1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 FEBRUARY 25, 2015 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 ACE SERVICE CENTERS 14 NO. 625359 (FH) 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 Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board Jerome E. Horton of Equalization: Chairman 3 4 Sen. George Runner (Ret.) Vice-Chairman 5 6 Fiona Ma, CPA Member 7 8 Diane L. Harkey Member 9 10 Yvette Stowers Appearing for Betty Yee, 11 State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief, Board Proceedings Division 15 16 ---oOo--- 17 For Appeals Division: Jeff Angeja Tax Counsel IV 18 19 For the Board: Kevin Smith Tax Counsel III 20 Legal Department 21 Lawrence Mendel Tax Counsel III 22 Legal Department 23 Kevin Hanks Chief, Sales and 24 Use Tax Department 25 For Petitioner: Mark Pugh Taxpayer 26 Steve Williams 27 Taxpayer 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 25, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what's our next 6 matter? 7 MS. RICHMOND: Good morning, Chairman and 8 Board Members. 9 Our first matter for this morning's agenda 10 is item C7, Ace Service Centers, Inc. Please come 11 forward. 12 Board Proceedings has received contribution 13 disclosure forms for today's hearings from the 14 parties, participants and agents. All forms are 15 properly completed and signed. All parties, 16 participants and agents are on the alpha listings 17 provided to your office. 18 Each person sitting at the table will be 19 asked to introduce themselves and, if necessary, 20 their affiliation with the taxpayer for the record. 21 Ten minutes is allocated for the taxpayer's 22 opening presentation, followed by ten minutes for 23 the Department's presentations, and five minutes is 24 allocated to the taxpayer for rebuttal. 25 Mr. Horton. 26 MR. HORTON: Thank you very much. 27 Mr. Angeja, would you please introduce the 28 issues in this case? 3 1 MR. ANGEJA: Good morning, Mr. Chairman and 2 Members. I'm Jeff Angeja on behalf of the Appeals 3 Division. 4 The appeal before you presents one 5 unresolved issue, which is whether the 40 percent 6 penalty for failure to timely remit sales tax 7 reimbursement collected from customers is supported 8 by clear and convincing evidence. 9 MR. HORTON: Thank you very much. 10 Welcome to the Board of Equalization. You 11 will have ten minutes to make your presentation. 12 Be mindful we will return and allow you an 13 opportunity to rebut what the Department has said. 14 Please commence with your introduction for 15 the record. 16 MR. PUGH: My name is Mark Pugh. I'm also 17 President of Ace Services. 18 MR. WILLIAMS: My name is Steve Williams. 19 MR. HORTON: Welcome. Mr. Williams, could 20 you do me a favor and pull the mike just a little 21 bit closer, sir? 22 Thank you, sir. 23 At your convenience. 24 MR. PUGH: Go ahead. 25 MR. WILLIAMS: Well, one of the things that 26 we have looked over about this 40 percent penalty, 27 there was no intention whatsoever on nobody's part 28 of intentionally doing anything to evade taxes. 4 1 But as it's wrote here, one would -- would 2 believe that we fraudulently underpaid the sales tax 3 on purpose to take the money to invest in other 4 businesses, which is simply not true at all. 5 And it also goes on to -- like in the 6 matter on page 2, in line 10 and 11, it states that 7 supposedly we found the sales tax recorded in 8 QuickBooks reconciled with amounts report on 9 Petitioner's sales and use tax returns. 10 In other words, what they're saying is 11 everything was correct at that time. But as you go 12 through and you read this, it's quite alarming 13 for -- for anybody. 14 On page 3, in line 9, it states, "We find 15 Petitioner knowingly collected the sales tax." 16 On line 11, "Petitioner knowingly failed to 17 remit sales tax reimbursement." 18 And on line 19 -- and there was an instance 19 where at the very beginning of our business, which 20 was in 2007, where we started the business, with one 21 location and then we -- within two weeks we had 22 another location. And within the next two years we 23 had had two more locations. So, we had four 24 locations going at that time. 25 And we used POS system, point of sale, it's 26 called ShopPros. It's out of Nevada. It's a 27 program for retail tire service, automotive-type 28 deal. 5 1 And when we first got the program, I found 2 errors at different parts of the program and 3 reported to ShopPros and they have redone some of 4 the software to -- so it would work right. 5 Well, at that time, the sales tax, from 6 what I can read at that time, what -- wasn't lining 7 up to what I thought was being collected. And, so, 8 I manually added the sales tax. 9 Now when the auditor that came in -- in I 10 believe in 2010 or 2011, she did different programs 11 that she had in test and found out at that time that 12 the program was working right. 13 And we sat down and we went through it and, 14 sure enough, she was right. And from that time on, 15 to present, we've used that same system that she got 16 onto us for collecting the sales tax and paying on 17 time. 18 But, you know, but this whole record that 19 somebody has wrote up, just like on page 3, it says, 20 "The fact that Petitioner maintained two conflicting 21 sets of records," which is completely untrue. 22 We used QuickBooks 'cause the POS system is 23 a POS system. It's a point of sale for retail and 24 it adds up your sales. It has inventory in that 25 particular location. 26 And it doesn't like add everything up to 27 one location. It -- it was all four locations in 28 one. So, I had four separate things going on to 6 1 maintain to get the totals. 2 Well, she wrote down that I was maintaining 3 two conflicting type sets of records. And she -- 4 which is not true at all. 5 And then on the next line, "We have strong 6 evidence of an intent to evade the payment of tax." 7 Now, you know, we're just simple people. 8 And when -- and this is the first time that we're in 9 business on -- ourself. We've been in this business 10 for all of our lives, but in 2007, when we started 11 this business together, it was the first time we did 12 it together, on our own. And did we make mistakes? 13 Yes. And we own up to our mistakes and we fixed 14 them and we'd go on. 15 But for somebody to -- to sit there behind 16 our backs and write this stuff up that we purposely 17 did it wrong to use the money in other instances, I 18 don't know where they get this. It's really 19 conflicting for me. 20 Just moving on, on all this, you know, like 21 I said from the time that the auditor made her 22 report and we could see that we did it wrong in the 23 past and from that time on we did it right. 24 If we were doing anything wrong, simply 25 put, somehow we would fix the records or whatever. 26 I mean, if we were doing fraud like she's talking 27 about, you can simply change the record or whatever. 28 That was not our intent and we never did 7 1 that. And we won't do that. You know, we told the 2 truth at that time and at this time that we're in 3 front of you and knew we'd get stuck. 4 When I say "stuck," for not being 5 knowledgeable and being a CPA, I mean, maybe we 6 should have went out and hired one, but we didn't, 7 'cause we thought -- or I thought -- it was my 8 responsibility on the business at that time to do 9 this part of the business, the back office-type 10 financial records. 11 And this was really the only part that I 12 guess I failed on doing something right. And I -- I 13 tried to make ends meet out of the whole thing and 14 tried to do it right. 15 And I guess treating the program of 16 ShopPros being wrong on so many other issues and 17 from what I read out of the reports, that it wasn't 18 right, so, I did it manually. 19 Did I keep all my handwritten totals? No. 20 I mean, it's all electronically filed. And, you 21 know, you can go back and get sales records for each 22 month, which we supplied for the auditor, but 23 there's nothing manually done because everything was 24 done electronically, that I thought everything was 25 okay. 26 You know, this whole thing -- I mean, we 27 were negligent, I guess, you'd call it negligent, 28 that we weren't doing it right. And once we found 8 1 out that we were doing it wrong, we took the effort 2 and from then on we did it towards what the auditor 3 told us how to do it -- or told me how to do it. 4 And right away after the audit review we 5 started paying it back, until we had this hearing. 6 But that was like three years ago we were paying 7 $3,000 a month. In fact, how your totals are, we 8 paid back $84,000. 9 Now in that time last year we had a -- some 10 predicaments of -- of employee -- a couple employee 11 lawsuits and -- to an insurance company and what 12 they didn't pay and what we had to pay out, it left 13 us strapped for cash. 14 And being a new company, you know, going on 15 six years, and we were -- both of our assets were 16 strapped to this whole business and the business 17 failed. And we had to file bankruptcy last year. 18 And the bankruptcy court is holding funds 19 directed for you guys. I'm not sure what the total 20 is, but it should be enough to pay, or close to it, 21 without the tax penalty or all this interest that 22 you added on from the $106,000 penalty. And, you 23 know, you tap it as of 3-1-15 and it's $928 a month. 24 That's -- that pretty much sums it up. You 25 know, either one of us just want to go on the record 26 that, you know, we never intentionally did anything 27 wrong. 28 And like I said, we -- I did it wrong. I 9 1 announced that with the auditor after I explained to 2 her how I arrived at it. And like I said, I didn't 3 keep my notes and they said, well -- well, she said 4 since didn't I didn't keep all my notes, "How can I 5 believe you?" 6 Instead they go on the other side of the 7 fence and behind our backs and write this stuff up 8 saying that we knowingly did it wrong and we used 9 the money to fund other businesses. 10 Well, we didn't have the funds 'cause, like 11 I said, last year we had to end up filing 12 bankruptcy. 13 MR. PUGH: We're here, obviously together, 14 as the two owners of a service. We're also here 15 independently. 16 And I would -- prepared a statement I would 17 like to read. It's one page and I am done. And, 18 so, thank you for giving me the opportunity. 19 Mr. Williams -- Steve Williams and I formed 20 this corporation in 2007, after I had had a 20-year 21 career as a district manager in a similar 22 organization. 23 Although the Appeals Board hearing summary 24 states multiple times that we were knowledgeable 25 business people, my experience was exclusively in 26 retail sales and automotive service. It was my lack 27 of knowledge and experience in bookkeeping and 28 accounting which kept me from forming a corporation 10 1 on my own. 2 Mr. Williams and I spent a considerable 3 amount of time deciding how we'd operate the 4 business. And that he -- that our roles would be 5 very specifically, I would manage the retail sides 6 and he'd be responsible for the administrative and 7 bookkeeping operations. 8 Our -- my, our constant mantra was that we 9 were to do things properly. During this time I 10 suggested an accrual account for collecting taxes, 11 something that we did not institute. 12 Shortly after opening our business, 13 Mr. Williams moved all of the administrative and 14 bookkeeping functions, including all the mail, to 15 his home on Peach Tree Lane in Poway. 16 At this point I was completely removed from 17 any of the administrative and bookkeeping 18 operations. Mr. Williams had the responsibility of 19 collecting the bank deposits, paid the bills, 20 performed the bookkeeping, wrote the checks, 21 performed the payroll, preparation and payment of 22 taxes, receivables, payables, auditing as well as he 23 handled the IT functions. 24 When the results of the sales tax audit 25 came in, Mr. Williams came and explained to me, 26 almost tearfully, that he had no idea that we had 27 owed so much or we had this problem. 28 A plan immediately was put into place to 11 1 repay the debt, while still disputing the charges of 2 fraud, as this was the first time I was made aware 3 of any tax problem. 4 Mr. Williams and I have had virtually no 5 contact since our stores closed nearly a year ago. 6 I was unaware of any Board of Equalization notices 7 or hearings that neither of us showed to or made 8 appearances to. 9 Please forgive me, Miss Mary -- how do you 10 say her last name? 11 MS. CICHETTI-BRENNAN: Cichetti. 12 MR. PUGH: Cichetti-Brennan confirmed that 13 I was not on the mailing list or I would have 14 appeared to the prior hearings. 15 I understand I am being held financially 16 accountable for the actions of the corporation. I 17 didn't do things properly. 18 I did not have access. And I came here 19 today to explain that I have no answers to the 20 questions posed because I did not have access to 21 those financial records. And I was not informed as 22 to how things worked in that regard. 23 The corporation I owned 51 percent of went 24 bankrupt -- bankrupt last year. A major company 25 purchased the entire organization and began 26 operations in June '14. 