1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 29, 2016 10 11 SALES AND USE TAX APPEAL HEARINGS 12 PETITION FOR REALLOCATION OF LOCAL TAX 13 14 CITIES OF ONTARIO, PALM SPRINGS, SAN DIEGO, 15 SANTA BARBARA, AND COUNTIES OF SACRAMENTO 16 AND SAN MATEO 17 NOS. 525325, 525326 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 of Equalization: Fiona Ma, CPA 3 Chairwoman 4 Diane L. Harkey Vice Chair 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 12 Joann Richmond Chief 13 Board Proceedings Division 14 15 For Board of Equalization Staff: Trecia Nienow 16 Tax Counsel IV Appeals Division 17 David Levine 18 Tax Counsel IV Appeals Division 19 20 21 For the Department: Scott Claremon Tax Counsel 22 Legal Department 23 Robert Tucker Assistant Chief Counsel 24 Legal Department 25 Kevin Hanks Chief, Headquarters 26 Operations Division 27 28 2 1 APPEARANCES (cont'd) 2 For Notified Jurisdiction City of Oakland: Christopher Kee 3 Attorney 4 For Cities of San Diego, 5 Ontario, Palm Springs, Santa Barbara, and 6 County of Sacramento: Eric Myers Attorney 7 8 For City of San Diego: Matthew Vespi Director of Financial 9 Management 10 Paul Prather Deputy City Attorney 11 For County of San Mateo: Brian Wong 12 Deputy County Counsel 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 29, 2016 4 ---oOo--- 5 MS. MA: Okay, Ms. Richmond. 6 MS. RICHMOND: So our next item is Item C 7 Sales and Use Tax Appeals Hearings. We have a local 8 tax reallocation hearing: Item C2, Cities of 9 Ontario, Palm Springs, San Diego, Santa Barbara, and 10 Counties of Sacramento and San Mateo. 11 Please come forward. 12 This case was granted an additional time, 13 14 minutes for the opening presentation and 11 14 minutes on rebuttal. 15 MS. MA: Okay. To Appeals, will you please 16 introduce yourself and the issues in the case. 17 MS. NIENOW: Chairwoman Ma, Members, good 18 morning. I'm Trecia Nienow from the Appeals 19 Division, here along with David Levine. 20 The primary issue is whether the local tax 21 that was directly allocated to the Oakland office 22 where the orders were received should be reallocated 23 to petitioners. If so, then the next issue would be 24 whether all petitioners meet the $500,000 threshold 25 for direct allocation. 26 As a reminder to the hearing participants, 27 because the taxpayer is not a party to this appeal, 28 confidential information regarding the taxpayer must 4 1 not be publicly disclosed. That includes the 2 identity of the taxpayer or any other information 3 which could easily identify the taxpayer. 4 In addition, this is an appeal that is 5 covered by Revenue and Taxation Code Section 40 and, 6 thus, requires a public decision. 7 Thank you. 8 MS. MA: Thank you, Ms. Nienow. 9 To the petitioners, welcome to the Board of 10 Equalization. You've been granted additional time 11 for your presentation and rebuttal. Collectively 12 you will have 14 minutes to make your initial 13 presentation, and we'll have an additional 11 14 minutes on the rebuttal. 15 Please introduce yourself for the record. 16 MR. MYERS: Thank you, Chairwoman Ma and 17 Members of the Board. My name is Eric Myers. I am 18 an attorney for an employee of MuniServices, which 19 is the sales tax consultant for the Cities of San 20 Diego, Ontario, Palm Springs and Santa Barbara, and 21 the County of Sacramento in this matter. We're 22 referred to typically in the documents as the 23 petitioners. 24 With me today is Matt Vespi, the Deputy 25 Director of Financial Management for the City of 26 San Diego, and Paul Prather who is seated in the 27 audience and available if we have questions for him; 28 he's the Deputy City Attorney for the City of 5 1 San Diego. 2 Mr. Vespi has prepared some remarks which I 3 will ask him to deliver in just a few moments, and 4 Mr. Prather may also have some comments. So I may 5 be playing a bit of musical chairs here. 6 Oh, looks like we've freed up another spot; 7 that's great. 8 Seated to the left of Mr. Vespi is 9 Mr. Brian Wong, Deputy County Counsel for the County 10 of San Mateo. When we've completed our brief 11 opening statements and comments, we will turn the 12 balance of our time over to Mr. Wong. We've tried 13 to coordinate our presentations to minimize 14 redundancies today. 15 The key question presented to the Board is 16 this: Were Ms. M's activities in the Oakland office 17 participation in the sales between the parent and 18 the taxpayer? This question has several parts and 19 I'll address each briefly as we've discussed them in 20 detail in our submissions. 21 The first is the relevant universal 22 discourse here is the transactions between the 23 parent and the taxpayer. Whatever else Ms. M may 24 have done, either in furthering the business in 25 general or in dealing with other customers are not 26 actually at issue in this case. The taxable 27 transactions in this case are between the taxpayer 28 and the parent, and that's what's at issue here. 6 1 The second is that what we need to be 2 looking for is the selling at retail, not 3 necessarily activities that advance the general 4 business that the taxpayer -- or the taxpayer was 5 in. 6 And then finally, sort of say stripped to 7 its bones the question becomes whether Ms. M's 8 receipt of estimates, called variously purchase 9 orders or nominations in the documentation, whether 10 her receipt of estimates constituted order-taking, 11 and it did not. 12 There were a series of successive estimates 13 and there was no obligation for the parent to 14 purchase the amount stated in its estimate. The 15 amount actually purchased happened when fuel was 16 loaded. 17 We acknowledge that the estimates may have 18 been useful for planning and inventory purposes, 19 that they may have even been vital for general 20 business purposes as they would be for any retail 21 establishment to make sure they have inventory to 22 sell. But they were not orders. They were 23 estimates. 24 Thank you for the opportunity to address 25 you today, and I'll turn some time over to Mr. Vespi 26 now. 27 MR. VESPI: Thank you. Good morning, 28 Chairwoman, Members of the Board. As Eric 7 1 mentioned, my name's Matthew Vespi. I'm Deputy 2 Director of Financial Management for the City of San 3 Diego. 4 The City of San Diego has a track record of 5 using economic development agreements in a 6 responsible manner to retain local businesses and 7 help them expand, creating new jobs and better 8 opportunity for the city's residents. 9 The City of San Diego does not use economic 10 development agreements to attract businesses to 11 relocate and, as a result, poach sales tax revenues 12 from other jurisdictions. 13 As you are aware, in this case an economic 14 development agreement was used to incentivize the 15 taxpayer to begin reporting all California jet fuel 16 sales to the City of Oakland in exchange for a 17 rebate of 65 percent of the sales tax. 18 As described by Mr. Myers, the City of San 19 Diego strongly believes the taxpayer's activities in 20 Oakland were not sufficient to create participation 21 in the sales in question and, thus, move the point 22 of sales and resulting sales tax away from San Diego 23 to the City of Oakland. 