1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 30, 2017 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 KEY EVENTS, INC. 14 NO. 600095(BH) and 953675(BH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 26 Reported by: Kathleen Skidgel 27 CSR No. 9039 28 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chairwoman 4 Sen. George Runner (Ret.) Vice Chair 5 Fiona Ma, CPA 6 Member 7 Jerome E. Horton Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Appeals Bureau: Jeff Angeja Tax Counsel IV 15 Legal Department 16 For Department of Tax and Fee 17 Administration: Kevin Smith Tax Counsel III 18 Robert Tucker 19 Assistant Chief Counsel 20 Dario Romano Business Taxes 21 Administrator III 22 For Petitioner: Heather Keenan Taxpayer 23 Jesse McClellan 24 Attorney 25 Priscilla Burpee Witness 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 30, 2017 4 ---oOo--- 5 MS. HARKEY: Okay, Ms. Richmond. 6 MS. RICHMOND: Our next item is C8a and 7 C8b, Key Events, Inc. 8 Please come forward. 9 MS. HARKEY: Okay, thank you. C8a and 10 C8b. 11 MS. MA: All right. 12 MR. RUNNER: Here we go. 13 MS. HARKEY: We're moving through. 14 MR. HORTON: Before we introduce it, is the 15 interest still an issue, at issue? 16 MR. ANGEJA: In this case? 17 MR. HORTON: All of them, actually. 18 MR. ANGEJA: Well, I mean -- 19 MR. HORTON: For this case. 20 MR. ANGEJA: DMCs. We've received -- we 21 have relieved a portion, but not all. 22 So my understanding is for case ID 600095, 23 that's still an issue regarding additional relief of 24 interest beyond what we've relieved. 25 MR. HORTON: You relieved it all from what 26 point in time? 27 MR. ANGEJA: We relieved it from the period 28 from October 1, 2012 to April 30th, 2013. 3 1 MR. HORTON: Why? 2 MR. ANGEJA: We had delay unrelated to the 3 deferral of these cases, if that's what you're going 4 for. 5 MR. HORTON: Yeah. When did the -- when 6 was the deferral? 7 MR. ANGEJA: Right around that 2013 period. 8 It would've come after this part. 9 Appeals has taken the position that the 10 deferral was not unreasonable. I realize reasonable 11 minds can differ, but that's what Appeals came up 12 with because there was a possibility of a favorable 13 change in the regulation so it would have only been 14 prudent to hold off. So that's why we thought it 15 was not unreasonable. 16 MR. HORTON: I think it is. 17 MS. HARKEY: Okay. 18 MS. STOWERS: Can we -- I'm sorry, Madam 19 Chair -- 20 MS. HARKEY: Yes. 21 MS. STOWERS: -- can we have a five-minute 22 break? 23 MS. HARKEY: Do you want a five-minute 24 break? 25 MS. STOWERS: Yeah. 26 MS. HARKEY: Sure. 27 MS. STOWERS: I've got a terrible 28 headache. 4 1 MS. HARKEY: Yeah, do you need some 2 Advil?. 3 MS. STOWERS: Someone brought me some 4 Tylenol. 5 MS. HARKEY: I have Advil if you want. 6 MS. RICHMOND: I think we are taking a 7 short recess. 8 MS. HARKEY: Five-minute break. 9 (Recess taken.) 10 MS. HARKEY: Now we lost Ms. Richmond. 11 MR. RUNNER: Oh. 12 MS. HARKEY: So -- 13 Here she is. 14 Okay, Ms. Richmond, will you please 15 introduce the next item. 16 MS. RICHMOND: We are now on item C8a and 17 C8b, Key Events, Inc. 18 MS. HARKEY: Thank you. Welcome. 19 Mr. Angeja, please introduce the items. 20 MR. ANGEJA: Madam Chair and Members, the 21 appeals before you share one common unresolved 22 issue, which is whether the adjustments to the 23 measure of disallowed claimed on taxable sales are 24 warranted and, as previously mentioned, the subitem 25 case ID 600095 presents an additional unresolved 26 issue, which is whether further relief of interest 27 is warranted. 28 MS. HARKEY: Thank you. 5 1 Okay. Welcome to the State Board of 2 Equalization. Please introduce yourself for the 3 record. You will have ten minutes. And then we'll 4 go to the Department that will also have ten 5 minutes. And then we'll be back to you on 6 rebuttal. 7 MR. McCLELLAN: Thank you, Madam Chairwoman 8 and Members of the Board. My name is Jesse 9 McClellan with McClellan Davis, here on behalf of 10 Key Events, Inc. 11 I'm joined today by Heather Keenan, the 12 president of Key Events; and to her left is 13 Priscilla Burpee, an accountant, who has a 14 significant amount of experience in the destination 15 management industry. 