27 As of this date no distributions from the 28 trustee from the sale have been made. 12 1 As a result, I've had to take a personal 2 bankruptcy, at the cost of my home I've owned for 3 25 years, all three of my vehicles and my life 4 savings that I had prior to starting Ace Service. 5 My father's lost a significant investment. 6 And none of these funds have yet to be distributed 7 by either the corporate or the personal trustee that 8 we believe would cover the amount of the initial 9 debt. 10 MR. HORTON: Thank you very much for your 11 testimony. 12 We'll now go to the Department. The 13 Department has ten minutes to make their 14 presentation. 15 We'd ask that you commence with your 16 introduction for the record. 17 MR. SMITH: Good morning, Chairman Horton, 18 Members of the Board. 19 I'm Kevin Smith from the Board's Legal 20 Department. With me today are Lawrence Mendel, 21 also from the Legal Department, and Kevin Hanks, 22 from the Sales and Use Tax Department. We will be 23 representing staff. 24 We agree with the Appeals Division 25 recommendation. Petitioner operated four automobile 26 repair and tire shops. 27 An audit was conducted and the Department 28 determined that Petitioner under reported its 13 1 taxable sales and failed to remit $266,304 in sales 2 tax reimbursement during the liability period. 3 The Department imposed a 40 percent penalty 4 for failure to timely remit collected sales tax 5 reimbursement pursuant to Revenue and Taxation Code 6 Section 6597. The 40 percent penalty imposed by 7 Section 6597 causes too it's an evasion penalty. It 8 requires proof of fraud or attempt to evade the 9 remittance of tax reimbursement, knowingly collected 10 from customers. 11 Fraud or intent to evade must be 12 established by clear and convincing evidence. 13 Evidence of intent to evade includes a substantial 14 deficiency that cannot be explained as being due to 15 an honest mistake or negligence, maintaining more 16 than one set of books and records, substantial 17 discrepancies between recorded and reported amounts, 18 which cannot be explained, and tax reimbursement 19 properly charged, but not reported. 20 Here Petitioner maintained two sets of 21 books and records: One generated by a point of sale 22 system called ShopPro, and another set of records in 23 QuickBooks. 24 The Department determined that the records 25 generated by ShopPro were accurate. The Department 26 was unable to determine -- and the Petitioner could 27 not explain how it calculated the numbers contained 28 in QuickBooks. 14 1 Petitioner used the numbers contained in 2 QuickBooks to report its sales and use tax 3 liability. This is evidence of an intent to evade. 4 In addition, the average amount of tax 5 under reported during the liability period was 6 $6,341 per month, an average of 42.68 percent of the 7 total amount of tax liability. 8 Petitioner is unable to explain the source 9 of the discrepancy or what it did with the excess 10 sales tax reimbursement collected. 11 Finally, Petitioner's sales invoices and 12 records were generated from its point of sale system 13 and reflected it added sales tax reimbursement as a 14 separate charge on its taxable sales. 15 This Petitioner knowingly collected the 16 correct amount of tax reimbursement but failed to 17 remit, indicating intent to evade. 18 Therefore, we conclude imposition of -- 19 that the imposition of the 40 percent penalty 20 against Petitioner is proper. Accordingly, we agree 21 with Appeals Division recommendation. 22 Thank you. 23 MR. HORTON: On rebuttal, please. 24 MR. WILLIAMS: Just the same as what I 25 stated earlier, even -- the gentleman states that we 26 had two sets of books, which we didn't -- unless 27 he's talking about two different programs. 28 The ShopPros programs that it's only for 15 1 POS and doesn't have any type program on that 2 software to do a ledger or any type of 3 reconciliation of sales or charges or anything 4 except for it keeps track of the inventory for that 5 shop up to date and it sells merchandise when you 6 type in a part number at a set price. I guess he's 7 trying to present that that is a whole separate set 8 of books where it's just two programs. 9 QuickBooks, for our type business, doesn't 10 have a regular POS system for our type business. 11 So, that's where we came into ShopPros that does. 12 And we use QuickBooks as far as maintaining a ledger 13 to do your payables and your total inventory and 14 your payroll and so on. 15 You got anything to add? 16 MR. PUGH: Maybe to clarify what you just 17 said is QuickBooks is for accounting and ShopPros 18 was designed for things QuickBooks couldn't do. 19 In California you have to comply with the 20 Bureau of Automotive repair laws of documentation 21 and specifications and that types of things that 22 QuickBooks doesn't have the capacity, so, you have 23 to have -- you have to have both to operate. 24 Well -- you don't if ShopPros had the 25 accounting back end, which it did not. So, that 26 clarifies your -- 27 MR. WILLIAMS: Yeah, it's not two 28 separate -- 16 1 MR. PUGH: -- statement. 2 MR. WILLIAMS: -- set of records -- 3 MR. PUGH: Correct. 4 MR. WILLIAMS: -- like you're stating. 5 It's two different programs, software 6 programs -- one being the POS and one doing the 7 ledger, financial end. 8 And they're not connected. 9 MR. HORTON: Thank you very much. 10 Discussion, Members? 11 Member Ma. 12 MS. MA: Thank you. 13 Mr. Williams, you talked about having 14 ShopPro at the beginning and that there were errors. 15 MR. WILLIAMS: Right. 16 MS. MA: Did you contact ShopPro and -- 17 MR. WILLIAMS: Yes, I did. 18 MS. MA: -- did they fix it? Like what 19 kind of errors were you finding? 20 MR. WILLIAMS: They were all sorts. In 21 fact, I forgot to mention that in this written deal 22 that the auditor, or whoever wrote it up, stated 23 that that's what I stated at the time at the -- not 24 at the conference that we had with the auditor and 25 she put down that I did not call ShopPros. 26 And which I was on the phone with ShopPros 27 a lot of different times with different errors and 28 one being the sales tax problem. 17 1 MS. MA: Were they overcharging or 2 undercharging or how -- how were they figuring 3 out -- 4 MR. WILLIAMS: It -- 5 MS. MA: -- the sales tax? 6 MR. WILLIAMS: -- went both ways. 7 So, at that time I believed the best way to 8 do it, the most accurate, is do it manually. So, I 9 was daily taking the sales daily and adding up for 10 the sales tax. 11 We did have sales -- you know, there were 12 intercompany transfers in which it was nontaxable 13 from like one shop to another. So, you had to 14 strike those out. And then we sold to other 15 retailers that had a resale license to not charge 16 sales tax. And we had to strike those out. And, of 17 course, your labor had to be extracted out. 18 And, like I say, I went through it manually 19 to perform that task to arrive at the figures I did. 20 There was a lot different situations. In 21 fact, at one time ShopPros wanted to put us on like 22 a Beta-type situation, a test, because I was on the 23 phone to them so much and finding different things 24 wrong and which they were fixing as we went. 25 But we chose not to do something like that, 26 to be -- to test any. We had -- or I had enough 27 time consuming responsibilities to not do such a 28 thing. 18 1 MS. MA: And one more question. 2 So, did your QuickBook figures tie to the 3 sales tax returns that you filed? 4 MR. WILLIAMS: The QuickBooks? 5 MS. MA: QuickBooks? 6 MR. WILLIAMS: Yes. Because I was taking 7 the numbers manually. QuickBooks doesn't figure the 8 sales tax. We were just using it as a back office 9 posting -- 10 MS. MA: Right. 11 MR. WILLIAMS: -- to write the ledger. 12 MS. MA: You used the numbers that you -- 13 MR. WILLIAMS: Paid. 14 MS. MA: -- right. 15 MR. WILLIAMS: Was listed -- 16 MS. MA: Off of your -- 17 MR. WILLIAMS: -- on the QuickBooks. 18 MS. MA: And did you file timely? Did you 19 file all -- 20 MR. WILLIAMS: Yes. 21 MS. MA: -- your sales tax returns? 22 MR. WILLIAMS: Yes. 23 MS. MA: Okay. 24 MR. HORTON: Member Runner. 25 MR. RUNNER: The -- help me understand a 26 little bit as to how it is, though, in this -- in 27 this process that you had a set -- you had a set of 28 books, which was the ShopPro, which ended up -- 19 1 MR. WILLIAMS: No, ShopPro wasn't a set of 2 books. 3 MR. RUNNER: -- okay. It was your -- 4 MR. WILLIAMS: POS system. 5 MR. RUNNER: -- your point of sales, okay. 6 So, it was a -- it was your POS and -- but 7 it did do some calculation of sales tax? 8 MR. WILLIAMS: Well, what it did was it 9 added -- you know, I didn't bring a report -- 10 MR. RUNNER: Right. 11 MR. WILLIAMS: -- but the auditor had it. 12 And it doesn't really put to your finger, 13 say, 8 percent sales tax, you owe this amount. 14 It went on a daily report or by invoice and 15 added up, you know, it drew lines down where he had 16 labor, he had resale, he had -- 17 MR. RUNNER: So, then you had to interpret 18 that and apply that then to your books? 19 MR. WILLIAMS: -- right. 20 MR. RUNNER: Okay. Then I guess the 21 question I have is you're not disputing the tax? 22 MR. WILLIAMS: No. After sitting down with 23 the lady, the auditor, and spending the afternoon 24 with her, I saw that I was doing it wrong. 25 MR. RUNNER: You know, when say you were 26 doing it wrong, did that mean you were not applying 27 the tax correctly? 28 MR. WILLIAMS: I guess you would state 20 1 that. 2 MR. RUNNER: 'Cause that's what -- I'm 3 trying to figure out, that's what I'm trying to get, 4 why it would be that you -- that you had this system 5 that reported point of sale and then you would take 6 that information and apply it to your books in 7 QuickBook -- QuickBooks, right? 8 MR. WILLIAMS: Uh-huh. 9 MR. RUNNER: But then it would -- but the 10 two numbers would be different. You would say that 11 the reason why it's different is because the 12 information that was coming from your point of sale 13 had errors in it? 14 MR. WILLIAMS: Right. 15 MR. RUNNER: But then upon the audit you 16 discovered that there was actually some taxable 17 sales that you did not then identify in your 18 QuickBooks? 19 MR. WILLIAMS: Well, like I said, I was 20 adding up the columns wrong -- 21 MR. RUNNER: Okay. 22 MR. WILLIAMS: -- to arrive at figure X, 23 the sales tax -- being the sales tax. 24 And I applied that into QuickBooks. 25 MR. RUNNER: And then you were audited? 26 MR. WILLIAMS: Audited and she went 27 through -- 28 MR. RUNNER: And as soon as you were 21 1 audited, you corrected the prob -- the system or 2 your -- you then understood correctly how to apply? 3 MR. WILLIAMS: -- right, because I was 4 doing it wrong. 5 MR. RUNNER: Okay. 6 MR. WILLIAMS: And then once I was shown -- 7 you know, either one of us was -- never been in 8 business for ourselves. 9 MR. RUNNER: Right. 10 MR. WILLIAMS: And I'm not a CPA. 11 MR. RUNNER: Now were you actually 12 collecting the sales tax from those -- from those -- 13 MR. WILLIAMS: I was not present in all the 14 locations to -- to see the money transactions. You 15 know, I'm just going by the numbers. 16 MR. RUNNER: But you don't know whether or 17 not you were actually collecting the sales tax? 18 MR. WILLIAMS: No, I -- in fact, I -- I'm 19 still mystified because, like -- as stated, you 20 know, $269,000, that was over a, I guess, a 21 three-year period -- 22 MR. RUNNER: Uh-huh. 23 MR. WILLIAMS: -- that wasn't collected. 24 And to have that much money off, you know, and like 25 the gentleman's saying, where is the money? 26 Well, we don't have the money, never had 27 the money. I mean, you can check us out personally. 28 We -- both of us have filed bankruptcy. Both of us 22 1 have lost -- 2 MR. RUNNER: Okay. 3 MR. WILLIAMS: -- everything. 4 MR. RUNNER: Did the other taxpayer want to 5 -- have a thought on that? 6 MR. PUGH: I think maybe if I am hearing 7 your question accurately, of the amount totaled, the 8 majority of it was unreported. 9 There was a small amount, less than -- I 10 don't have the report, less than $40,000, that I ran 11 a promotion for in the holiday time to bring in five 12 cans of food for the Salvation Army to get a free 13 oil change. 14 And, so, when we were providing free oil 15 changes, we made them free. We were unclear -- I 16 was unclear that you had to charge State tax on the 17 value. 18 MR. RUNNER: Yeah, you had to pay, there is 19 tax liability. 20 MR. PUGH: So, not all of those monies were 21 collected, if that's your answer. 22 MR. RUNNER: Okay. Let me ask you this -- 23 let me go to the Department real quick. 24 Okay. So, right now this -- this 25 particular taxpayer, the corporation, is in 26 bankruptcy? 27 MR. MENDEL: Correct. 28 MR. RUNNER: Correct? 23 1 And within the bankruptcy we have -- we 2 have -- we are engaged in that bankruptcy for the 3 amount of tax and interest due? 4 MR. MENDEL: That's correct. 5 MR. RUNNER: Correct? But we are not in 6 that bankruptcy for the penalty? 7 MR. MENDEL: That's correct. 8 MR. RUNNER: Remind me as to why it is that 9 the penalty would not be in the bankruptcy. 10 MR. SMITH: Well, this was first filed as a 11 Chapter 11 and it's the Board's policy, longstanding 12 policy, in Chapter 11 to not file for the penalties, 13 that's just the way they've -- it's based on an 14 Attorney General's opinion from the 1980s. 15 And then when it was converted to Chapter 7 16 at a later date, I guess the Department looks and 17 decides if they think that the penalty will be paid 18 off by the amount of assets left with the business. 