24 Additionally, as previously noted, the main 25 function of the taxpayer's Oakland location was to 26 estimate jet fuel inventories, not place actual 27 orders for jet fuel. While estimating fuel 28 inventories is an important business function, it 8 1 does not create participation in the sale. 2 The sales tax liability for the 3 transactions in question was created when the actual 4 number of gallons pumped and the actual spot price 5 of the fuel is known. Both of these were determined 6 at the San Diego Airport when the fuel was actually 7 pumped into the plane. No sales tax liability was 8 created by the taxpayer estimating future fuel needs 9 from the Oakland office. Furthermore, there was no 10 change in the level of service the City of San Diego 11 was required to provide to the airport or to the 12 taxpayer during this period of time because there 13 was no change in the taxpayer's operation in the 14 City of San Diego. 15 The City of San Diego had the same 16 financial obligations, although the city's sales tax 17 receipts had been reduced. 18 Again, thank you for your time and I'll 19 turn it over to Mr. Wong to complete our comments. 20 Thank you. 21 MR. WONG: Good morning, Chairwoman Ma, 22 Members of the Board. My name is Brian Wong. I'm a 23 Deputy County Counsel in the County Counsel's office 24 in San Mateo County. I represent the County, which 25 is one of the petitioners in this matter. 26 The County joins in the comments that 27 Mr. Myers has made with respect to participation. 28 And like Mr. Vespi, Vespi/City San Diego, San Mateo 9 1 County hosted a large international airport that 2 bears a number of costs associated with the presence 3 of that airport inside its borders. 4 In addition to the issue of participation, 5 I would like to make a couple comments with respect 6 to AB 451, which, as many of the Members know, was 7 the legislation that was passed in 2006 but was 8 operative in 2008. 9 AB 451 introduced amendments to Revenue and 10 Taxation Code sections 7204.03 and 7205, and those 11 amendments made the types of arrangements that are 12 at issue before the Board today not allowed. So it 13 wouldn't allow tax money to move from airport 14 jurisdictions to non-airport -- or to other 15 jurisdictions outside. 16 I guess I'd start with saying that we agree 17 with the Appeals Division with respect to AB 451 and 18 its amendments in that AB 451 is simply irrelevant 19 to the decision with respect to the appeal here 20 today. 21 This is true for several reasons. The 22 first is if you look specifically at the amendments 23 contained in AB 451, they're unambiguous. If you 24 look at just the line comparison, it's simply 25 deleted a line from the existing statute. That line 26 was "the retailer has more than one place of 27 business in the state." That change was meant to 28 effectuate the -- the change did not allow these 10 1 arrangements to move the tax to a different 2 jurisdiction. 3 When a statute is clear in that way, 4 there's no need to go looking around for further 5 understanding or further meaning. You look at the 6 statute, the statute is clear, and that is how we 7 should be determining what the legislator -- 8 Legislature intended by passing those amendments. 9 Second, looking at the legislative history, 10 to the extent that there are comments in there with 11 respect to a, quote, Oakland agreement being 12 contrary to the intent of the existing law yet 13 technically legal, those are from the summary 14 reports prepared by a legislative analyst that 15 summarized, kind of for context purposes, the 16 situation into which these amendments are going 17 into. It's not from the bill's sponsor, it's not 18 from a Legislature -- legislator. It's from an 19 analyst who's attempting to summarize. 20 Third, and perhaps most importantly, even 21 if portions of the legislative history were 22 informative as to the Legislature's intent, it's 23 clear from looking at the legislative history that 24 it was not looking at the specific details and facts 25 that are before this Board today. If you look at 26 the text of the reports, it's talking about a 27 Oakland agreement being technically legal. It 28 doesn't speak to the types of participation and 11 1 other items that will likely be a source of 2 discussion today. 3 I think I'd want to emphasize that what is 4 important is what actually occurred in Oakland, as 5 opposed to what technically could have happened 6 there that would have complied with the existing 7 law. 8 I think I'd reiterate at this point what 9 the Supplemental Decision and Recommendation had to 10 say about AB 451, which is that it set forth what 11 the law was going to be going forward, but it did 12 not interpret the existing law that was in place 13 during the time period in question here, which is 14 2004 to 2008. Nor did it approve a particular 15 interpretation of that law, which would be saying 16 that the arrangements that are issued today were 17 somehow in fact complying and allowed by the law at 18 the time. 19 I'd like to reserve any balance of time I 20 have for rebuttal at this point. Thank you. 21 MS. MA: Thank you very much. 22 Okay. We'll now go to the Department for 23 their presentation. You'll have ten minutes to make 24 your presentation. We'll return to the appellant 25 for rebuttal. Please introduce yourselves for the 26 record. 27 MR. CLAREMON: I'm going to -- I'm going to 28 let the City of Oakland go first, and then we'll 12 1 follow them. 2 MS. MA: Okay. 3 MR. KEE: Good morning, Chairman Ma and 4 Members of the Board. I am Chris Kee. I'm 5 appearing on behalf of the substantially affected 6 party, City of Oakland. Let me say, just as a 7 threshold matter, on behalf of the City, to extend 8 my gratitude for the opportunity to present our case 9 and to appear before you this morning. 10 After proceedings stretching over eight 11 years to appeals conferences, some 2,000 pages of 12 documentary evidence, live testimony for a matter of 13 hours, sworn declarations under penalty of perjury, 14 multiple extensive briefing, this matter has come 15 down a single question; and that was, did the 16 taxpayers Oakland office participate in any way in 17 sales transactions of jet fuel such that local tax, 18 under Bradley-Burns, was properly allocated to the 19 City of Oakland? Both the Department and the 20 Appeals Division agree that the answer to that 21 question is yes. 22 Using Regulation 1620's language as the 23 measure, it is abundantly clear that the activities 24 of the Oakland office constitute participation in 25 any way in the transactions by which jet fuel is 26 sold as a matter of industry practice. 27 What the record shows is that there was a 28 real office, staffed by a real person, engaged in 13 1 the real business of selling jet fuel to taxpayer's 2 customers which included its corporate parent and 3 multiple third-party customers. 4 I must take issue with Mr. Myers' 5 representation that this matter is only related to 6 sales between the taxpayer and the parent. The 7 record actually shows that the dealings with 8 third-party customers was a primary profit driver at 9 points during the time period that we're talking 10 about here. 11 The office was staffed full-time by a woman 12 of considerable accomplishments, whom I believe that 13 we are referring to as Ms. M for these proceedings. 14 She was highly regarded, much awarded, former 15 manager of the corporate parent's database group, 16 and she was the essential participant in these sales 17 transactions. 18 As the record makes clear, in the jet fuel 19 industry there's a process by which sales are 20 consummated, an increasingly precise series of 21 transactions culminating in a final nomination which 22 is the industry's term for a purchase order for 23 fuel. These were not estimates. These were not 24 mere estimates for the purpose of stocking the 25 shelves as it were. 26 These are -- as the Supplemental D&R 27 recognizes, these were purchase orders that were, in 28 essence, requirements contracts; specific orders 14 1 from specific customers to be filled at a specific 2 airport for a specific amount of fuel as was 3 possible for the customer to project. 