1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MAY 25, 2016 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 MORRISON AUTO CORPORATION 14 NO. 765464 (KH) 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 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 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Board of Equalization Staff: Jeff Angeja 15 Tax Counsel IV Legal Department 16 17 For the Department: Scott Lambert Business Taxes 18 Specialist III Business Tax and Fee 19 Department 20 Kevin Hanks Chief 21 Business Tax and Fee Department 22 Stephen Smith 23 Tax Counsel IV Legal Department 24 25 For Petitioner: Svetlana Dolyna Representative 26 Inna Tobys 27 Representative 28 ---oOo--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 25, 2016 4 ---oOo--- 5 MS. MA: Ms. Richmond, please call the 6 first item. 7 MS. RICHMOND: The first item on this 8 morning's agenda is Item C Sales and Use Tax Appeals 9 Hearings. Item C1 Morrison Auto Corporation. 10 Please come forward. 11 Board Proceedings has received contribution 12 disclosure forms for today's hearings from the 13 parties, participants and agents. All forms were 14 properly completed and signed. No disqualifying 15 contributions were disclosed. All parties, 16 participants and agents are on the alpha listings 17 provided to your office. 18 Each person sitting at the table will be 19 asked to introduce themselves and, if necessary, 20 their affiliation with the taxpayer for the record. 21 Ten minutes is allocated for the taxpayer's 22 opening presentation, followed by ten minutes for 23 the Department's presentation, and five minutes is 24 allocated to the taxpayer for rebuttal. 25 Chairwoman Ma. 26 MS. MA: Thank you very much. 27 Mr. Angeja, will you please introduce the 28 issues in this case. 3 1 MR. ANGEJA: Good morning, Madam Chair and 2 Members. I am Jeff Angeja on behalf of the Appeals 3 Division. 4 The appeal before you presents one 5 unresolved issue, which is whether additional 6 adjustments to the amount of unreported taxable 7 sales are warranted. 8 MS. MA: Okay. To the appellants, please 9 introduce yourself, and you will have ten minutes to 10 make your presentation. And then the Department 11 will make their presentation for ten minutes. And 12 then we'll come back to you on five minutes for 13 rebuttal. And then I'll open it up for questions 14 from all the Members. 15 MS. DOLYNA: My name is Svetlana Dolyna. I 16 am the representative of Morrison Auto 17 Corporation. 18 MS. MA: Can you put your microphone down a 19 little bit so we can hear? 20 MS. DOLYNA: My name is Svetlana Dolyna. I 21 am representative for Morrison Auto Corporation. 22 MS. MA: Okay. 23 MS. TOBYS: And my name is Inna Tobys, and 24 I am representative for Morrison Auto Corporation as 25 well. 26 MS. MA: Okay, great. Please begin. 27 MS. TOBYS: Okay. Our client just gave us 28 additional information, um -- um, and stating that 4 1 there's some large amount of money that was personal 2 money that she deposited in her business account. 3 The reason for that deposit was they were 4 trying to get a loan to purchase a building and they 5 showed the personal deposits on their tax return. 6 She collected the notes from people who 7 lent money to her, and she filed amended tax returns 8 to show a reduction in gross sales because they 9 overstated gross sales in order to qualify for 10 bigger loan, even they have to pay income tax on 11 this money. That was her explanation. 12 And in previously what I've read of the 13 case, she did not have those notes and she provided 14 them now. 15 The total amount of all the money she -- 16 personal money, was $251,600. And the notes are 17 provided as a backup. 18 And it was not taken in consideration 19 previously. 20 MS. MA: Anything else? No? 21 MS. TOBYS: That's it. 22 MS. MA: Okay. Good. 23 To the Department, if you would please 24 introduce yourself and commence your presentation. 25 MR. LAMBERT: Good morning, Chairwoman Ma 26 and Members. My name is Scott Lambert and I'll be 27 representing the Business Tax and Fee Department 28 today. To my right is Kevin Hanks, also with the 5 1 Business Tax and Fee Department, and to Mr. Hanks' 2 right is Stephen Smith with the Legal Department. 