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 NOVEMBER 18, 2015 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 STAINLESS FIXTURES, INC. 14 NO. 505327 (AP) 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 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 Legal Department 19 For Board: Scott Lambert 20 Hearing Representative 21 Stephen Smith Tax Counsel IV 22 Legal Department 23 Kevin Hanks, Chief Sales and Use Tax 24 Department 25 For Petitioner: David M. Berger 26 Attorney 27 Lana Hammerton Representative 28 ---oOo--- 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 NOVEMBER 18, 2015 4 ---oOo--- 5 MR. HORTON: Good morning, Members and 6 guests. 7 Members, let us reconvene the meeting of 8 the Board of Equalization. 9 Ms. Richmond, what is our first matter for 10 the day? 11 MS. RICHMOND: Good morning, Chairman and 12 Board Members. 13 The first matter on this morning's agenda 14 is item C, Sales and Use Tax Appeals hearings, item 15 C2, Stainless Fixtures, Inc. 16 Please come forward. 17 Board Proceedings has received contribution 18 disclosure forms for today's hearings from the 19 parties, participants and agents. All forms are 20 properly completed and signed. 21 All parties, participants and agents are on 22 the alpha listings provided to your office. 23 Each person sitting at the table will be 24 asked to introduce themselves and, if necessary, 25 their affiliation with the taxpayer for the record. 26 Ten minutes is allocated for the taxpayer's 27 opening presentation, followed by ten minutes for 28 the Department's presentation, and five minutes is 3 1 allocated to the taxpayer for rebuttal. 2 Mr. Horton. 3 MR. HORTON: Thank you. 4 Mr. Angeja, would you please introduce the 5 issues in this case as the taxpayers settles in? 6 MR. ANGEJA: Good morning, Mr. Chairman and 7 Members. I'm Jeff Angeja, on behalf of the Appeals 8 Division. 9 The appeal before you presents two 10 unresolved issues, which are whether any additional 11 adjustments to the amount of unreported taxable 12 sales are warranted and whether Petitioner was 13 negligent. 14 MR. HORTON: Thank you. Welcome to the 15 Board of Equalization. 16 As you settle in, please be advised that 17 you will have ten minutes to make your presentation. 18 We would ask that you commence with your 19 introduction for the record. And we will return and 20 allow you five minutes on rebuttal. 21 At your convenience, please commence with 22 your introduction. 23 MR. BERGER: Good morning, David Berger, 24 appearing for Stainless Fixtures, Inc. 25 MS. HAMMERTON: Lana Hammerton for 26 Stainless Fixtures, Inc. 27 MR. HORTON: Welcome. 28 MR. BERGER: Well, briefly, what had 4 1 happened is the taxpayer provided a great deal of 2 documentation at the auditor's request, some of 3 which was not usual and customary in terms of what 4 auditors usually like to see. 5 The taxpayer -- 6 MR. HORTON: Sir -- 7 MR. RUNNER: His mike -- 8 MR. HORTON: -- pull it forward a little 9 bit and -- 10 MR. BERGER: Oh, I thought -- 11 MR. HORTON: -- right in front of you. 12 MR. BERGER: All right. 13 MR. HORTON: You don't have to lean if 14 don't want, you can scoot the mike over. 15 MR. BERGER: The taxpayer has a fairly 16 archaic, custom design accounting software program. 17 And, so, some of the types of reports and things 18 that I think the auditor is used to seeing didn't 19 exist. 20 However, the taxpayer provided a number of 21 documents that supported adjustments to income, of 22 course, oral testimony, more than enough evidence to 23 shift the burden of proof to the State. 24 Unfortunately, exam -- or the auditors did 25 not wish to accept that. They asked for additional 26 things and then ignored them. 27 Just by way of example, there was a bad 28 debt expense that wrote off some of the sales. The 5 1 taxpayer provided an audited financial statement 2 showing the bad debt. Apparently that wasn't 3 sufficient and they asked for a list. The taxpayer 4 provided a list, apparently that wasn't 5 sufficient. 6 The point being that more than enough 7 evidence was provided and the State just ignored it 8 and didn't accept it. 9 Furthermore, the State then added, 10 basically at the end, $2 million of sales, despite 11 the fact that a CPA firm had certified audit -- 12 certified audited financial statements showing what 13 the sales, in fact, were. 14 Again my point is that enough evidence was 15 provided to shift the burden, yet the State provided 16 no reason whatsoever for adding arbitrary numbers 17 for sales, and, in fact, overstating sales with all 18 evidence to the contrary. 19 And then I'm going to let Mrs. -- Lana 20 Hamilton here -- Hammerton here give you a couple of 21 other examples 'cause she was more directly 22 involved. 23 MS. HAMMERTON: I did -- 24 MR. HORTON: Ms. Hammerton? 25 MS. HAMMERTON: -- I did provide the -- 26 like he was saying, the -- our journal ledgers and 27 entries that was asked for. I even took -- where 28 there was some of the items were voided out and 6 1 re-invoiced, I would -- I went through -- because 2 they didn't use the same item number system from one 3 to the other, because sometimes the girls are new 4 and they just re change it and they use -- like 5 every 501510 instead of the actual item number. 6 So, I went through and marked up that so 7 they could see that they're the same. Sometimes 8 they're called a waitress station or a beverage 9 station. It's the same thing. But the auditor 10 would say, no, they're different because they didn't 11 say the exact same thing -- things like that. 12 I do have -- our IT guy, he did download 13 it, based on what the auditor was requesting with 14 the person that came -- or the -- or over the phone 15 with the sales Board IT guy. But he also sent a 16 letter stating -- admitting that he didn't flag any 17 of the voids or other issues that would have come up 18 at that time. 19 And -- I mean, because there is -- a lot of 20 times when there's a void, the girls would void it 21 or because of the way the system is, sometimes the 22 numbers -- they would start an invoice, and if they 23 don't finish it and step out, when they come back in 24 the system gives the next number. 25 So, those invoice numbers would just 26 literally be skipped or missed, unless somebody goes 27 into the programming and renumbers it back to pick 28 it up. 7 1 MR. BERGER: Okay. But that was -- so, 2 those are the examples. 3 As I said, the underlying issue here is 4 that there was evidence produced. The auditors 5 refused it and have arbitrarily tacked on sales and, 6 of course, the tax and negligence penalty. 7 As far as the penalty goes, obviously there 8 should be no penalty because there should be no 9 additional tax. But to the extent there might be, 10 everything was done correctly. Everything was 11 reported correctly. And there should be no penalty 12 either. 13 MR. HORTON: Thank you very much. 14 Members, let us go to the Department. The 15 Department has ten minutes to make their 16 presentation. We would ask they commence with their 17 introduction for the record. 18 And we would also ask that they address the 19 concerns expressed by the taxpayer relative to 20 failure to adjust with documentation and the 21 subsequent arbitrary addition of tax. 22 MR. LAMBERT: Good morning, Chairman Horton 23 and Members. 24 My name is Scott Lambert. I'll be 25 representing the Sales and Use Tax Department today. 26 To my right is Kevin Hanks, also with the Sales and 27 Use Tax Department, and to Mr. Hanks' right is 28 Stephen Smith with the Legal Department. 8 1 In this particular case the taxpayer is a 2 construction contractor. They bill their customers 3 on a time and material plus tax. So, they do 4 collect tax from the customer. 5 Initially, to start off, the taxpayer's 6 records were lacking in that they had no audit trail 7 as to the amount of sales that were reported. There 8 was no sales tax working papers. 9 So, the Department was unable to determine 10 what sales had been reported. So, even if you 11 didn't have a sales tax working sheet, you should 12 still have a sales journal that would match what was 13 reported or a general ledger that matched to what 14 was reported. None of those matched to what was 15 reported. 16 The taxpayer also provided hard copies of 17 sales invoices. There appeared to be a lot of 18 invoices that were missing or marked as void. So, 19 the Department requested that the taxpayer provide a 20 download, an electronic download, of their sales 21 invoice record. 22 They did do that. The Department used that 23 electronic sales data to establish the audit 24 liability. What was found -- or what was claimed is 25 that a large percentage of the -- or most of the 26 large contracts were voided and reported or stated 27 to be reported at another time period. And the 28 Department just couldn't confirm that. 9 1 There were no job files that were provided. 