1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 9 REPORTER'S TRANSCRIPT 10 DECEMBER 13, 2017 11 (Prepared from audio recording) 12 13 14 15 SPECIAL TAX APPEAL HEARING 16 APPEAL OF 17 TOBACCO REPUBLIC INCORPORATED 18 NO. 727806 19 AGAINST PROPOSED ASSESSMENT OF 20 SALES AND USE TAX 21 22 23 24 25 26 27 REPORTED BY: Jillian M. Sumner 28 CSR NO. 13619 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chair 4 Fiona Ma, CPA Member 5 Sen. George Runner (Ret.) 6 Member 7 Yvette Stowers Appearing for Betty T. 8 Yee, State Controller (per Government Code 9 Section 7.9) 10 Joann Richmond Chief 11 Board Proceedings Division 12 For California 13 Department of Tax and Fee Administration: 14 Joshua Aldrich Tax Counsel 15 Steven Smith 16 Tax Counsel 17 Damian Armitage Tax Counsel 18 19 For Taxpayer: Oneida Morgan Hawley 20 Taxpayer 21 Victoria Reyes Witness 22 Angelique Reyes 23 Witness 24 25 ---oOo--- 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 13, 2017 4 ---oOo--- 5 MS. RICHMOND: That takes us to Item D, 6 Special Taxes Appeals Hearings. 7 Item D1, please come forward. 8 MS. HARKEY: Do you know what, Members, I do 9 not have my file for D1. I left that maybe -- yeah, 10 I need to get something for it. For some reason it 11 must be in my other -- it must be in my office. 12 Can you -- it's on my desk. I may have put 13 it in Day 4 file. So I apologize. I don't have any 14 Ds here. I have all the CDTFA cases. 15 (Whereupon there was a small break in the 16 hearing.) 17 MS. HARKEY: Okay. I actually am ready to 18 go. Thank you. 19 Okay. Thank you. 20 Mr. Angeja, will you please introduce the 21 items of this appeal. 22 MR. ANGEJA: Madam Chair and Members, the 23 appeal before you involves one unresolved issue, 24 which is whether further adjustments are warranted to 25 the measure of the unreported taxable distributions 26 in tobacco products. 27 MS. HARKEY: Thank you. 28 Welcome to the State Board of Equalization. 3 1 You have ten minutes to make your case, and the 2 Department will then have ten minutes. And you'll 3 have five minutes on rebuttal. 4 So please introduce yourselves for the 5 record and then begin. And be sure you talk into the 6 microphone. 7 MS. HAWLEY: My name is Oneida Morgan 8 Hawley. I am CEO of Tobacco Republic Incorporated. 9 And with me is Victoria Reyes, secretary, and 10 Angelique Reyes, CFO. 11 MS. HARKEY: Okay. You may begin. You have 12 ten minutes. 13 MS. HAWLEY: Madam Chair and Board Members, 14 thank you for taking the time to hear this matter. 15 I must ask you to keep in the forefront of 16 your mind that the audit time period is January 1st, 17 2009 through June 30th, 2011. The 4076 did not 18 exist, and, therefore, cannot be applied here. 19 I ask you to apply the reasonable person 20 standard. And I remind you, there was nothing 21 internally for auditors on how to perform an OTC 22 audit. No manual, training or memos. 23 Also, there was nothing for the public to 24 instruct them on the process a taxpayer should use 25 for determining wholesale cost in various situations. 26 The SPE audit manual, Chapter 3, says an 27 audit should be complete and accurate. That a third 28 party should be able to review and understand it 4 1 without consulting the auditor who prepared it. They 2 failed completely. 3 RTC Section 30017, Exhibit 7, wholesale 4 costs means the cost of tobacco products to the 5 distributor prior to any discounts or trade 6 allowances. Although there were many issues with 7 this audit, the major problem is with their 8 interpretation of those 18 words. 9 As reiterated by the PSTD (phonetic) and 10 legal counsel in excerpts from them in the following 11 documents: 12 Memorandum, November 30th, 2009, the purpose 13 for proposing this rule-making is to clarify the 14 existing law with respect to certain issues that were 15 raised by trial court and opposing counsel in 16 U.S. Smokeless Tobacco Brands Inc. v. State Board of 17 Equalization, Superior Court of San Francisco, 2009, 18 U.S.T. case. With respect to how the distributor's 19 wholesale cost of tobacco products upon which the 20 taxes base should be determined and what cost to be 21 included in determining the distributor's wholesale 22 cost. 23 Interested parties IP, January 6, 2010, the 24 need for regulatory clarification is exemplified by 25 issues and arguments put forth in the U.S.T. case. 26 Interested parties, May 14th, 2010, U.S.T. 27 decision paper Judge Con. Section 3001 does not 28 define wholesale cost to mean established price, nor 5 1 is there any word or phrase in that section that 2 connotes fair market values. 