4 It was Ms. M's job to receive and process 5 those orders and then arrange for delivery so that 6 there would be sufficient fuel to meet the 7 customer's requirements when their planes actually 8 pulled up to the pump. 9 The record shows that there was in fact no 10 agreement. There could be no sale unless and until 11 these purchase orders, signed purchase orders were 12 received by Ms. M at the Oakland office. So, far 13 from being, as Mr. Myers suggested, a mere estimate, 14 it was an indispensable, perhaps the indispensable 15 component of the sales transaction. 16 And because these transactions took place 17 in a volatile commodities market, it was also Ms. 18 M's job to ensure that once the customer's 19 requirements were met, that the taxpayer itself 20 would be left with as little uncommitted fuel on 21 hand as possible, which also reinforces the correct 22 understanding that this was not building inventory. 23 Excess inventory was in fact anathema to both 24 parties for a number of reasons: It was expensive 25 for the carrier to have excess fuel on-board when 26 they flew, and it was an economic risk on the part 27 of the taxpayer to have more fuel on hand than was 28 necessary to meet the requirements of its customers. 15 1 Petitioners, particularly in their 2 briefing, tell an entirely different story which was 3 based on the underlying premise that the Oakland 4 office was illegitimate from the very beginning and 5 that these entire endeavors were an elaborate scam. 6 I would submit, in light of the record, the full 7 record that is now before the court, that underlying 8 premise is difficult to sustain. 9 What petitioners really ask of this Board 10 is to effectively undo the legislative compromise 11 that resulted in the passage of AB 451. That 12 compromise, which did affirm that as a threshold 13 matter the Oakland office was legal under then 14 existing law, created a settled expectation on the 15 part of the City of Oakland that local allocation of 16 sales tax from sales consummated at the Oakland 17 office would continue until January 1st, 2008. 18 Having lost that battle in the Legislature, 19 petitioners now want this Board to do what the 20 Legislature and the Governor did not and would not 21 do. 22 In light of Oakland's settled expectations, 23 I would respectfully urge the Board to also consider 24 the real life consequences of what petitioners hope 25 to accomplish here, which is to claw back nearly 26 $13 million allocated to the City of Oakland over 27 10 years ago, revenues that have long since been 28 spent for the benefit of the citizens of the City of 16 1 Oakland. 2 Oakland is only now emerging from the 3 crushing effects of the Great Recession of -- the 4 Great Recession. And as a former employee of the 5 City, I can speak from personal experience about how 6 things were in those times. There were mandatory 7 furloughs, there were layoffs, there was 8 uncertainty, there were tough choices between 9 infrastructure, management and public safety. 10 Affirming the conclusions of the Department 11 and the Appeals Division thus has the triple benefit 12 of being the correct legal result on this record, it 13 reaffirms the will and considered judgment of the 14 Legislature, and it is fundamentally fair. 15 And so for all these reasons, I urge the 16 court -- the court -- the Board to deny the 17 petitions. And I'll gladly yield the microphone to 18 my colleague here. 19 MR. CLAREMON: Thanks. 20 Good morning, Chairwoman Ma, Members of the 21 Board. I'm Scott Claremon from the Legal 22 Department. With me are Robert Tucker and Kevin 23 Hanks, also representing the Department; and we'll 24 be presenting the position of the Department in this 25 matter. 26 We concur with the recommendation of the 27 Appeals Division that both -- that the petition 28 should be -- for reallocation of local tax should be 17 1 denied. 2 Taxpayer is a seller of aviation fuel with 3 many of its sales during the period at issue being 4 made to its parent company under a master 5 requirements contract. It is undisputed that the 6 sales took place in California. Therefore, pursuant 7 to Regulation 1620 and 1802, if a California 8 location of the taxpayer participated in the sales, 9 the sales would be allocated to that participating 10 location. If no location of the taxpayer 11 participated in the sales, then the applicable tax 12 would be use tax and the use tax would be allocated 13 to the jurisdiction of first functional use. 14 Participation in a sale includes any 15 activity serving some real purpose in the actual 16 sales process and involving some genuine physical 17 interaction with the sale. 18 Here, the evidence shows that the retailer 19 established an office in Oakland, staffed by a 20 single employee whose main responsibility was to 21 negotiate the acquisition of fuel in order to 22 balance supply with the orders received from 23 taxpayer's customers. And, again, in large part to 24 its parent company. 25 To that end and pursuant to the master 26 contracts, the employee would receive purchase 27 orders from parent on a monthly basis stating its 28 approximate fuel needs for the subsequent month. 18 1 According to the terms of the contract, these 2 purchase orders constituted an unequivocal and 3 unconditional offer to purchase by parent. 4 The employee's receipt of these purchase 5 orders and her related activities, including 6 managing fuel inventories, confirming deliveries and 7 addressing fuel shortages, constituted participation 8 in the sale. Since this is the only location of 9 taxpayer that participated in the sale, we concur 10 that the allocation should go to that jurisdiction, 11 City of Oakland. 12 Thank you. 13 MS. MA: Okay, thank you. 14 MR. KEE: Madam Chairwoman? 15 MR. CLAREMON: Before I -- I'm sorry. 16 MR. KEE: If I have some additional time, 17 with the court's indulgence -- 18 MS. MA: How much time do we have? Two 19 minutes. 20 MR. KEE: Let me address, very briefly, in 21 more detail the assertions about the estimates. 22 There is an exhibit, Exhibit 3 of the 23 Supplemental D&R is a declaration from Ms. H who is 24 the -- was Ms. M's primary contact at the parent 25 company. And in it she describes in considerable 26 detail what went into the nomination. She says that 27 she used a dedicated computer program called the 28 Brio Program, which would take into account known 19 1 passenger load, taxi time, known cargo weights, 2 flight schedule, and gallons of fuel consumed on the 3 flight. 4 The program would consolidate those 5 numbers. Ms. H would then compare that calculation 6 to the year's estimated and actual consumption of 7 fuel, and then manually adjust it for cancellations 8 and weather at the specific airports. Only after 9 she had done all those calculations, would then -- 10 would she submit the nomination to Ms. M. 11 So the notion that this was some sort of 12 rough guess about what a customer might need is, I 13 think, fairly thoroughly rebutted by the record. 14 There's also testimony from Mr. S who was the 15 general manager for the parent company as well. 16 MS. MA: Okay. We have Ms. S, Ms. M, and 17 Mr. S. Okay. 18 So thank you very much, Mr. Kee. 19 We will now return to the petitioner for 20 rebuttal. You have five minutes for your 21 rebuttal. 