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 26, 2015 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 THE WAKEFIELD COMPANY, INC. 14 NO. 608341 (EA) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 CSR No. 5214 27 28 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 6 Sen. George Runner (Ret.) Vice-Chairman 7 8 Fiona Ma, CPA Member 9 10 Diane L. Harkey Member 11 12 Yvette Stowers Appearing for Betty Yee, 13 State Controller (per Government Code 14 Section 7.9) 15 Joann Richmond 16 Chief, Board Proceedings Division 17 18 ---oOo--- 19 For Appeals Division: Jeff Angeja Tax Counsel IV 20 Legal Department 21 For Board: Andrew Kwee Tax Counsel III 22 Stephen Smith 23 Tax Counsel IV Legal Department 24 Kevin Hanks 25 Chief Sales and Use Tax 26 Department 27 For Petitioner: Ryon Rickard Taxpayer 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 26, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond, what is our next 6 matter? 7 MS. RICHMOND: Our next matter is -- our 8 next matter is item C14, The Wakefield Company, Inc. 9 Please come forward,. 10 MR. HORTON: As the taxpayer comes forward, 11 Mr. Angeja, would you please introduce the issues in 12 this case? 13 MR. ANGEJA: Good afternoon, Mr. Chairman 14 and Members. I'm Jeff Angeja on behalf of the 15 Appeals Division. 16 The appeal before you presents two 17 unresolved issues which are whether adjustments are 18 warranted for the amount of unreported taxable sales 19 and whether relief is warranted based on prior audit 20 advice. 21 MR. HORTON: Thank you. Welcome to the 22 Board of Equalization. You will have ten minutes to 23 make your presentation. We will return and allow 24 you five minutes on rebuttal. 25 We would ask that you introduce yourself 26 for the record. 27 MR. RICKARD: Thank you. Ryon Rickard, 28 president of The Wakefield Company. 3 1 I just have a brief statement. Thank you 2 for this opportunity to discuss our position 3 regarding the 2011 audit. 4 I have spoken to some of your 5 representatives and was able to present our side of 6 the issue. It boils done to an apples and orange 7 situation. 8 In the audit previous to 2011 we were told 9 how we could do our billing using the lump sum 10 method, basing the tax on the net cost of the 11 product and not taxing freight. 12 This method actually produced more tax 13 revenue for the BOE as it enabled The Wakefield 14 Company to win more bids against non-taxpaying 15 paying companies. 16 In the 2011 audit, which covered the worst 17 economic downturn in history, we were audited with 18 the itemized method, basing the tax on the gross or 19 retail price of the product and also charged tax on 20 freight. This created a large amount, inconsistent 21 with the lump sum system. 22 As a company that has been paying sales 23 taxes for over 46 years, we request that the BOE 24 relieve The Wakefield Company of the 2011 audit by 25 using Section 6596, subdivision (a) and accepting 26 our good faith payment of $6,993.32, made after the 27 2014 audit as a penalty. 28 In every audit other than 2011, the 4 1 Wakefield Company has shown to be in compliance and 2 a good provider of revenue to the BOE, in spite of 3 challenging economic conditions. 4 We would like to continue to do so as the 5 2014 audit will support. We hope that the BOE will 6 consider our long track record and enable The 7 Wakefield Company to continue to provide revenue to 8 help the sales tax situation, which has risen from 9 the 6 percent, when I got here in California in 10 1985, to almost 10 percent. 11 The Wakefield Company is a small company 12 with very limited resources and almost no assets 13 operating from a home office. There are no funds to 14 pay more than has already been paid. 15 If the 2011 audit cannot be redone using 16 the lump sum method, we would again request relief 17 under Section 6596, so that we may continue 18 providing revenue to the BOE. 19 Thank you. 20 MR. HORTON: Thank you very much. 21 We'll now go to the Department. The 22 Department has ten minutes to make their 23 presentation. 