1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 26, 2016 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 NEW NGC, INC. 14 NOS. 485164, 547426 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 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 For the Board Jerome E. Horton of Equalization: Chairman 3 Sen. George Runner (Ret.) 4 Vice Chair 5 Fiona Ma, CPA Member 6 Diane L. Harkey 7 Member 8 Yvette Stowers Appearing for Betty T. 9 Yee, State Controller (per Government Code 10 Section 7.9) 11 Joann Richmond Chief 12 Board Proceedings Division 13 Claudia Lopez 14 Staff Services Manager II Board Proceedings 15 Division For Board of 16 Equalization Staff: Jeff Angeja Tax Counsel IV 17 Legal Department 18 For the Department: Monica Silva Tax Counsel III 19 Legal Department 20 Lawrence Mendel Tax Counsel III 21 Legal Department 22 Kevin Hanks Chief, Headquarters 23 Operations Division 24 For Petitioner: Joseph Vinatieri Attorney 25 Linda Falcone 26 Representative 27 Gopalakrishnan Sethuraman Taxpayer 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 26, 2016 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next matter is Item C, 7 Sales and Use Tax Appeals Hearings. Item C1 New 8 NGC, Inc. 9 Please come forward. 10 This taxpayer was granted an additional 11 five minutes for their presentation. 12 MR. HORTON: Mr. Angeja, as the taxpayer 13 sets up, would you please introduce the matter in 14 this case. 15 MR. ANGEJA: Good afternoon, Mr. Chairman 16 and Members. I'm Jeff Angeja on behalf of the 17 Appeals Division. 18 The appeal before you presents one 19 unresolved issue, which is whether there's any 20 overpayment of tax or tax reimbursement with respect 21 to claimant's purchases of five specific materials 22 which were used in claimant's manufacturing 23 process. 24 MR. HORTON: Welcome to the Board. I 25 believe that the taxpayer has some exhibits there 26 that they might want the Members to look at a little 27 closer maybe. Or it's your call if you want to 28 begin to distribute that now, and you would pass 3 1 that over to Ms. Richmond's team and they'll pass it 2 around to the Members. But it's entirely up to you. 3 I'm actually stalling a bit to allow you to 4 get comfortable and prepare for your presentation. 5 At your convenience, please introduce 6 yourself for the record and commence your 7 presentation. 8 MR. VINATIERI: Thank you, Mr. Chairman, 9 and good afternoon, Members. I'm Joe Vinatieri on 10 behalf of National Gypsum or NGC. To my left is 11 Linda Falcone from Ryan and Company. And to my 12 nearest left is Dr. Sethuraman. 13 And I'd just indicate to the Board that I 14 know it's a little bit late and I've got a situation 15 relative to a council meeting this evening, so I'm 16 going to try to keep this as short as possible, but 17 we need to make sure that we get all the facts on 18 the record. 19 So with that, good afternoon and thank you 20 for the opportunity to be heard. This case raises 21 the important tax policy issue of the taxability of 22 various materials that go into the 23 gypsum-wallboard-making process. 24 As you know, there are a slew of 25 annotations going back to the '50s regarding whether 26 materials are utilized as a manufacturing aid and 27 subject to tax or whether materials are, one, 28 physically present in the finished end product and, 4 1 two, whether the materials primarily serve a 2 beneficial purpose -- magic words -- with the 3 intention that these materials remain in the final 4 end product. 5 To be candid, the annotations seem to go 6 back and forth with differing interpretations 7 regarding differing materials, with differing 8 outcomes. But in the late '90s, new standards were 9 mandated and new technologies were formulated 10 resulting therefrom. So, as such, it's important to 11 have actual scientific expert testimony regarding 12 our materials here at issue. 13 And with that, I'd like to introduce you to 14 Dr. Sethuraman who possesses a doctorate in 15 analytical chemistry from Baylor University and a 16 post doctoral fellowship in crystal growth kinetics 17 from State University New York, Buffalo. He's 18 principal scientist for National Gypsum and will 19 briefly illustrate the beneficial purposes -- 20 there's the word again -- for the raw materials in 21 question via a PowerPoint presentation. 22 Dr. Sethuraman. 23 DR. SETHURAMAN: Okay, thanks. 24 MR. VINATIERI: And before we go any 25 further, does everyone have the handouts in front of 26 you? 27 MR. RUNNER: Mm-hmm. 28 MR. HORTON: Yes. 5 1 MR. VINATIERI: Yes, we do. Thank you. 2 Dr. Sethuraman. 3 DR. SETHURAMAN: Thank you. At the outset 4 I would like to thank the Chairman and the Board 5 Members for your valuable time. And I would like to 6 tell you in advance if you -- if I'm going too fast 7 or if you have any problem hearing my accent, please 8 stop me and please do so. 9 In our wallboard production, the raw 10 materials at issue are naphthaline sulfonate, acid 11 tartaric acid, potassium sulfate and alcohol ethoxy 12 sulfate, and Versenex. Among those five products, 13 acid tartaric acid and potassium sulfate they are 14 used in special boards. And all these materials 15 become part of this final product and remains in the 16 core, and this can be extracted and analyzed if you 17 need it. 18 If you go to the slide number 3, this is 19 just -- just wanted to talk about the basic reaction 20 that's happening in our wallboard production 21 process. But you see gypsum rock from our quarry, 22 the gypsum rock is crushed, ground, and made powder 23 and heated to stucco, which is calcium sulphate 24 hemihydrate. 25 To that stucco powder we add water, to the 26 gypsum. This is called hydrolysis process, 27 hydration process. And our board contains 95 to 97 28 percent, to bring out the board weight. We make 6 1 different kind of boards, very different products. 2 Depending on the board, 95 to 97 of the board weight 3 board is made out of gypsum. That 2 percent is back 4 and face paper; and the remaining is the raw 5 material that goes into the -- into that board. And 6 there's no byproduct produced in our process. 7 And in next slide, if I may, number 4, the 8 final end product qualities, these materials are, as 9 I say, integral part of the core and it remains 10 there and serves the following purposes: Lower the 11 board weight and increases the dry strength. When I 12 say dry strength, that's a (inaudible) value. And 13 sag resistance and moisture resistance and improves 14 paper to core bond. 15 These properties are key properties we have 16 to meet. The reason why, one, our customer demand 17 these qualities in the board, plus ASTM and UL. 18 ASTM is American Society for Testing Materials and 19 UL is Underwriter Lab. They have specifications for 20 these materials, also separate requirements, quality 21 requirements, we have to meet them. 22 And in the absence of these material, 23 there's the visible flaws you can see on the surface 24 of the board, like cockles, blisters, and bubbles so 25 the surface is unsmooth, and also it makes a board 26 core inferior, and also the strength goes down. 27 These are not accepted by our customers who are the 28 end users. 7 1 The next slide, what I'm going to -- I'm 2 going to talk about the raw materials purchased for 3 resale and individually. 4 If I may draw your attention to slide 5 number 6, naphthaline sulfonate. It's used in all 6 board for the purpose of hydration and enabling the 7 crystal to be longer and thinner. It's an integral 8 part of the core, even after drying. It stays in 9 the finished product and creates a strong core which 10 optimizes the dry strength. And also, it maximized 11 the humidified bond. 12 Without this material, the boards are 13 susceptible to cracking and paper peel. That's not 14 good. 15 In -- as I mentioned earlier, all of the 16 boards that we prepare have to meet the ASTM and UL 17 requirements; that's very critical. If they don't 18 meet, we cannot sell it. So it has to meet the ASTM 19 requirements. 20 And the next slide, acid tartaric acid can 21 be also be called tartaric acid. These goes into 22 special board on high ceiling, ceiling boards and 23 also hard boards, also in manufactured housing. 24 This -- purpose of this material is to 25 create water resistant coating on the crystals. 26 This material adsorbs to the surface of the crystal 27 and prevents any moisture attacking the crystals. 28 Without this material, this material stays 8 1 in the core and create sag resistant property, which 2 is heavily demanded in highly humid condition; for 3 example take Florida, Louisiana, all the coastal 4 areas where the temperature's 90 degrees and 90 5 percent humidity, these boards have to withstand 6 those kind of very harsh condition. And it provides 7 tensile strength and compressive strength in the 8 board. And since it's adsorbed to the crystal 9 surface, it remains in the final product prevent the 10 crystal hydrolysis. 11 In general, most of the minerals, they tend 12 to dissolve in water. As we speak, these boards are 13 all breathing. They are absorbing moisture and 14 releasing moisture. And what happens, high 15 ceiling -- ceiling boards, when they absorb 16 moisture, the crystals tend to dissolve a little 17 bit. In high humid condition, it's much more worse. 18 As a result of that, the crystal weakens 19 and then they can very easily break. The ceiling 20 boards not only withstand the humidified -- high 21 humid condition, it also withstands -- has to 22 withstand the gravitational force. Because 23 gravitational force is (inaudible). When the board 24 is horizontal, it's a different case. If it's 25 vertical, it's a different case. 26 So these boards have to meet these ASTM 27 requirements. In '90s ASTM, they revise the 28 specification. It used to be they deflected -- they 9 1 allowed the deflection to be 30 millimeter. They 2 decreased to eight millimeter. And we have to 3 immediately take that into consideration, make the 4 board that meets the requirement. So that's why we 5 add tartaric acid, adsorbs to the surface and then 6 coats the surface and prevents the crystal absorbing 7 moisture, so it doesn't break or sag. 8 And the next material is the potassium 9 sulfate. This is used in specialty board; we call 10 it extra protection board. As you see, two blocks 11 from here, the stadium, you can see the purple 12 board; that is XP board. And it creates large 13 crystals in the core, and it stays in the core even 14 after drying. 