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 SPECIAL TAXES APPEAL HEARING 12 ADIL ALFONSE KHILLA 13 NO. 391101 (STF) 14 15 16 17 18 19 20 21 22 23 24 25 Reported by: Kathleen Skidgel 26 CSR No. 9039 27 28 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 T. 11 Yee, State Controller (per Government Code 12 Section 7.9) 13 Joann Richmond 14 Chief Board Proceedings 15 Division 16 For Staff: Jeff Angeja 17 Tax Counsel IV 18 For the Department: Pamela Mash 19 Tax Counsel 20 Phil Bishop Business Taxes 21 Specialist III 22 Stephen Smith Tax Counsel IV 23 For Petitioner: Adil A. Khilla 24 Taxpayer 25 26 ---oOo--- 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 26, 2015 4 ---oOo--- 5 MR. HORTON: Members, let us reconvene the 6 meeting of the Board of Equalization. 7 Ms. Richmond, what is our next matter? 8 MS. RICHMOND: Our next matter is item D, 9 Special Taxes Appeals Hearings; item D1 Adil Alfonse 10 Khilla. 11 Please come forward. 12 MR. HORTON: As the taxpayer comes forward 13 and settles in, Mr. Angeja, would you please 14 introduce the issues in this case. 15 MR. ANGEJA: Good afternoon, Mr. Chairman 16 and Members. The appeal before you presents one 17 unresolved issue, which is whether petitioner 18 distributed untaxed tobacco products purchased from 19 unlicensed out-of-state vendors. 20 MR. HORTON: Thank you. 21 Welcome to the Board of Equalization. You 22 have ten minutes to make your presentation. We 23 would ask that you commence with your introduction, 24 and then we will return and allow you five minutes 25 on rebuttal after the Department has made their 26 presentation. 27 At your convenience, sir. 28 MR. KHILLA: Thank you, Mr. Chairman. I 3 1 wanted to present evidence that I gave photos of, 2 that I had a burglary prior to closing my shop 3 that -- 4 MR. HORTON: I can see that the Department 5 has these, okay. 6 MS. MASH: Yes. 7 MR. KHILLA: Those are, unfortunately, the 8 most, you know, recent photos -- most recent photos 9 I could get. Most of my records were not available. 10 Certain records have been destroyed, but at least I 11 have some photo evidence, including the police 12 report. 13 Unfortunately, there was amendment to the 14 police report that never made it; I have one page 15 that I found. But when an event like this happens, 16 it's anarchy, you know. I did the best I could at 17 the time to report. And they clearly took all the 18 inventory in my store and completely destroyed it. 19 I mean, they came in -- I don't know why it 20 was so malicious -- but they moved things around. I 21 had lounge chairs, they went in the back, pulled 22 things out, pulled stereos out. 23 And, unfortunately, that scene was there 24 until actually a neighbor notified me, not the 25 police, not the alarm company, which I didn't have 26 at that time. But at 11:00 o'clock I walk into the 27 scene, as you can see, with the big hole cut in the 28 window, certain items strewn on the street. 4 1 And then the perpetrator cut himself on the 2 window, leaving forensic evidence. So a time after 3 I shut the shop down, they actually apprehended him 4 because he committed another crime and he matched 5 the forensic evidence. Unfortunately, I recovered 6 nothing of the inventory or stock or any 7 compensation from him, saying that he didn't have 8 any assets by the District Attorney. 9 Also, unfortunately, with my insurance 10 policy -- I had Crusader Insurance or Crusade 11 Insurance for 10 years, never having any claims 12 against the insurance company. I was going through 13 an issue with my father at the time who was elderly 14 and was ill, was dying, and I missed a payment or 15 they hadn't received it. 16 The insurance company was very close to my 17 home. I walked it into them, and this was before 18 the burglary. They indicated that they were 19 reinstating the policy; there was not going to be an 20 issue. 21 I reported the robbery or the burglary a 22 few days afterwards and then they chose not to 23 recognize the policy and defaulted on it. 24 So as far as compensation, I got zero 25 compensation from insurance or anything else. As a 26 matter of fact, I had to repair the shop out of my 27 own money so I could return it back to the 28 landlord. 5 1 All the inventory that was in the shop was 2 taken as far as cigars and tobacco. We specialized 3 in cigars mainly. We didn't really have a lot of 4 cigarette inventory, and a lot of apparel. None of 5 that was recovered. 6 If I can continue. The issue with the tax 7 as well is that I wanted to ask the Board if they 8 had a definition of what retail stock was? 9 MR. HORTON: Excuse me. My apologies. But 10 during the process, the Board will seek to provide 11 that. 12 MR. KHILLA: I got it, okay. 13 MR. HORTON: This is your time for your 14 testimony. 15 MR. KHILLA: So in -- in that 16 interpretation, what I realized from viewing the 17 photos is that the retail stock is what's being 18 presented for sale and accessible to the customer. 19 The majority of what you see is shelf stock; it's 20 overstock that was not accessible to the customer 21 for sale. 22 And most all the cigars I had in the shop 23 were top shelf brands. I had to purchase out of 24 state because those were not available from the 25 in-state suppliers. You couldn't compete with what 26 you could get available in the State of California. 