1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 23, 2017 10 (Prepared from audio recording) 11 12 SALES AND USE TAX APPEAL HEARING 13 APPEAL OF 14 RON AUSTIN 15 NO. 729239 16 AGAINST PROPOSED ASSESSMENT OF 17 SALES AND USE TAX 18 19 20 21 22 23 24 25 26 27 Prepared 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: Ramona Veregge 15 Business Taxes Specialist III 16 Legal Department 17 Jeff Angeja Tax Counsel IV 18 Legal Department 19 For the Department: Scott Lambert 20 Business Taxes Specialist III 21 Business Tax and Fee Department 22 Kevin Hanks 23 Chief Business Tax and Fee 24 Department 25 Stephen Smith Tax Counsel IV 26 Legal Department 27 For Petitioner: Ron Austin Taxpayer 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 23, 2017 4 ---oOo--- 5 MS. MA: C5, the reps are not here at this 6 time, so we are going to take C6 first, Mr. Ron 7 Austin. 8 MR. AUSTIN: Thank you. 9 MS. RICHMOND: Board Proceedings has 10 received contribution disclosure forms for today's 11 hearings from the parties, participants and agents. 12 All forms were properly completed and signed and no 13 disqualifying contributions were disclosed. All 14 parties, participants and agents are on the alpha 15 listings provided to your office. 16 Each person sitting at the table will be 17 asked to introduce themselves and, if necessary, 18 their affiliation with the taxpayer for the record. 19 Ten minutes is allocated for the taxpayer's opening 20 presentation, followed by ten minutes for the 21 Department's presentation, and five minutes is 22 allocated to the taxpayer for rebuttal. 23 Chairwoman Ma. 24 MS. MA: Thank you very much. 25 To the Appeals, Ms. Veregge, will please 26 introduce the issues in the case. 27 MS. VEREGGE: Good morning, Madam Chair Ma 28 and Board Members. I'm Ramona Veregge on behalf of 3 1 the Appeals Division. 2 The appeal before you presents one 3 unresolved issue, which is whether additional 4 adjustments are warranted to the unreported taxable 5 sales. 6 MS. MA: Okay. Thank you. 7 Mr. Austin? 8 MR. AUSTIN: Yes. 9 MS. MA: Welcome. You will have ten 10 minutes on your presentation. The Board will have 11 ten minutes. Then you'll have five minutes on 12 rebuttal. And then we will open it up for question 13 and answers. 14 So, welcome. Please introduce yourself for 15 the record and you may begin. 16 MR. AUSTIN: My name is Ron Austin. I'm 17 the taxpayer. 18 I had an audit. Uh, the audit didn't take 19 into account a lot of things. I have a -- I have a 20 copy of all the invoices from the audit period. So 21 I've turned these in before, but they were returned 22 to me. 23 I also -- QuickBooks, when I do my reports 24 for taxes, QuickBooks will run the, uh, report for 25 the amount of invoices that I have produced for that 26 period versus the amount of money that I've received 27 for that period. It's just a quirk with QuickBooks. 28 So from the beginning I've used that report. 4 1 So, uh, if someone doesn't pay me, um, it's 2 on my quarterly report. I don't go back and -- I 3 usually don't amend the quarterly report. So for 4 that three-year period, I have about $30,000 of 5 unpaid invoices that weren't taken into account. 6 Um, the -- the main manufacturer NEC, when 7 they bring out a new piece of equipment, before I 8 get trained they demand that I buy equipment to 9 demonstrate for clients. And it can't be sold; it's 10 demo equipment. So they've changed equipment three 11 or four times through this three period. I 12 purchased $12,000 of demo equipment which I can't 13 really sell because it's for demonstration purposes 14 only. That wasn't taken into consideration in the 15 audit. 16 Uh, the manufacturer gives me a one-year 17 warranty on their equipment, but to gain an 18 advantage with the competition, I've always offered 19 a five-year warranty on parts and labor on the 20 equipment. So if something fails between year two 21 and five, I purchase that piece of equipment and 22 replace it with the, uh, defective equipment at the 23 client's site. That wasn't taken into account of my 24 purchases during the audit either. 25 I lease through a couple of leasing 26 agencies. They collect the tax on the equipment. 27 I'm not sure if that has been taken into 28 consideration in the audit or not. 5 1 And, um, during the time of this audit, I 2 was on a payment plan, so I was producing copies of 3 my bank accounts to the Board of Equalization on a 4 monthly basis. They know that I -- how much money I 5 have, that I don't have 30, $50,000 extra anywhere 6 like the auditor was supposing. 7 So I don't think the audit was very 8 accurate. I do have a copy -- I can -- of every 9 invoice. I've produced a copy of my QuickBooks for 10 the period to the Board of Equalization. They just 11 returned it to me. 12 So, uh, I don't think that -- I think that 13 all of my reports are accurate and I don't owe any 14 money. 15 MS. MA: Okay. Well, we will see what the 16 Board says. 17 To the attorneys, please introduce yourself 18 for the records and you'll have ten minutes. 19 MR. LAMBERT: Good morning, Chairwoman Ma 20 and Members. My name is Scott Lambert. I'll be 21 representing the Business Tax and Fee Department 22 today. To my right is Kevin Hanks, also with the 23 Business Tax and Fee Department. And to Mr. Hanks' 24 right is Stephen Smith with the Legal Department. 25 In this particular case, the taxpayer is a 26 retailer of telephone systems, security cameras, and 27 equipment of -- of that nature. 28 Upon audit, the taxpayer provided limited 6 1 records. They consisted of the federal income tax 2 returns, profit and loss statements, and some sales 3 invoices. There were no purchase invoices that were 4 provided. 5 Upon looking at the cost of goods sold and 6 comparing that to the taxable sales that were 7 reported, there was a negative markup, which means 8 that the sales were below the cost of goods sold. 9 The markup in 2009 was a negative 41 percent; 2010 10 it was a negative 83 percent; and in 2011 it was a 11 negative 75 percent. 