15 In the finished product, it produces the 16 moisture resistant property of the core, according 17 to ASTM, which allows the moisture absorption to be 18 less than five percent. If it is above that, we 19 cannot sell the board. Because these boards goes 20 into highly water traffic area, like bathroom, 21 kitchen, and gymnasiums where you have high -- high 22 amount of moisture we encounter. 23 Also, this material improves the dry 24 strength of the board. Without the material, boards 25 are susceptible to moisture, absorb moisture, and 26 the paper can peel off. And also, in highly humid 27 and moisture environment mold and mildew can grow 28 easily. So it prevents mold and mildew growth. 10 1 And on slide number 9, alcohol ethoxy 2 sulfate is used in all the board purpose of 3 creating -- purpose of incorporating fewer number of 4 bubbles into the core. It stays in the finished 5 product and significantly improves the board 6 strength, also reduce the board weight. 7 Twenty years ago, board weight used to be 8 about 1800 pounds per thousand square foot. Now 9 it's about 1400. That's what the customer demand. 10 As we reduce the board weight, we have to 11 maintain the quality of the board, too. How do we 12 do that? We have to use new technology, maintain 13 that strength in the board. And it optimizes 14 strength and also sag resistant and bond due to very 15 good paper to code bond. And I will explain it in 16 next slide, how it works. 17 Without this material, you could have seen 18 one of the board that does not contain soap, that's 19 very heavy. So if you make heavy board. And it 20 creates inferior core structure which affects the 21 strength and the bond. 22 If you go to slide number 10, please bear 23 with me. Look at the figure on your right-hand-side 24 column. That's a normal board. We did calculate in 25 the core per square cubic inch that are about 22 to 26 27 or 30,000 bubbles. And those are like 10 to 15 27 microns in size. 28 In between those bubbles, look at the white 11 1 surface. That's a solid mass. They're about 10 to 2 20 micron size width. When crack property of the 3 paper, in the top, it can very easily propagate to 4 the core through the bubbles. Bubbles -- bubble 5 walls are the weakest link. It can go through the 6 bubble and then go to the next bubble, and it can 7 propagate it easily and then crack the board. 8 And if you look at the figure on the 9 left-hand-side of your slide, it has less number of 10 bubbles. What we have done, we reduced the surface 11 area of the bubbles. And also the mass in between 12 the bubbles have increased, that's a solid mass. 13 When crack developed on the paper, it goes 14 in the first bubble. In order to go to the second 15 bubble, it has to do more work through the solid 16 surface to get to the second bubble. That means you 17 have to apply more force for the bubble to propagate 18 along the board. That tells you, that means the 19 board strength is more. So it increases the board, 20 strength of the board, the dry strength of the 21 board. 22 And also, if you look at the paper to core 23 board, the brown line that's the paper on the front 24 face and back, if you look on the right-hand-side 25 picture, the number of bubbles underneath the paper 26 is too many. So under that circumstance, the paper 27 can peel up really easily because the bond between 28 the paper and core is very minimum, not too much. 12 1 Because too much bubbles, they can peel up easily 2 and it can suffer humidified bond. Whereas, in the 3 picture on the bottom, on the left-hand corner the 4 paper exposed to the solid mass, that gives more 5 strength to the paper and core of the -- the core 6 which use pretty good paper to core bond. 7 And lastly, Versenex. This is used in all 8 board to create needle-shaped crystal. This 9 ingredient remains in the core. And it's a chemical 10 reaction, unlike other material it depends on the pH 11 factor in the process. It optimizes dry strength 12 and also increases -- improves the humidified bond 13 and paper to core bond. 14 In the absence of this, like I said 15 earlier, you can see visible flaws like cockles and 16 unsmooth surface and blisters. These things can be 17 very easily seen when people paint the wall. And 18 these are all no-no for customers; we cannot sell 19 those boards. 20 And finally, in the appendix, if you look 21 at slide number 13 and 15 -- slide number 13 and 14, 22 it gives you the overview or like a bird-eye view of 23 how the board is -- gypsum board preparation 24 process. On this slide number 14, it gives a 25 picture of how it is being made in the plant. 26 So, if you have any questions. 27 MR. VINATIERI: I think, Dr. Sethuraman -- 28 Can we ask, how much time do we have left 13 1 for our presentation? 2 MS. LOPEZ: Probably less than a minute. 3 MR. VINATIERI: Less than a minute. So 4 I'll reserve my remarks for rebuttal. 5 MR. HORTON: Thank you. 6 Members, let us go to the Department. The 7 Department has ten minutes to make their 8 presentation. And we'd ask that you commence with 9 your introduction for the record, please. 10 MS. SILVA: Good afternoon. Monica Silva, 11 and with me, Lawrence Mendel and Kevin Hanks, for 12 staff. 13 Staff agrees with the recommendation of the 14 Appeals Division in this matter. Contrary to 15 claimant's argument, its purchases of the five 16 chemicals at issue were primarily for use in the 17 manufacturing of gypsum wallboard and not for 18 physically incorporating the chemicals into the 19 finished wallboard; and therefore, the purchases are 20 not exempt from tax. 21 The law provides that tax applies to the 22 sale of tangible personal property to persons who 23 purchase tangible personal property for the purpose 24 of use in manufacturing, producing, or processing 25 tangible personal property, not for the purpose of 26 physically incorporating it into the manufactured 27 article to be sold. 28 Examples of such tangible personal property 14 1 used in the manufacturing process include machinery, 2 tools, and, as relevant in this case, chemicals used 3 as catalysts or otherwise to produce a chemical or 4 physical reaction. 5 The court in the seminal case in this area, 6 Kaiser Steel, recognized the Board's Regulation 1525 7 to be a primary purpose test. Thus, with respect to 8 chemicals, if a chemical is purchased primarily to 9 act as an aid in the manufacturing process, the 10 purchase is taxable even if some portion remains in 11 the finished product. 12 On the other hand, if the chemical is 13 purchased primarily for incorporation as a component 14 of the finished product, the purchase is not taxable 15 despite the fact that some portion may be lost or 16 otherwise dissipated in the manufacturing process. 17 In determining the primary process of 18 claimant's purchase of each chemical at issue, the 19 fact that the chemical has a beneficial effect on 20 the finished wallboard is not determinative since 21 any chemical utilized by a manufacturer during the 22 manufacturing process, regardless of whether it was 23 purchased for use as a manufacturing aid or for 24 incorporation into the final product, will 25 necessarily have some beneficial effect on the final 26 product, or why else would a manufacturer use the 27 chemical at all? 28 The test then to establish the primary 15 1 purpose is whether the chemical was purchased 2 primarily for use in the manufacturing of the 3 wallboard that claimant sells or alternatively was 4 the chemical purchased primarily for incorporation 5 into the wallboard to be sold where the chemical 6 serves some functional purpose as a result of its 7 physical presence in the finished product. 8 Based on claimant's description in its 9 submissions of the manufacturing process, the five 10 chemicals were primarily used as manufacturing aids 11 for their chemical reactions in the manufacturing 12 process. 13 Let me now review each of the chemicals. 14 First, the naphthaline sulfonate. 15 According to claimant, the naphthaline sulfonate is 16 added to disperse the solid particles to maintain a 17 homogeneous slurry mix without any lumps and enables 18 the stucco to hydrate completely during the drying 19 process and forms a crystalline structure which help 20 makes -- which helps make the wallboard stronger. 21 That's basically a high tech separator, a 22 manufacturing tool in a chemical form. 23 Yes, we certainly accept that this 24 dispersing of the solid particles increases the 25 overall board strength and makes for a better 26 wallboard for the consumer. And yes, we accept that 27 there's a measurable amount of the naphthaline 28 sulfonate left in the final wallboard product. But 16 1 what is left in the final wallboard is as a result 2 of the use of the chemical during the manufacturing 3 process. 4 Based on claimant's description of the use 5 of the chemical, the primary purpose of the 6 naphthaline sulfonate is the chemical reaction that 7 disperses the solid particles in the manufacturing 8 process. 9 One way to look at it is that it could have 10 been a piece of machinery that dispersed the solid 11 particles, but obviously this is a high tech 12 process. What the naphthaline sulfonate clearly 13 does, its primary purpose as claimant has described, 14 is to act as a dispersing agent, and that happens in 15 the manufacturing process. That is its primary 16 purpose, as a manufacturing aid, and tax, therefore, 17 applies to its purchase. 