3 Have the drafters of that section intended 4 to import a fair market value concept into 30017, it 5 would have been easy for them to do so. Instead, the 6 phrase "cost" to the distributor without any modifier 7 for the word "cost," unmistakably evinces the intent 8 to define wholesale cost as the actual cost of the 9 OTP sold to the distributor, who is subject to the 10 tax imposed by Section 31023(d). 11 Even if contrary to my own view, that phrase 12 could reasonably be read to convey other meanings 13 such as fair market value besides actual cost, I 14 would still be compelled to interpret the phrase "in 15 favor of U.S.T. sales." 16 Aggy v. SPE, 1999, If there is ambiguity in 17 a tax statute, the ambiguity must be resolved in 18 favor of the taxpayer. 19 Interested parties, October 9th, 2015. 20 Statutory definition of wholesale cost is vague, 21 causing misinterpretation and confusion. Staff 22 believes it is important to provide a definition with 23 includable and excludable costs clearly states. This 24 is especially true when a distributor is also the 25 manufacturer of the product. 26 Interested parties, July 21st, 2015. The 27 calculation of wholesale cost has been the subject of 28 litigation exemplifying the need for regulatory 6 1 clarification. However, the term "wholesale cost" is 2 not defined in a regulation, causing 3 misinterpretation and confusion. 4 Interested parties, April 8th, 2016. The 5 wholesale cost of OTP depends on a variety of 6 factors. A statutory definition of wholesale cost is 7 very general and provides little guidance to 8 distributors as to how the wholesale cost of OTP 9 should be determined in specific circumstances. 10 The lack of statutory guidance regarding 11 whether certain manufacturing costs, shipping charges 12 and federal excise taxes should be included in the 13 calculation of wholesale costs has caused 14 misinterpretation and confusion among taxpayers. 15 BTC staff determined there is an issue or 16 problem within the meaning of Government Code Section 17 11346.2, as there is currently not a regulation that 18 further defines wholesale cost of OTP, and provides 19 sufficient examples to illustrate how wholesale cost 20 should be computed in various situations in which OTP 21 is distributed. 22 I will state the dictionary definition and 23 the usual and ordinary meaning of several words. 24 Free: costing nothing in terms of money, 25 without charge. 26 Complimentary: given free as a gift or 27 courtesy without cost or profit considerations. 28 Discount: deduction from the amount of an 7 1 invoice to offer for sale or sell at a reduced price. 2 Free and complimentary are both defined as 3 without monetary payment expectation. Whereas the 4 definition of discount definitely has a monetary 5 payment expectation, so it is not synonymous or 6 interchangeable with the other two. 7 Please refer to Exhibit 1, exclusive, 8 534827. A reasonable person asked what the amount of 9 taxable tobacco product is based on this invoice 10 would answer $768. Not the $3,601 they are 11 assessing. 12 The amount they want to assess is 13 unsupported. They acknowledge it is free in their 14 notes on the invoice. Free is not the same as 15 discount. Their math on this second attempt to 16 correct this invoice failed. 8533 times 25 is not 17 $2,133.33. 18 Plus, they deducted .33 from the $700 19 shipping erroneously included as tobacco product in 20 the original invoice, crediting only 699.67. 21 Schedule R1-7(a), line 91, Exhibit 6, 22 page 2. 23 Exhibits 2 and 3, Gurkha, 29907 and 36219. 24 Multiple items invoice, literally with no charge. 25 Nothing. No price noted. Zero dollars. Assessments 26 of $2,107 and $152 respectively is unsupported. This 27 is not a discount. It is free. And they acknowledge 28 it is free in the notes on the invoice. 8 1 Special Edition Elegance, No. 15 on 2 Exhibit 2, was assessed a value of $100. Now look at 3 Exhibit 3 for the same item which they mark as No. 4. 4 It was assessed a value of $32. 5 That's a $68 difference. How can they 6 justify such a disparity? And, again, this was a 7 second attempt to correct these invoices. 