3 In this particular case the taxpayer 4 operates three separate types of businesses: One is 5 a auto paint seller, both a retailer and wholesaler; 6 they operate a autobody collision repair shop; and 7 they also have spray booths that are leased out to 8 customers. 9 When the audit was conducted it was noted 10 that the reported sales of tangible personal 11 property was below the cost of goods sold on the 12 income tax returns. The taxpayer was asked for 13 their records. For the years 2009 and 2010, the 14 records were not available; they were either 15 destroyed or stolen. 16 The taxpayer did provide records for 2011, 17 and the audit was established based on the records 18 that were provided for 2011. 19 They provided invoices for the Morrison 20 Paint Company. They also provided invoices for the 21 Victory Auto Repair. And they provided sales 22 invoices for the rental. 23 From a review of the records, it was 24 determined that all the rental receipts for the 25 spray booths were nontaxable; the taxpayer had paid 26 tax on the purchase of those and they were 27 considered nontaxable in the audit. 28 For Victory Auto Collision Repair, we used 6 1 the invoices for 2011 to establish the liabilities 2 of the taxpayer's own sales invoices where they had 3 collected tax. The taxpayer had indicated that none 4 of those sales had been reported on the sales and 5 use tax returns. 6 So it was established about 15 percent of 7 the income from Victory was subject to tax; 8 inversely, 85 percent of that income was considered 9 nontaxable. 10 For Morrison, we decided to take one 11 quarter, which was the second quarter of 2011. We 12 took a look at each one of the sales invoices where 13 the taxpayer had charged tax on the invoices and we 14 established the quarterly sales based on the second 15 quarter of 2011. 16 When we added up all of our audited sales 17 for 2011, it matched the amounts that were reported 18 on the income tax return to a minimal amount. 19 When we established a percentage of error 20 for 20 -- for 2009 and 2010, the 2010 audited total 21 sales also matched the amount of sales that were 22 reported on the income tax returns. So, based on 23 that, the audit was established in that manner. 24 Regarding the taxpayer's arguments in 25 regards to the bank statements, we did take a look 26 at the bank statements and did a reconciliation. We 27 allowed almost $300,000 in loans and transfers that 28 were on the bank account. In addition, if you just 7 1 take 2010 and 2011, we still have a difference 2 unaccounted for difference, that went into the bank 3 of over $300,000. 4 So if you take, assuming that these loans 5 did take place and they were deposited into the 6 business bank account -- and I'll point out we don't 7 have that information in front of us -- but if we 8 did, we would still be below the amount of 9 unaccounted for deposits into the bank account. 10 So, just to reiterate, we didn't use the 11 bank accounts. We used the taxpayer's actual 12 purchase -- or sales invoices to establish the 13 liability. 14 And I would also point out on the amended 15 tax returns -- I just had a brief time to review 16 them this morning -- I don't believe that these 17 amended returns can be filed due to the date. And 18 also, on the cost of goods sold, I note that the 19 cost of goods sold has not changed other than 2011. 20 It appears that that had gone up, and it shows 21 300 -- $304,000. And I believe our audited sales 22 for 2011 is, total sales of paint and parts, is 23 220-something-thousand-dollars. 24 So, even you look at a markup in this type 25 of business, we're well below what an established 26 markup would be for that type of business. 27 So, accordingly, the Department concurs 28 with the Appeals Division Decision and 8 1 Recommendation. 