1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 30, 2016 10 11 PETITION FOR RELEASE OF SEIZED PROPERTY 12 MIDWEST ENTERPRIS, INC. 13 NO. 974926 (STF) 14 15 16 17 18 19 20 21 22 23 24 25 26 Reported by: Kathleen Skidgel 27 CSR No. 9039 28 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 15 Equalization Staff: Jeff Angeja Tax Counsel IV 16 Legal Department 17 For the Department: Pamela Mash 18 Tax Counsel 19 Stephen Smith Tax Counsel IV 20 Jay Keffelew 21 Business Tax Specialist II 22 23 For the Petitioner: Victor Sherman Attorney 24 25 ---oOo--- 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 NOVEMBER 30, 2016 4 ---oOo--- 5 MS. MA: Ms. Richmond, I think there's one 6 item we're going to take out of order. 7 MS. RICHMOND: Yes. 8 MS. MA: So please call the first item. 9 MS. RICHMOND: Good morning, Members. Our 10 first case that we're going to hear this morning is 11 Item D, Petitions for Release of Seized Property; 12 Item D1 Midwest Enterpris, Inc. 13 Please come forward. 14 Board Proceedings has received contribution 15 disclosure forms for today's hearings from the 16 parties, participants and agents. All forms were 17 properly completed and signed and no disqualifying 18 contributions were disclosed. All parties, 19 participants and agents are on the alpha listings 20 provided to your office. 21 Each person sitting at the table will be 22 asked to introduce themselves and, if necessary, 23 their affiliation with the taxpayer for the record. 24 Ten minutes is allocated for the taxpayer's opening 25 presentation, followed by ten minutes for the 26 Department's presentation, and five minutes is 27 allocated to the taxpayer for rebuttal. 28 Chairwoman Ma. 3 1 MS. MA: Okay, thank you. 2 Mr. Angeja, please introduce the issues in 3 this case. 4 MR. ANGEJA: Good morning, Madam -- good 5 morning, Madam Chair and Members. I'm Jeff Angeja 6 on behalf of the Appeals Division. 7 The appeal before you presents one 8 unresolved issue, which is whether the seized 9 cigarettes and tobacco products should be 10 forfeited. 11 MS. MA: Okay, great. 12 Welcome, to the petitioner. You will have 13 ten minutes for your initial presentation, and then 14 five minutes on rebuttal. 15 Please introduce yourself for the record 16 and then you can begin your presentation. 17 MR. SHERMAN: Thank you. My name is Victor 18 Sherman. I'm the attorney for the petitioner in 19 this matter. 20 As my brief indicates in this case, my 21 client N & N Wholesale, Inc. was incorporated in 22 Nevada and had all the various licenses to deal with 23 tobacco in that state. They also had the 24 appropriate licenses, California, seller's permit 25 and a tobacco products wholesale license. What they 26 didn't have was a distributor's license. 27 I've attached an affidavit of my client 28 which indicates that at the time certain products 4 1 were brought into the state of California he was 2 unaware that he needed a distributor's license 3 before he sold the product in California. 4 The products were brought in around June of 5 2016. There was an inspection at his place of 6 business and the products were seized. According to 7 my client, the products were worth around 790,000, 8 $800,000. The Board believes, or it was stated that 9 the products -- the investigators believe it was 10 around 1.7 million. 11 The issue in this case resolves -- revolves 12 around the fact that at the time the product was 13 seized, my client either was unaware that he needed 14 a distributor's license before bringing the product 15 into the state, but he knew he needed it or believed 16 he needed it before he sold the product. And he 17 intended to get a distributor's license before he 18 sold the product. 19 The product was seized. Apparently under 20 this statute the product is going to be forfeited if 21 the, uh -- if the Board proceeds the way it 22 intended, and the state would not get a tax of 23 around $230,000 based upon a value of 790,000 or 24 potentially double that if the product is worth more 25 than that. 26 And what we're saying is that it's -- it's 27 an all-or-nothing situation. The, uh -- apparently 28 the, um -- they're taking the position, the attorney 5 1 for the Board is taking the position that there is 2 no mitigation allowed in this situation regardless 3 of whether there's an inno- -- innocent mistake on 4 behalf of the petitioner. 5 And our position is that a simple mistake 6 should not result in a forfeiture of over $800,000 7 worth of items. 