12 So there -- there appeared to be an issue 13 with the reporting of sales. Um, the taxpayer did 14 provide some sales invoices. They were limited in 15 nature, but we were able to confirm that there were 16 sales to a company called NEC Financial that were 17 for resale that added to approximately $81,000, and 18 that was allowed in the audit. 19 There was also a category for supplies and 20 materials; uh, we had no information to indicate 21 whether those items were purchased tax-paid. In any 22 case, we allowed those as being tax-paid. They're 23 not included in the audit. So the only thing that's 24 been included in the audit are the cost of goods 25 sold. And those were marked up by 100 percent, and 26 that was based on a conversation that the auditor 27 had with the taxpayer. 28 So the cost of goods sold was marked up by 7 1 a hundred percent, we allowed sales to NEC 2 Financial, came up with the difference and compared 3 that to what was reported. We came up with a 4 difference of $123,000. 5 The taxpayer did provide us with 6 QuickBooks; I believe it was a thumb drive. We were 7 unable to open that. We did not receive any 8 information in regards to bad debts. 9 I'll point out the taxpayer's on a cash 10 basis for income tax returns, so they would not 11 claim bad debts on their income tax returns. But 12 there was no information that was provided to us as 13 to who the customers were that weren't paying, let 14 alone even who the customers were. We were not 15 aware of that. 16 Um, the taxpayer appears to be operating 17 out of his home. On his website he shows that he 18 has a 30,000-square-foot warehouse, with facilities 19 in six other cities. Based on the website, it 20 appears to be a larger operation than what's been 21 depicted by the records that have been provided. 22 So, accordingly, without additional 23 information, the Department prepared the audit using 24 the best information that was available. So, 25 accordingly, the Department concurs with the Appeals 26 Division Decision and Recommendation. 27 MS. MA: Okay. Mr. Austin. Five minutes 28 on rebuttal. 8 1 MR. AUSTIN: I -- I -- the auditor was at 2 my home, and -- and I gave him access to my 3 computer, to all of my records, to my QuickBooks, 4 and to my taxes, which were also on my computer and 5 that's where they got the information. So all that 6 information was made available. 7 The, uh, accounts that, uh, I have put into 8 collections, I did present that file to the Board of 9 Equalization with my accounts that have been put 10 into -- that I couldn't collect on. 11 Another thing that I do is that, uh, I -- I 12 bill -- I bill three ways: $95 collect on delivery; 13 $125 an hour, net 30; and over net 30, $155 an hour, 14 in an attempt to collect receivables in a timely 15 manner. 16 A lot of my client's pay 95 no matter when 17 they get it; I don't argue with them. And going 18 back and changing the, uh -- the invoice is kind of 19 moot after I've already filed the quarterly tax 20 return and paid for the quarterly tax return. 21 So -- so the second thing is, is that NEC 22 is my main manufacturer and I am their partner, so I 23 do show a picture of their warehouse and the 24 equipment that NEC, my partner, has available to me 25 24/7 on my website. And at one point when the 26 business was going a little better, I did have 27 several people that were assisting me and I was 28 using -- and I had equipment stored at their 9 1 locations, and I was, uh, using their addresses as 2 response. 3 I'm a sole proprietor. I've never had a 4 payroll. My bank account shows I've never made in 5 excess of a hundred thousand dollars a year gross. 6 And, uh, I don't have a hundred thousand or $150,000 7 profit laying around hidden anywhere. 8 And I have presented every invoice paid and 9 not paid. And I have them all again. 10 MS. MA: Mr. Runner. 11 MR. RUNNER: Just a couple quick questions 12 in regards to, um, some of the discrepancies. 13 To the Department. Taxpayer provided a 14 thumb drive, you couldn't open it. Um, what was our 15 attempt to get back with the taxpayers to say, "Hey, 16 what's the deal here, can you help us open this 17 thumb drive?" 18 MR. LAMBERT: Uh, I'm not sure exactly 19 what -- what took place in that case. I know the 20 Department made their attempt to do it and notified 21 him they couldn't open it. I'm not sure what took 22 place after that time. 23 MR. RUNNER: And what was your 24 communication back to the Department when they 25 couldn't open your thumb drive? 26 MR. AUSTIN: I gave them a, uh, DVD with 27 the information on it after that. 28 MR. RUNNER: Okay. Do we have record of 10 1 the DVD being passed then? 2 MR. LAMBERT: I don't. 3 MR. RUNNER: So these -- what you -- when 4 you describe these things, these are things that are 5 in the record from the audit. 6 MR. LAMBERT: Yes. 7 MR. RUNNER: Not things that you all know 8 took place. 9 MR. LAMBERT: That's correct. 10 MR. RUNNER: Okay. Just double-checking on 11 that. 12 So we don't have any -- so you -- you 13 believe you sent them all the information after they 14 couldn't receive the thumb drive. 15 MR. AUSTIN: I -- I -- they -- they have a 16 copy of all of my collectibles. 17 MR. RUNNER: Okay, that's -- let me go -- 18 let me -- 19 MR. AUSTIN: They have returned this copy 20 of all of the, uh, invoices. 21 MR. RUNNER: Okay, let me -- let me go 22 there. 23 Um, you have all your invoices there. 24 MR. AUSTIN: Yes, sir. 25 MR. RUNNER: The report said that they had 26 partial invoices. 27 MR. LAMBERT: That's correct. 28 MR. RUNNER: So you don't believe these are 11 1 all the invoices. 2 MR. LAMBERT: Well, I can't tell you if 3 those are all the invoices or not. 4 MR. RUNNER: Okay. 5 MR. LAMBERT: What I can tell you is that 6 the information -- the reports that I have, the 7 information we received, were limited invoices were 8 provided. It was not a detailed, uh -- it was not 9 something that we could go down and transcribe as to 10 the sales; we would have done that if that was the 11 case. 12 So there were some invoices that were 13 provided. We had asked for, obviously, all the 14 invoices, but we also wanted the purchase invoices 15 in order to take a look at what their actual markup 16 was. 17 MR. RUNNER: Do you believe you provided 18 the purchase invoices? 