18 Now looking at the tartaric acid. 19 According to claimant, the tartaric acid is added as 20 an ingredient to the slurry and subsequently 21 chemisorbs to the crystal surface. As a result of 22 this structural modification, the tensile and 23 crystal are increased, causing an improved 24 resistance sag. 25 As I understand it, this process keeps the 26 wallboards from sagging. As claimant has described, 27 the coating prevents the dehydration of gypsum 28 during the drying process. But it's not the 17 1 tartaric acid's presence as an ingredient in the 2 finished product that keeps the board from sagging 3 or creates some other essential use. It is, 4 instead, the use of the tartaric acid during the 5 manufacturing process, whereas claimant has 6 explained it chemisorbs to the crystal surface and 7 that prevents the dehydration of the gypsum during 8 the drying process. 9 The fact that some measurable amount 10 remains in the final product and has an overall 11 beneficial effect on the final wallboard isn't the 12 determining factor. Of course, the use of tartaric 13 acid is going to have some overall beneficial 14 effect, as does every chemical used, or why would 15 claimant use it at all? 16 What must be examined is where is its use 17 of primary benefit? Here, it is in the 18 manufacturing process when it chemisorbs to the 19 crystal during the drying process. Once it does 20 that in the drying process, the tartaric acid has 21 fulfilled its purpose. It is not an essential 22 ingredient added for incorporation to the final 23 wallboard. 24 As claimant has itself described, its use 25 of the tartaric acid was primarily used as a 26 manufacturing aid during the drying process, and tax 27 therefore applies to its purchase. 28 Now looking to the potassium sulfate 18 1 commonly referred to as potash. According to 2 claimant's description, potash is an ingredient -- 3 is added as an ingredient to increase the 4 super-saturation of the slurry mix. As a result of 5 the addition, the rate of nucleation increases, 6 which increased the stucco hydration rate and 7 provides the snap set. In addition, it changes the 8 morphology of the crystals -- gypsum crystals, 9 making a smaller surface volume. It serves to swell 10 the gypsum crystals and promote crystal growth. 11 The patent claimant provides for this 12 process is potash as an accelerator. The potash 13 accelerates the crystal growth. As claimant has 14 provided, if potash is not added, stucco hydration 15 is delayed and this wallboard does not set before 16 entering the kiln. Therefore, based on the 17 claimant's own description, the use of the potash is 18 in the manufacturing of the gypsum. It accelerates 19 the crystal growth. 20 Once added, its use is completed in the 21 manufacturing process. Its presence is a result of 22 the chemical reaction, the acceleration caused by 23 its use in the manufacturing process. Therefore, 24 its primary purpose is as a manufacturing aid and 25 its purchase was properly subject to tax. 26 Now looking at the alcohol ethoxy sulfate. 27 Claimant has explained that the alcohol ethoxy 28 sulfate foams in a manner that produces large 19 1 bubbles. Therefore, as I understand it, its primary 2 purpose is to make bubbles in the manufacturing 3 process. Once that is completed in the 4 manufacturing process, the chemical's presence is 5 not a primary ingredient with an essential function 6 in the final wallboard. Its use as a high tech 7 bubble-making machine has occurred in the 8 manufacturing process as a manufacturing aid. 9 We certainly accept that the use of the 10 chemical has an overall beneficial effect and it 11 causes -- in that it causes a lighter wallboard, but 12 its contribution, its primary use, is its 13 bubble-making in the manufacturing process. 14 Therefore, as a manufacturing aid, the sale of the 15 alcohol ethoxy sulfate was subject to tax. 16 Lastly, the Versenex. Claimant has 17 described the Versenex as a chelating agent that 18 bonds with calcium. The addition of Versenex as an 19 ingredient helps to reduce lump formation by 20 controlling the rate of nucleation without affecting 21 the stucco hydration rate. Which, as claimant has 22 further explained, it is used as a set retarder in 23 the wallboard. It slows the hydration of the stucco 24 and controls the fluidity of the slurry before the 25 setting process. 26 Once again, this chemical is used in the 27 manufacturing process for the chemical reaction that 28 occurs in order to help reduce lump formation 20 1 because lumps impact the structural integrity of the 2 finished wallboard. Claimant doesn't want lumps to 3 form during the manufacturing process, so Versenex 4 is added to slow the hydration of the stucco before 5 the setting process. Therefore, the primary use of 6 the Versenex is as a chelating agent in the 7 manufacturing process. It is not a chemical added 8 as an ingredient in the final product. As claimant 9 has described the use of the Versenex, it's not an 10 essential ingredient in the finished wallboard and 11 it does not provide a beneficial effect as a result 12 of its physical presence in the finished wallboard. 13 Instead, while a measurable amount of the 14 Versenex can apparently be found in the final 15 wallboard, the chelating is completed in the 16 manufacturing process before the setting. 17 Therefore, the primary purpose of the Versenex was 18 as a manufacturing aid to slow the hydration of the 19 stucco and, therefore, the sale of the Versenex to 20 claimant was a taxable sale. 21 In conclusion, we are in agreement with the 22 recommendation of Appeals that the claims for refund 23 for the five chemicals be denied. 24 MR. HORTON: On rebuttal, please. 25 MR. VINATIERI: Yes, at issue today is the 26 plain language of Regulation 1525. And let me read 27 you (a). 28 It says: 21 1 "Tax applies to the sale of TPP to 2 persons who purchase it for the purpose of 3 use in manufacturing, producing or 4 processing TPP and not for the purpose of 5 physically incorporating it into the 6 manufactured article to be sold. Examples 7 of such property are machinery, tools, 8 furniture, office equipment and chemicals 9 used as catalysts" -- 10 Chemicals used as catalysts. 11 -- "or otherwise to produce a chemical 12 or physical reaction such as production of 13 heat or the removal of impurities." 14 So the first question here is whether the 15 materials in question were purchased for use in the 16 manufacturing process and not for the purpose of 17 physically incorporating them into the manufactured 18 article to be sold. 19 Now you just heard testimony from Dr. 20 Sethuraman that the materials in question were 21 indeed fully incorporated into the manufactured 22 wallboard to be sold. All the material was 23 physically incorporated with none of the materials 24 escaping or dissipating in the process. They all 25 went in. 26 Second, section (a) gives several examples 27 such as chemicals used as catalysts to create a 28 chemical or physical reaction such as the production 22 1 of heat or removal of impurities. 2 Here, the materials in question do neither. 3 There is no chemical reaction in any of these, 4 except for Versenex in certain circumstances. So 5 there are no chemical reactions. 6 Secondly, the materials here, there is no 7 production of heat as is specific in the regulation, 8 (a). There's no removal of impurities. 9 So the materials in question flunk the 10 specific words of the manufacturing aid test of 11 section (a). But we got to look at the second test, 12 which is (b). And it says: 13 "Tax doesn't apply to sales of TPP to 14 persons who purchase it for the purpose of 15 incorporating it into the manufactured 16 article to be sold, as an example, any raw 17 material becoming an ingredient or a 18 component part of the manufactured 19 article." 20 And the word component's very important; 21 (b) is precisely the point. As you heard from Dr. 22 Sethuraman, the materials in question are indeed a 23 component part of this finished wallboard that we're 24 looking at. 25 (Knocking on board.) 26 MR. VINATIERI: It's all around us here. 27 It's everywhere. 28 And the materials we're talking about 23 1 provide critical characteristics to the final end 2 product as demanded by consumers and the ASTM 3 standards that Dr. Sethuraman talked to you about. 4 Now -- and UL, Underwriters Laboratory. 5 So earlier I referred to the confusing and 6 disparate nature of the various, and very old, 7 annotations for property used in manufacturing. And 8 the staff, in the Board Summary, states, and they 9 said, quote, "There is no evidence that the 10 materials provided a benefit." 11 There is no -- no evidence. Well, I mean I 12 choose to strongly disagree. So I want to go to one 13 specific annotation, I think that's very helpful 14 here, and it's Annotation 440.1853; it's called 15 "determining factors." 16 And it says this, it says: 17 "In determining whether an item was 18 used in a manufacturing process or became 19 part of the finished product, there are two 20 factors to consider. First is whether the 21 product is in fact physically present in 22 the finished product. And if so, a second 23 factor is what is the function of the item 24 in the finished product? If it primarily 25 serves a beneficial purpose in the finished 26 product, and it was put in with the 27 intention that it remain, it may be 28 purchased for resale, even though it may 24 1 have served a secondary purpose such as a 2 catalyst." 3 And that's an annotation from 1992. 4 So, let's apply that annotation, staff's 5 own annotation, to the facts here. First, is the 6 item present, are these materials present in the 7 finished product? The answer is yes. Everyone, 8 including staff, agrees with that. 9 Second, what is the function of the item 10 after the product is finished? And the annotation 11 provides, quote, "If the item still serves a 12 beneficial purpose, the item is a component part of 13 the finished product." 