8 Now, that is obviously a tremendous 9 detriment to the petitioner, but it's also a loss to 10 this state; because if the product is forfeited, 11 then the state will lose out on its tax. 12 We're suggesting that there should be an 13 alternative, that they have to take into 14 consideration the innocent possibility in this 15 particular case that the importer did not have a 16 distributor's license either because he made an 17 innocent mistake at the time and he didn't realize 18 he needed the distribution license before the 19 product was brought into the state of California, or 20 accept the fact that he was going to get a 21 distributor's license at the time he sold the 22 product. 23 Now, he did in fact apply for a 24 distributor's license after the fact. 25 Now, in reviewing the matter, although the 26 position is taken by the analyst -- or, excuse me, 27 by the attorney for the Board, or whoever is 28 opposing me, I'm not sure how it's to be referred 6 1 to. They're taking the position that they can't 2 take into consideration whatsoever that the person 3 may have made an innocent mistake and it's an 4 all-or-nothing situation. 5 We're saying that this is unconstitutional 6 under the Eighth Amendment to the United States 7 Constitution. 8 But regardless, if this Board should have a 9 procedure by which they can have a hearing to 10 determine whether or not there really was an 11 innocent mistake in this case, there was not an 12 intention to violate the law. 13 Now I have cited the United States Supreme 14 Court regarding excessive fines which are 15 disproportionate to the harm caused. And I've 16 listed the five considerations that the Supreme 17 Court looks at when determining whether or not this 18 is an excessive fine and violates the Eighth 19 Amendment to the United States Constitution. 20 Real quickly, whether or not there was any 21 tangible harm to the state is one of the -- is the 22 first reason. And we're saying that, rather than 23 being a harm to this state, by having a forfeiture 24 in this matter actually, if the Board approves that, 25 it's making more of a harm than what my client did 26 because the state is going to lose out on hundreds 27 of thousands of dollars worth of taxes that 28 otherwise my client is willing to pay. 7 1 He was not selling the product in the state 2 of California at the time the product was seized. 3 So the second point is, there was no intent 4 to evade the law. That's a second point that the 5 Supreme Court looks at when determining whether or 6 not there's an excessive fine. 7 The third point is you have to look at what 8 other penalties might be appropriate in determining 9 whether or not the penalty actually imposed in this 10 case, the loss of over $800,000 worth of product, 11 then you compare it with if there was a criminal 12 violation, what would be the fine under the criminal 13 penalty. And that is a maximum of $25,000. 14 So obviously the penalty of forfeiting the 15 product is way out of proportion to what the 16 criminal penalty would be if in fact there was a 17 criminal prosecution. 18 The other -- the fourth point is, What was 19 the harm caused to the state? And we're saying in 20 this case there was no harm caused to the state 21 because the product wasn't being sold in the state 22 of California, it was just being brought here before 23 it was distributed in the state of California. And, 24 in fact, as I've already stated, the harm is more to 25 the state in forfeiting the product rather than 26 giving the client the opportunity to pay the tax. 27 And the last one is the gravity of the 28 offense versus the amount of the forfeiture. And 8 1 I've already indicated that the forfeiture is way 2 out of proportion to the harm caused in this case. 3 Now, the attorney for the Board seems to 4 also look at the fact, because although they're 5 saying it's an all-or-nothing, they also cite 6 certain facts which indicate, well, maybe my client 7 did not have an innocent intent, which seems to be 8 contrary to the position that it doesn't really 9 matter what his intent was. 10 And one of the points they make is, well, 11 they seem -- they believe that he shipped in 12 products on earlier occasions. This is not true, 13 and if we had a hearing and could present evidence, 14 we would show that this is the first time he 15 actually brought any product into the state. 