1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 31, 2016 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 SOLVAY USA, INC. 14 NO. 812187 (OH) 15 AGAINST PROPOSED ASSESSMENT OF 16 SALES AND USE TAX 17 18 19 20 21 22 23 24 25 26 27 Reported by: Jillian Sumner 28 CSR No. 13619 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: Jarrett Noble 15 Tax Counsel Appeals Division 16 17 For the Department: Scott Claremon Tax Counsel III 18 Legal Department 19 Kevin Hanks Chief 20 Business Tax and Fee Department 21 Lawrence Mendel 22 Tax Counsel III Legal Department 23 For Petitioner: Susan Bittick 24 Attorney 25 Brian Browdy Attorney 26 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 31, 2016 4 MS. RICHMOND: Good morning, Chairwoman Ma 5 and Board Members. 6 Our first item on today's agenda is item C, 7 sales and use tax appeals hearings, Item C1, Solvay 8 USA, Incorporated. 9 Please come forward. 10 Board Proceedings has received 11 contribution disclosure forms for today's hearings 12 from the parties, participants and agents. 13 All forms were properly completed and 14 signed. No disqualifying contributions were 15 disclosed. 16 All parties, participants and agents are on 17 the alpha list 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 the 23 Department's presentation, and five minutes is 24 allocated to the taxpayer for rebuttal. 25 Chairwoman Ma. 26 MS. MA: Okay. Thank you very much. 27 Okay. Appeals, um, please introduce 28 yourself and the issues in this case. 3 1 MR. NOBLE: Good morning, Madam Chair and 2 Members. I am Jarrett Noble, on behalf of the 3 Appeals Division. 4 The appeal before you presents one 5 unresolved issue, which is whether Petitioner could 6 claim a deduction on its third quarter 2009 return 7 for amounts it overpaid in the first and second 8 quarter of 2009. 9 MS. MA: Okay. Thank you. 10 Ms. Bittick, um -- 11 MS. BITTICK: Good morning. 12 MS. MA: -- welcome to the Board. 13 You have ten minutes to make your initial 14 presentation, and then an additional five minutes on 15 rebuttal. 16 Please introduce yourself, and then you can 17 continue. 18 MS. BITTICK: Thank you very much, Madam 19 Chair and Members of the Board. I'm Susan Bittick. 20 I am with Ryan. We are a consulting firm, and we 21 represent Solvay USA. 22 Solvay is a chemical company that sells 23 chemicals and chemical regeneration services across 24 California. 25 Solvay is before the Board today seeking 26 equitable relief from the audit assessment of tax 27 arising out of the sales tax Solvay reported here in 28 2009. 4 1 The facts are straightforward and they're 2 not in dispute. 3 In 2009 Solvay incorrectly imposed tax on 4 sales it was making of nonexempt items to Chevron. 5 This error occurred for a period of seven 6 consecutive months between January and July of 2009. 7 In July of 2009 Chevron contacted Solvay 8 and asked Solvay to review those transactions, 9 because Chevron believed they were nontaxable. 10 Solvay did that immediately. It conducted 11 an internal review, and it confirmed that Chevron 12 was correct, the transactions were nontaxable. 13 It further determined that the error was 14 occurring because of a change that had been made in 15 the company's Vertex SAP System. And this change 16 had inadvertently caused the system to always flag 17 these transactions as being taxable rather than 18 nontaxable. 19 Solvay corrected that system. It added up 20 all the tax reimbursements it had received from 21 Chevron, and it promptly refunded that money to 22 Chevron. 23 Actually, they did it in the form of a 24 credit back to Chevron for all the tax 25 reimbursements. 26 And, of course, did not continue to tax 27 those transactions on a go-forward basis. 28 Now, of course Solvay had been reporting 5 1 and remitting sales tax to the state on that. And 2 so on the next sales tax report that it had due, the 3 third quarter report in 2009, Solvay made an 4 adjustment for the taxable sales that it had made to 5 Chevron. 6 It essentially reduced the taxable sales 7 that were due to be reported, and that brought down 8 the amount of sales tax due to the state that year 9 accordingly -- that period accordingly. 10 Essentially, it took a self-help credit to correct 11 this error. 12 And that put everything back to where it 13 should have been and would have been if the error 14 had never occurred. 15 Three years later the state audits Solvay, 16 and they choose to start the period of review with 17 July 1 of 2009. And of course you can see where 18 that's headed. 19 The period for audit then picked up the 20 third quarter of 2009, the period in which the 21 adjustment had been made. But it did not include 22 the first quarter or the second quarter, the periods 23 in which the overpayments to the state had occurred. 24 The auditor on audit did examine the 25 self-help credit, and the auditor confirmed that, in 26 fact, the transactions had been nontaxable. And 27 that Chev -- Solvay, in fact, had remitted back to, 28 um, Chevron the correct amount of tax that had been 6 1 inadvertently and incorrectly collected from 2 Chevron. 3 However, the auditor did not agree to the 4 adjustment, would not accept the adjustment, because 5 the auditor said that what Solvay should have done 6 is it should have filed an amendment to its Q1 7 report to correct the overpayments that were made in 8 Q1, and to its Q2 report to correct the overpayments 9 that were made in Q2. Or it should have simply 10 filed a refund claim. 11 And, of course, by the time this all came 12 out, the period to do either of those had expired. 13 So consequently, today, Solvay is facing an 14 assessment of about 383,000 -- just short of 15 that -- in tax that arise out of transactions which 16 everyone agrees were never taxable in the first 17 place. 