1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 25, 2017 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 GREEN APPLE, INC. 14 NO. 669807 (BH) 15 THE CRAVERY NORTHERN CA, INC. 16 NO. 669808 (BH) 17 AGAINST PROPOSED ASSESSMENT OF 18 SALES AND USE TAX 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: Fiona Ma, CPA 3 Chairwoman 4 Diane L. Harkey Vice Chair 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) 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 Board of Equalization Staff: Jarrett Noble 15 Tax Counsel Legal Department 16 17 For the Department: Scott Lambert Business Taxes 18 Specialist III Business Tax and Fee 19 Department 20 Kevin Hanks Chief 21 Business Tax and Fee Department 22 Stephen Smith 23 Tax Counsel IV Legal Department 24 For Petitioner: Janice Wong 25 Taxpayer 26 ---oOo--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 25, 2017 4 ---oOo--- 5 MS. MA: All right. Let's call the next 6 item then. 7 MS. RICHMOND: So our next item is C7a 8 Green Apple, Inc. and C7b The Cravery Northern 9 California, Inc. 10 Please come forward. 11 MS. MA: Thank you. 12 Okay. I think we're all ready. So, 13 Mr. Noble, please introduce the issues in this 14 case. 15 MR. NOBLE: Good morning, Madam Chair and 16 Members. I am Jarrett Noble on behalf of the 17 Appeals Division. 18 The appeal before you presents one 19 unresolved issue, which is whether relief is 20 warranted based on petitioner's reliance on 21 incorrect oral and written advice from the Board. 22 In addition, the Department has one revised 23 recommendation, which is to reduce the measure of 24 tax for Green Apple, Incorporated by $11,556. 25 MS. MA: Excuse me? One more time. 26 MR. NOBLE: Uh, reduce the measure of tax 27 for Green Apple, Incorporated. 28 MS. MA: Okay. 3 1 MR. NOBLE: By $11,556. 2 MR. RUNNER: That was the measure, not the 3 liability. 4 MR. NOBLE: The measure, yes. 5 MR. RUNNER: The measure. 6 MS. MA: Okay. Okay. Ms. Wong. 7 MS. WONG: Yes, hi. 8 MS. MA: Welcome. Please introduce 9 yourself for the record. You will have ten minutes. 10 MS. WONG: Yes. 11 MS. MA: You don't have to use the complete 12 ten minutes. 13 Then the state will present for ten 14 minutes. And then you'll have an additional five 15 minutes, and then it will be open to the Board for 16 discussion. 17 MS. WONG: So I believe each of the Member, 18 Board Member will have a copy of all this 19 information. Um, so I try not to, um, take too much 20 of your time. Just, uh -- I just newly submit a 21 timeline. So I'd just like to briefly give you an 22 idea of the whole case. 23 So start from December 2007, before I was 24 open two store. One is Green Apple, Inc. It was -- 25 Green Apple, Inc. was actually holding Icebee 26 yogurt, so it's like a yogurt store. It has seating 27 and then it takes about over a thousand-square-foot. 28 I took the floor plan for both places. 4 1 It's actually sharing one space. The Cravery 2 Northern California was a franchise, so that's the 3 reason why I wanted to keep the books separately. 4 So I had two incorporation because I had to report 5 to the Franchise Board and submit those, um, you 6 know, franchise fee. 7 So for The Cravery, there's no seating and 8 that was only, um, uh, selling pies, like drinks and 9 orders. We have sold some salads and stuff. 10 So I brought the plan to, um -- to the -- 11 floor plan and everything that I have to the Board 12 of Equalization in San Francisco, and I was applying 13 two permits, as you see in the chart. I say I 14 submit two permits application. But the Green Apple 15 one was accepted because it has seating. And The 16 Cravery was denied, that was mainly two reasons. 17 They say, first, it's, um -- it's a pie store. So 18 you're not selling, you know, uh -- you know, a real 19 meal. So, and then the second one, reason is 20 because there's no seating. So as a taxpayer I only 21 can -- I can only accept what they -- I was being 22 told at that point. 23 So on February 2008 I open Green Apple. 24 Um, I used the register on both places to collect 25 sales, you know, either credit card or cash. So 26 we're keeping a good record of what needs to be 27 charged to the customer on sales tax and everything. 28 For The Cravery, because I didn't have a 5 1 permit and I don't believe it's legal to collect 2 sales tax for no reason -- I cannot keep it; I have 3 to give it to Board of Equalization, but then where 4 do I give if I don't have a sales permit? So 5 meaning that I could not collect sales tax from the 6 customer; that was my understanding. 7 And The Cravery, for your reference, is 8 December 23rd, 2007. It was the first day it open. 9 But then on February 2008, while I start opening 10 Icebee frozen yogurt and I start worry because I 11 keep, uh, collecting tax for each transaction for 12 Icebee, I felt that was the right way of doing it. 13 So I submit to the Board of Equalization every 14 quarter once I receive, you know, the -- the bill -- 15 not the bill, but every time I need to record it -- 16 report it, right, so I submit the -- the sales tax. 17 I felt that's easier for me as a taxpayer. 18 So I went back to the Board of Equalization 19 in San Francisco again and requested a sales permit 20 the second time. But then they said, tell me the 21 same -- exact same thing, "No need to collect tax. 22 You have a pie shop." 23 So on March 2008, I wasn't feeling 24 comfortable about this because my friend was telling 25 me, "Oh, are you sure?" And then I'm, like, "Yeah, 26 they was telling me." 27 So I call again. I make a phone call to 28 the San Francisco Board of Equalization. I spoke to 6 1 Dorothy Richardson, and from what I know she was the 2 supervisor. 3 She told me that, "No, you don't need a 4 sales permit." 5 But then I said, "Well, is there somehow I 6 can have a written confirmation?" 7 She said, "Yeah, just go ahead and send a 8 fax to me." So she provide that fax number. 