14 So in the annotation at issue we're 15 painting materials that were applied to automobiles. 16 Because the materials, in general, improved the 17 durability and protective property of the paint, it 18 was held that the materials became -- here's the 19 word -- a component part of the final product. 20 So now you heard ample testimony from Dr. 21 Sethuraman regarding, he used the actual word 22 "durability," same as in the annotation. The 23 lighter weight. The moisture resistant properties. 24 (Knocking on board.) 25 MR. VINATIERI: The imparted strength to 26 the finished wallboard as a result of these 27 materials. 28 So, therefore, under this very annotation, 25 1 the materials herein meet both tests and may be 2 purchased for resale. 3 And there are other annotations such as 4 440.2150. And it says, quote, "... incorporated for 5 the primary purpose of imparting" -- "imparting 6 desired physical characteristics," closed quote, 7 that are in accord with our position. 8 Now, let me make one last statement 9 regarding Kaiser Steel. This case, this case is not 10 Kaiser Steel. 11 We all know the case. Kaiser attempted to 12 purchase various materials without tax that were 13 used in part of its steel making process. And as 14 Reg. 1525 indicates, "...acting as a catalyst to 15 produce a chemical reaction for the purpose of 16 removal of impurities." 17 Once again, those impurities came out in 18 the physical form of slag, which was then sold to 19 other people. And the slag was a byproduct of that 20 manufacturing process. Hence, Kaiser was all about 21 slag, a byproduct. 22 Here, there's no byproduct whatsoever. 23 None. None. 24 So, many of the staff annotations that we 25 see are based upon the Kaiser Steel case set of 26 facts. But those facts are inapposite with our 27 facts. And the Court was very clear, quote: 28 "It is evident from the record that 26 1 Kaiser's dominant motive or purpose in 2 purchasing the materials in question was to 3 use them in removing the impurities from 4 its molten steel, a purpose other than 5 resale." 6 So, much of the staff position relative to 7 our materials is actually predicated on this 8 byproduct mentality that we find coming out of 9 Kaiser, and it must be rejected because it doesn't 10 apply to the facts of our situation. 11 And I might just add that California is the 12 only state where we pay tax on materials. We're the 13 only one. There's 18, and that's 18 states. We're 14 the only one. 15 So, I just want to say in closing this 16 is -- this is an interesting case, it's a case where 17 I don't think the annotations, I don't think the 18 staff has stayed up with the changes in technology 19 standards. And I think it's something that the 20 Board needs to look at very closely. And I would 21 ask the Board to look at using the two-prong 22 beneficial purpose test of the other annotation that 23 I just talked about. 24 Thank you. 25 MR. HORTON: Discussion? 26 Member Runner. 27 MR. RUNNER: Yeah, let me. 28 The -- the -- the chemicals that we're 27 1 dealing with here, we would identify those as 2 essential to the -- to the -- for the sale of the 3 product? 4 MR. VINATIERI: Absolutely. 5 MR. RUNNER: Can they be replaced? Could 6 you replace one of the chemicals with a machine or a 7 tool? 8 MR. VINATIERI: No. 9 DR. SETHURAMAN: No. No. 10 MR. RUNNER: And the chemicals themselves 11 are all fully a part of then the end product? 12 DR. SETHURAMAN: Yes. 13 MR. RUNNER: Let me go back to the 14 annotation that they used, the 1992, in the issue of 15 present and function. Why doesn't that annotation 16 apply here? 17 MS. SILVA: I'm sorry. Which number was 18 that one? 19 MR. RUNNER: It was -- it was their 1992 20 annotation. I don't -- what was the number? 21 MR. VINATIERI: 44 -- 440.1853. 22 MR. RUNNER: Yeah. Why wouldn't that 23 annotation apply? 24 MS. SILVA: In that one, it involves 25 certain items purchased and used in applying paint 26 to automobiles. 27 MR. RUNNER: Okay. 28 MS. SILVA: Specifically, hardeners and 28 1 catalysts. 2 As described, they remain in the final 3 product. And in the final product they provide 4 protection to the paint by helping the paint film 5 retain gloss and prevent chipping and, in general, 6 improve the paint films. 7 This is not similar to the chemicals in the 8 current matter. Here, in the final wallboard 9 claimant has not provided evidence that the 10 chemicals act in a manner in the final wallboard. 11 What the chemicals do -- their purpose, to 12 diffuse, to accelerate, to make bubbles -- that all 13 occurred in the manufacturing process as a 14 manufacturing aid. 15 As the chemicals sit in the final product, 16 they have been used. Yes, some measurable amount 17 remains, but their primary use was completed in the 18 manufacturing process. We're not saying they don't 19 overall also have a benefit. You wouldn't use them 20 if they didn't have a benefit. We recognize that. 21 MR. RUNNER: Yeah, I'm trying to see if 22 we're nuancing that a bit too much. 23 In -- I mean -- okay. So in this 24 particular paint issue, it was applied to the issue 25 that it made it harder, harder to chip; is that what 26 you're telling me? The paint stayed better? 27 MS. SILVA: Like a paint. Like the paper. 28 Like the rock. Like -- 29 1 MR. RUNNER: Right. 2 MS. SILVA: -- you know, an item that's 3 actually functioning in the end product -- 4 MR. RUNNER: Okay. Well, let me ask -- 5 MS. SILVA: -- as opposed to a 6 manufacturing aid. 7 MR. RUNNER: -- which one of these 8 chemicals -- which one of these chemicals do not 9 function in the end product? 10 DR. SETHURAMAN: I just -- I mentioned 11 tartaric acid; it coats the crystal surface. In 12 highly humid conditions, the crystals can absorb 13 moisture and weaken, so this protects it. 14 MR. RUNNER: So the issue of mildew -- 15 DR. SETHURAMAN: Yeah. 16 MR. RUNNER: They keep mildew -- 17 DR. SETHURAMAN: Or potash. 18 MR. RUNNER: So -- so why isn't that the 19 same? Why isn't that the same in terms of being 20 able to keep it dry, mildew, strength, all those 21 issues? Why isn't that the same as function in 22 regards to paint that doesn't chip as easy? 23 MS. SILVA: Well, as -- as claimant had 24 described the products, it's added as the ingredient 25 in this slurry to do the chemisorb in the crystal 26 service. Its function, its use, its aid is in the 27 manufacturing process. That's how it's described by 28 claimant. 30 1 MR. RUNNER: So you -- so you would 2 interpret that as being able -- the function 3 itself -- even -- I mean the function -- clearly 4 there's function after the product's done, right? I 5 mean it made it stronger, made it drier, made it -- 6 so it has a function. 7 MS. SILVA: It does provide -- each one of 8 these chemicals provides an overall benefit for 9 their final product. 10 MR. RUNNER: A function in the final 11 product. And it's present. 12 DR. SETHURAMAN: Yes. 13 MS. SILVA: Well, it is present. But its 14 use, its work, what it does is as a manufacturing 15 aid in the manufacturing process. 16 MR. RUNNER: Okay, let me go -- 17 MS. SILVA: Which then lends itself to the 18 overall benefit. 19 MR. RUNNER: Yeah. I'm -- I don't know. 20 To me, I think we're trying to nuance that a little 21 too tight. 22 Let me ask you about the issue in regards 23 to you mentioned in your -- in your -- in the 24 discussion about something that can be done with a 25 tool or a -- or -- or a machine as you were going 26 through that. You know bubbles, they could be done 27 by a machine; is that true? Could you actually 28 create a machine that would create that kind of -- 31 1 MS. SILVA: Well, at this point, as 2 claimant has said, I mean we're now very much 3 involved in high tech process. We don't do it with 4 little bubble makers like -- 5 MR. RUNNER: Uh-huh. 6 MS. SILVA: -- kids do. We use chemicals 7 and we -- we recognize that. We recognize that now 8 chemicals are used as manufacturing aids. They're 9 catalysts. They perform functions that otherwise in 10 some -- 11 MR. RUNNER: Let me ask, are these -- 12 MS. SILVA: -- either didn't happen or 13 there's now no need for machines. You use a 14 chemical. 15 MR. RUNNER: Catalyst is a key word here, 16 isn't it? 17 MS. SILVA: It is -- it is one of the 18 words, catalyst or otherwise. 19 MR. RUNNER: Are these catalysts that are 20 in here? 21 MR. VINATIERI: No. 22 DR. SETHURAMAN: No. 23 MR. RUNNER: How would you define catalyst? 24 DR. SETHURAMAN: Catalyst -- 25 MR. RUNNER: Taxpayer. 26 DR. SETHURAMAN: Catalyst, say like you 27 have two reactions. 28 MR. RUNNER: Mm-hmm. 32 1 DR. SETHURAMAN: And then you want the 2 reaction to go farther, I add a catalyst and you get 3 the product. The product of the catalyst, I can 4 take it out and then reuse it again. That's 5 catalyst. 6 Catalyst doesn't get destroyed when the 7 chemical reaction. It can be reused for further 8 reaction. For further reaction, that's a catalyst. 9 Catalyst does not get destroyed in the chemical 10 reaction. 11 In chemistry, chemical reaction, A plus B 12 gives C plus D, totally different product. 13 As I say at the beginning, stucco, when 14 added water to that, stucco is calcium sulphate 15 hemihydrate when added water, hydrolyzed and gives 16 it totally different product which is gypsum. 17 Gypsum is calcium sulphate dihydrate. So that's a 18 chemical reaction. 19 MR. RUNNER: Okay, thank you. 20 MS. STOWERS: I just have a couple. 21 MR. HORTON: Member Stowers. 22 MS. STOWERS: Just a couple questions. 23 To the petitioner or claimant first. On 24 your PowerPoint presentation, page 7, acid tartaric, 25 you indicate it stays in the finished product and 26 prevents hydration of gypsum. 27 DR. SETHURAMAN: Yeah. 28 MS. STOWERS: What is it preventing the 33 1 hydration? 2 DR. SETHURAMAN: Normally these boards 3 breathe. As we speak, they absorb moisture and 4 release, depending on the temperature inside the -- 5 inside the building and then in between the cavity 6 in the studs they are breathing. 