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 21, 2015 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 TERRAVANT WINE COMPANY, LLC 14 NO. 717959 (AR) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 For the Board Jerome E. Horton 4 of Equalization: Chairman 5 Sen. George Runner (Ret.) 6 Vice-Chairman 7 Fiona Ma, CPA 8 Member 9 Diane L. Harkey 10 Member 11 Yvette Stowers 12 Appearing for Betty Yee, State Controller (per 13 Government Code Section 7.9) 14 15 Joann Richmond Chief, Board 16 Proceedings Division 17 ---oOo--- 18 For Appeals Division: Jeff Angeja Tax Counsel IV 19 20 For Board: Andrew Kwee Tax Counsel III 21 Lawrence Mendel 22 Tax Counsel III 23 Kevin Hanks Chief, Sales and Use 24 Tax Department 25 For Petitioner: Steven J. Roth Attorney 26 Matthew B. Andresen 27 Representative 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 21, 2015 4 ---oOo--- 5 MR. HORTON: Okay, Ms. Richmond, our next 6 matter. 7 MS. RICHMOND: Our next matter is item C2, 8 Terravant Wine Company, LLC. 9 Please come forward. 10 MR. HORTON: Mr. Angeja, would you please 11 introduce the issues in this case? 12 MR. ANGEJA: Good afternoon, Mr. Chairman 13 and Members. I'm Jeff Angeja on behalf of the 14 Appeals Division. 15 The appeal before you presents two 16 unresolved issues, which are whether Petitioner was 17 required to pay use tax on the purchase price of 18 wine making equipment used under alternating 19 proprietor agreements and, second, whether 20 Petitioner was negligent. 21 MR. HORTON: Thank you very much. 22 Welcome to the Board of Equalization. 23 Again my apologies for the time you had to wait. 24 You have ten minutes to make your presentation. 25 We would ask that you commence with your 26 introductions for the record. You will also be 27 allowed five minutes on rebuttal once the Department 28 has made their presentation. 3 1 At your convenience, sir. 2 MR. ROTH: Good afternoon. This is Steve 3 Roth, the taxpayer's lawyer. 4 MR. ANDRESEN: Hello, I am Matthew 5 Andresen. I'm the Production Controller at 6 Terravant Wine Company. 7 MR. HORTON: Welcome. 8 MR. ROTH: To begin with, the statement of 9 the facts given by the Board's staff is essentially 10 correct. It's -- it's papers. We believe they have 11 got it right. This is a business that provides wine 12 making facilities to its -- for its own use and for 13 others. 14 For its own use it makes -- it buys grapes 15 and/or bulk wine and makes its own wine. 16 That's a recent occurrence, correct? 17 MR. ANDRESEN: Yes. 18 MR. ROTH: For matters of other -- of 19 others, there's two kinds of contracts that the 20 taxpayer uses. One is a custom crush and the other 21 is an alternative proprietor -- an alternative 22 proprietor contract. 23 The custom crush is a situation where wine 24 growers with their own wine, their own vineyards, 25 will truck their -- their grapes into Terravant's 26 location and get them crushed for their own account 27 by our -- our customers. 28 We've got -- Terravant has separate 4 1 equipment that is used in the custom crush and the 2 alternate proprietors. Custom crush equipment was, 3 for the most part, tax paid, since they knew it was 4 going to be used by themselves. 5 There is -- there is a portion of it which 6 was inadvertently not tax paid, but that's -- we'll 7 deal with that later. 8 In regard to the equipment used in the 9 alternate proprietor agreements, the taxpayer 10 believes that those items of equipment are properly 11 purchased for use tax -- for resale, sorry, or for 12 use in California from outside of California. 13 And the use tax was not paid on the 14 alternate proprietor equipment because when leased 15 to the alternate proprietors, the proceeds of those 16 lease receipts were going to be tax paid to the 17 State. And, in fact, they were. The receipts from 18 alternate crush sales, alternate proprietor crush -- 19 alternate proprietor sales were taxpayered by the -- 20 tax paid by the taxpayer. 21 MR. ANDRESEN: We always just call it AP. 22 So, I don't know if that's going to make it easier. 23 MR. ROTH: Thank you. 24 So, the essence of the Board's staff's 25 position, as I understand it, is that the taxpayer's 26 agreements with its APs were not leases because the 27 taxpayer's employees, that's Terravant's employees, 28 rather than the AP's employees actually turned the 5 1 knobs and pulled the switches for the equipment that 2 was being used to make the wine. 3 We obviously disagree. Taxpayer maintains 4 that the taxpayer leased its wine making equipment 5 to its APs and that the APs controlled the use of 6 the wine making equipment by giving written 7 instructions to the taxpayer's employees on how to 8 manipulate and condition the wine, making it -- the 9 wine making equipment, how to add chemicals and 10 other materials to the wine and how the resulting 11 wine was to be stored and aged. 12 Both the federal tax and Trade Board rules 13 and those of the California Alcohol Beverage Control 14 required that the APs exercise a high degree of 15 control or responsibility for how the wine is made 16 and under these contracts the APs do so. 17 Board staff relies upon a 75-year-old case 18 decided by the California Supreme Court entitled 19 Entremont versus Whitsell. Based on the facts of 20 those case -- of that case, the court determined 21 that the purported lessees lacked sufficient control 22 over the equipment owner's employees. 23 The court stated that the equipment owner's 24 employees were told where and when to deliver their 25 loads -- they were truck drivers -- but not how to 26 do so. 27 The court did not explain how much control 28 of the employees would have been necessary, only 6 1 that on the facts of that case, there were not 2 enough. Therefore, the court found that Entremont 3 contracts were for the rendering of a service of 4 moving materials and not for leasing the trucks with 5 operators. 6 It's essentially the decision by the Board 7 staff in our case. 8 Primarily the taxpayer relies on the 9 definition of a lease contained in the Board's 10 Regulation 1660 (a), which defines, 11 "The lease of property as an 12 agreement under which a person secures 13 temporary use of the property, which 14 although not on his premises, is 15 operated by or under the control of 16 or --" I'm sorry, "under the direction 17 and control of the person or his 18 employees." 19 That's precisely what we have in this case. 20 The APs do not directly operate the equipment, but 21 they do under -- they do cause it to be operated 22 under the direction and control of the person or its 23 employees. 24 So, what we're saying is that there -- 25 there appears no requirement in the regulation that 26 this question of operation of use by the owner be 27 mandatory or optional. 28 We understand the staff takes the position 7 1 that if these operations were optionally done by the 2 Terravant employees, there would be no question 3 before the Board since it's not optional that the 4 APs used Terravant employees, they say, and we don't 5 have a lease. 