1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 16, 2015 10 11 12 13 14 15 FINAL ACTIONS 16 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Sen. George Runner (Ret.) Vice Chair 6 7 Fiona Ma, CPA Member 8 9 Diane L. Harkey Member 10 11 Yvette Stowers Appearing for Betty T. 12 Yee, State Controller (per Government Code 13 Section 7.9) 14 Joann Richmond 15 Chief Board Proceedings 16 Division 17 For Staff: Jeff Angeja 18 Tax Counsel IV Legal Department 19 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 16, 2015 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: That concludes our 7 administrative session. 8 Next are those items that have been taken 9 under submission. 10 MR. RUNNER: What happened to P, 3-day 11 review issue? 12 MS. HARKEY: We took that off. That got 13 moved so they could work on it. 14 MR. RUNNER: I thought it got resolved. 15 Okay. 16 MR. HORTON: Okay. Good? Need a break? 17 MS. HARKEY: Good. 18 MR. RUNNER: What's that? 19 MS. HARKEY: Good. 20 MR. HORTON: Need a break? Good? 21 MR. RUNNER: No, I'm good. 22 MS. HARKEY: No, we only have 23 (inaudible). 24 MR. HORTON: We're good? Okay. 25 MS. RICHMOND: Our first item is B1 26 Craigslist, Inc. 27 ---oOo--- 28 ITEM B1 3 1 CRAIGSLIST, INC. 2 NO. 725838, 843070 3 ---oOo--- 4 MR. HORTON: Is there a motion, Members? 5 MS. STOWERS: Move to sustain the Franchise 6 Tax Board. 7 MR. HORTON: Member Stowers moves to 8 sustain the Franchise Tax Board. Second by Member 9 Ma. 10 Without objection, Members, such will be 11 the order. 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our next item is B2 Hexu 3 Zhao. 4 ---oOo--- 5 ITEM B2 6 HEXU ZHAO 7 NO. 849110 8 ---oOo--- 9 MS. HARKEY: Move to sustain the FTB. 10 MS. STOWERS: Second. 11 MR. HORTON: Member Harkey moves to sustain 12 the FTB. Second by Member Ma. 13 Without objection, Members, such will be 14 the order. 15 ---oOo--- 16 17 18 19 20 21 22 23 24 25 26 27 28 5 1 MS. RICHMOND: Our next item is C1 Rocks, 2 LLC. 3 ---oOo--- 4 ITEM C1 5 ROCKS, LLC 6 NO. 459156(GH) 7 ---oOo--- 8 MS. HARKEY: I'm going to move to abate the 9 fraud penalty and, instead, assert a 10 percent 10 penalty for negligence. 11 MR. HORTON: So moved. Second by Member 12 Ma. 13 Objection noted. 14 Ms. Richmond, please call the roll. 15 MS. RICHMOND: Mr. Horton. 16 MR. HORTON: Aye. 17 MS. RICHMOND: Ms. Harkey. 18 MS. HARKEY: Aye. 19 MS. RICHMOND: Mr. Runner. 20 MR. RUNNER: Aye. 21 MS. RICHMOND: Ms. Ma. 22 MS. MA: Aye. 23 MS. RICHMOND: Ms. Stowers. 24 MS. STOWERS: No. 25 MS. RICHMOND: Motion carries. 26 ---oOo--- 27 28 6 1 MR. HORTON: Ms. Richmond. 2 MS. RICHMOND: Our last item is C4 CBC 3 Steel Buildings, LLC. 4 ---oOo--- 5 ITEM C4 6 CBC STEEL BUILDINGS, LLC 7 NO. 597564(KH) 8 ---oOo--- 9 MR. HORTON: Members? 10 MS. HARKEY: This is a tough one. 11 I'm -- I'm going to move to grant the 12 appeal. 13 MR. RUNNER: I'll second. 14 MR. HORTON: Member Harkey moves to grant 15 the appeal, second by Member Runner. 16 Objection noted. 17 Ms. Richmond. 18 MR. ANGEJA: Point of -- point of 19 clarification, if we might. If that motion were to 20 pass, the Board should consider conditioning the 21 refund on the return of the excess tax reimbursement 22 to the contractor, in accordance with Regulation 23 1700(b), because that conclusion would be that tax 24 was collected on a nontaxable portion of the 25 transaction. 26 MS. MA: One more time? 27 MR. HORTON: So -- 28 MR. ANGEJA: That motion in favor of the 7 1 taxpayer is to grant a refund to the taxpayer, but 2 they've collected excess tax reimbursement if that 3 motion were to prevail. So it should be conditioned 4 on returning it to the customer from whom they 5 collected it, which is the contractor. And that's 6 in accordance with Regulation 1700(b)(2). 7 MR. HORTON: Yeah, I kind of thought that 8 was automatic, but -- 9 Mr. Runner, objection to that? 10 MR. RUNNER: No. 11 MR. HORTON: No objection to that being the 12 case, second -- maker of the motion has accepted 13 that. Presuming the second has as well, such will 14 be the motion. 15 Any discussion in that regard? 16 So, in essence -- 17 MS. STOWERS: To grant -- excuse me. 18 MR. HORTON: -- to grant would provide 19 42,000 -- 45, $46,000. 20 MS. STOWERS: Although the claimant was 21 not -- 22 MS. HARKEY: But the payment was made. It 23 was just convoluted, if you recall. It was a 24 contractual, I'd say. 25 MS. STOWERS: Yeah, I mean -- 26 MS. HARKEY: It was substance -- or, you 27 know, form over substance in my opinion, and that's 28 why I made the motion. 