1 BEFORE THE CALIFORNIA STATE BOARD OF 2 EQUALIZATION 3 450 N STREET 4 SACRAMENTO, CALIFORNIA 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 30, 2017 10 11 12 13 14 SALES AND USE TAX APPEAL HEARING 15 APPEAL OF 16 ZIMMER US, INC., 17 NO. 773995, 801742 (EA), 18 AGAINST PROPOSED ASSESSMENT OF 19 SALES AND USE TAX 20 21 22 23 24 25 26 27 REPORTED BY: Jillian M. Sumner 28 CSR NO. 13619 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chair 4 Fiona Ma, CPA Member 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 Appeals Bureau: Jeff Angeja Tax Counsel IV 15 Legal Department 16 For Department of Tax and Fee 17 Administration: Robert Tucker Assistant Chief Counsel 18 Bradley Heller 19 Tax Counsel 20 Dario Romano Business Taxes 21 Administrator III 22 For Petitioner/Claimant: Susan Bittick 23 Representative 24 Brian Browdy Representative 25 26 ---oOo--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 30, 2017 4 ---oOo--- 5 MS. RICHMOND: Our next item is C7, Zimmer 6 US, Inc. 7 Please come forward. 8 MS. BITTICK: Good afternoon. 9 MS. HARKEY: All right. Welcome. 10 Mr. Angeja, will you please introduce the 11 items of this appeal. 12 MR. ANGEJA: Madam Chair and Members, the 13 appeal before you involves one unresolved issue, 14 which is whether a refund of use tax reported and 15 paid on the cost of medical instruments shipped to 16 California medical facilities is warranted. 17 I'd also like to remind the Board that these 18 matters are subject to Section 40 and will require a 19 published decision. 20 MS. HARKEY: Thank you. 21 Welcome to the Board of Equalization. 22 And you will have 10 minutes to make your 23 presentation. The end of your 10-minute 24 presentation, the Department will make theirs for 25 10 minutes. And then we'll be back to you on 26 rebuttal for five. 27 So please introduce yourselves for the 28 record, and you may begin. 3 1 MR. BROWDY: Madam Chairwoman, Members of 2 the Board, my name is Brian Browdy on behalf of 3 Zimmer US. And my colleague, Susan Bittick. 4 And I want to talk about three things this 5 afternoon. 6 First, I'm going to explain who Zimmer is, 7 what it does, and what these surgical instruments 8 are. 9 Second, I'm going to talk about the 10 controlling law and explain how, unlike the way the 11 sales and use tax statutes treat other kinds of 12 transfers of property, the law treats a loan of 13 property as a discreet, localized event taking place 14 at a specific time and place, and in this case, 15 outside of California. 16 And, finally, I want to talk about the very 17 undesirable administrative and policy implications 18 that would result from this Board's affirming the 19 Department's position in this case. 20 But before I get into what this case is 21 about, I want to make clear what this case is not 22 about. 23 This case is not about the Yamaha decision, 24 or the issue of in-state and out-of-state gifts. We 25 appreciate that Yamaha has been a hot button issue 26 before the Department and before this Board. And 27 while we did raise the issue -- the Yamaha issue 28 below, it was decided against us. And we now accept 4 1 that for purposes of today. 2 So I wanted to level set on this at the 3 outset, because the Board Hearing summary talks at 4 some length about Yamaha. But, again, Yamaha and the 5 issue about whether there was an in-state or 6 out-of-state gift is no longer in contention in this 7 case. 8 So who is Zimmer? 9 Zimmer is a company based in Warsaw, Indiana 10 that manufactures and markets prosthetic devices like 11 artificial hips, knees, and elbows to hospitals and 12 surgical facilities nationwide, including in 13 California. 14 Because of the highly specialized nature of 15 these implants, a Zimmer hip, knee, or elbow cannot 16 be safely or accurately implanted into a patient's 17 body without the use of specially engineered 18 instruments or tools. And that's what we're talking 19 about today, these tools. 20 So you can see what we're talking about. We 21 gave your Board pictures of some shoulder and knee 22 instruments, which you can find as -- I believe as 23 Exhibits Two and Three -- Two, Three and Four. 24 For historical reasons having nothing to do 25 with sales and use taxes, Zimmer doesn't actually 26 sell the instruments to purchasers of its prosthetic 27 devices; but instead provides them to the hospitals 28 and healthcare institution -- institution under its 5 1 instrument-loaner program. 2 How do the loaner instruments get to 3 customers in California? 4 In some cases, Zimmer ships them directly to 5 the hospital. But in most cases, Zimmer ships them 6 to an independent sales representative for 7 re-delivery to the hospital. 