8 And both of these invoices clearly state 9 that these were event orders. Which meant that the 10 no-charge items were for their rep to give away to 11 customers with purchases. They were not samples, and 12 they were not our product. The original auditor was 13 told this. 14 Exhibit 4, Tobacc-less SA (phonetic), 3104. 15 A reasonable person would say the taxable tobacco 16 amount is $2,740.25, yet they want to assess 17 $3,169.03. 18 Schedule R1-7(a), line 138, Exhibit 6, 19 page 3. The erroneous inclusion that an FET of 20 $253.75 -- that is unsupported. 21 Exhibits 8(a) and 9(a). The inclusion of 22 FET is only on the back of the BOE 501-CT under "for 23 example." And that is not the law. 24 Section 30017 does not include FET. There's 25 $175 erroneous assessment for items valued on the 26 invoice as zero dollars, and clearly labeled "free 27 goods." Again, free is not discount. 28 They acknowledge the overcharge of $6,101.18 9 1 on this invoice, but the actual amount is $6,432.49. 2 Again, their math even on the second attempt is 3 faulty. 4 Exhibit 5, Damarian, 12247. $12 is assessed 5 for an item clearly identified on the invoice as 6 credit, complimentary. Complimentary is not a 7 discount. It is free. 8 These are only a few of the very long list 9 of issues I have with the audits. They have made so 10 many blatant errors, it is impossible to trust to 11 have any confidence in any of their audit results. 12 Quoting them, wholesale cost is not defined 13 in a regulation causing misinterpretation and 14 confusion. That sounds to me like the very 15 definition of ambiguity. And the law is clear, if 16 there is ambiguity in a tax statute, the ambiguity 17 must be resolved in favor of the taxpayer. 18 Thank you. 19 MS. HARKEY: Thank you very much. 20 To the Department, you have ten minutes. 21 Please introduce yourself for the record. 22 MR. ALDRICH: Madam Chair and Members of the 23 Board, I'm Josh Aldrich from the California 24 Department of Tax and Fee Administration, together 25 with Damian Armitage and Steve Smith representing the 26 Department. 27 The Department concurs with the Appeals 28 Division's recommendation, and respectfully requests 10 1 that you find for the Department. 2 Petitioner doing business as Tobacco 3 Republic is liable for cigarette tobacco products' 4 tax, because she under-reported distributions of 5 tobacco in this state. 6 It is undisputed that petitioner is a 7 California-licensed distributor who distributed 8 tobacco products during the audit period. 9 The under-reporting is attributable to 10 petitioner's exclusion of discounts from the 11 wholesale cost, and the exclusion of federal excise 12 tax from the wholesale cost. And it's not disputed 13 that the product at issue was distributed. 14 Petitioner contends that the law is 15 ambiguous regarding this tax and federal excise tax. 16 The plain reading of Revenue and Taxation 17 Code 30017 does not render ambiguity. Wholesale cost 18 has been statutorily defined. Wholesale cost is the 19 cost of tobacco products to the distributor prior to 20 any discounts -- any discounts or trade allowances. 21 Furthermore, the Board adopted Regulation 22 4076, which is consistent with a plain reading of the 23 statute. Regulation 4076 is also consistent with the 24 reporting form BOE 501-CT. 25 Distributors like petitioner must report 26 their distributions on a monthly basis on the form. 27 And the form plainly states that wholesale cost 28 includes manufactured discounts and federal excise 11 1 taxes. 2 The burden of proof has shifted to 3 petitioner, because the Department's explanation for 4 the audit is reasonable. The Department relied on 5 documentation they were provided from vendors, and 6 petitioner's records that were acquired during the 7 audit and appeal's process. 8 Petitioner must establish by documentation 9 or other evidence that the circumstances she asserts 10 are more likely than not to be correct. 11 Um, let's see -- accordingly, we ask you to 12 deny the petition. 13 We are available for questions. 14 Thank you. 15 MS. HARKEY: Thank you. 16 You have five minutes on rebuttal, if you'd 17 like. 18 MS. HAWLEY: Okay. 19 I, of course, disagree with what they have 20 stated. I have -- for years have consistently 21 declared that the original audit of 322 invoices was 22 full of errors, and the PD -- STD and legal counsel 23 refuse to listen. 