24 We'd ask that you commence with your 25 introduction for the record, please. 26 MR. KWEE: Good afternoon, Chairman Horton 27 and Members of the Board. 28 I am Andrew Kwee with the Board's Legal 5 1 Department. With me today is Stephen Smith and 2 Kevin Hanks also and we will be representing staff. 3 Revenue and Taxation Code Section 6051 4 provides that tax applies measured by a retailer's 5 gross receipts from the retail sale of tangible 6 personal property and estate. As an exception, 7 certain charges for installation on nontaxable. 8 Regulation 1521 sets forth how tax applies 9 to certain construction contracts to furnish, 10 install materials and fixtures on or to real 11 property. 12 Regulation 1521 specifically states that a 13 construction contract does not include the 14 furnishing of tangible personal property if the 15 person furnishing the property is not responsible 16 under the construction contract for the final 17 affixation or installation of the property 18 furnished. 19 During the audit period Petitioner claimed 20 deductions on his sales and use tax returns in an 21 amount representing Petitioner's profits from the 22 sale of tangible personal property. Petitioner 23 labeled the deduction "lump sum contracts." 24 When questioned by the Department, 25 Petitioner -- the Petitioner confirmed that on 26 several occasions that it did not perform 27 installation. Petitioner did not hire 28 subcontractors to perform installation. And there is 6 1 no on-site installation involved during the audit 2 period. 3 Therefore, Regulation 1521 is inapplicable 4 because it explains how tax applies to items 5 furnished and installed by construction contractors 6 in performance of a construction contract. 7 However, here Petitioner did not perform 8 any construction contracts during the audit period. 9 Further, there is no provision in the sales 10 and use tax law to deduct profit from gross 11 receipts. Therefore, there is no statutory 12 authority for Petitioner deduct its profit from the 13 retail sale of tangible personal property. 14 With respect to the Revenue and Taxation 15 Code 6596, relief is unavailable under this 16 provision when the pertinent facts and conditions 17 have changed since the prior audit. 18 Petitioner is not eligible for relief for 19 the taxes based on reliance on advice provided on a 20 prior audit because in the prior audit Petitioner 21 installed and/or hired construction contractors to 22 install the items furnished to customers. 23 And under those facts, Regulation 1521 24 includes scenarios under which the measure of tax 25 could be the cost price. 26 Further, the transportation charges are 27 taxable because they are not separately stated. And 28 Revenue and Taxation Section 6012 provides 7 1 transportation charges are taxable unless the 2 transportation charges are separately stated. 3 Therefore, tax applies to Petitioner's 4 gross receipts and no further adjustments are 5 warranted. 6 And we concur with Appeals Division's 7 decision and recommendation 8 MR. HORTON: On rebuttal, please. 9 MR. RICKARD: I would go to back to the '94 10 audit, the previous audit, where the auditor stated, 11 "The taxpayer is a construction 12 contractor who sells fabricated playground 13 and park equipment. The taxpayer contracts 14 both lump sum and time and material. 15 Installation is typically subcontracted." 16 By that time we had disbanded our 17 installation crew and were doing strictly 18 subcontract work -- which is to say we paid someone 19 to do some work. 20 And I would argue in the audit period we 21 did pay someone to do work. We had an installation 22 in Temecula, I believe -- no, it was Temecula, where 23 we issued a credit to the contractor to correct some 24 installations, which is, in my book, paying somebody 25 to do something when you give them a credit. You 26 are paying them to do the work. And we did so. So, 27 that is not correct. 