16 There's also an issue as to what occurred 17 May -- the month before, in May, when there was -- 18 apparently my client was questioned by some 19 investigator and there was a misunderstanding of 20 whether or not he was really in business or not. 21 The point being, there should be a procedure set up 22 by this Board in which a determination can be made 23 whether or not a forfeiture is completely 24 disproportionate to the alleged offense. And just 25 by taking the position that no matter what the 26 reasons were, even if you were totally innocent or 27 you received bad advice or your paperwork was out of 28 order and you applied for a license but it hadn't 9 1 actually been authorized yet, without taking into 2 consideration any of the reasons why maybe you did 3 something wrong but then forfeit the entire product 4 is both not in the interest of the Board and is 5 unconstitutional. 6 Thank you. 7 MS. MA: Okay. Thank you, Mr. Sherman. 8 To the Department, you have ten minutes for 9 your presentation. Please introduce yourself. 10 MS. MASH: Thank you, Chairwoman Ma, 11 Members of the Board. I'm Pamela Mash from the 12 Board's Legal Department, along with Jay Keffelew 13 and Steve Smith representing staff. 14 The cigarettes and tobacco products in 15 custody cannot be returned because tax was not paid 16 on these products. 17 Under the Cigarette and Tobacco Products 18 Licensing Act law, when the Board discovers that a 19 wholesaler possesses untaxed -- possesses cigarettes 20 and tobacco products on which tax is due but hasn't 21 been paid, the Board is authorized to seize that 22 product. 23 It's presumed under the Licensing Act that 24 tax hasn't been paid unless the wholesaler in 25 possession of the product provides a purchase 26 invoice showing that it purchased tax-included 27 product from a licensed distributor or a wholesaler. 28 In this case staff received a lead from law 10 1 enforcement that petitioner was in possession of 2 untaxed product. When staff visited petitioner's 3 warehouse they found two men at the loading dock 4 unloading a semi-truck filled with cigarettes and 5 tobacco products, um, and unloading them into the 6 warehouse. 7 One of the men stated that Mr. Naoum, who's 8 the petitioner's president, had hired them to unload 9 these trucks and that this was the fourth time that 10 they'd traveled to California to unload these trucks 11 at that warehouse location. The other three times 12 were in March, April and May of 2016. 13 He also stated that each time they unloaded 14 a truck, the warehouse would be filled with pallets 15 of cigarettes and tobacco product; and when they 16 came back the following month with more product that 17 the warehouse would be mostly empty. 18 At petitioner's warehouse staff found over 19 $1.7 million of untaxed cigarettes and tobacco 20 products. And when staff contacted Mr. Naoum he 21 stated that the product was his but that he didn't 22 have any purchase invoices for it, and no invoices 23 were found on site at the warehouse. 24 The bills of lading provided by the driver 25 of the truck showed that the product came from Chase 26 Cash and Carry in Dearborn, Michigan and there was 27 no indication that any California excise tax was 28 paid on any of the product. 11 1 As a licensed wholesaler, petitioner may 2 not possess untaxed product. Petitioner argues that 3 it intended to obtain a distributor's license. But 4 the fact remains that at the time there was an 5 inspection at the warehouse there was no 6 distributor's license under the petitioner's 7 account. 8 Petitioner didn't even attempt to get a 9 distributor's license until six weeks after the 10 seizure occurred. And we know from the men who were 11 unloading the truck that petitioner had these 12 deliveries made at least three other times, 13 beginning in March 2016. So petitioner had been 14 operating without a distributor's license at least 15 since March 2016 and never attempted to get a 16 license, um, until he got caught with over 17 $1.7 million of product at his warehouse. 18 And in fact in May 2016 Mr. Naoum did tell 19 staff that he wasn't operating in California at all, 20 which turned out to be a lie. 21 So all of these facts indicate that 22 petitioner never really intended to obtain a 23 distributor's license. And in fact he did intend to 24 evade tax, which he did. And because the seizure 25 resulted in a citation, he's unable to obtain a 26 distributor's license now until that citation 27 process is completely resolved. 28 Finally, the question of whether a fine of 12 1 forfeiture is constitutionally excessive is for an 2 appellate court to decide. This Board may not 3 declare a statute unconstitutional or refuse to 4 enforce a statute on the basis that it's 5 unconstitutional until and unless that statute has 6 actually been found unconstitutional by an appellate 7 court. 