6 We believe that that's not -- that's not 7 even an appropriate analysis. Because if we look at 8 the question of whether or not the premises is 9 operated under the direction and control of the 10 person or its employees, I think there is no doubt 11 that we have -- our -- our employees, Terravant's 12 employees, are under the direction and control of 13 the APs. Everything they do is pursuant to written 14 documents and agreements which are required to be 15 received prior to doing the work. 16 And in the materials I provided, you should 17 find six or eight indications -- six or eight items 18 there. There is instructions given. They're not 19 appropriate to any particular AP, but give you an 20 idea -- how much to receive, how much water to put 21 it into, which vats, how much ice, what kinds of 22 chemicals, that kind of stuff. 23 So, the instructions given by the APs are 24 required to be quite detailed. And they are. 25 So, we believe that under the -- under the 26 Regulation 1660 (a) we qualify as leases. 27 Finally, the Board determined that the 28 taxpayer was negligent in reporting its tax 8 1 obligations by virtue of the size of the deficiency 2 determination, and because sales invoices and sales 3 tax worksheets were not prepared and maintained by 4 the taxpayer. 5 You'll find in your materials -- I have 6 given you copies -- the sales statements that the 7 taxpayer does, in fact, prepare and mail to its 8 customers on a regular basis. They're not strictly 9 invoices, but they are -- they are -- they give the 10 amount of -- the amount that's owed and the amount 11 that's been paid, the amount that's still owed. 12 Seems to me that that's good enough for a 13 sales invoice. 14 Staff further says the sales tax worksheets 15 were not prepared. As I understand it, the 16 taxpayers estimated the value of the sales made to 17 the APs as related to the depreciation of -- in the 18 particular equipment itself. 19 That's because there were so many other 20 services involved in the transaction that only that 21 amount related to the lease of the equipment to the 22 APs was taxable. 23 These were not sales worksheets, but they 24 were an attempt to make the proper reportings and I 25 don't think that there is any doubt that it's not 26 unusual for taxpayers to lack sales tax worksheets 27 for their -- in their records. 28 That's one of the standards of whether a 9 1 negligence penalty is supposed to be applied and, 2 that is, what would an ordinarily -- an ordinary 3 taxpayer do? Well, ordinary taxpayers do the best 4 they can to report their tax. 5 And staff is concerned that there is a 6 large deficiency here. I suggest that the size of 7 the deficiency is not so much important as why it 8 was -- what it was caused by. 9 In this case the primary deficiency was 10 caused by a misunderstanding and the application of 11 how the -- a misunderstanding of the way that the 12 Board would apply 1661 -- or 1660 (a) to determine 13 whether or not they were -- these equipments were 14 being leased. 15 That's -- that's my -- 16 MR. HORTON: Members, we'll now go to the 17 Department. The Department has ten minutes to make 18 their presentation. 19 And we'd ask that you commence with your 20 introduction for the record. 21 MR. KWEE: Yes. Good afternoon, Chairman 22 Horton and Members of the Board. I'm Andrew Kwee 23 with the Board's Legal Department. 24 With me today is Lawrence Mendel and Kevin 25 Hanks. And we'll be representing staff. 26 The facts establish that use tax applies to 27 Petitioner's purchase of the wine making equipment 28 and that Petitioner is not leasing the equipment to 10 1 its customers. 2 Petitioner purchased the wine making -- the 3 wine making equipment without paying tax or tax 4 reimbursement at the time of purchase. 5 Petitioner then operated the wine making 6 equipment pursuant to certain AP contracts with its 7 customers. 8 Petitioner did not subsequently pay or 9 report tax to the Board on the purchase price 10 because Petitioner contends that it is leasing the 11 equipment and that the tax applies to its rental 12 receipts. 13 The Department examined the Petitioner's 14 contract with its customers and determined that 15 Petitioner is not leasing the equipment. Thus, tax 16 applies based on the purchase price. 17 If Petitioner made any use of the wine 18 making equipment, tax would apply based on 19 Petitioner's purchase price. 20 Otherwise, in the case of a lease of wine 21 making equipment, use tax would generally apply to 22 the rentals payable under the lease. 23 As stated by the Supreme Court in Entremont 24 versus Whitsell, and this is a quote, 25 "The chief characteristic of 26 renting or leasing is the giving up 27 of possession to the hirer so that 28 the hirer and not the owner, uses and 11 1 controls the rented property." 2 End quote. 3 The Supreme Court's position is reflected 4 in our annotation 330.2465, which explains, 5 "If the owner of the property 6 always provides the operators, i.e., 7 the owner will not provide the property 8 without its operator, the transaction is 9 not a lease. The charges made by the 10 owner are regarded as charges made for 11 nontaxable services." 12 End quote. 13 We have many other annotations applying 14 the same standard. And it has been the Board's 15 longstanding position that when the owner does not 16 surrender possession and control of the property to 17 the hirer, then that transaction is not a lease. 18 Here Petitioner's contracts do not contact 19 -- constitute a lease because, as explained in the 20 D & R, the decision and recommendation, only 21 Petitioner is permitted to operate the equipment 22 used in the wine making process. And Petitioner is 23 the only person who actually operates the wine 24 making equipment. 25 This is confirmed in Section 9 of 26 Petitioner's contract, which is attached as 27 Exhibit 1 to the D & R, with its customers and it 28 specifies, quote, 12 1 "No work will be performed 2 by Petitioner unless and until their 3 requested work orders are approved by 4 Petitioner in writing." 5 Section 9 goes on to state that, 6 "No sale or work will be 7 performed without a written work 8 order from the customer." 9 Thus, not only is Petitioner the only 10 person authorized to use the equipment, all work 11 requested by the customer is also subject to 12 Petitioner's approval. 13 Based on these facts, the transactions at 14 issue do not qualify as leases because Petitioner 15 always operates the wine making equipment and does 16 not ever relinquish control over the use of the wine 17 making equipment to its customers. Therefore, tax 18 applies to Petitioner's purchase of the wine making 19 equipment. 20 The Department already made an allowance 21 for these receipts that Petitioner reported, 22 therefore, no adjustments are warranted. And we 23 concur with the Appeals Division's recommendation. 24 MR. HORTON: On rebuttal, please? 25 MR. ROTH: With regard to the annotation 26 claims that the -- the equipment without employee -- 27 that the equipment must be provided without 28 employees, it's my understanding that the equipment 13 1 can be requited -- provided optionally without 2 employees. 3 The question came up prior to the hearing 4 and after the preparation of my materials as to 5 whether or not the taxpayer has ever made the 6 facilities available for APs without use of its 7 employees. 8 Do you know? 9 MR. ANDRESEN: We have not made it 10 available for use without employees. That's 11 primarily due to the fact that the very technical 12 nature of the work -- the danger of ruining 13 equipment and stuff like that -- if there was an AP 14 vinter that had all of the necessary training and 15 qualifications and had all of the employees, which 16 would not be economical, that's why we've never had 17 a request for it, then under those circumstances we 18 would definitely consider letting the -- their 19 employees, you know, work the equipment. 