28 What we did was from 1994 to 2011 we did 8 1 the same exact thing we had done previously. The 2 auditor in 1994 did not make any discrimination 3 between what a contractor is by the State or what a 4 contractor is by the BOE. And there is obviously a 5 distinction. 6 Further, the auditor in '94 knew that we 7 did not have an installation crew and that 100 8 percent of our installations were subcontracted. 9 So, that's the advice we were going on from 10 1994 to 2011. 11 MR. HORTON: Thank you. 12 Discussion, Members? 13 Member Harkey. 14 MS. HARKEY: Thank you. Thank you for 15 appearing today. 16 This is for Mr. Rickard. Did you change 17 your business model at all? 18 MR. RICKARD: Yes. Right around '92 we 19 disbanded our installation crew and decided to sub 20 out all installations because of the high litigation 21 problem in California. 22 MS. HARKEY: So, your '94 audit reflected 23 that? 24 MR. RICKARD: Yes. We did not have an 25 installation crew at the time. We had disbanded it. 26 MS. HARKEY: So, do I understand you 27 correctly, that you said that you did install during 28 this recent audit, which was 4 of '08 to 8-31-11? 9 1 MR. RICKARD: Well, we did pay -- like I 2 said, we issued a credit to have a contractor come 3 and do some work on the site. 4 It was contracted out through the general 5 contractor, who back charged us for the amount, 6 which we paid for. 7 MS. HARKEY: Okay. So, the next -- let me 8 see here. 9 This is for the Department. Do you have 10 1994 audit papers? 11 MR. KWEE: Yes. Well, the 1994 was 12 actually a waived audit. So, it was a one-year 13 period that was examined. And we have two pages, 14 which are attached to the decision and 15 recommendation as an exhibit. 16 MS. HARKEY: And what is your conclusion in 17 that -- so I don't have to start reading right now? 18 MR. KWEE: Was there a specific area in 19 which you wanted me to address? 20 MS. HARKEY: Well, I want -- what I think 21 the point is is was he following audit procedures 22 correctly? 23 MR. KWEE: Oh, and in the prior audit, the 24 document indicates that the taxpayer was a 25 construction contractor who sells pre-fabricated 26 playground and park equipment and that they contract 27 both lump sum and on time and material and that 28 installation is typically subcontracted. 10 1 And those facts are, from our 2 understanding, different from the current audit 3 period. 4 Because in the current audit period, the 5 Petitioner did not -- was not responsible for the 6 final installation and -- of the materials furnished 7 and installed. And to the contrary, that it -- 8 according to the Petitioner, they were only able to 9 indicate one instance of work provided and that was 10 actually repairing a defective product approximately 11 a year after the sale without charge. So, that 12 wasn't installation, that was just a repair or that 13 was correcting a defective product. 14 But, basically, yes, the facts -- we do 15 believe the facts have changed substantially from 16 1994. 17 MR. RICKARD: If I may? 18 MS. HARKEY: Yes. 19 MR. RICKARD: I'll help him out. I have 20 the '94 audit here. 21 "A preliminary examination and 22 short test indicate an audit would result 23 in little or no tax change. 24 Recorded and reported taxable measure were 25 found to be in agreement. There were no 26 unreported ex-tax purchases of supplies or 27 fixed assets. There were no bad debt 28 credits. Exempt sales were properly 11 1 claimed." 2 MS. HARKEY: So, it sounds like you were 3 doing these same things. 4 So, did you -- you have a contractor's 5 license? 6 MR. RICKARD: Yes -- well, we had. We no 7 longer do. 8 Because of the 2011 audit, we decided -- 9 that's when we decided to change to your system -- 10 quote, "your system," with QuickBooks and without 11 the lump sum, the straight itemized on the gross 12 system. 