7 And in ceiling, same thing; in a highly 8 humid condition, like in Florida, or like in the 9 bathroom, or in a kitchen, or where you have too 10 much water, water content, high humid content. 11 So the paper is not like plastic. It is 12 porous. It absorbs moisture. And when the 13 moisture, in high humid conditions, when it touches 14 the crystals -- as I say, minerals tend to dissolve 15 in water. As it absorbs water or humidity, they 16 tend to affect the crystal. When the crystals 17 weaken, then they're going to break, and then it's 18 going to sag. 19 So the tartaric acid adsorbs to the 20 surface, prevent the moisture touching the crystal, 21 absorbed in the crystal. 22 MS. STOWERS: Okay. 23 DR. SETHURAMAN: Adsorb, yeah. 24 MS. STOWERS: So, when someone buys that 25 product and they build a building, they build a 26 house that's in this area, is it happening now? 27 DR. SETHURAMAN: Yes. As I say -- the 28 question is the sagging? 34 1 MS. STOWERS: No, I'm just trying to get an 2 understanding that is it preventing it once a 3 customer buys a product and they build whatever 4 they're building, because you have this acid in the 5 product, is it continue -- continuing to prevent 6 hydration? 7 DR. SETHURAMAN: Yes. 8 MS. STOWERS: I'm just trying to see 9 does -- does it only do it during the manufacturing 10 process, or does it continue at the end of the 11 product as well? 12 DR. SETHURAMAN: It continues doing that. 13 MS. STOWERS: Okay. 14 DR. SETHURAMAN: This is, as I said, this 15 goes on special products we call high strength 16 ceiling board and then in hard board and also 17 manufactured housing board. We don't know where 18 they put that manufactured housing. So in the 19 highly humid condition, they tend to sag. 20 MS. STOWERS: Okay. 21 DR. SETHURAMAN: And the ASTM revised the 22 specification that reduced from 30 millimeter to 8 23 millimeter. So now to meet that we add tartaric 24 acid, we coat the surface, and prevent the sagging. 25 MS. STOWERS: Okay. 26 DR. SETHURAMAN: It continuously happens, 27 yes. 28 MS. STOWERS: So, and then my next question 35 1 is on page 8, which inhibit mold and mildew 2 growth. 3 DR. SETHURAMAN: Yes. 4 MS. STOWERS: Is that happening now, after 5 the end product? 6 DR. SETHURAMAN: It prevents, yes. In a 7 normal board -- that's also special board. 8 MS. STOWERS: Mm-hmm. 9 DR. SETHURAMAN: These boards goes into 10 bathroom, kitchen, gymnasium, swimming pool, those 11 kind of areas they use this board where you have 12 humid condition, too much moisture, the perfect 13 condition of -- perfect humidity and temperature, 14 mold and mildew can grow like crazy. 15 MS. STOWERS: Okay. 16 DR. SETHURAMAN: So this board prevents the 17 mold and mildew. That's why they use the XP board 18 in the arena here, you can see it in the -- 19 MR. VINATIERI: The new Kings -- the new 20 Kings arena. 21 DR. SETHURAMAN: -- arena. So those boards 22 has ability to prevent mold and mildew properties. 23 These are special boards. 24 MS. STOWERS: Okay, thank you. 25 To the Department, at least for those two, 26 do you not see those as being -- having a functional 27 use at the end of the product? 28 MS. SILVA: I think the overall benefit 36 1 that they are to impart definitely is in the final 2 product. But what it did to do that, its use, is in 3 the manufacturing process. 4 For the potash, it's a accelerator. It 5 accelerates crystal growth. It makes the crystals 6 grow. That's a manufacturing aid. 7 And the other one was the tartaric acid. 8 MS. STOWERS: Mm-hmm. 9 MS. SILVA: And, again, I -- I agree that 10 it improves the resistance, and I see the overall 11 end benefit. But I don't understand that its use is 12 actually being used in the final product. It's the 13 chemical reaction in the manufacturing process is 14 where it's used. 15 MS. STOWERS: Okay. To the Department or 16 to Appeals, there's -- to Appeals, there's a comment 17 in a hearing summary regarding the tax reimbursement 18 and use tax and there may be a need for re-audit -- 19 MR. ANGEJA: Yes. 20 MS. STOWERS: -- to identify the tax 21 deduction. Will you speak to that, please? 22 MR. ANGEJA: Yes. If the taxpayer were to 23 prevail on all or some portion of these chemicals, 24 it would be entitled to a claim -- it would be 25 entitled to a refund of the use tax that it directly 26 reported to the Board, use tax that it would have 27 paid to out-of-state retailers. 28 Any tax reimbursement paid to California 37 1 retailers is a tax-paid purchases resold deduction 2 that would be available to offset any remaining tax 3 liability after the refund of the use tax and any 4 other sales tax liability that they had. 5 We're not able to discern how much of 6 either claim is tax-paid purchases resold deduction 7 or use tax. The concern would be over refunding a 8 tax-paid resold -- tax-paid purchases resold 9 deduction when there's no liability to offset that 10 against. And a re-audit would allow the Department 11 to go in and look and verify tax-paid purchases and 12 the amount to allow, if any. 13 MS. STOWERS: Okay. Thank you. Thank you 14 both. 15 MR. HORTON: Question of Appeals. There's 16 language in the annotations that refers to a dual 17 purpose. Can you bring -- shed any light on the 18 dual purpose concept? 19 MR. ANGEJA: Sure. That's the crux of 20 these cases, is that there's a use of these 21 chemicals in the manufacturing process and there's a 22 benefit to the final product. And so we've got a 23 manufacturing aid that is present in the final 24 product. 25 The question and the task for the Board, 26 and it's a question of fact is, is there a 27 functionally -- does the -- does the presence of the 28 chemical in the final product cause a functional 38 1 benefit? In other words, by its presence is it 2 serving the purpose? 3 The example for these Sheetrock boards may 4 be if one were to have a chemical benefit -- I don't 5 want to say "chemical benefit." It's undisputed 6 that it's used in manufacturing process, whether 7 it's a catalyst, chemical, or otherwise, it's used 8 in that process. 9 If it also made it, say, glow in the dark 10 in the final product, there's a functional purpose 11 in the final product by its physical presence being 12 served as opposed to being merely inert and present 13 after the process was done, and that's the essence 14 of these cases. 15 The two chemicals that were mentioned, the 16 tartaric acid being one, I'm hearing two different 17 things. One being that during the process of 18 creation, it creates the crystals that are water 19 resistant. I don't know, and I'm not 20 cross-examining, but my question would be, is the 21 tartaric acid by its presence -- so let's say it's 22 sprayed onto the wallboard after the fact, is that 23 making it water resistant, or is it the result of 24 that process that made the chemicals change somehow 25 such that the chemicals in the final product is what 26 makes it water resistant? 27 MR. HORTON: Well, maybe the Department or 28 the appellant can answer that question. Let me 39 1 rephrase it so it comes from the dais. 2 But clearly the chemical -- well, not 3 clearly. But from my perspective, the chemical 4 causes -- 5 Well, how about this, can you share with us 6 what happens -- what does the chemical do to the -- 7 how does the two chemicals interact and what happens 8 when they do? When they're mixed together in the 9 manufacturing process, what happens to the crystal? 10 What does the chemical naphthaline sulfonate do to 11 the wallboard? What's it cause it to do? 12 DR. SETHURAMAN: Like I say, it makes a 13 hydration to go efficiently and enable the crystals 14 to be longer and needle-shaped. 15 MR. HORTON: So it causes the -- it causes 16 the wallboard to separate during the manufacturing 17 process? 18 DR. SETHURAMAN: The tiny particles. 19 MR. HORTON: Tiny particles; that chemical 20 causes it to separate? 21 DR. SETHURAMAN: Yeah. But it's not a 22 chemical reaction. 23 MR. HORTON: I'm not debating that. But 24 the function of the chemical -- 25 DR. SETHURAMAN: Yeah. 26 MR. HORTON: -- at that point is to cause 27 it to separate. And then once the chemical 28 interacts and it causes the other chemical to 40 1 separate, what happens then? Then it goes -- what's 2 the next phase? Then it goes to the curing process? 3 DR. SETHURAMAN: Yeah, goes to drying 4 process. 5 MR. HORTON: All right. And what do the 6 chemicals do in the drying process? It just goes 7 back to its natural -- the drying process, what's 8 the purpose of the drying process? 9 DR. SETHURAMAN: The drying process, we are 10 adding X amount of water. 11 MR. HORTON: And what's the purpose of it? 12 DR. SETHURAMAN: The purpose of it is we 13 want pretty good fluidity so that we can fill the 14 envelope. If you look at one of those figure on 13, 15 how the board is being made, we are pumping about 16 somewhere between 1 to 2 tons of material. 17 MR. HORTON: And then once -- once you're 18 finished with the curing process, does the product 19 itself at that point, once it's finished, does it -- 20 does it meet all the specifications? 21 DR. SETHURAMAN: Yes. Yes. 22 MR. HORTON: It's harder, it's more water 23 resistant at that point? 24 DR. SETHURAMAN: Yes. 25 MR. HORTON: The chemical that remains in 26 there, is it there in substance or -- and the fact 27 that it's there in substance, does it continue to do 28 something? 41 1 DR. SETHURAMAN: It remains in there. For 2 example, the tartaric acid, it's adsorbed to the 3 surface of the crystal and makes the crystal 4 not absorb moisture and then weaken. 5 So if I don't have tartaric acid, then I 6 cannot use it on high strength ceiling. That's what 7 we call high strength ceiling board, and that 8 particular board has to have tartaric acid to give 9 that particular property that we need. 10 MR. HORTON: Question of the Department. I 11 think what the taxpayer's saying is that the 12 tartaric acid, when it's combined with the crystal, 13 it causes the crystal to elongate. And in doing so, 14 it creates a metabolical structure that is water 15 resistant. And that happens in the manufacturing 16 process. But -- but what also happens in the 17 manufacturing process is that it attaches to the 18 crystal. 