20 But that's never come up because it's not 21 economical. And the level of training and technical 22 knowledge that you need to work the equipment is, 23 you know, substantial. 24 That's also the reason for Section 9 in 25 here on why the host review stuff is -- even though 26 we are operating under the control and direction of 27 it, if we were provided an order that would result 28 in, say, damage to the equipment or something like 14 1 that, that's why we're reviewing it, because we have 2 the technical knowledge and understanding to review 3 and just make sure that nothing's going to, you 4 know, ruin millions of dollars in equipment. 5 MR. ROTH: And, finally, with regard to 6 the question of possession, we maintain that 7 constructive possession is transferred in that the 8 APs are the only ones deciding what's to -- what's 9 to be happening with those equipments during the 10 period of time that they're ever using them. 11 That is -- I mean, certainly they don't 12 hold them in their hand, but they -- they hold -- 13 constructively they hold them in their hand. 14 MR. ANDRESEN: And we literally won't do 15 anything at all to the wine without the written 16 instructions. 17 During crush, for example, the APs will 18 have their wine makers there the whole time 19 providing directions, you know, going over 20 everything and written out. 21 Our employees don't do anything at all. 22 It's under the total control over the APs wine 23 makers. 24 Submitted. 25 MR. HORTON: Thank you. 26 Discussion? Member Harkey. 27 MS. HARKEY: Thank you. It's getting 28 crowded up here, so excuse my hitting my microphone. 15 1 For the taxpayer, what was the company's 2 original business plan? 3 MR. ANDRESEN: Our original business plan 4 was mainly focused on providing the AP vintner 5 services with a small amount of custom crush for 6 other purposes, such as wineries that don't have an 7 AP vendor's license. And, so, we would provide 8 services through them. 9 So, our original plan, we set aside a large 10 portion of the facility for AP purposes. And that 11 would be designated only for AP use. 12 For anything that we thought might be used 13 by AP and custom crush, we wouldn't pay tax on that. 14 For example, with the bottling line, for example, 15 would be used by both. So, we made sure to pay tax 16 on both of that. 17 MS. HARKEY: Did you have good faith belief 18 that you were following all regulations and the 19 proper tax? 20 MR. ANDRESEN: Yes, we did. We did have 21 some counsel on that matter. 22 We tried to find a record of that, but it 23 was probably about eight years ago now. I'm sorry, 24 we couldn't find it. 25 But we thought that this was a reasonable 26 interpretation of the law. We believe that this was 27 a lease, that we had given control to the AP 28 vendors, we were abiding by federal and state 16 1 regulations on what an AP vendor is. 2 And we figured if the federal regulations 3 say this is a lease, then this must be a lease. 4 And, so, we paid taxes based on that. 5 MS. HARKEY: Okay. I reviewed the case 6 considerably, so, I may be going over some things. 7 But I need some -- I want some further 8 emphasis from you as -- why is it necessary for the 9 host or the lessor to supply its own employees as 10 part of the lease? 11 MR. ROTH: It's mainly due to the technical 12 nature of the work. Like I mentioned earlier, it's 13 not -- it wouldn't be impossible, we don't have a 14 policy strictly prohibiting them from providing 15 their own employees, assuming they had the training 16 and knowledge to use it, but this is a technical 17 business. It's very expensive equipment. And, so, 18 we provide our own employees. 19 And it's also very economical too. You 20 figure that, you know, we have, I think, 20 to 30 AP 21 vintners on there. And it wouldn't be very 22 economical for an AP vintner to have their own -- 23 have their own employees that they use for, you 24 know, what, a couple hours a day or something like 25 that. 26 So, you know, based on the technical nature 27 and based on the economics of it, it just makes 28 sense for our employees to work under the direction 17 1 of the AP vendors in this circumstance. 2 MS. HARKEY: Okay. Does the AP agreement 3 or lease state specifically who controls the 4 equipment and the facility? 5 MR. ANDRESEN: I believe that it does, that 6 it states that the AP vendors are in control. 7 And as we mentioned in Section 9 there, 8 that we don't do anything at all except under a 9 specific written work order or control from the AP 10 vendor. 11 MS. HARKEY: Okay. Does the lease outline 12 clearly who controls the whole process? 13 I mean, is there a provision for a lessee 14 wine maker or consultant in your lease? 15 MR. ANDRESEN: Yes. 16 MS. HARKEY: Somebody to be overseeing the 17 process -- 18 MR. ANDRE SEEN: Yes. 19 MS. HARKEY: -- from the AP side? 20 MR. ANDRESEN: The AP -- yeah, the AP 21 provides the wine maker. And they're in control of 22 it, yes. 23 MS. HARKEY: Okay. I think we know that 24 the lessee provides instructions in writing; is that 25 correct? 26 MR. ANDRESEN: Yes, ma'am. 27 MS. HARKEY: Must they be in writing? 28 MR. ANDRESEN: They must be in writing. 18 1 MS. HARKEY: Is this a fair representation 2 of instructions that you would see? 3 MR. ANDRESEN: Yes, ma'am, it is. Those 4 are pretty recent ones. Those are mainly custom -- 5 the crush part of it. 6 But it's, I think, a fair representation of 7 the types of orders. You know, they'll say, 8 "We want you to do this. We want 9 you to put the tanks in at 5 degrees. 10 We want you to add this chemical. We 11 want you to punch down the wine, basically 12 mix the wine around, whatever it is. We 13 want you to rack the barrel. We want 14 you to leave it there." 15 Anything that is done to the wine, that's 16 what it is. And it's very specific because, you 17 know, wine's very expensive and anything that goes 18 wrong could potentially damage the wine. 19 And, so, we want to be very specific to 20 protect both the wine and, of course, ourselves. 21 MS. HARKEY: Okay, these are pretty 22 specific. You know, 23 "Draw out 5 percent of the juice, 24 add 75 milligrams of whatever enzyme." 25 Over here it says, 26 "Clean juice off from inside 27 of fermenter head space after filling. 28 Place fermenters into cold room. 19 1 Estimated two days cold soak. Punch 2 down two times days daily with dry ice." 3 They are pretty specific. 4 MR. ANDRESEN: I just make wine. 5 MS. HARKEY: Yeah, and the reason -- the 6 reasons that you actually review and sign off on 7 those is what? 8 MR. ANDRESEN: Is -- is just to make sure 9 that, for whatever reason, they weren't maybe doing 10 some type of operation that could damage equipment 11 or something like that or possibly damage personal 12 safety if the wine maker just, you know, went crazy 13 and tried to have us do something that we shouldn't 14 do. 15 So, it's just a curious review to make sure 16 that everything wouldn't damage anything. 17 MS. HARKEY: Okay. Who assumes liability 18 or responsibility for damage or injury to other 19 persons or property? 20 MR. ANDRESEN: I believe we have both sets 21 of insurance. We do and then we also have -- make 22 the AP vintners do, I'm -- 23 MS. HARKEY: Right. Do you have an 24 indemnity provision? 