19 In this case they didn't believe there 20 would be enough money left to pay the penalty, so -- 21 MR. MENDEL: The priority on penalties is 22 way farther down and essentially not only with the 23 tax, but all of the unsecured creditors would get 24 paid -- 25 MR. RUNNER: Well, we wouldn't know that. 26 Why wouldn't -- I mean, again -- 27 MR. MENDEL: -- we know -- 28 MR. RUNNER: -- we wouldn't know what the 24 1 assets are necessarily. 2 MR. MENDEL: At that point, we -- 3 MR. RUNNER: We just get a letter from the 4 bankruptcy court saying, tell us what they -- tell 5 us what they owe you, right? 6 MR. SMITH: I think -- 7 MR. MENDEL: -- this was the information we 8 got from our bankruptcy people, that they looked at 9 it and made the determination based on what had been 10 filed in the bankruptcy court when it converted to 11 Chapter 7 that it seemed highly unlikely that there 12 was going to be enough money to get all the way down 13 to the penalty. 14 MR. RUNNER: Okay. So, let me ask you this 15 then -- then let's say that the -- the, you know, 16 they moved through the bankruptcy. 17 Let's say that -- that we are -- that the 18 BOE is fully satisfied on the -- on the tax and the 19 interest side. 20 Would it be our normal procedure then to do 21 a -- to follow up with a dual determination to go 22 after the balance to on them as individuals? 23 MR. MENDEL: If the facts represented that 24 there was a responsible person involved, then, yes. 25 MR. RUNNER: That would -- again I asked if 26 that -- 27 MR. MENDEL: Yes. 28 MR. RUNNER: -- would be the normal 25 1 process? 2 MR. MENDEL: That would be the normal 3 process. 4 MR. RUNNER: So, the normal process is that 5 they would go through their bankruptcy. 6 We didn't file for all -- all of -- the 7 full satisfaction based upon -- whether it's 8 Attorney General or we didn't think the balance 9 would be enough or whatever -- the next step would 10 be, normally, that then we would then go after them 11 individually -- 12 MR. MENDEL: Yeah. 13 MR. SMITH: Let me just clarify -- 14 MR. RUNNER: -- in regards to -- in regards 15 to any outstanding balance, which would include the 16 penalty? 17 MR. MENDEL: Yeah. 18 MR. SMITH: -- and to clarify something on 19 the bankruptcy? 20 MR. RUNNER: Sure. 21 MR. SMITH: Because it's a corporation and 22 under Chapter 7, they can't get it discharged. 23 So, the penalty will never be discharged. 24 Just because we didn't file a proof of claim with 25 the bankruptcy court -- 26 MR. RUNNER: Right. 27 MR. SMITH: -- doesn't mean that we can't 28 collect if there is more money left over. 26 1 MR. RUNNER: Right. 2 MR. SMITH: It doesn't mean we can't 3 collect on the penalty -- 4 MR. RUNNER: Don't we have -- 5 MR. SMITH: -- outside of the bankruptcy. 6 MR. RUNNER: -- again, don't we -- don't we 7 have the ability -- whatever balance is owed, 8 whether it be the penalty or the underlying tax, we 9 have the ability to go after -- 10 MR. MENDEL: We -- 11 MR. RUNNER: -- out of bankruptcy, correct? 12 MR. MENDEL: -- we could, yes. 13 MR. RUNNER: Yeah, we can. 14 Again, you can't bankruptcy yourself out of 15 the tax liability. 16 MR. MENDEL: Correct. 17 MR. SMITH: Correct. 18 MR. MENDEL: And I'm not sure what the 19 Board Members asked for prior to the hearing, but we 20 do have samples of the ShopPro reports and -- 21 MR. RUNNER: You're not sure what we asked 22 for or -- 23 MR. MENDEL: -- I'm am sure whether you -- 24 the Board Members have actually seen these before. 25 And there seems to be some confusion as to 26 what the ShopPro reports actually show. 27 And I wondered if the Board Members would 28 be interested in seeing copies of the ShopPro 27 1 reports? 2 MR. RUNNER: What would you believe the 3 relevancy of that would be? 4 MR. MENDEL: You know -- 5 MR. HORTON: My apologies, I mean, this 6 line of questioning, in my mind, is somewhat 7 inappropriate. 8 MR. RUNNER: The line of questioning or 9 that line of answering? 10 MR. HORTON: Not yours, Mr. Runner. 11 MR. RUNNER: I just wanted to clarify. 12 MR. HORTON: Yeah, relax. 13 We have the Department asking the Members 14 if it's appropriate for you to submit evidence on 15 the record and to the Members. 16 It's -- that's your job. 17 MR. RUNNER: We would believe that if it's 18 relevant you would have already given it to us. 19 MR. HORTON: So, if you want to submit this 20 into the record and you want the Board Members to 21 review this as part of the evidence, I would suggest 22 that you provide the clerk the evidence. 23 They'll copy it and present it to the Board 24 as an exhibit. 25 Is that what you want to do? 26 MR. MENDEL: Yes. 27 MR. RUNNER: I would further suggest that 28 you do it prior to the day of the hearing. 28 1 MR. HORTON: All right. 2 MR. RUNNER: Just my opinion. 3 MR. HORTON: Please -- 4 MR. RUNNER: Again -- okay, so, let me keep 5 going on my question. 6 MR. HORTON: -- I mean, it's not 7 uncustomary for either the Department or the 8 taxpayer to provide evidence at the hearing. They 9 do it all the time. And we provide them that 10 opportunity. So -- 11 MR. RUNNER: Well, yeah, although I believe 12 it's the obligation of the Department to fully brief 13 us on all of the information that they have that 14 they think is relevant to the case. 15 The taxpayer I don't hold to that same 16 responsibility. 17 MR. MENDEL: I understand. 18 MR. RUNNER: Okay. 19 MR. MENDEL: We believe -- 20 MR. RUNNER: Let me -- let me go on. 21 Again here I think that's going to get 22 distributed, which is -- let me just ask, in regards 23 to the process of the -- of the penalty, the evasion 24 penalty. 25 To qualify for the evasion penalty, is 26 it -- it's a series of -- it's a series of issues 27 that could qualify you for the evasion penalty? 28 MR. HANKS: It's a -- Mr. Runner, it's a 29 1 series of issues that -- that the District examines. 2 What they examine is whether or not, in 3 their opinion, it appears as though tax 4 reimbursement was collected and satisfies the 5 requirements of the regulation. 6 As you know -- 7 MR. RUNNER: And the regulation has a 8 series of -- 9 MR. HANKS: -- tests. 10 MR. RUNNER: -- of tests. 11 MR. HANKS: Criteria. 12 MR. RUNNER: Okay. And, so, again, those 13 -- so, some of those are two sets of books -- you 14 tell me what they are. 15 MR. HANKS: Actually, the regulation itself 16 identifies that -- that we've got two elements that 17 need to be satisfied for -- 18 MR. RUNNER: Okay. 19 MR. HANKS: -- for the penalty to apply. 20 The first is a dollar threshold. And the 21 unremitted tax needs to be over $1,000 per month per 22 reporting period. That's the first test. 23 The second test is that the total 24 unremitted tax needs to exceed 5 percent of the 25 total tax collected in the same quarterly reporting 26 period in which the tax was due. 27 So, those are the two elements that the 28 audit staff would be looking at to determine whether 30 1 this penalty applied. 2 Now in the current case -- 3 MR. RUNNER: How does amounts determine 4 motivation? 5 MR. HANKS: -- I think what -- what the 6 auditor needs to do is look at the evidence in its 7 totality. 8 MR. RUNNER: Right. 9 MR. HANKS: And look at these two tests to 10 determine whether or not this -- this Section 6597 11 penalty might apply if -- if the evidence exists 12 that satisfies that criteria. 13 In the current case, actually, the numbers 14 far exceed the numbers that we're talking about 15 here. 16 Instead of -- 17 MR. RUNNER: Yeah, I know the numbers, 18 okay. 19 But my question is -- but then there is 20 some other criteria too, like, you know, the 40 21 percent threshold? 22 Isn't that one of the criteria that 23 sometimes is looked at, whether or not the tax due 24 is greater -- or the remittance is what, more than 25 40 percent of the tax? 26 MR. HANKS: No. The tax -- the tax amount 27 is actually 40 percent of the -- of the tax. And, 28 so, that's -- that's the -- the calculation 31 1 basically for the penalty itself. 2 The other factors -- 3 MR. RUNNER: Okay. 4 MR. HANKS: -- for evasion, however, are 5 different. And they're enumerated in our Audit 6 Manual Section 509.25. There are various evidence 7 standards that we might look at, such as any 8 falsified records where more than one set of records 9 is maintained. 10 In this case I think the Petitioner was 11 clear in stating that the purpose for having the two 12 records, but there's still a lot of unclear 13 information regarding why the collected amounts from 14 ShopPro wasn't transferred into QuickBooks. 15 Also we look to see if there are 16 substantial discrepancies between recorded amounts 17 and reported amounts, which can't otherwise be 18 ordinarily -- can't be explained. 19 In this case the Petitioner could not 20 identify why it was that these reduced sums were 21 reported to the Board. We have no indication how 22 those amounts were reduced. 23 Also there needs to be, perhaps, willful 24 disregard of specific advice as to the applicability 25 of tax in certain situations. 26 In this case actually the Petitioner was 27 very mindful that tax applied to the sales of 28 tangible personal property. They went out and 32 1 purchased a commercial grade software package that 2 correctly enumerates what items the tax applies to, 3 what items it doesn't. 4 The ShopPro program, in our verification, 5 was accurately accounting for when tax was 6 calculated, the amounts that -- that were owed. 7 MR. RUNNER: We did not identify any -- any 8 mistakes in the ShopPro, the point of sale? 9 MR. HANKS: No, no mistakes were 10 identified. 11 So, we actually looked at sales invoices 12 for a two-month period and traced those invoices to 13 the ShopPro software. We didn't see any evidence of 14 any errors whatsoever. 15 Another thing that we looked for, though, 16 in terms of evidence of evasion is whether or not 17 the tax reimbursement was properly charged, 18 evidencing again the knowledge of the requirements 19 of the law. 20 MR. RUNNER: Let me go back to the 21 taxpayer. 22 So, in the Department's view of examining 23 the ShopPro, they have -- their opinion is that 24 there was no errors in the collection -- or -- or in 25 the sales tax applied. 26 Would it -- you, apparently, disagree with 27 that and, in fact, apparently have said that you've 28 had conversations with the ShopPro -- 33 1 MR. WILLIAMS: Right. 2 MR. RUNNER: -- can you explain that? 3 MR. WILLIAMS: Like five years before that, 4 when she came in to audit, she audited two months 5 worth at that time. It was like 2012, I believe -- 6 like January, February or December, January of 2012. 7 Now we opened the business back in 2007. 8 And that's where we had all of these problems for a 9 year or two, whatever. And I just continued doing 10 the same thing. 11 I guess I was repeating my mistakes up to 12 the time that she arrived. And she never looked at 13 like the four or five years before that was talking 14 about, she just focused on these two months. 15 MR. RUNNER: Is that right? 16 Well, let me ask you, the ShopPro printouts 17 that I have here now, I guess, are these -- are 18 these during the time of the audit? 19 MR. SMITH: Yes. 20 MR. RUNNER: Okay. So, if these are during 21 the time of the audit, again what would be the 22 reason as to why it is that their belief would be 23 that these were applied correctly or the tax was 24 applied correctly and then you would -- you felt it 25 wasn't and, therefore, made some adjustment? 26 MR. WILLIAMS: Right. 27 Back five years before that. So, what she 28 did instead, instead of looking at that part of the 34 1 ShopPros back four or five years before, she had 2 a -- made us sign papers to go back further with the 3 amount we owed. And she took the percentage all the 4 way back to 2007. 5 So, when you -- when I said earlier for 6 three years, it was really for like six years, I 7 guess, or five years. 8 MR. RUNNER: Okay. Thank you. 9 MS. STOWERS: Mr. Chairman? 10 MR. HORTON: Yes, Ms. Stowers. 11 MS. STOWERS: To the Petitioner, you said 12 that you communicated with ShopPro during this time 13 period regarding the errors that you believe 14 existed? 15 MR. WILLIAMS: That time period was way 16 back in the 2007 period. 17 MS. STOWERS: 2007? 18 MR. WILLIAMS: Yes. 19 MS. STOWERS: Did you have anything in 20 writing, like an e-mail? 21 MR. WILLIAMS: I probably did at that 22 time -- 23 MS. STOWERS: Okay. 24 MR. WILLIAMS: -- with the bankruptcy 25 court. They took all that away, you know, with all 26 the records and so on. 27 MS. STOWERS: Okay. When you were 28 comparing what ShopPro was doing and doing your 35 1 calculations to what you thought was the correct 2 amount of sales tax, did you do any bank 3 reconciliation? 4 And I ask that because we're showing that 5 623,961 in tax was collected, but yet 357,657 was 6 only remitted. 7 That's a difference of 266,000. Did you 8 noticed that you had unexplained deposits? 9 MR. WILLIAMS: Well, that's why I was 10 saying early, it was -- it's not settled in my mind 11 how that even came about. 12 And neither one of us have cash in our 13 pockets or didn't have cash in our pockets, so to 14 speak, or into the business. 