24 In their partial re-audit of 77 invoices, 25 they found 36 with blatant errors. That's a 47 26 percent error rate. 27 On the re-audit, they acknowledge 28 overcharges in excess of $21,000, which equates to a 12 1 monetary error rate of 59 percent in their favor. 2 This is unacceptable. How can an audit, which has 3 been contested for years, and supposedly been 4 reviewed by numerous people at multiple levels, been 5 signed off again and again as accurate? 6 Chairwoman Harkey, your staff, Mr. Mathis, 7 looked at one invoice and saw a problem. And he 8 actually listened to me. 9 Both him and Senator Runner's staff, 10 Mr. Wiggins, tried to get clarification as to the 11 formula used. And both were told there was no 12 standard, no reputable formula, no explanation could 13 be given as to how the computations were done. They 14 could not identify the moneys attributed to FET or 15 untimely pay. 16 The auditor didn't even know the definition 17 of distributed product. She tweeted the invoice date 18 as both the delivery receipt date and the distributed 19 product date in spite of my having explained the 20 difference on more than one occasion. 21 It was also explained in writing to the PSTD 22 and legal counsel to no avail in Exhibit 10. And 23 that the Department's interpretation of the existing 24 statute constitutes a regulation as defined under the 25 Administrative Procedures Act, APA, and as such, must 26 be promulgated in accordance with the APA. 27 Even if the interpretation is found to be 28 valid, it cannot be legally enforced until it goes 13 1 through the required rule-making process, interested 2 parties participation, review and acceptance by the 3 Office of Administrative Law, and finally by the 4 Secretary of the State. 5 The question must be asked how our entire 6 industry can be expected to comply with rules that 7 did not exist in the period in which the Department 8 seeks to hold this responsible for the tax. The 9 answer is they can't. 10 I refer you to Government Code Section 11 11340.5, no state agency shall issue, utilize, 12 enforce or attempt to enforce any guideline, 13 criteria, bulletin, manual instruction order or 14 standard of general application or other rule which 15 is regulation under the guidelines and so forth. Uh, 16 you know -- has been adopted as a regulation and 17 filed with the Secretary of the State. 18 This is a protection mechanism in place, and 19 it is a very logical process. The rule-making 20 protocal for the SP -- is on the SPE Web site. The 21 Program Department or Legal Division identifies the 22 need for a new regulation amendment based on new 23 Legislation court decisions or changes in 24 interpretation of existing laws which have general 25 taxpayer impact. 26 With full knowledge that what they were 27 doing was not ethical, moral or legal, the PSTD and 28 legal counsel purposefully, willfully put me and our 14 1 industry through hell for years. They were 2 attempting to use an underground regulation. 3 According to CCR Section 250, underground 4 regulation means any guideline, criteria, and so 5 forth, including a rule governing a state agency 6 procedure that is regulation as defined in Section 7 11342.600 of Government Code, but has not been 8 adopted as a regulation and filed with the Secretary 9 of State pursuant to the APA, and is not subject to 10 express statutory exemption from adoption pursuant to 11 the APA. 12 The OAL and the courts have consistently 13 struck down rules and policies for this. 4076 was 14 just in the beginning stages of the APA process. Not 15 adopted, so it cannot be applied here. This is all 16 due to the adverse of the PSTD and legal counsel as 17 they were absolutely aware that they were utilizing 18 and attempting to enforce an underground regulation. 19 Per Debbie Caspey (phonetic) of the Special 20 Taxes and Audit Division and Teresa Covert from the 21 Disclosure Office, there was no manual training memos 22 for conducting an OTP audit for either the auditor or 23 the taxpayer for the audit time period. 24 This audit should have never taken place. 25 MS. HARKEY: Thank you. 26 MR. RUNNER: Madam Chair. 27 MS. HARKEY: Yes. 28 MR. RUNNER: Just for the record, I would 15 1 want to say that any conversation my staff may have 2 had with this taxpayer was prior to July 1st. 3 MS. HARKEY: Right. We also had 4 conversation that actually got the audit adjusted. 5 The Department made adjustments from a tax of 22,000 6 down to 13,000 based on review. 