16 Key Events operated what is commonly 17 referred to as a Destination Management Company, or 18 a DMC. A DMC, in summary, is a service-based 19 business that specializes in creating, planning and 20 coordinating activities and events for corporate 21 clients. 22 We anticipate that you will -- that you 23 will hear the Department describe DMCs as retailers 24 of tangible personal property, something we've heard 25 a lot about today, or TPP; and that, as such, the 26 services they provide in relation to those sales are 27 subject to tax. But it is simply not that 28 clear-cut. 6 1 DMCs operate their businesses from offices 2 just like you and I work from. They have no 3 storefront or brick and motor retail location. They 4 don't hold inventory or purchase raw goods or 5 materials for resale or further processing. They do 6 not issue resale certificates for food and beverages 7 that they arrange on behalf of their clients; and, 8 in fact, they're legally precluded from doing so due 9 to ABC licensing obligations and workers' 10 compensation insurance purposes. 11 So to suggest that they are a retailer of 12 TPP, just like any other, is misleading. 13 Contrary to what the Department claims, we 14 believe DMC activities do not fit into the Revenue 15 and Taxation Code definitions contained under 16 section 6006 which defines sale, section 6007 which 17 defines retail sale, 6014 defines seller, or 6015 18 which defines retailer. And for that reason they do 19 not fall within the provisions of code section 6012 20 which the Department cites as support for the 21 imposition of tax. 22 In 2013, this Board heard the case of Fun 23 is First, Inc., a DMC. Ms. Burpee, who is here with 24 us today, represented the petitioner in that case 25 and the Board unanimously granted the petition. 26 We believe the Board reached the correct 27 conclusion in that case for several reasons that are 28 detailed in our brief and summarized as follows: 7 1 First, a DMC is a service provider, not a 2 traditional retailer as the Department claims. The 3 true object sought by a DMC customer is the services 4 they offer. As such, they should be treated as 5 consumers of TPP, which incidentally transferred 6 during the course of some of the programs they form. 7 On average service charges related to food and 8 beverages make up a mere three percent of the 9 revenue generated by a DMC. In this case I think it 10 was 2.83 to be exact. 11 Second, petitioner acted as an agent of its 12 clients and its standard service agreements provided 13 as Exhibit 8 clearly establish an agency 14 relationship between it and its client. Petitioner, 15 its clients, and applicable vendors clearly 16 understood that petitioner was acting on behalf of 17 its client and not purchasing for resale as a 18 standard retailer does. 19 Third, petitioner charges for services to 20 arrange food to be provided by third parties are 21 exempt as optional services. Clients are not 22 required to purchase food as part of the programs 23 designed by petitioner and they can obtain the same 24 food, from the same restaurants, without 25 petitioner's involvement. 26 And fourth, the Department's interpretation 27 of existing statutes in relation to DMC activities 28 constitutes a regulation as defined under the 8 1 Administrative Procedures Act. And, as such, it 2 must be promulgated in accordance with the 3 Administrative Procedures Act. 4 So even if the interpretation is found to 5 be valid, it cannot be legally enforced until it 6 goes through the required rulemaking process, which 7 includes interested parties participation, review 8 and acceptance by the Office of Administrative Law, 9 and finally by the Secretary of State. 10 Despite this Board's directive to engage in 11 the rulemaking process back in 2013 when it heard 12 the Fun is First case, the Department still is not 13 engaged in that process. 