15 So, I'm not 100 percent sure if all that 16 tax at that time over that whole period of time was 17 100 percent collected. 18 Now, like Mark stated earlier, part of this 19 was from a period of time where we were giving away 20 oil changes at no charge. And we thought by no 21 charge, we didn't charge sales tax either. 22 And we didn't know that we had to pay a 23 sales tax on our costs of goods, the oil and the oil 24 filters. 25 MS. STOWERS: So, did you do a bank 26 reconciliation in general -- 27 MR. WILLIAMS: Well -- 28 MS. STOWERS: -- when you closed your books 36 1 at the end of the quarter or end of the year? 2 MR. WILLIAMS: -- we -- we never collected 3 that. 4 MS. STOWERS: Okay, thank you. 5 MR. HORTON: Question of the -- Member 6 Harkey. 7 MS. HARKEY: Okay, I -- this question for 8 the Department, I have these records and it says, 9 "Sales Report from 4-1-2009 through 6-30-2009." 10 I have non labor tax -- let's go to what 11 you just gave me. These first two I can't read, 12 they're too tiny. 13 But if I go to page -- Ace Tire Centers of 14 Chula Vista, it's tiny, it's blurry, who can read 15 it? 16 So, one, two -- third page, it's dated 17 8-23-11. It says, "Ace Tire Centers, Chula Vista, 18 sales report from 4-1-2009 through 6-30-2009." 19 It says that there were non labor tax of 20 726 and the total of 64278. 21 And then it says taxable zero. And non tax 22 64278. And then it says parts non tax. 23 What -- what does this -- all this mean? 24 Since you submitted it as evidence, can you explain 25 it to me? 26 MR. MENDEL: It's just -- the first column 27 is labor that would be taxable. 28 The second column is labor that was entered 37 1 that was nontaxable. 2 Third column is a labor discount column. 3 Tax -- parts that are taxable that were sold. Parts 4 that were not taxable that were sold. 5 And the end amount for that period of tax 6 was $160.51, based on the tax applied to those 7 sales. 8 And then -- 9 MS. HARKEY: Where's the -- 10 MR. MENDEL: -- the line below is an 11 accumulated total from the entire tax year, I 12 presume. 13 But it's just showing that ShopPro kept 14 track of both taxable labor, nontaxable labor, 15 taxable parts, nontaxable parts and showed the 16 amount of tax due based on those accrued sales and 17 charges for that period of time and kept a running 18 total. 19 MS. HARKEY: Okay, this is for the 20 taxpayer. Do you see the sheet that I'm looking at? 21 MR. WILLIAMS: Right. 22 MS. HARKEY: So, what did you do with those 23 figures when you got them? Where did you put them? 24 MR. WILLIAMS: At this time I don't 25 remember, I mean -- 26 MS. HARKEY: What would you have done under 27 normal practice? 28 MR. WILLIAMS: -- I -- I really don't 38 1 remember. I mean -- 2 MS. HARKEY: Do you not recall the ShopPro 3 program at all or can you tell me how you -- 4 MR. WILLIAMS: We haven't been in business 5 in almost a year. And then this was back three 6 years ago. 7 MS. HARKEY: So, you quit using ShopPro 8 a while ago? 9 MR. WILLIAMS: Well, it's been almost a 10 year since we closed our shops. And then what I was 11 doing was three years before that. 12 MS. HARKEY: Okay. But if you saw a total 13 like this, where would you put it? 14 What would you -- what would be your normal 15 practice if you were -- 16 MR. WILLIAMS: I -- I don't remember, 17 ma'am. 18 MS. HARKEY: -- I'm trying to help you 19 here. 20 MR. WILLIAMS: Yeah, I'm -- 21 MS. HARKEY: I mean, you know, this is -- 22 this is tough. 23 So, you never did -- you're not disputing 24 the tax, you didn't know where the 266 came from or 25 whatever the figure was, I believe it was 266, but 26 you didn't dispute it. 27 How long -- yeah, 269745. How long did you 28 make payments? And either one of you can answer 39 1 this. 2 MR. WILLIAMS: Well, we made $84,000 worth 3 of payments when the -- when the audit conference 4 with the auditor was finished. 5 I took the initiative to call and to set 6 something up. And the lady really didn't want to do 7 anything at that time. She didn't have our audit 8 back from the auditor and -- 9 MS. HARKEY: When was that? I mean, give 10 me a rough guesstimate of what year. 11 MR. WILLIAMS: -- I want to say 2011. 12 MR. PUGH: They shut down our business in 13 2014. 84,000 divided by three would be 28 months 14 and I think we did not miss any payments. 15 So -- 16 MS. HARKEY: Okay, so you did -- 17 MR. PUGH: -- go 28 months prior. 18 MS. HARKEY: -- you paid from -- you paid 19 for 28 months and then you went out of business? 20 MR. PUGH: That's right. 21 MR. WILLIAMS: Right. 22 MS. HARKEY: Okay. Okay, when did you -- 23 just in your best estimate and I know it's hard to 24 reach back, but this audit took place on what 25 time -- what date did you actually get notified? 26 Or maybe the Department can tell me, when 27 did you notify that there was a tax due and when did 28 you begin -- when did they start to correct what 40 1 they were reporting? 2 MR. HANKS: The end of the audit period 3 extended through the second quarter of 2011. 4 And I believe Mr. Smith has more 5 information regarding when -- when those work papers 6 then were given to the taxpayer. 7 MS. HARKEY: So, did they -- I guess -- 8 thank you, Kevin. 9 Did -- did they -- were they accounting for 10 things correctly prior to that? 11 MR. HANKS: I don't have a record of -- of 12 what the payments were prior to that time. 13 And, so, perhaps Mr. Smith can speak to 14 that as well. 15 MS. HARKEY: I'm -- I'm just -- I think the 16 Department did their job. I'm very concerned with a 17 fraud. 18 I think there was probably more negligence 19 than fraud. And with the company being with the 20 bankruptcy trustee, as you know, secured creditors 21 come first, if there's anything left. 22 And frequently in bankruptcies, trustees -- 23 the trustee doesn't seem to find much left. There 24 is usually like, what, a five percent return, I 25 think, something. 26 So, if you're down in the unsecured line, 27 chances of getting anything out of that are slim and 28 none. 41 1 So -- 2 MR. WILLIAMS: Can I intervene here? 3 MS. HARKEY: Yes, you may. 4 MR. WILLIAMS: We -- we were told by the 5 trustee that the Board of Equalization for sales tax 6 would come off the top, so to speak. 7 So, whatever money is left in the assets 8 you people would get first, before any creditor, 9 secured creditor, or anybody. 10 MS. HARKEY: But not the bankruptcy 11 trustee. 12 MR. PUGH: Absolutely. 13 MS. HARKEY: You know, I mean, they -- 14 MR. WILLIAMS: He's got his fees. 15 MS. HARKEY: -- yes, they do and it doesn't 16 sound like there was -- I'm just assuming, was there 17 a lot left when you went into bankruptcy? 18 MR. WILLIAMS: Well, I want to -- I can't 19 remember the amount. 20 And then there was amounts that kept 21 arriving as we had dealer accounts charged. 22 MS. HARKEY: Right. 23 MR. WILLIAMS: Kept paying and we had 25, 24 $30,000, I know that was, I believe, put through 25 after we closed. 26 And then these locations were auctioned 27 off. I believe the four locations went for 28 around -- a little over 100,000. 42 1 MR. PUGH: If I remember -- 2 MS. HARKEY: So, I guess what I'm getting 3 to is once you take the bankruptcy trustee's fee, 4 the auctioneer's fee and you pay all the other 5 miscellaneous expenses, there probably won't be a 6 lot left. 7 And, so, I'm sorry, I had a question for 8 the Department. I wanted to know -- I can't 9 remember. 10 Go back, tell me what I was asking. 11 MR. MENDEL: They started making -- I'm 12 sorry, they started making payments on 10-19-2011. 13 The actual NOD was issued in 2012. So, it 14 would have been right at the end of the audit period 15 that they, essentially, started making payments on 16 this liability -- before we had even actually issued 17 the NOD. 18 MS. HARKEY: But the taxpayer was saying 19 that they had found they were correcting prior to 20 that. 21 Is that true? Or you were correcting your 22 sales or did you just start following or -- 'cause 23 it appears -- what I heard -- what I heard you say 24 was that once you found out you were reporting 25 wrong, you reported accurately. 26 At what point was that? At the end of the 27 audit? 28 MR. WILLIAMS: Before the end of the audit, 43 1 I think following that month that we discussed 2 during the audit -- 3 MS. HARKEY: Okay. 4 MR. WILLIAMS: -- when we went through it, 5 before the final audit, 'cause I was paying every 6 month. 7 MS. HARKEY: Okay, thank you. 8 MR. HORTON: Okay. Question of the 9 taxpayer, in your earlier testimony you indicated 10 you had been in business all your life. 11 Can you elaborate on what that means? 12 MR. WILLIAMS: Well, we've been in the tire 13 and automotive field, in sales. We worked for 14 different companies. 15 We never -- well, Mark had never been on 16 his own. 17 MR. HORTON: Yourself? 18 MR. WILLIAMS: I myself was at one time, 19 but that corporation I was the President and on to 20 the sales part where we did wholesale and retail. 21 And we had -- I had an actual CPA do it 22 that was part of the company as an employee. 23 MR. HORTON: You also testified that -- 24 that you had to -- that you manually entered the 25 information into Quicken. 26 MR. WILLIAMS: QuickBooks. 27 MR. HORTON: QuickBook, can you elaborate 28 on that process? 44 1 MR. WILLIAMS: She -- Ms. Harkley (sic) 2 was -- was -- asked me earlier the same questions is 3 back on this report that was send out, how did I 4 figure from these totals and what to put into 5 QuickBooks. 6 I do not remember at this time period, you 7 know, after four years, by not even processing and 8 doing what I even did. 9 MR. HORTON: So, for a three-year period, 10 why not just take the numbers from ShopPro and 11 transfer them to Quicken? 12 And then the follow-up question would be, 13 ShopPro, as I understand it, has all of the 14 capacities that Quicken has -- 15 MR. WILLIAMS: No. 16 MR. HORTON: -- relative to accounting. 17 And based on this, you -- for sales tax purposes, 18 you have the total taxable sales, total taxable 19 labor. 20 The Department was able to use it to 21 calculate taxable sales. The auditor was able to 22 use ShopPro to calculate taxable sales without 23 having to have Quicken at all. 24 So, if it has the capacity, and according 25 to the web it has the capacity, its promotional says 26 it has the capacity, so, why have Quicken? 27 MR. WILLIAMS: Well, I -- again this does 28 not have the capability of doing a general 45 1 ledger-type for the business. 2 It's only a POS. And this information 3 gathers up from each and every invoice. 4 MR. HORTON: So, you used for the purpose 5 of your general ledger calculations and so forth? 6 MR. WILLIAMS: Right, right. 7 But when it came to the sales tax part, 8 back in 2007 is where the problem originated. 9 MR. HORTON: Was that error in 2007 ever 10 corrected? 11 MR. WILLIAMS: Yeah. 12 MR. HORTON: When was it corrected? 13 MR. WILLIAMS: I'm not sure. 14 MR. HORTON: A year, a month, a day? 15 MR. WILLIAMS: Well, it took them a while 16 and I don't remember when. 17 MR. HORTON: When it was -- when it was not 18 working, did you continue to use it? 19 MR. WILLIAMS: And I was into a habit of 20 doing it every month the way I was doing it. 21 MS. HARKEY: Manually? 22 MR. WILLIAMS: Right. 23 MR. HORTON: When -- when ShopPro wasn't 24 working, did you continue to use it? 25 MR. WILLIAMS: As far as for the sales tax? 26 No. 27 MR. HORTON: What did you use it for? 28 MR. WILLIAMS: Well, I was -- I used it 46 1 part of the way with the sales. 2 And I was backing off 'cause their -- I 3 guess by the auditor going through every invoice for 4 two months, we came to find out that these totals at 5 that period was correct. 6 MR. HORTON: I understand that. 7 MR. WILLIAMS: And back in 2007, it was 8 not. 9 MR. HORTON: So, in 2007 when ShopPro 10 wasn't working -- 11 MR. WILLIAMS: Right. 12 MR. HORTON: -- what did you use it for? 13 I mean, did you continue to use it just for 14 point of sale and then convert over and start to use 15 Quicken at that time? 16 Or did you continue to use it, even though 17 it wasn't working? Or was it working for accounting 18 tax purposes but wasn't printing out invoices? 19 What was wrong with it? 20 MR. WILLIAMS: It -- it was printing 21 invoices and it was tracking the inventory and it 22 was calculating the sales. 23 MR. HORTON: Wrong or right? 24 MR. WILLIAMS: Right. 25 MR. HORTON: Okay. 26 MR. WILLIAMS: But it was wasn't tracking 27 like the resale and interstore transfers, 28 intercompany transfers for other -- it was not 47 1 coordinating those with the actual. 2 MR. HORTON: So, during the time that it 3 wasn't working properly -- 4 MR. WILLIAMS: I was doing everything. 5 MR. HORTON: -- you would do it manually? 6 MR. WILLIAMS: From the QuickBooks, from 7 the sales. And I knew what each store was 8 transferred 'cause we kept records of that. 9 In other words, one location selling to 10 another location, we called it a sale, you know, 11 where I had to back off those sales in the 12 percentage of sales tax supposedly we're supposed to 13 collect, but you don't because it was intercompany. 