27 I'm also seeking relief of penalty and 28 interest because of the prolonged time it took. 6 1 After the burglary, I went through an episode of 2 congestive heart failure. I was dealing with my 3 father. And I did make attempts to contact the 4 Department in 2/'07. 5 There was periods of time between 2/'07, 6 2/'09 that I got ahold of representatives, but I 7 don't have the name. And they cited that they had 8 big case loads. I wanted to know what to do. I 9 wanted to know how to proceed because this was the 10 first time I've ever had an issue like this. And I 11 never got any correspondence back from them, 12 anything timely. So there was gaps between 2/'07 13 2/'09 and 2/'09 and 2/'12. That's where I'm seeking 14 the relief in penalty and interest for as well. 15 MR. HORTON: Thank you. 16 Members, we'll now go to the Department. 17 Department has ten minutes to make their 18 presentation. We would ask that they commence with 19 their introduction for the record. 20 MS. MASH: Thank you, Mr. Chairman, Members 21 of the Board. I'm Pamela Mash with the Board's 22 Legal Department, along with Phil Bishop and Steve 23 Smith representing staff. 24 Petitioner is liable for the excise tax on 25 the distribution of untaxed tobacco products 26 purchased from out-of-state sellers. 27 The tax law imposes a tax on the 28 distribution of tobacco products purchased from 7 1 out-of-state sellers not licensed in California. 2 Distribution includes the sale of untaxed tobacco 3 products in this state, the use or consumption of 4 untaxed tobacco products in this state and the 5 placing in this state of untaxed tobacco products in 6 retail stock for purpose of selling the products to 7 customers. 8 All tobacco products transported to 9 California and no longer in the distributor's 10 possession are presumed to have been distributed. 11 There's no dispute that during the audit 12 period petitioner purchased over $51,000 of untaxed 13 tobacco products and reported only about $2,000 to 14 the Board. 15 Until today, there's been no dispute that 16 the cigars were placed in retail stock and were 17 available for sale to petitioner's customers. 18 Petitioner states that he didn't report the 19 remaining $49,000 because his entire cigar inventory 20 was stolen from his store. The petitioner also 21 states that none of the cigars that were stolen from 22 his store were in his retail stock. 23 All inventory located at the taxpayer's 24 retail place of business is considered retail stock. 25 This includes product displayed for sale 26 underneath -- sale -- sales counters, the back 27 rooms, offices, or anywhere on the premises of the 28 retail location. 8 1 In this case, by petitioner's own 2 statements made during the appeals conference, his 3 entire inventory of cigars was available for sale 4 and displayed in the retail location and was 5 accessible to the public prior to the burglary. 6 And the pictures provided by petitioner 7 show rows and rows of shelves displaying the cigars 8 in open and individual boxes displayed in his retail 9 store. 10 Also, in one of petitioner's exhibits that 11 he provided today, there's a picture of the front of 12 the store; it's one of the color pictures. There's 13 a picture of the front of the store, and on the 14 window it says "walk-in humidor." I believe the 15 walk-in humidor is what is the picture -- it's a 16 black-and-white picture that has two sets of photos 17 on it. And that's where all the cigars were 18 displayed for sale. We would consider that retail 19 stock. 20 The police report lists the burglarized 21 address as the address we have on file for 22 petitioner's retail location, and that's the 23 location where he had licenses and from which he 24 made sales. 25 So it's our position that whether or not 26 the cigars were stolen, they were first placed in 27 petitioner's retail stock. And the law is very 28 clear in this area. Petitioner distributed the 9 1 cigars at the time he placed them in his retail 2 stock. So the tax for the distribution was at that 3 time and not at the time petitioner actually sold 4 the cigars. 5 Also, while petitioner had an inventory of 6 about $50,000 in his store -- prior to the burglary, 7 after the burglary, and for the duration of the 8 audit period for which he held a license -- 9 petitioner only reported about $44 to $116 each 10 month. So even if we were to accept petitioner's 11 argument that none of this product was part of his 12 retail stock, there's still no explanation for 13 petitioner reporting an average -- on average, less 14 than $100 per month when he had thousands of dollars 15 worth of inventory in his store and he continued to 16 make weekly purchases. 17 Even in the nine months following the 18 burglary, petitioner purchased about $18,000 of 19 cigars and he reported less than $100 on average 20 each month. So that means that month after month he 21 was purchasing, on average, about $2,000 each month 22 and reporting only about $100. That's only five 23 percent of what he actually should have been 24 reporting to the Board. 