8 But whether the instruments are shipped to 9 the independent sales representative first or 10 directly to the hospital, Zimmer always, in every 11 case, ships them by common carrier from outside the 12 state of California. 13 Once the instruments get here, Zimmer really 14 has nothing to do with them. It doesn't dissemble 15 them or test or repair them here. It most certainly 16 doesn't tell surgeons how to use them. 17 The hospitals, and not Zimmer, clean and 18 sterilize the instruments using their own equipment. 19 And when they become worn or obsolete, the 20 instruments are destroyed by a third party neither 21 chosen nor approved by Zimmer. 22 In many cases there is a sales 23 representative who is present in the operating room 24 who can answer technical questions about an implant, 25 or provide other advice on product use. 26 But in the case here -- I don't know how 27 other instrument prosthetic manufacturers do it, but 28 I know in the case here, these are independent sales 6 1 representatives. They are not Zimmer agents. They 2 are not Zimmer employees. They don't carry Zimmer 3 business cards. 4 The sales reps who are present in the OR are 5 not Zimmer agent or employees. They're independent 6 contractors. Zimmer has no ownership interest in the 7 sales reps. It doesn't direct or control their 8 activities. 9 And that's all made clear by Exhibit 3 to 10 the Department's reply brief, which is a signed 11 statement from one of the sales representatives to 12 this effect. 13 So the operating room activities of these 14 sales representatives are for their own account, and 15 there's no basis for attributing them to Zimmer. 16 The Department said in its reply brief that 17 the evidence indicated that Zimmer stored the 18 instruments in California. But for the reasons 19 outlined in our response, that is not so. 20 The independent sales representative 21 agreement the Department pointed to doesn't say that. 22 And it's not even for this period, anyway. 23 The product purchase agreement it points to 24 doesn't say that. And the sales representative 25 letter has been clarified to explain that Zimmer 26 never stored any instruments at the sales 27 representatives' facility. And that's Exhibit 2(a). 28 So that's who Zimmer is. 7 1 Now I want to talk a little bit about the 2 law. 3 The decision and recommendation concluded 4 that Zimmer owed the California use tax on the loaner 5 instruments, because a loan is a use. But that's not 6 the end of this story. Because under Rev. and Tax 7 Code Section 6201 and 6202 a loan, just like any 8 other use, is subject to the use tax only if it 9 occurs, quote, within this state. 10 And the loan or use here clearly did not 11 occur in California. 12 The Rev. and Tax Code is no help in 13 determining when and where a loan of property is 14 considered to be made. But the Civil Code provides 15 very clear guidance on what is really the case 16 dispositive question here. 17 In Section 1884, the Civil Code defines a 18 loan as an arrangement where one person gives 19 temporary possession of its property to another, and 20 the other person agrees to give it back without 21 compensation for its use. 22 So by its very definition, the key element 23 of a loan is the giving of possession of the 24 property. 25 And I want to add that that's not just a 26 narrow, technical definition in some obscure Civil 27 Code statute. Because that's completely consistent 28 with the plain and ordinary meaning of the word 8 1 "gift" as defined in Black's Law Dictionary. 2 So, again, by definition, the giving of 3 possession that is the making of a loan is a 4 localized event that takes place at a specific time 5 and place. 6 And in the case here, Zimmer gave purchasers 7 of its prosthetic devices constructive possession of 8 the instruments outside of California when it 9 delivered them to the common carrier. 10 And once Zimmer delivered the instruments to 11 the carriers, except for, perhaps, in extremely rare 12 cases, it never called them back, and it never 13 redirected their delivery to another facility. 14 I said in my opening I was going to explain 15 how the law treats a loan differently from the way 16 the sales and use tax laws treats other transfers. 17 And talking here specifically about leases. 18 What do I mean? 19 In Rev. and Tax Code Section 6006.1, it says 20 that the granting of possession by a lessor to a 21 lessee is a, quote, continuing sale in this state by 22 the lessor. And the possession of the property by 23 the lessee is a, quote, continuing purchase for use 24 in the state for the duration of the lease, 25 regardless of when or where the property was 26 delivered to the lessee. 