14 And then we had the resale and, of course, 15 labor items -- all this gets backed off. 16 MR. HORTON: Okay. I mean, I -- I 17 appreciate the elaboration. And I want to be as 18 courteous as I possibly can. 19 But I'm -- 20 MR. WILLIAMS: It's just like -- 21 MR. HORTON: -- the evidence you submitted 22 to the record seems to have, as you articulated, it 23 seems to have the information here printed that you 24 would manually transfer, as your testimony is, from 25 here over to Quicken for the audit period, a 26 three-year period. And for every month it was done 27 wrong. 28 That's your testimony? 48 1 MR. WILLIAMS: Well, the period -- 2 MR. HORTON: Because to take it -- 3 MR. WILLIAMS: -- from 2007 -- 4 MR. HORTON: -- to take it from ShopPro -- 5 MR. WILLIAMS: From 2007? 6 MR. HORTON: -- and to take this document, 7 which has a total tax. 8 MR. WILLIAMS: Uh-huh. 9 MR. HORTON: And then take that and write 10 it into -- or enter it or manually put it into 11 Quicken -- QuickBooks for three years, every time 12 you did it wrong -- manually, this is not the 13 machine. 14 MR. WILLIAMS: Uh-huh. 15 MR. HORTON: This is someone physically 16 taking this information -- 17 MR. WILLIAMS: Uh-huh. 18 MR. HORTON: -- and transferring it instead 19 of transferring -- I don't know if you can do it 20 electronically, but -- 21 MR. WILLIAMS: No. 22 MR. HORTON: -- you did it manually. You 23 did it wrong for three years to the tune of 200 and 24 some thousand dollars. 25 MR. WILLIAMS: Well, there's -- there's 26 another area -- 27 MR. HORTON: Is there a physical reason 28 that happened? 49 1 MR. WILLIAMS: -- well, it's just like 2 right here on this page -- in which I talked with 3 the auditor back at that time, even what she 4 audited -- 5 MR. HORTON: No, I'm -- 6 MR. WILLIAMS: ShopPros is not correct. 7 MR. HORTON: -- I understand that. 8 MR. WILLIAMS: This is not correct today. 9 MR. HORTON: So -- so, your presumption was 10 is that the sales tax that it reported here was 11 wrong? 12 MR. WILLIAMS: Right. 13 MR. HORTON: And it was wrong for three 14 years? 15 MR. WILLIAMS: And it's still wrong even on 16 this. 17 MR. HORTON: And, so, you're disputing the 18 audit liability? You don't owe this money because 19 ShopPro -- the Department inappropriately used these 20 numbers from ShopPro and, therefore, you are 21 disputing it or you agree with the liability? 22 MR. WILLIAMS: Well, it's off by -- 'cause 23 we're a tire retailer, for every unit of tire that 24 you sell, we have to pay a $1.75 fee to the State of 25 California. 26 MR. HORTON: I understand that. 27 MR. WILLIAMS: Okay. The $1.75 is not 28 taxable. 50 1 MR. HORTON: So, your argument is that you 2 adjusted the ShopPro to reflect the fee because 3 ShopPro was in error and actually charged tax? 4 MR. WILLIAMS: Well, that's -- 5 MR. HORTON: I guess the fee was somehow 6 placed under taxable labor inappropriately by -- 7 MR. WILLIAMS: -- and it still is here. 8 MR. HORTON: -- your partner, 'cause he was 9 handling it? 10 MR. WILLIAMS: They never fixed that. 11 MR. HORTON: No, someone has to enter it 12 that way. This is software. 13 MR. WILLIAMS: Right, on that part. So, 14 for every unit sold, the sales tax -- 15 MR. HORTON: Let me ask -- let me ask Mr. 16 -- my apologies, if I say your name wrong. 17 MR. PUGH: Sure. 18 MR. HORTON: Mark -- 19 MR. PUGH: Pugh. 20 MR. HORTON: -- Pugh. You handled the 21 retail side? 22 MR. PUGH: I did. 23 MR. HORTON: And does that include entering 24 the taxable sales? 25 MR. PUGH: I wrote invoices. 26 MR. HORTON: Invoices. 27 With the exception of a period of time in 28 which you had the free oil changes, did you invoice 51 1 for the sales tax and the tire fee, which -- 2 MR. PUGH: It was -- 3 MR. HORTON: -- by the way, is taxable, 4 but -- if it's the same one I'm thinking of. But we 5 will clarify that later. 6 But the -- the tire fees, this is the -- 7 I'm presuming you are talking about the waste 8 fees -- 9 MR. WILLIAMS: Correct. 10 MR. HORTON: -- that you pay? 11 MR. WILLIAMS: Right. 12 MR. HORTON: Okay. Now you're paying waste 13 fees, why would that be part of your sales? 14 MR. WILLIAMS: Well -- 15 MR. HORTON: And why would that be 16 deductible from taxable sales? 17 It's a fee that you pay -- 18 MR. WILLIAMS: -- right. 19 MR. HORTON: -- for taking the tire and 20 disposing of it. Has nothing to do with your sales. 21 Why would you feel that you have -- 22 MR. WILLIAMS: Well -- 23 MR. PUGH: That isn't correct, there is a 24 dollar -- 25 MS. HARKEY: Can you talk into the 26 microphone, please? 27 MR. HORTON: Yeah. 28 MS. HARKEY: Sorry. 52 1 MR. PUGH: There is $1.75 California tire 2 tax. 3 And then there's -- 4 MR. HORTON: Tax. 5 MR. PUGH: -- a disposal fee that is not 6 taxable. 7 MR. HORTON: The tax is not, I agree. 8 MS. HARKEY: Disposal is not taxable? 9 MR. HORTON: He's talking about the -- 10 MS. MA: So -- okay. So, there is an 11 invoice that we were just submitted, right? 12 So, on the left-hand side it says labor and 13 it totals up to the total at the bottom, 1,155. 14 And then on the center part, which is the 15 parts section, that totals to 1721, right? 16 MR. PUGH: Uh-huh. 17 MS. MA: California environmental fee, the 18 1.75, totaling $7, the tire disposal fee, someone 19 wrote here, "not taxed, head repair as well as gas 20 not taxed." 21 Yet it's showing up as taxable on this 22 ShopPro report, right? 23 So, you're like backing them out because 24 they're not taxed? 25 MR. PUGH: I'm not doing -- I'm not sure 26 what you're asking. 27 MS. MA: Okay. So -- 28 MR. PUGH: On this case they put gas in the 53 1 car 'cause they had to test drive it and there was 2 no gas in the car. And you paid taxes when you get 3 the gas, which is built into the thing. 4 It should have been labor or it should have 5 been billed as a non tax. 6 MS. MA: Right, so -- so, whoever was like 7 importing your -- the salespeople -- 8 MR. PUGH: Right. 9 MS. MA: -- based on just this one, the 10 last, one you're saying some of those things should 11 not have been taxed? 12 MR. PUGH: Correct. 13 MS. MA: But they punched it in as taxed 14 and they charged tax on it. So -- 15 MR. PUGH: That happens. 16 MS. MA: -- what I'm hearing is that 17 Mr. Williams like backed out some of these fees or 18 taxes, gas that shouldn't have been taxed and then 19 paid -- put it on the QuickBooks and then paid tax 20 on that. 21 So, that's what I'm hearing and that 22 happens, as you know, right? Whoever set this up or 23 whoever is punching in, your clerks, they don't know 24 if there's tax or not, they just punch it all into 25 parts and then -- with the description. 26 And then you guys have to figure out what's 27 tax and not tax, basically? 28 MR. HORTON: Okay. 54 1 MR. WILLIAMS: I believe so. 2 MR. HORTON: Can you respond to that? I 3 mean, we need to -- 4 MR. WILLIAMS: Well, that's part of what 5 I've been talking about. 6 You got me in circles here, but way back 7 in 2007 -- 8 MS. HARKEY: Stick to the tax, stick to the 9 tax and nontaxable. 10 MR. WILLIAMS: -- there was things that I 11 backed out that in some instances I shouldn't have 12 backed out. Then there was things that I didn't 13 back out that I should have. 14 So, there was some -- some things that just 15 wasn't done right. 16 MR. HORTON: Okay. So, did you do this 17 mentally? Or is there some documents somewhere we 18 can -- 19 MR. WILLIAMS: Well, I just did it by hand 20 every month to every location. 21 MR. HORTON: -- you wrote it down 22 somewhere? 23 I mean, I'm looking at this and -- 24 MR. WILLIAMS: I don't track it. 25 MR. HORTON: -- I'm going to go to the 26 Department. So, the Department should be kind of 27 putting their thinking caps on and looking at the 28 same documents to determine -- 55 1 MR. WILLIAMS: So -- 2 MR. HORTON: -- and they should be prepared 3 to respond to whether or not the auditor actually 4 even examined this. 5 Because -- I'm going to this for the 6 benefit of the Department -- even if there is 7 negligence, if there's fraud, it still does not take 8 away the taxpayer's rights to a fair and equitable 9 assessment of their liabilities. 10 So, we still have to exercise due diligence 11 and provide them with all of the deductions that are 12 available and not just presume. 13 Even if all those elements exist, it's just 14 a statement. But -- and I'm not going over there 15 yet, but I will, so, get ready. 16 MR. SMITH: Okay. 17 MR. HORTON: The California environmental 18 tax, I don't have the one Member Ma has. 19 Can I borrow it? 20 MS. MA: The bottom on the back. 21 MR. HORTON: Can the Department take a look 22 at this and determine if, in fact, the items that 23 should not be taxed were included in the taxable 24 sales? 25 MR. HANKS: Mr. Horton, I was looking at 26 the second invoice and trying to back into the -- 27 MR. HORTON: Okay, let me -- 28 MR. HANKS: -- tax reimbursement that was 56 1 charged. 2 MR. HORTON: -- let me help you out here. 3 The second invoice means -- means what? 4 MR. HANKS: It's invoice No. 125780. 5 MR. HORTON: Okay, we're on the same page. 6 I got the same invoice. 7 MR. HANKS: So, just in looking at the tax 8 reimbursement that was charged, I divided that by -- 9 by the $249.45, which was his subtotal for -- for 10 the parts charges. 11 And I'm coming up with -- with -- not a 12 round number that would have reflected the tax rate 13 that was in effect I believe at that time. 14 And, so, what that indicates to me is that 15 perhaps there is more programming involved here 16 where the programming is not applying tax to certain 17 of the charges above. 18 I would actually have to deconstruct this 19 to see exactly what -- what the tax was applied 20 against and what wasn't. 21 But I think the most important item to 22 mention here is that this is the invoice that would 23 be given to the customer. So, it really doesn't 24 matter what -- what the tax -- tax -- correct tax 25 calculation should have been on the taxable selling 26 price of the tangible personal property sold. 27 What really matters is what tax 28 reimbursement was charged to that customer, if the 57 1 taxpayer collected excess tax reimbursement. 2 MR. HORTON: I appreciate that. 3 I don't believe the question was relative 4 to excess tax reimbursement. You know and I get it. 5 I mean, I get the excess tax reimbursement argument. 6 The matter before us is I'm asking the 7 Department to determine if, in fact, there's a 8 computer error where nontaxable labor, fees and so 9 forth were included in the taxable category. 10 Even though it is minuscule to 269,000 in 11 tax, you got to make a whole lot of these errors, 12 but -- but I still want to be protective of the 13 taxpayer in that regard. 14 MR. WILLIAMS: If I may add to that? 15 MR. HORTON: One second, sir. He's doing 16 his calculations. 17 MR. WILLIAMS: When we -- 18 MR. HORTON: Sir, unless you want to get 19 into that circular discussion. 20 MR. HANKS: Actually, it does -- it does 21 look like they're applying tax against the 22 California environmental fee. 23 MR. WILLIAMS: Right. 24 MR. HORTON: Okay. And the California 25 environmental fee is based on a percentage? 26 MR. PUGH: Flat. 27 MR. HANKS: That's a set environmental fee. 28 MR. HORTON: $1.75, that's kind of a 58 1 leading question. 2 So, the -- so, the $1.75, the liability is 3 actually wrong then? 4 MR. WILLIAMS: Right. 5 MR. HANKS: No, we wouldn't state that the 6 liability was wrong because to the extent that the 7 customer actually paid $17.81 -- 8 MR. HORTON: Now we can have the excess tax 9 reimbursement discussion. 10 But I'm discussing about what the Board 11 would determine that the liability would be based on 12 the law and what tax is due on. 13 MR. HANKS: Right. So, I agree with you, 14 Mr. Horton. We should have had a conversation that 15 it appears -- and perhaps that conversation was had, 16 I don't know -- but it does appear as though that 17 the taxpayer's programming was inaccurate, at least 18 for this time period, where they were charging tax 19 reimbursement against a fee that was not subject to 20 tax. 21 However, that -- that does raise a question 22 about whether or not then they were collecting 23 excess tax reimbursement, charging tax on amounts 24 that weren't taxable. 25 To the extent that they collected those 26 amounts from their customer and could refund those 27 amounts to their customer -- 28 MR. HORTON: You would be -- 59 1 MR. HANKS: -- the Board would be 2 satisfied -- 3 MR. HORTON: -- okay. 4 MR. HANKS: -- with that. 5 MR. HORTON: So, it appears that the -- the 6 ShopPro software made a mistake, was -- calculated 7 at least the fees on -- environmental fees as 8 taxable when, in fact, it shouldn't have calculated 9 that. 10 So, it's your testimony that you backed 11 that fees out when you took the total over to 12 Quicken? 13 MR. WILLIAMS: That would be one of them. 14 And the other -- 15 MR. HORTON: What others? 16 MR. WILLIAMS: -- the other would be the 17 disposal of the tire. 18 MR. HORTON: And where is that on this 19 invoice? 20 MS. MA: It's on the next page. 21 MR. MENDEL: Next page, bottom line, sir. 22 MR. WILLIAMS: It's $3 a tire. 23 MR. HORTON: Okay. 24 Department, take a look at it. 25 MR. HANKS: I'm looking at it. And I 26 didn't think that that was taxed. 27 No, I don't believe that was taxed. 28 MR. HORTON: Okay. So, you don't believe 60 1 it was taxed? 2 MR. HANKS: No. 3 MR. HORTON: Okay. So, the only 4 adjustment -- taxpayer, Mr. Williams? 