2 And the job files are critical to determine what 3 actually happened on any particular job. 4 We also requested to contact the customers 5 and attempted to contact customers without luck. We 6 either weren't provided with the contact information 7 for the customer or the contact information wasn't 8 accurate. 9 So, that left the Department really no 10 choice other than to accept what was on the 11 electronic sales data register. And that's what we 12 did. 13 I'll also point out that the accounts 14 receivable or cash receipts journal wasn't provided 15 and, so, it's very -- very difficult or near 16 impossible to be able to track deposits if you do 17 not have a cash receipts journal. 18 So, the taxpayer did provide documents to 19 indicate that sales were reported at later times. 20 Some were accepted. A lot weren't. 21 What we found is there were various 22 inconsistencies between the billings to indicate 23 that -- it appeared that it was possibly another job 24 or that the invoices weren't reported at a later 25 period. The taxpayer would say it was billed at 26 another time, but then the amount of tax on that 27 invoice wouldn't trace to the sales tax returns that 28 were outside the audit periods. 10 1 So, they'd say they reported something and 2 they filed a zero return. And it could not have 3 been reported at that particular time. 4 As far as bad debts, the Department did 5 accept at least one -- one bad debt. The other ones 6 we couldn't accept. They didn't fall under 7 Regulation 1642. The amounts of bad debts that were 8 claimed on the income tax returns were significantly 9 lower than the sales that were in question. They 10 were minor in amount. 11 So, it did appear that the taxpayer was 12 reporting on the income tax returns on an accrual 13 basis and taking a deduction, but the deductions 14 were -- were small in amount. 15 As far as the Department using arbitrary 16 sales, the Department used the taxpayer's recorded 17 sales, their electronic records to establish the 18 liability. There wasn't anything arbitrary about 19 the sales that were used to establish the liability, 20 they were actually the taxpayer's records. 21 What might be meant by arbitrary is that 22 the taxpayer gave an alternative reason for when the 23 sale could have been reported at a later date, which 24 is usually -- which was, I think in most cases, the 25 sales were either reported before or after the audit 26 period, or else the taxpayer claimed that the sales 27 were voided and the information was -- that the 28 Department had was inconsistent with the arguments 11 1 that were being made by the taxpayer. 2 The records requested are the normal type 3 of records that would be requested in this audit. 4 What was unusual was the lack of records that the 5 taxpayer had in this particular case. 6 They've been in business for a number of 7 years. This -- they had been audited four times 8 earlier. This was their fifth audit. 9 I'd point out that they were audited 10 subsequent to this. It was found during that 11 particular audit that voided sales, when we were 12 able to contact the customer that, in fact, those 13 voided sales actually took place, and that the 14 customer verified that the amounts were reported. 15 So, that leads to the penalty. The amount 16 of liability was $2.1 million. That was 87 percent 17 of the amount of sales that were reported as 18 taxable. So, it was substantial in amount. 19 The -- the records were lacking in that it 20 was very difficult to substantiate the actual 21 sales -- the payments, the actual sales. And in 22 some case they provided us with records that were -- 23 in one case they provided us with a record that 24 indicated that there was a sale that was not in 25 their sales register, had a different sequence of 26 numbers. We're not sure exactly why that is. We're 27 not sure what amounts were used to report. 28 They collected the tax from their 12 1 customers. There were no taxable sales reported in 2 two periods. The taxpayer did have a history during 3 this time period of filing late returns and also 4 collection issues that they were having during this 5 particular time. 6 And the errors in this particular audit are 7 similar to parts of the previous four audits, 8 although we're not sure exactly what happened in the 9 earliest period because it was in the early parts of 10 the '90s. 11 The other -- the other audit periods, there 12 was a negligence period -- penalty applied in the 13 audit that was two before this particular audit 14 for -- for clerical errors and resales that were 15 disallowed in that period, which was also $1.2 16 million. 17 So, for those reasons, the Department 18 concurs with the Appeals Division's decision and 19 recommendation. 20 MR. HORTON: Thank you. 21 On rebuttal, please. 22 MR. BERGER: Well, perfect example of how 23 the audit staff had no idea what they were doing. 24 First of all, the taxpayer is not a 25 construction company, it's a manufacturer of 26 restaurant equipment. It is done to specs, or 27 specifications, so, oftentimes these sales change. 28 And that's the genesis of invoices being produced 13 1 and then when things are changed, they're voided and 2 reissued. 3 Secondly, the claim is made that no general 4 ledger was provided when, in fact, it was. The job 5 files were not provided -- claimed that the job 6 files were not provided when, in fact, they were. 7 The sales data was produced. 8 Unfortunately, it does include the voids. And they 9 had no way of knowing it, other than the taxpayer's 10 testimony and other evidence that showed where they 11 were voided out, and again was ignored. 12 Oh, and as far as the accounts receivable 13 and cash receipts, that's a good point because when 14 you add $2 million of sales, you would think that an 15 auditor would want to see the cash deposits and the 16 accounts receivable to make sure that it ties out. 17 In fact, it was never addressed, it was 18 never asked for. They didn't bother to check. 19 The State has admitted that they didn't use 20 the documentation that was provided. They 21 acknowledged that they couldn't follow it, that 22 there were, in fact, voids, and they didn't 23 acknowledge them or use them. In fact, they 24 charged, in effect, double sales on these invoices. 25 Oh, the taxpayer contacted all of the 26 customers and asked them if they were contacted by 27 the Board. And all of them said that they were not 28 ever contacted by the Board. 14 1 The bad debt issue, again that tied in 2 directly to the certified audited financial 3 statements and refused to be accepted. 4 The arbitrary sales comment really was that 5 the sales were -- the sale amounts were really 6 fabricated because, as I said, they're adding sales 7 that don't exist. 8 As far as the negligence penalty in the 9 earlier audits, they're pretty much irrelevant, 10 first of all. 11 And second of all, the State acknowledges 12 that they are old and he has no idea what they were 13 about or what was in them. 14 Let's see if there is anything else that I 15 scribbled down here. 16 Let's see, in fact, he said something about 17 when he supposedly contacted the customers they 18 acknowledged that they were invoiced for a sale. 19 There's no mention of whether or not any 20 particular invoice was earlier provided and voided 21 or whether it was a subsequent invoice -- just 22 saying did you get an invoice and did you pay it or 23 something like that really doesn't do anybody any 24 good with respect to the way that the taxpayer 25 system works with the voids and the re-do -- I am 26 sorry, with the voids and then the reissue of an 27 invoice with a different number. It's just the way 28 that archaic system works. 15 1 But, as I say, there's evidence provided in 2 the job files that were showing there was evidence 3 of the voids on the system. All of that was given 4 to the auditors and absolutely just ignored. 5 I speculate, but I think they just didn't 6 realize -- didn't understand what was happening. 7 Let me see if there is anything else. Bad 8 debts were 105 one year, 115 another year -- the 9 files. 10 The electronic records included all the 11 voids and reinvoices. As I said, the auditors had 12 no way of knowing what they were -- which were which 13 other the taxpayer's explanation and additional 14 documentation to verify that. But again it was just 15 ignored. 16 Anything else from you? 17 MS. HAMMERTON: The -- only on the voids -- 18 the only other thing I could add on there is that on 19 the reinvoices they did say the same job date and 20 same city and everything else. 21 I mean, they -- the invoice itself states 22 it's the same job, same city, has the same items on 23 it. 24 I mean, you wouldn't build two of the exact 25 restaurants in the area. You could, but, unlikely. 26 MR. BERGER: Thank you. 27 MR. HORTON: Thank you very much. 28 Members, discussion? 16 1 Member Ma. 2 MS. MA: So, I'm a little confused. It 3 sounds like -- I don't know what's going on. 4 I mean, the client says they provided all 5 the documents, and, you know, they've been keeping 6 track. And then the BOE says, no, we didn't get 7 anything. So, what is really going on? 8 So, the taxpayer -- you said you audited 9 financial statements? 