27 And the regulation 1660 says the same thing. 28 So why is this significant? 9 1 It's significant because the Rev. and Tax 2 Code had to create this legal fiction of a, quote, 3 continuing sale or continuing purchase in order to 4 make a lease taxable in California when the leased 5 property is delivered outside the state. 6 So in other words, without this statutory 7 construct of a continuing sale or a continuing 8 purchase, these leases would not be subject to sales 9 or use tax in California. 10 And so that's really the point. While we 11 have this statute and this regulation that create 12 this legal fiction of a, quote, continuing sale or 13 continuing pur -- continuing purchase in the case of 14 a lease, we do not have anything like that in the 15 case of a loan. 16 So unlike with the lease where the property 17 is delivered outside of California, when it comes to 18 a loan of property delivered outside of California, 19 once the property is delivered, there's nothing in 20 the sales and use tax law, or anywhere else in the 21 law that we know of, that deems there to be any sort 22 of continuing sale, continuing purchase, or 23 continuing use of that property once it enters 24 California. 25 So because of that, we go back to the 26 definition of a loan in the Civil Code. And the 27 plain and ordinary meaning of the word, which says 28 that a loan is made when Person A gives Person B 10 1 possession of the property for Person B's use, with 2 Person B giving it back without compensation for its 3 use. And when and where possession of the property 4 is given occurs at a discreet time and place, in this 5 case outside of California. 6 To summarize the law, then, while the 7 decision and recommendation was correct in stating 8 that a loan is a use, that's not the end of the 9 story. Because under Rev. and Tax Code Section 6201, 10 6202, a use isn't subject to tax unless it occurs, 11 quote, within this state. 12 And the use here that is the making of the 13 loan occurred outside the state when Zimmer made 14 constructive delivery of the instruments. 15 So I want to talk, finally, in my remaining 16 minute or two, about what I think you'll agree would 17 be the very adverse administrative and policy 18 implications of affirming the Department's position 19 in this case. 20 So let's step back and look at exactly what 21 the Department's position in this case really is, and 22 what it would mean in the everyday world. 23 A person lives in California and goes up to 24 Oregon to visit a friend, and she eyes her friend's 25 old mountain bike. 26 So the friend loans it to her and lets her 27 take it back to California for use on her 28 bicycle-messenger business, under the condition that 11 1 she always wears a helmet when she rides it, and that 2 she gives it back in working condition on her next 3 visit. 4 Under the position the Department takes in 5 this case, the friend would be subject to California 6 use tax on the bike. The fellow in Oregon just lets 7 his friend in California borrow his bike, and now he 8 owes use tax here. 9 Think about that. 10 Or this: a couple in Delaware tells their 11 expectant friend in Los Angeles that they'll loan her 12 their old bassinet as long as she gives it back when 13 the baby outgrows it. They deliver it to the local 14 FedEx, who delivers it to the mother in California. 15 If this Board backs the Department's 16 position in this case, the couple in Delaware now 17 owes California use tax on the bassinet. 18 Or, finally, my colleague, Ms. Bittick, who 19 lives here in California, tells me she loves fountain 20 pens. And because I have a collection of them at 21 home in Chicago, I tell her I'll loan her some cool 22 ones when I get back home. 23 And I bring them to the UPS by my house. 24 And the UPS delivers them to her in California with 25 the understanding that she'll give them back to me 26 next time she sees me. 27 Again, if the Board upholds the Department's 28 sweeping position, I would owe California's use tax 12 1 on these fountain pens. 2 These results -- the results in these 3 examples, which are factually exactly parallel to 4 what we have with Zimmer, are counterintuitive on 5 their face, and they're not in keeping with basic, 6 practical or common sense. 7 They're also questionable policy, and would 8 be extremely difficult to administer. Because even 9 if the position could be enforced in those examples, 10 or the countless other ones like it, it would result 11 in an avalanche of use tax returns and other filings 12 for often minuscule amount of tax. 13 It's difficult to conceive that this is what 14 the Legislature intended, or that this is how the 15 Department wishes to marshal its limited, 16 administrative resources. 