22 MS. RICHMOND: Excuse me, Ms. Ma. They had 23 additional time granted for rebuttal. 24 MS. MA: Okay. How much time? 25 MS. RICHMOND: Eleven minutes. 26 MS. MA: Eleven minutes on rebuttal. 27 MR. MYERS: Thank you. 28 It is really quite an interesting question 20 1 that this case poses. Mr. Kee has quite eloquently 2 spoken to the fact that they tried very hard to make 3 this look like an order; that, in fact, they called 4 it a purchase order. But you have to go through 5 quite a bit of mental gymnastics to call this an 6 order in any common sense meaning of that word. 7 For example -- and I will -- there's been 8 much noted that the estimates were well-thought-out. 9 Well, that's great, they were well-thought-out 10 estimates and I'm sure that was helpful to the 11 business. But a well-thought-out estimate does not 12 constitute an order. There's no obligation to buy 13 the amount in the estimate. 14 The amount invoiced, the amount to which 15 the tax applied was the amount actually loaded 16 onto the plane, no matter how good the estimate was. 17 The estimate was not the amount that resulted in 18 either tax liability or the sale. It was the actual 19 upload of the fuel to the plane. 20 Furthermore, I think there's a little bit 21 of uncertainty, even in the record, about there was 22 a 30-day estimate and then a 10-day estimate. We 23 have in the contracts at issue actually a 24 requirement that the taxpayer provide the seller 25 with a purchase order. 26 I'm quoting from Exhibit 3 of the original 27 D&R, page 9: 28 "For all California purchases pursuant 21 1 to a requirements agreement, at least 30 2 days prior to the beginning of each month, 3 seller shall provide to buyer a purchase 4 order requesting buyer's approximate jet 5 fuel requirements." 6 And that would be for the subsequent 7 one-month period subject to the terms and provisions 8 of the agreement. 9 "Not later than 10 days upon receipt of 10 the purchase order" -- so that would be the 11 parent having received the purchase order 12 from the taxpayer -- "buyer shall place its 13 order for the jet fuel by submitting to 14 seller a signed and completed purchase 15 order at the location specified above." 16 But even that procedure wasn't followed. 17 The testimony from Mr. S was that there was a 30-day 18 estimate provided and a 10-day estimate provided. 19 When if you actually look here, should have come in 20 about 20 days. 21 It doesn't matter that much to me per se 22 whether they followed the contract exactly or not. 23 The point is that the contract doesn't actually 24 establish a binding obligation. It didn't treat it 25 that way. They gave an estimate, then they refined 26 it, and then at the airport they uploaded the fuel. 27 Mr. Wong, I believe you had some comments 28 on rebuttal. 22 1 MR. WONG: Yes, on 451. 2 To briefly address some of Mr. Kee's 3 comments on the legislation, I think I'd want to, 4 again, highlight that we are looking at what 5 actually happened in Oakland and whether that could 6 have been something the Legislature would have even 7 looked at. 8 I think one specific example indicating 9 that wasn't the case is if you look at the 10 legislative history -- I believe it's in the April 11 11th, 2005 report -- when it's describing existing 12 law, it specifically states that the sales tax 13 revenue is allocated to the jurisdiction where the 14 negotiations take place. And I'd like to point out 15 that looking at the Supplemental Decision and 16 Recommendation, as well as the record here, I think 17 it's pretty clear that the negotiations with respect 18 to the actual sales we're talking about here didn't 19 occur there; I think that's pretty clear from the 20 record. 21 And so, to the extent that there is a claim 22 that the Legislature was looking at what exactly was 23 going on at the Oakland office and saying somehow 24 that this is fine, we're going to allow that to 25 continue for two more years, that's -- that's taking 26 it far, far more than what's even suggested in the 27 legislative history. 28 MR. MYERS: Thank you. I think one final 23 1 thought would be -- and we take very seriously 2 Mr. Kee's statement about the real life 3 consequences. 4 I've been in front of this Board a number 5 of times in the past. Our company works with a lot 6 of cities and local jurisdictions. No one, no one 7 likes to ask a city to pay back money that it 8 received. That's not an easy thing to do. And 9 certainly we feel for the City of Oakland. 10 If, you know, they interpreted the 11 legislation as meaning something that it did not 12 mean, which was that its process was somehow blessed 13 in the interim two years without regard to what the 14 actual rules say about participation, I'm sure that 15 they must feel frustrated by that. 16 But, we're not experts in how this thing 17 would come to pass. We have seen in the past that 18 the Board has the authority to stretch out payment 19 plans and do things over time to mitigate impact. 20 Who knows, and I don't know, so I'm purely 21 speculating and Mr. Kee can call me on the carpet 22 for it, whether the -- whether the city could get 23 anything back from the taxpayer, I simply don't 24 know. But we do feel for them. 25 On the flip side, if we were entitled to 26 the money, it's been a lot of years where we didn't 27 have the money either. And so there's, I think, 28 some equities on both sides. Many cities were 24 1 impacted by the Great Recession. So I would just 2 add that as an additional thought. 3 Thank you, Chairwoman Ma. 4 MS. MA: Okay, thank you. 5 Members, discussion? 6 Ms. Harkey. 7 MS. HARKEY: I always start 'em out. I 8 shouldn't do this, but I do. 9 As I see, we've got two issues here: Is it 10 sales tax or is it use tax? Sales tax, tax would be 11 allocated to Oakland. Use tax, it's allocated to 12 the local jurisdiction. 13 So, question for Mr. Kee. For the majority 14 of time in question, it is my understanding that the 15 taxpayer had the same employee working in Oakland. 16 MR. KEE: That is correct. 17 MS. HARKEY: Okay. What were the 18 employee's duties and what actions did they perform? 19 MR. KEE: Well, her -- as I described 20 earlier, one of her principal goals was the 21 processing of these purchase orders in the manner in 22 which I described, that the parent or the third 23 party would submit these nominations to Ms. M who 24 would then receive them and process them. And an 25 integral part of the processing was to arrange with 26 the suppliers that there would be sufficient fuel at 27 the various airports to meet the specific 28 requirements. So she was matching the purchase 25 1 order supplies to the purchase orders in as precise 2 a manner as she could. 3 There is, in the record, a performance 4 evaluation which describes what she did. And if 5 you'd like -- let me read it to you. 6 MS. HARKEY: Okay. 7 MR. KEE: This is from her 2005 performance 8 evaluation: 9 "Process spot deals, creating the 10 contracts, sending confirmation, approving 11 broker invoices, and setting delivery dates 12 and location. Also created and modified 13 term contracts with Morgan Stanley, Mesa, 14 Air Wisconsin, and Sky West at SFO and LAX. 15 Worked with" -- and then there's a litany 16 of airports -- "to resolve fueling issues 17 such as answering questions about invoices 18 or processes, following up on audit issues, 19 sending current copies of contracts, and 20 looking into tax refunds. 21 "She followed up on into-plane 22 overcharge at San Jose airport for $14,464 23 in credit and averaged $2,000 a month 24 reduction in charges. Going forward, she 25 led an effort to create standard into-plane 26 and GSE templates and minimum insurance 27 requirements for large and small stations." 