8 1 I think the taxes were paid -- or the taxes 2 were paid, the refund was intended to be for the 3 purpose of, but only it was to a different entity 4 which confused -- and the taxpayer has done it 5 properly going forward, so -- 6 MR. HORTON: Yeah. My concern with this is 7 that we're establishing that even if the taxpayer 8 actually has done it wrong going forward and should 9 make the adjustments subsequent to this if this is 10 the ruling of the body. All the other transactions 11 are wrong, but this one's right. But every other 12 one that he's done right, according to what the 13 Department has said, is actually wrong. 14 MS. HARKEY: Well, we're not writing an 15 opinion on this. I mean, it's not like we're going 16 to use this time and time again. I think this was 17 an extenuating circumstance. It was just really -- 18 it was really confusing, I think, for everybody 19 involved. 20 MR. HORTON: Okay. My other concern with 21 this, Members, is that it's just -- I mean, 22 unfortunately, the Legislature does form over 23 substance all the time, and then we're stuck here 24 having to follow the law, or attempt to. 25 And part of the reason that they -- they -- 26 at least when I served there, is there's a revenue 27 issue if they -- if they expanded it to 28 manufacturers, it would expand the revenue based on 9 1 the revenue adjustment. 2 The other issue is, when they expand it to 3 the manufacturers to be able to in fact actually 4 take the credit or make this transaction, which 5 in -- what is taken in the case, they're able to 6 collect sales tax from a vendor, pay it to the Board 7 of Equalization, offset it on their tax return. And 8 so the intent is to sort of isolate the tax credit 9 or the tax benefit to the individual, in this case 10 the farmer, and not to expand that credit beyond the 11 dollars allotted by the Legislature. 12 I certainly would support legislation to -- 13 to amend that. Quite frankly, I think the dollar 14 value might not make it. 15 MR. RUNNER: This -- this is not what -- I 16 don't think that -- this is what this is. This is 17 clearly the issue that -- again, I get the hurdle. 18 I get the problem. I know why it's a hassle to do 19 it. I get the fact that the law is specific on this 20 issue. 21 I just get frustrated when it is that 22 somebody who is supposed to, with the intent of the 23 law, be able to be able to get the -- to -- to 24 receive the tax benefit. And because of the 25 procedural issues -- this is the procedural issue. 26 This isn't trying to give it to the manufacturer. 27 This is a procedural issue that kept it out of the 28 hands of the intended person, which was the farmer. 10 1 So I get the hassles. I know why this is a 2 hurdle, but at the end of the day I -- I just have a 3 hard time when a farmer comes up here and says, "Why 4 don't I get this? I did everything. I'm a farmer. 5 This is what the intent of the Legislature was. Why 6 don't I get this?" 7 We say, "Well, if you would have just 8 bought the building and this guy would have just 9 billed it for you, then you would have been okay." 10 I get why citizens get frustrated with the system. 11 And so I just -- I -- you know, when it 12 comes to me, I'm just willing to go ahead at times 13 and say, "Look, I think we need to understand that 14 sometimes the system's too -- too -- too nuanced for 15 people." 16 I think this is a perfect example of why we 17 have to have aggressive education systems out there. 18 Why it is we need to be out in the field, why we 19 need people out in the field talking about these 20 kinds of things; so that people don't miss the 21 opportunity that is there when they get -- 22 My concern always has been I believe people 23 need to pay the proper amount of tax. That means 24 they should get all the tax benefit, too. This is a 25 guy who didn't get the tax benefit he should have. 26 MR. HORTON: Well, I mean, I share the 27 frustration. And I think everybody shares the 28 frustration and we get it. And this farmer that's 11 1 come before us recorded it wrong. I don't know why. 2 I do know the tax benefit to the 3 manufacturer has occurred and don't think that 4 that's going to be unwind by our vote. And so we're 5 going to end up with two parties out there 6 benefiting from this. 7 And not only this farmer, but then the 8 concern goes to every other farmer who did it right, 9 every other farmer who had the benefit of a zero sum 10 gain environment where there's a limited amount of 11 tax credits provided by the Legislature. Now -- now 12 the incumbency upon them creates a problem. 