19 MR. AUSTIN: No. I didn't provide with 20 the -- 21 MR. RUNNER: Any record of the purchases 22 that you made, did you provide any information for 23 just that? 24 Mr. AUSTIN: No, sir. I wasn't asked for 25 it and I didn't provide it, so I apologize. 26 MR. RUNNER: Um, let me just ask a couple 27 of things in regards to the, um -- what did -- what 28 was allowed for some of these -- for either bad debt 12 1 expenses or for, um -- or for, um, some of these 2 purchases that were made that were for, uh, demo 3 equipment, I guess is what it would be. What -- 4 what -- what -- what was provided for the taxpayer 5 in that regard? 6 MR. LAMBERT: I -- I -- I don't believe 7 anything was provided for that. 8 MR. HANKS: I think that was the 9 difficulty, Mr. Runner, that -- that the audit staff 10 had, was just verifying, you know, to the extent 11 that there were bad debts, what those bad debts 12 were. He hadn't documented, either, that -- that he 13 had the demo equipment that he's describing. 14 MR. RUNNER: Was there any allowance for 15 bad debt? 16 MR. LAMBERT: No. 17 MR. RUNNER: Do we know any business that 18 would not operate with some kind of bad debt? 19 MR. LAMBERT: Um, yes. 20 MR. RUNNER: Is that right? 21 MR. LAMBERT: I think so. 22 MR. RUNNER: You think there's a -- there's 23 a -- boy, that would be a really good business if 24 somebody could actually operate and be able to have 25 a hundred percent. 26 MR. LAMBERT: I would say generally 27 businesses will have bad debts. 28 MR. RUNNER: Right. 13 1 MR. LAMBERT: Generally. 2 MR. RUNNER: Generally. 3 MR. LAMBERT: But not always. 4 MR. AUSTIN: My industry -- 5 MR. RUNNER: Hold on. Just a minute. Just 6 a minute. 7 MR. LAMBERT: So, um, yeah, in this 8 particular case -- 9 MR. RUNNER: What would -- I mean 10 typically, don't we typically allow for bad debt? 11 MR. LAMBERT: Well, you have to -- you have 12 to provide the documentation for the -- for the bad 13 debt in order to allow it. Uh, we can't just 14 estimate what your bad debts would be. 15 MR. RUNNER: Well, oftentimes it seems to 16 me you guys are before us and you talk about what 17 industry norms are. Is there not an industry norm 18 for bad debt in this kind of a business? 19 MR. LAMBERT: Uh, there -- there may be. I 20 mean this business is slightly different than a 21 general business in the fact that it's being 22 operated out of his home, which, um, you're probably 23 going to have a little bit different circumstances. 24 When you're going to some of these, um -- and I 25 would think they're mainly businesses, but I'm not 26 sure exactly -- 27 MR. RUNNER: Okay. 28 MR. LAMBERT: -- you know, where they're 14 1 being -- 2 MR. RUNNER: Okay. Let me just ask, in 3 regards to the, um -- uh, the income tax returns. 4 MR. AUSTIN: Yes, sir. 5 MR. RUNNER: You know, a lot of this audit 6 was based upon what you reported on your income tax. 7 How do you -- how do you -- what's the discrepancy 8 then that between what you're saying here took place 9 in terms of these sales and what you reported on 10 your income tax? 11 MR. AUSTIN: Well, business was rough 12 through those years. 13 MR. RUNNER: Okay. 14 MR. AUSTIN: Through '09. 15 MR. RUNNER: Sure. Yes, it was. 16 MR. AUSTIN: I always thought it was going 17 to get better. So instead of throwing in the towel, 18 I kept pushing it. But -- 19 MR. RUNNER: Are you still -- but why would 20 you reflect something different in your income tax 21 versus what you reported to the Board? 22 MR. AUSTIN: I think -- I think my income 23 tax, uh, shows that I purchased equipment that I 24 didn't get paid for. I purchased equipment that I 25 didn't sell, and I purchased equipment that I used 26 for warranty that I didn't collect on. So that's 27 what my income tax shows. 28 MR. RUNNER: Let me ask you -- back to the 15 1 Department -- the income tax returns that we're 2 dealing with, are they -- are they demonstrating 3 purchases or are they demonstrating sales? 4 MR. LAMBERT: Both. But, um, we used the 5 cost of goods sold, which is generally what you're 6 putting in there are items that you sold. 7 MR. RUNNER: Okay. You know, I got to tell 8 you, to the taxpayer, we -- I'd like to get more 9 information. My problem is I know my office reached 10 out to you and you didn't return calls. Uh, and so 11 that makes it really difficult for us to kind of 12 help you through a process here. So it's hard for 13 me to do that, just kind of on the fly here. 14 Um, so, you know, some of the things I'm 15 hearing in regards to your nonresponse to the 16 Department is consistent with nonresponse to my 17 office. Um, so I'm trying to get through it, but it 18 makes it difficult when we can't have good 19 conversations prior. 20 So, let me see if any of the other Members 21 have any thoughts or questions. 22 MS. MA: Ms. Harkey. 23 MS. HARKEY: Um, I, um -- my office also 24 could not receive -- did not receive return phone 25 calls. I think Clifford Oakes left a message. We 26 were trying to figure out, you know, if there's any 27 options here for you prior to the hearing, to help 28 you out. 16 1 But I do have an email here that's from the 2 auditor and various Appeals Division that says, it's 3 August 12th, says: 4 "Dear Mr. Austin: As you know, I 5 couldn't open the QuickBooks on the flash 6 drive you provided. However, I reviewed 7 invoices and the general ledger copy. 8 "Attached is the schedule I prepared 9 for the claimed bad debt invoices. 10 Please review it and let me know if these 11 invoices you are claiming as bad debt. 12 "Based on my review, some of the 13 invoices are taxable sales. However, the 14 rest are either nontaxable or the general 15 ledger you provided are missing this 16 information. Please review and provide 17 correct amounts, if they are taxable sales 18 or nontaxable. 19 "I did not find any invoices related 20 to the replacement for warranty. Please 21 email me a copy of the invoices so this 22 audit can be concluded." 