7 MR. RUNNER: Prior to July 1st. 8 MS. HARKEY: Right. Prior to July 1st. 9 This was done way back when. 10 So let me see -- so does anybody have any 11 questions? 12 MR. RUNNER: I have some questions in 13 regards to some timeline issues. I'm concerned in 14 regards to the timing of some of this audit and 15 possible interest relief during some of the timing of 16 this. 17 Can you speak to the length of this audit 18 and some of the issues? 19 MR. ALDRICH: Sure. 20 So the audit engagement letter was sent out 21 to -- sorry -- on -- sorry -- 22 MR. ARMITAGE: 9/15/11. 23 MR. ALDRICH: Yeah. And so there was a 24 series of delays during the audit. Largely 25 attributable to petitioner's health conditions. 26 There was lots of reorganization -- or rescheduling 27 to accommodate on her request to help deal with the 28 health issues that she was experiencing at that time. 16 1 And -- so, for example, even the first date 2 they were supposed to meet was rescheduled from 3 September to October 24th. 4 MR. RUNNER: What year? 5 MR. ALDRICH: Of 2011. 6 MR. RUNNER: Mm-hm. 7 MR. ALDRICH: And part of the delay was also 8 acquiring documents from vendors. So invoices and 9 whatnot. Which petitioner cooperated with. The -- 10 MR. RUNNER: Let me just go to a couple that 11 I'll ask about. 12 MR. ALDRICH: Okay. 13 MR. RUNNER: I've got about seven months the 14 end of basically from the middle of '12 to the first 15 month of '13, because of the auditor errors. 16 MR. ALDRICH: The middle of '12 -- is 17 there -- so in the middle of '12 I have petitioner 18 was out for medical reasons, and we requested to meet 19 with them in July of 2012. 20 MR. RUNNER: Mm-hm. 21 MR. ALDRICH: Lots of phone calls, no 22 responses. 23 MR. RUNNER: The reason we were meeting with 24 them at that time was what? 25 MR. ALDRICH: She wanted additional 26 explanations and to go over the audit workbook 27 papers. 28 MR. RUNNER: We had made no adjustments at 17 1 that point? 2 MR. ALDRICH: We did. We revised the audit 3 workpapers on September 27th, 2012. And then 4 petitioner was back from her injury, and we wanted to 5 meet with her. Lots of no responses. 6 MR. RUNNER: Okay. Let me go to the next 7 one, which is September 13th -- or September 1st, 8 2013 to 7/31/15, about 22 months. Just a long time 9 before the Appeals Conference. 10 MR. ALDRICH: I'm sorry, what was the date 11 again? 12 MR. RUNNER: From 9/1/13 to 7/31/15. 13 MR. ALDRICH: So, um, there was a request 14 for a postponement of the Appeals Conference that was 15 faxed in from the petitioner's representative. The 16 request was granted. 17 MR. RUNNER: On what date? 18 MR. ALDRICH: That was faxed in on 19 December 9th, 2014. 20 Um, let's see, and then -- then there was 21 some e-mails between the Appeals Conference folder 22 and to provide time for additional submission of 23 information. 24 And then petitioner submitted additional 25 references and statutes, laws, and whatnot. 26 MR. RUNNER: Any of these related to the -- 27 how much of this process was, I guess, extended 28 because of the original audit and the errors that 18 1 needed to be corrected? 2 MR. ALDRICH: Um -- 3 MR. ARMITAGE: Damian Armitage with the 4 Department. 5 I don't believe that the delay that occurred 6 during the appeals process had anything to do with 7 any of the errors. 8 MR. RUNNER: Let me ask it to the 9 taxpayer. 10 MS. HAWLEY: I had consistently asked for 11 information and clarification from them as to how 12 they came up with certain numbers and to break down 13 what was what. 14 Because when I look at the audit results, 15 it's got all of this money. And you're saying, Well, 16 it's for, uh, you know -- for FET charges, and for 17 discounts, and for this and for -- and I'm saying, 18 Well, what part of this money that you're putting in 19 here is what? Explain it to me. You know, break it 20 down for me. 21 Because I can't tell what's what. And how 22 do I defend myself, you know, against something that 23 I don't understand? They have never been able to 24 break down to me how they did it, because they lumped 25 everything together. 26 They acknowledged that a discount and FET 27 and timely pay, all these things are all, you know, 28 different categories. But they lump everything 19 1 together. And I'm -- you know, with their formula. 