9 And then I sent her a fax. And I remember 10 on the same day or a day after I received a fax 11 copy. So that was actually my fault because I could 12 not find the fax copy. Because I tried to keep it 13 in a safe place, but I just couldn't able to find 14 it. But I, um -- I do have it, so there's no way I 15 would throw it away. So that's the reason why it 16 brought me here basically because I couldn't find 17 that written copy. 18 On September 2009, I went to the Board of 19 Equalization the third time. The reason behind it 20 is because at that time there was someone interested 21 in opening a second location for Cravery pie. So I 22 went ahead and asked, because if I'm having two 23 locations, I better be clear what's happening and 24 what I need to be done as a taxpayer. 25 So I went ahead and then explained the 26 situation, there's a potential location. I show 27 them the address and everything. So then finally 28 they say, okay -- I remember it was the supervisor 7 1 told me, okay, you can have this permit. But 2 remember, this permit is only used to collect tax 3 for combo and soda drinks. 4 If -- you know, as a taxpayer I would not 5 make this up, because it was so clear, the 6 instruction was given. So I -- when I -- the first 7 minute when I got the tax permit number, when I went 8 back to the store, I tell all my employee that this 9 is what you need to do. And I changed the register 10 right away at the same day, to collect tax for combo 11 drinks -- combo and soda drinks. 12 So on January 2010, that was what you will 13 see, um, why Icebee or Green Apple, Inc. was getting 14 involved. But because the franchise, the whole 15 franchise for Cravery is, um -- it didn't work out. 16 So as a franchisee we no longer need to submit any 17 franchise. It was -- the whole relationship was 18 broken. So that's why, for my accountant was 19 advising me, in fact, I can use Green Apple, Inc. as 20 the, um, incorporation and holding two businesses, 21 that would save me $800 per -- per year because I no 22 longer need to report to my franchise, uh, you know, 23 fee. 24 So I thought, oh, that's a good idea. So 25 that's the reason why I paid January 2010 because I 26 believe maybe not that exactly day I went in, but 27 then it start from January 2010. I probably went in 28 on December sometime. And then saying that, oh, 8 1 this is the change. 2 So I explain it to the Board of 3 Equalization's member. And then they say, okay, 4 then you start using this new number. So they gave 5 me, I think the same day, they gave me a new number. 6 They say, starting from today you should use this 7 new number to collect both taxes for Cravery and 8 Icebee, which is Green Apple, right. And then you 9 start, um, combining those tax and file it every 10 month. 11 Um, so that's about what I wanted to say. 12 But one thing I want to say is, as a taxpayer, I 13 believe and I totally, um, think I was doing the 14 right thing. I try so many times, not just calling, 15 but physically going into the Board of Equalization, 16 believing the government is the -- you know, 17 promising the right thing. 18 I don't think I did anything wrong to be 19 assessed this tax. And I did not collect any of 20 this tax for the customer. Not because I didn't 21 want to, it's because I have no right and it was 22 illegal to collect any sales tax without a sales 23 permit. 24 So the sales permit is the first thing I 25 need, to collect. And then if you look at September 26 2009, once I got my sales permit for Cravery, I 27 start collecting it. And who make it up for combo 28 and soda? Surely it wasn't me. 9 1 So -- so I mean that's something that we 2 should think about it, and that's the reason why up 3 'til now I still searching for the letter, and also 4 up 'til now I still a hundred percent totally 5 believe I didn't do anything wrong to not collect 6 tax. 7 Thank you very much. 8 MS. MA: Okay, thank you. 9 Department, please introduce yourself. Ten 10 minutes for the -- your presentation. 11 MR. LAMBERT: Good morning, Chairman Ma -- 12 or noon, maybe -- 13 MS. MA: Yes. 14 MR. LAMBERT: Don't say that too often -- 15 but, Chairman Ma and Members. My name is Scott 16 Lambert, I'm representing the Sales and Use Tax 17 Department today, or Business Tax and Fee 18 Department. To my right is Kevin Hanks, also with 19 the Business Tax and Fee Department; and to his 20 right is Stephen Smith with the Legal Department. 21 In this particular case the taxpayer 22 operated two businesses that were next to each 23 other. One was a yogurt shop, and the taxpayer had 24 collected tax on all sales from the yogurt shop 25 during this audit period and reported them. 26 The Department looked at the records for 27 that location and accepted them. They appeared to 28 be accurate. So the only issue was The Cravery, 10 1 which was loaded -- located next door. 2 The Cravery sold various different items. 3 It was not a bakery. And that's maybe where some of 4 the issue comes from is the description of it as a 5 bakery. 6 What it sells are pot pies. And if you -- 7 growing up anyway, I think most of us ate frozen pot 8 pies. That's similar to what it is. They're 9 various types of those. But in a -- in essence, 10 it's a little bit different than the pot pies in the 11 fact that these pies can be eaten without utensils. 12 So the crust is strong enough where you can hold it 13 in your hand with -- it comes in a little paper 14 container, and it's also in a clam shell container 15 that's over that, and it's easily portable. 16 So that -- that's the main thing that the 17 taxpayer sells. But there's also a number of other 18 items that the taxpayer sells that may not have been 19 described. They include soup, sliders, hot 20 sandwiches, crepes, soda, combination meals; and the 21 combination meals always have a hot, um, pot pie. 22 And there was also a sign that had seating next door 23 which was available in the -- in the Icebee. 