17 So in summary, the instruments are not 18 subject to use tax in California. Because the use 19 that is the loan of the instruments takes place 20 outside of California where constructive delivery of 21 the property is made to the purchasers of the 22 prosthetic implants. 23 MS. HARKEY: Is that it? 24 MR. BROWDY: That is it. 25 MS. HARKEY: Okay. Thank you very much. 26 Okay. To the Department, you have 10 27 minutes. Please introduce yourselves for the 28 record. 13 1 MR. HELLER: Thank you, Chairwoman Harkey. 2 Good afternoon, Chairwoman and Members of 3 the Board. I'm Bradley Heller from the California 4 Department of Tax and Fee Administration's Legal 5 Division. 6 And to my right are Robert Tucker from the 7 Department's Legal Division, and Dario Romano from 8 the Department's Business Tax and Fee Division. 9 The Department agrees with the Appeals 10 Bureau's conclusion and recommendation as set forth 11 in the claimant's decision and recommendation. 12 The Department respectfully requests that 13 the claimant's claims for refund be denied. 14 California use tax is imposed on the storage 15 use or other consumption of tangible personal 16 property purchased from a retailer for storage use or 17 other consumption in California, unless an exemption 18 or exclusion applies. 19 Revenue and Taxation Code Section 6008 20 broadly provides that storage expressly includes any 21 keeping or retention of tangible personal property in 22 the state for any purpose, except sale in the regular 23 course of business, or subsequent use solely outside 24 of this state. 25 Revenue and Taxation Code Section 6009 also 26 broadly provides that use expressly includes the 27 exercise of any right over -- right or power over 28 tangible personal property incident to the ownership 14 1 of that property. 2 During the claim period, which is April 1, 3 2009 through September 30th, 2013, claimant sold 4 medical devices to its California customers, but did 5 not sell the instruments at issue in the claims for 6 refund. 7 Instead, claimant purchased the instruments 8 outside of California without paying sales or use 9 tax, retained the title to the instruments, and 10 loaned its instruments to its California customers 11 for use in surgeries in California to implant devices 12 they purchased from claimant. And the loan was at no 13 extra charge. 14 Also, claimant correctly reported and paid 15 California use tax on its purchases of the 16 instruments for storage use or other consumption in 17 California as the Department verified that it had for 18 the prior audit period, which ended March 31, 2008. 19 So this was a longstanding practice of 20 reporting tax on these instruments as they were drawn 21 and shipped to California. 22 The tax was properly reported, because by 23 loaning its instruments to its California customers 24 for functional use in California, requiring the 25 customers to bear the risk, if any, of its 26 instruments were missing or damaged while in 27 California, and requiring their instruments to return 28 when the customer's agreements are terminated -- and 15 1 these are all written requirements of the terms of 2 their purchase agreement -- the claimant exercised 3 ownership rights and powers over its instruments 4 while those instruments were in California, and kept 5 its instruments in California for a purpose other 6 than sale in the regular course of business, or 7 subsequent use solely outside the state. 8 Therefore, claimant both used and stored its 9 instruments in California, and use tax applied, 10 because there was no express statutory exclusion or 11 exemption from tax for that storage and that use in 12 California. 13 In addition -- let me move forward since 14 we're not talking about that. 15 In addition, as the claimant indicated, 16 they've conceited that these were not gifts. As they 17 originally tried to argue that they were entitled to 18 a refund because they were gifts completed out of 19 state. 20 And the claimant's current arguments about 21 how claimant shipped the instruments to California 22 via common carrier, claimant didn't own or operate 23 the California distribution centers, and the 24 claimant's customers functionally used the 25 instruments in California do not establish a single 26 statutory exemption or exclusion from use tax at all. 27 And the Department respectfully requests 28 that the Board deny claimant's claim for refund, 16 1 because there's absolutely no statutory exclusion or 2 exemption for the use and storage of the instruments 3 in California. 