14 So the question has to be asked, how can an 15 entire industry possibly be expected to comply with 16 rules that do not exist to this day and certainly 17 did not exist in the periods in which the Department 18 seeks to hold them responsible for tax? 19 The answer is that they can't. 20 I will address these issue in more -- these 21 issues in more detail in our rebuttal time. 22 I would now like to turn it over to Ms. 23 Burpee who will address -- or who will confirm that 24 Key Events operates in the same exact manner as Fun 25 is First. And then she's also going to discuss her 26 experience in dealing with audits and seeing the 27 disparities between the same type of business being 28 audited by a different auditor, which is a symptom 9 1 of the lack of regulatory guidelines. 2 Ms. Burpee. 3 MS. BURPEE: Good evening, Madam Chair and 4 Members of the Board. I'm Priscilla Burpee of 5 Business Advisory Services, and I've been working 6 with destination management companies and their 7 California sales tax issues since the matter first 8 arose in 2004. 9 As Mr. McClellan mentioned, I represented 10 Fun is First, Inc. before this Board almost four 11 years ago, and the decision was unanimous in favor 12 of the petitioner. 13 The absence of clear guidelines for the 14 destination management industry, combined with each 15 auditor's discretion in interpreting sales tax 16 regulations, has led to widely varying audit 17 methodology and instructions to DMC taxpayers. I've 18 seen a broad range of opinions of tangible personal 19 property, inclusion of service fees related to TPP, 20 and allowance of sales tax paid at the source. 21 Individual DMCs have been given very 22 different instructions by Department staff and 23 auditors for assessing and reporting sales tax 24 subsequent to their initial audits. 25 For the audits I've seen, encompassing the 26 years 2001 through 2009, net taxable measure ranged 27 from just over 3 percent to almost 17 percent for 28 businesses which all operated under the same basic 10 1 model. 2 One of my clients is a group of DMCs with 3 common ownership. These businesses shared not only 4 ownership, but also management decisions, used the 5 same proposals, contracts and invoices, had common 6 clients and vendors, and provided substantially 7 similar services for their clients throughout 8 California. 9 Each of the businesses was audited in a 10 different district, and the audits resulted in a 11 range of over 400 percent between the lowest and 12 highest percentages of net taxable measure. 13 In the course of working with many 14 different DMCs around the State of California, I 15 have found that their core business model is 16 essentially the same. It's a very small, 17 tightly-knit industry comprised now of fewer than 25 18 different companies, less than half the number of 19 DMCs in existence when the initial audits were 20 conducted. Most of the DMCs were founded by 21 individuals who worked at one or more other DMCs and 22 brought the skills, processes and procedures they 23 learned to their own companies. 24 The operations of Key Events, Inc. are 25 essentially the same as those of Fun is First, Inc.; 26 they provide the same types of services to the same 27 types of clients and invoice those clients in 28 similar fashion. 11 1 If you redacted documents from both 2 businesses, it would be very difficult to determine 3 any differences between the two. Both have always 4 paid all applicable sales taxes to their vendors and 5 never considered themselves to be anything other 6 than service providers. 7 In the case of Fun is First, the Board 8 unanimously agreed that they were not sellers of 9 food and beverage. I urge you to make the same 10 determination in this case. 11 MS. HARKEY: Thank you. 12 Okay, to the Department, you have ten 13 minutes. Please introduce -- 14 MR. McCLELLAN: Madam Chairwoman, sorry to 15 interrupt. 16 MS. HARKEY: Yes. 17 MR. McCLELLAN: The taxpayer, Heather 18 Keenan, was going to -- 19 MS. HARKEY: Oh, okay. 20 MR. McCLELLAN: -- make some comments. 21 MS. HARKEY: Do we have more time? 22 MS. RICHMOND: We have two more minutes. 23 MS. HARKEY: Two more minutes. 24 MS. KEENAN: I'll talk really, really fast. 25 MS. HARKEY: Sure. 26 MS. KEENAN: I've been in this -- 27 MS. HARKEY: Don't worry. 