8 And as of today there's no appellate court 9 that has ruled that any of the Licensing Act code 10 sections or any of our tax laws were deemed 11 unconstitutional. 12 The Board may not order -- it may only 13 order the release of these products if it determines 14 that they were illegally or erroneously seized. 15 This product was clearly properly seized because it 16 was untaxed and petitioner cannot legally possess 17 it. 18 So there's no circumstance under which 19 these products can be returned. 20 Thank you. 21 MS. MA: Okay. Thank you. 22 So, Mr. Sherman, you have five minutes on 23 rebuttal. 24 MR. SHERMAN: Okay. The exact point that 25 I'm trying to make is exactly what the legal 26 representative made in her point. 27 She's citing facts to indicate that my 28 client intended to do something wrong. The fact of 13 1 the matter is, none of those facts are true and none 2 of those facts have been proven. And that's the 3 problem with this case, that she is quoting from an 4 investigator who supposedly talked to somebody at 5 the business without any documentation to support 6 that position. 7 If there was a hearing, everything she said 8 I could prove was not true. And theoretically then, 9 if she's relying upon facts to justify the seizure 10 and the forfeiture, then I should be given the 11 opportunity to present facts contrary to that. But 12 there is no procedure, presumably, set up for me to 13 present the facts. 14 So on the one hand the Board, through their 15 representative is relying on facts saying that my 16 client brought in the product in March, April and 17 May; none of that is true. He never brought any 18 tobacco products in in March, April and May. And 19 what they were, were charcoal e-pens, accessories. 20 They were not tobacco products. 21 But the position, through the attorney, is 22 that in fact they're justifying the conduct here, 23 the seizure in this case based upon an unproven 24 fact. 25 To the same extent, they're relying upon an 26 unproven fact that my client supposedly made a 27 statement that he wasn't doing business in 28 California. In fact, my client never said that. If 14 1 we had an opportunity to present evidence, we would 2 present the fact that what he said is that I'm 3 delaying my entry into California and I'm not doing 4 business in that particular month. 5 So on the one hand, they're taking the 6 position that the facts justify the seizure. On the 7 other hand, they're not giving the petitioner an 8 opportunity to present facts which dispute that 9 position. 10 The bottom line, however, is that the 11 attorney is taking the position it doesn't matter 12 what the facts are, that if you don't have a 13 distributor's license, even if you're a completely 14 innocent party and you've made an honest mistake, a 15 forfeiture is permitted regardless of what the facts 16 are. And what I'm saying is there's no possible way 17 that that's going to pass constitutional muster. 18 The last point I want to make is that it's 19 true that this body can declare the, uh, statutes 20 unconstitutional. But to be legal the seizure has 21 to comport with the law. And this body should have 22 the authority to order an evidentiary hearing to 23 make a determination whether or not my client was 24 really an innocent party and whether or not he ever 25 brought the product in before. And this was the 26 first time and he only made an honest mistake. And 27 if he made an honest mistake, then forfeiture is way 28 out of proportion to the alleged activity. 15 1 Thank you. 2 MS. MA: Any questions? 3 Ms. Harkey. 4 MS. HARKEY: Hi. Um, did your client have 5 any invoices? 6 MR. SHERMAN: Yes. 7 MS. HARKEY: For this product? 8 MR. SHERMAN: He did. 9 MS. HARKEY: And he had invoices from 10 where? 11 MR. SHERMAN: He had invoices from the 12 people that he bought the product from. In other 13 words, he purchased the product, I think, in 14 Michigan. And, in fact, I think there were invoices 15 seized at the time of the seizure of the product. 16 But he did have invoices, yes. 17 MS. HARKEY: He had invoices for the 18 product? 19 MR. SHERMAN: Yes. 20 MS. HARKEY: So the invoices for the 21 product -- this is to the Department -- did not show 22 any taxes paid? 23 MS. MASH: Correct. 24 MS. HARKEY: So they just came directly 25 across the border? 26 MS. MASH: They came from Michigan. 27 MS. HARKEY: Okay. 28 MR. SHERMAN: So they did have invoices. 16 1 MS. HARKEY: How long -- how long has your 2 client been in business? 3 MR. SHERMAN: I believe that he started the 4 business in Nevada in February of the same year, 5 2016. 