5 MR. WILLIAMS: Yeah, well, see, how the 6 software worked out on one of the situations that we 7 brought up was that disposal fee and the California 8 environmental fee, which is listed under parts. 9 And all the parts are always taxable. 10 MR. HORTON: No, not according to this 11 ShopPro you have. 12 MR. WILLIAMS: Well -- 13 MR. HORTON: It seems to distinguish 14 taxable parts and nontaxable parts. 15 MR. WILLIAMS: -- well, your taxable parts, 16 unless somebody punched it in wrong, but the 3.50 17 and the $6, that would be 9.50 subtracted off the 18 209.45. 19 And I believe the sales tax was -- 20 MR. PUGH: Comes right out to what it 21 should be. 22 MR. WILLIAMS: And that's at the 1 -- 23 MR. PUGH: Eight and a half. 24 MR. WILLIAMS: -- eight and a half. 25 If you take 209.45, which is the parts 26 total, and subtract that 9.50 and take the 8.5 27 percent, it comes right on the button at 17.81. 28 MR. PUGH: The total amount equals 17.81. 61 1 That means these were taxed. 2 MR. WILLIAMS: And it says "tax." 3 MS. MA: Then how -- continue to the next 4 one, it's only 7 percent. 5 MR. PUGH: Is that right? 6 MR. WILLIAMS: It's 17.21. So, 8.5 -- 7 MR. PUGH: She's right, it's different. 8 MS. HARKEY: I have a question for Appeals. 9 MR. HANKS: Yeah, that would be 16.99, 10 actually, at an eight and a half percent tax rate. 11 So, it's not computing according to what I 12 see. 13 MR. HORTON: Could you speak into the mike, 14 'cause, I mean -- 15 MR. HANKS: Yes. 16 MR. HORTON: -- we could make the 17 calculations, but we need the Department to do it. 18 And we need the Department to enter it into 19 the record as to what they believe the situation 20 is -- not the Members, though every Member up here 21 seems -- is capable of doing it. 22 MR. HANKS: Right. 23 Mr. Horton, in reviewing it, it looked like 24 it absolutely calculated to the correct tax rate 25 when I did the math for subtracting 3.50 from the 26 209.44 or 209.45. 27 MR. HORTON: So, you were to subtract -- 28 well, I think the first step would have been to take 62 1 the tax and then capitalize it, take -- basically 2 divide it by the tax rate gives you the measure. 3 Subtract that from the parts, which 4 everything seems to be going into -- or, even easier 5 than that, would be to just take the parts. 6 There must be more to this invoice. 7 MR. RUNNER: Here's my problem I'm having 8 right now and that is we can sit here and calculate 9 all day what is and isn't. 10 MR. HANKS: Right. 11 MR. RUNNER: Here's my bigger problem and 12 that is I believe I asked specifically whether the 13 Department had found any errors earlier in my 14 questioning in regards to the Shop program. 15 And I believe the answer was no. 16 So then you hand me from your exhibit 17 examples and we find errors. 18 So, I have a little issue in regards to 19 when you told me, no, what kind of examination you 20 really did do. 21 MR. HANKS: If I could clarify what -- 22 MR. RUNNER: That would be good. 23 MR. HANKS: -- the auditor -- what the 24 auditor said -- and I believe this is -- this is 25 what I identified before. 26 What the auditor did was to trace sales 27 invoice information from sales invoices like this to 28 the sales journals. 63 1 MR. RUNNER: Hold on, Mr. Hanks, hang on, 2 hang on. 3 That's not what my question was. 4 They -- the taxpayer said that there were 5 some errors that they then had to move by hand from 6 their shop report to their QuickBooks. 7 My question was not to the auditor, it was 8 to you, did we find any errors? 9 And the answer was no. 10 So, my question is the same, did -- what 11 kind of examination did you do in order to prepare 12 an answer that told me no? 13 MR. HANKS: Mr. Runner, I think I 14 understand pretty -- pretty well what the auditor 15 did. And I think that was based on my description. 16 Now to expand on that -- 17 MR. RUNNER: I don't have the auditor here. 18 I don't have the auditor here to ask what they did. 19 I have you here, right -- so, hang on just 20 a minute. 21 MR. HORTON: Trying to be helpful. 22 MR. RUNNER: I have you here. 23 So, when I have a question in regards to 24 interpreting, I only can go to you, I can't call the 25 auditor up. 26 So, that's my challenge. So, when I asked 27 the Department if there is -- if they've examined 28 something, I assume when you give me an answer that 64 1 it is an answer that you know the answer to. 2 So, that's my dilemma. 3 MR. HORTON: Okay. Much appreciated. 4 So, based on this invoice -- and we may 5 want the Department to go back to a more -- I mean, 6 do a calculation. 7 Even understandable that -- excuse me, 8 sales tax was collected from the consumers, it seems 9 to be that everyone is prepared to submit that they 10 actually collected sales tax from the consumers, 11 with the exception of the time in which they had 12 the -- they gave away free auto repairs, which I'm 13 -- oil changes, my apologies, which I presume were 14 not invoiced. 15 MR. PUGH: Absolutely they were. 16 MR. HORTON: They were invoiced? 17 MR. PUGH: Right. 18 MR. HORTON: And tax was charged on that 19 invoice? 20 MR. PUGH: No. 21 MR. HORTON: So, we don't need to adjust 22 for that, you know, because they didn't charge tax, 23 therefore, it wouldn't be in the numbers. 24 And, therefore, you wouldn't have picked it 25 up. So, the Department wouldn't have picked it up. 26 MR. HANKS: Right. 27 MR. HORTON: Possibly the Department may 28 have picked up -- and go back and verify -- fees 65 1 that should not have been taxed. 2 At that point they have an excess tax 3 reimbursement. And they have -- they, being the 4 taxpayer -- has -- have an option of refunding the 5 excess tax to their customers, which may be 6 relatively complicated now, or the Department will 7 keep -- or the State of California will keep the 8 tax. 9 And they should be fully aware -- I mean 10 advised of their rights in that regard, okay. 11 The -- the tire fees, anything else that 12 you adjust -- did you make an adjustment for? 13 MR. WILLIAMS: Well, those two for sure. 14 Well, and -- 15 MS. HARKEY: Either one of you can answer, 16 if you have -- please? 17 MR. WILLIAMS: There was a situation at the 18 very beginning on the interstore -- intercompany 19 transfers in which we -- 20 MR. HORTON: When you say "the very 21 beginning," what -- 22 MR. WILLIAMS: 2007. 23 MR. HORTON: -- in 2007 there was a 24 situation? 25 Can you define the situation? 26 MR. PUGH: I'll say it real quick since 27 that's my side. 28 MR. HORTON: Into the mike, please. 66 1 MR. PUGH: Yes. I'm Store A. He's Store 2 B. I sell four tires I don't have. So, I run to 3 his store and get them. 4 So, we have to have some sort of way of 5 calculating the transfer of inventory. 6 We really didn't have a way to do it other 7 than to make a sale. And, so, that would be a 8 nontaxable sale that it was reporting the tax -- 9 MR. HORTON: And when you say made a 10 sale -- 11 MR. PUGH: -- in 2007 again. 12 MR. HORTON: -- my apologies, you wrote up 13 an invoice? What -- 14 MR. PUGH: The only way we could account 15 for moving inventory from one store to another store 16 was to make it a sales invoice, correct. 17 MR. HORTON: And that sales invoice, by 18 your testimony, was a nontaxable sale? 19 MR. PUGH: It -- he would have told me he 20 was making tax. 21 I don't know the back side of it, I'm just 22 telling you how we -- 23 MR. HORTON: I'm just asking what you did 24 at your store. 25 What did you do at your store that you -- 26 when you transferred it, did you transfer it as a 27 nontaxable sale or you transferred it as a taxable 28 sale? 67 1 MR. PUGH: Well, I want to go on record as 2 saying that I rarely did it, only a couple times. 3 There was a button that you could push for 4 tax or to make it nontaxable, yes. But that didn't 5 always happen. 6 MR. HORTON: All right, you guys. 7 Do you have any evidence of that -- where 8 you have the actual document where you -- 9 MR. WILLIAMS: No, not at this time. 10 MR. PUGH: Not here. 11 MR. HORTON: Department, where are the 12 records? Where are the invoices? 13 MR. WILLIAMS: It would be -- 14 MR. PUGH: Trustee. 15 MR. WILLIAMS: -- the trustee. 16 MR. HORTON: The trustee has them all? 17 MR. WILLIAMS: Has them all. 18 MR. HORTON: Can you get those records to 19 the Department? 20 MR. MENDEL: We don't -- we don't have the 21 actual invoices in the file any more that were 22 reviewed. 23 MR. HORTON: That's not my question. 24 MR. MENDEL: I -- I believe we can request 25 copies from the trustee. 26 MR. HORTON: Okay. So, Mr. Pugh, your 27 testimony is you rarely did it? 28 How -- 68 1 MR. PUGH: I was a supervisor, not a 2 salesman. 3 MR. HORTON: -- how often did you receive 4 it from the other store? 5 You rarely received or you rarely 6 transferred or both? 7 MR. PUGH: I wasn't an on the counter 8 salesman, I was the supervisor for the four 9 stores -- or two at the time. 10 Frankly, I did some. I over -- I taught 11 how to do it, but I was not the one actually doing 12 it, but I do know errors were made. How often, I 13 can't tell you. 14 MR. HORTON: Mr. Williams. 15 MR. WILLIAMS: Yes, sir. 16 MR. HORTON: He never -- he rarely received 17 it? 18 MR. WILLIAMS: Received the merchandise? 19 MR. HORTON: Yeah, on the intercompany 20 transfer, how often did you send it to him? 21 MR. WILLIAMS: No, the -- how it went 22 was -- to demonstrate again, he's Store A, I would 23 be Store B. 24 MR. PUGH: Let me back up, I was using that 25 as an example of A and B. 26 He wasn't actually Store B and I was 27 Store A, I was using that as an example. 28 MR. HORTON: Oh, okay. 69 1 MR. PUGH: We were -- we were more -- I was 2 supervisorial; he was administrative. 3 We had store managers and store staff. 4 MR. HORTON: Okay. 5 MR. PUGH: I'm sorry, I should have made 6 that clear. I was trying to make an example. 7 MR. HORTON: In your efforts to account for 8 these intercompany transfers, how did you account 9 for them? 10 MR. PUGH: I pointed them out to Steve 11 every time I saw them. 12 MR. HORTON: Okay, all right. 13 And -- okay, Ms. Stowers. 14 MS. STOWERS: Just real quick 15 clarification. 16 Was -- in the intercompany transfers, was 17 that just for 2007? 18 MR. WILLIAMS: No. 19 MS. STOWERS: It was for the entire -- 20 MR. WILLIAMS: Yeah. 21 MS. MA: MS. STOWERS: -- for which 22 periods? Which years? 23 MR. WILLIAMS: All of the periods. 24 MS. STOWERS: Okay. 25 MS. MA: Okay. 26 MS. HARKEY: Can I ask a follow-up? 27 MR. HORTON: Sure. 28 MR. WILLIAMS: Mistakes were made on that 70 1 part. 2 MR. HORTON: Member Harkey, then Member Ma. 3 MS. MA: So, you would -- 4 MS. HARKEY: Go ahead, Member Ma. 5 MR. HORTON: Okay, Member Ma. 6 MS. MA: -- I will continue in this. 7 MS. HARKEY: I'll wrap up. 8 MR. HORTON: I had no idea -- you guys had 9 a thought. 10 MS. HARKEY: No, I've got my written down. 11 I'm good. 12 MR. HORTON: I reserve the right to return. 13 MS. MA: So -- so, you said that you would 14 tell Mr. Williams when you knew of transfers or saw 15 transfers? 16 MR. PUGH: Correct. 17 MS. MA: Did you -- how did you tell him? 18 You just verbally said, "We transferred four tires." 19 And then he would write it down and -- 20 MR. PUGH: I -- I don't know what he did. 21 I either would -- he worked out of his house, that's 22 where our corporate office or accounting offices 23 were. 24 If I were in a store and I saw it, I would 25 either e-mail him or call him. 26 MS. MA: And how did you reconcile all of 27 the stores, like at the end of the day to know 28 whether there were transfers or -- 71 1 MR. PUGH: I'd have to direct that to -- 2 that was his department. 3 I'm going to direct that to you. 4 MS. MA: I'm just saying you oversaw two 5 stores and then how about the other two stores? 6 MR. PUGH: All of them. 7 MS. MA: You oversaw all the stores? 8 So, if you saw it happening, you knew it 9 was happening, you would tell him? 10 MR. PUGH: Correct. 11 MS. MA: And then he would put it into 12 QuickBooks and back it out? 13 MR. PUGH: I don't know. 14 MR. WILLIAMS: Well, I would keep track of 15 something like that for -- 16 MS. MA: Uh-huh. 17 MR. WILLIAMS: -- again to the end of the 18 month and manually back it off. 19 MR. HORTON: Okay, Member Harkey. 20 MS. HARKEY: This is -- this is for 21 Appeals. 22 What does it require to reduce the penalty 23 to negligence in lieu of fraud? 24 MR. ANGEJA: That's a judgment question for 25 the Board. 26 MS. HARKEY: Thank you. 27 Members, we've -- we've gone through this 28 like really, really fine-tooth comb. We've got two 72 1 people filed bankruptcy. We've got a business in 2 bankruptcy. And we're unsecured. 3 We can keep pursuing this and I think that 4 maybe we ought to do it in another manner. 5 I am going to -- and I will just say this 6 here in front of everybody because we've been at 7 this for so long -- I would like to -- I would like 8 to make the motion to reduce to negligence penalty 9 in lieu of fraud and refer everything to O. I. C. 10 and see what's left. 11 Because I'm just not sure where we're going 12 to go with this. We can go through $3 and 150 and 13 250 and we can have the Department continue to 14 research and to check statements, but I think we're 15 kind of at the end of the rope here. 16 So, that is a motion I'm -- I wish to make. 17 MR. RUNNER: I'm sorry, you're going to 18 have to repeat it since I just walked in. 19 MS. HARKEY: I'm sorry. I'm sorry, you 20 weren't here and I know that the Chair -- the Chair 21 was not ready for this -- 22 MR. HORTON: Yeah. 23 MS. HARKEY: -- but I would -- I would like 24 to -- 25 MR. HORTON: There's a motion on the floor 26 by Member Harkey to -- 27 MS. HARKEY: -- reduce from negligence 28 penalty instead of fraud, in lieu of fraud, and then 73 1 refer the whole deal to Offers and Compromise. 