10 MR. BERGER: Yes. 11 MS. MA: Can I see them? 12 MR. BERGER: If she has them. 13 MS. MA: And are you audited every year? 14 Or do you -- 15 MS. HAMMERTON: Right now it's just 16 reviewed. 17 MR. BERGER: It used to be -- 18 MS. HAMMERTON: It used to be audited all 19 the time. 20 MR. BERGER: -- it's all for the banks. 21 And then the banks said they'd review, so, they are 22 doing reviews now. 23 Back at the audit period they were full on 24 audits. 25 MS. MA: Full on audits? 26 MR. BERGER: Yeah. 27 MS. MA: Okay, I'd like to see your -- 28 MR. HORTON: Pardon me, Member Ma. 17 1 To the Department, have you had an 2 opportunity to review these documents? 3 MS. MA: Should have. 4 MR. LAMBERT: We have -- we have looked at 5 the income tax returns and we have seen financial 6 statements. 7 I don't know exactly what they -- what 8 financial statements they have, but we have looked 9 at financial statements and income tax returns in 10 the past. 11 MR. RUNNER: They're talking about the 12 audit. 13 MS. HARKEY: Audited financials. 14 MR. LAMBERT: I believe we've looked at -- 15 MR. HORTON: You've -- 16 MR. LAMBERT: -- we looked at financial 17 statements, I really can't tell you if these are 18 this. 19 MR. HORTON: After Member Ma has reviewed 20 them, we'll give you an opportunity to look at them 21 again. 22 MR. BERGER: You did say they asked for a 23 list of -- a breakdown of it. 24 Yeah, so, they had to have seen them. 25 MS. HAMMERTON: Yeah, they got them. 26 And they asked for the breakdown on the bad 27 debt. They got the list of that too. 28 MR. HORTON: Okay. 18 1 MS. MA: Let just me read it, see if there 2 is any irregularity. 3 MR. HORTON: Member Runner. 4 MR. RUNNER: Yeah, just a quick couple of 5 questions while Member Ma is reviewing those. 6 Tell me a little more about the bad debt 7 issue. And -- well, no, actually, let me start 8 another place. 9 And this is kind of a basic question 10 because we look at them as a construction 11 contractor. They look at themselves as a 12 manufacturer, apparently. 13 Can you -- let me go to the Department. 14 What is it that we believe makes them a construction 15 contractor? 16 MR. LAMBERT: Installations. 17 MR. RUNNER: The installations. 18 MR. LAMBERT: Yes. 19 MR. RUNNER: Let me ask the taxpayer. 20 Do you do installations of your 21 manufactured product? 22 MS. HAMMERTON: Yes. 23 MR. RUNNER: Okay. So, by our definition, 24 that's what -- 25 MS. HAMMERTON: It's more of a deliver and 26 set in place, is that -- but we call it install. 27 MR. RUNNER: Do you hook them up? 28 MS. HAMMERTON: No. We have to hire 19 1 plumbers or electricians or -- 2 MR. RUNNER: Do you -- 3 MS. HAMMERTON: -- if it's a -- it's a full 4 on blown building, they already have those 5 contractors. 6 MR. RUNNER: You contract with delivery. 7 In your contracts do you -- do you provide the skill 8 to hook them up? 9 MS. HAMMERTON: No, no. It's -- we deliver 10 the equipment. We'll set it in place. 11 And then the -- if they're -- like I said, 12 if it's a full on blown building, the GC's already 13 hired their plumbers and electricians -- 14 MR. RUNNER: Right. 15 MS. HAMMERTON: -- to come through. 16 They hook everything up, not us. 17 MR. RUNNER: You just deliver them and set 18 them on the site? 19 MS. HAMMERTON: Yes. 20 MR. RUNNER: Does that qualify them as a 21 contractor? 22 MR. LAMBERT: Well, I believe in the 23 contract that it has the installation, but I believe 24 it's really a moot point -- 25 MR. RUNNER: Okay. 26 MR. LAMBERT: -- in this particular case. 27 MR. RUNNER: Tell me why. 28 MR. LAMBERT: And the reason is is because 20 1 what they're -- how they're billing it is time and 2 material plus tax. 3 So, in other words, they do have an 4 installation charge that's billed for that. 5 MR. RUNNER: Is that a delivery charge or 6 an installation charge. 7 MS. HAMMERTON: We state it as install. 8 We do delivery and then we -- the install 9 portion's separate for the guys to take it in. 10 We've done T & M once in while when they 11 don't know how much it's going to cost, because 12 they're asking -- you know, the contractor wants 13 things on the site. So, the guys will call it in to 14 have certain things made. And then we have to take 15 it out there. 16 MR. RUNNER: Do you all -- some of your 17 contracts include time and materials and install and 18 some don't? 19 MS. HAMMERTON: Our contracts do not, no. 20 That's usually like on the extras or after the fact. 21 The -- our contracts would include the 22 delivery and then the install, which is, like I 23 said, we deliver it, we put it in place. 24 MR. BERGER: I think it's the definition of 25 install that's a little confusing here. 26 They call -- what they call install is 27 actually delivering it into the spot where the item 28 goes. In other words, these things -- you've seen a 21 1 restaurant kitchen, I'm sure? 2 MR. RUNNER: Right, right, uh-huh. 3 MR. BERGER: These things go in a certain 4 place. 5 MR. RUNNER: Right. 6 MR. BERGER: So, they're pushed into or 7 dropped -- 8 MR. RUNNER: They're not left on the front. 9 MR. BERGER: -- they're not left -- thank 10 you. 11 MR. RUNNER: You actually put them in the 12 room to which they're going to be installed? 13 MS. HAMMERTON: Yes. Sometimes they're 14 not ready to go into the room, though, so, they 15 have -- 16 MR. RUNNER: Because the contractor who's 17 doing the job doesn't have the site prepared? 18 MR. RUNNER: Right. And they'll ask -- 19 sometimes they ask for them delivered early, 20 sometimes we have to bring them back because they 21 have no place to put them. 22 MR. RUNNER: Okay, given that 23 description -- 24 MR. LAMBERT: What they're basically 25 arguing is that their total sale is subject to tax, 26 tangible personal property. 27 We allowed a deduction for installation, 28 which is nontaxable. 22 1 MR. RUNNER: Okay. 2 MR. LAMBERT: And we only included the 3 amount that they billed out as tangible personal 4 property. 5 MR. RUNNER: Okay. 6 MR. LAMBERT: And the tax was charged -- 7 MR. RUNNER: Let me ask the taxpayer and 8 their representative, do you believe that the fact 9 that they've identified you as a construction 10 contractor in regards to how they interpret how you 11 do your work affect their -- their application of 12 tax law? 13 MR. BERGER: I'm not sure that I could 14 answer that. 15 MR. RUNNER: Okay, okay. Let me ask you 16 then the -- follow up with a couple of questions 17 about bad debt. 18 You feel like at this point you delivered 19 that you delivered a number of items identifying bad 20 debt? 21 MR. BERGER: Yes. 22 MR. RUNNER: What I'm hearing from the -- 23 from the Department is that -- that what you 24 delivered and what you -- what you identified as bad 25 debt was inconsistent with the income tax returns. 26 What -- what would be the explanation for 27 that? 28 MR. BERGER: I don't have -- I don't know 23 1 that that's accurate, first of all. I mean, I heard 2 him say it -- 3 MR. RUNNER: Okay. 4 MR. BERGER: -- but I don't know that 5 that's accurate. 6 I am not looking at the tax return compared 7 to the audit -- audited financials. 8 Yes, I would want to look at that and see 9 if, in fact, they are consistent or not consistent. 10 As I sit here, I don't know that. 11 MR. RUNNER: Let me go back to the 12 Department then. 13 What did you see as the difference, you 14 know, the amount to which they were claiming as bad 15 debt and the amount to which they were -- which they 16 had identified on their tax returns? 17 MR. LAMBERT: On the income tax returns we 18 have two years, 2003, 2004. 19 In 2003 the bad debt claimed was $23,000 20 and in 2004 the amount was $755. 21 MR. RUNNER: Okay, given -- given that -- 22 again, you haven't reviewed those numbers, but if 23 those are, indeed, the accurate numbers, why would 24 they not reflect the total amount of bad debt that 25 you had already given to the BOE? 26 MR. BERGER: Again not looking at them, my 27 speculation would be that it's timing differences. 28 The notes I am given here, there was 24 1 105,000 in '03; 115,000 the following year. 2 Again I'm not looking at them, but, you 3 know, for accounting there is -- there is allowance 4 for bad debts and that sort of thing, which are not 5 allowable for income tax purposes. 6 So, it's conceivable that it's just a 7 matter of -- 8 MR. RUNNER: Apples and oranges. It could 9 be an apple. 10 You may believe, I don't know if it's true 11 or not, you may believe that the -- that there's not 12 a clear -- that there could be a difference between 13 bad debt definition that was used in the federal 14 income tax versus what would be required of the BOE? 15 Is that -- 16 MR. BERGER: -- yes. 17 MR. RUNNER: Department, could -- 18 have you -- have we seen an experience like that, 19 that bad debt is bad debt transferrable from bad 20 debt that we identify to -- to have bad debt 21 identified on federal income tax? 22 MR. SMITH: Regulation 14 -- 1642 provides 23 that one of the requirements is that the bad debt be 24 legally charged off as bad debt for income tax 25 purposes. 