25 MR. ANDRESEN: -- I honestly don't know 26 that off the top of my head. Sorry. 27 MS. HARKEY: Okay. I've got a copy of your 28 lease here. 20 1 So -- okay, in Entremont versus Whitsell, 2 that was submitted to us, I believe you submitted 3 your -- your information last night. 4 And it said that in the decision Entremont 5 assumed all responsibility for damage or injury to 6 persons and property, but also they retained the 7 right to hire and fire the drivers of the trucks. 8 And, so, it was a two-edged sword as to why it was 9 considered a service. 10 Now, you -- you have, I believe -- I've 11 looked at your -- I've got your lease agreement, I 12 think, just today. 13 And, so, I've been trying to note 14 paragraphs of it, but in paragraph 7 it lines out 15 that, 16 "Title to wine and insurance, 17 title to grapes and juice and risk 18 of loss remain with the AP vintner 19 at all times, subject to any lien 20 that the host may have for amounts 21 due but not paid under the agreement. 22 The AP vintner shall provide at sole 23 cost and expense general liability 24 insurance and property insurance 25 covering AP vintner's grapes, juice, 26 wine. And to the effect that AP 27 vintner delivers grapes or wine to 28 host, such property insurance, to the 21 1 extent commercially available, shall 2 insure AP vintner's grapes and juice 3 and wine processed therefrom." 4 They've got bottling supplies and then over 5 MR. ROTH 21 it says, under "Indemnity," 6 "AP vintner shall defend, 7 indemnify and hold harmless host as 8 to the owners, members, officers, 9 directors, shareholders, and 10 representative's agents and employees 11 against any and all liability, lessor 12 expense of any kind, including, but 13 not limited to claims, damages, costs, 14 fees, including reasonable attorneys' 15 fees, interest, accounting fees, expert 16 witness fees, costs and expenses, 17 losses, recovery, settlement expenses 18 and/or fines incurred by the host, 19 whether or not foreseeable, contingent, 20 otherwise as whether directly or 21 indirectly arising from related to AP 22 vintner's negligence, willful misconduct 23 or breach of this agreement." 24 So, it seems to me you've got pretty clear 25 directions in the lease as to who has the liability. 26 Okay. For the sales and use tax appeals, 27 did you review -- Department, I'm sorry, thank you. 28 I have got a lot of paper here, so, excuse 22 1 me. I'm new. I know a few of you, but not 2 everybody. 3 Did you review the APA agreements? 4 MR. KWEE: Yes. And we have a copy of 5 that. I think it's attached as Exhibit 1 to the 6 Decision and Recommendation also. 7 MS. HARKEY: Okay. Thank you. 8 Do you have -- your point, as I'm reading 9 or has been broken down for me, is that the AP 10 vintner may not operate any of the equipment used to 11 produce wine at any time. That's why you think it's 12 not a lease. 13 And the host winery actually supplies 14 employees. And the AP vintners work orders are 15 approved in writing by the host and lessor. 16 Is that your three main issues? Are those 17 your three main issues? 18 MR. KWEE: Yes, it's essentially that 19 Petitioner will not and is not willing to allow his 20 customers to operate the machinery. 21 So, we're looking more at the actual 22 equipment, not the instruction of the wine making 23 process, we're looking at who has possession and 24 control over the specific items of the wine making 25 equipment at issue. 26 So, yes. 27 MS. HARKEY: Okay. Unlike a truck, where 28 you actually leave the truck with the drivers, this 23 1 is leasing equipment with specific instructions and 2 maybe even supervisorial oversight of the process. 3 Do you not see a difference between those 4 two? 5 MR. KWEE: Well, I understand that, yes, 6 there is some difference. 7 But essentially what we're looking at is 8 just the use of the equipment and who has possession 9 and control over that specific kind of equipment. 10 So, in that respect, we believe it's 11 similar with Entremont. 12 MS. HARKEY: Well, when I read the 13 agreement, the AP agreement, while the physical 14 location of the equipment is on Terravant property, 15 the use is by the lessee. The use instructions are 16 with the lessee. And the use supervision is with 17 the lessee. 18 I believe that's pretty different than in 19 the Entremont Whitsell case. 20 MR. KWEE: If I might clarify? In the 21 Entremont versus Whitsell case, the factors that 22 were cited by the court were: 1, that the operators 23 are employees of the owner, not the hirer; 2, the 24 hirer was -- has no power to select or discharge the 25 operators of the equipment; and, 3, the owner's 26 responsibility to carry compensation insurance for 27 the operators -- that the owner had the 28 responsibility to carry compensation insurance for 24 1 the operators; and, 4, the owner is responsible for 2 damage caused by operation of the equipment. 3 And that's -- and we're looking at those 4 factors generally getting more towards the actual 5 use of the equipment. 6 They are looking at who has possession and 7 control over the use of the equipment and that's -- 8 I guess that's how we were looking at it, from who's 9 selecting and who's -- who has authority to operate 10 the equipment. 11 And that is why we thought this fit 12 squarely within the annotation, which says that if 13 the taxpayer will not allow the equipment to be 14 rented without the use by the customer, then that 15 does not qualify as a lease. 16 And that's what we were seeing. 17 MS. HARKEY: Okay, I understand. I 18 understand what you're saying. 19 I think there is a -- a different -- a big 20 difference between what the trucks are doing when 21 you're leasing them and people are coming and 22 driving them off versus when they're dropping off 23 the grapes with instruction, with supervision, with 24 clear controls as to how it's to be operated on 25 very -- probably technical, and as we've heard, and 26 as, you know, the staff admits is, you know, very 27 expensive equipment. 28 So, thank you. 25 1 MR. HORTON: Further discussion? 2 Ms. Stowers. 3 MS. STOWERS: Clarification to the 4 Petitioner. 5 Are the instructions providing on the wine 6 making process or how to use the equipment? 7 MR. ANDRESEN: Both. So, you know, some 8 equipment, obviously, has more things that you can 9 do than others. 10 But it's -- if there's more than one way to 11 possibly use the equipment, you know, then you're 12 going to have instruction on how to use it along 13 with what you're -- what you're doing with it. 14 MS. STOWERS: And the APs would give that 15 instruction? 16 MR. ANDRESEN: Correct, yes. 17 And, so, the -- especially when it's the 18 busy times, you know, we'll oftentimes have these AP 19 vintners there all day supervising their wine, 20 supervising instructions and saying, 21 "This is what I want you to do. 22 Here's how I want you to do it. Here 23 is it written down." 24 And then they're watching them do it. 25 So, it's not like, you know, somebody's 26 just sitting in an office somewhere shooting off a 27 little e-mail for the critical time for the wine 28 making. They're often there supervising it and 26 1 giving detailed instructions on what and how to do 2 it. 3 MS. STOWERS: Thank you. 4 MR. HORTON: Further discussion, Members? 