24 So, uh, the Department determined that the 25 sales made from The Cravery were of a taxable 26 nature. An observation test was performed. Based 27 on that observation test, a little over 85 percent 28 of the items were considered to be hot items or 11 1 taxable items. And of those, over 80 percent were 2 considered to be food, and the Department considered 3 the taxpayer to fall under the 80/80 percentage or 4 rule where all sales would be subject to tax. 5 So, the -- the taxpayer's claiming that 6 they don't owe any tax under section 6595 -- I'm 7 sorry, 6596 of the Sales and Use Tax law, excusable 8 delay, reliance on advice. 9 There's two things that are -- well, 10 there's multiple things, but there's two things in 11 particular that you need to have in order to show 12 that the Department gave you incorrect advice. One 13 of them is a letter sent in to the Department that 14 fully explains your business. And then the response 15 from the Department that tells you that you don't 16 need to charge tax on items. 17 Based on the letter that was presented by 18 the taxpayer, and it was the last item at the back 19 of the summary D&R, there's a letter dated March 20 28th, 2008. The Department feels that, one, there's 21 no evidence that we received this fax letter. 22 There's no evidence that the Department responded to 23 that letter. 24 So there are procedures that the Department 25 goes through when they receive these taxpayer 26 inquiry letters, and it goes through an extensive 27 review process. And they keep a log, and then the 28 letter that is sent back is kept in a locked file 12 1 cabinet. There was no indication or no evidence 2 that a response had been made or that, um -- or that 3 we had received that faxed letter. 4 The taxpayer also said that a fax was 5 returned to them by the Department within two days. 6 Um, and it's a minor issue, but the taxpayer did 7 send or faxed in on a -- on a Friday. And that, as 8 I said, there was no evidence that -- that we 9 received that faxed letter. 10 So if you look at the letter itself, it 11 doesn't explain the -- the true nature of the 12 taxpayer's business. It kind of refers to itself as 13 a bakery. Based on this letter, you really could 14 not give a reply. There -- it's a difference 15 whether the item sold is hot or cold. So if in fact 16 everything you sold was a bakery item and it was 17 to-go, you should not have a permit. You're not 18 required to hold a permit. There's nothing that you 19 sold that would necessarily be taxable. 20 If you're selling a hot food item -- or 21 let's say the pot pie, all of them you sold, there 22 was no heating of those pies and you just sold those 23 pies to-go, you would not be required to hold a 24 permit for that either, those strictly food. What 25 makes it taxable is the heating of that particular 26 item. 27 It's the same thing with the soup, the 28 sliders, the hot sandwiches, the crepes. Soda, in 13 1 and of itself, you would be required to hold a 2 permit. So even if you were a bakery and you were 3 selling soda, you're required to hold a permit for 4 that. Any time there's a combination meal, if one 5 of the items is hot, it's sold for a single price, 6 that's a taxable transaction even if it is to-go and 7 you would be required to charge tax on that. 8 So the letter that is being written here is 9 really incomplete to describe what type of business 10 was taking place. 11 And as I mentioned, you know, part of 6596 12 is to provide the Department's response. If there 13 wasn't a response, then it's highly unlikely that it 14 went through the review process. If there is a 15 response, a taxpayer is required to provide that. 16 There's -- at this point, there's no telling as to 17 if there was a response whether -- or what was said 18 in that response. 19 The one item -- pretty much the, uh -- the 20 submission or exhibit that's been provided by the 21 taxpayer, the dates appear to be accurate. Two 22 things I would point out is some of these we're not 23 sure exactly what was said between the Department 24 employees and the taxpayer. 25 I would point out Dorothy Richardson was 26 not a supervisor. She was a Tax Tech that had been 27 there for a limited period of time under March of 28 2008. It would not be the type of person that would 14 1 respond to a taxpayer inquiry letter. 2 On January of 2010, there was not a new 3 number that was provided for The Cravery. The 4 number that was used was the existing number for the 5 Green Apple. 6 So, um -- oh, in terms of -- the Department 7 did recommend a reduction of $11,556. And how we 8 arrived at that was using all the information for 9 The Cravery that we had. We did have the majority 10 of their POS records; we accepted those. We had to 11 estimate basically three-quarters worth of, um, of 12 sales and we used a method that is acceptable. But 13 I believe the method that we're using now is more 14 accurate in that we're taking all the POS, dividing 15 it by the number of months and using the average 16 monthly sales to determine the audited taxable 17 measure for those missing periods. 18 So accordingly, with that adjustment, the 19 Department concurs with the Appeals Division 20 Decision and Recommendation. 21 MS. MA: Okay. Ms. Wong, you have five 22 minutes on your rebuttal. 23 MS. WONG: Yes. So, as you guys may know 24 or may not know, our business originally was really 25 selling pot pie only. But since things can change, 26 like we did not have seating like -- like what I 27 said initially. But things can change over the year 28 as long -- as you can imagine 2007 up to 2011 or 15 1 even few years ago, the recession and everything 2 was -- business was tough. 3 So the slider and the hot sandwich, like 4 this gentleman just mentioned, um, I -- I think it 5 was like after 2011 or 2012. I don't have a very 6 clear memories where -- when we started. But before 7 we have the permit, I can say we did not have the 8 slider. We did not have the crepe and everything. 