18 Again, none of this is in dispute. And 19 throughout our dealings with audit, we've discussed 20 the fact that Solvay feels this is a very harsh 21 result given what actually transpired here. 22 However, we've been told repeatedly that 23 the -- the staff really has no power to do anything 24 about that. And that's why we're before the Board. 25 Because you, as a Board, do have equitable 26 authority and equitable, um, power in order to 27 correct this. 28 And so we're asking the Board for relief. 7 1 We're asking the Board to essentially offset the 2 assessment with what we know was actually reported 3 for those periods under the doctrine of equitable 4 recoupment. Which we believe fair -- fairly and 5 squarely does apply to this situation. 6 I know that you do occasionally see 7 requests for equitable recoupment relief. And so 8 you're familiar with the doctrine, and you 9 understand that it is a defense only that a taxpayer 10 can raise to an assessment to prevent the type of an 11 equity that can occur when, um, you strictly apply 12 the statute of limitations. 13 So it applies in situations where a 14 taxpayer like Solvay is facing a deficiency and has 15 time-barred overpayments that it cannot access, 16 which are arising out of the same transactions. 17 That's exactly the situation we see here. 18 There is no question that Solvay's assessment is 19 directly connected to the same transactions which 20 would avail it of -- of a refund for the overpayment 21 of the tax. 22 It all occurred within a very compact period. 23 It's all part of a -- a commonality of events. And, 24 therefore, we're asking the BOE for that relief. 25 Now, I would point out to you that, um, the 26 Department does not agree that Solvay qualifies, 27 because they believe that a taxpayer may never 28 invoke the doctrine unless that taxpayer can show 8 1 that they have been subjected to tax twice. 2 We believe that is a very strict, um, 3 somewhat torturous view of the rules of how doctrine 4 of equitable recoupment apply. And that, in fact, 5 when you look at Solvay and you look at the 6 situation presented here, Solvay is economically 7 identical to a taxpayer who is being taxed twice. 8 There's simply no difference between 9 imposing tax where no tax is due at all, and in 10 imposing tax twice when it's only due once. 11 So we believe that this is exactly the type 12 of situation where equitable remedy is appropriate. 13 Just in closing, I would like to point out 14 one other thing. I'd ask you to take it into 15 account as you weigh the merits of our request, and 16 it's this: 17 From the time Chevron contacted Solvay and 18 raised the question of whether tax was being 19 correctly applied to these transactions, Solvay's 20 response has been exactly what the Department and 21 this Board wants to see vendors do. 22 Solvay wasted no time. It immediately 23 investigated this inquiry. It made a determination. 24 It corrected its system. And most importantly, it 25 returned every penny of the amount of money it had 26 collected from Chevron, back to its customer. 27 And so while it did not follow what are the 28 standard rules for correcting the reports and the 9 1 remittances to the state, it had done absolutely 2 everything correct right up until that point in 3 time. 4 And so we do believe that given those 5 things and given the fact that there is no tax that 6 was due to the state of California on these 7 transactions had it all occurred the way it should 8 have in 2009, we do believe that, um, it is a harsh 9 result to let this assessment stand as it is. 10 Thank you, Members. I'm happy to answer 11 any questions. 12 MS. MA: Thank you. 13 Okay. The Department, please introduce 14 yourself and commence with your presentation. 15 MR. CLAREMON: Good morning, Chairwoman -- 16 woman Ma, Members of the Board. I'm Scott Claremon 17 with the Legal Department. With me are Lawrence 18 Mendel and Kevin Hanks, who are also representing 19 staff. 20 We concur with the Appeals Division that no 21 adjustment is warranted to the audited measure of 22 tax. 23 During an audit of the Petitioner, from the 24 period from the third quarter of 2009 through the 25 third quarter of 2012, staff discovered an 26 under-reporting of tax of approximately 382 -- or 27 $383,000. 28 As a way of explanation, Petitioner claimed 10 1 that it had been reported -- it had over-reported 2 tax prior to the audit period. And rather than file 3 a claim for the refund for those periods, it had 4 said -- instead overstated deductions from taxable 5 sales on its third quarter returns. 6 Chapter 7 of the Revenue and Taxation Code 7 explicitly sets forth the proper procedure for 8 recoupment of overpaid tax, which is to file a claim 9 for refund for the period or periods at issue within 10 the applicable statute of limitations. Which here 11 would have been three years from the due dates of 12 those returns. 13 On the other hand, unilaterally taking 14 what's referred to as a self-help deduction in a 15 different period is not a valid manner of claiming a 16 refund. 17 Since Petitioner did not file a valid 18 claim, it is barred by the statute of limitations 19 from receiving a refund for the first and second 20 quarters of 2009, either directly, or as it has 21 attempted to do here as a credit against subsequent 22 liabilities. 23 With regard to the doctrine of equitable 24 recoupment, um, this Board does not have general 25 equity power, but the Board can apply the case -- in 26 a -- in the case -- can apply that doctrine in the 27 case of a time-barred claim, um, in the narrow 28 circumstances -- circumstances for which there is 11 1 judicial precedent. And that precedent goes all the 2 way up to Supreme Court decisions, United States 3 Supreme Court decisions. 4 That precedent is clearly and explicitly 5 limited to when a single transaction or taxable 6 event was taxed twice under two different theories. 