23 And then it says down, here, it says, you 24 know -- 25 "I received your voicemail stating that 26 you were dropping off the documents and a 27 flash drive at the Riverside office 28 today." 17 1 That's 7/23/15. 2 "Department will have 15 days to 3 review documents and files." 4 So it sounds like there was communication. 5 It sounds like he dropped off what was necessary. 6 Does the Department have any record of 7 this? 8 MR. LAMBERT: I -- he did provide invoices 9 after the appeals conference, and there are some 10 copies of those. But those are, um -- I -- they 11 appear to be incomplete, at least the ones that I 12 have seen. The invoice numbers, there's large gaps 13 between them. 14 As far as he did provide a thumb drive to 15 that -- to us, uh, and we could not open that and, 16 uh -- 17 MS. HARKEY: Did you have any expert try to 18 open it? I mean it seems like this is all -- this 19 all, you know, an issue with a flash drive on 20 QuickBooks. 21 MR. LAMBERT: Yeah. 22 MS. HARKEY: About QuickBooks. And I think 23 QuickBooks would have answered most of these 24 questions, uh, you know, and would have given the 25 Department a real solid case. 26 Um, the appellant seems credible. 27 Unfortunately, I think he's just not -- it's really 28 unfortunate, as Mr. Runner said, that he didn't 18 1 return calls to our offices and we couldn't have 2 gotten involved in this a little bit earlier. 3 But it appears that there was 4 communication. It appears there was a drop-off as 5 late as July 23rd of '15 where, you know -- or 6 7/23 -- yeah, 7/23 of '15. And I -- you know, as 7 much as I hate to do this, I would like to send this 8 back for a 30/30/30 and see if we can't get those 9 QuickBook docs opened, and see what we get. 10 I think that, you know, if it's not there, 11 it's not there. But I don't see -- I think the 12 appellant is credible. I don't see him as a high 13 flyer, and I'm -- I'm just kind of predisposed to 14 want to at least look at that QuickBooks file. And, 15 uh, if we can't get QuickBooks, then I guess we're 16 in trouble. 17 But I think that we can have experts that 18 can open those things up on the flash drive. 19 MR. LAMBERT: Yeah, we, uh -- we have -- we 20 do have computer audit specialists that -- that can 21 do that. The -- generally the audit staff can do 22 it. They have the system in the district offices 23 that they can open it up. 24 MS. HARKEY: Right. 25 MR. LAMBERT: And generally that's -- 26 MS. HARKEY: You just said that they didn't 27 do that. 28 MR. LAMBERT: Right. 19 1 MS. HARKEY: And we know that generally 2 they can. 3 MR. LAMBERT: Right. 4 MS. HARKEY: And if not, we can call in a 5 specialist. 6 MR. LAMBERT: Right. 7 MS. HARKEY: I think that's like the real 8 key issue here, and I think sometimes, uh, uh, 9 constituents don't call back because they think it's 10 just one more auditor. You know, we get that 11 periodically where they just don't want to talk 12 about it anymore. And so I -- you know, I'm -- I am 13 a little bit sympathetic to this. 14 MR. LAMBERT: Right. 15 MS. HARKEY: Would I have support from 16 staff, or from the Board rather, to send this out on 17 a 30/30/30 and see if we can't get some information? 18 MS. MA: Can we just ask a couple 19 questions? 20 MS. HARKEY: I would -- 21 Sure. Go ahead. 22 MS. MA: Okay, good. 23 Okay. So, Mr. Austin, how long have you 24 been in business for yourself? 25 MR. AUSTIN: 11 years. 26 MS. MA: Okay. Are you still open? 27 MR. AUSTIN: I'll be -- not -- I'll be 28 giving a letter to the Board of Equalization this 20 1 quarter that I'm no longer in business. 2 MS. MA: Okay. That wasn't my question. I 3 just wanted to ask do you have a bookkeeper that you 4 work with, or -- 5 MR. AUSTIN: No. 6 MS. MA: You do your own QuickBooks? 7 MR. AUSTIN: Yes. 8 MS. MA: Okay. Um, you know, I do 9 sympathize with the taxpayer. You know, I think he 10 was trying to keep track of, you know, all of his 11 purchases and his sales and stuff. But, you know, 12 if you're not, um, an accountant or a bookkeeper or 13 someone that is thinking about reversing everything 14 out, right, when you don't get paid or you get paid 15 late, you know. And then these books are being 16 used, um, in a sales tax audit because now they 17 don't jive, um, I think there needs to be some 18 explanation in terms of how you keep your books and 19 the fact that you didn't maybe back out for bad 20 debts. 21 You probably had a ledger that said, "Hey, 22 I never got paid for this, I never got paid for 23 that." But you probably didn't adjust your 24 QuickBooks, which is not something I think a lot of 25 people do. They just use it as like an accounting 26 tool and a check register, so to speak. 27 And I don't know if I'm speaking out of 28 turn, but maybe you can tell us, you know, how you 21 1 use your QuickBooks. 2 MR. AUSTIN: Well, I, um -- first off, is 3 that if I don't charge anyone I wasn't making an 4 invoice. So that would be the warranty equipment. 5 So, in order for me to -- I do keep a 6 service order, handwritten, and I have quite a stack 7 of those. And going back through all those to see 8 how many individual -- I attempted to do that for a 9 few of these years, but with other stuff going on, 10 quite frankly, it's been overwhelming. 11 Um, I did speak to Clifford several times. 12 And I can't remember, I think it was a gal from your 13 office. 14 The VA and the kidney stone, and then a 15 kidney infection, the last month and a half I've 16 been -- I've been in a bad situation. The VA's 17 just -- it's been rough. It's been really rough. 18 And, uh, someone Clifford led me to said to 19 go to the, uh, meet -- go to the folks that mediate 20 and make a settlement. That's where I need to go 21 from this point. So I spent some time going there 22 and they tell me, "Look, you're not even in the 23 right place." I, you know, haven't -- 24 So, a lot of times I get spun in circles. 