13 So now -- and the 2014 audit, which shows 14 up that we are in total compliance as of right now. 15 And that's why we paid that $7,000 as a 16 good faith effort, which included part of the lump 17 sum year that we were still working on. 18 MS. HARKEY: Okay, thank you. 19 MR. HORTON: Further discussion, Members? 20 Member Stowers. 21 MS. STOWERS: Just clarification. 22 On that 1994 waived audit, I see where you 23 read No. 6 regarding what the preliminary 24 examination showed. 25 But I want to go up to No. 4, nature of the 26 business. 27 "The taxpayer's a construction 28 contractor who sells prefabricated 12 1 playground and park equipment. The 2 taxpayer contracts both lump sum and time 3 and material. Installation is typically 4 subcontracted." 5 I need clarification -- 6 MR. RICKARD: Okay. 7 MS. STOWERS: -- for the years at issue. 8 Was that still your business practice? 9 MR. RICKARD: Meaning 2008? 10 MS. STOWERS: 2008 -- April 1st -- 11 MR. RICKARD: This is in '94. 12 MS. STOWERS: -- yes, but I believe you're 13 saying that based on this prior audit, you believe 14 that you should have relief because your business 15 was the same. 16 MR. RICKARD: Basically, we were -- when we 17 had the audit in '94, they said, "Look, as long as 18 you're a contractor and you quote your jobs on a 19 lump sum basis," which is what we did, "then you can 20 pay the tax on the -- on the net." 21 MS. STOWERS: Did they put that in writing? 22 MR. RICKARD: Well, it -- we followed their 23 advice that they set forth here in the '94 audit. 24 I don't know if they put it in writing 25 because your audit's incomplete. 26 MS. STOWERS: Okay. All right, thank you, 27 sir. 28 To the Department, is it your understanding 13 1 that the business has changed based on this 2 statement on No. 4 -- 3 MR. KWEE: Yes. 4 MS. STOWERS: -- nature of the business? 5 MR. KWEE: Yes, our understanding is that 6 the business is substantially different than as 7 reflected in No. 4, as you just read. 8 MR. HANKS: Ms. Stowers, if I could also 9 just add? 10 The Petitioner refers to this examination 11 as an audit, but actually it's a waived audit. So, 12 our audit staff were only out there, I see, for 13 three hours. 14 And, so, it -- this technically is not an 15 audit, but it was a report that was generated 16 indicating that we're waiving the account for -- for 17 an audit because it appeared that the taxpayer was 18 properly reporting their sales. 19 MS. STOWERS: Does that matter? I -- if 20 it's -- so, if it's a waived audit, there is no 21 relief under 6596? 22 MR. HANKS: No, Ms. Stowers, that could 23 apply if there were comments with -- within this 24 waived audit report that indicated that we had 25 looked at transactions of the type that Petitioner 26 is alleging were examined, then certainly we could 27 recommend 6596 relief. 28 We just don't see where that's indicated in 14 1 the one-page or three-page waiver form that we have 2 before us. 3 MS. STOWERS: And there was an actual audit 4 in a prior period? Am I understanding that? 5 I think I'm looking at Exhibit 1 in the 6 D & R. 7 MR. KWEE: Correct, that was the first 8 audit, yes. 9 MS. STOWERS: And at least on Exhibit 1, 10 page 2, it indicates sales and install playground 11 equipment -- which you're saying they do not install 12 equipment for the audit period that's at issue? 13 MR. KWEE: Correct. And also the billing 14 method has changed. 15 MS. STOWERS: Okay. 16 MR. RICKARD: May I make a comment? 17 MS. STOWERS: Yes, sir, please. 18 MR. RICKARD: Keep in mind, that by us 19 using this lump sum method that you find so 20 horrible, we actually made you more money, okay. 21 Just so we are clear on that. 22 Because we were able to take jobs away from 23 companies that are out of state, don't pay tax or 24 are not represented locally. So, we actually made 25 the BOE a lot more money using this method. 26 MS. STOWERS: More money to the California 27 State general fund? 28 MR. RICKARD: That's right, for the State 15 1 taxpayers. 2 MS. STOWERS: Okay. Thank you, sir. I 3 have no more questions. 