5 Question of the Department. In regards to 6 the alleged lease receipts, any indication in the 7 contract that there is tax being charged? 8 MR. KWEE: Well, Petitioner had contends -- 9 contends, I understand, in various documents during 10 the audit that it did collect tax from customers. 11 However, the Petitioner did not provide us 12 any records or documentation for audit. So, we were 13 unable to verify that statement. 14 MR. HORTON: Can the taxpayer produce any 15 evidence that tax was charged, collected and paid to 16 the Board on the lease receipts? 17 MR. ANDRESEN: Paid -- paid, yes. I mean, 18 we have two different things that we mainly pay 19 sales tax on on a quarterly basis -- part of it to 20 our restaurant and tasting room and the additional 21 amount is taxes that we've been paying on our AP 22 vintners. 23 I don't want to misquote, what I believe 24 what he's saying is that on our actual invoices we 25 don't break out, "Hey, you paid $100 in lease sales 26 tax." That's not what we do. We have the -- we 27 have one lump sum. 28 But then we go behind the scenes and say, 27 1 "Okay, out of the $10,000 that you 2 paid, $1,000 of that is related to the 3 use of nontax or equipment that hasn't 4 been tax paid on and, so, we need to pay 5 a portion of that for it." 6 MR. HORTON: And how do you communicate 7 that to the customer? 8 MR. ANDRESEN: We don't really communicate 9 that to the customer at all. We don't feel that the 10 customer really cares how much tax they're paying on 11 a lease. They just care about the dollar amount 12 that they're paying. 13 And, so, we give them one easy billing. We 14 say, "You owe us $10,000." And then we worry about 15 paying taxes on it. 16 MR. HORTON: Any language in the contract 17 referencing lump sum charges with tax included on 18 the lease receipts? 19 MR. KWEE: I didn't see that. 20 And just to clarify, we did not receive 21 lease invoices or lease receipts, that's why we were 22 unable to verify if the tax was collected from 23 customers. 24 MR. HORTON: If the taxpayer provided you 25 that information, would that change your position? 26 MR. KWEE: No, that would just support that 27 we already gave them an allowance for the use tax, 28 which we calculated to have been paid during the 28 1 term of the audit period. 2 MR. HORTON: So, you offset it? 3 MR. KWEE: The liability, yes. 4 MR. HORTON: What you presume to be the tax 5 paid to the -- 6 MR. KWEE: Correct. 7 MR. HORTON: Will you stipulate that the 8 tax was collected and reported? 9 MR. HANKS: We can verify the amounts that 10 were reported and paid. So, we have approximately 11 $1.3 million in taxable measure reported under this 12 particular time period. 13 And, so, the assumption is -- has been made 14 that all of those reported amounts relate to taxes 15 that presumably were included in amounts they've 16 billed on a lump sum basis to their customers. 17 The difficult part, I think, for staff was 18 just determining what those amounts were. Because, 19 as Petitioner has described, these amounts are -- 20 are combined in just a lump sum billing charge. And 21 there were no separate worksheets that we could 22 examine that identify the specific sales tax charges 23 made. 24 MR. HORTON: What is -- question of the 25 Appellant, what is the anticipated life of this 26 equipment? 27 MR. ANDRESEN: It depends on the equipment. 28 But a lot of it is probably seven to 15 years, some 29 1 of it more, some of it less. 2 MR. HORTON: I thought I heard in part of 3 your testimony that -- I think I was wrong, but I 4 want to ask anyway -- that the equipment in question 5 was used for API as well as possibly for your own 6 operation? 7 MR. ANDRESEN: No, sir. 8 The equipment that is in question here that 9 is used by the AP vintners is only used -- 10 MR. HORTON: It's strictly -- 11 MR. ANDRESEN: -- by the AP vintners, 12 correct. 13 We pay tax on and concede that any 14 equipment that is used by -- by both sets needs to 15 have tax paid on it at the original time of purchase 16 and cannot be leased out. 17 So, for example, the bottling line, we pay 18 tax on that at the point of purchase. 19 But the AP vintner equipment in question 20 that we have been paying tax on as we lease it out 21 is only used by the AP vintners. 22 MR. HORTON: Subsequent to the audit period 23 have you continued to collect and report tax on the 24 lease receipts? 25 MR. ANDRESEN: Correct. 26 MR. HORTON: As you understand it? 27 MR. ANDRESEN: Yes, as we understand it, 28 yes. 30 1 MR. HORTON: Member Runner. 2 MR. RUNNER: Yeah, just a couple of 3 questions in regards to the -- let me go first to 4 the negligence penalty. 5 What was the reason for a negligence 6 penalty? 7 MR. KWEE: There were several factors that 8 we looked at and -- when we added the negligence 9 penalty. 10 And just to clarify, the reason that we had 11 the negligence was Section 6484 provides a 12 negligence penalty if all or any part of the 13 deficiency was due to negligence. 14 And here 47 percent of the deficiency 15 measure results from purchases of amounts which 16 Petitioner now concedes that it did not use for 17 leasing purposes. 18 Two, the Petitioner estimated its use tax 19 liability as stated. And the Department has no way 20 of basically verifying that the Petitioner's lease 21 receipts or the amounts of the use tax collected 22 from customers because no records were provided to 23 us. 24 Three, the records that the Petitioner did 25 maintain did not accurately reflect the reported 26 amounts -- the -- the amounts that he reported on 27 his sales and use tax returns. 28 And, four, again the Petitioner maintained 31 1 absolutely no records or source documents pertaining 2 to its claimed lease receipts for the audit periods. 3 So, that's where the factor -- 4 MR. RUNNER: Well, isn't part of that -- 5 your last points are all because he believed he was 6 leasing the equipment, right? 7 MR. KWEE: Oh, no. Just to clarify, they 8 didn't provide records to support their lease 9 receipts. 10 They -- like even -- they claimed that they 11 reported use tax, but they didn't provide records to 12 report the use tax that they actually reported to 13 the Board. 14 And that was -- the lack of records was one 15 factor which is evidence of negligence. 16 MR. ANDRESEN: That's just not true. We 17 provided -- you know, it might be -- not be in the 18 form that they did, but we have worksheets that say 19 we sold this amount. And then we, you know, 20 calculated that to be the amount of sale -- this 21 part is related to the tax that hasn't been paid and 22 then we pay tax on it. 23 We don't list it out on the invoice, but we 24 have worksheets stating how we came to the tax. You 25 can disagree with that, but about it's not like we 26 just pulled these numbers out of thin air. 27 MR. ROTH: And you make these -- made these 28 schedules? 32 1 MR. ANDRESEN: We went all over this with 2 the auditor three years ago. 3 MR. RUNNER: Let me just ask the -- the -- 4 again I'm struggling with the fact that I think -- 5 it seems to me what I'm hearing -- maybe I'm hearing 6 you wrong -- that part of this negligence penalty is 7 based upon the fact that they -- that they 8 were calculating -- that they felt that they were 9 collecting under one scenario, to which the 10 Department believes was an incorrect scenario of 11 collection. 12 Is that -- did I -- did I -- 13 MR. KWEE: That's correct, 53 percent of 14 the liability pertains to the amount. 