28 MS. KEENAN: Hello, and thank you for 12 1 hearing us this afternoon -- this evening. We 2 really appreciate it. 3 I've been in this industry for 35 years. 4 Of that 35 years, 27 I've owned my own business. 5 We've always been considered service providers. And 6 no CPA, attorney, accountant or other DMC has ever 7 told us that we need to pay tax in any way, or 8 register to pay tax in any way. 9 We've always paid tax to our applicable 10 vendors. We don't sell goods. We provide services 11 and experiences. People who come into San Francisco 12 want an experience and need help to arrange it, they 13 can do the same thing on their own. 14 I don't understand how we can possibly be 15 required or requested to pay -- to comply for 16 periods where sales tax receipt was necessary. It 17 wasn't known that it was necessary, and nobody in 18 our industry was paying sales tax. 19 Even now the lack of guidance or the lack 20 of clear understanding or rules has really been a 21 game-changer in our industry and turned it 22 upside-down. The amount of energy and expense it 23 takes to arrange this actually exceeds the actual 24 tax that we pay yearly. 25 So, thank you for your help and thank you 26 for hearing it. Maybe two more seconds. 27 MS. HARKEY: Are you good? 28 MR. McCLELLAN: Thank you. 13 1 MS. HARKEY: Okay. Thank you. 2 Now, your turn. 3 MR. SMITH: Good evening Chairwoman Harkey 4 and Members of the Board. I'm Kevin Smith from the 5 California Department of Tax and Fee 6 Administration's Legal Division. With me today are 7 Robert Tucker and Dario Romano, also from CDTFA. 8 We concur with the Appeals Bureau 9 recommendation. Under Revenue and Taxation Code 10 section 6006 subdivision (a) transfers of food and 11 beverages for consideration are sales at retail and 12 are subject to tax. 13 While petitioner argues that it should not 14 be considered the retail of food and beverages, 15 Regulation 1603 subdivision (i)(3)(C) specifically 16 states that sales and meals by restaurants to event 17 planners or party coordinators who buy and sell on 18 their own account are sales for resale. 19 Petitioner purchased the food and beverage 20 on its own account, and therefore the restaurant's 21 sale of food and beverage to petitioner were sales 22 for resale. When petitioner contracted with its 23 customers for transfers of food and beverage in 24 exchange for consideration, it was a retailer of 25 those meals and it was taxed measured by its gross 26 receipts from those sales. 27 Under section 6012 gross receipts is 28 defined as the total amount of the sale price of a 14 1 retailer's retail sale of tangible personal 2 property, as well as any services that are part of 3 the sale. If a purchaser cannot acquire the 4 property without also obtaining the services, then 5 the services are considered mandatory and part of 6 the sale of tangible personal property. 7 Here, petitioner charges customers a 8 service fee in order to obtain the restaurant meal. 9 Its customers did not have an option to decline 10 these service fees. Therefore, the service fees 11 were mandatory as part of petitioner's sale of 12 tangible personal property and are considered part 13 of its gross receipts, subject to tax. 14 Turning to petitioner's argument that the 15 true object of its contracts with its customers was 16 for services, we disagree. It is undisputed that 17 petitioner was obligated to transfer food, 18 beverages, and other tangible personal property to 19 its customers pursuant to its contracts. 20 Petitioner's compensation for its services 21 for the dining program was conditioned on petitioner 22 providing food and beverage to its customers. Thus, 23 the true object of the contract was petitioner's 24 transfer of tangible personal property to its 25 customers. 26 Regarding petitioner's assertion that it 27 was acting as an agent of its customers, an agent is 28 one who represents another, called a principal, in 15 1 dealings with third persons. An agent has the power 2 to alter legal relations between the principal and 3 third parties, and the principal has the power to 4 control the agent with respect to matters entrusted 5 to them. 6 There's no evidence here that petitioner 7 could have contractually obligated its customers to 8 third parties without the customer's consent. 