4 MR. HORTON: Mr. Runner. 5 MR. RUNNER: Yeah. Just to clarify in 6 terms of the audit in, what was it, '94, again you 7 say it's not an audit, but I mean, I'm trying to 8 think, if I was a taxpayer and, you know, the BOE 9 came into my office and they said, "Hey, tell us 10 what your business is." 11 And we tell them and they look around and 12 say, "Okay." Spend a few hours looking around, I'd 13 think that everything's okay, 'cause that's what 14 they just told me. 15 So, you know, I -- again we may not call it 16 an audit, but I think the taxpayer feels like they 17 just were looked at and they passed. 18 So -- 19 MR. SMITH: The comments -- 20 MR. RUNNER: -- I'm sorry, go ahead. 21 MR. SMITH: -- if I may? 22 The comments also say in two place that the 23 installation was subcontracted. 24 If he were subcontracting the installation 25 here, we might -- you know, the -- 26 MR. RUNNER: That's my question, actually, 27 that was going to be my question back to the 28 business model discussion. 16 1 And that is, that was talking about 2 subcontracting. Didn't I hear that that's what 3 you're still doing? 4 MR. RICKARD: Well, I mean if a job comes 5 up and someone needs installation, we will get a 6 contractor to help that person out. 7 MR. RUNNER: Okay, thank you. 8 MR. RICKARD: Okay. We don't -- we haven't 9 had an installation crew since like '92. 10 MR. RUNNER: Well, I didn't ask about 11 installation crew, I talked about just what you 12 first described. 13 MR. RICKARD: Right, right. 14 MR. RUNNER: You do that today? 15 MR. RICKARD: Well, not any longer, 'cause 16 we're no longer a contractor. We -- 17 MR. RUNNER: Okay. You did that up to -- 18 MR. RICKARD: 2011. 19 MR. RUNNER: -- 2011? Through this audit 20 period -- 21 MR. RICKARD: Yeah. 22 MR. RUNNER: -- you did that? 23 MR. RICKARD: Right. We would -- in order 24 to relieve ourselves of liability -- 25 MR. RUNNER: You subcontracted out? 26 MR. RICKARD: -- we would -- we would 27 actually recommend a contractor to somebody. 28 MR. RUNNER: Right and you -- and you paid 17 1 for it? 2 MR. RICKARD: Yeah. 3 MR. RUNNER: And you paid for it? 4 MR. RICKARD: Correct. 5 MR. RUNNER: Okay. So, doesn't that 6 qualify? 7 MR. KWEE: Well, we had actually discussed 8 during the course of the audit with taxpayer and 9 they had confirmed on various occasions that they 10 actually did not and were not responsible for the 11 installation. 12 And in this letter dated May 29th, 2014 -- 13 I am sorry, it's not an exhibit -- but the -- the 14 taxpayer had actually stated that -- to the Appeals 15 conference holder after the Appeals conference that 16 we were able to determine only one instance of work 17 provided, which consisted of correcting the Treegate 18 situation, which is what we discussed earlier, where 19 there was an overcharge to correct the defect of 20 product and the -- the invoices that the Department 21 examined actually indicated that no installation was 22 performed. 23 Therefore, the Department does not believe 24 or have evidence that there was installation 25 performed during the course of the audit period at 26 issue. 27 MR. RICKARD: That's not true. 28 MR. RUNNER: Okay. Then let's talk about 18 1 the -- you would believe that your -- that your 2 operational process in using subcontractors, by 3 recommending somebody and then giving them money -- 4 MR. RICKARD: Right. 5 MR. RUNNER: -- in order to go do that 6 installation -- 7 MR. RICKARD: Right. 8 MR. RUNNER: -- was the same in 2000 -- 9 during this current audit or this audit we're 10 talking about now that's before us, and in 1994? 11 MR. RICKARD: Correct. 12 MR. RUNNER: And in the 1994 audit, didn't 13 it identify that as one of the ways that he did 14 business? 15 MR. KWEE: Yes. And if the Petitioner is 16 able to provide documentation showing that they did 17 actually perform installation labor -- 18 MR. RUNNER: Hold on, he's saying he didn't 19 perform installation labor. 