25 I just wanted to get in and get in front of stuff 26 here, and get moving on this stuff. And I haven't 27 been audited before, so I wasn't prepared for some 28 of the questions that have been asked of me. 22 1 I made it clear, crystal clear, I'm not 2 able to double the markup on my equipment because 3 the industry won't bear that. We have a very 4 competitive industry. And also because I'm an 5 entrepreneur and I work from my home, some folks 6 can -- have been able to get equipment from me and I 7 haven't been able to get payment from 'em. Plain 8 and simple. 9 I spent a lot of time and I go to small 10 claims courts and stuff, and I just don't get it. 11 It's like a waste of time to go to small claims 12 court. The guy will just want to -- the mediator 13 will just cut the stuff in half and if I don't 14 accept that, I lose. So, uh, it's rough. It's been 15 rough to -- to run this. 16 But, uh, with -- I tried to keep my 17 warranty. Business is falling to nothing now. But 18 folks have trusted me, and I've told them I give 19 them a five-year warranty and that's the only reason 20 I'm continuing in business up 'til this point. But 21 I can't continue anymore. 22 I did audit. I did change some QuickBooks 23 and go back and audit. I went into the Board of 24 Equalization and my rep, Sonia Garcia, in her 25 handwriting, audited the six quart- -- four of the 26 quarters. I was owed money, $2200. 27 From that point on, me trying to collect 28 that money and get back from -- because of those 23 1 audits, I have been fighting tooth and nail. 2 So, no, I don't go back and I don't amend 3 any quarterly returns now. It has created me so 4 much difficulty that I would never, ever do it 5 again. And, uh, it was my rep, her handwriting, 6 that actually did the amended returns. 7 I was very adamant, "You owe me $2200." 8 Here it is in her writing and all that. 9 "No, we don't, no." 10 Then I'm audited. They say it's a 11 different timing, I think it's the same timing. 12 But all through this I've been making 13 quarterly payments and I've been turning in bank 14 accounts, my bank records to Board of Equalization, 15 for years. They know I don't have the money and I'm 16 not bringing in that kind of money and things like 17 that. 18 My industry is a high loss industry. 19 Everyone knows that IT stuff is rough to collect on, 20 especially for a sole proprietor. I have 21 30,000-some-odd dollars worth of losses over this 22 period. I've got invoices that say I'm charging -- 23 somebody took 'em 60 days, I'm charging $155 an hour 24 and they're paying me 95, I'm not going to court. 25 I've always lost. Always, always lost. Never got 26 more than the original 95 in court. Don't even go. 27 Why would I go back and change it? I can't go to 28 the Board of Equalization and change it. They'll 24 1 rip me apart. 2 So, uh, this has just been going, and I've 3 been trying to -- I've been to meetings with the 4 Board. I've contacted the Board. I've got a stack 5 of emails with the Board. This last month and a 6 half -- I apologize to Cliff and your folks -- I've 7 been down and out. 8 But, uh, I don't -- I didn't make 150, 9 $175,000 and hide it in a pillow case. It just 10 didn't happen. It -- it -- my, uh -- my income 11 doesn't show it. My lifestyle doesn't show it. My 12 history doesn't show it. There's no W -- there's no 13 1099s or W-2s or anything rolling in that show that 14 I'm -- you know, it's just not -- it's just not 15 happening. It's been a struggle. 16 MS. MA: Okay. Ms. Stowers. 17 MS. STOWERS: Thank you. 18 To Mr. Austin, do you still have the flash 19 drive, the QuickBook flash drive? 20 MR. AUSTIN: I -- I have -- still have 21 QuickBooks, and I can copy that on a DVD, a flash 22 drive, anything. And -- and -- and if someone wants 23 to come to my -- 24 The auditor was in my office, in my chair, 25 with access to everything that I have carte blanche. 26 I didn't block him from getting anything. He had my 27 files. He had my QuickBooks. All my taxes were on 28 the computer. He didn't look at -- he didn't want 25 1 to look at paper. 2 MS. STOWERS: Okay, I understand. All 3 right, thank you. 4 To the Department, I want to ask you about 5 the markup. 6 MR. AUSTIN: But I could definitely -- 7 MS. STOWERS: You definitely could provide 8 another one. 9 MR. AUSTIN: -- produce another one, yes, 10 ma'am. 11 MS. STOWERS: Okay. For the markup you 12 guys used a hundred percent markup based on 13 Mr. Austin's statement? 14 MR. LAMBERT: Verbal, verbal response. 15 MS. STOWERS: Verbal statement? 16 MR. LAMBERT: Mm-hmm. 17 MS. STOWERS: Do you have any data on what 18 the industry average is for markup? 19 MR. LAMBERT: I don't. I, uh, I'm not 20 familiar with this type of business myself 21 personally. I did reach out to other offices to see 22 what their, uh -- their experience has been in this 23 type of business. I got one response back, and 24 their -- their thought is, is they would expect the 25 markup probably to be lower than the hundred 26 percent. 27 What I would say is that we have -- we have 28 asked the taxpayer for purchase invoices. We'd be 26 1 more than happy to calculate an actual markup based 2 on the sales of the product and the purchase price 3 of it, instead of estimating it based on his verbal 4 response. 5 So if he's able to provide us with a 6 purchase invoice, we would be willing -- well, I 7 should say purchase invoices, we would be willing to 8 calculate a markup. 9 MS. STOWERS: Okay. So the one office said 10 it should -- their experience is the markup would be 11 lower than -- 12 MR. LAMBERT: It has been in the past. 13 MS. STOWERS: -- than his verbal statement. 14 But the Department also says a negative 15 markup is not reasonable. 16 MR. LAMBERT: Well, that's right. 17 MS. STOWERS: Okay. I just wanted to be 18 clear. So it's not negative, but it's not a hundred 19 percent either; somewhere in between. 