7 This is not that situation. Rather, 8 Petitioner is seeking to offset its liability from 9 transactions in one period with its overpayment on 10 transactions during another period. 11 The U.S. Supreme Court has stated that, 12 quote, It -- equitable recoupment -- has never been 13 thought to allow one transaction to be offset 14 against another transaction. 15 And the Board similarly has refused to 16 allow offsets from different transactions in the 17 Davis memorandum opinion, in which it cited the 18 narrowness of the doctrine. 19 The Supreme Court has also stated that 20 equitable recoupment is to be applied narrowly so 21 as not to seriously undermine the statute of 22 limitations in tax matters. And that, again, is 23 exactly what would happen here. 24 Petitioner is arguing that there's no 25 difference between when tax is paid twice and only 26 owed once, which is the situation where equitable 27 recoupment can be applied, and the situation here 28 where tax is paid once and not owed at all. 12 1 The problem is, that latter description is 2 essentially the description -- the description of 3 every time-barred refund claim. It's overpaid and it's 4 outside the statute of limitations. 5 So by applying it here, we would 6 essentially be allowing it for essentially every 7 time-barred refund claim. And that's exactly what the 8 Supreme Court has said not to do. 9 So for all those reasons, we agree with 10 the, um -- we concur with the Appeals Division. 11 Thank you. 12 MS. MA: Okay. 13 Ms. Bittick, five minutes on rebuttal. 14 MS. BITTICK: Um, yeah, I'll -- I'll be 15 very brief. 16 Um, this would not open this up to every -- 17 to, um, equitable relief on every time-barred refund 18 claim. 19 It is quite clear that the only time the 20 doctrine can appropriately be used is when there is 21 a commonality between the assessment and the refund 22 where they are arising out of the same transactions. 23 You are not going to see that every day. 24 In this situation, there is commonality. 25 They do arise out of the same tax, uh -- tax issue 26 and same tax event. And so they are appropriate. 27 I also do not agree that what you're 28 have -- what you have here are offsets of tax from 13 1 one period against another period. 2 Again, what is critical to the doctrine of 3 equitable recoupment is whether they arise out of 4 the same commonality of events and tax events. And 5 not necessarily, well, did they occur in period one, 6 period two, period three. 7 This is a calendar year taxpayer. For 8 them, the period was 2009. These events all 9 occurred success -- in successive seven months, in 10 the first seven months of that period. 11 And so I don't think there is anything 12 unique about the fact that when the state came in to 13 audit, they decided that the audit period started on 14 July 1 of that year. They could have easily said 15 January 1 or March 1, or whatever date that they 16 wanted to pick. 17 So, um, I would just say that I don't think 18 that that's -- that is valid either. 19 MS. MA: Mr. Horton. 20 MR. HORTON: Thank you -- Thank you, 21 Madam Chair. 22 Question of the Department, um, is there 23 any evidence that when the audit was commenced, did 24 the auditor at that time have the option of 25 backdating or starting the audit period earlier, or 26 was the earlier periods outside the statute when the 27 audits started? 28 MR. HANKS: Mr. Horton, the earlier periods 14 1 were out of statute. So that wasn't a -- a 2 possibility for the -- the auditor. 3 MR. HORTON: When they -- when they first 4 commenced the audit, it was out of statute at that 5 time? 6 MR. HANKS: Correct. 7 MR. HORTON: What is the theory upon which 8 the tax was originally assessed, and what is the 9 subsequent theory upon which the tax was refunded? 10 Strike the word "theory" and just put 11 "reason" there. 12 MR. MENDEL: They -- they -- 13 MR. HORTON: Same -- that might -- 14 MR. MENDEL: What they did was they 15 increased their nontaxable sales, their sales for 16 resale, I believe. 17 MR. HANKS: Correct. 18 MR. MENDEL: And that was how they took 19 their self-help credit. There was no way from 20 looking at the return itself that the auditor could 21 see that there was a different -- a different theory 22 for the credit. 23 MR. HORTON: So the original excess tax 24 reimbursement occurred as a result of claiming sales 25 for resale? 26 MR. MENDEL: No, I believe what -- 27 MR. HORTON: Or -- 28 MR. HANKS: Mr. -- Mr. Horton, what -- what 15 1 originally happened is the -- the transactions with 2 their customers were taxed originally, but then it 3 was subsequently determined that the sales of -- of 4 the product was actually exempt from tax. 5 And so tax was initially collected and 6 reported to the Board, um -- 7 MR. HORTON: So originally you -- you had 8 just a pure excess tax reimbursement -- 9 MR. HANKS: Correct. 10 MR HORTON: -- situation. 11 Subsequent to that you had a, um, what? 12 MR. CLAREMON: We had reported deductions 13 for which that -- that were in -- that were 14 overstated, essentially, on the third quarter 15 return. 16 MR. HORTON: Were they -- 17 Question to the taxpayer, were the reported 18 deductions overstated as a result of -- of -- was 19 the claim -- potential claim for refund, or the 20 adjustment, the self-help, the result of resales 21 claimed in error -- I mean -- failure to claim the 22 appropriate resales -- sales for resale? Or exempt 23 sales of some sort? 24 MS. BITTICK: Exempt sales, yes, sir. 25 MR. HORTON: No further questions at this 26 time, Madam Chair. Thank you. 27 MS. MA: Ms. Harkey. 28 MS. HARKEY: I don't even need to raise my 16 1 hand. She knows I'll have 'em. 2 Thank you, Chairwoman Ma. 3 Um, so Solvay paid sales tax which the 4 California State Board of Equalization Sales and Use 5 Tax Department acknowledges they never owed; is that 6 correct? 