25 In fact, both before and after the theft 26 and in the years prior to the audit period, 27 somewhere -- petitioner consistently reported only 28 about five percent of his purchase -- purchases, 10 1 usually somewhere between 4.1 percent and 4.9 2 percent. And this pattern of purchasing and 3 underreporting was the exact same before and after 4 the burglary. The burglary did not have any affect 5 on how petitioner was purchasing and reporting to 6 the Board. 7 So neither the theft of the tobacco 8 products nor the argument about whether they were in 9 retail stock at the time they were stolen relieve 10 petitioner of his tax liabilities today. 11 For these reasons we concur with the 12 Appeals Division's recommendations. 13 Thank you. 14 MR. HORTON: On -- on rebuttal, please. 15 MR. KHILLA: I just wanted to say that the 16 cigars were being stored there because of the 17 humidification. I didn't -- you can't store them 18 out of the humidor because then they would be 19 ruined. 20 I was part of reorder programs from these 21 large companies that obligated you, month after 22 month, to take product or you could not have the 23 choice product to sell. So it continued because I 24 was obligated to them, you know, from signing up 25 with them or I would lose them as vendors. And 26 without that, you could not compete and sell product 27 in the state. 28 Also, the prior years we had been taxed. 11 1 The OTP had gone up from, you know, 28 percent to 2 over 48 or 50 percent. And that made the sales 3 incredibly soft, augmented with Prop 10, Prop 99, 4 auditing ourselves, paying more taxation on our 5 product we had sitting because we couldn't sell it 6 because of the amount of taxation that was due on 7 OTP, because of all the unlicensed vendors that were 8 out there competing with us. 9 I registered. I licensed. I tried to do 10 the right thing selling the product. There was no 11 governing the amount of people that were going out 12 there trying to sell product, black market, 13 illicitly, and putting you out of business 14 basically. It led to very soft sales. 15 MR. HORTON: Thank you very much. 16 Discussion, Members? 17 MS. HARKEY: I'll start. 18 MR. HORTON: Member Harkey. 19 MS. HARKEY: Okay. Why -- this is for the 20 taxpayer. Explain again why everything you had was 21 in the store or humidor, which is the store, right? 22 MR. KHILLA: Correct. 23 It was there placed because it was the only 24 place that had humidification. If you don't keep 25 cigars in a humidified environment, they will be 26 ruined. I couldn't store them in the back room. I 27 couldn't store them in a place that didn't have 28 humidification. I was forced to store them in a 12 1 place where they would be taken care of until I 2 could actually open them up and sell them. 3 MS. HARKEY: So I see in this picture -- 4 pardon me -- that there are boxes and things on 5 display, open on shelves. Where do you consider 6 that it was your storage, so to speak, and not -- 7 not inven- -- not -- not for sale inventory. 8 MR. KHILLA: My storage would be above 9 where the open shelves are where access to the 10 customer was available, where he could grab a cigar 11 off the shelf, off of -- out of a box, and bring to 12 the register and buy it. 13 There were actually signs that said 14 clearly: "Do not touch the boxes. They are not to 15 be opened. They are not for sale." It was a way -- 16 the only way we could store the product. So what 17 was available, what was -- is the open boxes on the 18 shelf. And the overstock was everything above, to 19 the sides and below, below the open boxes. 20 MS. HARKEY: Thank you. 21 What -- what did you do with the cigars -- 22 I don't know if this is applicable or not -- but the 23 cigars that came after all of this happened? Did 24 you open up another store? 25 MR. KHILLA: No, I did not. No, I did not. 26 I basically -- they kept arriving. I stored them at 27 home, and I still have some of them. 28 I did not -- I was not in -- in the market 13 1 to sell anymore after having my business ruined, 2 everything taken, my check ledgers taken. You know, 3 there was no real place to vend, but the contract 4 continued to go. 5 MS. HARKEY: Okay. How -- how many -- how 6 much of your inventory would you say was stored up 7 above in sealed boxes? 8 MR. KHILLA: I would say at least 70 9 percent of inventory was stored up above. Because 10 I -- they're all top shelf brands that I could 11 account for just by names. And they're an 12 accounting of the boxes and the brands that I can 13 see and identify from the one photo. 14 MS. HARKEY: Okay. You filed a police 15 report that shows a $32,000 loss. 16 MR. KHILLA: Right. 17 MS. HARKEY: What happened to the other 18 amounts? 19 MR. KHILLA: It was an inaccurate report 20 because -- I don't know if anyone's gone through 21 anything like that, but I did not have a bar code 22 system. I didn't have a way to identify individual 23 cigars. There were open boxes. 24 So once that was taken, you know, I did not 25 do an accurate accounting. I did what I could out 26 of memory. I was by myself, tending to the whole 27 matter. 28 So to be able to recall what you accrued 14 1 from an X amount of time in the humidor and, you 2 know, what exactly you had from memory -- because 3 they wiped everything out. They took all the boxes. 