9 Further, petitioner contracted with third parties on 10 its own behalf and there's no indication that the 11 alleged principals, that is the customers, have the 12 power to control the conduct of the petitioner with 13 those third parties. Therefore, there was no agency 14 relationship. 15 With regard to petitioner's reliance on the 16 Board's decision in Fun is First, in deciding the 17 Fun is First appeal, the Board did not adopt the 18 opinion as precedential or adopt any opinion at all. 19 Therefore, the decision is Fun is First does not 20 control the outcome of this appeal. 21 Finally, I'll turn to the underground 22 regulation argument. So what petitioner is asking 23 CDTFA to do when it says that this is an underground 24 regulation is to -- they actually would like us to 25 be adopt a regulation that would violate the clear 26 statutory law in this area. If we did that, that 27 would actually not comply with the APA, and OAL 28 would likely reject that attempt to make a 16 1 regulation. So that's it for that. 2 Accordingly, we ask that you deny the 3 petition. Thank you. 4 MS. HARKEY: Thank you. 5 Okay, you have five minutes. 6 MR. McCLELLAN: Thank you, Madam Chair. 7 I, in summary, disagree, as it may not be a 8 surprise, with everything the Department just said. 9 There's mischaracterizations with respect 10 to our positions. I won't go through them all, but 11 if you have any questions, obviously I'd be happy to 12 address them. 13 I will quickly address the claim that we're 14 asking the CDTFA to draft a regulation that's not 15 consistent with the law, and we certainly have never 16 said that. 17 Ultimately there has to be -- when there's 18 an interpretation of the law, that interpretation 19 has to go through a process. Otherwise, you leave 20 it up to virtually any individual to make an 21 interpretation and then apply that generally to the 22 tax-paying public. There's a protection mechanism 23 in place, and I'd actually like to go through what 24 that process entails. And it's -- it's a very 25 logical process and there's a very good reason why 26 it's in place. 27 And if you -- if you turn to Exhibit 1 of 28 what we provided, there's a portion of the 17 1 Administrative Procedures Act within that, and 2 there's also information from the Office of 3 Administrative Law. 4 In summary, a regulation includes the 5 interpretation of the law, including the 6 interpretation of existing statutes that is 7 generally applied. 8 Government Code section 11340.5 goes on to 9 stated that no state agency shall issue, utilize, 10 enforce, or attempt to enforce, any guideline, 11 criterion and so forth, which is a regulation as 12 defined, unless that has gone through the rulemaking 13 process and has been filed with the Secretary of 14 State pursuant to this chapter. In other words, 15 it's gone through the APA process. 16 The Office of Administrative Law says that 17 if a state agency issues, enforces, or attempts to 18 enforce a rule without following the APA when it is 19 required to, the rule is called an underground 20 regulation. 21 So we have what's defined as a regulation 22 because it's an interpretation of the law. How else 23 do you determine that a DMC is a retailer? There's 24 no DMC statute. There's no DMC regulation. You 25 have to look at the statutes, you have to interpret 26 those in combination and reach that conclusion. 27 Ultimately it's a regulation. 28 In order to enforce a regulation, you have 18 1 to go through a process. And if you don't go 2 through that process, even if your interpretation is 3 correct, it ultimately -- it's not valid. It can't 4 be upheld. And the Office of Administrative Law has 5 struck down rulings or policies of the Board of 6 Equalization in the past; the courts have done the 7 same. 8 Exhibit 2 is the rulemaking protocol that 9 is published on the Board of Equalization website as 10 adopted by the CDTFA. It describes what we just 11 discussed in the first line or the first sentence of 12 the protocol, includes changes in interpretation of 13 existing law which have general taxpayer impact. 