2 MS. MA: Okay. 3 To the taxpayers, you have five minutes on 4 rebuttal to anything that they said. 5 MS. TOBYS: Well, I just wanted to add that 6 mainly 2011 was used to estimate, go back and 7 estimate 2010 and 2009. And according to the 8 records we got from client, the main portion of the 9 personal money were deposited in 2009 and 2010; 2009 10 was 53,600 and 2010 was 170,000, and 2011 was only 11 28,000 of personal money. 12 So using 2011 to estimate 2010 and 2009 13 wouldn't be really correct approach because there's 14 large difference between personal deposits and in 15 all those years. 16 MS. MA: So how much was deposited 2009, 17 2010, 2011? 18 MS. TOBYS: 2009 was 53,600; 2010 was 19 170,000; and 2011 was 28,000. 20 MS. MA: So that's the 251,600. 21 MS. TOBYS: Right. 22 MS. MA: Okay. 23 Questions? 24 Ms. Harkey. 25 MS. HARKEY: This is for the Department. 26 So you didn't use those cash deposits anywhere? You 27 actually -- 28 MR. LAMBERT: We -- we did not use the bank 9 1 reconciliation to establish the liability, and 2 consequently we did not do anything with any -- any 3 kind -- 4 MS. HARKEY: The cash received or not 5 received, or loans repaid or not; you looked at 6 their records? 7 MR. LAMBERT: We looked at their sales 8 invoices for 2011, which is the only sales invoices 9 that they had available, or at least that they 10 provided to us. And we used those invoices to 11 establish the liability and not the bank account. 12 If we had used the bank account, it would 13 have established a higher liability, even if we took 14 out these loans. So -- and that was -- the auditor 15 said that's one of the reasons why they didn't use 16 the bank accounts. But we could have been well 17 within our rights to use them. 18 MS. HARKEY: To the taxpayer's side, why 19 are we keeping -- why are you continuing to focus on 20 the bank deposits, these amounts, if they weren't 21 actually part of the audit? 22 MS. DOLYNA: Basically because normal -- 23 normal ordinary business, like Morrison, they don't 24 have hundred percent collectibles, collectible 25 rations. If we bill customers, it's not hundred 26 percent that's ordinarily billed. Business received 27 money back. 28 So it's -- I would say it's definitely bank 10 1 analysis should be done because it reflects actual 2 money collected from the customers. 3 MS. HARKEY: So what you're saying is that 4 you did work and you didn't -- even though you 5 invoiced for it, you didn't get paid on the 6 invoices? 7 MS. DOLYNA: This is just our assumptions 8 because we didn't compare all invoices. We just did 9 bank analysis and just received information from the 10 customers that some money was deposited into bank 11 account. So this is just assumption. 12 We didn't investigate this. But, in 13 general, from accounting point it's -- 14 MS. HARKEY: Well, the reason I'm asking is 15 because your whole case seems to -- seems to focus 16 on these amounts of deposits at different times. 17 But yet, that wasn't part of the audit and you're 18 here for an audit issue. 19 So I'm trying to figure out why -- why 20 these are so important to you from your perspective 21 if they're not part of the audit? I'm still not 22 clear on that. You -- because they used your 23 invoices for 2011, which is all that they had. 24 MS. DOLYNA: Right. 25 MS. HARKEY: They didn't use your bank 26 accounts or check your cash records. They weren't 27 worried about. They were just using your invoices. 28 And based on -- 11 1 MS. TOBYS: They estimated 2009 and 2010 2 based on 2011. 3 MS. HARKEY: Based on 2011. So in 2000 -- 4 but you didn't have records for 2010 and nine, 5 right? 6 MS. TOBYS: According to the client, I 7 think there was a break-in or something, of the 8 store. They didn't have -- 9 MS. HARKEY: Okay. Let me -- let me go 10 back to the Department. 11 I'm -- I'm just confused as to why these 12 would be considered. I guess maybe what they're 13 saying is they had more invoices in 2011. And so if 14 you're using that to extrapolate the previous years, 15 they did not think that was accurate. So they're 16 showing you that they really didn't have these 17 sales. 18 I mean, am I understanding this correctly? 19 MS. TOBYS: Right. They overstated the 20 sales. 21 MS. HARKEY: You overstated the sales. 22 So just respond. 