6 MS. HARKEY: Okay. Um, so he had not 7 distributed, but yet the -- the deliverer of the 8 product said that they had been there four times 9 that year. 10 MR. SHERMAN: That's the allegation, that 11 they had been there four times, but they had not 12 delivered any tobacco product. 13 MS. HARKEY: Okay. 14 MR. SHERMAN: That is a contention made. 15 MS. HARKEY: So the police report, or the 16 police lead says that there was product there. The, 17 um -- which is what alerted our department. 18 Then we had the, uh -- the gentleman who 19 was unloading at the dock say that they had been 20 there four times. 21 We have invoices that show that they did, 22 in fact, come and deliver and unload. 23 MR. SHERMAN: This particular day. 24 MS. HARKEY: Yeah, that particular day. 25 But I'm sure we could find some more if we dug. 26 And so I'm just -- I'm just trying to 27 figure out what else you would need under the code, 28 the Business and Professions Code, and under -- 17 1 under the seizure, what else you would -- you would 2 need. 3 I think -- I think the case is pretty cut 4 and dried. 5 MR. SHERMAN: Well, that's a -- if I might 6 interrupt for a moment. That's assuming that the 7 facts presented are accurate. 8 MS. HARKEY: Okay. Tell me, what is not 9 accurate? Facts. 10 MR. SHERMAN: This is -- facts. This is 11 the first time they ever brought, uh, tobacco 12 products into the state of California, this 13 particular time. 14 MS. HARKEY: How can he prove that? 15 The burden of proof is on your client. 16 MR. SHERMAN: Well, first of all, he puts 17 it in an affidavit and it says that. So he put 18 forth evidence. 19 The Board, or the attorney for the, uh -- 20 the Board hasn't produced any declarations from 21 anybody that says this is not true. 22 MS. HARKEY: The Board doesn't necessarily 23 have to. You have to prove -- 24 MR. SHERMAN: Okay. Well, I -- I -- 25 MS. HARKEY: You have to prove that it -- 26 that -- that what they're saying is not true. This 27 is tax law. 28 MR. SHERMAN: Give me an evidentiary 18 1 hearing and I'd be happy to prove it. 2 MS. HARKEY: That's not what we're required 3 to give you. I know you would like that, but that's 4 not -- 5 MR. SHERMAN: Well, then how -- 6 MS. HARKEY: -- what we're required to give 7 you. 8 The evidence is in the reports that we've 9 got, the product that's been seized, and the 10 testimonies that are recorded here. 11 MR. SHERMAN: There's no testimony -- 12 MS. HARKEY: And -- and there is -- 13 Well, there is in the, uh -- in the, uh, 14 Hearing Summary, Appeals Board Hearing Summary; it 15 states dates and times and individuals that were 16 spoken to. 17 MR. SHERMAN: That's not testimony. 18 MS. HARKEY: Well, it's testimony to me -- 19 MR. SHERMAN: That's not subject -- 20 MS. HARKEY: -- for this Board hearing. 21 MR. SHERMAN: Well that's not subject to 22 cross-examination. 23 MS. HARKEY: No, it's not. 24 MR. SHERMAN: Well then how -- it's not -- 25 MS. HARKEY: I'm sorry, it's not. 26 MR. SHERMAN: And it's not -- 27 MS. HARKEY: I appreciate -- 28 MR. SHERMAN: It's not under oath. 19 1 MS. HARKEY: I appreciate your issue, but 2 what I'm trying to tell you is the law is very 3 specific. And it's unfortunate, uh, that you have 4 to prove that he had never done this before when we 5 have -- we have documentation that he had in fact. 6 MR. SHERMAN: You do not have any 7 documentation that he did this before. 8 MS. HARKEY: Yes, we do. 9 MR. SHERMAN: No, you don't. 10 MS. HARKEY: You need to read the briefs. 11 So, I'm through. I'm through. 12 MS. MA: Okay, I -- I do have a question. 13 What is Kandy Wholesale, Mr. Sherman? 14 MR. SHERMAN: Kandy Wholesale, I believe, 15 was the -- the company that was incorporated in the 16 state of California. 17 MS. MA: Is that Mr. -- 18 MR. SHERMAN: That's Mr. Naoum, the 19 same co- -- the same owner. 20 MS. MA: Okay. What does he sell there? 21 MR. SHERMAN: The only thing he was -- he 22 did nothing. That was set up for the purpose of 23 bringing tobacco product into the state of 24 California. 25 MS. HARKEY: Yep. 26 MS. MA: Okay. But did he have a physical 27 address? 28 MR. SHERMAN: Yes. And then it gives it 20 1 located at three -- 13102 3rd Street, Chino, 2 California. 3 MS. MA: So is it a business? 4 MR. SHERMAN: Yeah, it's a business and 5 it's a -- it's a warehouse. 6 MS. MA: Okay. It's a warehouse. 7 MR. SHERMAN: Yeah. 8 MS. MA: So, but you said that he never 9 brings in any product into California. So what does 10 he do at this place? 