20 MR. KWEE: -- oh, I'm sorry. 21 MR. SMITH: They have to be responsible for 22 the installation. 23 They don't have to perform the installation 24 themselves, but in order for it to be a construction 25 contract, they have to be responsible for the 26 installation. 27 And they can hire someone, a subcontractor, 28 to actually perform the installation. 19 1 But my understanding was -- 2 MR. RUNNER: Well, if he's paying for it? 3 MR. SMITH: -- well, I don't know that 4 we've seen that evidence. 5 MR. RICKARD: Well -- 6 MR. RUNNER: Is that right? We don't have 7 evidence of the fact -- how was -- how did -- 8 MR. RICKARD: Let's put it this way, in 9 1994 -- 10 MR. RUNNER: Right. 11 MR. RICKARD: -- there was no specification 12 describing what a contractor is or isn't. There was 13 no minimum job requirement to have performed, okay? 14 MR. RUNNER: Uh-huh. 15 MR. RICKARD: All he said was if you're a 16 contractor, boom, lump sum. 17 MR. RUNNER: Yeah. 18 MR. RICKARD: And we were a contractor. 19 MS. HARKEY: He didn't change his practice. 20 MR. RUNNER: And you didn't change your 21 practice at that point? 22 MR. RICKARD: No, we just kept -- we kept 23 on doing the lump sum business as directed that we 24 could until 2011, when they said, "Well, whoa, you 25 can't do that any more." 26 MR. RUNNER: Let's make it real clear. 27 You never collected any of the sales tax 28 that -- that right now the State says is due from 20 1 anybody? 2 MR. RICKARD: No. 3 MR. RUNNER: No? 4 So -- so, you never collected anybody's 5 sales tax and used it for anything? 6 MR. RICKARD: Whatever -- whatever we -- 7 MR. RUNNER: These are transactions to 8 which now you are being -- BOE is saying you need to 9 be taxed differently -- 10 MR. RICKARD: Right. 11 MR. RUNNER: -- than how it is that you 12 actually then collected the sales tax? 13 MR. RICKARD: Exactly. We collected it on 14 the net. 15 MR. RUNNER: Right. 16 MR. RICKARD: BOE now wants it on the 17 gross. 18 MR. RUNNER: And you would feel like your 19 1994 audit gave you -- well, again -- your review 20 and experience in talking with the BOE staff in 21 1994 -- 22 MR. RICKARD: Right. 23 MR. RUNNER: -- and what they said 24 identified the fact that you were, indeed, carrying 25 out the business correctly? 26 MR. RICKARD: Correct. 27 MR. RUNNER: So, you -- and you stopped 28 doing the current -- that practice when? 21 1 MR. RICKARD: In 2011 when we had the audit 2 and they said, "Whoa, whoa, there's a problem here." 3 And we said, "Okay, fine. We'll change." 4 MR. RUNNER: So, now in 2011, once they 5 identified this, then they -- then you said, "Okay, 6 we don't want -- we're going to do it differently 7 now." 8 MR. RICKARD: We're going to play your 9 game, we're -- 10 MR. RUNNER: "We're going to go ahead and 11 tax the whole amount." 12 MR. RICKARD: -- play your game, right. 13 MR. RUNNER: And that's what you're 14 currently doing? 15 MR. RICKARD: Yeah, as evidenced by the 16 2014 audit. We're spot on. 17 MR. RUNNER: Okay, thank you 18 MR. HORTON: If the Board was to allow time 19 for the taxpayer to support that he was, in fact, 20 during this audit -- that he has contracts where he 21 actually subcontracted out the installation and he 22 paid for it, not the consumer, and charged the 23 consumer a lump sum, including that subcontracted 24 price, would you exclude it? 25 MR. SMITH: Yes. 26 MR. HORTON: Do you have such evidence? 27 MR. RICKARD: I just have that one instance 28 that I mentioned where we had a crew go out and help 22 1 correct some of the defects and then we paid the 2 general contractor via a charge-back to finish the 3 job, which is the same thing. 4 MR. HORTON: To the Department -- 5 MR. RICKARD: And I think I've said that to 6 them already. 7 MR. HORTON: -- and they should -- to the 8 Department, the prior audit that's relative to the 9 6596 credit, what was the taxpayer selling, 10 installing, not selling, not installing, 11 subcontracting, retailing -- generally speaking? 