9 And for the number that he mentioned, that 10 there's no new number, I apologize on that because 11 this was few years ago. But I remember I received a 12 brand new permit. Whether the number is the same, I 13 don't remember. But it's a brand new permit. It 14 says Icebee slash Cravery. So that's what I put up 15 in my store and start from that day I collecting tax 16 with that sales permit. 17 So that's what I really want to men- -- uh, 18 emphasize. 19 And for the information given, yes, I -- I 20 thought Dorothy was the supervisor for sure. And I 21 did not, um, know why, um, there was no record. But 22 the fax was received it either on the same day or 23 within those days, like what I first mentioned. And 24 I remember it was 3:00 p.m. I remember I send out 25 something at 1:00 p.m. And then I receive it at 26 3:00, because I was sitting right next to the fax 27 machine waiting, because I was sharing the line with 28 my phone and the fax, you know, those days. 16 1 So, um, what I want to, uh, declare is 2 everything I said is true. And what I did I believe 3 I was correct. And that was it. I didn't say 4 anything that, um -- that is not, um, the truth. 5 That's what I'm trying to say. 6 Thank you. 7 MS. MA: Okay. Members? 8 Ms. Harkey. 9 MS. HARKEY: This is a real tough case 10 because I can understand the confusion. 11 When I'm reading here it says, uh -- it 12 says that it was -- the permit said they were pies 13 to-go. And I believe the taxpayer said that they 14 were -- yeah, it says "type of item sold," on the 15 permit, "meat pie, sold to-go only." And they are 16 like a bakery shop. 17 No indication of hot food, but unless 18 you're really involved in the industry, you probably 19 don't know that makes a distinction. I didn't know 20 that until I got sitting up here and you guys 21 educated me, hot or cold, you know. If I have a 22 cold sandwich, I'm good. If I have a hot sandwich, 23 then there's sales tax. Which I think is very 24 confusing. I wish we could change that somehow. 25 MS. MA: Yeah. 26 MS. HARKEY: Make it consistent. 27 MS. MA: Yes. 28 MS. HARKEY: Because it's just -- I mean it 17 1 requires the people that open up a business to go 2 through, you know -- who would -- who would know? I 3 didn't know. 4 Anyway, um, so I have a lot of sympathy for 5 that. 6 And I'm -- I'm wondering -- I -- I do 7 believe she's very credible. The taxpayer's very 8 credible in her -- her explanation, and if you look 9 at her flow chart. And I'm wondering, I know the 10 Department has made some concessions on stuff, but 11 I'm just wondering if there's -- 12 I guess, for the taxpayer, I'd like to ask 13 you, when -- when did you say you began to serve 14 other items other than your pot pie? 15 MS. WONG: I would say it's probably after 16 I received the combo. So like what I said, then 17 combo if every time, like this gentleman say, the 18 combo come with the pie, which is hot, then we would 19 have collected tax after that, right? So I would 20 not be able to collect any tax before that. And 21 the -- I can look up and see when we start 22 introducing those. But I totally believe it's after 23 2010. 24 MS. HARKEY: So that's for The Cravery -- 25 MS. WONG: Yes. 26 MS. HARKEY: -- only, right? 27 MS. WONG: Yes. 28 MS. HARKEY: The Cravery only. 18 1 So I'm wondering -- because we've got two 2 cases here; we've got Green Apple liability, we've 3 got Cravery liability. 4 MS. WONG: Yeah, because the Green Apple is 5 because after 2010, um, the sales permit was for 6 both. 7 So the Green Apple I paid everything. For 8 the Icebee yogurt part, like what they reported to 9 you, that I pay everything and they already review 10 it very well. They had no question about that. 11 But then why the Green Apple involved, it 12 was because of 2010 I combine those under one 13 corporation. 14 MS. HARKEY: Okay. 15 MS. WONG: So mainly all this tax they were 16 chasing back is just for The Cravery pie. 17 MS. HARKEY: Okay. So let me ask the 18 Department. I've got two liabilities here, Green 19 Apple, Inc. and Cravery. Green Apple is audit 20 period 10/1/08 to 9/30/11. Is that combos or no? 21 MR. LAMBERT: Well, let -- I'll -- I'll 22 explain. We can take the -- the Green Apple out of 23 it. That's the yogurt shop. That's okay. And I'll 24 explain how it gets a little bit confusing. 25 In the early part of the audit period, from 26 October of 2008 to September 20th of 2009, The 27 Cravery was operating, but it did not have a 28 seller's permit. 19 1 MS. HARKEY: Okay. 2 MR. LAMBERT: And so it went -- so when we 3 went back to establish the liability it went under 4 the Green Apple. 5 MS. HARKEY: Okay. 6 MR. LAMBERT: Starting on September 21st of 7 2009, the taxpayer got a separate permit for The 8 Cravery. And so that's the only liability up 9 there -- up through December 31st of 2010. 10 On January of 2011, the taxpayer closed out 11 The Cravery Northern California, Inc. permit and 12 then started reporting The Cravery back again under 13 the Green Apple. 14 So all this liability is for The Cravery 15 location. But there's different owners for that 16 time period. So when you're seeing the Green Apple 17 liability -- 18 MS. HARKEY: Mm-hmm. 19 MR. LAMBERT: -- it's only for The Cravery, 20 but it was during the time that the Green Apple 21 owned it. 22 MS. HARKEY: Okay. I'm kind of looking 23 that maybe there is something we can do with any 24 liability prior to 2010, because I do believe -- I 25 mean, I know this is not written advice, but I mean 26 this is truly very, very detailed. She's very, very 27 forthcoming. And -- and I'm thinking if we could do 28 something, you know, just maybe assess a liability 20 1 from January of 2010 forward or something. Because 2 I hate to go all the way back, because it looks 3 like -- I mean we don't have an exact day of when 4 she -- yeah, January of 2010 actually, that's the 5 date that she says she got her -- got her permit, 6 another permit. 7 So she closed Cravery Northern California 8 and then put everything under the Green Apple. 