7 MR. CLAREMON: They -- they were nontax -- 8 they paid it on nontaxable sales, that's correct. 9 MS. HARKEY: Correct. Okay. 10 The reason that I'm hearing -- and I -- 11 correct me if I'm wrong, is that there was a change 12 in the accounting system? 13 MR. CLAREMON: Well, that -- that's 14 internally what happened for them. That's -- 15 MS. HARKEY: Oh, okay. 16 MR. CLAREMON: -- that has nothing to do 17 with the -- 18 MS. HARKEY: Okay. 19 Then, Ms. Bittick -- 20 MR. CLAREMON: -- the audit. 21 MS. BITTICK: Yes. 22 MS. HARKEY: Was -- was there a change in 23 the accounting system? 24 MS. BITTICK: There were modifications that 25 were made in that time period to the accounting 26 system that inadvertently created this mistake, that 27 is correct. 28 MS. HARKEY: Okay. Is this -- 17 1 MS. BITTICK: And I believe that was 2 acknowledged in the audit work papers. 3 MS. HARKEY: Is this something most 4 companies just do on a regular basis, or was this an 5 unusual circumstance? 6 MS. BITTICK: I -- I don't believe it was 7 an unusual circumstance, but I'm not aware. 8 Taxpayers do upgrade those systems periodically, 9 and -- so I'm not aware if that was what had 10 triggered that. 11 MS. HARKEY: Okay. 12 The time period for claiming the refund of 13 those overpayments expired prior to the audit 14 commenced with the third quarter of 2009. Had our 15 audit commenced with 1Q, 2Q, even 4Q, would there 16 have been a remedy to offset within the audit 17 period? 18 MR. CLAREMON: If the audit had -- well, if 19 the audit had -- had -- if the second quarter -- 20 we're talking about the first quarter and the second 21 quarter. So if we had gone back one quarter, we -- 22 there would have been a remedy with regards to the 23 second quarter. Because you can offset within the 24 audit period. 25 And if that had started more than two 26 quarters previously, there would be an offset for 27 both those quarters. I think if the audit had 28 started later, all three of these quarters would 18 1 have been barred by the statute. 2 So it wouldn't necessarily be a remedy, it 3 would just be a moot issue. 4 MS. HARKEY: It would -- it would be moot. 5 MR. CLAREMON: Yeah. 6 MS. HARKEY: Right. So 4Q, we wouldn't 7 know about it, and 1Q or 2Q, we would have been 8 okay -- or the company would have been okay. You 9 would have made an adjustment. 10 MR. MENDEL: Just to clarify, even if we 11 knew about it, we would have been barred by the 12 statute of limitations from assessing it against 13 them. 14 MS. HARKEY: Right. 15 MR. MENDEL: Just like they're barred now 16 by the statute from taking -- 17 MS. HARKEY: Okay. I just want to add some 18 clarification to the statute of limitations, because 19 I've had to study a lot on this. Because I've 20 been -- there were two particular cases this time 21 that were very, very difficult for me to get my 22 hands around. And I wanted to be sure I totally 23 understood it and was following, reading the law as 24 best I could and understanding what the issues are. 25 And in my read -- and I read Fordham Law 26 Review. And I -- quite -- quite in depth. And in 27 my read, the statute of limitations is there, quite 28 honestly, to protect citizens from the government. 19 1 Although it works both ways, but it's to 2 protect the citizens or the taxpayers. Because we 3 are a -- we -- we -- we rely on self-reporting. 4 It's very important that taxpayers feel 5 that it's an honest approach, that, you know, 6 they're -- they're treated fairly, because we expect 7 them to self-report. 8 And so by the same token that we expect 9 them to self-report, I was wondering why they 10 can't -- if it's in -- within a current year, a 11 calendar year, a fiscal year, which is their fiscal 12 year, which is how they report to the IRS, the 13 FTB -- and they make adjustments in those reports 14 all the time, why, you know, we wouldn't allow them 15 to self-correct in a -- in their current fiscal 16 year. 17 And, um, I understand that the sales tax is 18 different. It's done on quarterly. But I have 19 found, in some of the cases that established the 20 equitable recoupment, um -- you know, it was 21 basically -- let me -- I took some notes here. 22 I think when I -- in my reading, Lewis v. 23 -- Lewis v. Reynolds set the stage for offset remedy 24 under equitable principles, and was, in fact, a 25 victory for the government. And that was decided 26 that items in closed years can affect some open 27 claims. 28 And then in Bull v. United States, which 20 1 was equitable recoupment in favor of the taxpayer, 2 it said that any transaction during any single 3 taxable year, the government may, uh, scrutinize. 4 Now, these are obviously income tax cases, 5 but I think they speak to the point that closed year 6 or transactions during single taxable year might be 7 applicable here. 8 When I examine the quarterly returns from 9 1Q '07 -- because I wanted to go back myself -- 10 1Q '07 through 3Q '12, they showed an aberration in 11 total taxes paid, uh, with that -- with that -- that 12 quarter that was -- that's in question that we began 13 the audit. 14 There were -- the average, uh, taxes 15 were -- the lowest quarter outside of 3Q '09 was 16 624,000 on 2Q '07. And the average amount paid 17 quarterly was actually 952,000. 18 And in the case in question, it was 19 500-and-some-odd thousand that was remitted that was 20 the self-correct. 21 And so I was wondering if maybe that's what 22 triggered the audit. Now, I've since, you know -- 23 I've since been told that, "No, we don't have the 24 ability. That maybe under CROS we would have the 25 ability. But under the current system, we don't 26 have the ability as a staff." 27 So I don't believe staff intentionally 28 tried to pick this audit time frame. 21 1 So tell me, did -- is there a chance, 2 because I've -- I -- is there a chance -- this is 3 for the Department. 