. CLAREMON: The atoms turn into a 28 different chemical. 51 1 MR. BHOLAT: But it still remains in the 2 water. 3 MR. RUNNER: I think that's an 4 interesting -- yeah, that's the interesting issue. 5 It isn't removed. There's not a process then to 6 remove it from the water. 7 MR. BHOLAT: Correct. 8 MR. RUNNER: It changes -- 9 MR. BHOLAT: To something else. 10 MR. RUNNER: -- into something else. 11 MR. BHOLAT: But it's still -- 12 MR. RUNNER: But it's still -- it's not in 13 the water, but it changes to something else. 14 MR. BHOLAT: Correct. 15 MR. HORTON: If that's true, then it's 16 served as a manufacturing aid, because it caused 17 this reaction. But it stays there. And it serves 18 as a purpose in being there, because if you could 19 chemically remove it -- and I'm really stating this 20 so you guys could tell me actually what happens. If 21 you could chemically remove it, the sulfuric -- if 22 you can chemically unwind the reaction, you would 23 end up with sulfuric acid, something else and 24 something else. And does that apply to water 25 versus -- or chemicals? 26 The latter part comes from -- 27 MS. HARKEY: Does 6365 apply to water or 28 chemicals? 52 1 MR. CLAREMON: Water. 2 MS. HARKEY: It applies to water. 3 MR. CLAREMON: Water. 4 MS. HARKEY: So I think that may be the 5 answer, as unfortunate as I hope to say this. 6 But I think the big issue in this case was 7 the Stryker issue, was the -- 8 But I do think that 6353 -- 6353 applies 9 to -- applies to water, not necessarily the 10 chemicals. It's code 6353 is what I've got here. 11 And that's the one that the city is relying on and 12 that the Department is debating. And I think it's a 13 water, but I don't think it applies to chemicals. 14 MS. STOWERS: Madam Chair. 15 MS. HARKEY: Yes. 16 MS. STOWERS: I think I follow what you're 17 saying. But let me just go back to the 18 Department -- 19 MS. HARKEY: Sure. 20 MS. STOWERS: -- with regards to the 21 manufacturing aid. 22 So it's used to -- I'm not a scientist -- 23 to make the water drinkable. 24 MR. CLAREMON: Correct. 25 MS. STOWERS: And I think Mr. Horton was 26 saying but it's still in there. Isn't that -- but 27 doesn't it have to be a primary purpose test or -- 28 MR. CLAREMON: Yeah. 53 1 MS. STOWERS: Can you speak to that, 2 please? 3 MR. CLAREMON: Is what Kaiser Steel states 4 is that even if it remains in the water, that's not 5 sufficient. It's what was the primary purpose. 6 Here the primary purpose being causing that 7 reaction. 8 MR. HORTON: Okay. 9 MS. HARKEY: Member Runner. 10 Are we finished up here? 11 MR. HORTON: Move in favor of the 12 Department on that item. 13 MS. HARKEY: Do we have a second? 14 MS. STOWERS: Second. 15 MS. HARKEY: Okay. Let's hear a second. 16 We've got a motion and a second that on this 17 particular part the chemical that we deny the 18 refund, deny the refund and rule in favor of the 19 department. 20 And on the first one we granted the refund 21 on Stryker issue on the vendor issue. And so thank 22 you. 23 MR. BHOLAT: Thank you. 24 MR. VOSS: Thank you. 25 MR. CLAREMON: Thank you. 26 ---oOo--- 27 28 54 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on September 28, 2017 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 54 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: November 28, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 55