9 I don't know. I just feel like some of 10 this needs to go away and I'm not sure how to really 11 work on that. I -- I feel like she's -- I mean I -- 12 I believe this taxpayer really did try to do her 13 job. It would be different if she collected it and 14 stashed it somewhere and just not remitted it, but 15 she hasn't collected it. And I don't see that she's 16 in a position, probably, to remit it. It's a lot of 17 money. So I'm just trying to find a way. 18 One day -- I think it was a one-day 19 observation test that was re- -- that was used to 20 invoke the 80/80 rule? 21 MR. LAMBERT: That's correct. 22 MS. HARKEY: Yeah, is there any -- is there 23 any -- 24 MS. MA: How many hours? 25 MS. HARKEY: -- wiggle room on that? 26 MR. LAMBERT: Um, well, it was for the 27 entire day that they were open. It was a Thursday. 28 It was in January of 2012. 21 1 The sales for that day were, in total from 2 The Cravery were, um -- I want to use the word 3 "equal," but that's not the right word -- but 4 representative of the POS data that they gave us for 5 average daily sales. So, that day appeared to be a 6 typical type of sales day that -- that they had. 7 And, like I said, the majority of their 8 sales are the pie sales. So, um, you know, as far 9 as this -- this is a franchise. And I can't tell 10 you what exactly was being sold in the earlier 11 periods. But based on Yelp it was not just the pie, 12 there were other things that were being mentioned in 13 the earlier period. So, um -- 14 MS. HARKEY: I understand that. I think 15 she says that when the recession hit, she had to get 16 versatile so she could keep the doors open. I think 17 that's -- that is what, probably what happened. I 18 think she's very, very credible. So I'm just trying 19 to find some creative way to get a break here. 20 Anyway -- 21 MS. MA: Do you have any ideas, Ms. 22 Stowers? 23 Okay, Ms. Stowers. 24 MS. STOWERS: Um, to the Department. So 25 the observation test was January 2012? 26 MR. LAMBERT: That's correct. 27 MS. STOWERS: And that's when you concluded 28 that the 80/80 rule applied and makes everything 22 1 taxable? 2 MR. LAMBERT: Uh, based on -- based on 3 that, um, test, yes. 4 MS. STOWERS: Yes. And because she was 5 selling, in 2012, the hot pies and other taxable 6 items? 7 MR. LAMBERT: Right. The majori- -- right. 8 So the type of nontaxable items that she would have 9 would be: There's some cold sandwiches, there are 10 salads, and then there's also cookies. And I 11 believe that's the extent of it. 12 A lot of times with the salads, there'll be 13 a combination and so it'll be sold as one price for 14 a hot pie and a salad at that time. 15 MS. STOWERS: Okay. 16 MR. LAMBERT: But the majority of them are 17 hot pies. And that is originally what they started 18 selling were -- was the hot pies. 19 MS. STOWERS: Really? I was going to ask 20 Ms. Wong, when did you start selling the -- the hot 21 pies? 22 MS. WONG: The pot pies? 23 MS. STOWERS: The pot pies, yes. 24 MS. WONG: The pot pies start from the very 25 beginning. 26 MS. STOWERS: Oh, from the very 27 beginning. 28 MS. WONG: Yeah. So it's our major -- 23 1 MS. STOWERS: That was your major. 2 MS. WONG: Yeah. 3 MS. STOWERS: That's where I thought we had 4 some relief. If we just -- 5 MS. MA: Hot -- were they hot or cold? 6 MS. WONG: They are hot. 7 MS. STOWERS: I was thinking she didn't 8 start selling them until 2010. 9 MS. WONG: And I did explain to them that I 10 have a bakery and I'm selling meat inside and it's 11 hot. 12 MS. HARKEY: Yeah, she did say that in her 13 permit, it was meat. 14 MS. STOWERS: Yeah. 15 MS. WONG: Yeah. 16 MS. HARKEY: So, I mean the fact that 17 somebody thought it was maybe a pastry or a bakery 18 item, I think is the problem. 19 MS. WONG: Yeah. And the "no seating" part 20 is like we always say "no seating." But the thing 21 is like, customer keep saying, "Oh, is there 22 seating? Is there seating?" Then my employee start 23 putting a sign -- I mean instead of them keep coming 24 in and ask, they just put a sign say "seating 25 next-door." I mean what can I do? 26 MS. STOWERS: Do you know when you put that 27 sign up? 28 MS. WONG: Yeah. So I believe it's 24 1 after -- it's like around 2010. So at the beginning 2 we didn't have a sign. It was all the recession, 3 you know, we trying to just put this company in the 4 hole, you know, just to try to survive. So whatever 5 customer ask, we just try to, you know, accommodate, 6 you know. 7 MS. STOWERS: So if -- if she didn't have 8 seating prior to 2010, would the 80/80 rule apply? 9 MR. LAMBERT: Uh, it would change things 10 because obviously if you take a cold food item and 11 bring it to the seating that's made available, it 12 would make it subject to tax. 13 What I would point out, at least during our 14 observation test, there were just 15 percent of 15 customers used the seating. And in none of those 16 circumstances did it cause a nontaxable item to 17 become taxable. 18 MS. STOWERS: And just kind of walk me 19 through. So no tax obviously was collected 20 whatsoever. 21 MR. LAMBERT: Well, that's not -- well -- 22 MS. STOWERS: I mean for the ones you're 23 looking at. 24 MR. LAMBERT: Right. They did report tax, 25 and it started when they got the permit for The 26 Cravery. And what they started reporting tax on 27 were soda sales and combined -- combination meals. 28 And they reported those as taxable, and they were 25 1 given credit in the audit for that. But that's the 2 extent of what they reported as taxable. 3 MS. STOWERS: So are the -- are the 4 corporations, the businesses still conducting there? 5 MR. LAMBERT: No. 6 MS. STOWERS: And these are corporate 7 liabilities? 8 MR. LAMBERT: Yes. 9 MS. STOWERS: So if relief is not -- if we 10 can't find relief, they would be candidates for 11 Offer in Compromise? 12 MR. LAMBERT: Right, yeah. That's my 13 understanding -- 14 MR. HANKS: Yes. 15 MR. LAMBERT: -- of it. 16 MS. MA: When did, um -- can I ask what's 17 the date that they got this new combo, new number 18 that she's talking about, in 2010? 19 MR. LAMBERT: Oh, the -- in -- on -- I'm 20 not sure. There wasn't a new number obtained in 21 2010. 