19 Correct me if I'm wrong. 20 DR. SETHURAMAN: It adsorbs. 21 MR. HORTON: It absorbs or attaches. 22 DR. SETHURAMAN: Adsorbs. 23 MS. FALCONE: Adsorbs. 24 DR. SETHURAMAN: A-d. 25 MR. HORTON: Adsorbs, okay. 26 DR. SETHURAMAN: Adsorbs. 27 MR. HORTON: Adsorbs to the crystal and 28 forms a layer that in and of itself enhances its 42 1 stability as far as water, being water resistant. 2 If that was to occur, what would be your view? 3 MS. SILVA: It's a new fact to me that it 4 becomes its own lawyer of something. 5 MR. HORTON: Well, let's make sure that is 6 in fact -- 7 MS. SILVA: -- because I thought -- at 8 first I thought you were talking about the 9 naphthaline sulfonate, so I thought we sort of -- 10 MR. HORTON: That's -- I was just talking 11 about the tartaric acid now. 12 MS. SILVA: Okay. 13 MR. HORTON: I don't want to state that as 14 a fact, and I don't want to put it on the record as 15 a fact. I'd rather ask the question, is that what 16 happens to the tartaric acid? What's -- what's its 17 metabolic form and purpose after it's gone through 18 the curing process? 19 DR. SETHURAMAN: They adsorb to the surface 20 of the crystal and remains there. 21 MR. HORTON: And given that the taxpayer's 22 testified that it adsorbs to the crystal and it 23 remains there, does it serve any purpose? 24 DR. SETHURAMAN: Yeah, this serves a 25 purpose. It creates a sag resistant property, 26 doesn't allow the board -- 27 MR. HORTON: It contributes to it. It, in 28 and of itself, is not going to stop it from sagging. 43 1 It just contributes to it possibly? 2 DR. SETHURAMAN: If I don't have that, then 3 I have heavy sagging. 4 MR. HORTON: So the original -- original 5 chemical process that caused the crystal to 6 elongate, strengthen, be more water soluble, that in 7 of itself is not sufficient; that serves no purpose 8 for doing that? 9 DR. SETHURAMAN: No. Any minerals, there's 10 a soluble product. That's pretty constant. So they 11 tend to absorb moisture and tend to be weakened. 12 Once it's weakened, then it's going to break down 13 and crack the board. 14 So this adsorbs to the surface and prevents 15 the water getting into the crystal so that the 16 crystal is safe and it doesn't allow the board to 17 sag. 18 MR. VINATIERI: And is that part of the 19 breathing process that you talked about? 20 DR. SETHURAMAN: Yeah, breathing, yeah. As 21 I said, this is used on highly humid condition. 22 This is like a special product. Like I say, it goes 23 into high ceiling boards and manufactured housing 24 boards. 25 MR. HORTON: So, it sounds to me as if 26 though the testimony is is that it serves a dual 27 purpose in that this particular chemical serves a 28 dual purpose, if it does, what is the Department's 44 1 view? 2 MS. SILVA: That the primary purpose is as 3 a manufacturing aid in the manufacturing process 4 where it chemisorbs to the crystal surface, where it 5 makes that -- the crystals. 6 MR. HORTON: And so there -- there would be 7 no allocation where it's being used here, end used 8 here? 9 MR. MENDEL: If something actually is a 10 manufacturing aid and also has a function in the 11 final product, that its actual presence in the final 12 product is as some sort of hardened coating, then we 13 would consider that to be a component part. 14 However, if the function of the chemical 15 is, for instance, in the drying process, by either 16 retarding the drying process or accelerating the 17 drying process to make sure all of the moisture is 18 removed from the final wallboard, then we would say 19 that the function occurs during the drying process, 20 during the manufacturing process, and therefore it's 21 a manufacturing aid. But if it is a dual function 22 where there is actually a benefit by its presence in 23 the final product, then it would be a component 24 part. 25 MR. ANGEJA: If I may clarify. What he 26 said is that if the Board were to find that these 27 chemicals served a functional purpose in the final 28 product by their presence, we don't get into whether 45 1 it was 5149 or 8020 or 99-1. Any amount of 2 functional purpose in the final product, so long as 3 it's being served by the physical presence of that 4 chemical in the final product, which is the Kaiser 5 Steel thesis that we've all followed, the Board has 6 historically treated that as a purchase for resale 7 even if there's a significant component that is 8 manufacturing. 9 So, I think what you, perhaps, were meaning 10 regarding the dual purposes, any amount of that 11 secondary purpose so long as it's for resale would 12 qualify. 13 MR. HORTON: Okay. 14 MR. ANGEJA: So the question before you 15 answers the whole thing. 16 MR. HORTON: The -- to the Department, the 17 Department has any evidence that the testimony is 18 that it forms a protective layer is not a -- is not 19 what happens in the chemical -- in the chemical -- 20 I'm going to call it a chemical reaction process 21 because in my mind a reaction is a reaction whether 22 it combines, separates, moves, any of that. 23 MR. MENDEL: We -- we are relying entirely 24 on the material provided to us -- 25 MS. SILVA: By the claimant. 26 MR. MENDEL: -- by the claimant, and 27 looking at that material and reading whether there 28 is a chemical reaction, as you say, during the 46 1 manufacturing process or whether its actual presence 2 in the final product is a presence, that imparts a 3 benefit into the final product as a component, as 4 opposed to simply something that enhances the 5 manufacturing process. 6 MR. HORTON: A question of Appeals. My 7 understanding in the -- just to go back to -- just 8 need a clarification in the Kaiser Steel case. 9 There was -- the Board did allow a -- apportionment 10 of the -- of the material and the cost and so forth. 11 Does that -- is there any distinction in the Kaiser 12 case from the -- the notion or the legal theory of 13 apportioning the amounts used? 14 And part of the challenge we have here is 15 the argument that nothing happens in the 16 manufacturing process, when clearly it does. I mean 17 there is -- there's a reaction that takes place, and 18 the chemical serves a specific purpose during that 19 manufacturing process. 20 MR. ANGEJA: My understanding is that the 21 Kaiser Steel Court did not allow any kind of 22 allocation or bifurcation. All of that that was 23 purchased, the aluminum was for use as a 24 manufacturing aid. 25 MR. HORTON: I think what it said was is 26 that if an allocation -- if an allotment can be 27 determined, then they would say that it would be 28 allocated. But I think in the Kaiser Steel case 47 1 they just -- wasn't able to make that 2 determination. 3 MR. ANGEJA: But the way this Board has 4 interpreted it is that -- and I'm repeating myself, 5 so I apologize, but we technically don't allocate. 6 If you were -- 7 MR. HORTON: Okay. 8 MR. ANGEJA: -- to find that there were 9 some portion that was used in the final product by 10 the benefit of its -- by function of its presence 11 there, we wouldn't engage in any kind of an 12 allocation. We've allowed that as a sale. 13 But I think that the paint annotation is a 14 illustration of that. No doubt it had a 15 manufacturing component. But by its presence in the 16 final product, it also served the purpose of making 17 the paint harder; that was allowed as a sale for 18 resale. 19 MR. VINATIERI: So -- 20 MR. HORTON: Yeah. 21 MR. VINATIERI: So might I respond, please? 22 Let's get to the bottom line here. Some of us have 23 been around a long time. Maybe not that long, come 24 to think about it. 25 But, there's always been, when it comes to 26 manufacturing aids, a bias, in my opinion, on the 27 part of the staff that if there is a chemical 28 reaction -- and, once again, there's not a chemical 48 1 reaction here except with respect to Versenex. 2 There might be a physical reaction. There's no 3 chemical reaction. 4 But the staff has always said if there is a 5 chemical reaction, it's a manufacturing aid. If 6 there's a chemical reaction, there's a manufacturing 7 aid. That's always been the bias. And the problem 8 is, with that bias -- 9 MR. HORTON: This is -- 10 MR. VINATIERI: -- that it does not comport 11 with -- with the reality of what's been going on 12 currently in terms of how there's been technological 13 changes. And -- and -- 14 MR. HORTON: Not to interrupt you, 15 Mr. Vinatieri, but the discussion relative to 16 tartaric acid is kind of going in your favor. 17 MR. VINATIERI: I understand that. But -- 18 okay. 19 MR. HORTON: I mean -- 20 MR. VINATIERI: I'm sorry. It's just very 21 frustrating because we've had -- 22 MR. HORTON: Here's a follow-up question to 23 the historical debate. Is that if you took the 24 tartaric acid and injected it at the end of the 25 process, would it have an effect? The answer is 26 probably no, that it has to be injected in the 27 beginning in order to accomplish the end objective, 28 which says that something happens in the 49 1 manufacturing process. 2 The law, as the Kaiser case draws a 3 distinction saying that if there is some allocation 4 there, you can make an allocation. Our legal staff 5 has advised us that we don't do that. The Board 6 traditionally has not done that. 7 So if you can establish a beneficial 8 purpose at the end, irrespective of what happens in 9 the beginning, it could be ninety percent, but there 10 is a clear purpose and benefit at the end, then 11 you've established a sale for resale. 