11 MR. SHERMAN: He set it up for the purpose 12 of bringing a product into the state of California. 13 That was the purpose, and the first time he brought 14 it in was June of 2016. 15 MS. MA: Okay. So to the, uh, Department, 16 is that where we confiscated the product? 17 MS. MASH: Yes. 18 MS. MA: Is that the Chino location? 19 MS. MASH: That's is the warehouse where, 20 um, the seizure occurred. 21 MS. MA: Okay. And so, um, we have 22 testimony from the folks there that they had been 23 doing this a couple of other times. 24 MS. MASH: Four times, yeah. 25 MR. SHERMAN: No, you do not. 26 MS. MA: When did they open this warehouse? 27 MS. MASH: Uh, I don't know when they 28 opened the warehouse, but the per- -- the license, 21 1 the wholesaler's license for this warehouse was, um, 2 obtained in February of 2016. And then the first 3 shipment's, based on the truck driver who brought 4 'em in, was in March 2016. So the very next 5 month. 6 MS. MA: So they had a license? 7 MS. MASH: They had a wholesaler's license, 8 not a distributor's license. So you can have 9 untaxed product only if you have a distributor's 10 license in California. A wholesaler's license is 11 similar to a retailer's license. 12 MS. MA: Okay. 13 MS. MASH: You cannot purchase and be in 14 possession of untaxed product, ever. 15 MS. MA: Okay. 16 MS. MASH: And so they had the -- they 17 didn't have the correct license. 18 MS. MA: And is that on our website very 19 clearly stated? 20 MS. MASH: That's on our website, that's 21 provided to everybody who obtains a permit or a 22 license with us in writing. Um, email links, 23 publications, all kinds of things. 24 MS. MA: So presumably when Mr Kasoam -- 25 Naoum got his first license, he would know about 26 this, that if he's going to do something other than 27 what he was going to get, he would have to get 28 additional licenses. 22 1 MS. MASH: Yes. 2 MS. MA: Okay. So, Mr. Sherman, I don't 3 know if he hired you at that time and you advised 4 him of these laws or not. You did not. 5 MR. SHERMAN: No, I was not -- 6 MS. MA: Okay. 7 MR. SHERMAN: He did not have a lawyer at 8 the time. 9 Plus, it's a misstatement to say that the 10 person they interviewed, uh, stated that they 11 unloaded tobacco products. What the person said 12 actually was that they unloaded pallets. And these 13 pallets were sealed, so there's no way for him to 14 know what was inside the pallets. 15 But the point of the matter is, this is an 16 allegation from an investigator that speaks to 17 somebody who's not under oath, there's no statement 18 from this person independent. This is just what an 19 investigator says this person allegedly said, and 20 they're treating it as a fact. And you can't treat 21 as a fact what somebody says that may not have had 22 knowledge what was inside these pallets. 23 MS. MA: Okay. But we have 7 pages of 24 seized, uh, products. This is like the, I guess, 25 the receipt of what was in all the pallets. 26 MR. SHERMAN: There's no -- there's no 27 question that he had -- 28 MS. MA: Okay. 23 1 MR. SHERMAN: -- product on the day of the 2 seizure. No question about that. 3 MS. MA: And were they, you know, stamped? 4 Were they legally ready to be sold in California or 5 not? 6 MR. SHERMAN: He did not have a 7 distributor's license. He had a wholesale license 8 and they had not yet been distributed. 9 And the point of the matter is he was under 10 the mistaken impression that he did not need the 11 distributor's license until he actually was selling 12 the product. He didn't realize he needed the 13 license just to bring it into the state of 14 California. 15 Now, maybe on the website he misread it. 16 Maybe he didn't have an attorney at the time. The 17 point of the matter is he made a mistake and you 18 cannot take $800,000 from somebody, worth of 19 product, because he made a mistake. That's the 20 whole point. 21 And what is the advantage to the state of 22 California? They're losing a quarter of a million 23 dollars, at least, in taxes. He's willing to pay 24 the tax. So it's a loss-loss for everybody. He 25 loses the 800,000 and the state loses a quarter of a 26 million dollars. How is that a result that we 27 should endorse? It seems like a ridiculous outcome 28 in this case. 24 1 But the point of the matter is, the law is 2 clear, we should be able to prove that the fine is a 3 punitive fine which is completely disproportionate 4 to the activity. That's what the United States 5 Supreme Court said, and there should be a procedure 6 by which we can come forward with the evidence to 7 show that it was an innocent mistake. 