26 MR. BERGER: But not necessarily in the 27 same year. 28 MR. SMITH: Well, that could be. 25 1 MR. BERGER: It's probably just timing 2 differences. 3 MR. RUNNER: Well, yeah, except the amounts 4 are awfully different. 5 I mean -- yeah. 6 MR. BERGER: Sure. And if it was asked of 7 the taxpayer, I am sure the taxpayer could have 8 provided a reconciliation of that. 9 But it was never brought up. It was never 10 asked. 11 MR. RUNNER: So, you believe -- let me ask 12 you this, the -- again, I'm sorry, you're 13 representing the taxpayer, and, ma'am, you are? 14 MR. BERGER: She's an employee. She's a 15 bookkeeper. 16 MR. RUNNER: Okay, you're a bookkeeper, 17 okay. 18 Then do you believe that there were these 19 larger bad debts claimed on federal income tax in -- 20 MS. HAMMERTON: Yes. 21 MR. RUNNER: -- prior years? 22 MS. HAMMERTON: Yes. 23 MR. RUNNER: And you could provide 24 documentation on those bad debts for those previous 25 years? 26 MS. HAMMERTON: Yes. 27 MR. RUNNER: That would identify -- 28 MS. HAMMERTON: Yes. 26 1 MR. RUNNER: -- that would be relevant to 2 this -- that would be relevant to this audit -- 3 MS. HAMMERTON: I have -- 4 MR. RUNNER: -- period? 5 MR. RUNNER: -- it's just that they're '03, 6 '04 and '05. So, I have to really look for them, 7 but, yes. They should have copies even with the 8 accountant -- accounting firm. 9 MR. BERGER: I would think that -- I would 10 think the accounting firm has that in their files 11 anyway -- 12 MR. RUNNER: Right, right. 13 MR. BERGER: -- 'cause they would have do 14 that. 15 MR. RUNNER: Right, okay. 16 Okay. And again, if -- if they could 17 provide numbers that may correlate to -- identified 18 within this audit period that may not have shown up 19 in these particular audit years that -- or years 20 that we did the income tax review, that would help 21 substantiate their claims? 22 MR. LAMBERT: That's right. 23 We did request that data, but it's not 24 uncommon -- or I should say -- 25 MR. RUNNER: You requested the data? 26 MR. LAMBERT: -- for the bad debts, for 27 the -- there was a couple sales that they said were 28 not paid. 27 1 MR. RUNNER: And again what I think I heard 2 them say is they kept providing you things -- 3 MR. LAMBERT: Right. 4 MR. RUNNER: -- for it. 5 And at that point I don't know if you asked 6 them for their income tax for those previous years 7 that might have shown the bad debt, right? 8 I mean, you -- 9 MR. LAMBERT: I believe we did, but -- 10 MR. RUNNER: Okay. 11 MR. LAMBERT: -- but it is common for a 12 sale that's reported in one year not to be 13 claimed -- 14 MR. RUNNER: Right. 15 MR. LAMBERT: -- as a bad debt until a 16 subsequent year -- 17 MR. RUNNER: Right. 18 MR. LAMBERT: -- because usually you go 19 through the collection. 20 MR. RUNNER: Right. 21 MR. LAMBERT: -- issues. And, so -- 22 MR. RUNNER: Right. 23 MR. LAMBERT: -- it takes a while before 24 you are going write that off because you're going to 25 try to collect it, right? 26 MR. RUNNER: Okay. 27 MR. LAMBERT: And then -- 28 MR. RUNNER: But in -- I guess in 28 1 practicality, if, indeed, they could demonstrate 2 that they have that, that could affect then how it 3 is that we looked at that? 4 MR. LAMBERT: That's right. 5 MR. RUNNER: Okay. 6 MR. LAMBERT: As Mr. Smith said, under 7 Regulation 1642 what would be looking for is the bad 8 debt claimed on the income tax returns. 9 And then we would want to see a schedule of 10 the transactions that make up that amount. 11 So, in other words, if you have down 12 $100,000 you are claiming as a bad debt, we need to 13 know what it's made of. 14 MR. RUNNER: And I would assume that that 15 would also be the same requirement that the IRS 16 would require in regards to demonstration of that. 17 MR. BERGER: Exactly. 18 MR. RUNNER. Right. So, that would be a 19 part of that. 20 MR. LAMBERT: And that -- 21 MR. RUNNER: Okay. Well, we'll see what 22 goes on with the rest of the discussion, but that's 23 certainly something that we may want to -- need to 24 take a look at it. 25 Thank you. 26 MR. BERGER: Okay. 27 MR. HORTON: Member Harkey. 28 MS. HARKEY: Thank you. 29 1 Okay, I just want to clarify that the bad 2 debt claimed would show up in subsequent tax 3 returns, not in prior? 4 So, if you are claiming bad debt from -- 5 you know, it's going to be the years forward because 6 it takes a while for it to become bad debt. 7 MR. LAMBERT: Makes sense. 8 MS. HARKEY: It's not the same as it's 9 billed, not the same day as it's billed. 10 MS. HAMMERTON: Unless it was -- it could 11 be in the same year. It could be, it depends on 12 when the project was done and some of the 13 communication as far as trying to collect it. 14 MS. HARKEY: Well, I'm trying -- I'm trying 15 to help you here because you've got -- you've got 16 23,000 showing in 2003 that you are claiming 105 17 for. 18 You've got $755 are claimed in 2004, that 19 you are saying 115,000. 20 MS. HAMMERTON: Uh-huh. 21 MS. HARKEY: So, that's kind of an issue. 22 MS. HAMMERTON: Right. 23 MS. HARKEY: Okay. So, I'm just -- I'm 24 just trying to clarify things here. 25 Okay. The auditor tested 25 large jobs; is 26 that correct? 27 MR. LAMBERT: Somewhat correct. I think 28 what it came down to is we actually used the 30 1 electronic sales register. 2 And then what we decided to do, in order to 3 narrow down the focus of it, was to take the 4 transactions with tax over $1,000. And there were 5 25 of those, and that's where the 25 came from. 6 And that, at the time, equaled about 87 7 percent of the liability. 8 MS. HARKEY: Thank you, yes. 9 Only seven sales were adjusted by the 10 auditor of the 25 is what my records show. 11 MR. LAMBERT: It could be in that -- in 12 that range, yes. 13 MS. HARKEY: Okay. This is questions for 14 the taxpayer or representative. 15 You state that a sale was voided, but there 16 are multiple progress billings, for which 17 installation, labor, delivery charges, and whatnot 18 were shown. 19 So, what -- I can understand the voided 20 sale when they're still in the planning stages, but 21 how do you void a sale after it's finished? 22 MS. HAMMERTON: Because what happens 23 sometimes is when the project managers -- as I was 24 saying earlier, the extras that come along at the 25 end of a project, they'll ask for stuff and it gets 26 delivered. 27 And the shop gives one list and the guys 28 give sometimes another list and then -- 31 1 MR. RUNNER: Who are the "guys"? 2 MS. HAMMERTON: -- the guys that are asking 3 for it. 4 MS. HARKEY: Your customer? 5 MS. HAMMERTON: Our customers or our 6 project managers. 7 MS. HARKEY: Okay. 8 MS. HAMMERTON: Okay, either or. 9 And, so, what will happen is they have to 10 -- they sit down at the end and say, "No, you didn't 11 -- we didn't deliver this item." Or, "We didn't get 12 this." Or, "We got this, but not" -- so, then they 13 wind up going through it. 14 So, what happens is that they have already 15 given it to the girl in the receivable to bill it, 16 based on what they -- you know, the list that was 17 generated. 18 And when they sit down and go through it or 19 sometimes they will give them a discount at the end 20 of the project, so, then they mark it up. 21 And she rebills it and she doesn't change 22 the invoice -- which is what they really should do, 23 but they don't -- she generates a new invoice. 24 And sometimes they even -- they'll even do 25 it sometimes with a different number set. That's 26 what I was saying earlier. 27 MS. HARKEY: Well, how do you reconcile 28 that? 32 1 MS. HAMMERTON: Because if it's been 2 voided, we put it in the file with the other one. 3 So, it's attached to the invoice that is -- that's 4 redone against it. 5 And then the file has every invoice for the 6 job. So, when I go through it, I want -- I check -- 7 when I have checked on the job folders, I go through 8 and I start with the contract amount. And I see 9 that that's billed. 10 It's usually the extras that are the issues 11 or the problems on the jobs is when they start doing 12 all the extras on it. So -- 13 MS. HARKEY: Okay. You say that some of 14 these sales were reinvoiced at a later date. 15 MS. HAMMERTON: Yes and -- 16 MS. HARKEY: But sometimes sales weren't 17 even reported during the entire quarter on later 18 dates. That's what we found when we were looking at 19 that. 20 Can you explain that? 21 MS. HAMMERTON: No, not really, because I'm 22 not -- I wasn't doing it at that time. 23 So, I can tell you now we go through -- I 24 know when the auditor came in, I did provide him 25 with the list of what we -- we used to run a report 26 from our system that shows the sales for that period 27 and then the report that went to the BOE, when it -- 28 'cause at that time it was still paper trail, not 33 1 electronic reporting. 2 So, I know I gave him all of that at that 3 time when he came in for each -- each quarter. 