12 Which I'm at somewhat of a disadvantage on 13 the tartaric acid because the Department is not -- 14 has not -- is not able to say that that chemical 15 forms a layer and it attaches and it has a soluble 16 value. But the taxpayer's testified that it does. 17 In that situation, I am -- I believe I'm bound to 18 believe the evidence before me, which is the 19 evidence provided by the taxpayer that it does. 20 The -- the other chemicals I am familiar 21 with and did spend quite a bit of time with them, 22 and they just seemed to be there. They don't seem 23 to really accomplish any objective. The objective 24 that they accomplish -- naphthaline sulfonate is 25 separated. It -- it continues to be separated. 26 It's just to withdraw it would cause a breakdown of 27 all the chemicals. And as well as the potassium 28 sulfate, the alcohol ethoxy sulfate and Versenex. 50 1 But the acid tartaric seems to have some 2 kind of benefit. 3 Anyway, Member Harkey. 4 MS. HARKEY: Thank you. 5 I would like to point out that tartaric 6 acid can be purchased for resale for beer and wine. 7 So I think we've got a pretty well established 8 record on tartaric acid. 9 MR. HORTON: And what does it do to the 10 kidney? 11 MS. STOWERS: What does it do? 12 MS. HARKEY: Who knows. But it -- it can 13 be purchased for resale. 14 So I'd like to go to naphthal -- 15 naphthal -- I can't pronounce it. 16 Naphthaline sulfate. 17 DR. SETHURAMAN: Naphthaline sulfate. 18 MS. HARKEY: Naphthaline sulfate. There 19 you go. I was trying not to lisp, but you need to, 20 to pronounce that. 21 Okay. Looking at the annotation, which is 22 the one that we are all reviewing here, annotation 23 440.1853. First is with the item is in fact 24 physically present in the finished product. And it 25 is, I believe. 26 The second factor is what the function -- 27 what's the function of the item in the finished 28 product? If it primarily serves a beneficial 51 1 purpose in the finished product and it was put in 2 with the intention that it remain, it may be 3 purchased for resale even though it may also have 4 served a secondary purpose as a catalyst. 5 So it doesn't matter if it served as a 6 catalyst. It's, like, what was his intent? 7 It's used for the purpose of hydration, in 8 your display, enabling the gypsum crystals to be 9 longer and thinner. It optimizes the dry strength 10 and creates a stronger core. 11 I believe I asked you, or I'd like to ask 12 you, if you remove it, what happens? 13 DR. SETHURAMAN: This is the board, 14 without naphthaline. 15 MS. HARKEY: Okay. May I see that board? 16 Bring it up here for the -- 17 (Pause.) 18 MS. HARKEY: So looking at this, I can 19 clearly see it's wrinkled and the paper's kind of 20 fraying, and it doesn't look like anything you would 21 want to sell. 22 And one of my questions on a lot of these 23 is, can you take them out? If you can take them 24 out, then they're probably not part of the permanent 25 item. Which, I believe that this in itself kind of 26 displays that it needs to be in there to form this 27 board. 28 So how -- how does the Department respond 52 1 to that? 2 MS. SILVA: I agree, it -- it does improve 3 the Board; we don't dispute that. But it doesn't do 4 that by its presence right now, sitting there in 5 that board in the finished product like, say, the 6 paper or the rock. It performs its function in the 7 manufacturing process, and it's added to disperse 8 the solid particles, to keep the slurry mix without 9 lumps, which -- because they don't want it to look 10 poor or nobody's going to buy it. 11 So, I'm not disputing that it doesn't have 12 an overall benefit. Certainly everything that they 13 put in this product has an overall benefit or is 14 required by -- by their standards. 15 MS. HARKEY: Well, but it says -- it says 16 in this annotation that if it primarily serves a 17 beneficial purpose in the finished product and if it 18 was put with the intention that it remain, does it 19 primarily serve a beneficial purpose? 20 MS. SILVA: In the finished product? I 21 would say it doesn't, sitting there in the finished 22 product. 23 MS. HARKEY: Okay. It's out here. So this 24 is without it. 25 So with it it's a flat board, I believe. 26 Just, you know, a saleable board. 27 So I do believe it serves a purpose here. 28 And even though it may have served a secondary 53 1 purpose as a catalyst -- I'm not a scientist so I 2 really don't know if it was a catalyst or it wasn't. 3 We assume it had some -- some way of elongating. 4 They say it makes it -- that it makes it -- it 5 enables the gypsum to -- crystal to be longer and 6 thinner. 7 So, there it is with it inside, and here it 8 is if you remove it. So, this truly is not a 9 product that you can use. This is. And so my 10 contention is that it is actually a part -- it's 11 made with the intention that it remain inside. 12 So I think on that case, is -- is it 13 physically present in the wall board? Yes. Does 14 the presence in the wallboard serve a beneficial 15 purpose? Yes, it optimizes strength, maximizes 16 strength between paper and core. 17 So I -- I would like the Board to consider 18 the potential of this product as well, or this 19 chemical as well. 20 I think we kind of hit on, a little bit, 21 potassium sulfate. 22 Okay. Potassium sulfate is the product 23 that is for the boards that are for moisture? 24 DR. SETHURAMAN: Yeah, moisture. 25 MS. HARKEY: Moisture. 26 So for that, is it physically present in 27 the wallboard? 28 DR. SETHURAMAN: Yes. 54 1 MS. HARKEY: Does the presence of potash 2 in -- or, excuse me -- yeah, does the presence of 3 potash in the wallboards serve a beneficial purpose? 4 And what is that beneficial purpose? 5 DR. SETHURAMAN: It reduces the moisture 6 absorption because the ASTM requires minimum of five 7 or less than five percent absorption. So it meets 8 that requirement. 9 MS. HARKEY: Okay. Thank you. 10 DR. SETHURAMAN: And, also, those boards 11 are all mold and mildew -- prevents mold and mildew 12 growth. 13 MS. HARKEY: Now, I do -- I am having a 14 problem reconciling the Versenex. 15 Does it have a physical presence in the 16 wallboard? Yes, it does. 17 Does the presence of Versenex in the 18 wallboard serve a beneficial purpose? I think we've 19 got a problem saying yes to this. It causes a 20 chemical reaction. This is one of those products 21 that really does cause a chemical reaction, and so 22 its purpose is really in the manufacturing process. 23 So I would have a hard time supporting that. 24 The only one left is the alcohol ethoxy 25 sulfate. Okay, this is the one with the bubbles. 26 So it's used -- explain to me how that works. 27 Taxpayer, Joe, either one of you. 28 DR. SETHURAMAN: Currently our customer 55 1 demand lower weight wallboard. As I said, used to 2 be like 1800 pounds per thousand square foot. Now 3 it's 1400. And now they want to even go further 4 down with the board weight. 5 As you bring the board weight down, the 6 quality also goes up, but we have to maintain the 7 quality. In order to maintain the quality, we have 8 to use this alcohol ethoxy sulfate to reduce the 9 board weight and maintain the quality of the 10 strength of the board. 11 As I showed on one of the slides on the 12 figure how the bubbles -- the solid mass in between 13 the bubbles increases the strength, that's what it 14 does. If I remove the soap, the board is very 15 heavy. You can feel this one. Also it causes the 16 paper blow and cockles. 17 MR. VINATIERI: That's without the alcohol 18 ethoxy. 19 DR. SETHURAMAN: Without -- without alcohol 20 ethoxy sulfate. You can take the control board on 21 this one and you can feel the weight. 22 MS. HARKEY: Okay. So it does have a 23 presence in the wallboard. And it serves a 24 beneficial purpose because it increases the volume 25 of the bubbles? 26 MR. RUNNER: The size. 27 MS. HARKEY: The size. The volume. 28 They're little. 56 1 DR. SETHURAMAN: Yeah, actually -- 2 MS. HARKEY: And it makes them big. And it 3 decreases cracking and sagging. 4 DR. SETHURAMAN: Sagging, yeah. 5 MS. HARKEY: Now, if you hadn't used that 6 and you kept the bubbles small, how thick would the 7 board or would -- what would you have to do with the 8 board in order to meet the requirements? 9 DR. SETHURAMAN: If I don't use the soap, I 10 will be making like 2,000 pounds per thousand square 11 foot board. 12 MS. HARKEY: And what do you have to make? 13 DR. SETHURAMAN: 1400. 14 MS. HARKEY: 1400. 15 MR. VINATIERI: That's ASTM, correct? 16 DR. SETHURAMAN: Yeah. Board weight. The 17 ASTM requirement for the (inaudible), which is dry 18 strength, is 80-pound force. And then the 19 humidified deflection should be 8 millimeter for the 20 sag resistance. And the humidified bond should be 21 almost hundred percent. When -- humidified bond, 22 when you expose the board to 90 percent humidity and 23 90 degree Fahrenheit for 24 hours, and when you peel 24 the paper up it should not come off the board. If 25 it comes off, it's a failure. So we have to meet 26 that. 27 MS. HARKEY: Okay. Thank you. 28 MR. HORTON: I just want to go back to Mr. 57 1 Angeja just to make it clear relative to the law, 2 even though the Board can certainly ignore the law, 3 but the law as it relates to apportionment. Any 4 thoughts? 5 MR. ANGEJA: The language of Kaiser Steel, 6 the result of their vote was that they did not. But 7 the language of Kaiser Steel was that it could be 8 done. And to the extent that you can identify the 9 percentage of the purpose for one versus the other, 10 an allocation could be made. 11 MR. HORTON: Then I wanted to go to the 12 appellant relative to the process in the chemical. 13 The potassium sulfate, not including the potassium 14 sulfate will result in this; is that correct? 15 DR. SETHURAMAN: Not including potassium 16 sulfate? Yeah. 17 MR. HORTON: And when will this occur? At 18 what point? Let's say you didn't include enough, 19 the appropriate amount, it would cause this -- or if 20 you included none. 21 DR. SETHURAMAN: I didn't understand the 22 question very well. When will -- 23 MR. HORTON: My apologies. Let me restate. 24 The potassium sulfate, when you include it, 25 the purpose is to avoid this and to make sure that 26 the -- 27 DR. SETHURAMAN: Potassium sulfate -- I 28 believe, that is soap -- I mean alcohol ethoxy. 