12 MR. HANKS: Mr. Horton, if I could add, and 13 Mr. Kwee will probably have something else to add, 14 but I note on the verification comments they 15 identify that the taxpayer is a construction 16 contractor who sells pre-fabricated playground and 17 park equipment. 18 But also that the taxpayer has some 19 over-the-counter sales, sales for resale and sales 20 for installation. 21 So, it appears that the taxpayer was acting 22 in the capacity of both a retailer, as well as a 23 construction contractor on different types of 24 contracts. 25 I note that in the prior audit that we had 26 conducted we supplied the Petitioner with a copy of 27 the regulations. 28 And typically the auditor will talk to the 23 1 taxpayers as to their obligations if they're a 2 construction contractor versus a retailer. 3 In these examinations the taxpayer's 4 apparently differentiated between them acting as a 5 construction contractor and making sales as a 6 retailer and applying tax to those over-the-counter 7 retail sales. 8 So, there were minimal differences that 9 were identified in -- in the first audit. There was 10 some -- some difference, some clerical errors in 11 reporting. 12 But it appears as though the taxpayer was 13 acting in both those capacities in those prior time 14 periods. 15 MR. HORTON: Okay. 16 MR. HANKS: For the current time period, 17 they're strictly making retail sales, 18 over-the-counter sales, it appears. 19 MR. HORTON: So, your observation of the 20 current period is that there was no installation and 21 there was no subcontracting -- as it was in the 22 prior audit? 23 MR. SMITH: That's our understanding. 24 MR. HORTON: Question of the taxpayer. 25 Mr. Rickard, was that -- you believe that 26 to be the case as well? 27 MR. RICKARD: I'm not sure how -- what -- 28 what they're talking about, but -- 24 1 MR. HORTON: They're saying that -- 2 MR. RICKARD: -- we did -- you know, any 3 sale that -- that was not a lump sum sale, any 4 time -- the auditor told us any time you quote 5 somebody a sales tax number, then you have to pay 6 that sales tax, which is what we did. 7 And those were itemized invoices that 8 showed the sales tax. You know, cities are famous 9 for that. They wanted to see the itemized sales 10 tax. 11 So, on our quotes we itemized the sales 12 tax. We paid the sales tax that was itemized. 13 And if you want call that retail, I don't 14 know. We don't have a store. We're not a brick and 15 mortar operation. 16 MR. HORTON: And the auditing question, who 17 were some of your customers? 18 MR. RICKARD: Gosh, a lot of developers, a 19 lot of contractors. 20 I mean like Irvine Company, D. R. Horton, 21 you've got City of LA, you've got County of LA, 22 you've got State of California. 23 MR. HORTON: And for those customers who 24 actually did the installation? 25 MR. RICKARD: They usually had their own 26 crews. We would just sell them the product. 27 MR. HORTON: Okay, thank you. 28 Further discussion, Members? 25 1 MR. RUNNER: Just -- and again just to 2 clarify. 3 MR. HORTON: Mr. Runner. 4 MR. RUNNER: That is the same op -- and in 5 the 1992 audit -- 6 MR. RICKARD: Uh-huh. 7 MR. RUNNER: -- you did -- you did 8 subcontracting? 9 MR. RICKARD: Yes. 10 MR. RUNNER: And you -- and you also then 11 sold? 12 MR. RICKARD: Right. We also did itemized 13 billings. 14 MR. RUNNER: Itemized billing? 15 MR. RICKARD: Yeah. 16 MR. RUNNER: So, again, it was the same 17 operation? 18 MR. RICKARD: Same thing we've been doing, 19 you know, for 17 years between audits, so -- 20 MR. RUNNER: Let me ask you about the 21 over-the-counter retail that came up. 22 MR. RICKARD: Well, it's not 23 over-the-counter, we don't have a counter. 24 MR. RUNNER: Well, besides -- 25 MR. RICKARD: But, I mean -- 26 MR. RUNNER: -- take away the figurative 27 counter. 28 MR. RICKARD: -- in other words, if you 26 1 call us up tomorrow and say, "Hi, I want to buy a 2 bench," no problem, we'll sell you a bench. 