2 Even when I've asked them, "Well, what's what?" could 3 never get a response from them. 4 So I had told them that I contest the whole 5 thing. Because they wanted to know exactly what was 6 my problem with the thing. I said I can't make heads 7 or tails out of the money that you guys are 8 attributing here, because I don't know what is FET, 9 what is discount, you know, what is any of these 10 things, because you've lumped it all together. 11 They would never, you know -- they couldn't 12 even break it down and tell me what's what. And I 13 said, "How am I supposed to defend myself on this 14 when you can't even tell me what's what?" 15 And I consistently told them that there were 16 things wrong. There were things wrong. We finally 17 got to the point where we were going to be in 18 hearing. 19 And, you know, your staff, Mr. Runner. 20 And yours, Ms. Harkey, did talk to me. And 21 went, "Oh, yes. We see what you're saying. There's 22 a problem here. You can't tell what part is what." 23 Even when I went to the -- 24 MR. RUNNER: Let me go -- that's fine. 25 That's fine. Let me just go -- 26 Go ahead. 27 MR. ALDRICH: Could I respond to that, 28 please? 20 1 MR. RUNNER: Yeah. 2 MR. ALDRICH: She sent in a letter 3 April 1st, 2013 regarding some of her concerns of the 4 audit. That was responded to with a telephone 5 conference on April 11th from Julia Findlay and also 6 with a follow-up letter to explain what exactly had 7 happened. 8 Also during -- prior to that letter, though, 9 the auditor had offered to meet with the petitioner 10 to explain the audit process as well. Subsequent 11 letters also explain our position and the process 12 seized. 13 And in the re-audit, the FET and the 14 discounts are separated out. It wasn't common to -- 15 or I don't think it was -- it's not required that 16 they be separated, because they're all considered to 17 be discounts or to be part of the wholesale cost. So 18 that's one of the -- 19 MR. RUNNER: Well, let me ask you this, 20 was -- the re-audit was performed when? 21 MR. ALDRICH: It began March 26, I think. 22 MR. RUNNER: Year? 23 MR. ALDRICH: Of 2016. Let me look. 24 MR. ARMITAGE: I think it was March of 25 2016. 26 MR. RUNNER: Completed? 27 MR. ARMITAGE: It was completed on 28 July 13th, 2017. 21 1 MR. RUNNER: Okay. I guess my point in 2 regards to some of this is, yeah, there was 3 communication during those seven and twenty-two month 4 periods, during those periods of time in '12 and '13, 5 and '13 and '15. But they are related to the issues 6 she was dealing with with the re-audit. Or the 7 errors in -- in -- in the discussion. 8 Because at that point the re-audit -- what 9 did the re-audit lower the liability to? 10 MR. ALDRICH: So the re-audit lowered the 11 liability to 13,406.19 in tax and $7,565.64 in 12 interest. 13 MR. RUNNER: Right. And I guess my point 14 would be that it was the re-audit that finally 15 happened that lowered the liability. And during 16 those times, at that point, it's -- that's what the 17 taxpayer was trying to communicate. "I need these 18 things looked at. I need these things looks at." 19 Finally there was a re-audit. 20 So I still believe that -- I guess in my 21 head -- that the delay here, even though the taxpayer 22 may have been involved in the delay, was still always 23 about the fact that there was an error in the audit. 24 Which subsequently proved to be right in the 25 re-audit. 26 And so I guess that's why I would be looking 27 at those months as potential interest relief during 28 those times. 22 1 So I'll let others talk about it. 2 MS. STOWERS: I just kind of want to pick up 3 on what you're saying that there was concerns by the 4 petitioner on how the audit was conducted and some 5 errors. And she was communicating with the 6 Department trying to get an explanation. And it 7 seems to me that her request was not being responded 8 to. 9 It was not until Ms. Harkey and Mr. Runner's 10 staff got involved that there was any adjustments 11 made. So that is a concern. 12 MS. HAWLEY: That's correct. I had 13 repeatedly asked for explanations as to how they did 14 this, how they were allocating moneys. Because if 15 you're lumping everything together, how do I know 16 what amounts are what? And how do I defend, you 17 know, myself? 18 And especially when you can't explain it to 19 me, you know. When I'm asking them, and they can't 20 explain it to me. 21 Now the partial re-audit that they did was 22 because they contacted several manufacturers and got, 23 you know, the invoices from them in addition to 24 examples of problems that I had with the audit that I 25 had given to Senator Runner's staff member. Because 26 I was showing him, you know, Hey -- look at 27 Chairwoman Harkey's staff. I said, "Look at these 28 invoices." 