15 Where is that? 16 MR. MENDEL: If I might clarify? 17 If the only reason that there was a 18 discrepancy here was because their belief that they 19 were leasing -- 20 MR. RUNNER: Right. 21 MR. MENDEL: -- as opposed to using, we 22 would not have imposed the negligence penalty. 23 The negligence penalty was imposed more 24 from the lack of records kept to verify the actual 25 lease receipts. 26 I mean, assuming it were actual -- there 27 were actual leases, they basically -- 28 MR. RUNNER: Well, he believed that they 33 1 were. 2 MR. MENDEL: -- they had these numbers -- 3 MR. RUNNER: He believed that they were, 4 though, right? 5 MR. MENDEL: -- we believe that the records 6 were inadequate, that they -- I believe the audit 7 work papers indicate that they backed into the lease 8 receipts based on depreciation values of the 9 equipment rather than actual source documents 10 showing the amounts paid and the amounts allocated 11 for each payment to lease receipts. 12 MR. RUNNER: Now did I understand that you 13 -- we did credit them? 14 MR. MENDEL: Yes, for the amounts they 15 actually paid. 16 We -- we took the total -- 17 MR. RUNNER: So, we do believe that they 18 did pay correctly -- excuse me, they did pay on some 19 of those -- some of -- on some of those lease -- 20 MR. MENDEL: -- as -- 21 MR. RUNNER: -- that they did -- a 22 portion of that money did go towards the tax? 23 MR. MENDEL: -- yeah, we took -- I 24 believe -- and Mr. Hanks can correct me -- but I 25 believe we took their total tax payment. And they 26 had a sales tax accrual account and we backed out 27 the sales tax accrual account and basically made the 28 assumption that the remainder of tax was use tax on 34 1 the alleged rental agreements. 2 MR. RUNNER: Am I missing something here? 3 So, we -- we basically have, at least on 4 this portion of it, a disagreement in regards to how 5 it is that the tax should be collected and paid? 6 They believe that they were in this lease 7 that, therefore, they were remitting the tax as 8 their -- as their leases were going on? 9 MR. ANDRESEN: Yes, sir. 10 MR. ROTH: Correct. 11 MR. RUNNER: Right? 12 And we even gave them credit for that? 13 MR. MENDEL: Yes. 14 MR. RUNNER: But then -- but now we've also 15 decided that, no, these weren't leases. So, now 16 we've asked them for use tax on the balance of what 17 we believe -- the -- the balance is for the unpaid 18 tax on the tangible goods? 19 MR. MENDEL: Well, that was the reason for 20 the credit. 21 MR. RUNNER: Right. 22 MR. MENDEL: We believe they owed tax on 23 the purchase price. 24 MR. RUNNER: We believed they were paying a 25 tax, we just didn't -- 26 MR. MENDEL: And, so -- 27 MR. RUNNER: -- we just didn't believe they 28 were paying it the right way? 35 1 MR. MENDEL: -- based on the correct 2 measure, yes. 3 MR. HANKS: Mr. Runner, if I could also 4 clarify? 5 The Petitioner has -- has admitted that the 6 property that they used under their custom crush 7 agreements were subject to tax. And yet we have 8 $2.4 million of those purchases that weren't 9 reported to the Board. 10 And, so, if we just compare that 11 understatement with what they did report to the 12 Board, we still have a -- we have an error rate of 13 over 100 percent. 14 MR. RUNNER: Let me ask -- let me ask the 15 taxpayer about that. 16 The differences in regards to then that 17 other portion to which -- not the lease portion, but 18 the other portion of the equipment that was -- that 19 was -- 20 MR. ANDRESEN: Yes, sir, because our 21 original game plan -- 'cause we started in 2008 -- 22 was that the vast majority of everything was going 23 to be AP. 24 And then under the course of the audit we 25 realized that some -- our game plan had changed. 26 2008 was obviously not a very good time to start a 27 business. And more of that equipment was being used 28 now for custom crush or for our own purposes. 36 1 Originally we did not have any of our own 2 wine. And we started doing some private label and 3 stuff. 4 And, so, at that time we conceded that this 5 portion of equipment that we had originally set 6 aside for AP wasn't getting used by them. It was 7 getting used by us now. And we conceded that yes, 8 it needed to have tax paid on it. 9 So, that came up in the course of the 10 audit. We said, "You're right. This is now being a 11 joint use thing so we need to pay tax on that." 12 MR. RUNNER: So, that was a change of 13 business plan -- 14 MR. ANDRESEN: A change of business plan. 15 MR. RUNNER: -- when you purchased? 16 MR. ANDRESEN: Yes, correct. 17 MR. RUNNER: 'Cause when you purchased the 18 equipment originally, you -- 19 MR. ANDRESEN: It was all going to be used 20 for AP. 21 MR. RUNNER: -- thought it would all be 22 used for the AP and the State would get reimbursed 23 through the lease process? 24 MR. ANDRESEN: Yes, sir. 25 And then once we came into the audit, we 26 were like, you know what, you're absolutely right. 27 We should have -- our game plan changed. We started 28 using this. 37 1 We'll pay the tax on it. No problem. 2 MR. RUNNER: Is that what our audit 3 reflects is that that was recognized in the 4 beginning of the audit and, therefore, identified 5 and, therefore, reconciled? 6 MR. HANKS: That's not identified. 7 I think the difficulty here is -- 8 MR. RUNNER: That's not identified? What 9 does that mean? 10 MR. HANKS: -- I want to share with you 11 what the books and records comment includes in the 12 audit working papers, 'cause I think this will 13 illustrate the difficulty staff had with -- with 14 what the reported amounts represented. 15 They identified that the taxpayer 16 maintained a double set of accounting records. 17 Taxpayer has contracts, but no sales invoices to 18 customers and no sales tax worksheets. Sales and 19 use tax was estimated. 20 Taxpayer did not collect sales or use tax 21 on the usage of machines to make wine for customers. 22 And that was a conclusion that the auditor 23 made based on the -- on the lack of detailed 24 knowledge regarding what these reported amounts 25 consisted of. 26 MR. RUNNER: Is that the taxpayer's 27 understanding of what happened in the audit? 28 MR. ANDRESEN: So, I guess I would agree 38 1 that we don't write on our invoices, "You owe $100 2 in sales tax." 3 Instead what we did is we looked at the -- 4 we looked at the total amount. We used depreciation 5 to figure out what part of our bill was related to 6 this equipment that had -- was being leased and had 7 not had taxes paid on it. And then we paid a 8 portion of that revenue as taxes. 9 So, we -- we -- we looked at the invoice 10 and then we made a determination of what amount we 11 owed as tax on it. And then we paid taxes on that 12 portion. 13 MR. RUNNER: That portion description of 14 what the auditor said, is that what you recalled in 15 that discussion? 16 MR. ANDRESEN: I -- I believe so, but I 17 didn't -- 18 MR. ROTH: Were you in that discussion? 19 MR. ANDRESEN: -- I was in that discussion, 20 but I -- I just -- I kind of disagree with the 21 statement of it, the statement of us not having 22 working papers and stuff like that. 23 We have working papers, but it's just we 24 don't calculate it the same way you calculate sales 25 tax when you to go a store. 26 You know, like I purchased a candy bar or 27 whatever, I owe a dollar. That's not how -- how we 28 did it because it's a much more complicated 39 1 contract. 