4 MS. HARKEY: You gave the auditor -- 5 MS. HAMMERTON: Uh-huh. 6 MS. HARKEY: -- all of that? 7 MS. HAMMERTON: Yes. 8 MR. BERGER: My recollec -- if I may? 9 My recollection is there was a pretty big 10 spreadsheet that she prepared on those 25 items with 11 an explanation of each and every one of them. 12 So, if only seven were adjusted, I'm not 13 sure what happened to the rest. 14 But I would think it would be in your 15 file. 16 MS. HARKEY: We have a lot in our files. 17 MR. BERGER: I see. 18 MS. HARKEY: It's been going on for a quite 19 a while. 20 So, I'm -- I would like to see -- if we 21 could, I would like to see if you -- if anybody has 22 that sheet that she was -- that she provided. 23 And I won't hold this up for that. I'll 24 let -- let us move on to the next. 25 I've just -- 'cause that might -- that 26 might -- that might have some information on it that 27 we've been trying to -- trying to -- 'cause I'm 28 looking for a worksheet or something. 34 1 However, the invoices -- okay, if I can 2 find -- if we can get a copy of that report, that 3 spreadsheet that you provided. 4 Department, do you recall? 5 MR. LAMBERT: Well, the spreadsheets -- we 6 did get the spreadsheet. 7 That's -- that's particular spreadsheet is 8 not going to help us in what was reported. All that 9 spreadsheet has to do is it deals with the 25 sales 10 that were in question. 11 What we're looking at is we want to see a 12 worksheet of what amounts were reported. That would 13 help us. 14 It -- also if we saw the job file, because 15 we never saw that on these contracts. We never saw 16 that. We never -- in a lot of cases never saw 17 accounts receivable ledger on these. And, so, there 18 is a lot of things that we didn't see. 19 But on all of those 25, we -- we did take a 20 look at the arguments that they made. And we 21 accepted approximately seven of them, and maybe that 22 is the actual number. 23 On the other ones, there was -- we have 24 reasons why we didn't accept those. There was 25 inconsistencies between what was on their invoices, 26 and sometimes inconsistencies in the arguments that 27 they made. 28 In other words, they would say it was 35 1 billed at a later date. And all of them were 2 outside the audit period. And then we would look to 3 that period, and we would find that, well, you 4 didn't report any tax in that period that you said 5 that sale was rebilled. 6 And they come back and say, "Well, it was 7 actually billed in this other period, that it was." 8 So, there was, you know, a moving target 9 that we had. 10 But one thing of interest -- may be of 11 interest to you is the taxable sales that were 12 reported in the audit for the period '96 to '99, 13 they reported 9.3 million in taxable sales. And 14 that was approximately a third of their sales. 15 And the period 2000 to 2002 they reported 16 7.7 million in taxable sales. That was 26 percent 17 of their sales were reported as taxable. 18 For this audit period, they reported 3 -- 19 33 or $32.7 million in sales, but only reported 20 $2.5 million in taxable sales, which is only 8 21 percent. 22 So, you see in this particular audit period 23 that the percentage of taxable sales has dropped 24 substantially from what it was in the prior audits. 25 And I'd also point out that there was a 26 difference between the sales that were reported on 27 the income tax returns and the sales that were 28 reported on the sales and use tax returns. The 36 1 amounts on the income tax returns were higher. In 2 fact, in one year it was $4 million higher. 3 But we strictly used the amounts that were 4 on their electronic sales records instead of using 5 the higher income tax returns figures. 6 MS. HARKEY: Okay. Can you explain any of 7 that -- the difference in -- the reduction in the 8 taxable sales, all the different -- 9 MS. HAMMERTON: Yeah, because in those 10 earlier years the company was selling a lot of stuff 11 directly. Or in those years that they reported, 12 they were doing the jobs directly, which makes them 13 taxable. 14 Whereas, a lot of our customers now are 15 brokers. So, we sell to them. And they have a 16 resale because they're selling it to somebody 17 else. 18 MS. HARKEY: Did we check that these people 19 had resale? Or we can't even find the sales? 20 MR. LAMBERT: Well, the -- the contracts at 21 issue, they're -- excuse me, other than one 22 transaction that they claim is a resale that -- that 23 the invoice shows tax on, there is no question on 24 these contracts that they were taxable. 25 The taxpayer charged the sales tax on them. 26 And -- but what you see is it's not reported in this 27 audit period, they claim it's in periods outside the 28 audit period where it was rebilled. 37 1 And in the subsequent audit period only six 2 and a quarter percent of their sales were reported 3 as taxable. 4 So, it -- it still shows that there's a 5 minor amount of sales that are being reported as 6 taxable. 7 MS. HARKEY: I just have one question out 8 of a bit of curiosity. 9 When did you, sir, get involved in this? 10 MR. BERGER: After the audit. 11 MS. HARKEY: After the audit? So, you've 12 been involved for how long? 13 MR. BERGER: Well, it's been going on for a 14 couple of years, probably -- 15 MS. HARKEY: Okay. 16 MR. BERGER: -- three, maybe two and a 17 half, three years. 18 MS. HARKEY: Okay. And it sounds like the 19 bookkeeper is relatively new or wasn't involved in 20 2003. 21 So, you are doing things differently now? 22 MS. HAMMERTON: Yes. 23 MS. HARKEY: Okay. So, you -- this is not 24 a first audit for the company. How have the other 25 audits been handled? 26 Were they owing -- 27 MR. LAMBERT: Yeah. Well, the -- the 28 taxpayer representative has been involved with this 38 1 company for a significant period of time and was 2 involved in the prior audits. 3 So, as far as the liability, the prior one 4 for this there was just a $70,000 in computation 5 errors. 6 But the audit before that there was 7 $1.2 million in sales that were made up between 8 clerical errors and disallowed resales during that 9 period of time. 10 So, there has been errors in each one of 11 the audits. 12 MS. HARKEY: Okay. 13 MR. BERGER: Quite an improvement in the 14 next audit. 15 MS. HARKEY: Thank you. 16 MR. HORTON: Member Ma. 17 MS. MA: Yeah. So, I just reviewed just 18 that one audited financial statements and there were 19 no like irregularities. 20 The CPAs didn't take exception to any of 21 their, you know, use of accounting, you know, GAAP 22 accounting principles. 23 So, I'm having a disconnect saying that 24 they don't have GLs, they don't have cash 25 reconciliations, they don't have this, they don't 26 have that, yet the audited financial statements, by 27 a CPA firm, didn't find any of those irregularities. 28 So -- 39 1 MR. LAMBERT: Well, what -- 2 MS. MA: -- where is the disconnect for me? 3 MR. LAMBERT: I did not say that they 4 didn't have GLs. What I said was is that the GLs 5 did not tie out to the amounts that were being 6 reported. They did have general ledgers. 7 They -- but, as I said, they didn't tie out 8 to the records. 9 The -- the download from the sales invoice 10 register appeared to be more complete. 11 As far as that other information, all I can 12 say is we didn't receive that information. So, 13 whether they have it or not, that's another issue. 14 All I could say is is that we weren't 15 provided with the job folders. We weren't provided 16 with the cash receipts journal. So, whether they 17 have it or not, I can't say that. All I can say is 18 it was not provided to us. 19 MS. MA: So, I guess to the -- 20 MS. HAMMERTON: The -- the auditor was 21 provided with it. 22 He didn't like our system. So, that's when 23 we had to do the download that he wanted from the 24 board for all the sales, for the AR. 25 But as far as the jour -- I mean, our 26 ledger's thick. And if they -- if somebody asks for 27 it, we provide it. 28 But he -- he got copies of parts of it, and 40 1 he didn't even want to look at it. He didn't want 2 to look at the reports we had for the -- that we had 3 turned in for the sales tax board. 4 He wanted the way he wanted it so that he 5 could see the stuff. And I do know, like I said, 6 when they downloaded all of those invoices, they 7 picked up the voids. They weren't flagged. They 8 picked up -- some of it crossed over, because I had 9 duplicate numbers -- which I pointed out to him as 10 well. 11 There was the -- there was -- you know, it 12 had the wrong customer on some of them. I'd show 13 him the invoice and the reports say one thing and 14 the invoice said something different, things like 15 that. 16 And I -- and as far as job folders, he did 17 get the job folders if he asked for job folders. 18 We've always provided the job folders during the 19 audits that I know of. 20 MS. MA: So, were you the bookkeeper at the 21 time for this -- 22 MS. HAMMERTON: No, I was not. 23 I was -- I was called in because the 24 bookkeeper actually had left during that time 25 frame -- to come in and clean it up with them. 26 MS. MA: So, were you able to reconcile 27 your books with the sales tax audits? Or were there 28 discrepancies, in your opinion? 