8 And they're basically conceding by reciting 9 facts. If it was an innocent mistake, then maybe 10 the result would be different. But they don't want 11 to look at the facts. They're just saying well, 12 we'll -- we're going to accept the -- the 13 investigator's report in this case as being in fact 14 true. 15 They didn't file criminal charges in this 16 case. He was given a citation, but obviously the 17 D.A. in this case has a problem with presenting a 18 criminal case because no criminal case has been 19 filed. And if you believe the investigators, then a 20 criminal case should have been filed. 21 So there's an issue here. And you just 22 can't accept what an investigator says some third 23 party said who may not have had knowledge of what 24 was really going on. And that's what this Board 25 apparently is doing in accepting the representation, 26 and that's not right. 27 MS. MA: Mr. Runner. 28 MR. RUNNER: Why's your client not here? 25 1 MR. SHERMAN: Well, why is he not here? 2 Well, he -- 3 MR. RUNNER: Right. I was just wondering, 4 in terms of a compelling story, it would just 5 seem -- and, again, in terms of the evidence and the 6 discussion in regards to his business and all those 7 it would seem if he really was concerned about 8 the -- the process, the forfeiture, the fact that 9 he -- that he'd want to tell his story. 10 MR. SHERMAN: Well, I -- I was -- 11 MR. RUNNER: It's not a small amount. 12 MR. SHERMAN: I'm more than happy to 13 bring -- I had no idea that he would be permitted to 14 tell his story at this hearing, that you would be -- 15 that he would able to talk. 16 I was given the impression that this was 17 just a legal matter and there was not an opportunity 18 to present evidence at this matter. 19 He -- he -- he submitted an affidavit. 20 They didn't -- they didn't submit any documentation 21 contrary. At least I did something under oath. 22 MR. RUNNER: How long did your client have 23 possession or have the, uh -- the contract or 24 involvement with the -- with the -- with the, uh, 25 warehouse? How long had he been using that 26 warehouse? 27 MR. SHERMAN: I don't know exactly. So I 28 wouldn't be able to answer that question exactly. 26 1 MR. RUNNER: Months? 2 MR. SHERMAN: No, it certainly wasn't 3 months. It was, I think, the month before, is my 4 best guess. But I can't tell you exactly how long 5 he'd had the warehouse. 6 MR. RUNNER: Okay. Again, there'll be -- I 7 mean this is the process. You may not like the 8 process, and there's a process -- you know, there's 9 an appeals process that you can go ahead and deal 10 with after this. 11 But, you know, at this point, um, you know, 12 I -- I'm just a bit taken back by the fact that it 13 seems to be a pretty large seizure -- well, it is a 14 large seizure. Um, the story seems to be very -- at 15 least as you would tell it, very compelling, but 16 your client doesn't want to come -- didn't want to 17 come tell the story. 18 MR. SHERMAN: Well, that's not true that he 19 doesn't want to come. I had no idea that he had the 20 opportunity. This is the first time -- 21 MR. RUNNER: Then I would suggest that you 22 didn't understand your role here representing him. 23 MR. SHERMAN: Well, that's very possible. 24 It's the first time I've ever appeared in front 25 of -- 26 MR. RUNNER: Okay. 27 MR. SHERMAN: -- the Board of Equalization. 28 So if I've made a mistake -- 27 1 MR. RUNNER: But I would assume you're 2 competent enough to then understand the rules before 3 which you have when you come before us. 4 Thank you. 5 MR. SHERMAN: Is there a rule -- well then 6 I would ask that the matter be continued and I'll 7 bring my client before this Board and have him 8 subject to an examination if that's appropriate. 9 I mean, what would be the harm then to 10 continue it to another day? I'm certainly willing 11 to bring him in to do that. 12 MS. MA: Well, I think his point is you've 13 been in practice since 1984 and if you were going to 14 come before us, you probably would have looked at, 15 you know, our website to see how we conduct these 16 proceedings. 17 So, you know, the fact that, you know, 18 you're saying you've never been before us, never -- 19 didn't understand the process -- 20 MR. SHERMAN: Is -- 21 MS. MA: -- I think is a little bit, um -- 22 MR. SHERMAN: Excuse me, is there a 23 process -- is there something on your website that 24 says I can present evidence at this hearing? 25 MS. MA: You can present evidence. That's 26 what we're looking for. 27 MR. SHERMAN: Okay. So I can present -- I 28 can present witnesses? 28 1 MS. MA: What do you have? 2 MR. SHERMAN: I can present witnesses? 