14 Prior to 2004, and more clearly in 2007 and 15 2008, there's absolutely no evidence that suggests 16 that the Board of Equalization considered a DMC to 17 be a retailer. 18 So in order to change that determination, 19 there had to have been an interpretation of the law, 20 which by definition is a regulation. And as Exhibit 21 4, I've included a penalty of perjury statement from 22 another DMC operator where they went to the Board of 23 Equalization back in 2001 to ask whether or not they 24 would be required to register for sales and use tax 25 purposes. And under penalty of perjury they stated 26 that they were directed that they did not have to 27 register. 28 Exhibit 3 is a Department internal 19 1 memorandum that's dated June -- I'm sorry, that's 2 dated April 17th of 2008. That memorandum is sent 3 to the entire audit staff saying don't register 4 DMCs, don't audit them, don't process refunds, don't 5 do anything. And yet we sit here today with the 6 Department asserting a liability for periods prior 7 to that. 8 How could you -- how could you conceivably 9 and reasonably establish an internal policy that 10 you're not going to even have DMCs register in 2008, 11 but at a later date and time conclude that it's okay 12 to go back and audit them through 2001? I think 13 that that's asinine, and it's completely 14 unreasonable. 15 Now, eventually the Department did issue 16 some guidelines. And Exhibit 5 is a copy of the 17 guidelines that were originally proposed. And this 18 goes to the inconsistency issues that arise when you 19 don't have authoritative guidelines that exist. 20 Now, Exhibit 5 is a copy of the proposed 21 guidelines. It includes directives on agency. And 22 what it says is if an agency agreement exists 23 between a DMC and its client, the charges by the DMC 24 to its client for food and beverages may not be 25 subject to tax. 26 Well, in this particular case the standard 27 terms and conditions established that there was an 28 agency agreement. And it's not high-hilled climb. 20 1 Ultimately, any two people can agree that there's an 2 agency relationship. And in fact, it can be implied 3 from the circumstances. There doesn't have to be a 4 written agreement. 5 Now, Exhibit 6 is the current guidelines 6 that exist for DMCs. And one of the reasons why I 7 included this, and I highlighted the portion that I 8 wanted to draw your attention to, is that these 9 guidelines on the first page say please note that 10 the information included in general -- I'm sorry. 11 Please note that the information included is general 12 in nature and is not intended to replace any law or 13 regulation. 14 So there actually is no regulation that 15 specifically gives guidelines to DMCs. There's no 16 law that specifically gives guidelines to DMCs. 17 In the guidelines that were established, I 18 would suggest were done so in a vacuum to some 19 degree, and there's a disclaimer on the first page 20 of them that essentially say don't rely on these. 21 You have to rely on law and regulation for your 22 guidelines, but in fact none exist. 23 So we're stuck in this quagmire where if a 24 DMC comes to me, for example, and asks me what the 25 proper way to assess tax on their sales, to report, 26 I can provide my best formulation of what the law 27 says. But ultimately, there's no authoritative 28 regulation that I can go to. 21 1 So ultimately, we think there's a number of 2 reasons why tax doesn't actually apply to 3 petitioner's transactions and other DMC 4 transactions. But notwithstanding our 5 interpretation and not withstanding the Department's 6 interpretation, ultimately what the interpretation 7 ends up being needs to be developed through an open 8 regulatory process. And then the industry needs to 9 be given an opportunity to understand what that is, 10 and then they can comply going forward with whatever 11 it may be. 12 I think it's entirely unreasonable to hold 13 petitioner and hold other DMCs responsible for 14 complying with rules that were not in existence. 