20 MR. LAMBERT: Well, right. It, um -- it 21 would not be negative, and that's what it shows 22 right now. And while what I would say is if you 23 take a look at his purchases and compare to what 24 he's reported as sales, he reported -- during the 25 three-and-a-half-year period, he reported $63,000 in 26 taxable sales. But his purchases were, uh, I think, 27 it was close to 250,000 which -- I mean that's the 28 purchases compared to this is sales. But you would 27 1 have to back out the 80,000 for resales out of that. 2 But even still, when you take a look at 3 that, you reported 63 and you're still 150-something 4 in purchases, it's a -- it's a large disparity 5 between the two. 6 MS. STOWERS: And when it comes to the 7 purchase invoices, would you need all of them or 8 would you be able to sample them? 9 MR. LAMBERT: No, I think -- I think we 10 could sample them. It would have to be like a 11 representative period. 12 MS. STOWERS: Okay. 13 MR. LAMBERT: And we would be willing to -- 14 to do that. 15 MS. STOWERS: Okay. 16 Mr. Austin, do you have access to your 17 purchase invoices? 18 MR. AUSTIN: Yes, ma'am. 19 MS. STOWERS: Thank you. Thank you. 20 MS. MA: Mr. Horton? 21 MR. HORTON: Yeah. 22 MS. MA: Mr. Horton. 23 MR. HORTON: Um, I can appreciate the 24 position of the Department when there just doesn't 25 seem to be adequate books and records in order to 26 make the -- the computations. It sounds as if 27 though the Department, or at least the auditor, made 28 some attempt to, uh -- to obtain that information. 28 1 But the inherent challenge on the side of 2 the taxpayer is though, you know, when life's 3 challenges sort of hit you, it -- it affects your 4 thinking and the process. And then when you're 5 faced with the -- you know, dealing with a 6 bureaucracy, even though there appears to be, based 7 on the data provided, an understatement. And so now 8 the question is whether or not the appropriate 9 adjustments were provided in order to accurately 10 reflect the proper amount of tax that may be due to 11 the State of California. And therein is where the 12 breakdown seems to have happened as far as 13 cooperation from the taxpayer, understanding from 14 the taxpayer, and so forth. 15 In reviewing the audit working papers, I 16 must say it was a little concerning, uh, that there 17 wasn't comments about the adjustments that could 18 have been made to reflect that possibly this could 19 have been made or possibly there could have been an 20 adjustment for bad debts. However, the evidence 21 wasn't provided in order to make the adjustment for 22 bad debts. 23 Possibly there could have been an 24 adjustment for installation labor, which is exempt. 25 But the evidence wasn't there to determine what that 26 adjustment might be. He has maintenance contracts; 27 whether those maintenance contracts are mandatory or 28 optional, therein may be an adjustment for repair 29 1 labor. 2 And so in hindsight when we look at the 3 documents presented, it sort of appears that the 4 Department didn't take it into consideration and 5 have the discussion with the taxpayer, which may 6 have solicited verbal testimony of some sort to give 7 the Department some additional insight to what the 8 actual data may have been or where to have gone and 9 obtain that data. 10 So I'm going to see if I can go through 11 that process a little bit and see if it's helpful. 12 Question of the taxpayer. The items that 13 you sold, did you install any of those items? 14 MR. AUSTIN: Yes, sir. 15 MR. HORTON: And tell me about how you bill 16 for installation? Or did you, or was it -- 17 MR. AUSTIN: Well, you know, it's 18 competitive in the industry, very competitive. 19 MR. HORTON: Not how much. Did you -- did 20 you -- 21 MR. AUSTIN: And so -- so sometimes I have 22 to emulate a good competitor in order to be 23 successful at winning an award. 24 So, some of the competitors, they will 25 list -- they will, uh, give a quote to the client 26 for equipment only and say the labor is free where 27 they folded a price in actually for the -- for the 28 labor and for the warranty. 30 1 And so I have to -- and if someone, "Hey, 2 they're not charging me labor," I can't, "Well, I 3 have to. Goodbye. Sorry." I'm not in a position 4 to be able to do that. 5 I have to, you know, "Well, what are they 6 charging?" 7 So I have to present things sort of in that 8 way if I can. Normally I would charge a different 9 price for -- I would charge for equipment and charge 10 for labor. 11 MR. HORTON: I would think the customer is 12 looking at the -- the bottom line. So -- 13 MR. AUSTIN: They're always looking -- 14 MR. HORTON: If they're including -- 15 MR. AUSTIN: -- at the bottom line. 16 MR. HORTON: If your competitor includes 17 installation, labor, and maintenance in their 18 contract, the ultimate sales price is going to be 19 higher than yours as far as the product. And then 20 when you add it in -- separately stated, 21 hopefully -- uh, it will, uh, be a competitive 22 price. So what I'm hearing you say is that instead 23 of billing lump sum, you actually bill for the 24 product and then separate for installation? 25 MR. AUSTIN: Yeah. I would normally bill a 26 separate line item for installation, yes, sir. 27 MR. HORTON: Do you have any invoices that 28 reflect that? 31 1 MR. AUSTIN: Definitely, yes, sir. 2 MR. HORTON: You've got some with you? I 3 see you looking down. 4 MR. AUSTIN: Yes. Mm-hmm. 5 MR. HORTON: Okay. And when you -- when 6 you went back out to make repairs, how did you bill 7 for that? Did you repair -- did you bill parts and 8 labor? Or you just -- 9 MR. AUSTIN: If they added, moved or 10 changed something, I billed them. 11 MR. HORTON: Okay. 12 MR. AUSTIN: If something I sold them 13 broke, I re- -- the labor and the part were free of 14 charge. 15 MR. HORTON: Was under warranty. 16 MR. AUSTIN: They're under warranty. 17 MR. HORTON: Okay. And how often did you 18 have situations where things changed that were not 19 under warranty but caused you to have to make 20 additional charges for repair or -- 21 MR. AUSTIN: That -- that's a normal piece 22 of business that someone would add a phone or add a 23 board for more telephone lines or something like 24 that. And I would charge them for labor and the 25 part. 26 MR. HORTON: I thought I heard -- I thought 27 I heard in your testimony that you -- you filed 28 small claims on some of your customers? 