28 It says: 26 1 "This exercise has gotten into all 2 areas to define their requirements and 3 ensures that these will be included in 4 every contract going forward. It also 5 makes contract negotiations much more 6 efficient since only changes need review 7 and approval." 8 Among her other tasks was to -- she was 9 deemed the dealmaker with respect to what -- 10 MS. HARKEY: Okay. Don't name companies or 11 anything. 12 MR. KEE: I'm sorry. The, uh -- what were 13 called proposed terms sales contracts, which was the 14 internal process by which contracts were generated. 15 She was the dealmaker for these, as is shown in the 16 record, and she would negotiate the terms for, for 17 instance, a location agreement which is another 18 industry-specific term for an agreement that would 19 set the general terms on a longer term basis for the 20 fuel that would be acquired. 21 For instance, it would set pricing and the 22 type of fuel and the manner in which it would be 23 delivered into the planes at the airports. Ms. M 24 negotiated those contracts, those -- and so she 25 would generate the proposed term sales. Those would 26 get passed through the company hierarchy for 27 approval. If it was above her ability to sign, 28 there was a -- a monetary cap set on the amount that 27 1 an employee could sign. So she would circulate 2 these through the corporate structure, and then the 3 contract would be generated on the basis of terms 4 that she had negotiated with respect to, for 5 instance, these location agreements. 6 She did arrangements with suppliers on the 7 price of fuel as well as for arranging for delivery 8 as I was mentioning earlier. So, for instance, if 9 there was a specific requirement and there was not 10 enough fuel available at the location, she would 11 make the specific arrangements with the supplier to 12 make sure there was enough fuel on hand. She would 13 truck it in if necessary. So she was -- that was 14 the degree to which she would go to work with the 15 suppliers to make sure, once again, that there was 16 sufficient fuel to meet the requirements of these 17 purchase orders. 18 I could go on. 19 MS. HARKEY: I think I get it. 20 MR. KEE: But that's the general sense of 21 what she did. 22 MS. HARKEY: Thank you. 23 For the Department, what constitutes 24 participation in sales? 25 MR. CLAREMON: Well, again, the standard we 26 look at is -- and it says "any form of 27 participation." So we look at any activity serving 28 some real purpose in the actual sales process and 28 1 involving some genuine physical interaction. 2 So we think the taking of the purchase 3 orders and then arranging for supply. In response 4 to that is both something that has an effect on the 5 sale and it's also there's a -- the physical 6 interaction with the seller -- excuse me, the 7 purchaser, in this case is the receiving of the 8 orders. 9 MS. HARKEY: Okay. This is for the 10 petitioner. Can you explain why you believe this is 11 not participation in the sale? 12 MR. MYERS: Sure. The participation in the 13 sale is an undefined term. The standard just quoted 14 to you by the Department exists nowhere in law. It 15 is a decent standard that was put forward in the 16 test D&R with a slight change from the original 17 Decision and Recommendation. 18 We think that 1620(a)(2)(A) can't possibly 19 mean what it says, which is "in any way." For 20 example, if we take that literally and we follow, 21 say, a line of reasoning that Mr. Kee has advanced, 22 the payroll office is participating in a sale 23 because the payroll office pays the people who do 24 the selling, and no one has consistently argued that 25 the payroll office is a place of sale. 26 So we think that this rule has to be read 27 with a reasonable limitation in mind. And that is 28 it's sort of directly involved in the selling. 29 1 Now, again, the selling of what? Here, the 2 issue is the sales between the taxpayer and the 3 parent. And despite all of the wonderful things 4 that Mr. Kee has just read that Ms. M did, it's 5 acknowledged in the record she didn't negotiate the 6 master contracts between taxpayer and parent, she 7 didn't negotiate the location agreements between 8 taxpayer and parent. What she did, and I'm quoting 9 now from paragraph 18 of her own declaration that's 10 Exhibit 2 to the Supplemental Decision and 11 Recommendation: 12 "As mentioned above, however, the most 13 important part of my job was to manage, on 14 an ongoing basis, the balance between 15 purchases and supplies of fuel at the 16 various airports under my responsibility." 17 She managed inventory; incredibly important 18 for any retailer. Please don't get me wrong. We're 19 not arguing that that's not an important business 20 activity. It isn't sales activity. It isn't the 21 receiving of an order. "I want five shirts today." 22 Okay. 23 She received estimates. "Hey, we're 24 probably going to order this much. Our planes are 25 looking like this. Please make sure you have enough 26 on hand that when we show up there's enough 27 inventory for us to fuel our planes." That isn't 28 participation because it isn't order-taking. 30 1 Now if the question is, is it some other 2 form of participation that hasn't been defined yet, 3 we don't think so because it's so broad. That -- 4 that interpretation, to reach Oakland's position, is 5 so broad that it allows in all sorts of activities 6 that are related as business activities, that but 7 for those activities there wouldn't be a business, 8 but that aren't selling at retail. 9 MS. HARKEY: Okay. I -- I understand your 10 point. I'm having difficulty because -- well, one 11 of the things you said is that, you know, doing 12 payroll. But I believe Regulation 1620 states that 13 participation in transaction any way, be the local 14 office branch or outlet or other place of business, 15 is sufficient to sustain the sales tax. 16 And then it says, also goes on to include a 17 California business location of the retailer serving 18 some real purpose in the actual sales process -- 19 which would eliminate payroll -- and involving some 20 genuine physical interaction with the sale from that 21 location, such as negotiating sales, accepting 22 orders, approving credit, delivering goods to the 23 customer or billing is what constitutes 24 participation in the sale. 25 So do you -- I'm trying to work with you 26 here. But do you deny that the Ms. M submitted 27 30-day nominations? 28 MR. MYERS: No. 31 1 MS. HARKEY: Okay. Then there was a 10-day 2 period where those nominations or purchase orders 3 were confirmed. 4 MR. MYERS: There was another estimate, a 5 10-day estimate, yep. 6 MS. HARKEY: Right. Okay. Estimate or 7 nominations. I think nominations is more the 8 technical term. 9 So the employee -- you don't believe that 10 the employee actually purchased the fuel. 11 MR. MYERS: No, we believe the employee was 12 involved in making sure there was fuel on hand. 13 MS. HARKEY: Okay. Okay, I'm through. 14 Thank you. 15 MS. MA: So I do have a question. So was 16 this Oakland office required to get a seller's 17 permit? 18 MR. HANKS: Yes. Ms. Ma, we believe that 19 they -- they were required to maintain a seller's 20 permit for that sales location. 21 MS. MA: And did they file taxes? 22 MR. HANKS: They did have a permit for that 23 location. 24 MS. MA: And they filed their sales tax 25 returns? 26 MR. HANKS: Correct. 27 MS. MA: Okay. 28 Mr. Runner. 