3 MS. MA: Yes. 4 MR. SHERMAN: Well, I did present a 5 witness. I have an affidavit from my client. But 6 if -- if -- if -- 7 MS. MA: Okay. Well, we're saying we 8 read -- 9 MR. SHERMAN: You're laughing at this fact. 10 We're talking about a large amount of money. 11 MS. MA: Exactly. And so -- 12 MR. SHERMAN: So fine. So then give me an 13 opportunity to present a witness then. All right? 14 So what would be the harm -- 15 MR. HORTON: Madam Chair. 16 MR. SHERMAN: -- to continue it to another 17 date and I'll present a witness? 18 MS. MA: Mr. Horton. 19 MR. HORTON: Thank you, Madam Chair. 20 Question of the taxpayer. The, uh -- 21 the -- the cigarettes that were seized by the 22 Department, did they belong to your client? 23 MR. SHERMAN: Yes. 24 MR. HORTON: Had your client paid tax on 25 them? 26 MR. SHERMAN: He more than -- he's willing 27 to pay tax. They won't let him. 28 MR. HORTON: When they seized 'em, had he 29 1 paid tax on it? 2 MR. SHERMAN: No, he had not because he 3 didn't have a distributor's license. He was 4 prepared to pay tax. 5 MR. HORTON: That was the third question. 6 Well, those three conditions is all that 7 requires, in order for the Department to seize the 8 property. 9 MR. SHERMAN: I understand that, but 10 we're -- 11 MR. HORTON: Now, regardless of -- I mean, 12 unless you could provide testimony that indicated 13 that the property had tax on it, that you actually 14 paid the tax on it and that they had a distributor's 15 license, that's the only thing that would relieve 16 your client. 17 MR. SHERMAN: Well, then -- then you're 18 saying then Ms. Ma's statement to me is -- why 19 didn't I present testimony, is irrelevant. 20 MR. HORTON: Well, I -- I -- I -- 21 MR. SHERMAN: Is that the point, that it's 22 irrelevant what the reason was? That he may have 23 been an innocent party -- 24 MR. HORTON: I don't. 25 MR. SHERMAN: -- and he may have been under 26 a mistaken impression, that makes no difference; is 27 that what you're saying? 28 MR. HORTON: Sir, I'm asking the 30 1 questions. 2 MR. SHERMAN: I'm sorry. 3 MR. HORTON: I don't believe that that was 4 the intent of the Member. I think the Member was 5 asking for evidence that would support your client's 6 position along the lines that they were not taxed, 7 he had a distributor's license, he was in business, 8 he was operating in the state of California legally. 9 He wasn't. And -- and you actually, you 10 know, you actually sort of stimulated my thought 11 here. I mean as the author of the legislation, I 12 think we probably should go back and say not only 13 should we be able to seize it, but we probably 14 should be able to assess the tax as well and collect 15 the tax. 16 So, I mean that would be my view of the 17 situation because he makes a good point. I mean the 18 point is, is the state of California is losing the 19 tax that should have been paid at the time that the 20 property was acquired. And then the subsequent 21 illegal distribution of it is the reason that we're 22 seizing the property. So we left a gaping hole in 23 the legislation. And so, uh, Mr. Sherman, thank 24 you. 25 MR. SHERMAN: I'm happy to help the Board. 26 MS. MASH: I should note that there is a 27 criminal citation pending on this matter. So the 28 state might get something. 31 1 MR. HORTON: Okay. 2 MS. MASH: The county. 3 MR. HORTON: All right. Well, that's 4 helpful. 5 MR. SHERMAN: By the way, just as -- as a 6 last statement. You're saying why didn't you 7 present my client to give evidence. The basic 8 position is it doesn't matter what he said. 9 MR. HORTON: Thank you, Madam Chair. 10 MR. SHERMAN: He can't give any evidence. 11 MS. MA: Miss -- 12 MS. STOWERS: I don't have any questions. 13 MS. MA: Okay. 14 MS. STOWERS: Madam Chair? 15 MS. MA: Yes. 16 MS. STOWERS: Are we ready? 17 I move to adopt staff recommendation to 18 deny the petition. 19 MS. HARKEY: Second. 20 MS. MA: Okay. There is a motion to adopt 21 staff recommendation made by Ms. Stowers, second by 22 Ms. Harkey. 23 Without objection, motion carries. 24 MR. SHERMAN: Thank you. 25 By the way, I've been practicing since 26 1966, not 1984. 27 MS. MA: Well, that's what your website 28 said. Sorry, I didn't look at -- didn't go down to 32 1 your degrees. 2 ---oOo--- 3 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 33 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 November 30, 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 33 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: January 6, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 34