15 And for that reason we ask that you grant the 16 petition. 17 Thank you. 18 MS. HARKEY: Thank you. 19 Member Runner. 20 MR. RUNNER: Yeah, let me -- I'm going to 21 start with the decision that we made back four years 22 ago. And I appreciate the fact that the Department 23 has determined that that wasn't precedential and 24 that's true. But along with that was a request for 25 a formal process. I don't believe anything was ever 26 engaged in. 27 So at that point we had identified 28 unanimously on -- I mean basically, you know, that 22 1 these were service providers and asked for a formal 2 process to take place in order to create an IP, 3 interested parties process, in order to try to 4 create then a more -- a clear routine or clear 5 structure. 6 I guess I won't ask why that didn't take 7 place, just observe that it didn't. 8 And, you know, so I -- I mean I think the 9 facts of this case, along with some of the other 10 ones coming up, are all very similar, all around the 11 same kind of issues that we reflected here back in 12 2000, what, 14 -- 13, 13, that these are indeed 13 service providers, not retailers. And maybe we'll 14 solve the problem tonight by making this 15 precedential. 16 MS. STOWERS: May I comment on that? 17 MS. HARKEY: Yes. 18 MS. STOWERS: I've kind of been going over 19 my notes here. 20 I remember the Fun is First case. And I 21 know that we had a similar case that was scheduled 22 in January of this year, so I did some research. 23 And at that time -- for Fun is First, at that time 24 Controller was the Chair for the BTC. 25 MR. RUNNER: Mm-hmm. 26 MS. STOWERS: And she was definitely 27 interested in a regulatory process. But after 28 further discussion with staff, the decision was made 23 1 not the pursue it but to provide some guidelines, 2 industry guidelines that the Department often does 3 for areas of law. And that's how we got the 4 guidelines posted on the website. 5 When the -- to the Department, when the 6 guidelines were posted, for those who were 7 registered or identified as DMCs, did you do any 8 education and outreach? 9 MR. ROMANO: All I'm aware of is the -- the 10 industry page that we put out. Whether or not they 11 had separate outreach, I'm not aware of that. 12 MS. STOWERS: Okay. All right. 13 I'm kind of going over the notes. During 14 this process when the Controller was wanting to have 15 some kind of regulatory process, she did look into a 16 law change because she concluded, we all concluded, 17 that a law change was more important as opposed -- 18 was more appropriate than a regulation, and several 19 bills were introduced -- SB 700 in 2007, SB 1628 and 20 AB 676 and AB 1687 in 2010 -- and they all failed to 21 pass. 22 So it seems to me that we still need a law 23 change. I mean, I hear what Mr. Runner is saying 24 about making a formal precedential decision. That 25 would be up to the Board to decide. But I -- I do 26 think we definitely have a problem here, especially 27 for this particular taxpayer who has the exact same 28 period as Fun is First, similar fact pattern and was 24 1 held in abeyance. I see that Appeals is -- the 2 Department has recommend abatement of interest for 3 about one-year period? 4 I would believe to the extent that there's 5 a tax liability, all interest should be abated. 6 So I don't know if you guys want to go any 7 further, but that's -- you know, I think we still 8 have a tax liability, but I think all the interest 9 should be cancelled on this particular liability. 10 MS. MA: Yeah. So I watched Fun is First, 11 the hearing, and that was, what, October 31st, 2013. 12 Similar facts. I don't really know -- I don't feel 13 like I need to go through it all again. Members 14 Horton and Runner were here. We heard the 15 arguments. 16 MS. HARKEY: And we heard -- we heard 17 several bills in the Legislature. 18 MS. MA: Yeah, so -- 19 MR. RUNNER: Well, again, and the bills in 20 the Legislature aren't -- I don't believe -- I mean 21 that was a way to deal with it. But I think it's 22 certainly within our realm to be able to create then 23 clarity in -- in -- in the law that already 24 exists. 