2 MR. RUNNER: I'll second that. 3 MR. HORTON: -- motion by Member Harkey, 4 second. 5 Matter's on the floor. 6 MR. RUNNER: Right. 7 MR. HORTON: Continued discussion. 8 MR. RUNNER: Okay, yeah. 9 MR. HORTON: Let me, Members -- Mr. Runner. 10 MR. RUNNER: Just a quick question in 11 regards to the issue of O. I. C. when you're in 12 bankruptcy, in terms of that process. 13 'Cause I'm not -- and maybe just help us 14 understand how that would actually work, if we 15 actually referred something to O. I. C. while it was 16 in bankruptcy. 17 Maybe -- let me go to Appeals. 18 MR. ANGEJA: I'm not that familiar with 19 O. I. C., but I don't believe it's a barrier. 20 MR. RUNNER: Okay. 21 MR. ANGEJA: And I do know that O. I. C. is 22 able to take -- it has to be a final liability and 23 O. I. C. can take into account ability to pay, 24 whereas Settlement does not. 25 So, I don't think the bankruptcy is -- 26 MR. RUNNER: The bankruptcy doesn't make 27 any difference at that point? 28 MR. ANGEJA: I don't believe that it does. 74 1 MR. RUNNER: Even though we've -- even 2 though we've entered -- we have given them a 3 liability? 4 MR. ANGEJA: You've determined a liability. 5 MR. RUNNER: Right. 6 MR. ANGEJA: That doesn't stop them from 7 going to O. I. C. 8 In fact, this Board -- 9 MR. RUNNER: Okay. 10 MR. ANGEJA: -- routinely refers matters to 11 O. I. C. 12 MR. RUNNER: Okay. Well, let me ask you 13 procedurally again. 14 But if -- but if -- I am trying to get 15 through how physically that works. 16 And again maybe somebody can help me in 17 terms of how the bankruptcy process would work at 18 that point. 19 If, indeed, we go to O. I. C., O. I. C. 20 goes ahead and determines a smaller amount and -- 21 but yet our amount is already in bankruptcy, how 22 does that -- how does that work? 23 MR. ANGEJA: I believe what will be -- the 24 liability remaining from bankruptcy is still going 25 to exceed. 26 MR. RUNNER: Okay. So, the assumption is 27 the O. I. C. is what comes out of bankruptcy? 28 MR. ANGEJA: Yes. 75 1 MR. RUNNER: Okay, I got it. That makes 2 sense to me now. 3 Okay, thank you. 4 MR. HORTON: All right. So, we've -- 5 we've -- and I do want to try to -- to the extent 6 that we can -- try to get the right measure of tax 7 first. 8 And I certainly appreciate my colleagues' 9 motion. 10 Now back to the line of questioning of the 11 taxpayer. So, we have these -- we have these -- 12 these -- these items that are not taxable, that 13 you're making an adjustment for. 14 You have these intercompany transfers, that 15 some are rung up as taxable, some could -- are rung 16 up as nontaxable, we don't have any evidence. 17 Do you -- do you receive that? When you 18 receive, do you receive the distinction? Do you 19 distinguish the two? 20 Like when you make the adjustments for 21 intercompany transfers and they send you an amount 22 and that amount is hypothetically $1,000, but you 23 see that they have actually rung some of them up as 24 taxable and some taxable some as not taxable, do 25 you -- do you presume that it's all taxable? Or do 26 you presume it's not all nontaxable? 27 What's your knowledge of the tax liability 28 on intercompany transfers? 76 1 ---oOo--- 2 MR. WILLIAMS: Well, at the very beginning 3 when the software wasn't working to distinguish the 4 two -- 5 MR. HORTON: No, I'm asking about your 6 manual entry, your manual calculation. 7 MR. WILLIAMS: Yeah. 8 MR. HORTON: The tax -- your partner tells 9 you that you have -- 10 MR. WILLIAMS: Right. 11 MR. HORTON: -- intercompany transfers. 12 MR. WILLIAMS: Right. 13 MR. HORTON: When you make that manual 14 tran- -- that -- that input, or that adjustment, do 15 you adjust it outward as nontaxable? 16 MR. WILLIAMS: On all the transfers, it'd 17 be just a minus from -- from sales. 18 MR. HORTON: And do you have an idea how 19 often that occurred? 20 MR. PUGH: Not often. 21 MR. WILLIAMS: Daily. 22 MR. PUGH: No. 23 MR. HORTON: One's saying "yes." The 24 gentleman that kind of oversees the store seems to 25 be gesturing that it doesn't happen daily. In fact, 26 his earlier testimony -- 27 MR. PUGH: I don't know daily. It's not 28 often. 77 1 MR. HORTON: -- was that it rarely 2 happened. 3 You guys want to confer? 4 MR. PUGH: I don't think it happened often. 5 No. It didn't happen often. 6 MR. WILLIAMS: It happened quite often with 7 four locations. 8 MR. PUGH: And -- and perhaps I'm referring 9 to the invoices I saw. And I saw -- you know, he 10 saw all the paperwork from all the stores. I saw 11 the limited samples when I was in a store. So -- 12 MR. HORTON: Okay. 13 MR. PUGH: It's a subjective question. 14 MR. RUNNER: Mr. Chair, real quick. I 15 don't mind this discussion, except it's really not 16 pertinent to the motion. 17 MR. PUGH: Correct. 18 MR. RUNNER: So I mean -- 19 MR. HORTON: Well, I think it is. 20 MR. RUNNER: -- if we want to ahead and 21 deal with the motion and then -- 22 MR. HORTON: I think it is. And the 23 pertinency of the motion is always to the Members' 24 purview, so -- 25 Now, if you want to move the motion, that's 26 a motion that you could make and say, "Well, I don't 27 want to discuss this anymore. I want to move the 28 motion." 78 1 I'm saying I think there's additional facts 2 that I'd like to have on the table. But that's 3 always the right of the Member to do that, not to 4 make a determination as to whether the evidence that 5 you want to see or that another Member wants to see 6 is pertinent or not. And the way to address that is 7 to say, "Well, move the question," and you -- you -- 8 you get that done and the motion carries or it 9 doesn't. 10 MR. RUNNER: Or the other process is if, 11 again -- if other Members would feel like there's 12 a -- if it is of greater value to try to get to 13 review the numbers as opposed to just accepting the 14 numbers and going to OIC, which is, I believe, what 15 the motion is, um -- 16 MR. HORTON: I -- as I understand, the 17 motion is to -- 18 MS. HARKEY: Is to reduce the penalty. 19 MR. HORTON: -- reduce -- not to -- 20 MS. HARKEY: Or to reduce the -- 21 MR. HORTON: To eliminate the negligence 22 penalty. 23 MS. HARKEY: No, to -- 24 MR. HORTON: Or reduce it down -- strike 25 that. My apologies. 26 To reduce the fraud penalty -- 27 MR. RUNNER: Right. 28 MR. HORTON: -- down to a negligence 79 1 penalty. 2 MR. RUNNER: Right. 3 MR. HORTON: That's it. 4 MR. RUNNER: Oh, and -- no, I think it was 5 and then refer to OIC. 6 MS. HARKEY: And then refer to OIC. 7 MR. HORTON: We're not discussing OIC. 8 MR. RUNNER: What's that? 9 MR. HORTON: I'm not discussing -- 10 MS. HARKEY: Okay. 11 MR. HORTON: And for the record, I think 12 there is fraud here. I mean, I think there's fraud 13 here. I think there's embezzlement here. And those 14 is my lines of questioning that's going on. I mean, 15 if you want to know the -- the -- the essence of why 16 I'm asking these questions. 17 MR. RUNNER: Wouldn't the answer to some of 18 these questions be best solved then with a re-audit? 19 MR. HORTON: The answers to the question 20 relative to the excess tax reimbursement. But to go 21 to the intent of the parties, the questions along 22 the lines of, well, when you -- did you do bank 23 reconciliations? 24 Yes. 25 When you did the bank reconciliations, did 26 you notice that you had an excessive amount of 27 revenue placed into the bank, cash placed into the 28 bank relative to what you're reporting to the Board 80 1 of Equalization? 2 Yes. 3 So you collected excess tax reimbursement; 4 you deposited it in the bank, but somehow you 5 reported less to the Board of Equalization and that 6 calculation was acceptable. And you transfer the 7 information to another set of records, and you 8 transferred it incorrectly. 9 I get the fact that there are some minor 10 errors. The minor errors being the items that are 11 not taxable, and I certainly want those adjustments 12 to be made. But we're not talking about minor 13 errors. And these are -- and if you're looking at 14 the measure -- I mean, if we did a quick 15 calculation -- 16 What's the measure? 17 MR. MENDEL: The entity's aggregate 18 deficiency measure of $3,171,762, consisting of four 19 audit items. 20 MR. HORTON: So we're talking about 21 $3 million in errors. At best, 10 percent of that 22 is attributed to these calculation errors, at best. 23 In which, by their -- you know, by the taxpayer's 24 admission is that those calculation errors are 25 sometimes taxable, sometimes not; and we don't have 26 any evidence whatsoever to support that. The only 27 evidence that we have relative to an error is the 28 minor errors here relative to the fees, which 81 1 doesn't speak to the intent of the parties. It 2 speaks to an error that was made by the machine, 3 apparently caught or not caught. We haven't been 4 able to establish that. 5 But $3 million of -- of -- you've collected 6 from California consumers, didn't go into the 7 General Fund, went into your pockets by virtue that 8 you deposited it into the bank. Maybe it didn't go 9 into your pocket, Mr. Pugh. It went into somebody's 10 pocket, somebody's bank account. And that's not 11 fraud? 12 MR. RUNNER: Gross. 13 MS. HARKEY: Yeah, the three million, sir, 14 was gross. That's not the -- 15 MR. HORTON: Oh, I know. I know. 16 MS. HARKEY: Not the tax. 17 MR. HORTON: But -- but, I mean, you got to 18 look at the measure to -- because we're looking at 19 measure as relates to these fees, in order to 20 ascertain whether or not these fees -- what 21 percentage of these fees possibly could be of the 22 total measure. Because if you look at the tax on $3 23 it's nominal relative to the tax in question. And I 24 could do that calculation as well. 25 And it always disturbs me, especially 26 during the time that we have budget crises and so 27 forth -- I mean, I'm okay with, you know, minor 28 adjustments. I'm okay with errors. I'm okay with, 82 1 you know, calculation errors and disputes in laws. 2 But when -- when -- when someone takes from 3 California consumers -- Miss Betsy, Miss Rose -- all 4 of those individuals that come in to get a tire, 5 who -- who transfer the tax to -- to -- to you in 6 hopes that that tax is used to pay for our schools, 7 pay for education, pay for our roads; instead, it 8 goes into the bank to be used for personal purposes. 9 MR. RUNNER: Mr. Chair? Now -- and I think 10 this is to the motion. Thank you. 11 I -- I think there certainly is question 12 about a large amount of tax, in terms of the dollars 13 here. And I -- you know, the issue comes down to 14 intent. But here's where my struggle is in regards 15 to this, and here's where it is that I kind of find 16 myself at this point almost ignoring the intent a 17 little bit. And that is, I believe that we have 18 a -- we have a responsibility to ensure that 19 whatever we find, whatever -- as we build the case 20 toward fraud, that it is sound, that it is 21 defendable, and that it is correct. 22 And when it is -- and -- and I guess I'm a 23 bit tainted right now by the fact that I believe, 24 unfortunately, the Department made a representation 25 that something was correct when indeed it wasn't. 26 See, the point -- I almost -- I wish the 27 Department at times would say "I don't know" or "We 28 didn't check that out." I'd -- I'd feel better 83 1 about those kinds of responses than I do about "Oh, 2 no, it is correct." 3 MR. HORTON: Then they possibly owe you an 4 apology -- 5 MR. RUNNER: Right. 6 MR. HORTON: -- even now, Mr. Runner. 7 MR. RUNNER: Well -- well, again, here's 8 the problem. 9 MR. HORTON: And I get that. 10 MR. RUNNER: And again, so -- so the 11 challenge for me is -- again, I -- I don't know what 12 the intent of the taxpayer is and whatnot. 13 But at this point I -- if we make errors 14 there and we make representations there in an issue 15 that is as -- as significant as an issue of fraud, I 16 believe our fraud issues, when they come forward, 17 should be airtight. And that's where my concern is. 18 And so that's why I'm supportive of moving 19 from a fraud to negligent in order then to maybe 20 even give a communication to our staff to say, hey, 21 look, when you bring us these, make sure that 22 they're really, really right. And make sure the 23 paperwork is really, really correct. And when 24 there's a question, make sure you answer it 25 correctly so that we can move forward with 26 credibility for us as an organization and for us as 27 Members. 28 MR. HORTON: Member Harkey. 84 1 MS. HARKEY: I heard, I -- I believe, a 2 little bit differently than the Chairman on some of 3 these issues. 