13 And so -- well, anyway, that's -- that's my 14 concerns. 15 There's a motion on the floor. There's a 16 second. 17 MS. MA: Can I -- 18 MR. HORTON: Objection noted. 19 Member Ma. 20 MS. MA: I'm sorry. I'd like -- I didn't 21 understand, or I just missed the conversation, about 22 the farmer wanting -- contacting the BOE and the BOE 23 giving them the advice or not accepting their 24 amendment. Does -- 25 MR. HORTON: I -- I could probably -- but I 26 prefer to go to Appeals. 27 MR. ANGEJA: My -- my understanding of the 28 testimony was that the parties tried to get CBC to 12 1 rewrite that contract or somehow revise it. 2 There's a problem, as David Levine would 3 say, once you've wrung that bell, the sale occurred 4 and apparently the contractor -- I'm sorry, the 5 vendor would not revise the contract. And so the 6 transaction actually was a sale to this contractor 7 rather than to the farmer. BOE would have no 8 ability to rewrite someone else's contract after the 9 fact. 10 MR. HORTON: And the other challenge, 11 Member Ma, was it was two years subsequent to the 12 actual transaction and the manufacturer himself 13 refused to do it. 14 MR. RUNNER: Right. 15 MS. HARKEY: Yeah, the manufacturer -- 16 MR. RUNNER: And it makes sense why that 17 would be the case. 18 MR. HORTON: I wouldn't do it either. He's 19 got the tax benefit. 20 MS. HARKEY: Does he have the tax benefit? 21 MR. RUNNER: Who? He didn't have the tax 22 benefit. 23 MS. HARKEY: He doesn't have the tax 24 benefit. He actually sold the item. 25 MR. HORTON: He sold the item. 26 MS. HARKEY: He didn't get the tax 27 benefit. 28 MR. HORTON: He had income that was offset 13 1 by a tax liability. Even though appropriately so, 2 but -- and if we unwind everything and made an 3 amendment to his tax returns, amendment to -- to the 4 grower's tax returns who reported and paid a sales 5 tax that he could have probably deducted because he 6 paid it and deducted it out of his expense, expensed 7 it off his income statement. And if he goes in and 8 we give it back to him, theoretically, I guess, it 9 would get recognized as some form of income in his 10 subsequent filing. Maybe the statute of limitations 11 has passed and he won't have to even recognize the 12 35 -- 13 Anyway, it's just -- I mean I think that's 14 why the law is the law, you know. And that's why 15 the law isn't expanded to the manufacturers and they 16 have these conditions in place, because of these 17 double-edged swords and all of these consequences. 18 The -- the intent is to direct exemption to 19 the farmers that are out there and to assure that 20 all the farmers that are out there have the benefit 21 of this deduction. And when you -- when you have 22 manufacturers being able to take the deduction 23 because of their association, you take away a 24 benefit from all the other farmers out there. 25 MR. RUNNER: No. That's not what that 26 implies, but that's fine. I mean I know -- that's 27 fine. 28 MR. HORTON: Member Runner, we got two 14 1 different views. 2 MR. RUNNER: Let's just go to the vote. 3 MR. HORTON: Okay. There's a motion and a 4 second. 5 Further discussion, Members? 6 Hearing none, noting objection, Ms. 7 Richmond, would you please call the roll. 8 MS. RICHMOND: Mr. Horton. 9 MR. HORTON: No. 10 MS. RICHMOND: Ms. Harkey. 11 MS. HARKEY: Aye. 12 MS. RICHMOND: Mr. Runner. 13 MR. RUNNER: Aye. 14 MS. RICHMOND: Ms. Ma. 15 MS. MA: No. 16 MS. RICHMOND: Ms. Stowers. 17 MS. STOWERS: No. 18 MS. RICHMOND: Motion fails. 19 MS. HARKEY: Well, we tried. 20 MR. HORTON: Well done, Member Harkey, 21 Member Ma. 22 MS. HARKEY: We tried. Okay. 23 MR. HORTON: Ms. Richmond. 24 MS. RICHMOND: The motion failed. 25 MR. HORTON: Subsequent motion, Members. 26 MS. HARKEY: Move to support the 27 Department. 28 MR. HORTON: Member Harkey moves to sustain 15 1 Franchise Tax Board. Second by Member Ma. 2 Without objection, Members -- 3 MS. STOWERS: BOE. It's the Department, 4 not FTB. 5 MS. MA: BOE. Support the BOE. 6 MS. HARKEY: Yeah, BOE. Move to support -- 7 MR. HORTON: I didn't say Department? 8 Members, strike that. 9 Member Harkey moves to sustain the 10 Department. Second by Member Ma. 11 Without objection, Members, such will be 12 the order. 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 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 December 16, 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 16 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: December 18, 2015 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 17