4 Is there a chance that that lower 5 remittance -- all throughout that whole year was like 6 almost a million dollars, a million dollars. Then 7 we have -- went down to 540, I believe. Something 8 like that. And then another close to million 9 dollars. Was there a chance that that would have 10 triggered an audit? 11 MR. HANKS: Ms. Harkey, that wouldn't 12 necessarily have triggered the audit. In this case, 13 unfortunately, the amount of the -- the claimed 14 resales for that third quarter of '09, you know, 15 wasn't material enough to -- to indicate to the 16 staff that there was some problem with -- with the 17 filing for that period. 18 And I do note that the company had been 19 audited previously. And so, you know, there was an 20 audit history. 21 Just in looking at our IRIS files, too, I 22 note that the taxpayer had some knowledge of filing 23 claims for refund with the Board. And so I have 24 evidence that they had filed, um, three refund 25 claims previously. 26 So there -- there was some knowledge 27 on -- on their part, um, related to claims for 28 refund. And -- and, unfortunately, that's -- that's 22 1 really the mechanism that -- that should have been 2 used in this case to -- 3 MS. HARKEY: Right. I just -- I'm having 4 problems with knowing that if we started the audit 5 in 1Q, or started the audit in 2Q, or started the 6 audit in 4Q, we wouldn't be sitting here. 7 So that's -- that's the deal. Those are 8 our arbitrary guidelines. 9 And I think in this instance, having the, 10 uh, computer changes, which -- although the 11 representatives know, I don't think you do these on 12 a regular basis. You probably update your computer 13 systems on a -- you know, a periodic basis. And 14 then noticing it within the same calendar year. 15 And I'm not saying that you did anything 16 wrong versus the statute of limitations. But what I 17 am saying is I believe this presents kind of an 18 unusual case for the Board. 19 And since it's within the same calendar 20 year for this FTB or this IRS, it would be adjusted 21 within a year. And, like I said, had we started in 22 another quarter, it would have been adjusted. 23 So I'm just having a real hard time, um, 24 not following the reasoning we talk -- in the 25 equitable recoupment defense, because I've read on 26 it. I've found that there's no strict guidelines 27 it has to be a double payment or whatever. Even 28 though the -- even though the Appellant has stated 23 1 that it's a -- there's a similar circumstance. 2 But they all seem to -- the -- the whole 3 trail of cases that are Supreme Court cases all seem 4 to have a different twist to them. There's no fine 5 line. Like, you can't meet these four points and 6 you're in. 7 They all seem to have a little bit of a 8 different twist, depend -- and they -- sometimes 9 they favor the government and sometimes they favor 10 the taxpayer. 11 So, um, I guess that's the end. I don't 12 have a lot of questions. I just have equitable 13 issues. 14 Thank you. 15 MS. MA: Mr. Runner. 16 MR. RUNNER: Mm-hm. 17 Um, yeah, let me just ask a couple of quick 18 questions. 19 Can you review -- what -- when did the 20 auditor -- at what point in the audit did the 21 auditor discover, um, the -- the problem, and -- and 22 then was directed to what it is that the taxpayer 23 was trying to resolve? 24 MR. HANKS: I've got copies of the 25 auditor's verification comments. 26 MR. RUNNER: Uh-huh. 27 MR. HANKS: But I don't see an indication 28 within those comments exactly the -- the time frame 24 1 for -- 2 MR. RUNNER: Yeah. 3 MR. HANKS: -- for when that discussion 4 happened. 5 MR. CLAREMON: Yeah, I don't -- I don't 6 know exactly when that happened. We do know that 7 the -- the first contact with the aud -- with the 8 taxpayer was after the statute had -- had run. It 9 was in September of 2012. 10 MR. RUNNER: So it wouldn't have made any 11 difference, I guess, is what -- 12 MR. CLAREMON: No. The very first contact 13 by letter and phone was September -- it was the end of 14 September 2012. 15 MR. RUNNER: So if the auditor -- if we 16 would have chosen to audit them sooner, this would 17 not have been a problem? 18 MR. CLAREMON: As -- right. Sooner or 19 later as Ms. Harkey pointed out. 20 MR. RUNNER: Later, being? 21 MR. CLAREMON: Everything would have 22 been -- 23 MR. MENDEL: Then we would have been barred 24 by the statute. 25 MR. CLAREMON: And we would have been 26 barred by the statute as well. 27 MR. RUNNER: Okay. You know, I guess the 28 challenge that we have is when -- is when the state 25 1 of California acquires money that it shouldn't 2 acquire. And what is the process then for us to 3 create, um, what I think taxpayers and citizens 4 desire, and that's a treat -- fair treatment. 5 Let me ask you, in regards to the issue and 6 direction in regards to equitable recruitment 7 relief, what -- what the -- let me go to counsel for 8 Appeals. 9 The guidelines that are given are -- are -- 10 are under -- under the Supreme Court? Is that what I 11 just heard? 12 MR. NOBLE: Yes. 13 MR. RUNNER: And are they spec -- they laid 14 out that -- that specifically, in regards to, um, how 15 bound we are, or -- 16 MR. NOBLE: You're asking about the 17 criteria? 18 MR. RUNNER: Yeah. 19 MR. NOBLE: The three -- 20 MR. RUNNER: Yeah. 21 MR. NOBLE: -- elements? 22 MR. RUNNER: Yeah. Yeah. 23 MR. NOBLE: Yes. The Supreme Court laid 24 those out, the California courts have followed those 25 for tax law cases involving equitable recoupment. 26 The big one is -- is it Iron Works -- yes 27 -- is Iron -- Independent Iron Works, where they 28 talk about the three -- the three elements required, 26 1 which we've discussed in these -- 2 MR. RUNNER: Okay. Let me go to the 3 taxpayer's representative then. 4 Um -- how -- how would you steer us through 5 that? 6 MS. BITTICK: Well, as I said, um, I have 7 seen many cases where the lower courts, interpreting 8 what they think they're reading at the U.S. Supreme 9 Court level, do repeat this notion that you need to 10 have double taxation coming out of inconsistent 11 theories. 