32 1 MR. RUNNER: Yeah, just a -- you know, 2 clearly what we're trying to find is a -- we have a 3 dispute in regards to this definition of 4 "participation" and also, to a degree, in regards to 5 trying to define what these nominations are and 6 what -- the way -- how they actually acted. 7 Let me -- let me hear again from -- from 8 the City of Oakland what it is that you believe took 9 place when these -- with these nominations? Why 10 were these -- why were these nominations indeed 11 participation? 12 MR. KEE: I think it's important to make 13 that evaluation in the context of the 14 industry-specific process. This is how sales were 15 consummated in the jet fuel industry. There were 16 these increasingly more precise transactions 17 starting -- well, I suppose starting with the master 18 contract. Then the next level would be these 19 location agreements. Then the next level would be 20 these 30-day nominations. Then the 10-day 21 nominations. And then someone's actually 22 putting the -- 23 MR. RUNNER: Fuel. 24 MR. KEE: -- the fuel into the plane. 25 I'll concede Ms. M was not out there on the 26 tarmac putting fuel into the plane. But, but for 27 her involvement with this, that final act would not 28 have taken place. 33 1 So my understanding is how -- the process 2 worked like this: That either the parent or, I must 3 continue to emphasize, there was considerable 4 third-party activity as well. We're not just 5 talking about the parent/taxpayer interactions. 6 But the -- whoever was submitting the 7 nominations would make these elaborate calculations 8 in order to get as specific volume of fuel as they 9 could based on those various factors -- the lift 10 factors, the weather, the cancellations, any of 11 these things -- because, in the industry it was 12 expensive for them to be carrying excess fuel on 13 their planes. So as a matter of business practice, 14 it was essential for them to have a specific 15 estimation. 16 MR. RUNNER: So the challenge is they 17 didn't know the exact amount of the sale? 18 MR. KEE: They could not know. 19 MR. RUNNER: They could not know. 20 MR. KEE: Yeah. 21 MR. RUNNER: Let me go back to the 22 Department then. 23 We would -- at least what I'm hearing is, 24 not knowing the exact amount of the sale does not 25 negate the fact that there was participation? 26 MR. CLAREMON: That's correct. That the 27 participation could take place before -- you know, 28 there's participation leading up to the time the 34 1 sale takes place. 2 MR. RUNNER: Okay. Let me go and ask a 3 quick question to the taxpayer and on the Appeals 4 side. 5 You just went through and described the 6 role of Ms. M, and it seemed to me one of the issues 7 you said, I thought I heard, was overseeing 8 purchases. 9 MR. MYERS: I believe I acknowledged to Ms. 10 Harkey that she -- she was involved in purchasing, 11 yep. 12 MR. RUNNER: Okay. 13 MR. MYERS: Purchasing the fuel. 14 MR. RUNNER: Okay. Let me just ask, the 15 other question I'm just kind of -- and it may or may 16 not have much to do with it. I'm just interested in 17 why it is that the Legislature delayed the 18 implementation of the bill. It seems to me that the 19 Legislature always does that for a purpose. And -- 20 and remind me again why you believe that they 21 delayed the implementation of the bill? 22 MR. WONG: Well, I guess maybe my first 23 response is, we don't know for sure because there's 24 nothing specific in the legislation. 25 MR. RUNNER: But we know -- we know it's 26 unusual not to. 27 MR. WONG: We know. I mean I think if you 28 look at the history, there were some concrete 35 1 reasons offered in some of the legislative history 2 as to why there might be a delay or why it might 3 make sense. I think at one point it was proposed 4 that there be some sort of study done by the State 5 Controller to understand more about these types of 6 arrangements and kind of what they involve. 7 MR. RUNNER: Right. 8 MR. WONG: Maybe some kind of specific 9 facts that I think would have been critical -- 10 MR. RUNNER: Right, but none that of 11 happened. They just delayed -- 12 MR. WONG: None of that happened. They 13 just delayed it. So there's some -- there's nothing 14 in the history that indicates specifically why they 15 decided to delay it. 16 MR. KEE: Member Runner, if I may. 17 MR. RUNNER: Let me -- 18 MR. KEE: Oh, I'm sorry. 19 MR. RUNNER: I'm compelled to feel like 20 there was a -- I mean, again, it seems to me that 21 there -- if there was a concern in regards to the 22 correction aspect or something that they believed 23 was not done in a fashion that was -- they're trying 24 to undo or redo something, it seemed to me -- I'm 25 struggling with the fact why it wouldn't be 26 implemented immediately. Or not immediately, but 27 you know in the beginning of the year. So that's 28 why I struggle with that. 36 1 There seemed to me -- and, again, I guess 2 we're all, to a degree, guessing a bit. It seems to 3 me that there was some acceptance to what the 4 process was in order to create, in my opinion, some 5 transition issues that would take place. 6 Go ahead. 7 MR. KEE: No, that's fine. I'll withdraw 8 that comment. 9 MR. RUNNER: Okay. 10 MR. WONG: I could offer a brief comment, 11 and I think Mr. Myers also had something he wanted 12 to add. 13 I think you're right, we don't know for 14 sure. I think that's the concern is that we don't 15 want to be making a decision based on some 16 assumption about why something happened. And I 17 think that's compounded by the knowledge that we 18 have today that there wasn't a full record for the 19 Legislature to really be deciding on a delay. 20 Like, it'd be maybe a different situation 21 if they had the record that's available today, they 22 were able to look in detail at exactly what Ms. M is 23 doing in Oakland and then decide we're going to go 24 ahead and say yes. 25 MR. RUNNER: I'm not sure that that was 26 what they believed their job to be, but that's 27 okay. 28 MR. WONG: Well, but -- sorry. Go ahead. 37 1 MR. MYERS: I think that's our point to 2 some degree, Member Runner. 3 MR. RUNNER: When -- when -- when was this 4 bill done? 5 MR. MYERS: What's that? 6 MR. WONG: 2006. 7 MS. MA: 2006. 8 MR. MYERS: 2006. 9 MR. RUNNER: A few of us were probably 10 there at that time, right? 11 MR. MYERS: Implemented in 2008. 12 MS. HARKEY: I was there when 13 implementation. 14 MR. RUNNER: Okay, go ahead. 15 MR. MYERS: I think that's precisely our 16 point. To read the legislative history as saying 17 that the Legislature specifically found that this 18 was participation, I think puts too much weight on 19 the legislative history. It's not there. 20 MR. RUNNER: Okay, thank you. 21 MS. STOWERS: Ms. Ma? 22 MS. MA: Yeah, I mean I would just like to 23 add, you know, sitting on Rev. and Tax, we would 24 usually extend the implementation because of 25 planning purposes, whether cities and counties 26 required more time to plan since, you know, they 27 already budget out at least one or two years and, 28 therefore, you know, implementing it too soon would 38 1 actually -- 2 MR. RUNNER: Bad economic. 3 MS. MA: Right. Exactly. 4 Ms. Stowers. 5 MS. STOWERS: Yes. To Oakland, I think you 6 may have addressed it, but -- when you were speaking 7 to Mr. Runner. But you said something earlier about 8 how the industry operates? 9 MR. KEE: Yes. 10 MS. STOWERS: Can you -- I'm sorry -- but 11 walk me through it again? 