4 And in addition, I just wanted to briefly 5 mention that the policy examples -- I -- at least, in 6 my opinion, did not accurately apply California sales 7 and use tax to the transactions. 8 And, for instance, for one, like an old 9 bassinet probably would not be subject to any 10 California use tax, since it was probably first 11 functionally used outside of the state, and didn't -- 12 and did not enter in the state in any period of time, 13 which a presumption that use tax would apply would be 14 created. 15 So there wouldn't be a use tax on property 16 purchased out of state and first used out of state. 17 And then the used bike, again, the bike 18 owner and the person who had the old bassinet, 19 neither of them are retailers, as is the claimant in 20 this case. So tax wouldn't necessarily apply to them 21 at all in any of those transactions. 22 And, in addition, to the extent that any of 23 them actually paid sales or use tax to another state, 24 they'd be entitled to a credit if any use tax was 25 applied by California. 26 So the facts are completely different than 27 the facts of this case. And I don't believe that 28 it's gonna -- just applying sales and use tax to 17 1 actual -- excuse me -- use tax to actual storage and 2 use of property in California does not open a parade 3 of horribles for the state. 4 MS. HARKEY: Thank you. So that's it. 5 All right. You have five minutes on 6 rebuttal. 7 MR. BROWDY: Thank you. 8 I would -- I would respectfully disagree 9 with the assertion that there is no exemption or 10 exclusion. There is no exemption. 11 Exclusion is simply that there is no use 12 within this state as required by Rev. and Tax Code 13 Section 6201 and 6202. 14 So whether that's an exclusion or an 15 exemption, it doesn't come -- the transactions at 16 issue here don't come within the meaning of the use 17 tax statute, because the use is not within this 18 state, as required by the statute. 19 As for the examples we gave of the bicycle 20 and the bassinet, the use tax -- application of the 21 use tax is not conditioned on the users being a 22 retailer. So whether the person loaning the bicycle 23 or the bassinet or the fountain pen is a retailer or 24 not, they could still be subject to use tax if they 25 used property in the state. 26 Tax is imposed on the use in the state of 27 property purchased at retail. It's not imposed on 28 retailers for the use of property in the state. 18 1 And so if -- if the property was -- the 2 example I gave was a woman in Delaware who loaned 3 their property to someone in California. There's no 4 sales tax in Delaware. The property could have been 5 exempt. My fountain pen could be exempt in Illinois 6 for whatever reason. 7 So the examples are factually identical to 8 what's happening here with Zimmer. 9 As far as the assertion that Zimmer stored 10 the property in the state within the meaning of 11 Section 6008, there's no evidence that Zimmer, 12 itself, stored the property anywhere in California. 13 The sales representatives, if anyone, stored 14 the property in California. But Zimmer, itself, did 15 not. And there's a statement to that effect in the 16 supplemental letter that we provided from the sales 17 representative as your -- in your exhibit package. 18 As far as the exercise of any right over the 19 property, Zimmer, itself, did not exercise any right 20 over the property within California. The fact that 21 it owned property that is in California is not 22 dispositive. The mere ownership of property is not 23 taxable. It's the use of property in California 24 that's taxable, not the mere ownership of it. 25 And the fact that Zimmer had reported and 26 paid use tax on these instruments in prior audit 27 periods as a longstanding practice, is also not 28 dispositive. Because that practice, we submit, was 19 1 incorrect. Zimmer should not have been paying -- 2 paying use tax on the instruments in prior periods. 3 As far as -- what happens if an instrument 4 goes missing or is lost or damaged or destroyed, 5 which the Department cited as an example of Zimmer's 6 exercise of power over the instruments while they're 7 in the state, if a California hospital loses an 8 instrument that it has on loan, Zimmer bills them for 9 a new one, and they pay for it. And Zimmer charges 10 them sales or use tax accordingly. 11 So I would suggest that the fact that -- 12 that that is not evidence of Zimmer's control over 13 the instruments while they're in the state. 14 MS. HARKEY: Thank you. 15 Okay. Members. 16 MS. MA: I have a question. 17 Do you guys depreciate the instruments on 18 your books? 19 MR. BROWDY: Yes, as an indication of 20 Zimmer's ownership of the instruments. 21 MS. MA: Right. 