3 MR. RUNNER: Okay. 4 MR. RICKARD: And it'll ship from 5 Pennsylvania to your house. 6 MR. RUNNER: And that was the same in 7 199 -- 8 MR. RICKARD: '94. 9 MR. RUNNER: -- 4 as it is in 1998 -- or, 10 excuse me, 2008? 11 MR. RICKARD: Correct. 12 MR. RUNNER: Okay, thank you. 13 MS. HARKEY: Okay. I -- 14 MR. HORTON: Ms. Harkey. 15 MS. HARKEY: -- have one question, I'm 16 sorry. 17 For the Department, we go back to '92 for a 18 full audit. And then in '94 we come in and we kind 19 of give the blessing on the company. 20 So, the same process, the same procedure is 21 assumed for -- the taxpayer could rightfully assume 22 he's doing things right if we give him a clean bill 23 of health. 24 So, we didn't say anything in 1994 about 25 the way he did business. And your contention is 26 that he's not still doing business that way, but his 27 contention is that he is. And his only verification 28 is that he actually had to issue a credit. 27 1 Did you take that credit or anything into 2 consideration? 3 MR. SMITH: The key language in the '94 4 report, from my perspective, it says that the 5 installation was subcontracted. That means there 6 was installation being performed. 7 If he were responsible for doing 8 installation in this audit, we would -- we wouldn't 9 be here. 10 As for the credit, our understanding is 11 that was to repair defective merchandise. It didn't 12 relate to the installation. 13 So, he's -- the construction contractor 14 rules only apply if the person selling the property 15 is responsible for the installation. 16 And he said a moment ago that in most cases 17 he sells to people that have their own installation 18 crew. 19 MS. HARKEY: In large. But in '94 he was 20 doing the same thing, so, that's what I'm saying to 21 you. 22 And this is what he's applying for is 23 relief because of the '94 and the previous audit. 24 And if he was conducting business the same 25 way -- and it's a small company and he's, you know, 26 running, obviously, seems like out of his house -- I 27 don't -- I'm trying to figure out what changed. 28 I know that the economy tanked, different 28 1 things happened. Maybe his company shrank in size, 2 but his method of operation, seems to me, to have 3 been the same, only maybe not doing as much of it or 4 maybe doing very little of it. 5 And he -- and when he found out -- 6 MR. SMITH: All we have now are the written 7 comments to go by. And the written comments 8 indicate that he was -- had subcontractors. 9 And I don't believe that to be the case -- 10 MS. HARKEY: Well, when he -- 11 MR. SMITH: -- in the recent audit period. 12 MS. HARKEY: -- well, when he found out 13 that -- per this audit -- that things were 14 incorrect, he's immediately now switched out to 15 follow the rules. 16 And he's been -- he's under the assumption 17 that he's followed the rules through his 46 years of 18 business. 19 Thank you. 20 MR. HORTON: Further discussion, Members? 21 Hearing none, is there a motion? 22 MS. STOWERS: Take it under submission, 23 please. 24 MR. HORTON: Ms. Stowers moves to take the 25 matter under submission. 26 Second by Member Runner. 27 Without objection, Members, such will be 28 the order. 29 1 Thank you very much for appearing before us 2 today. The Board will take your matter under 3 consideration. 4 And 1521 is -- and all of the regulations 5 that are associated with that are very, very 6 complicated. 7 I want to make sure that the Department 8 meets with the taxpayer and provides whatever 9 assistance necessary to assure that he's aware of 10 what you are expecting. 11 Thank you, sir. 12 MS. HARKEY: It's changed, obviously. 13 MR. HORTON: Yeah. Well, there's a couple 14 things they might want to tell him about. 15 Okay. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 30 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 26, 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 30 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: MARCH 18, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 31