4 They took the open stock. You know, there were 5 remnants of cigars on the street, you know, on the 6 sidewalk. But, unfortunately, it was very difficult 7 for me to be able to quickly make an assessment and 8 be that accurate with it. 9 MS. HARKEY: Thank you. 10 You already answered; I had a question 11 about any insurance proceeds. 12 Were any -- was anything not stolen, I 13 guess is a good question? 14 MR. KHILLA: Not in the -- none of the 15 apparel or the cigar. They even took collectibles 16 because we had like an antique motif in the store. 17 So they went and took toys that were on the shelf 18 and what have you, you know. I mean lighters, 19 Colibri lighters of thousands of dollars. 20 I -- I -- only one person was apprehended. 21 I tend to believe it was several people at one time 22 because there were trash bag after trash bag that 23 were taken out that hole. And, like I said, they 24 couldn't probably get it all in their cars at one 25 point because I found remnants on the sidewalk, on 26 Topanga, on the parking lot across the street. 27 So they evidently had planned this out and 28 had the time to do as much damage as they wanted. 15 1 That was evident to me when, by 11:00 o'clock that 2 morning, no one else, you know, had even called the 3 police or made any mention to it. Just when a 4 neighboring business opened up, that's when I found 5 out. That's when I came and saw the horror. 6 MS. HARKEY: How long were you in business? 7 MR. KHILLA: From '95 to '05, about 10 8 years. 9 MS. HARKEY: Had you ever been audited 10 before? 11 MR. KHILLA: I don't believe so, no. 12 MS. HARKEY: Okay. This is for the 13 Department. 14 MS. MASH: Sure. 15 MS. HARKEY: Hi. 16 MS. MASH: Hi. 17 MS. HARKEY: This case has taken almost 10 18 years. Why? What -- what's -- what's gone on in 19 this time? 20 MS. MASH: A lot has gone on. I think the 21 time periods that the petitioner was alluding to 22 between February 2007 and March 2009 when the 23 auditor was trying to prepare this case, that's 24 about 25 months. And I think part of the delay can 25 be attributed to the fact that it was, based on the 26 information I have, very difficult to get in contact 27 with the petitioner. And we have letters that were 28 sent out and no response. We asked for police 16 1 reports. No response. And I think the auditor was 2 trying to get something from the petitioner before 3 moving it forward. 4 I do agree that 25 months is an awfully 5 long time. I think in -- all cases are different. 6 In this case, with the facts we have, I think nine 7 months to about 12 months is an appropriate time to 8 try to investigate and contact the petitioner. 9 The additional, I guess, 13 months that's 10 left, it might be appropriate to relieve some of 11 that interest. But it would probably take about a 12 year to prep that case to go forward. 13 The second set of dates that the petitioner 14 stated was, I think, 2000 -- March 2012 to June 15 2014, and that's when this case was in settlement. 16 And so I'm not privy to settlement information. 17 It's confidential. And if I was, I couldn't discuss 18 it at this hearing anyway. So I can't address that. 19 So that, I'll have to leave to you to 20 decide. 21 MS. HARKEY: This is for -- for your 22 explanation as well. 23 MS. MASH: Sure. 24 MS. HARKEY: Inventory is considered 25 inventory -- when is this? I'm -- this is my second 26 Board hearing. 27 MS. MASH: Do you mean retail stock 28 inventory or -- 17 1 MS. HARKEY: Right. 2 MS. MASH: Sure. So retail stock is 3 anything that's on the premises of a retail location 4 that's -- basically a customer could potentially 5 purchase. And a retail location is anywhere from 6 which you sell cigarettes or tobacco products at 7 retail. 8 So in this case -- I mean, as you can see 9 from the picture, these are shelves with open boxes 10 with displays. They're -- they're ready to be sold. 11 Anyone could walk in and grab one. Even the shelves 12 up at the top, you could point at and someone could 13 pick it up and buy it for you potentially. 14 And as I stated earlier, there's a picture 15 that shows walk-in humidor in the front of the sign. 16 So if I'm walking down the street, I see the store 17 and it says "walk-in humidor," I'm going to assume I 18 can walk into that humidor and buy whatever's in 19 that humidor. So, to me, that's the definition of 20 retail stock. 21 MS. HARKEY: Okay. I think -- I think this 22 is -- a lot of this -- a lot of the case will be 23 based on that. 24 What -- where -- if you -- if you had this 25 ship -- 26 I mean, like, let's say we go into a 27 Costco. 28 MS. MASH: Mm-hmm. 18 1 MS. HARKEY: And we see all of the stuff in 2 the pallets way up above. 3 MS. MASH: Mm-hmm. 4 MS. HARKEY: That's not for ours. Is that 5 considered still retail stock? 6 MS. MASH: Absolutely, yes. Because if you 7 can't reach it, you could ask someone to come get it 8 for you, something like that. 9 What we would consider not retail stock 10 would be if there was product that's saved at a 11 storage facility offsite; if there's product at the 12 petitioner's residence, if he doesn't have a license 13 to be selling from his residence. There are 14 distributors who have a license to sell from their 15 residence. 