41 1 MS. HAMMERTON: With the -- what the 2 audit -- when the audit went down, I went back 3 through -- I went through and marked everything up 4 for him. 5 I did a total -- a beginning spreadsheet 6 with every invoice on it for him back when. So -- 7 to show him what was off on what he asked to have 8 downloaded. 9 So, yeah, our books does not reflect the 10 same as that printout because there was a lot of 11 stuff in there that we don't have in ours because 12 they're voided. 13 I can print out my voids. They're 14 separate, which told him I could. 15 MS. MA: So, did you reconcile the -- 16 your -- you obviously looked at your sales tax 17 filings? 18 MS. HAMMERTON: Right. 19 MS. MA: Did they tie to your books and 20 records? 21 MS. HAMMERTON: Yes, they did. 22 MR. RUNNER: I have a question. 23 MS. MA: One other question, to maybe the 24 BOE. 25 When did your company start? 26 MS. HAMMERTON: Oh, the company's been in 27 business since, I believe, '87. 28 MS. MA: '87. 42 1 MS. HAMMERTON: Yes. 2 MS. MA: So, it looks like since '89 the 3 BOE has audited them -- audited the company every 4 year almost, right? 5 MR. LAMBERT: No. 6 MS. HAMMERTON: No. I mean -- 7 MR. LAMBERT: We've audited them four 8 times, up through this one. 9 MS. MA: And, so, was it the same problems 10 each time? I mean, why did you feel the need to go 11 and audit them every three years, right? 12 '89 to '92, '93 to '95, '96 to '99, 2000 to 13 2002, then 2008 to 2011, 2011 to 2014 -- like why 14 are there so many audits, like continual audits, 15 time and time again for this company? 16 MR. LAMBERT: Well, we found mistakes each 17 time that we've gone out there. 18 And the audit -- the audit or two before 19 this one had a difference of $1.2 million for 20 clerical errors and resales. 21 The audit after this one, they were audited 22 again, there is a substantial liability similar to 23 the liability in this audit. 24 So, there's a history of underreporting 25 from this particular taxpayer. 26 And also -- I can't get into our audit 27 selection -- but I would point out that, you know, 28 there was a low percentage of sales that were being 43 1 reported as taxable in this particular period. 2 MS. MA: But then they have audited 3 financial statements and their auditors don't say 4 that there is irregularities and clerical errors 5 and, you know, void -- voided receipts. 6 So, I don't understand what -- what is 7 going on. If your audited financial statements -- I 8 mean, you know, maybe -- you know, I mean, when you 9 do an audit, and you get audited financial 10 statements signed by CPAs, they go through 11 everything, right? 12 They go through all your books and records. 13 They reconcile to make sure, you know, everything 14 is -- is in order, what they're reporting on the 15 financial statement is, you know, accurate. If 16 there is any problems, they list all of the 17 irregularities and, you know, attachments on all of 18 the items they need to fix. 19 Yet the BOE has audited them eight times 20 and says there is clerical errors, there's missing 21 this, you know, everything is reported wrong. 22 Yet their audited financial statements 23 don't reflect that. 24 So -- 25 MR. HANKS: Ms. Ma, if I could just add? 26 The financial statements that we're talking 27 about, the audited financial statements, really have 28 the purpose of just making a representation as to 44 1 the accuracy of the financial statement, information 2 that's contained in the financial statements that's 3 contained in the balance sheet. 4 It's not a sales and use tax audit. So, 5 those -- those CPAs aren't going to be reconciling 6 against amounts that get reported to Board of 7 Equalization. 8 So, our audits are looking at those 9 records, trying to determine whether or not the 10 amounts that they're reporting to this agency are 11 fairly representative of what's reflected in their 12 books and records. 13 And what we're finding is that there's just 14 a lack of -- of documents that the taxpayer's 15 apparently sharing with us. 16 I'm assuming that if they have audited 17 financial statements, that those auditors are 18 probably looking at job cost folders for a select 19 number of those contracts. 20 And, unfortunately, in this situation 21 taxpayer's not sharing that same information with 22 our audit staff. 23 When we asked to see those job contracts, 24 contract folders, those aren't presented to us. 25 When we asked to see -- "Where is your 26 scheduled backup that identifies how you reported 27 amounts to us on a quarterly basis?" Those records 28 aren't supplied. 45 1 When we asked for a cash receipts journal 2 to try and verify whether or not these contracts 3 were voided, and perhaps represent bad debts, that 4 information isn't supplied to our auditors. 5 So, I think -- there is different 6 information being supplied, I would guess, to the 7 CPAs that audit those financial statements than is 8 provided to our audit staff. 9 MR. BERGER: Are you a CPA? 10 MR. HORTON: Sir. 11 MR. BERGER: Sorry, I apologize. He's 12 going to act like an expert, he should -- 13 MS. MA: They're not auditors, they're 14 attorneys, so -- 15 MR. HORTON: Sir, excuse me. 16 MR. BERGER: He's talking like he knows 17 what a CPA does, and he's not a CPA. 18 MR. HORTON: Sir -- 19 MR. BERGER: I apologize, I apologize. 20 MR. HORTON: -- again. 21 MS. HARKEY: This is a court. 22 MR. BERGER: Sorry. 23 MR. HORTON: Member Ma. 24 Member Runner. 25 MR. RUNNER: Yeah, just a couple quick 26 follow-ups. 27 Let me just say, the audits that I've gone 28 through, our auditor has followed up on our records 46 1 in regards to anything that we had liabilities in 2 regards to. 3 So, I'm not sure exactly what kind of an 4 audit would ignore your relationship with a State 5 agency to which you were filing with. 6 So, I don't know. Member Ma might have far 7 more experience than I do, obviously, in auditing -- 8 but for the organizations that I am a part of that 9 get audited. 10 But let me just follow up on this -- the 11 things that we say are lacking -- and this kind of a 12 frustration that I have when we get into the idea 13 of -- of what a taxpayer says they provided to an 14 auditor and then what we say we didn't get. 15 'Cause I'm thinking the gap here is when 16 you all received this information, and you are 17 getting this, you are reflecting back on the record 18 of what the auditor said that they asked for and 19 got, is that correct? 20 MR. LAMBERT: That is correct. 21 MR. RUNNER: You didn't, in yourself, 22 follow up to see if any of these things were ever 23 provided? 24 MR. LAMBERT: We don't have direct 25 knowledge of it -- 26 MR. RUNNER: Right. 27 MR. LAMBERT: -- other than what the 28 written records say. 47 1 MR. RUNNER: Yeah, which is kind of my 2 frustration right now is that -- is that you got a 3 taxpayer that said, "I provided that. I did that." 4 And the auditor -- and again we have 5 somebody -- the taxpayer saying, "But the auditor 6 didn't like the form I gave it in." 7 And, so, I get frustrated then because 8 you're representing secondhand what took place. 9 The taxpayer is kind of reporting back on 10 what their direct conversation was and what they 11 provided. 12 So, you know sometimes it's frustrating to 13 me, quite frankly, that we don't have the auditor 14 here to find out exactly what took place. 15 Because it's very difficult then for -- I 16 mean, again, you're just reading the record. So, 17 that's a -- kind of a frustration that I have. 18 And, so, the only really -- when they say, 19 "We provided that," the only thing that you really 20 can say is you don't have any record of the auditor 21 reporting that they received that, correct? 22 MR. LAMBERT: Well, that's more of a 23 negative. 24 There is an actual statement that says, "I 25 didn't receive it." 26 MR. RUNNER: Right, right, I think that's 27 what I said, the auditor didn't say that -- the 28 auditor -- 48 1 MR. LAMBERT: They indicated -- well, there 2 is indication that, "I asked for it, didn't receive 3 it." 4 So, it's more of a positive. 5 MR. RUNNER: Again, I guess, but a part of 6 the problem is -- what I'm hearing a little bit is 7 the auditor was asking a certain way that it be 8 presented. 9 I think what I'm hearing from the taxpayer 10 is their records -- their processes just don't 11 provide it in that system -- 12 MS. HAMMERTON: Right. 13 MR. RUNNER: -- that way. 14 And, so, you know, I'm -- I am wondering if 15 we just have people talking past each other, you 16 know, in that -- in that regard. 17 So, I'm -- you know, that is a -- sometimes 18 I get frustrated that when we have a taxpayer who 19 says, 20 "I did that. I did that. I did that. 21 The auditor said this. The auditor told me 22 this or whatever." 23 And then basically we have the Department 24 saying, 25 "We did that. We did that. We looked 26 at it." 27 But, in reality, it's really not firsthand 28 knowledge. 