12 Again, what we believe is that to the 13 extent that that is required, we have what is the 14 equivalent of that happening here. 15 However, I would go back and just point out 16 one thing. And -- and I think Member Harkey touched 17 on this, and -- and was quite accurate about it. 18 The doctrine of equitable recoupment has 19 developed over more than 80 years, primarily through 20 U.S. Supreme Court decisions. 21 And there was a period of time where 22 taxpayers were really trying to push the edge of the 23 envelope. And they were trying to use that doctrine 24 to take any out-of-statute refund they had to try to 25 reduce a timely assessment. 26 And the courts have tried to rein that in 27 and say, This is not a doctrine that permits you to 28 do a complete search of your entire tax history to 27 1 try to find those kinds of situations for offsets. 2 What is common in all of the cases in which 3 the court has permitted the doctrine of equitable 4 recoupment is unjust enrichment to the taxing 5 authority. 6 If you look at any case in which the Court 7 has permitted the doctrine of un -- of equitable 8 recoupment, you will find that what is troubling to 9 the court seems to be the fact that the taxing 10 authority is going to be unjustly enriched. 11 And I think certainly when you have double 12 taxation, there is -- there is the idea that that's 13 unjust enrichment. 14 We have the exact same thing here where we 15 have no tax due, and yet tax being imposed. 16 MR. RUNNER: But the challenge before us 17 then is to find the path to then allow us then to 18 create -- to -- to correct -- 19 MS. BITTICK: Mm-hm. 20 MR. RUNNER: -- that unjust enrichment. 21 MS. BITTICK: Right. And as I -- as I 22 said, we believe they are economically identical to 23 double taxation, um -- 24 MR. RUNNER: Let me ask you about the 25 double taxation issue. 26 Where -- how -- how -- how clean is that 27 definition that we -- that -- that -- I mean, I -- 28 it seems to me that double taxation is -- double 28 1 taxation means that you were -- you -- you basically 2 paid a tax -- 3 MS. BITTICK: Owed it once, paid it twice. 4 MR. RUNNER: Owed it once, and then -- and 5 then -- and then paid it again. And, therefore, you 6 were double taxed. 7 It seems to me to be a pretty narrow 8 definition of double taxed if you also don't include 9 in there the fact that you were taxed incorrectly. 10 MR. CLAREMON: Again, this is -- we 11 primarily see this doctrine applied successfully in 12 income tax cases where there -- for instance, it's 13 taxed against a trust and the trust beneficiary. Or 14 it's taxed under income tax principles and state tax 15 principles. 16 And I -- and I do think there's -- there's 17 more, sort of, ambiguity with income tax where you 18 can defer income from year to year. 19 And so there's -- there's more room for 20 confusion where you would pay tax on a certain 21 amount of income and then pay it later. 22 Sales tax is different. You report 23 quarterly, and it is a tax on a 24 transaction-by-transaction basis. 25 So it's simply not the same thing to say, 26 When we overpaid tax on specific transactions in the 27 first and second quarter, and then we underpaid on 28 specific transactions in the third quarter, that 29 1 we're being double taxed on the same transactions. 2 Because that's just not the case. You're 3 underpaying on these transactions and you're 4 overpaying on these transactions. 5 MR. NOBLE: And if I might clarify, part of 6 the difference in that example of double taxation 7 versus being taxed on something that shouldn't have 8 been taxed -- 9 MR. RUNNER: Mm-hm. 10 MR. ANGEJA: -- where it was effectively 11 only taxed once, in the one case, you have two taxes 12 on the same transaction. In the second, you have an 13 overpayment. Without a timely claim, that's a 14 waiver. 15 To equate the two is to abolish the waiver 16 provisions in the statute of 6902. It will always 17 be the case with every meritorious claim for refund, 18 that there has been something taxed that shouldn't 19 have been. 20 But absent the element of double taxation 21 on the same transaction, the doctrine doesn't apply. 22 And it isn't murky, it is clear. There's three 23 elements. And the one that's failing here is the 24 double taxation element. 25 MR. RUNNER: What's the consequence if we 26 just find for the taxpayer without dealing with the 27 issue of -- without going down the path of, uh -- 28 of, um -- of equitable recoupment? We don't even 30 1 use that. 2 MS. MA: How about unjustly enriched? How 3 about that? 4 MR. RUNNER: Right. Or we don't get 5 anything. We just find for the taxpayer. 6 MR. ANGEJA: When there are disputed facts, 7 I have said on more than one occasion, that the 8 trier of fact could find a various path -- 9 MR. RUNNER: A taxpayer. Mm-hm. 10 MR. ANGEJA: Right. 11 This case, the facts aren't disputed, and 12 there needs to be a legal theory. And Appeals 13 hasn't found a legal theory. 14 MR. HORTON: Let me see if we can, Madam 15 Chair, put some more information on the table just 16 in case. 17 MS. MA: Okay. Mr. Horton. 18 MR. HORTON: I really don't know the facts 19 of this case, but I do know the law. 20 But, um, when the error was, um -- when the 21 error was recognized -- when the error was 22 recognized, um, did Solvay take any action to notify 23 the Board? 24 MS. BITTICK: I don't believe they did. 25 MR. HORTON: At what point did they 26 recognize the error? 27 MS. BITTICK: They discovered the error 28 when it was called to their attention by the 31 1 customer. And they did the investigation, which was 2 in the third quarter of 2009. 