16 In this case, I don't think that was the 17 case. So if there was anything in a storage 18 facility, in a warehouse somewhere, somewhere 19 offsite, that would be considered not retail stock. 20 That would be overstock inventory, something like 21 that. And that wouldn't be, you know, considered 22 taxable at the moment that it was placed in a 23 warehouse or storage facility. As long as they 24 weren't making sales from those facilities. 25 MS. HARKEY: Okay. Is there anything 26 pertinent to this industry -- this product, I should 27 say, that would require it to be stored in a certain 28 place? 19 1 MS. MASH: I mean cigars should be stored 2 in humidors to be kept fresh if people want to sell 3 them. Almost all retailers who sell cigars have 4 humidors, unless they have stale, bad product, which 5 that also happens. 6 MS. HARKEY: Okay. And would you consider 7 any of this storage overstock or -- 8 MS. MASH: No. 9 MR. HORTON: Mr. Runner. 10 MR. RUNNER: Yeah, couple quick questions. 11 The, what seems to be, very small sales, how do you 12 explain those very small sales? 13 MR. KHILLA: Because of the weak market, 14 the economy and the escalation of the OTP. 15 You know, after -- after Prop 10 and 99 had 16 passed, you know, there are -- once I got into the 17 business, I -- you know, like I said, I pulled a 18 license. I didn't realize there was going to be -- 19 for one there was, you know, a demand for cigars. 20 So you have privateers, black market -- 21 MR. RUNNER: Right. 22 MR. KHILLA: -- jumping into it left and 23 right. So even -- 24 MR. RUNNER: So -- but -- but prior to 25 when -- I mean you must have -- you clearly could 26 not have had a business with those kind of sales 27 going on for very long. So were those kind of sales 28 like in the -- over what kind of period of time? I 20 1 mean what happened? 2 MR. KHILLA: It reduced closer to the time 3 that the burglary happened and shutting down. 4 You know, in -- in '95 -- from '95 there 5 was an absolute shortage of cigars. From '95 to 6 2000, prior to Prop 10 passing, and 99, we did have 7 better years. But subsequently, after that, you 8 know, there was a lot of competition that was coming 9 in out-of-state, unlicensed, untaxed, and Internet 10 sales, you know. Even customers would come in and 11 try to sell me cigars. 12 So everybody was jumping on the bandwagon, 13 trying to make a buck. 14 MR. RUNNER: Okay. Let me ask the -- the 15 definition again, let's talk a little bit more about 16 the definition of available for retail stock. 17 MS. MASH: Sure. 18 MR. RUNNER: Well, let me ask this. Let me 19 ask this -- the taxpayer this question first. Those 20 open boxes that I see in this picture -- 21 MR. KHILLA: Yes. 22 MR. RUNNER: -- are those products the same 23 products that are in the unopened boxes up above? 24 MR. KHILLA: They could be. Some are, some 25 are not. Some are duplicates, some are not. 26 MR. RUNNER: So somebody could walk in that 27 store and not find something in those open boxes 28 because it's a box up there? 21 1 MR. KHILLA: Potentially. But that is 2 the -- the minority of the stock. It wouldn't be 3 like -- because everything that I have shelved, I 4 had doubles and triples of because of the repurchase 5 program -- 6 MR. RUNNER: Right. 7 MR. KHILLA: -- the reorder program. So, 8 yeah, an occasional one or two box of a -- of a 9 boutique cigar? Sure. 10 MR. RUNNER: That would be what? 11 MR. KHILLA: That would be a cigar that a 12 customer maybe would come in and say, okay, perhaps 13 that one box. But that would be the exception to 14 the rule. 15 We had absolute control in exercising not 16 selling those boxes. 17 MR. RUNNER: Are those box -- are there 18 box -- again, I got an old picture that's hard to 19 read. 20 Are those all open boxes that are on those 21 shelves? 22 MR. KHILLA: On the shelves, yes. Above 23 the shelves -- 24 MR. RUNNER: So if I wanted to buy a box of 25 cigars, I would have to get it from above? 26 MR. KHILLA: You'd have to ask the owner, 27 which was myself, or the person running the store, 28 prior to doing that. And it would be up to my 22 1 determination if I wanted to sell it or not. 2 MR. RUNNER: Right. But I'd assume -- I'd 3 assume you'd want to sell. 4 MR. KHILLA: Sometimes people make you 5 offers that are not fair offers. They want to -- 6 they want to give you cash. 7 MR. RUNNER: I'm assuming that you'd sell. 8 I'm assuming that it's a fair offer. 9 MR. KHILLA: Sure. 10 MR. RUNNER: Okay. So all the boxes -- all 11 the displays in the cases seem to be open. 12 MR. KHILLA: On the display, yes. 13 MR. RUNNER: So those are single cigar 14 sales? 15 MR. KHILLA: Yes. 16 MR. RUNNER: If I wanted to buy a box of 17 cigars, I have to go above and get 'em. 18 MR. KHILLA: You'd have to request it, 19 yes. 20 MR. RUNNER: Okay, thank you. 21 MR. HORTON: Further discussion, Members? 22 Just to get it on the record, untaxed 23 tobacco product, Section 30009 and 8, as it relates 24 to consumption, can you give us some indication as 25 to whether or not -- how consumption is deemed under 26 the law? 27 MS. MASH: Sure. So Section 3008 -- 30008 28 of the Rev. and Tax Code is the section that I was 23 1 citing to you earlier, which is -- defines 2 distribution, right. And there's three ways to 3 define distribution: One is the sale of untaxed 4 tobacco products; one is the use or consumption of 5 untaxed tobacco products; one is placing them in 6 retail stock. 