25 MS. HARKEY: Well, to add -- to add to your 26 support for what you just said is that the finding, 27 Legislature felt that the BOE had the ability to 28 correct the issue and should correct the issue 25 1 without Legislative change. 2 I think when it got to the Legislature it 3 got very confused, got mixed in with other things. 4 There's always higher priorities. And they thought 5 that we at the Board had the ability to change 6 this. 7 I think what we have right now is an 8 underground regulation. We have virtually no 9 instruction. The website's been changed to say, 10 with a big disclaimer, "don't count on us." And I 11 don't understand how a tax agency can issue guidance 12 with "don't count on us." I just find that 13 appalling and we've heard -- we've had that in 14 several cases. 15 You know, if it's on your website and you 16 can't make the decision from an agency perspective 17 whether it's taxable or not or how to provide 18 guidance, I don't know how we expect taxpayers to 19 figure it out, you know. And to hire even attorneys 20 that don't have any firm guidance to, uh -- to 21 follow. 22 So I do think that if we can't get the 23 Department to go through and write a reg., that we 24 ought to offer a precedential opinion on this, with 25 similar facts, and -- but I think that will require 26 that we outline what those specifically are. And I 27 think, more to the point, probably what you're -- 28 what we're saying here is that we find them as 26 1 providers of service and not -- 2 MR. RUNNER: Retailers. 3 MS. HARKEY: -- not retailers of products. 4 And so that would probably go to the direction. 5 MS. MA: Can I add one thing? 6 And I'd also like to add, on these 7 publications, I didn't know when this was created or 8 when it was updated. So to the -- 9 MS. HARKEY: We don't know. 10 MS. MA: I know, but -- 11 MR. McCLELLAN: Latter part of 2015. 12 MS. MA: But, I mean, there should be a 13 date when it was either created or updated. I mean 14 I'm going to recommend that, and I'll send a note to 15 Nick Maduros. But it's really hard to figure out, 16 you know, if you're -- I see you're using these, 17 too, but they look older because they're not the 18 same ones and I don't know. 19 MR. McCLELLAN: No, that's -- I agree 20 completely. 21 MR. RUNNER: I would -- I don't know if 22 everybody's -- 23 MS. HARKEY: Motion? 24 MR. RUNNER: -- through speaking. I'll 25 make a motion. I would move that we grant for the 26 taxpayer and that we would find that DMCs are 27 service providers and not retailers, and that we 28 make this a precedential decision. 27 1 MS. HARKEY: I'll second. 2 Is there any objection? 3 MS. STOWERS: I'm going to -- 4 MS. HARKEY: Come on, Yvette. 5 MS. STOWERS: I'm willing to cancel the 6 interest, but -- 7 I'm going to object. 8 MS. HARKEY: Okay. Call the roll, please, 9 Ms. Richmond. 10 MS. RICHMOND: Chairwoman Harkey. 11 MS. HARKEY: Aye. 12 MS. RICHMOND: Mr. Runner. 13 MR. RUNNER: Aye. 14 MS. RICHMOND: Mr. Horton. 15 MR. HORTON: Aye. 16 MS. RICHMOND: Ms. Ma. 17 MS. MA: Aye. 18 MS. RICHMOND: Ms. Stowers. 19 MS. STOWERS: No. 20 MS. RICHMOND: Motion carries. 21 MS. HARKEY: 4-1. 22 MS. KEENAN: Thank you. 23 MR. McCLELLAN: Thank you. 24 MS. HARKEY: Thank you. 25 MS. MA: How are we going to do that? If 26 we're going to make these (inaudible). 27 MS. HARKEY: No. We just -- with a 28 precedential we grant for this taxpayer and that 28 1 we -- the precedential opinion is only going to be 2 based upon the service providers and not retailers. 3 That's kind of the -- making that statement. 4 MR. HORTON: Members, I think these cases 5 are fact-driven and probably should be looked at on 6 a case-by-case basis. So I'm not necessarily 7 inclined to make them precedential. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 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 August 30, 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 29 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: October 30, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 30