32 1 MR. AUSTIN: Yes, sir. 2 MR. HORTON: Do you have the court 3 documents where you -- 4 MR. AUSTIN: No, sir. 5 MR. HORTON: Can you get the court 6 documents? 7 MR. AUSTIN: I think so. 8 MR. HORTON: How often did you file -- how 9 often did you take -- 10 MR. AUSTIN: I filed maybe three times. 11 MR. HORTON: And that's because of the 12 expense of doing so or -- 13 MR. AUSTIN: The time and the expense 14 versus the return. I didn't -- it didn't seem to me 15 to make sense to do that. 16 MR. HORTON: Okay. Um, your income tax 17 returns, who prepared those for you? 18 MR. AUSTIN: I do. 19 MR. HORTON: And you use QuickBooks to do 20 that? 21 MR. AUSTIN: I use TurboTax. 22 MR. HORTON: You use TurboTax. 23 Um, where did you -- where did you get the 24 numbers to -- to prepare your tax returns? 25 MR. AUSTIN: From QuickBooks. 26 MR. HORTON: You just pulled them out of 27 QuickBooks? 28 MR. AUSTIN: Yes, sir. 33 1 MR. HORTON: Department, I -- the 2 Department indicated earlier that they had taken a 3 look at cost of goods sold, and I think you 4 indicated that you thought the cost of goods sold 5 was somewhere around 250,000. 6 MR. LAMBERT: Yes. 7 MR. HORTON: Where did you get the cost of 8 goods sold? 9 MR. LAMBERT: Well, we got the cost of 10 goods sold from their income tax returns. 11 MR. HORTON: Okay. And question of the 12 taxpayer. In pulling your -- determining what your 13 cost of goods sold, did you, uh -- what did you 14 include in cost of goods sold on your tax -- well, 15 strike that. 16 Let me go back to the Department. Were -- 17 were there deductions on the tax returns for other 18 expenses such as labor, parts, and nonpurchase-type 19 expenses? 20 What I'm getting at, could -- could the 21 taxpayer possibly have reflected cost of goods sold 22 to include his cost of operation as opposed to 23 actual purchases? 24 MR. LAMBERT: I should correct my statement 25 in terms of the cost of goods sold. It was actually 26 $122,000 -- 27 MR. HORTON: Okay. 28 MR. LAMBERT: -- for a total cost of goods 34 1 sold. 2 So could it have included other things? 3 It's possible. But he did have materials and 4 supplies broken out in a different category. 5 MR. HORTON: He did? 6 MR. LAMBERT: He did. And those were 7 allowed as tax-paid. 8 And he does do installation, so -- and I -- 9 and I have seen some of the invoices and it does 10 show installation as separate. But the installation 11 would not be included in the purchases. And so when 12 you apply a markup to the purchases, it would not 13 include installation. 14 Now, if you did have circumstances, which 15 he explained, where he has a lump sum -- 16 MR. HORTON: I think we're -- where I'm -- 17 where I'm going with this is, I concur with your 18 assessment about the installation not being 19 reflected in the markup. The inherent challenge is 20 the markup. 21 And so when you take a look at these other 22 factors, it begins to give you a better picture of 23 what the markup should have been, or whether or not 24 the markup, which he stated, of a hundred percent is 25 actually lower. 26 And so the -- from my experience, sometimes 27 the challenge is semantics. And so when you say to 28 the taxpayer "cost of goods sold," they think "cost 35 1 of operation." When you say to the taxpayer 2 "markup," well, they sort of think, "Well, what's my 3 markup on labor and parts," and so forth and so on. 4 And so without really doing a -- a markup test and a 5 segregation test because the information and the 6 data isn't there, the only way we can get at what 7 the markup might be, just to give us a sense of it, 8 is to begin to do these types of questions and 9 interviews. 10 So, question of the taxpayer. Your cost of 11 goods sold, did that include anything? Was that 12 just purchases, in your mind, when you put it on 13 the -- 14 MR. AUSTIN: You know, I apologize that I'm 15 not a tax expert. But I would say cost of goods 16 sold or the line that he took is probably all the 17 things that I write off. 18 MR. HORTON: Okay. All right. 19 I would concur with Member Harkey, Ma, or 20 all the Board seem to be, that this is one of those 21 situations where the lack of cooperation in 22 providing books and records, uh, early on caused the 23 agency to basically take what I think is the 24 appropriate position, is to make a call based on the 25 available data. 26 And then going forward it appears that the 27 agency could have explored other opportunities to 28 make adjustments to those numbers, the markup 36 1 itself, the bad debt deductions and so forth. But 2 the position that the agency takes that that's 3 incumbent upon the taxpayer to at least make the 4 argument that it exists and then make the 5 argument -- then provide whatever factual 6 documentation that they can provide to support that. 7 It seems that we've gotten to that point in 8 that the 30/30/30 may provide the taxpayer an 9 opportunity. If they can in fact provide us with 10 copies of the court cases where he went to court, 11 and being understanding that you're not going to go 12 to court on every taxpayer, it at least seems to 13 imply that there's some reasonableness to his 14 argument that there was a bad debt of some sort. 15 And an adjustment for installation and repair 16 appears to be in order. Uh, and if the adjustment 17 at the end of the day results in a reduction in the 18 markup from a hundred percent down to a lower 19 number, uh, that would be understandable as well. 20 And so I would encourage the agency to 21 take, in this case, given the circumstances that the 22 taxpayer faces, take a proactive consultation sort 23 of position and see what we can do to kind of pull 24 out the information necessary to get to the accurate 25 number. 26 MR. AUSTIN: Mr. Horton, may I address? 27 MR. HORTON: Uh, yes, sir. 28 MR. AUSTIN: I have provided everything 37 1 that the auditor wanted from day one. I have -- I 2 have argued with the auditor from day one that 3 I can't double my price and sell that out on the 4 market. It ain't -- from day one I argued with him 5 that I can't double my pricing and -- and -- and 6 sell. It's not -- it's not going to happen. 