7 Section 3009 (verbatim) defines use or 8 consumption. That includes the exercise of any 9 right or power over cigarettes or tobacco products 10 incident to the ownership thereof, other than the 11 sale of cigarettes or tobacco products or keeping or 12 retention thereof by licensed distributor for the 13 purpose of sale. 14 So in this case really that the retail 15 stock definition or the section of Section 30008 is 16 the one that's the most applicable. 17 MR. HORTON: Thank you very much. 18 MS. MASH: Sure. 19 MR. HORTON: Member Harkey. 20 MS. HARKEY: I have one more question that 21 it has to do with distribution. 22 MS. MASH: Sure. 23 MS. HARKEY: Is it -- it seems to be the 24 presumption -- and I don't know what the law is -- 25 but it seems to be a presumption that all -- all the 26 tobacco products, when they are acquired by a 27 distributor, even if they're no longer in the 28 distributor's possession, are still seen as having 24 1 been distributed? 2 MS. MASH: Right. If they're no longer in 3 the distributor's possession, that means they've 4 been -- the presumption is they have been 5 distributed, so -- 6 MS. HARKEY: Well, they were distributed 7 and they sound like they were distributed pretty 8 widely. 9 MS. MASH: Well, I mean, in this case they 10 were distributed the moment that they were placed 11 in -- on these shelves by this petitioner. That's 12 when they were distributed. 13 So it's a little -- I mean the definition 14 of -- so distribution isn't necessarily selling it 15 or handing it out or doing something other than 16 literally putting it in retail stock. That's 17 considered a distribution as well. 18 MS. HARKEY: Well, they -- they were 19 distributed; we have no doubt about that. The 20 business is closed. This is first audit. 21 MS. MASH: Now, right. Absolutely. 22 MS. HARKEY: Gone. 23 MR. HORTON: Haven't been able to 24 get (inaudible). 25 MS. HARKEY: I'd just -- I'd like a 26 clarification on that, for Appeals, some legal. I 27 need to know what constitutes "distribution." I've 28 heard from the auditor. I need to -- 25 1 MR. ANGEJA: She -- the Department has 2 explained it correctly. Distribution is a broad 3 definition that includes placing it into sale or 4 into retail stock by a retailer. 5 Also includes any use by that distributor 6 for purposes other than sale. So if they were to 7 use it themselves, give it away, store it incident 8 for -- sorry -- store it for purposes other than for 9 sale. 10 MR. HORTON: It might be helpful if you add 11 that small word "for" distribution. I'm not -- it 12 doesn't change what you just said, but it sounds -- 13 from a layman's perspective, it makes a little 14 better sense to say it's available for distribution. 15 It doesn't necessarily have to be distributed. 16 MR. ANGEJA: Or even -- right. 17 MS. HARKEY: I -- I need -- I have one 18 more -- 19 MR. HORTON: I'm okay if you disagree. 20 MS. HARKEY: -- off of that. 21 What -- how much of that is statute and how 22 much of that is regulation? 23 MR. ANGEJA: All of it is statute. It 24 starts with Section 30008. The distribution, the 25 presumption, the statute that you were referring to 26 is 30109. And the exercise of ownership for any 27 purpose other than for resale is 300 -- 30009. 28 MS. HARKEY: Can you define then one more 26 1 definition, because these are two, I think, 2 important points. What -- what -- how do you define 3 or how is "retail stock" defined? 4 MR. ANGEJA: There's not a statutory or 5 regulatory definition for it. It's been the 6 Department's longstanding interpretation that -- I 7 forget. I can't quote you exactly, but -- 8 MS. MASH: I can tell you. It's -- we have 9 an annotation that defines retail stock as anything 10 that's on the premises of the retail location. And 11 it specifically states: "Any product that's 12 displayed for sale, underneath sale counters, in 13 back rooms, offices, anywhere on the premises of the 14 retail location." 15 And it's -- it's not a regulation or a 16 statute, but it's an annotation. 17 MS. HARKEY: It's an annotation. 18 MS. MASH: Correct. 19 MS. HARKEY: Okay. 20 MR. HORTON: Member Runner. 21 MR. RUNNER: For -- for all of us, and 22 especially since some -- can you help us understand 23 how something becomes an annotation and -- and -- 24 and the -- what would you call it? The strength of 25 that versus -- annotation versus regulation versus 26 statute? 27 MR. HORTON: Mr. Angeja. 28 MS. MASH: Right. So -- 27 1 MR. RUNNER: I don't care who -- who -- 2 MR. HORTON: Mr. Angeja. 3 MR. RUNNER: Let's see, how about -- how 4 about -- yeah, I'll go to Appeal on that. 5 MS. MASH: Sure. 6 MR. ANGEJA: So I was actually looking up 7 the annotation number -- 8 MR. RUNNER: Give you a break. 9 MR. ANGEJA: -- which I haven't had a 10 chance to get. 11 In this case that's memorandum from the 12 Department to the District that the Department then 13 chooses to annotate which is not legally binding. 