23 MR. LAMBERT: Okay. I didn't understand 24 that to be their argument. But given that it -- 25 that it is, what I would point out is that the -- we 26 used their actual sales invoices for 2011, and that 27 it matched the sales or gross receipts on the income 28 tax returns for 2011. And the amount that we came 12 1 up with in 2010 matched the gross receipts that were 2 on the 2010 invoices. 3 MS. HARKEY: Right. 4 MR. LAMBERT: And the amounts that we came 5 up with are lower than the deposits into the bank 6 account for 2010 and 2011. 7 So based on that, it appears -- 8 MS. HARKEY: It appears that you've 9 allocated appropriately. 10 MR. LAMBERT: That's -- and without the '09 11 and 2010 invoices, the only way we can establish a 12 liability -- 13 MS. HARKEY: Did you -- did you track back 14 to the 2009 and '10 tax returns? 15 MR. LAMBERT: We did with -- 2010, we did 16 and it matched up. 17 MS. HARKEY: Okay. 18 MR. LAMBERT: For 2009, the problem with 19 that is is that we only audited for two quarters out 20 of that -- 21 MS. HARKEY: Okay. 22 MR. LAMBERT: -- that year. It's not the 23 same basis. 24 MS. HARKEY: Okay, thank you. 25 MS. STOWERS: Chairwoman. 26 MS. MA: Yes. Ms. Stowers. 27 MS. STOWERS: Thank you. 28 To the Department, just a point of 13 1 clarification. You indicated that you had the 2011 2 invoices? 3 MR. LAMBERT: Yes. 4 MS. STOWERS: Did you say anything about 5 taxes was collected? 6 MR. LAMBERT: They were. 7 MS. STOWERS: They were? 8 MR. LAMBERT: Well, they -- just to be 9 clear, they were collected for two of the business 10 operations. They were collected for Morrison Paint 11 and they were collected for Victory Auto Collision. 12 They were not collected for the spray booth 13 rentals, which we determined to be nontaxable 14 because the material was purchased tax-paid and 15 leased in substantially the same form as acquired. 16 MS. STOWERS: And were you able to tell 17 from the invoice if the customers paid by cash or 18 credit card? 19 MR. LAMBERT: I don't believe -- I'm unsure 20 of that. I just have a printout of -- I have a 21 schedule of the invoices and the amounts that were 22 paid on there, but I can't tell -- or I don't know 23 whether you can tell from the invoices or not. 24 MS. STOWERS: But you can tell that the 25 business collected taxes. 26 MR. LAMBERT: That taxes were separately 27 stated on the sales invoices. 28 MS. STOWERS: On the sales invoices. 14 1 MR. LAMBERT: Correct. And those are the 2 figures that we used. 3 We didn't -- other than a minor amount of 4 resales that were disallowed, it's based on the 5 amount of sales tax that was on the actual sales 6 invoices themselves that were extrapolated. 7 MS. STOWERS: With respect to the federal 8 income tax returns, is it your testimony that the 9 gross receipts on the 2011 tax return reconciled 10 with the taxable measure that you're coming up with, 11 the Department came up with? 12 MR. LAMBERT: The gross receipts on the -- 13 yes, on the -- on the gross receipts on the 2011 14 original tax return matches the gross receipts that 15 were arrived at in the audit; that's correct. 16 MS. STOWERS: Is there a change on this tax 17 return that we have as an exhibit? Is that the same 18 number? 19 MR. LAMBERT: It is, um -- it is not. 20 MS. STOWERS: This number's less? 21 MR. LAMBERT: Yes. The, um -- the cost of 22 goods sold on this one has changed as well. 23 For 2011, they reported $450,000 in gross 24 receipts. And on the return that we have here for 25 2011, the amended return that's just been provided, 26 we have $394,000. So there's a difference of 27 $56,000. 28 I'm not sure how that was established based 15 1 on -- even if you took the non sales deposits that's 2 being provided, it doesn't match 56,000 -- 3 Well, let me -- 4 Well, actually it does. It exactly equals 5 that. So they've taken the deposits on there and 6 have reduced the amount on the original income tax 7 return to the amount on the amended return for 8 2011. 9 MS. STOWERS: To reflect the cash 10 deposits. 11 MS. MA: The loans. 12 MR. LAMBERT: Well, for the loans. 13 MS. STOWERS: The loans. 14 MR. LAMBERT: Right. 