7 And, uh, I provided him with -- this is the 8 stack that was returned to me one week later in a 9 big fat envelope with the disk, saying they couldn't 10 open the thing. 11 I've -- I also gave them the file that I 12 gave to a collection company for all of the accounts 13 that I put into collections on top of the other 14 ones. I've been pretty forthcoming -- 15 MR. HORTON: Okay. 16 MR. AUSTIN: -- with the information. And 17 then when I saw that they were saying that -- 18 that -- that -- the initial one was saying that I 19 owed $30,000, that I had made 270, $80,000 over this 20 three -- the initial audit was -- was nuts. 21 I didn't sit there and ignore that. I knew 22 the power of the Board of Equalization. They had 23 already laid a lien on my home and stuff. I already 24 understood the power of the Board of Equalization. 25 I wasn't playing any games with the Board of 26 Equalization. 27 I gave them -- I printed all of this. You 28 know, this is tough. I printed it all out and I 38 1 gave it to them. They just returned it to me and 2 said, "Oh, we can't do anything." But, no -- and I 3 have emails showing -- 4 MR. HORTON: I think -- 5 MR. AUSTIN: -- that -- that I was in 6 contact with these folks day after day after day 7 after day. 8 MR. HORTON: Apologies, but I, um -- 9 MS. HARKEY: We're trying to give you a 10 break here. 11 MR. HORTON: I think that -- I think that, 12 um -- it sounds as if though there was an evolution 13 took place. And as the -- as this case evolved, 14 additional information was presented. And now we 15 have an opportunity, the agency has an opportunity 16 to take a look at it and I think it would be very, 17 very helpful to you. 18 MR. AUSTIN: Thank you. 19 MR. HORTON: So thank you, and -- 20 MR. AUSTIN: And I -- 21 MR. HORTON: I would will make a -- 22 Go ahead, Mr. Runner. 23 MS. MA: Mr. Runner. 24 MR. HORTON: My apologies. 25 MR. RUNNER: Yeah, I think -- I think we're 26 in a -- in fact, I'll make a motion for a 30 -- 27 actually I think one was made. I'll second the 28 motion for a 30/30/30. 39 1 MS. HARKEY: We'll explain to you what that 2 means. 3 MR. RUNNER: And let me just take a moment 4 just to let you know. 5 I think the issue is we're -- we are 6 concerned that there's some information that would 7 be helpful to you as a taxpayer. The problem is we 8 don't have enough of it right now to make a 9 decision. So you may be frustrated that you've 10 already presented it, but the problem is we don't 11 have enough information right now. 12 So what we're going to do is you're going 13 to get a 30/30/30, which simply means that you and 14 the Department are going to go ahead can talk more. 15 The difference is you're going to be talking to them 16 instead of the original auditors, and you're going 17 to be able to talk some more about those issues. 18 You'll present your things. They'll 19 present theirs. You'll work -- you'll work through 20 it. Eventually and if you cannot get satisfied at 21 that point, you will be back in front of us. So 22 it's a continued hearing, and I think that's the 23 best we can do. 24 But we can't -- I don't -- I don't -- 25 there's not enough information for me to make a 26 decision for you right now. So that's why I would 27 support a 30/30/30. 28 MS. HARKEY: Yeah. Thank you. I think 40 1 that's the sentiment up here. 2 We seem to -- all of us seem to feel 3 there's parts missing, you know. You're a credible 4 witness. We're not denying your credibility. We 5 think you're a credible witness. Uh, you know, a 6 taxpayer testifying on his behalf is always 7 difficult. 8 There's a matter of QuickBooks, there's a 9 matter of invoices, there's a matter of bad debts. 10 Mr. Horton went through the audit issues with you, 11 or with the Department. 12 You know, the installation labor, 13 maintenance labor, all of those things could reduce 14 what the Department originally assessed you. And 15 then, like I said, this books -- or this email says 16 that the auditor actually prepared a claim for bad 17 debt invoices, which we did not find in our review 18 of the file. So I'd suggest we get that. 19 And then like, uh, Member Horton suggested, 20 anything that you have to do that would be just like 21 a sampling of what you actually collect on your bad 22 debts when you went to small claims, anything that 23 you can have. 24 And so we apologize that you feel that 25 you've provided all this. We, up here at the Board, 26 are trying to make an equitable decision based on 27 the information presented to us. 28 I know you were sick and that totally 41 1 explains why you didn't return phone calls. So this 2 is just to give it a little more time. And you'll 3 be working with Department professionals that will 4 be looking at everything -- it won't be the original 5 auditor -- and coming back and, you know, figuring 6 out where the -- where the margin is. 7 So I think it's a good solution for you. I 8 recommend that you, um, take this and understand 9 you're going to have some assistance and somebody's 10 going to be talking directly to you, not on multiple 11 other accounts, but they'll be working on yours. 12 MR. AUSTIN: Thank you. 13 MS. HARKEY: So the 30/30/30 was suggested 14 and -- and, uh -- 15 MS. MA: Mr. Runner? 16 MR. RUNNER: Yeah. 17 MS. HARKEY: -- seconded. 18 MS. MA: Okay. Ms. Harkey made the motion 19 for a 30/30/30, seconded by Mr. Runner. 20 Without objection, motion carries. 21 MR. ANGEJA: And to continue the hearing. 22 MS. MA: And to continue the hearing, yes. 23 MS. HARKEY: If it's not resolved, right. 24 MS. MA: Yeah, if it's not resolved. 25 Thank you. 26 ---oOo--- 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 state 9 that I transcribed from recorded audio, to the best 10 of my ability, the proceedings in the above-entitled 11 hearing; and that the preceding pages 1 through 42 12 constitute my transcription of the proceedings. 13 14 Dated: March 15, 2017 15 16 17 ____________________________ 18 Kathleen Skidgel, CSR #9039 19 Hearing Reporter 20 21 22 23 24 25 26 27 28 43