12 MR. KEE: Yes. I think it's important to 13 keep in mind that there is -- that there is a sales 14 process. There's a series of transactions at the 15 end of which fuel actually goes into the wing tip. 16 And those include these various stages which are 17 the -- that are in the record. There's the master 18 contract. There is what are referred to as the 19 location agreements. Then there are these 20 increasingly more precise nominations, the last of 21 which is this 10-day nomination which involves these 22 very sophisticated methods of evaluating as exactly 23 as they can what the customer's requirement is going 24 to be -- is going to be at a specific airport. 25 And it's important to keep in mind that 26 this is a -- the calculation is done by a 27 specific -- by the customer, the specific customer 28 at a specific airport. It's not as if they can go 39 1 to the shelf and pull down X number of widgets that 2 they have. This is -- this is a specific number 3 that's generated by the customer saying this is what 4 we are going to need at this airport in this time 5 period. 6 So that's -- that's how the industry works. 7 MS. STOWERS: And for our particular issue 8 here, Ms. M interacted with the customer? 9 MR. KEE: Yes. Yes. There could be no 10 sale unless there was a purchase order, a signed 11 purchase order received at the Oakland office. So 12 there -- there would be no -- there would be no fuel 13 going into the wing tip but for Ms. M processing the 14 purchase order at the Oakland office. 15 MS. STOWERS: Thank you. 16 MS. MA: Mr. Horton. 17 MR. HORTON: Thank you, Madam Chair. 18 I just wanted to sort of weigh in on the 19 legislation. The Legislature generally is not a 20 trier of fact. So I agree with Oakland that the 21 legislation only comes into play prospectively. 22 Even then, the facts are the determining factors as 23 to whether or not there was participation. 24 So the historical aspect of this is -- I 25 mean, I get the intent language and I get the 26 implications, but I don't -- that's not their 27 position as the Legislature. They don't determine 28 the facts, so they would not have determined 40 1 participation or the lack thereof in the legislative 2 process. Surely, discussions evidently took place, 3 but that's -- I don't see the value of the 4 legislation. 5 But I do see the value of the various 6 different activities taking place by Mrs. M: 7 purchasing, participation, judgment, several 8 judgment calls relative to the transaction and the 9 contractual relationship of the parties. 10 MR. PRATHER: Mr. Horton, can I -- 11 MR. HORTON: Sure. 12 MR. PRATHER: Deputy City Attorney, Paul 13 Prather for San Diego. 14 I just want to talk about this 15 participation in the sale. There are certainly very 16 important things that Mrs. M did to stock the 17 warehouse. We have warehouses in San Diego. We 18 have requirements contracts with other companies, 19 and there are people there that make sure that that 20 warehouse has plenty, plenty of product that can be 21 ordered. 22 So if participation in the sale is actually 23 stocking the warehouse, then that may include a lot 24 of things which hasn't before been before this 25 Board. It's really an expansion of what has been 26 done before, which is the actual, in our belief, the 27 order which was actually made. 28 There are no penalties if a plane doesn't 41 1 pick up that fuel. There was no lawsuits from the 2 taxpayer, no missed fees. And it was purely an 3 estimate was all that was done at that office. And 4 until the plane actually pulled up, decided it was 5 going to fly, that's when the order and the tax was 6 assessed. 7 So participation in the sale has never, 8 that I've seen before, gone so far as to include 9 stocking the warehouse. Which, if the warehouse 10 doesn't have product, then indeed there can't be a 11 sale. 12 MR. HORTON: Yeah. I mean the inherent 13 challenge with this entire transaction is, I think 14 was sort of codified by Thurgood Marshall as a 15 Supreme Court Justice when he basically said that 16 there's nothing sinister about arranging one's 17 finances in order to minimize your tax liability. 18 And so it appears that the transaction was 19 intentionally arranged in such a way that there was 20 an element of participation from the initial 21 issuance of the permit, wherein the permit would not 22 have been issued unless there was some grounds of 23 participation because the permit wouldn't have been 24 necessary. 25 So, presumably, back to the point in which 26 the permit was initially issued, the activity, 27 discussion, decision, the authority provided is 28 informative and implies that the authority was 42 1 there. And the evidence subsequent to the authority 2 seems to imply as well that some activity did take 3 place. 4 The measurement of that activity would -- 5 would -- would cause this body to have to sort of 6 micromanage and do the audit, which has been done by 7 the Department. The Department has evaluated the 8 evidence and measured it to determine if that was 9 there. 10 So, I mean I do give credence to your 11 argument relative to the stocking and the 12 warehousing, but any element of participation and 13 contractual relationship, authority, all those 14 things, kind of feeds into the participation. 15 Now, whether or not in the Legislature's 16 wisdom they say, well, we don't want this to occur 17 anymore, you know, so that's their right to make a 18 law. But, unfortunately, from my perspective at 19 least, we are the triers of facts and we can only 20 judge by the facts that are presented to us today. 21 MS. MA: Okay. Mr. Myers. 22 MR. MYERS: And -- and we're grateful that 23 as triers of fact you've taken your time to try to 24 wade through this, and we appreciate that. It's a 25 big record. 26 A couple of items to note that I would urge 27 the Board's caution on: 28 First, the fact that they were issued a 43 1 seller's permit. The threshold for being issued a 2 seller's permit is essentially that you apply for 3 one. 4 Secondly, the due diligence of the 5 Department. While there was some investigation, 6 most of the records have been produced by the 7 taxpayer and the City of Oakland during the second 8 appeals conference, not an audit. The initial 9 investigation was they went to the office, showed 10 up, saw that there was a computer there and said, 11 well, it looks to us like there's an office here. 12 So, I think we need to be careful drawing 13 conclusions from those two sources of authority. 14 Obviously if the Board reaches a different 15 conclusion than what we urge, we respect the Board's 16 judgment on that. 17 The final point is simply this -- and I 18 think this is why this is a tricky case -- there's 19 no, at least on my part, I will not speak for 20 Mr. Wong, but on our part, there's no disputing that 21 Ms. M did important things for the business. But 22 handling the purchasing side is not itself 23 participation in the sale. That is a logistics 24 matter. That doesn't mean it's unimportant. 25 Doesn't mean she didn't have authority. Doesn't 26 mean she didn't contract. 27 And to the extent that Mr. Kee wants to 28 bring up, again, that there were significant profits 44 1 on the other side, great. I haven't seen those in 2 the record, but we are focused on the transactions 3 between taxpayer and parent. And it has been 4 conceded that she didn't negotiate those. She 5 didn't have contractual authority there. She 6 handled getting the inventory ready. Really 7 important, not selling at retail. 