22 MS. MA: So she said that she went to the 23 BOE office, they gave her a permit and the num- -- 24 the name changed. 25 MR. LAMBERT: Are you referring to January 26 of 2010 -- 27 MS. MA: Yes. 28 MR. LAMBERT: -- that's on the -- 26 1 MS. MA: Yes. 2 MR. LAMBERT: Yeah. So what that was is 3 she had a -- she had separate permits in December 4 of -- in December of 2009 she just had a, um -- 5 It should be January of 2011, but, um -- 6 MS. WONG: Oh, sorry. 7 MR. LAMBERT: Yeah. What she was referring 8 to is January 2011, but I'll explain that. 9 She had two separate permits before January 10 of 2011, one for Green Apple and one for The 11 Cravery. The Cravery corporation closed out and 12 then Green Apple took over The Cravery location and 13 reported both under Green Apple's seller's permit. 14 So there was no new seller's permit. It 15 was an existing permit, but then what she's 16 referring to is she got the new, um -- 17 MS. HARKEY: Name change. 18 MS. MA: Name. 19 MR. LAMBERT: For the wall. You know -- 20 MS. MA: Yeah. 21 MR. LAMBERT: -- you'll come in and you'll 22 see the permit on the wall. That's what they 23 printed up, and they changed that to add "The 24 Cravery" on there. But there was no new permit, in 25 and of itself. 26 MS. MA: But the new permit said what? 27 What was the latest permit? 28 MR. LAMBERT: Well, the -- the existing 27 1 permit, which was the Green Apple, on there was 2 written -- in January of 2011 it said Green Apple 3 slash The Cravery, and it covered both of those 4 locations. 5 MS. MA: Okay. So she shut down one. She 6 shut down The Cravery permit. And then the BOE just 7 combined the two -- 8 MR. LAMBERT: Under -- 9 MS. MA: -- locations. She had two 10 locations open still? 11 MR. LAMBERT: They were next -- they were 12 right next to each other. In fact, they were 13 connected. And, yes, they were considered separate 14 locations and they went under the existing Green 15 Apple permit, starting in January of 2011. 16 MS. MA: Okay. Okay. 17 Mr. Runner. 18 MR. RUNNER: Yeah just, um -- yeah, it's a 19 perplexing issue. Clearly the -- the taxpayer had 20 a -- had an ongoing history of compliance when the 21 law was understood with the -- with the neighboring 22 business. Um, and so I'm kind of perplexed as to, 23 you know, I -- you know, these are confusing issues 24 at times. It gets more confusing when there 25 potentially could be a letter request regards to 26 taking a look at the bakery and what they're doing, 27 how that was sent or lost. 28 I guess I have no -- I guess I have no 28 1 reason to doubt that she sent it. Um, I wish -- now 2 whether it was received, I guess we don't know for 3 sure. We have no history of that, which would be 4 typically what we would have. But I would have no 5 doubt that she was trying in multiple ways, at 6 multiple times, to try to clarify the law and find 7 herself in compliance. 8 MS. MA: Dorothy Richardson. 9 MR. RUNNER: Tell me who -- tell me about 10 Dorothy Richardson. 11 MR. LAMBERT: Um, I just -- I have, uh, an 12 understanding that I just received earlier. My 13 understanding is, is that she worked for a short 14 period of time as a Tax Tech in the San Francisco 15 district office. 16 MR. RUNNER: Okay. And why did -- why 17 did -- to the taxpayer, why did you copy her on 18 this? 19 MS. WONG: Yeah. I have like -- because I 20 find -- because I call. That was the person that -- 21 no, not the first person I spoke to. Then they say, 22 oh, yeah, wait -- you wait a minute, I have to 23 transfer you to a supervisor or something. 24 MR. RUNNER: Yeah. 25 MS. WONG: So then she told me that, "Oh, 26 okay. You can send a fax to us." 27 Then I'm, like, "Should I cc to you?" So I 28 written her name and her fax number. 29 1 MR. RUNNER: Yeah, okay. So clearly -- 2 clearly, again, this -- you know, sometimes we get 3 documents and we wonder if they were changed around, 4 right? Clearly this would be a document that would 5 seem to be authentic. Uh, there'd be no reason to 6 figure out and come up with a name to cc, that was 7 only there for a short time especially. Um, so 8 clearly this is a -- a -- a -- a document that was 9 done at that time with the intent of trying to find 10 the issue. 11 Um, let me ask, if we -- the issue of us -- 12 of the ability for us to then make a decision based 13 upon -- under the, uh -- the taxpayer swearing under 14 penalty of perjury that she received advice, um, 15 obviously isn't as good as having that piece of 16 paper. But what is the significance if she indeed, 17 under penalty of perjury, identified the fact that 18 she had received that advice? 19 MR. NOBLE: Well, she's stated under 20 penalty of perjury that she has received the advice 21 already. 22 I would note that there is an alleged 23 response, that the Board is the finder of fact here. 24 So, uh, if you find her credible, the Board is the 25 finder of fact. 26 MR. RUNNER: And so we could find in fact 27 under -- because of her -- her -- her, um, swearing 28 under penalty of perjury that that did come back, 30 1 that would be the finding of fact that we could make 2 the decision on? 3 MR. NOBLE: Yes. 4 MR. RUNNER: Okay. In that case I would 5 find for the taxpayer, make a motion for the 6 taxpayer. 7 MS. HARKEY: Second. 8 MR. HORTON: Comment, Madam Chair. 9 MS. MA: Mr. Horton. 10 MR. HORTON: Members, I think that would 11 set a -- I mean I'm sympathetic as well and believe 12 something happened. I don't know what it was. But, 13 um, setting a dangerous precedent of -- of having a 14 taxpayer under the penalty of perjury say we 15 received written at advice, therefore you are ought 16 to overturn any tax liability. Well, quite a few 17 taxpayers will come forth and provide that penalty 18 of perjury, uh, document because it has no standing, 19 has no -- there's no liability for them doing so. 20 But, uh -- 21 MR. RUNNER: I -- I -- I agree. I think 22 the thing that compels me is I believe that at this 23 point the taxpayer is truly representing herself in 24 the situation correctly and has other documentation. 