15 MS. STOWERS: Okay. 16 MR. LAMBERT: And so what I would point out 17 is, is that they still have the cost of goods 18 sold -- well, I shouldn't say they still have. They 19 reported two -- or claimed $252,000 in -- 20 I'm sorry. 21 The cost of goods sold for 2011 remains the 22 same. 23 MS. STOWERS: No change. 24 MR. LAMBERT: Yeah. 25 MS. STOWERS: Okay. Thank you very much. 26 To the petitioner, you indicated that, 27 um -- that the records for 2009 and 2010 were not 28 provided because there was a break-in? 16 1 MS. TOBYS: Well, that's what the client -- 2 MS. DOLYNA: Yes, that's what happened, 3 but -- 4 MS. TOBYS: I think it was a break-in. 5 MS. DOLYNA: Yeah. I don't remember. She 6 said something happened with the (inaudible). I 7 don't remember if it was fire or something happened, 8 but she -- we didn't investigate the cause. 9 MS. STOWERS: So does that mean that we 10 wouldn't have a police report or a fire inspection? 11 MS. DOLYNA: No, we -- actually, we didn't 12 pay attention. 13 MS. TOBYS: We would have to ask her. I 14 didn't ask her. 15 MS. DOLYNA: Yeah, we didn't ask her what 16 happened. 17 MS. TOBYS: I would assume it should be. 18 MS. STOWERS: Okay. I was just -- I was 19 just more curious on why we didn't have those 20 records. But I note that the Department didn't 21 impose a negligence penalty for lack of records, so 22 I appreciate that. 23 Thank you very much. 24 MS. TOBYS: Thank you. 25 MS. MA: Mr. Runner. 26 MR. RUNNER: Yeah. I'm gonna -- I'm still 27 trying to get through, at least in my thinking, 28 the -- the sales invoice issue that we used. 17 1 So we basically established liability based 2 upon their sales invoices. 3 MR. LAMBERT: Correct. 4 MR. RUNNER: Okay. And what I heard, at 5 least the taxpayers say, is that the sales invoices 6 may total that; however, there was some -- all that 7 revenue or those dollars didn't come in for various 8 reasons. Is that correct? 9 MS. TOBYS: Yes. 10 MR. RUNNER: Okay. My question then is, 11 normally that would then show up as bad debt. 12 MS. TOBYS: Well, they're on cash basis. 13 MR. RUNNER: So you just netted it out? 14 MS. DOLYNA: Actually, tax return prepared 15 on the cash basis, but that is not reported as a 16 cash basis on the tax returns. 17 MR. RUNNER: And you kept no -- you netted 18 it out, but you kept no record of netting it out? 19 MS. DOLYNA: Actually, no. 20 MR. RUNNER: You just had the dollars, you 21 just counted the dollars as they came in the door? 22 MS. DOLYNA: We just paid attention to 23 actual bank deposits. 24 MR. RUNNER: You didn't have a set of 25 invoices out there that you had that said "paid" on 26 them, and you know -- and then you would -- 27 MS. DOLYNA: Exactly. We didn't do -- 28 MR. RUNNER: You didn't -- you didn't ever 18 1 match up your payments with your invoices? 2 MS. DOLYNA: No, we didn't do personally. 3 We didn't do this investigation. We just 4 investigate deposits, bank deposits and -- 5 MR. RUNNER: Do you know who didn't pay 6 you? 7 MS. DOLYNA: Definitely they would know, 8 but we -- 9 MR. RUNNER: Who's "they"? Who's "they 10 would"? Who's the "they"? 11 MS. DOLYNA: Morrison definitely -- 12 MR. RUNNER: The client would know. 13 MS. DOLYNA: Definitely. Definitely it's 14 kind of straightforward information. 15 MR. RUNNER: It's kind of hard for us to 16 get our questions answered if you don't know the 17 answer and the client isn't here. 18 MS. DOLYNA: Exactly. Exactly. 19 MR. RUNNER: Okay, thank you. 20 MS. MA: No more questions? 21 Okay. Seeing no further questions, do I 22 have a motion on the floor? 23 MS. HARKEY: Support staff 24 recommendation. 25 MR. HORTON: Second. 26 MS. MA: Okay. There's a motion by 27 Ms. Harkey, a second by Mr. Horton, to support staff 28 recommendation. 19 1 Without objection, motion carries. 2 Thank you very much for coming today. 3 ---oOo--- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 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 May 25, 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 20 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: June 17, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 21