14 It's not equivalent to a statute or regulation. 15 It's published in our business taxes law guides. 16 MR. RUNNER: Right. 17 MR. ANGEJA: They're intended to provide 18 guidance to practitioners. And in theory -- not in 19 theory. They apply law to a specific set of facts 20 that, in theory, if we've got the same facts, we 21 would reach the same result and apply those -- 22 MR. RUNNER: And what's -- 23 MR. ANGEJA: -- principles. 24 MR. RUNNER: -- the Board's relationship to 25 setting an annotation? 26 MR. ANGEJA: Say that again? I'm sorry. 27 MR. RUNNER: What the Board's relationship 28 to an annotation? 28 1 MR. ANGEJA: I think what you're asking is, 2 Does the Board itself publish or approve those? 3 It's not equivalent to a regulation. That is 4 published by the Department. 5 MR. RUNNER: That's what I'm asking. 6 MR. ANGEJA: So, I believe -- 7 MR. RUNNER: So in theory, if the Board 8 chose something different, that would become -- 9 MR. ANGEJA: That's correct. 10 MR. RUNNER: -- that -- that would become 11 the new -- 12 MR. ANGEJA: That's correct. 13 MR. RUNNER: -- understanding of what 14 placed in retail sale would be. 15 MR. ANGEJA: That's correct. 16 MR. RUNNER: Okay, thank you. 17 MS. STOWERS: Chairman. 18 MR. HORTON: Yes. Member Stowers. 19 MS. STOWERS: How long has this annotation 20 been in place? 21 MS. MASH: Since 1997. 22 MS. STOWERS: And, to your knowledge, have 23 we been following this annotation? 24 MS. MASH: Yes. 25 MS. STOWERS: Thank you. 26 MR. HORTON: Member Harkey. 27 I'm -- I'm sorry. Member Ma. 28 MS. MA: Am I going? 29 1 MR. HORTON: Member Ma. 2 MS. MA: So, I just got here, so I'm going 3 to ask a question. 4 MS. MASH: Of course. 5 MS. MA: All the cases that we've heard so 6 far have to do with people who have been in business 7 and, you know, maybe didn't report, didn't have the 8 paperwork correctly, there's discrepancy. 9 But in this case there was a burglary; all 10 his inventory was stolen. Have -- are there any 11 hardship provisions? 12 MS. MASH: In this case there are not. 13 First, let me -- let me say that all of the evidence 14 we have here shows that before and after the 15 burglary the amount that the petitioner was 16 reporting and the way that he was purchasing was 17 exactly the same. 18 So even after the burglary he continued to 19 purchase the same amount of product on a mon- -- 20 weekly basis and he reported the same amount on a 21 monthly basis. So the burglary didn't really have 22 an affect on the reporting or the purchasing. 23 As far as a hardship credit or something 24 like that, we don't have something like that 25 for cig- -- for other tobacco products, for these 26 cigars. 27 We have something kind of similar in the 28 cigarette portion, and it's based on Section 30177 30 1 of the Rev. and Tax Code. And there's a regulation, 2 it's Regulation 4063. And that regulation explains 3 that if there're cigarettes that are destroyed and 4 that it's found by clear and convincing evidence 5 that the cigarettes have been destroyed or somehow 6 unsalable, that those cigarettes would be -- that 7 the taxpayer would have -- would get credit for 8 those cigarettes. 9 Again, we don't have that in -- with OTP. 10 But that regulation very specifically states that 11 the theft or mysterious disappearance of cigarettes 12 will not -- shall not constitute casualty for which 13 refund or credit will be given. 14 So even if we want to sort of apply that to 15 the cigars in this case, theft or mysterious 16 disappearance is not applicable, so we can't take 17 that into account. 18 MS. MA: Thank you. 19 MR. HORTON: Member Harkey. 20 MS. HARKEY: Okay. But we have -- our 21 annotation is for what is typical, right? What 22 we -- we use it on cases that are -- 23 How many -- I guess my better question is 24 how many times do you have all your inventory stolen 25 on the cigar shop that you've audited or know about 26 or have any familiarity with? 27 MS. MASH: Um, I mean I could -- 28 MS. HARKEY: Is this an unusual 31 1 circumstance? 2 MS. MASH: Um, it's -- it -- I couldn't 3 really say whether it's an unusual circumstance. 4 But we have cases where a lot of, you know, all 5 kinds of retail stores are broken into. Some have 6 inventory stolen, all of it is stolen. I mean, it 7 happens. 8 I don't -- I don't have data on that, but 9 it happens sometimes, sure. 10 MS. HARKEY: Okay. So the -- the internal 11 memo -- 12 MS. MASH: Mm-hmm. 13 MS. HARKEY: -- to the District, from '97, 14 is really not legally binding? 15 MS. MASH: No. It's just what we've 16 been -- 17 MS. HARKEY: It's been common practice. 18 MS. MASH: Correct. 19 MS. HARKEY: And -- I -- I understand 20 that. I've just got a problem with this common 21 practice being applied in this case because we've 22 got a very, very unusual circumstance. So -- and 23 then we've got the cigarette exemption. 