4 I did not hear that there were two sets of 5 books. I heard there was a point of sale book that 6 is very confusing to me because the Department made 7 a few errors; small, maybe little, but this 8 gentleman truly had confusion with it, had issues 9 with it. 10 What happened? I don't believe that there 11 was just money taken and put in banks. I -- I 12 didn't hear that the reconciliation of the bank 13 statements -- did the reconciliation of -- I guess 14 for the -- did the reconciliation of the bank 15 statements justify your audit? I mean was that 16 like -- was that -- that the gold standard that was 17 used? Or was it the books that you had? 18 Because I -- I thought there were invoices 19 checked to the Quicken -- or not the Quicken, but 20 the -- the point of sale books. But I didn't read 21 that -- 22 MR. HANKS: That's correct. 23 MS. HARKEY: I mean I'm assuming you do 24 some reconciliation. But did you actually find the 25 monies collected deposited? 26 MR. HANKS: Right. The audit staff 27 typically wouldn't look to -- to see where those 28 amounts were necessarily deposited. What they were 85 1 looking at was -- was tracing information from the 2 sales invoices through the software package and -- 3 and making sure that -- that those invoices were 4 properly reflected in the sales journals. 5 So that -- those were the numbers that the 6 auditor was -- was tracing and those were the -- the 7 sums that they used to then compare against reported 8 tax -- 9 MS. HARKEY: Right. 10 MR. HANKS: -- to calculate the difference. 11 MS. HARKEY: So -- so I -- more to my 12 point, I did not hear that the reconciliation of the 13 bank statements was used as the standard. And so I 14 don't really know, sitting here, whether or not that 15 money was deposited or not. 16 This is the second hearing where we've had 17 somebody -- where I've made a motion and I've 18 been -- I feel kind of like it was -- it was turned 19 on me such that I was supporting fraud. So I'd like 20 to say I do not support fraud. 21 I do believe that there's enough confusion 22 in these records and there's enough confusion with 23 these two former taxpayers and enough long -- long 24 enough time and four stores and split and new 25 business and people that really probably shouldn't 26 be running a business but should have been working 27 for someone, that there's enough confusion here that 28 I don't believe it was fraud. If somebody can show 86 1 me the money in the bank account, then I might buy 2 into that, but that's not what I'm examining here. 3 So I believe it was negligence. I don't 4 think that the gentleman who was keeping the books 5 was keeping books properly. And I don't think that 6 there were -- and now with the records being taken 7 to bankruptcy court, good luck getting what you need 8 because there's probably oodles of documents and the 9 stores have been sold. 10 And I'm not sure where the State comes out 11 by doing further examination. Not that I mind doing 12 further examination, but we're spending taxpayer 13 dollars to do that further examination, probably to 14 come up with zero. 15 And so I -- I still -- I would like a vote 16 on my motion. It's not because I wish to create, 17 you know, any more confusion or deny anyone to look 18 at anything. I think we're perfectly -- we can look 19 at everything when we come back for the OIC, see if 20 there's any adjustments being made. 21 And I appreciate your perspective, 22 Mr. Chair, having been an auditor. And I think -- I 23 think you -- you get right to the point on the items 24 and you'd like to see the -- the true calculation. 25 But I don't believe there was fraud here. 26 And unless somebody can show me the money in the 27 bank accounts, I can't buy into fraud. 28 So that's where my -- my motion is 87 1 negligence. I do believe there was negligence. And 2 if there's anything left that the State can -- 3 can -- can retain after -- after we go through the 4 bankruptcy and whatnot, I would -- I would like that 5 to happen. 6 But I think this has been going on since -- 7 for years and we spent a lot of money. And I'm not 8 so sure that we're going to collect anything. 9 So my motion remains, and I would hope to 10 have cooperation for that. 11 MR. HORTON: Thank you. 12 Let me clarify. I mean Members may have 13 their perspective, which they're entitled to. It's 14 not a conclusive perspective, not on this item or 15 any other item. And so, just to be clear here, the 16 support one way or the other is not a conclusive 17 statement as far as I'm concerned. 18 I do believe Miss -- Member Stowers did ask 19 about the bank reconciliation. And instead of me 20 having these questions -- you know, making this 21 statement I'll just ask. We have the benefit of the 22 taxpayer here. 23 When you collected your sales, did you 24 deposit it into the bank? 25 MR. WILLIAMS: Yes, sir. 26 MR. HORTON: Okay. Did you do monthly bank 27 reconciliations? 28 MR. WILLIAMS: Yes, sir. That went along 88 1 with the general balance sheets. 2 MR. HORTON: And what amount did you 3 deposit into the bank? Did you deposit the amount 4 reflected collected as reflected in -- in ShopPro, 5 or did you deposit into the bank the amount you 6 recorded in Quicken? 7 MR. WILLIAMS: QuickBooks. 8 MR. HORTON: QuickBooks? 9 MR. WILLIAMS: Uh-huh. 10 MR. HORTON: And what did you do with the 11 different amount of cash? 12 MR. WILLIAMS: There wasn't -- there wasn't 13 much. Some months were off a few hundred dollars, 14 so that's -- 15 MR. HORTON: No, the Department has 16 examined ShopPro and Quicken and they've concluded 17 that it was off by three-point-some million dollars, 18 the difference between the two. 19 Your testimony, as I understand it, is that 20 the amount that you collected from your customers 21 was deposited into the bank. And the amount that 22 you re- -- that you deposited into the bank was not 23 the amount that you collected from the customers but 24 the amount that you actually recorded in Quicken. 25 Please correct me if I'm wrong. 26 MR. WILLIAMS: Getting -- getting myself a 27 little confused here in circles. 28 MR. HORTON: That's all right. 89 1 MR. WILLIAMS: The money that we -- 2 MR. HORTON: That's the way to stay out of 3 it. 4 MR. WILLIAMS: The money collected from the 5 store, from sales, we did daily bank deposits. 6 MR. HORTON: Okay. So -- 7 MR. WILLIAMS: At the end of the month we 8 have a balance sheet. Okay. On that balance sheet 9 is your bank, your cash on-hand. 10 MR. HORTON: So the -- the total -- total 11 cash that you collected from your customers was 12 deposited into the bank. 13 MR. WILLIAMS: Correct. 14 MR. HORTON: The Department has alleged 15 that that total cash that you collected is 16 $3 million shy of what you reported to the State 17 Board of Equalization. 18 And -- 19 MR. WILLIAMS: No. 20 MR. HORTON: That's not the case? 21 MR. WILLIAMS: No. 22 MR. HORTON: You never collected that cash 23 from your customers? 24 MR. WILLIAMS: That's where -- I've said it 25 more once on this hearing that I'm kind of mystified 26 on this $269,000. 27 This $3 million that you're talking about 28 is -- I believe what they're talking about is the 90 1 total gross sales of products. 2 MR. HORTON: So -- 3 MR. WILLIAMS: Not -- not the tax. 4 So if -- 5 MR. HORTON: So your -- your position is 6 the Department calculated your taxable liability 7 wrong? 8 MR. WILLIAMS: Well, I -- I'm not sure what 9 question you're trying to -- want me to answer. 10 They're talking about a $3 million difference thing. 11 They're calculating if I'm -- 12 MR. HORTON: Let me just take this invoice 13 here. 14 MR. WILLIAMS: You got your gross sales is 15 what you're talking about. 16 MR. HORTON: Sir, with all due respect, let 17 me just take this invoice here. 18 MR. WILLIAMS: Okay. 19 MR. HORTON: This invoice, invoice number 20 125780, it shows a total of $267. That amount, 21 which is reflected in your Quicken -- I mean -- 22 MR. WILLIAMS: QuickBooks. 23 MR. HORTON: -- reflected in your ShopPro 24 and would basically add up to a total number after 25 all of these amounts are totaled up, where would 26 that -- is that amount the amount of cash that you 27 deposited into the bank? 28 MR. WILLIAMS: Right. 91 1 MR. HORTON: Okay. 2 MS. MA: So I -- Mr. Chair. 3 MR. HORTON: I'm ready to move with the 4 question. I don't want to do this anymore. I mean, 5 unless you guys want to do it. 6 MS. MA: Well, I just think the 7 clarification I think at -- at issue is the 266,304 8 in taxes that the Department says that he collected 9 but didn't remit. 10 MR. HANKS: Correct. Correct. 11 MS. MA: And it's the 8.5 percent off of 12 the $3 million, $3.1 million in gross sales. 13 MR. HANKS: Right. 14 MS. MA: So I think you guys are right, you 15 guys are right. 16 So it's the 266 -- 266,304 that's at issue. 17 And that's where the penalty is based off of, is 18 that number. 19 MR. RUNNER: Mm-hmm. 20 MR. HANKS: Correct. 21 MS. MA: Right. 22 MR. HANKS: Correct. 23 MS. MA: So is Ms. Harkey -- can I just 24 clarify, is your motion the 10 percent negligence 25 penalty on that 266? 26 MS. HARKEY: I think -- I think that what 27 we're talking about right now is yes, yes, because 28 right now it's the penalty that we're discussing. 92 1 MR. RUNNER: Actually, I believe -- let me 2 just double check here. But I believe if we 3 actually remove the negligence -- or the -- excuse 4 me, the fraud penalty, then the measure gets 5 smaller, right? Because -- 6 MR. HORTON: Statute of limitation. 7 MR. RUNNER: -- the fraud penalty extended 8 the -- by two years? 9 MR. ANGEJA: First two quarters would be 10 outlawed by the statute of limitations -- 11 MR. RUNNER: Okay. 12 MR. ANGEJA: -- if fraud is not 13 available. 14 MR. RUNNER: So there would be -- so it 15 would actually shrink -- 16 MR. ANGEJA: The measure. 17 MR. RUNNER: -- the measure a bit. Okay. 18 Does that make sense? 19 MS. MA: Yeah. 20 MS. STOWERS: Okay. 21 MS. MA: Which means interest, too, yeah. 22 MR. HORTON: Okay. There's a motion on the 23 floor to abate the fraud penalty and submit a 24 negligence -- apply a negligence penalty and to 25 adjust accordingly relative to the -- to the statute 26 of limitation. I believe such motion is second by 27 Member Runner. And to refer to OIC. 28 Objection noted. 93 1 Ms. Richmond, call the roll. 2 MS. RICHMOND: Mr. Horton. 3 MR. HORTON: No. 4 MS. RICHMOND: Ms. Harkey. 5 MS. HARKEY: Aye. 6 MS. RICHMOND: Mr. Runner. 7 MR. RUNNER: Aye. 8 MS. RICHMOND: Ms. Ma. 9 MS. MA: Aye. 10 MS. RICHMOND: Ms. Stowers. 11 MS. STOWERS: No. 12 MS. RICHMOND: Motion carries. 13 MR. HORTON: Ms. Richmond, where are we 14 with the other cases? 15 MS. RICHMOND: We do have item C9. 16 MR. HORTON: C9? Oh, okay. 17 Members, we need a break? 18 MS. HARKEY: Sure. 19 MR. HORTON: Take a five-minute break. 20 MR. ANGEJA: Dismissed? 21 MR. HORTON: Oh. 22 MS. MA: Maybe someone -- 23 MR. HORTON: My -- my apologies. 24 Okay. Strike that. Members, my apologies. 25 The Board has concluded that the negligence 26 penalty does not apply. 27 MS. MA: Fraud. 28 MR. HORTON: I mean the fraud penalty does 94 1 not apply. However, the negligence penalty does 2 apply. And, as a result of that, negligence -- when 3 the Board applies negligence they're allowed to go 4 back at least eight years. 5 In this case you didn't -- your business 6 started only two years prior -- two quarters prior 7 to the audit period or whatever Appeals testified, 8 and they will give you a clarification on that. So 9 that causes those period in time to -- to be subject 10 to the statute of limitations. Therefore, the 11 statute would have ran. So whatever the liability 12 is for that period of time no longer exists because 13 the statute would have ran in the absence of a fraud 14 penalty. 15 And so it reduces your liability to that 16 degree. And at the same time your liability is 17 reduced by the elimination of the 40 percent fraud 18 penalty. 19 And I would ask that Appeals, during the 20 break time, kind of -- kind of explain that. But 21 give him the numbers as well so he can understand 22 what the numbers are and how it affects them. 23 To the Department, at the same time, we 24 would ask that you notify the bankruptcy court of 25 the decision of the Board. And, to the extent that 26 we can, reduce our request for funding out of the 27 bankruptcy court. 28 MR. WILLIAMS: One question. This OIC -- 95 1 MR. HORTON: Offer in compromise is another 2 process that you'll be able to enter that will take 3 into consideration your bankruptcy, your inability 4 to pay, and it's a negotiation that happens outside 5 of the Board. And at that time you'll be able to 6 make an offer based on your ability to pay. 7 The Department will take in consideration 8 the amount of funds that is currently in bankruptcy 9 court and those are funds like in their mind funds 10 that's in the bank. It is any amount that probably 11 comes out of bankruptcy court that you can now 12 negotiate based on your ability to pay. 13 MR. WILLIAMS: Okay. 14 MR. HORTON: Does that help? 15 MR. PUGH: Okay. 16 MR. HORTON: Okay. Thank you so very much 17 for your testimony. 18 MR. PUGH: Thank you. 19 ---oOo--- 20 21 22 23 24 25 26 27 28 96 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 February 25, 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 76 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: April 9, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 97 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 February 25, 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 77 through 96 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: April 10, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 98