2 MR. RUNNER: Okay, thank you. 3 MR. HORTON: Members, I'm going to go to 4 Appeals just for purpose of clarification of the 5 law, so that the parties -- at least we some 6 agreement on that. 7 And the question that I have of Appeals is 8 relative to the lease versus actual purchase and 9 which -- and which is -- which tax applies, use tax 10 versus a continuing sale and the sales tax. 11 Secondary to that would be the ability to 12 collect sales tax without some contractual 13 understanding between parties. 14 Third question would be, given the life of 15 this property may go up to 15 years, the irrevocable 16 decision to enter into the lease, the impact of that 17 as it relates to potential tax liability. 18 MR. ANGEJA: Jeff Angeja on behalf of 19 Appeals. 20 I'd actually like to answer your second 21 question first because we've been a bit remiss. 22 Section 6206 does require a separate 23 statement of the use tax on documentation provided 24 to the purchaser. 25 I don't think it affects the outcome in 26 this case, but that hasn't been mentioned. And it's 27 a subset that we stand on that the use tax is 28 supposed to be separately stated. That might have 40 1 eliminated some of the problems here. 2 Your comment on the useful life and how 3 long it's in service over the course of the lease, I 4 think what you're getting at is if one makes an 5 election to pay use tax on the rental stream, one 6 may end up paying more tax than one would have if 7 one made the election to pay on cost. 8 And then your first question regarding the 9 purchase price, which tax applies, use tax applies 10 to a lease because that's a use in the State, a 11 continuing sale and purchase, which is what they 12 believe that this lease was, is subject to use tax. 13 They bought these assets both from 14 out-of-state vendors, in which case use tax would 15 apply to the purchase. They also bought under a 16 resale certificate from in-state vendors. And then 17 if they make a use of that, such as a lease, use tax 18 would apply to that as well. 19 MR. HORTON: Question of the Appellant. 20 If the Board was to do a 30-30 and try to 21 resolve these lease receipts, would you be able to 22 provide them with that information that establishes 23 what the actual lease receipts charged to the 24 customer and possibly some evidence that the 25 customer's aware of it? 26 MR. ANDRESEN: The customer's not. They're 27 -- that is not how we designed our AP contracts. 28 That's not how we designed our invoices. 41 1 The customer is just provided a straight 2 bill. And our understanding of the law was that 3 that was okay and that we just paid the -- the use 4 tax or the lease tax based on the portion of the 5 revenues that was related to the lease afterwards. 6 MR. HORTON: The clarification provided by 7 Appeals as it relates to your irrevocable decision 8 would mean that if the Board concluded that this was 9 a lease, despite the -- what I perceive to be 10 evidence to the contrary -- that you -- and that the 11 life of this equipment is 15 years, that you would 12 now have to charge your customer tax on the lease 13 receipts of this activity for the next 15 years. 14 MR. ANDRESEN: Our understanding was that 15 you can convert leased equipment to nonleased 16 equipment. 17 For example, the equipment that we had that 18 we had originally set aside for APs that they didn't 19 use and that we then converted over to our use and 20 then we paid use tax on it. 21 So, my understanding is that that's 22 permissible. 23 Maybe I'm wrong on that. 24 MR. ROTH: In response, Mr. Horton, yes, we 25 do understand that. 26 MR. HORTON: Okay. Why don't I go back to 27 Appeals and have them just tell us what the law says 28 as it relates to the conversion and what the measure 42 1 of tax at that point might be. 2 MR. ANGEJA: Actually, you both get to the 3 same place with his understanding. 4 If they have it leased for a course of -- a 5 number of years, if they make any use of it other 6 than leasing it, tax becomes due measured by the 7 purchase price. 8 It's the same as if they took inventory off 9 the shelf. And, of course, with credit allowed for 10 what's already paid over time. 11 So, effectively it's -- 12 MR. HORTON: So, we end up right back where 13 we are? 14 MR. ANGEJA: -- practically to the same 15 spot. 16 MR. HORTON: Okay. I guess that's sort of 17 trying to figure out why we're here today. 18 But given that we are -- Member Ma. 19 MS. MA: So, thank you, Mr. Chair. 20 So, I think this is a complicated issue, 21 and I think the tension is because we are talking 22 about a 21st century business, yet operating on a 23 20th century regulation. 24 In my mind, you know, I believe that the 25 Petitioner has separated and understands what is 26 personal versus AP vintner use. They operated 27 consistently as lessors on AP equipment use. Their 28 contracts with AP vintners consistently reflect 43 1 their lessor/lessee practices. And, lastly, they 2 collected and remitted use tax based on the rental 3 receipts. 4 You know, I do believe that their AP 5 vintners do have constructive possession and control 6 of the equipment. 7 You know, California is the largest wine 8 producer. We produce 90 percent of American wines 9 here in the United States. And I think we're No. 4, 10 behind France, Spain and Italy. 11 And I think we need to continue to embrace 12 these kinds of innovative and ground breaking 13 businesses. And we should be encouraging emerging 14 industries of custom crush and craft brew shops 15 because they are popular to the consumers and 16 they're also creating jobs. 17 One of the campaign platforms that I ran on 18 was to really help fix these kind of problems and 19 treat businesses fairly. 20 And I think this is a perfect example of 21 how we encourage small businesses to grow here in 22 the state and also support these emerging 23 industries. 24 So, I motion to grant taxpayer's petition. 25 MS. HARKEY: Second. 26 MR. HORTON: There's a motion by Member Ma 27 to grant the petition. Second by Member Harkey. 28 Discussion, Members?. 44 1 I got to say I'm actually concerned for the 2 taxpayer if we rule this as a lease. Department's 3 going to be somewhat compelled to take a look at the 4 subsequent periods and seek out evidence relative to 5 tax being paid on this lease continuing. 6 And then when the taxpayer converts it, if 7 they convert it, we end up right back where we are 8 with the exception of the interest which has been 9 paid and these offsets. 10 And then you've got debit interest versus 11 credit interest, which ultimately harms -- I mean, 12 not harms, but the taxpayer ends up in a -- not as 13 good of a position as they would be if they paid tax 14 on the purchases. 15 But -- 16 MR. ROTH: We'd really prefer to pay tax on 17 the lease receipts. 18 MR. HORTON: Okay. So, there's a motion, 19 there's a second. 20 Further discussion? 21 MS. STOWERS: Mr. Horton, can I ask a 22 little clarification? 23 MR. HORTON: Member Stowers. 24 MS. STOWERS: On the allowance that we're 25 providing, the 1.3, for what is presumed to be 26 reported use tax, are we sure this is for APA only 27 or is it for APA and crushing? 28 MR. HANKS: I would have to say we're 45 1 uncertain. We're uncertain if it relates to -- to 2 those contracts specifically either -- either a 3 blend of those contracts or one group of contracts 4 or perhaps even other property. 