24 MS. MASH: Right. Which, again, says theft 25 or mysterious disappearance -- if these were 26 cigarettes, that exemption wouldn't -- that -- that 27 credit wouldn't have applied anyway because if it's 28 theft or mysterious disappearance, it wouldn't. 32 1 I mean the reason really for the -- the -- 2 for -- for saying theft or mysterious disappearance 3 is not going to allow you to have a credit is 4 because in those kind of cases if you can't prove, 5 with OTP specifically -- 6 I -- I'm -- I'm sure some of it was stolen, 7 maybe all of it was stolen. Regardless, this is an 8 area where there's so much tax evasion already, and 9 if you can't prove by clear and convincing evidence 10 that this tobacco product did not get sold to 11 somebody, if you can't prove that that's not what 12 happened, we're going to assume that that's what 13 happened because the law says we can presume that 14 that's happened. Otherwise, it just opens it up for 15 so much abuse and evasion. 16 MS. HARKEY: Okay. I guess my next is, is 17 he's got a police report -- 18 MS. MASH: Correct. 19 MS. HARKEY: -- that shows some, but not 20 all. 21 MS. MASH: Actually, the police report is 22 accurate. If you -- if you look at the numbers -- 23 MS. HARKEY: That's not what mine says. 24 MS. MASH: -- the $32,000 -- it's 32 -- 25 32,900. So $33,000 that was reported. 26 So, overall, we're talking about $51,000 27 worth of product. And the petitioner stated in the 28 police report about 33,000 was stolen. Then we have 33 1 another 18,000 that he purchased after the burglary. 2 That's $51,000. So the police report is -- it's not 3 incorrect. 4 MS. HARKEY: Okay. So the police report is 5 accurate. And the taxpayer states that the 18 was 6 simply because he had -- was on continuous 7 contracts. It wasn't -- it wasn't -- it wasn't 8 something that he actually purchased -- ordered. 9 Do you -- for the taxpayer, do you have 10 anything that -- that can lend credibility to that 11 statement? 12 MR. KHILLA: I -- I will find it. Because 13 J.C. Newman, which is Fuente, had an automatic 14 reorder program. In order to be with them, you had 15 to select an X amount of, you know, faces of cigars. 16 And then they had their other sister brands, like 17 Cuesta-Rey and Montesino and Hemingway, and those 18 came if you wanted it or not because they -- there 19 was a shortage. So you wouldn't get the box 20 necessarily then, but you'd have to check off 20 of 21 30 or 40 or 50 types of cigars and they came 22 annually. They came when they could fill it because 23 it's like wine, maturation happens at a certain 24 time, they -- they harvest it, then they send it to 25 you. 26 And remember, I invested my life into that 27 business. So after having the horror of not 28 recovering insurance, you know, I was trying to 34 1 recoup. I was trying to attempt to do something in 2 the shop, but there was no way. With the amount of 3 money that I had to put out just to satisfy the shop 4 security and with this ongoing stuff coming, it 5 wasn't an elective choice where I said, hey, you 6 know what, let me order this stuff and, you know, 7 let me just, you know, throw it out the back door. 8 That's not what happened. 9 MS. HARKEY: Did you sell from your house, 10 product from your house? 11 MR. KHILLA: Um, not from my house. I 12 store it from my house. I gave it away, you know. 13 Still have some of it. I mean I -- I -- 14 MS. HARKEY: Okay. 15 MR. KHILLA: You know, from the end of that 16 year is when I just wanted to be out of the cigar 17 business. 18 MS. HARKEY: Thank you. 19 MR. HORTON: Member Runner. 20 MR. RUNNER: Yeah, quick question. Since 21 we're dealing with an annotation, and if this Board 22 was to decide, for instance, that that annotation is 23 not applicable in given these circumstance, that 24 doesn't change the annotation, correct? 25 MR. ANGEJA: Correct, unless you direct us 26 to the contrary. 27 MR. RUNNER: Right. Right. 28 MR. ANGEJA: The path you might -- 35 1 MR. RUNNER: We could -- we could decide 2 that that annotation does not apply to these 3 circumstances. 4 MR. ANGEJA: If you -- I -- yes, find 5 different facts, then you can reach a result 6 that's -- 7 MR. RUNNER: Okay. 8 MR. ANGEJA: Without overturning the 9 annotation. 10 MR. RUNNER: Okay, thanks. 11 MR. HORTON: Okay. Um -- 12 I'm sorry. 13 The -- although the annotation does not 14 carry the force of law, is it -- is it based on law 15 given a certain set of circumstances, and more 16 depictive of providing direction in a set of -- 17 certain set of circumstance? 18 MR. ANGEJA: It purports to be based on 19 Section 30008 -- I don't know if I have the right 20 number of zeros in that -- because it's trying to 21 come up with a definition of retail stock. 22 MR. HORTON: 3 -- okay. 23 All right. Thanks. 24 Further discussion, Members? 25 Hearing none, is there a motion? 26 MS. STOWERS: Move to take the matter under 27 submission. 28 MR. HORTON: Moved by Member Stowers to 36 1 take it under submission. Second by Member Ma. 2 Without objection, Members, such will be 3 the order. 4 Thank you very much for appearing before us 5 today. The Board will take your matter under 6 consideration later on this evening and send you a 7 written report of our decision. 8 MR. KHILLA: Thank you. 9 MS. MASH: Thank you. 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 37 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 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 37 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: March 16, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL 22 Hearing Reporter 23 24 25 26 27 28 38