3 That is when they -- it -- they certainly 4 were aware that the types of transactions that were 5 occurring were nontaxable. But what they were not 6 aware of was that their system was incorrectly 7 imposing tax on them. 8 They didn't see that until it was called to 9 their attention by Chevron and they conducted the 10 investigation. 11 MR. HORTON: Okay. Thank you. 12 MS. STOWERS: Thank you. 13 MS. MA: Ms. Stowers. 14 MS. STOWERS: I just want to say, um, I 15 understand where Ms. Harkey is coming from and 16 Mr. Runner, that the state is being, um, unjustly 17 enriched. 18 And I also struggle with this concept of 19 double taxation in order to get the equitable 20 relief. Because the cases are like, as you said, 21 Department, dealing with income tax cases where 22 they're generally federal -- on the federal side 23 where there's two different types of taxes being 24 imposed. 25 And that's not what we have here in a sales 26 tax. This is a transactional tax. So I'm not even 27 sure how we could, um, look to that language to get 28 to equitable relief in any sales tax case. 32 1 But yet, the -- the state of California is 2 being unjustly enriched by holding on to the money. 3 And especially when we know, and our -- the 4 Department auditors confirmed that the excess sales 5 tax reimbursement was returned to the customer. 6 And that's the part that I -- I really 7 struggle with. 8 MS. MA: I'm struggling with the same 9 thing. 10 I mean, it was a nontaxable transaction, 11 and the customer, um, returned -- Solvay returned 12 it, and so, therefore, they made them whole. 13 And in this case, now we are, I feel, 14 unjustly enriching the state on money that wasn't 15 even due or taxable. 16 So it's not really a fair, um, argument in 17 this case. Because it wasn't -- the tax wasn't due, 18 they incorrectly corrected it, they returned it. 19 Everyone was made whole in the situation. 20 And now because we audited one quarter but 21 not the other two quarters, where it would have 22 given them an opportunity to go back and maybe 23 amended the return, um, now we're saying it wasn't, 24 um, you know -- we're not going to consider it, and 25 we're actually going to penalize you for that. 26 Which, for me, is not, you know, fair. Um -- 27 MR. MENDEL: I just -- I want to point out 28 that any time-barred claim for refund involves the 33 1 Board having money that it wasn't originally 2 entitled to. 3 And in this case, Solvay states that they 4 moved quickly, they -- once they discovered this, 5 they verified it, they refunded the money. They had 6 over two years to file amended returns or a claim 7 for refund, instead of taking a self-help deduction, 8 which isn't allowed under the law. 9 Solvay is a large sophisticated company. 10 They knew the proper procedures to follow and chose 11 not to do them. Solvay is here because they chose 12 to follow this path instead of filing a claim for 13 refund as required under the Revenue and Taxation 14 Code. 15 MS. MA: Ms. Harkey. 16 MS. HARKEY: I -- I, uh -- I understand the 17 Department's reasoning. Believe me, I do. And I 18 understand that we can't be blowing through statute 19 of limitations. But what I also see here is that it 20 is a very unusual circumstance. This is not 21 something you're going to see every day. 22 It happened within the same calendar year. 23 The audit just happened to happen on the quarter 24 when the refund took place. Yes, it was a self-help 25 refund, which we don't allow, but it was in the same 26 transaction, to the same client, honoring, I believe, 27 the client's request and making the state and the 28 client whole. 34 1 I think that's unusual enough. And also, 2 the cause of it. It was a system malfunction, for 3 lack of a better term. Actually, probably a 4 programming error, um, that was discovered after a 5 seven-month period by the actual person being taxed, 6 or -- or the actual entity being taxed, and reported 7 then back to the company that had the computer 8 system that was doing the reporting. 9 I've also requested that, um -- and it was 10 accommodated -- that we place a little ability -- I 11 asked Susanne Buehler, Isn't there some way, within a 12 reporting year, that if, in fact, there occurs 13 something like this, that it would be noted on the 14 return that, yes, this is an adjustment, we're 15 making this? 16 Because if we expect self-reporting, I 17 don't know -- other than because it's always been 18 done, why we don't allow it within a calendar year, 19 a self -- you know, a correction like you do on 20 income tax and -- and other things. 21 So I'm trying to pursue this so this does 22 not become a, you know -- a regular thing. And I 23 don't want anyone to think that I'm supporting, um, 24 blowing through a statute. Not at all. 25 But I do think that the equitable 26 recoupment cases that I've read are varied enough, 27 and the reasoning behind them and the history of 80 28 years, and I -- I'm -- I'm not qualified to debate 35 1 this with Appeals or you. And I understand that. 2 But in reading the cases, I did not find 3 that there was one single -- where it was always all 4 of the above. 5 And so I am ready to find for the taxpayer 6 in this instance. This is not a Section 40, so we 7 won't have to say exactly why we did it. I 8 understand that. But I think it's unique enough. 9 And I would like to say, for the record, 10 that I think the reasons are unique enough that I 11 would like to allow this -- or grant for the -- for 12 the taxpayer here. 13 And because of the circumstances, I do not 14 believe it'll be a common occurrence. So -- 15 MR. RUNNER: Is that a motion? 16 MS. HARKEY: I will make a motion. 17 MR. RUNNER: I'll second. 18 Let me respond, I guess, to 19 the -- 20 MS. MA: Okay. Mr. Runner. 