5 You know, we just don't know because those 6 taxpayer worksheets weren't supplied to the audit 7 staff. 8 The audit staff, though, after consulting 9 with the taxpayer, was convinced that the reported 10 amounts did relate to what they understood was tax 11 owed on rental receipts. 12 And, so, that's why the audit staff 13 recommended a full credit basically for everything 14 that was reported. 15 MS. STOWERS: Okay. 16 MR. HORTON: Given the Board rules that it 17 goes the other way, what's the impact just in this 18 audit? 19 Liability, I should say, not impact. 20 MR. HANKS: So, we'd have to do an analysis 21 to determine what those rental receipts are for this 22 time period, giving them again credit for 1.3 23 million. 24 I can't help but think that there are very 25 detailed worksheets somewhere that identify how 26 these reported amounts got calculated, especially if 27 they're based on depreciation. 28 MR. HORTON: Taxpayer has indicated they're 46 1 willing to provide them. 2 MR. HANKS: So -- so, we could certainly 3 look at those records and see how those -- those 4 reported amounts were calculated. 5 But, as Mr. Horton has indicated, that the 6 Department would be expecting to see those revenue 7 receipts being reported to us continuously then 8 over time. 9 MR. RUNNER: I guess I'm a little confused. 10 If we find for the taxpayer, why are we going back 11 and recalculating and re-examining his account? 12 MR. HORTON: We're not finding on the 13 amount, we're finding on the law and the fact 14 patterns. 15 MR. RUNNER: No, I think the motion was to 16 find for the taxpayer, the amount. 17 MR. HORTON: The -- 18 MR. RUNNER: So, I don't think we're asking 19 for a re-audit. 20 MR. ANGEJA: On a go forward basis -- 21 sorry. 22 MR. RUNNER: So, I'm just trying to -- 23 MR. HORTON: Mr. Runner. 24 MR. RUNNER: -- figure out why we're going 25 down that path, I guess. 26 'Cause I -- what I would have thought we 27 would need to do is along with then -- if indeed 28 that would pass, I would think maybe the other thing 47 1 we would want to do is go to the Business Taxes 2 Committee and have them begin to review the concerns 3 that Member Ma brought up in regards to the current 4 reg -- the current regs in regards to this lease 5 issue in order to make sure that we are consistent 6 into the future. 7 MR. HORTON: Let me clarify the motion. 8 MR. HANKS: Mr. Chairman, if I -- if I 9 could just add and clarify my statement previously? 10 The Petitioner has agreed that the taxes 11 owing on the custom crush agreement property -- and 12 that property is measured by approximately $2.2 13 million -- so, tax would be owed on -- on that 14 amount. 15 If -- if we assume that -- that the 16 others -- the other amounts that were in question 17 related to taxable receipts, we'd have to compare 18 that amount to the 1.3 million that was reported to 19 us and see if there was a difference there. 20 MR. RUNNER: You know, I'm confused. 21 Aren't we just finding -- if the motion was 22 to find for the taxpayer, isn't -- why -- I mean, I 23 guess I'm confused as to why it is that we're going 24 back and recalculating. 25 MR. MENDEL: Taxpayer has already conceded 26 that they owed some of the -- 27 MR. RUNNER: Right, right, right. So, that 28 staff -- 48 1 MR. MENDEL: -- I mean -- 2 MR. RUNNER: -- so, there was agreement on 3 that? 4 MR. MENDEL: -- it would not be a grant. 5 MR. HORTON: Member Runner. 6 MR. RUNNER: So, there was agreement on 7 that. 8 MR. ANDRESEN: Right. 9 MR. RUNNER: And, so, we -- the issue -- 10 the motion, I think, was on the -- on the protested 11 amount. 12 So, if we find in favor of the taxpayer on 13 the protested amount, what are we going back and 14 re-examining? 15 MR. HORTON: Member Stowers. 16 MS. STOWERS: From my understanding is that 17 the custom crush, the tax on that, would still be 18 due 'cause they agreed. 19 Therefore, the question is do they still 20 get an allowance for the 1.3 because they -- did 21 they or did they not collect tax on that and remit 22 it to the Board? 23 Their response was that they did not or we 24 could not tell that they remitted it to the Board. 25 MR. RUNNER: I don't think that was the 26 response. I think the response is that that's how 27 they were handling it and they made -- were making 28 the payments. 49 1 And as they would continue under this 2 understanding that they were actually operating a 3 lease, that the use tax would continue to get paid. 4 MR. ANDRESEN: That's correct, sir. 5 MR. RUNNER: So, I -- 6 MS. HARKEY: That's -- that's my 7 understanding of the motion -- 8 MR. HORTON: Maybe I -- 9 MS. HARKEY: -- that we're going with the 10 taxpayer. 11 MR. HORTON: -- as I understand the motion, 12 I understand the motion is -- is that Member Ma's 13 desirous to -- as I understand it -- the motion is 14 that this is, in fact, a lease and that the lease 15 payments to date have been reported to the Board 16 pursuant to the stipulation by the Department and 17 that they acknowledged the reporting and offset it 18 against the liability. 19 And the taxpayer has been advised that they 20 will continue to make lease receipts for the next -- 21 MR. ANDRESEN: Forever. 22 MR. RUNNER: Right. 23 MR. HORTON: -- forever on this property. 24 MS. MA: So, they could pay more -- 25 MR. RUNNER: Right. 26 MS. MA: -- than the actual tax they would 27 have paid if they had -- 28 MR. RUNNER: Uh-huh. 50 1 MR. HORTON: Okay. 2 MS. MA: -- paid it up front. 3 MR. HORTON: Okay. There's a motion to 4 that effect, second by Member Harkey. 5 MS. STOWERS: Objection. 6 MR. HORTON: Objection noted. 7 Ms. Richmond, please call the roll. 8 MS. RICHMOND: Mr. Horton. 9 MR. HORTON: No. 10 MS. RICHMOND: Mr. Runner. 11 MR. RUNNER: Aye. 12 MS. RICHMOND: Ms. Ma. 13 MS. MA: Aye. 14 MS. RICHMOND: Ms. Harkey. 15 MS. HARKEY: Aye. 16 MS. RICHMOND: Ms. Stowers. 17 MS. STOWERS: No. 18 MS. RICHMOND: Motion carries. 19 MR. HORTON: Congratulations. 20 MR. ROTH: Thank you very much. 21 MR. RUNNER: And then I -- and then the 22 understanding is that the Business Taxes Committee 23 would have to kind of review that? 24 MS. HARKEY: We'll review it. 25 The court decision was 1930s or something. 26 MR. HORTON: Let me go to Mr. Angeja. 27 Just in reference to AB 2323, I'm not 28 conscious of the numbers now. 51 1 MR. ANGEJA: We are below the threshold 2 here. 3 MR. HORTON: We're below? 4 MR. ANGEJA: Below, this is not subject to 5 Section 40. 6 MR. HORTON: Oh, thank God. 7 Okay, all right. 8 MS. MA: What's Section 40? 9 MR. HORTON: Members, I would -- I would -- 10 I would -- I would subordinate to the Business Tax 11 Committee as to whether or not, after subsequent 12 review, this is a matter that they actually want 13 to -- 14 MR. RUNNER: Correct. 15 MR. HORTON: -- take up and leave it up to 16 Madam Chair in that regard. 17 MR. RUNNER: That's fine. 18 MR. HORTON: Not make that an order of the 19 Board. 20 MR. RUNNER: Right. 21 Thank you. 22 MR. HORTON: Thank you very much for 23 appearing before the Board. The Board has made its 24 decision and ruled in your favor. 25 Congratulations. 26 ---o0o--- 27 28 52 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on JANUARY 21, 2015 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 52 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: FEBRUARY 11, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 53