49 1 And that's a little frustrating at times 2 for me. Because at times it would be good to say 3 now -- to the auditor, 4 "How did -- how did -- how did you 5 respond when they -- why did you ask them 6 for it in a form that --" 7 'Cause again, I don't think the taxpayer is 8 responsible for providing a certain form of the 9 report. They're just responsible for returning the 10 information, correct? 11 MR. HANKS: Correct. 12 MR. LAMBERT: Correct. 13 MR. RUNNER: Okay. You know, clearly from 14 my perspective there's a number of issues, of which 15 a lot of them revolve around the -- specifically 16 around the -- the -- the debt write-off that 17 requires, I think, you know, some time for the 18 taxpayer and the Department to continue on some 19 discussions on this. 20 But I would really also -- if we end up 21 going down the path of some more time for you all to 22 work it out -- to actually have the Department 23 firsthand review with the auditor, a conv -- was 24 there conversation with the auditor or was this 25 just -- 26 MR. LAMBERT: Well, I -- I did not have a 27 conversation with the auditor. The auditor and the 28 audit supervisor no longer work for the Board of 50 1 Equalization. 2 I did have contact with the auditor that -- 3 that conducted the re-audit. 4 MR. RUNNER: Okay. 5 MR. LAMBERT: And I heard what she said. 6 But, you know, that's the problem in a lot 7 of cases is, you know, some of the auditors are no 8 longer with agency and what we have is the record -- 9 MR. RUNNER: Right. 10 MR. LAMBERT: -- of what they've written 11 up. 12 MR. RUNNER: Right, okay. 13 Well, I -- for right now, I would ask us to 14 move a 30-30-30, with a continued hearing based upon 15 some of the discussion. 16 MR. HORTON: Uhmm -- 17 MR. RUNNER: We can do it later or now, 18 doesn't make any difference. 19 MS. HARKEY: I would -- I would like to 20 have a comment. 21 MR. HORTON: Yeah, let me ask a couple of 22 questions. 23 MR. RUNNER: Sure, sure. 24 MS. HARKEY: Go ahead. 25 MR. HORTON: Okay. I think it's -- given 26 that this is the fourth audit, that auditors have 27 gone in and reviewed these books and records and 28 came up with similar results, let me ask, would it 51 1 be helpful if -- I'm supportive of the 30-30-30 -- 2 but would it be helpful if -- if you had an 3 opportunity to consult with an auditor as to what is 4 taxable and what's not taxable? 5 I mean, part of your testimony relative to 6 whether you install or you don't install, you didn't 7 charge tax on it -- I'm fully aware that the 8 Department simply took your accrual account and 9 reconciled that to the reported amounts. 10 All this other -- what happened in between, 11 your accrual account is the amount that you said you 12 collected as far as sales tax. So, at worst, we 13 would have an excess tax reimbursement issue -- at 14 worst, relative to the amount collected and reported 15 in your records that they reconcile. 16 We could also have an issue -- if we're 17 going back looking at these installation charges, 18 whether they're actual services in connection with 19 the sale, if the taxpayer's testimony is correct, 20 that they didn't make any installations, that those 21 were services in connection with transaction and not 22 an actual installation. 23 So, presumingly, and if those installation 24 charges were not -- tax wasn't charged on those 25 installation charges, that -- according to your 26 testimony was a service in connection -- then the 27 tax wouldn't have appeared in the accrual account 28 and the Department wouldn't have picked them up. 52 1 And, so, maybe I should go to Mr. Angeja, 2 just to provide some clarification as it relates to 3 to Regulation 1642, I believe, and bad debts. 4 Because the bad debts are -- my 5 understanding at least -- is claimable when they 6 have been charged off. 7 And, so, those would be reflected in the 8 charge off, would be only the charge off within the 9 audit period. 10 So, the one subsequent may also create some 11 overlap and may inspire the agency to go back out 12 there again -- if they're not already out there. 13 MR. ANGEJA: You've got it correct. 14 The -- with regard to 1642, it has to be 15 charged off for income tax purposes in order to 16 qualify as a deduction for sales and use tax 17 purposes. 18 There would be a timing issue in terms of 19 when the bad debt actually accrued. It's got to be 20 applicable to that quarter for sales and use tax to 21 be written off. 22 What you were discussing with regard to 23 construction contracts, as I understand it, they're 24 asserting they weren't doing installation and 25 weren't performing as a construction contractor. 26 So then your comment is if there were still 27 services provided that they weren't a construction 28 contractor for, services that are part of the sale 53 1 of TPP are taxable. 2 So, I presume you're suggesting the measure 3 of tax could possibly even go up -- 4 MR. HORTON: I'm -- 5 MR. ANGEJA: -- and, so, that prompted your 6 question that -- the Department could advise them on 7 what's taxable. 8 My understanding here is that they billed 9 on time and materials basis and charged tax. So, we 10 wouldn't have an issue of an increase or assessing 11 additional tax on services, it would only be the tax 12 that's been applicable to the sales of tangible 13 personal property that they said they accrued it. 14 Whether we've got accounting errors in that 15 process is where it would be helpful to do a 16 30-30-30. 17 MR. HORTON: All right. So -- 18 MS. HARKEY: Do you understand, sir? 19 MR. HORTON: Yeah. 20 MS. HARKEY: Do you understand what a 21 30-30-30 is? 22 MS. HAMMERTON: No. 23 MS. HARKEY: You get thirty days to dig up 24 all of the records. 25 They get thirty days to review them all. 26 And then they come back here -- well, we 27 want it to come back here -- isn't that kind of what 28 it is? 54 1 Thirty days -- you've got -- all this stuff 2 that you said you had, that you can prove up -- and 3 don't take it lightly, 'cause it could work against 4 you or for you is what you were just told. 5 But you need all the stuff that you said 6 that you provided -- provide, show, and display. 7 And let the Department review it. 8 We want to see it back to be sure that 9 we're reviewing everything because we don't just 10 want this to go on into limbo. 11 And that's why there's 30 -- so, within 90 12 days we would expect you back here with some -- or a 13 settlement of sorts, or whatever it is you decide to 14 do -- pay up or whatever -- we would expect it to 15 be, you know, within that 90-day period. 16 So, there are a lot of things you're saying 17 that you provided that they're saying they didn't 18 get. 19 Well, I'd suggest that if you're going 20 to -- you provide them now. And you document that 21 you provided them. 22 And, quite honestly, when you come back to 23 the Board, if there's another Board hearing that you 24 choose to go through, that you provide us with 25 something a little bit more than, "Hey, they were 26 bad," or "They didn't do this." 27 We want to see what you've provided. Make 28 a package for us. This is important to you. It's a 55 1 lot of money. So -- 2 MS. HAMMERTON: I have one question on 3 providing, would it be on these 25 or you want it on 4 the whole thing? 5 Because you're talking about six books a 6 year of invoices. 7 MS. HARKEY: Yeah, you'll need to discuss 8 that with -- 9 MS. HAMMERTON: Five -- 10 MS. HARKEY: -- the auditor. 11 MS. HAMMERTON: Okay. 12 MS. HARKEY: Okay, you decide exactly 13 what -- what they need to see. 14 Because you said that you have job files. 15 And they say they didn't see job files. 16 You said you had them and you would have 17 provided them. I would suggest you do provide them. 18 You say that you have whatever the bad -- 19 bad debts, figure that out. 20 If there are voided invoices and you can 21 prove that these are voided sales that were 22 rebilled, prove that up. 23 Those seem to be the major issues. And 24 since you've been through this audit, I would assume 25 it's not that -- I mean, audits are always 26 cumbersome, but you've had -- you said you did all 27 this one time. 28 So, I'm hoping you can -- sounds like there 56 1 is a lot going on. 2 But you just prove up -- the burden of 3 proof is on the taxpayer, and understand that. It's 4 not -- it's not okay for you to just sit here and 5 say, "Well, we gave it to them, but, you know, they 6 didn't look at it. 7 Or, "We would have given it, had they 8 asked -- had they asked." 9 I don't care if they asked or not, give 10 them your proof -- give them your proof, because the 11 burden of proof is on the taxpayer in tax law. 12 MS. HAMMERTON: Okay. 13 MS. HARKEY: So, they're not being mean, 14 they need -- but they -- they're trying to do their 15 job. 16 And if you have any data, bring it forth, 17 don't wait to be asked for it. 18 MS. HAMMERTON: Okay. 19 MS. HARKEY: You prove up. 20 MS. HAMMERTON: But they're going to tell 21 me what ones they want to see, 'cause as I was 22 saying, you know -- 23 MS. HARKEY: Yeah, they can get -- 24 MS. HAMMERTON: -- six binders about yay 25 big (indicating) per year. There's four or five 26 file cabinet drawers per year of job folders. 