23 1 These are things that I'm having problems 2 with. That this makes no sense where they've put in 3 for one manufacturer, Tobacco Safe Fuego product 4 (phonetic), they would show the amount that was the 5 total amount that we owed at the bottom, which was 6 multiple invoices. And they were taking that full 7 amount and putting that in as what we owed. 8 So basically I was being charged two and 9 three and four and five times for the same product, 10 because of they didn't know how to read the invoice 11 correctly. Were drawing from the wrong location. 12 MS. STOWERS: I understand. 13 MS. HAWLEY: Also -- 14 MR. RUNNER: Let me ask you in regards to -- 15 to Appeals in regards to the issues that we have with 16 the finality penalty. What are our options with the 17 finality penalty? 18 MR. ANGEJA: If you find reasonable cause 19 for the failure to timely petition, you can relieve 20 the penalty. 21 MR. RUNNER: Okay. I'd like to make a 22 motion that -- relieve the final -- finality penalty 23 along with interest relief from 7/1/12 to 1/31/13 and 24 from 9/1/13 to 7/31/15. 25 MS. STOWERS: Second. 26 MS. HARKEY: Okay. There's a motion and a 27 second. 28 Are you clear on it, Mr. Angeja? 24 1 MR. ANGEJA: I -- for clarification, the 2 finality penalty usually requires the payment of the 3 tax as the standard condition. 4 MS. STOWERS: But you said we could find for 5 reasonable cause. 6 MR. ANGEJA: You can relieve the finality 7 penalty based on reasonable cause, but the standard 8 condition that the Board has always adopted is the 9 payment of the condition -- 10 MR. RUNNER: So she -- if she makes the 11 final -- if she makes the penalty -- if she makes the 12 payment, the finality penalty will go away? 13 MR. ANGEJA: That's the standard 14 condition. 15 MR. RUNNER: That's understood. 16 MS. HARKEY: Okay. There's a motion and a 17 second for that. 18 Is there any objection? 19 MS. HAWLEY: Okay. I'm sorry. I'm not -- 20 I'm not a lawyer. 21 MS. HARKEY: No, we're not -- we're not 22 either. So here we go. Let me just -- 23 Is there any objection? Let's get through 24 this first. 25 No? Okay. 26 Here's the situation. You have been granted 27 interest relief for -- from 7/1/12 to 1/31/13 for 29 28 months. Twenty-nine months of interest relief. Your 25 1 audit was already adjusted. 2 And also, if you pay the disputed tax and 3 the remaining interest, your finality penalty of 4 1,340 will disappear. 5 MS. REYES: I have a question. So with -- 6 MS. HARKEY: The -- the -- the tax is 7 assessed properly at this point. The items that are 8 given free are tax, and the FET is -- should be part 9 of that invoice. So I apologize for the 10 misunderstanding there, but that is -- that -- that 11 is -- 12 MS. HAWLEY: That didn't go in -- the FET 13 was only mentioned in the -- 14 MS. HARKEY: Okay. Well, we've decided the 15 case. And we're not here to dispute anymore. 16 MS. HAWLEY: I'm -- 17 MS. HARKEY: I'm just trying to explain -- 18 MS. HAWLEY: I'm -- 19 MS. HARKEY: -- what we decided. 20 MS. HAWLEY: I'm trying to under -- 21 MS. HARKEY: Appeals can explain it to you, 22 but -- 23 And I also need to ask Appeals, if she 24 enters into a payment plan, will the penalty be 25 deleted? Assuming she just can't come out of pocket 26 for all this. 27 MR. ANGEJA: Appeals doesn't handle that, 28 but my understanding is if they enter into a payment 26 1 plan and successfully complete it, that's usually 2 also when a finality penalty is relieved, even if 3 relief wasn't otherwise warranted -- otherwise 4 ordered by the Board. 5 MS. HARKEY: Okay. Thank you. 6 MR. ANGEJA: So, yes. 7 MS. HARKEY: And if you need any more 8 explanation, we'll be happy to have someone talk to 9 you in the back. But the hearing is -- the hearing 10 is completed. We've granted as much relief as we 11 think we possibly -- as we legally can. 12 Thank you. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 27 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that from December 13, 2017 audio, I recorded 10 verbatim, in shorthand, to the best of my ability, 11 the proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 28 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: July 18, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 28