25 So I agree, I don't think it's a green light for 26 anybody to come forward. They still have to be able 27 to provide enough testimony and -- and -- and -- and 28 example in what they're doing and how they've 31 1 exercised their business in the past. Again, the 2 business next-door -- 3 MR. HORTON: Maybe -- maybe -- 4 MR. RUNNER: -- gives me credibility to do 5 it. 6 MS. MA: Mr. Horton. 7 MR. HORTON: I mean, I'm going to stretch 8 it, but -- and I don't want to put words in the 9 taxpayer's mouth, but maybe, uh -- did you receive 10 written advice from the Board of Equalization, but 11 you may have lost it, or may have -- 12 MS. WONG: Yeah. So it's like in this part 13 where I said "fax copy, still searching," it was 14 from Dorothy Richardson. And the reason why I 15 remember her name is because from this original 16 letter. 17 MR. HORTON: Did you -- without going too 18 much further, did you have an opportunity to review 19 that written advice you received from the Board of 20 Equalization? 21 MS. WONG: No, because, um, after I receive 22 it, I was, um -- I told my husband I got it and he 23 said, "Oh, please put it in a safe place." Which I 24 did, and I couldn't find it because it's too safe. 25 And then after the, you know, 2011 -- 26 MR. HORTON: Well, wait. Wait, wait. 27 MS. WONG: -- or '12 -- 28 MR. HORTON: Do you believe the decisions 32 1 you made was pursuant to the written advice you 2 received from the Board of Equalization? 3 MS. WONG: Yes, both written and verbal 4 advice. 5 MR. HORTON: Okay. Um, and the Department, 6 you have no record of sending written advice? 7 MR. LAMBERT: That's correct. Um, there's 8 a log that's maintained. There was no record in the 9 log. There's also, um, a copy of the letter that's 10 kept in a locked file cabinet. 11 We, um -- we try to get 'em out pretty 12 fast, but two day -- two days is, um, not generally 13 how fast they come out -- 14 MR. HORTON: How fast -- 15 MR. LAMBERT: -- because of the fact it 16 needs to be reviewed when it is something that is in 17 the taxpayer's favor. 18 MR. HORTON: Yeah. 19 MR. LAMBERT: If it's something where we 20 come back taxable, um, then it'll be reviewed but it 21 doesn't necessarily go through the same scrutiny as 22 that. 23 And the other thing is -- which may be very 24 important -- is they cannot recall responding to a 25 letter by fax. That's not what the Department -- 26 not what their standard procedure is and they don't 27 recall ever doing that, so -- 28 MS. HARKEY: Well, Richardson's not here 33 1 anymore. 2 MR. LAMBERT: -- that -- 3 MR. HORTON: Um, question of the 4 taxpayer -- 5 MR. HANKS: In the log -- I was just going 6 to add, Mr. Horton, in the log that the district 7 maintains, and they do have taxpayer letters that 8 they've written, um, in response to questions that 9 have been posed by taxpayers. And generally those 10 responses are in letter form. So ordinarily we 11 wouldn't be sending advice letters via fax. So 12 that's -- that's a different scenario for us as 13 well. 14 MR. HORTON: Um. Well, the -- well, the 15 challenge is, is that both documents have to be 16 clear and explicit in order for it to be, um -- fall 17 under the legal requirements. The question has to 18 be clear and explicit; we don't have that. The 19 response has to be clear and specific. 20 Um, this is a franchise? 21 MR. LAMBERT: That's correct. 22 MR. HORTON: How large of a franchisor do 23 we have here? 24 MR. LAMBERT: You know, I'm not 25 particularly sure. All I can tell you is the 26 information that I've gleaned from our computer 27 system and from the Internet, they don't appear to 28 be active now. But there were a number of -- a 34 1 small number of other franchises that appeared to 2 have permits and were -- 3 MR. HORTON: Any evidence why the permit 4 was issued in the first place? 5 MR. LAMBERT: For -- for there? For there? 6 Um, I did not look at the applications for the other 7 taxpayers. 8 MR. HORTON: Any -- any information 9 provided when the permit was originally issued? 10 Any -- did they check off the compli- -- you know, 11 the box they check off, we provided this and this 12 and that? 13 MR. LAMBERT: Right. I did not check the 14 other tax -- other franchisee's permits. 15 MR. HORTON: No, the franchisee before 16 us. 17 MR. LAMBERT: Oh, before us. 18 MR. HORTON: Yeah. 19 MR. LAMBERT: Oh, I'm sorry. The question 20 again? 21 MR. HORTON: The taxpayer operates a 22 franchise. 23 MR. LAMBERT: Yes. 24 MR. HORTON: When they came in to fill out 25 their -- to request a permit, they were issued a 26 sales and use tax permit. 27 MR. LAMBERT: That's right. 28 MR. HORTON: Presumably because whoever 35 1 issued it presumed that there was a tax liability. 2 MR. LAMBERT: That -- 3 MR. HORTON: Or a potential for a tax 4 liability. 5 MR. LAMBERT: That they were selling 6 taxable transactions, yes, that's correct. 7 MR. HORTON: Did they provide 'em with any 8 documentation to -- to, uh, you know, educate them? 9 MR. LAMBERT: Oh, they were -- at the time 10 that they took out the original permit, which was 11 for Green Apple, they were given pamphlet 22, which 12 is the dining and beverage industry. So they would 13 have received that at the time that the initial 14 Green Apple permit was -- was issued. 15 MR. HORTON: All right. Well, that makes 16 it tougher. The Board can't overturn itself even in 17 a written advice. Um -- 18 MS. MA: I have one more question. 19 MR. HORTON: All right. Well, Members, 20 this is indicative of the reason why we need new 21 business education outreach seminars, a whole lot of 22 them. 23 Anyway, thank you, Madam Chair. 24 MS. MA: Can I ask the Department -- can I 25 ask the Department, how come you only did a one-day 26 observation test? I thought we were supposed to do 27 three days. 28 MR. LAMBERT: Well, at the time that this 36 1 was performed it was different rules at that 2 particular time. It was in 2012, January of 2012. 