58 1 MR. HORTON: Here's the other one with the 2 bubbles. 3 DR. SETHURAMAN: Yeah, okay. That one is 4 lignosulfonate, I believe. If I don't put potassium 5 sulfate, then -- 6 MR. HORTON: The chemical that causes this 7 to -- paper to attach and to avoid this -- 8 MS. HARKEY: The wrinkling. 9 MR. HORTON: -- wrinkling. 10 MS. HARKEY: That was the naphthaline. 11 DR. SETHURAMAN: Naphthaline Sulfonate. 12 MR. HORTON: Naphthaline -- naphthaline 13 sulfonate, okay. So the naphthaline sulfonate, at 14 what point does this occur? Does it -- 15 DR. SETHURAMAN: We can see it 16 immediately. 17 MR. HORTON: This occurs if you don't 18 include naphthaline sulfonate? 19 DR. SETHURAMAN: I completely took it off, 20 yes. 21 MR. HORTON: If you completely took it out. 22 DR. SETHURAMAN: Yeah. 23 MR. HORTON: And if you included it, this 24 wouldn't occur? 25 DR. SETHURAMAN: Yeah. 26 MR. HORTON: And when would it be smooth? 27 DR. SETHURAMAN: Yes. 28 MR. HORTON: At what point would it be 59 1 smooth? 2 DR. SETHURAMAN: Immediately. 3 MR. HORTON: Immediately. And -- and the 4 manufacturing process would cause this at some 5 point. You include it, you do it right, it comes 6 out smooth. 7 DR. SETHURAMAN: (Nodding.) 8 MR. HORTON: Okay. So the benefit occurs 9 during the manufacturing process to cause those 10 chemicals to do whatever they do to come out smooth. 11 I get the -- I get the argument -- let me 12 take it to the secondary argument. The secondary 13 argument is that after it -- it is added, it causes 14 the needle-likes to separate and then the curing 15 process causes it to hard smoothly and it's got hard 16 and accomplishes all of these objectives. It stays 17 in the product. And at that point it converts from 18 a chemical -- I mean from a liquid into a powdery 19 form; is that correct? 20 DR. SETHURAMAN: Yeah, the naphthaline 21 sulfonate contains -- 22 MR. HORTON: And when it -- 23 DR. SETHURAMAN: It's not a solid. It's a 24 liquid form. So when the liquid -- once it -- when 25 it dries, it becomes solid inside the core. 26 MR. HORTON: Becomes solid. And -- and so 27 it's in here now -- 28 DR. SETHURAMAN: Yeah. 60 1 MR. HORTON: -- in a solid form. Okay. 2 So my -- my concern with that was is that 3 the purpose of it hardening and so forth is that 4 the -- the reverse chemical reaction, if you were to 5 put it under intense fire to cause that, which is 6 one of the ways that it would cause it not to be as 7 hard, the absorption rate would remain the same with 8 or without the chemical because the chemical served 9 its purpose and accomplishes objective. 10 So if you could actually remove it, the 11 benefit in its powder form, it doesn't make it any 12 stronger than it's already made it in the 13 manufacturing process. 14 DR. SETHURAMAN: If I remove that? 15 MR. HORTON: No, not if you remove it. It 16 has to go there. The reaction has to take place. 17 And then afterwards, after it's out, if you were 18 able to remove it -- which you can't because the 19 process of removing it is going to destroy the 20 board, as I understand it. 21 DR. SETHURAMAN: Yeah, we have to destroy 22 the board to analyze the sample, yes. 23 MR. HORTON: Yeah. 24 DR. SETHURAMAN: But it's in there. If you 25 want to do that, we can extract the board. 26 MR. HORTON: Right. 27 DR. SETHURAMAN: Like I say, the 98 percent 28 of the board is mostly paper and gypsum. The 61 1 other -- remaining is the other ingredient and 2 it's -- we can literally -- we can extract the 3 material and then analyze it, yes. But we have to 4 destroy the board and then do everything. 5 MR. HORTON: The -- what's this other one? 6 The potassium sulfate, the annotation which they -- 7 the annotation -- let's see if I can remember, 440 8 point something that dealt with this particular -- 9 MS. HARKEY: 440.1853? 10 MR. HORTON: No. 440.1234, I think it is. 11 To the Department, what does that 12 annotation say? 13 MR. MENDEL: Gypsum for Wallboard. The 14 last paragraph says: 15 "Both the retarders and potassium 16 sulfate are used to produce chemical or 17 physical reactions during the manufacturing 18 process. The retarders are used to delay 19 drying and the potassium sulfate is used to 20 produce a snap set. Although the retarders 21 and potassium sulfate remain in the 22 finished gypsum, their physical presence 23 does not have any beneficial effect 24 whatsoever. Accordingly, these chemicals 25 are purchased primarily for use in the 26 manufacturing process..." 27 I'd also point out that 440.1330 also deals 28 with potassium sulfate with essentially the same 62 1 conclusion -- 2 MR. HORTON: And -- 3 MR. MENDEL: -- that they're used in the 4 manufacturing of wallboard to either retard or 5 accelerate the drying process. And that's -- their 6 purpose is filled during the manufacturing 7 process. 8 MR. HORTON: And what is the process of 9 developing an annotation; what do we go through? 10 MR. MENDEL: An annotation results from -- 11 MR. HORTON: Not results. What's the 12 process? 13 MR. MENDEL: The process -- 14 MR. HORTON: If the Board wants to 15 promulgate an annotation, what does it do? 16 MR. RUNNER: Staff does. 17 MR. MENDEL: We write an annotation and 18 submit it to the Board. 19 And if you will let me look up the exact 20 process. 21 MR. HANKS: Mr. Horton, while we're waiting 22 for that, if I could just add -- 23 MR. HORTON: Sure. 24 MR. HANKS: -- just related to the one 25 annotation that we're looking at regarding gypsum 26 for wallboards, 440.1234, where they're talking 27 about the use of retarders and potassium sulfonate 28 to produce chemical reactions in this manufacturing 63 1 process, it's somewhat akin, when I look at this, 2 this analysis, somewhat akin to what we're looking 3 at with the tartaric acid in the sense that that 4 product is also used to prevent the dehydration of 5 the gypsum during the drying process. It appears as 6 though it's very important that the gypsum in a 7 slurry mix dry at a consistent rate, that the 8 material itself be a consistent, uniform homogeneous 9 consistency throughout this process. 10 So I think what we're trying to describe is 11 just how these chemicals are used in this 12 manufacturing process as an aid in drying this 13 material uniformly, having it be a consistent and 14 uniform material throughout the hundred thousands of 15 feet of wallboard that get created. 16 This dehydration process and the wetting 17 process in the material critically important. They 18 don't want one edge of this product to dry at a 19 different rate than another. It also has to be 20 consistent. That's where the bubbling action comes 21 in, again as an aid to make sure that we've got a 22 homogeneous slurry that -- that they're producing. 23 So it has ultimately, at the end of the 24 day, the characteristics that they're describing, 25 that we all agree are benefits to wallboard. But 26 really it aids in this -- this manufacturing process 27 to make sure that you've got a homogeneous uniform 28 material that's dried and produced, you know, 64 1 identically so that we get the -- the smooth dry 2 board of the type that we're seeing around us today. 3 MR. HORTON: Okay. I mean I get that 4 the -- that there's a chemical reaction that takes 5 place during the manufacturing process and that the 6 benefit is accomplished in the manufacturing 7 process. There's no debate about that. 8 Kaiser Steel took that up in its 9 deliberation. And I believe that the law says that 10 you can -- you can and you should do an 11 apportionment and an allocation when the allocation 12 is warranted. But, you know, it's up to the Board 13 as Kaiser Steel so stipulated. 14 The inherent challenge for the agency is to 15 dispute if there is a benefit subsequent to -- an 16 additional benefit that the -- two benefits, the 17 dual purpose, and that dual purpose environment 18 where the chemical actually does something other 19 than just existing as two percent of its mass, which 20 doesn't necessarily contribute to any more strength 21 than the other 98 percent does, and it's incidental 22 to the process. I get that. 23 The distinction -- and I understand why the 24 annotation exists. I understand the historical 25 analysis. People spend far more time in developing 26 that annotation, research and analysis, than we're 27 spending here on the Board. So I get the importance 28 of the annotation and the process. 65 1 The tartaric acid, tartaric acid, the 2 testimony is is that it attached and has a water 3 resistant characteristic. Now, I don't -- I don't 4 hear the Department saying it doesn't. I don't hear 5 the Department have any evidence that it doesn't. 6 So therein it has a dual purpose. 7 The rest of these chemicals, the primary 8 purpose of forming the bubble and enlarging happens 9 in the manufacturing process. The asset combines, 10 it enlarges, causes to grow, and then it sits there 11 as a powder, but -- or whatever form it's in. 12 Anyway -- 13 MR. MENDEL: Did you -- 14 MR. HORTON: No. 15 MR. MENDEL: -- want the annotation 16 process? 17 MR. HORTON: I'm good. 18 MR. MENDEL: Okay. 19 MR. HORTON: Further discussion, Members? 20 Hearing none, Member Runner moves to take 21 the matter under submission, second by Member Ma. 22 Without objection, Members, such will be 23 the order. 24 Thank you very much for appearing before 25 us. Very interesting discussion. We should 26 probably continue this discussion with a bunch of 27 chemists. But in light of the responsibilities of 28 the Board, I'm sure we'll do -- fulfill our 66 1 responsibilities in that regard. 2 MR. VINATIERI: Thank you. 3 DR. SETHURAMAN: Thanks, Chairman, and 4 other Members. Thank you. Thanks for your time. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 67 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 January 26, 2016 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 67 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: February 18, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 68