21 MR. RUNNER: -- where I would come from. 22 And I -- I -- you know, I -- I -- I -- I 23 get the bind that we are in, I get the bind that 24 Legal is telling us about. I get all that. 25 And what I end up trying to do at times is 26 to weigh that against what I believe my elected role 27 is in regards to trying to create -- you know, I -- 28 I believe we have unique roles. I believe the 36 1 public engages us and elects us then to bring, at 2 times, a little more common sense to the -- to the 3 process. 4 And so at some times I'm probably willing 5 to take more risk than others when it comes to this 6 issue. Because I think ultimately what citizens of 7 California want is a fair tax system. And I think 8 that that's part of what it is that -- why we have 9 an elected body. 10 And so at that point I'm, at times, willing 11 to -- to risk that. Now, I'm not sure what my risk 12 is here. I don't believe anybody is going to come 13 around and sue us for this issue. But I do believe 14 that there is a process of -- of -- of common sense 15 and equity that I think plays a -- plays a role in 16 this process. 17 And I know that puts the staff in a bind, 18 because I know the staff is doing exactly what 19 they're supposed to be doing. And I think their 20 role is different than my role. 21 And so I think that's why I feel 22 comfortable in -- in -- in moving in that direction. 23 MR. HORTON: Madam Chair. 24 MS. MA: Mr. Horton. 25 MR. HORTON: You know, I share the -- the 26 -- the concern about the inequity of this situation. 27 I've been here for a while, so I've seen this 28 inequity before on countless occasions. 37 1 I've also seen the inequity go the other 2 way where the state is owed funds, but the statute 3 has barred the state from being able to collect 4 those funds. 5 And I was sitting here pondering if I had 6 the legislative authority to change the law, how 7 would I do it? I mean, how would I change the 8 statute to say that under certain circumstances, you 9 know, the statute could be ignored, basically? 10 And in the absence of the Supreme Court 11 ruling, I might be able to find a pathway there. 12 But it's inherently challenging, because in doing 13 so, we're sort of opening up Pandora's box for the 14 taxpayer to be put at a disadvantage when the Board 15 goes in and finds the exact same situation, or the 16 presumption of double taxation, and wants to open up 17 the statute of limitation and back-date it as such, 18 and collect tax that in error was made, and statute 19 has appropriately ran. The same concepts of statute 20 of limitation that provides and exists in the civil 21 cases, and kind of becomes more of a human rights 22 issue, at what point can the courts continue to 23 prosecute an individual? 24 You've been prosecuted once, and we want to 25 prosecute them again. And at some point we've got 26 to say, "Stop, state of California. Stop, courts." 27 You know, enough is enough. 28 And unfortunately the Legislature and the 38 1 Supreme Court has sort of drawn the line here in the 2 sand. Which is a little unusual that they would be 3 this definitive in their -- in their communication. 4 I just can't find any wiggle room on this. 5 I wish I could. 6 I would be supportive of legislation, but, 7 quite frankly, I don't think the legislation would 8 pass. The cost of the double impact, the 9 double-edged sword aspect of tax law in general. 10 MS. MA: Um, I -- I also feel like we're 11 sitting here as a Board as well. And we have to 12 make tough decisions. And everyone is doing exactly 13 what they are supposed to be doing on both sides. 14 I do think that this is a unique situation 15 since it has to do with one client refunding what 16 was incorrectly collected, nontaxable, and they 17 refunded, and they made everybody whole. 18 I do feel that the state would be unjustly 19 enriched if it was allowed to retain the tax that it 20 wasn't due in the first place from its customer, that 21 it collected from the customer, that it did refund to 22 the customer. 23 So I understand, I hear all the arguments 24 on both sides, um, but I feel that there is no 25 economic harm in this situation. Everyone was made 26 whole. And by the state assessing and trying to 27 assess the money is unjustly enriching the state. 28 Um -- that's how I feel about this case. 39 1 And depending on when the audit may or may not have 2 occurred, obviously has an impact in this because 3 it's quarter -- one -- two quarters off. 4 But in the overall scheme, I -- I feel like 5 there has been no economic harm done, everyone was 6 made whole, we weren't, um -- we weren't -- yeah -- 7 exactly. We weren't, um -- they weren't liable to 8 collect the tax, to remit the tax to the state. 9 They refunded it like we want everyone to obey 10 the tax laws for sales and use tax. 11 And so I'm going to be voting with the 12 taxpayer. But I guess we can just put it up for 13 vote. 14 Okay. So there's a motion by Ms. Harkey, a 15 second by Mr. Runner, um, to vote for the taxpayer. 16 Ms. Richmond, please call the roll. 17 MS. RICHMOND: Ms. Ma. 18 MS. MA: Aye. 19 MS. RICHMOND: Ms. Harkey. 20 MS. HARKEY: Aye. 21 MS. RICHMOND: Mr. Horton. 22 MR. HORTON: Pass for now -- well, I don't know. 23 MS. MA: You can abstain. 24 MR. RUNNER: We'll make you vote. 25 MR. HORTON: Yeah, I know. I know what I 26 can do. I know. 27 Abstaining for now. Pass for now. 28 MS. RICHMOND: Mr. Runner. 40 1 MR. RUNNER: Aye. 2 MS. RICHMOND: Ms. Stowers. 3 MS. STOWERS: Aye. 4 MR. HORTON: Okay. Back to Horton. I'm a no. 5 MS. RICHMOND: Mr. Horton. 6 MR. HORTON: No. 7 MS. RICHMOND: Motion carries. 8 MS. MA: Okay. Thank you. 9 ---o0o--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 41 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on August 31, 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 41 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: November 18, 2016 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 42