3 It was before we came up with the three-day rule. 4 But the requirements at that time were 5 generally to do several days of testing, is what the 6 directions were at that particular time. And I 7 think the issue there was more this 6596 issue 8 instead of the one day. And we did the one-day 9 test; it appeared to be representative. The 10 taxpayer didn't argue against it, and that's why it 11 was left at one day. 12 That is -- was not uncommon before we took 13 the new rules that came into effect here just 14 recently. 15 MR. HORTON: What was -- 16 MS. MA: So when -- when did you adopt a 17 new rule? 18 MR. LAMBERT: I believe -- I'm going to say 19 it was after January 2015. But I -- I can't recall 20 off the top of my head the exact date of that. 21 Maybe, um -- 22 MS. MA: I don't remember -- I don't 23 remember seeing or hearing that you guys were 24 adopting a new rule. 25 MS. HARKEY: We did under Business Taxes 26 Committee. 27 MS. MA: Oh, you guys did? 28 MR. HANKS: So, October of -- October 28th 37 1 of 2015 is when we came out with new observation 2 test rules. 3 MS. MA: So that's a mandatory? 4 MR. HANKS: That discussed a three-day 5 test. 6 MS. MA: So mandatory three days now? 7 MR. HANKS: It is if we're using an 8 observation test to determine what taxable sales 9 should be. In this case we didn't do that. We 10 didn't have to use an observation test per se to 11 determine what total sales were because we relied on 12 the taxpayer's records for that information. 13 MS. MA: Okay. So the tax as determined is 14 based on the taxpayer's records. 15 MR. HANKS: Yes. 16 MS. MA: They're not -- 17 MR. LAMBERT: That's -- that's correct. 18 Well, for the most part. There are three quarters 19 where there's an estimate based on their own 20 records. But for the most part it is their records, 21 actual. 22 MS. MA: Okay. 23 Ms. Harkey. 24 MS. HARKEY: Are hot bakery items to-go 25 taxable? 26 MR. LAMBERT: Bakery items? No. 27 MS. HARKEY: Okay. 28 MS. MA: Hot -- I thought hot food is 38 1 taxed. 2 MS. HARKEY: Hot bakery items are not. 3 MR. LAMBERT: No. 4 MS. HARKEY: And she thought she had a 5 bakery. And she also thought that they were to-go. 6 She didn't have seating. 7 This is turning on the head of a pin and 8 she -- you know, I believe her. I think she really 9 tried to get the advice right. So, you know, she 10 thought she had a hot bakery item, you know. 11 MR. LAMBERT: Yeah. I would say, just to 12 correct that answer, generally no. If it was in 13 connection with another item as a meal -- 14 MS. HARKEY: Yeah. 15 MR. LAMBERT: -- it could be subject to 16 tax. 17 MS. HARKEY: And that's -- that's -- that's 18 when she got the permit, was when she -- when she 19 went in and she was selling it with other meals then 20 she got the permit, because if she sold it with a 21 drink or something then she was paying taxes and she 22 understood that. But prior to that she had a hot 23 bakery item. You know, this is all -- 24 MS. MA: Okay. Okay, can you repeat that? 25 Hot bakery item to-go, no seating, tax -- taxable or 26 not taxable? 27 MR. LAMBERT: Yeah, well generally. I mean 28 there's some other things, you know, whether there's 39 1 admission or not. But generally, if you're -- let's 2 say you're a bakery -- 3 MS. MA: Yeah. 4 MR. LAMBERT: -- and you're just baking 5 pies and bread and -- 6 MS. HARKEY: To go. 7 MS. MA: To go. 8 MR. LAMBERT: -- to go, you don't have any 9 place to sit, generally you do not need a permit for 10 those items because they were not intended to be 11 sold hot. They -- they might be hot when they're 12 sold, but it's really the intent of it and whether 13 it was a bakery item. And that -- that's what comes 14 into play. 15 MR. HORTON: Madam Chair, if I may. 16 MR. LAMBERT: So having a meat pie, a pot 17 pie with other vegetables or whatever is in there, 18 would -- that is not a bakery item. It's considered 19 to be hot food. And there's a difference between 20 just having a croissant and having this. 21 MS. MA: Mr. Horton. 22 MR. HORTON: Thank you, Madam Chair. 23 Um, does consumption have anything to do 24 with it, law? 25 MR. LAMBERT: Well, if you -- if there were 26 seating available or there was -- 27 MR. HORTON: No, no. I mean the -- the 28 intent to cons- -- 40 1 MR. LAMBERT: Yes. 2 MR. HORTON: It's intended to be consumed 3 hot. 4 MR. LAMBERT: Intended to be -- 5 MR. HORTON: -- consumed hot. 6 MR. LAMBERT: Yeah, I would say that would, 7 um -- that's part of it that would, um -- but you'd 8 have to take a look at, um -- 9 MR. HORTON: Baked goods. You go outside, 10 you're in your car, they're a little warm. But, you 11 know -- 12 MR. LAMBERT: Yeah. 13 MR. HORTON: -- they're not as served. 14 MR. LAMBERT: That's right. 15 MR. HORTON: Yeah, okay. 16 MS. HARKEY: Well, this takes -- 17 MR. LAMBERT: It's a complicated area. 18 MS. HARKEY: There's a motion and a 19 second. 20 MS. MA: Okay. So there's a motion and a 21 second. Who made the motion? 22 MR. RUNNER: I did. 23 MS. MA: Sorry. Mr. Runner made the 24 motion, seconded by Ms. Harkey. 25 Uh, Madam -- Ms. Richmond, please call the 26 roll. 27 MS. RICHMOND: Chairwoman Ma. 28 MS. MA: Aye. 41 1 MS. RICHMOND: Ms. Harkey. 2 MS. HARKEY: Aye. 3 MS. RICHMOND: Mr. Horton. 4 MR. HORTON: No. 5 MS. RICHMOND: Mr. Runner. 6 MR. RUNNER: Aye. 7 MS. RICHMOND: Ms. Stowers. 8 MS. STOWERS: Abstain. 9 MS. RICHMOND: Motion carries. 10 MS. MA: Okay. Thank you very much. 11 MS. HARKEY: Congratulations. 12 MS. WONG: Oh, is that -- 13 MS. MA: So we ruled in your favor. 14 MR. NOBLE: You're granted. 15 MS. WONG: Oh. Okay, thank you very much. 16 I have no idea. Thank you so much. Thank you. 17 MR. HORTON: Madam Chair, as a point of 18 clarification, we granted the entire amount? 19 MS. HARKEY: Yes. 20 MS. MA: Yes. 21 MR. RUNNER: Mm-hmm. 22 MS. WONG: Thank you so much. 23 ---oOo--- 24 25 26 27 28 42 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 January 25, 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 42 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: April 21, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 43