8 This is not a business license tax. It is 9 a tax on the action of selling at retail. And to 10 the extent that Mr. Kee correctly points out that it 11 is a process, it is really a process in almost -- in 12 many, many business-to-business transactions now. 13 We're not talking, for the most part, about people 14 walking into an order and placing their order at the 15 cashiers -- at the cash register and then walking 16 out. We have a lot of instances where it's a 17 process. That doesn't make them unique. And we 18 would urge the Board to hold the line and not allow 19 inventory management to become participation. 20 Thank you. 21 MR. HORTON: Madam Chair? 22 MS. MA: Mr. Horton. 23 MR. HORTON: Question of the Department. 24 From your findings, the taxpayer has indicated that 25 the only activity of consideration is the purchasing 26 and warehousing. Did you find any activity other 27 than that? 28 MR. CLAREMON: We agree with the Appeals' 45 1 decision that there was no negotiation; we agree 2 with that. But we do see communication and emails 3 between the purchaser, the parent in this case. So 4 when we talk about, as we've discussed, when we talk 5 about the purchasing of the inventory, it's in the 6 context of their communication and their receiving 7 these nominations from the -- the purchaser. 8 MR. HORTON: The taxpayer has described 9 your initial investigation as walking into the 10 office, seeing a computer, and concluding that there 11 was activity. My understanding was is that 12 initially you actually ruled against the City of 13 Oakland. It was your initial finding. And then 14 subsequent to that, the request of additional 15 documentation, evidence came forth, and that then 16 you took the position. 17 I don't want to -- I don't want to describe 18 what took place. But I do want to ask, your 19 investigation of the facts in this case, what did it 20 entail? 21 MR. CLAREMON: Well -- 22 MR. RUNNER: Somebody. 23 MS. HARKEY: Bring out the guns. 24 MR. HANKS: Mr. Horton, yeah, it's a -- 25 it's a delicate subject to discuss. But this was 26 typical of any of the local tax cases that we have 27 where -- where the Department needs to obtain 28 documentation to evidence that the sales took place 46 1 in a given locale. 2 Our initial attempts to obtain that 3 information were unsuccessful. As I understand it, 4 some subpoenas were issued to various parties to 5 obtain additional information supporting exactly 6 what activities took place at that location. But it 7 was with the issuance of different legal means that 8 we were able to obtain a lot of documentation that 9 documented the transactions that we're talking about 10 today, sufficient for us to determine that 11 order-taking was taking place. 12 MR. HORTON: So it's your belief that your 13 investigation was far more comprehensive than 14 depicted by the taxpayer? 15 MR. HANKS: That's correct. 16 MS. MA: Mr. Myers, you have -- your 17 last -- 18 MR. MYERS: I'm debating whether we should 19 continue going down that -- I will simply say that 20 this case was scheduled to come to hearing before 21 these Members, before the Board, a couple of years 22 ago. If I misstate, I'm sure Ms. Nienow can correct 23 me. But at that time the Decision and 24 Recommendation was that there was no participation. 25 And that was after the Department's investigation. 26 So while I am loathe to do so, I must give 27 the credit where it belongs, to the City of Oakland 28 and Mr. Kee who, in the Supplemental Decision and 47 1 Recommendation -- in the second appeals conference, 2 brought a lot of this documentation to bear. 3 So I only add that by way of saying, look, 4 I'm not really here to disparage the Department or 5 anybody else. But I would say, please be cautious 6 in putting too much weight in the Department's 7 investigation. Oakland did bring forth a lot of 8 this documentation. And, you know, we've argued 9 from it and we'll see whether successfully or not. 10 But thank you. 11 MR. HORTON: Madam Chair, I would -- 12 MS. MA: Mr. Horton. 13 MR. HORTON: -- like to go to Appeals just 14 to get their view of the evidence provided by all 15 parties here and their conclusive analysis. 16 MR. LEVINE: David Levine for Appeals. 17 Just for clarification, Appeals has never 18 regarded purchasing, regardless of how important it 19 is -- 20 MR. HORTON: Whatever it is. 21 MR. LEVINE: -- as an element in selling. 22 And as far as I know, the Board has not either. It 23 is a process, but we focused on selling only. 24 Here, if you -- and Mr. Myers, we agree 25 with a lot of what Mr. Myers has said except a 26 couple critical things. We reversed the 27 Department's finding in the D&R. The Department 28 found that there was participation at Oakland. We 48 1 found there was not sufficient evidence. 2 It was in the second appeals conference 3 where Oakland came forward with the documentation 4 that we've relied on now. And what we rely on is 5 the nominations. If you agree with us that they 6 equal purchase orders, then -- Regulation 1620, as 7 Ms. Harkey pointed out, is explicit. Purchase 8 orders are participation. 9 We think that the nominations, even if they 10 don't rise to the level of purchase orders, which we 11 think they do, we still think that they are 12 significant participation in the sales because 13 they're a necessary function. That's how these 14 things work. That's how they have to work in most 15 cases. So granted, the nominations relate to having 16 the inventory available, but it is part of the 17 selling process between the buyer and the seller. 18 So that's where we are at in this case. 19 MR. HORTON: Madam Chair, just a conclusive 20 statement. May I? 21 MS. MA: Mr. Horton. 22 MR. HORTON: The -- when I was promoted to 23 a Tax Counsel IV, this was one of my first audits of 24 a local tax allocation dealing with fuel. And it 25 was extremely complicated; I thought it was. 26 And so there was tons and tons of evidence. 27 Purchase orders, you know, fuel going in and out all 28 over the nation and so forth and so on. And it was 49 1 probably one of my first lessons, also. The 2 supervisor came in and said, "Horton, what are you 3 doing, and why are you spending all this time on 4 this? Why don't you pull the master agreement and 5 see if it's open-ended?" 6 I did. Master agreement was open-ended, 7 which indicated that someone had to make a 8 subsequent decision as to what actually was being 9 transferred. 10 And then he simply said, "Who made that 11 decision and where was it made?" You know. And 12 it's one of the unfortunate things that they can 13 actually move an individual that's make -- that's 14 authorized to make that call into any particular 15 city that they want to and allocate the local tax to 16 that city. Unfortunate, and some might even say 17 somewhat unfair, but it is the reality of the law at 18 the time that we are called to make a decision. 19 But, and I agree, too, Mr. Myers. Good 20 arguments, good points. Well done. 21 MR. MYERS: Thank you. 22 MS. MA: Having said that, do you want to 23 make a motion? 24 MR. HORTON: No. 25 MS. MA: Anyone like to make a motion? 26 MR. RUNNER: I would move the staff 27 recommendation. 28 MR. HORTON: Second. 50 1 MS. MA: Okay. Mr. Runner moves the staff 2 recommendation and to deny the petition. Mr. Horton 3 seconds. 4 Without objection, motion carries. 5 Thank you, Members. We are going to take a 6 recess and reconvene at 1:30. 7 Thank you all for coming. 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 51 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 March 29, 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 51 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: April 20, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 52