27 So, I mean, if you just want them all 28 dumped -- 57 1 MS. HARKEY: Well, I think with the 25 2 files that they examined, that's what they'll want 3 to see. 4 And I'm not going to dictate this, but I 5 think you can probably meet with them afterwards. 6 MR. LAMBERT: Yes. 7 MR. HANKS: Yes. 8 MS. HARKEY: Thank you. 9 MR. BERGER: Just -- may I ask a question? 10 There's nothing to prohibit them from 11 having one of their auditors come out and looking at 12 whatever they want, as opposed to her boxing up? 13 MS. HARKEY: That's okay too. You guys 14 work it out. 15 I mean, if it's -- if it's real cumbersome, 16 then let's just arrange and get it done. 17 But what I'm saying is don't wait to be 18 asked to prove what you are telling us. 19 MR. RUNNER: Well, I'd actually ask the 20 Department to make sure that they communicate 21 clearly what it is that they believe the taxpayer 22 needs to provide. 23 'Cause I'd hate to have us talking past 24 each other. 25 MR. HANKS: Sure. 26 MR. RUNNER: So, I think if we can do that, 27 then they can basically go on their drill of going 28 through and finding out what that is. 58 1 MS. HARKEY: Well, it's basically seven 2 files. Seven were adjusted -- seven out of the 25 3 that were adjusted, that's where I have where your 4 problem is. 5 MR. HORTON: Let's go back to the 6 Department. 7 Which items did you adjust for? 8 MR. LAMBERT: Well, there's a number of 9 them, seven, but that -- 10 MR. HORTON: And what was that adjustment? 11 MR. LAMBERT: -- what was the adjustment? 12 Oh, I'd have to go through and add them up, 13 but -- I don't know what the total is. 14 MR. HORTON: How does that tie into the 15 liability, those adjustments? 16 MR. LAMBERT: It doesn't tie into the 17 liability because it's not included in the 18 liability. 19 Only the items that remain, the 17 items, 20 would be included. So, we really don't need all 25 21 contracts because we've already accepted a number of 22 them. 23 So, we're -- really only the ones at issue. 24 Now we may need the -- we would need the cash 25 receipts journal for the entire period of time, 26 because we need to see the payments that were made 27 and what went into the bank account during that 28 particular time period. 59 1 So, that's going to be -- you know, we need 2 to see exactly when the payments were made, in fact, 3 were multiple payments made for different jobs? 4 And, so, it's -- it's a big task, I mean, 5 it took a long time. 6 MR. HORTON: Let me -- Mr. Berger, you do 7 understand that the audit liability is based on the 8 reconciliation of the accrual account? 9 MR. BERGER: Yes. 10 But if I may clarify, the seven -- the 11 originally -- the original liability was all 25 when 12 we appealed and went through a re-audit type of 13 thing. 14 And we did the spreadsheet that he's 15 referring to that I referred to earlier. Seven were 16 adjusted in there. And then the audit was -- I'm 17 sorry, the liability was reduced for those seven. 18 Just put it all in there. 19 MR. HORTON: Where we are now is just a 20 reconciliation -- 21 MR. BERGER: Of the 18? 22 MR. HORTON: -- of the accrual account to 23 what was reported. 24 And, so, many of those -- the variables, as 25 the Members have pointed out, the variables relative 26 to the bad debt account, if the bad debt wasn't 27 charged off against the accrual account, then there 28 should be an adjustment to the audit. 60 1 The other invoices, if your testimony is 2 that you're -- even if it's billed time and 3 material, presuming that the testimony is that the 4 time was partly installation -- I think I heard 5 installation and sales tax was part of the 6 computation, sort of implying that the 7 installation -- which was not an installation, but a 8 service -- wasn't included in the sales tax -- that 9 they would want to sort of examine those documents 10 again. And see if there's any amount that should 11 have been accrued that wasn't accrued. 12 MR. BERGER: I don't know that that portion 13 was ever part of the audit originally. 14 I understand what you are saying. 15 MR. HORTON: No, I'm not even looking at or 16 thinking about what originally happened. 17 I'm only discussing where we are currently. 18 Where you are currently is is that they have looked 19 at your accrual account, reconciled it to what you 20 reported and picked up the difference. 21 I mean, it's -- it's a thick audit, you 22 know, that led them. And they went through looking 23 at a lot of different documentations that led them 24 to a much more simpler way of coming up with the tax 25 liability. 26 And, so, if you want to revert back, I just 27 want to make sure that, you know, that you have that 28 opportunity. 61 1 Why don't we do this, Members, I'm going to 2 ask that the Department consult with the taxpayer, 3 provide them with copies of the law, make sure that 4 they thoroughly understand what the law says as it 5 relates to construction contractors, time and 6 material billing, services in connection with the 7 sale of tangible personal property, Regulation 1642, 8 as it relates to your bad debt deductions. 9 And then through Appeals -- Appeals will 10 come back, if you want a 30-30-30 at that point, I 11 think it -- that there is wisdom in providing the 12 taxpayer with what they want. 13 Does that work for you? 14 MR. BERGER: That sounds fine, your Honor 15 -- Mr. Chairman. 16 MR. HORTON: That will work. 17 MR. BERGER: I'm just a little confused on 18 the timing. 19 So, the 30-30-30 doesn't start until after 20 they provide us with the law? Or is the 30-30-30 21 starting and we're back in 90 days? 22 MR. HORTON: Mr. Angeja -- 23 MR. BERGER: We're going to try to do all 24 of that within the 90 days. 25 MR. HORTON: -- just to make sure we put it 26 on the record. 27 MR. ANGEJA: I think I understood you to 28 say that you want them to do that process right now. 62 1 MR. HORTON: No, they're asking for an 2 explanation of the 30-30-30. 3 MR. ANGEJA: Which is needed before they 4 leave here today, but the Board -- 5 MR. HORTON: You can give it to them right 6 now. 7 MR. ANGEJA: -- and Ms. Harkey covered most 8 of it, but you would have -- 9 MR. HORTON: I know, you did an excellent 10 job. 11 MR. ANGEJA: -- you would have 30 days 12 within -- 13 MR. HORTON: But he's asked again. So, I 14 just want to make sure. 15 MR. BERGER: No, I just didn't know if the 16 30 starts now or what you just asked him to provide 17 us is within that 30 days. 18 MR. HORTON: Well, what's going to 19 happen -- what's going to happen now is that before 20 we leave, you will have an opportunity to have a 21 discussion with the Department. 22 And then you'll come back and the 23 Department will tell us that the taxpayer's 24 requested that we give them the 30-30, knowing what 25 the law says, and where -- what the audit liability 26 is based on. 27 MR. BERGER: Okay. 28 MR. HORTON: Or, you know, we can move a 63 1 30-30-30 right now. 2 I mean, I'm -- I just would prefer that you 3 have the maximum amount of knowledge and 4 understanding because your testimony seems to 5 contradict your desire to have the liability go 6 down. 7 MR. BERGER: I think your recommendation is 8 fine with us. 9 Let's have a chat and we can come back. 10 MR. HORTON: Okay. Thank you. 11 Well, you won't come back, but you will 12 communicate through -- 13 MR. BERGER: Yeah. 14 MR. HORTON: -- okay. 15 MS. HARKEY: Sometimes it's 30-30-90. 16 MR. RUNNER: 30-30-30 is a guideline. 17 MR. HORTON: Yeah. 18 MR. ANGEJA: It is 30 for the taxpayer, 30 19 for the Department, and 30 for Appeals to do its 20 analysis. 21 And then when that's complete, it comes 22 back on the next available Board calendar. 23 So, it's not literally 90 days before it 24 comes back to you, but I know Board Proceedings 25 enforces those timelines with some latitude. 26 MR. RUNNER: Right. 27 MR. HORTON: And also be advised that the 28 interest continues to accrue 'til the liability is 64 1 paid. 2 So, if you -- if you have a guesstimate as 3 to what you think the liability might be, and you 4 want to save yourself 30, 90, 100 days of interest, 5 you could do so that way. 6 All right. So, is there a motion to take 7 the matter under submission? 8 Moved by Member Stowers. Second by Member 9 Harkey. 10 Without objection, Members, such will be 11 the order. 12 The Board looks forward to hearing from the 13 two of you, through the Appeals Unit, relative to 14 the 30-30-30. 15 Thank you very much for appearing before us 16 today. And good luck. 17 MR. BERGER: Thank you very much. 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 65 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 NOVEMBER 18, 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 65 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: DECEMBER 18, 2015 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 66