22 MR. BROWDY: Yes. 23 MS. MA: So you own it, you depreciate it, 24 it's in your inventory, you loan it, and then it 25 comes back? I kind of missed that about -- does it 26 come back? 27 MR. BROWDY: One point of clarification. I 28 don't know that it matters. But they're not an 20 1 inventory item, it's an asset. 2 MS. MA: Okay. 3 MR. BROWDY: But Zimmer loans them to a 4 hospital. The hope is that the hospital keeps using 5 it over and over again. 6 The instruments are sometimes returned. If, 7 for example, Dr. Harkey leaves a particular hospital. 8 And she was the surgeon who used Zimmer instruments. 9 And there's no longer a need for them at that 10 particular facility, they'll be sent back. 11 But the normal course is for them to be 12 continued to be used until they're obsolete or 13 damaged. In which case, the hospital or the sales 14 representative destroys them; not Zimmer. 15 But there are cases. But it's Zimmer's hope 16 that once they go out the door, they never come back. 17 Because then they're not being used. 18 MS. MA: And then you said if for some 19 reason they break it, the hospital calls you, you 20 would sell the product to the hospital and charge 21 them sales tax here in California. 22 MR. BROWDY: If the hospital loses one or 23 damages it, Zimmer will bill them for a new one, send 24 them a new one. And they'll sell them the new 25 instrument, and they'll charge them sales or use tax 26 if it applies. And it usually does. 27 MS. MA: Okay. 28 I'm done for now. 21 1 MS. HARKEY: I know you're done. 2 Member Runner, any questions? 3 MR. RUNNER: I'm thinking. 4 MS. HARKEY: Okay. I know this is -- this 5 is a different -- 6 Yes. 7 MS. STOWERS: Just real quick. 8 So you only sell them to them after they use 9 the product for a while and they decide -- and it's 10 damaged? You never just outright sell the product? 11 MR. BROWDY: They can -- Zimmer can outright 12 sell them -- sell the instrument. But it's the 13 practice, of not only Zimmer, but of others in the 14 industry, to loan them to the hospitals who are the 15 purchasers of their hips, knees, shoulder-replacement 16 systems. 17 But they will -- so the circumstance that I 18 was describing where they sell the instrument is if a 19 hospital loses one, Zimmer will send them a new one 20 with an invoice. You broke it; you bought it. We'll 21 replace it, but now you have to pay for the new 22 one. 23 MS. STOWERS: You broke it; you buy it. 24 I've heard that term. 25 So how often does that happen? 26 MR. BROWDY: It does happen. I don't think 27 it's a common occurrence. But it's not -- it's not 28 unheard of. 22 1 MS. STOWERS: So if they break it, they pay 2 for it. Zimmer, then, would charge them. Isn't that 3 exercising the control over it? 4 MR. BROWDY: They charge them for a new one. 5 They'll send a new instrument and invoice them for 6 the new instrument. 7 MS. STOWERS: Okay. Thank you. 8 MR. BROWDY: You just hope it's not broken 9 while in your body. 10 MS. STOWERS: Yeah. 11 MS. BITTICK: And the new instrument is an 12 actual sale. 13 MR. BROWDY: Right. And the new instrument 14 is an actual sale. 15 MS. BITTICK: It's not a loan. 16 MR. BROWDY: It's not a loan. 17 MS. STOWERS: I understand that part. The 18 new one is a sale, but the initial one is a loan. 19 And it's a -- it's a loan. 20 MS. BITTICK: Right. 21 MS. STOWERS: But with the under -- with the 22 goal that it would never be returned. 23 MR. BROWDY: That's the hope. 24 MS. STOWERS: That's the hope. 25 Okay. Thank you. 26 MR. HORTON: Madam Chair. 27 MS. HARKEY: Yes. 28 MR. HORTON: Question of the appellant. 23 1 If I understand your argument correctly, is 2 that title -- that -- title passes to the consumer 3 outside the state of California? 4 MR. BROWDY: No. Title never passes to 5 the -- 6 MR. HORTON: I mean possession. Pardon me. 7 MR. BROWDY: Constructive possession 8 transfers to the purchaser outside of the state, 9 yes. 10 MR. HORTON: And that's the initial use. 11 And that the subsequent use is not subject to use 12 tax. 13 MR. BROWDY: Well, the subsequent use is not 14 made by Zimmer. 15 MS. BITTICK: Yeah. I think it's important 16 to distinguish between the various parties here. 17 Because the question is, does Zimmer use the 18 instruments? 19 And Zimmer makes their loan outside of the 20 state. The sales reps or the healthcare facility 21 takes possession. And those people, the physician, 22 or other health -- I guess it would always be a 23 physician -- may use the instruments in California. 24 That's a different question and a different trigger 25 of -- if you would, of use tax obligation. 26 The question here is, is Zimmer in that 27 surgical suite using those instruments? And the 28 answer is no. 24 1 MR. HORTON: The -- question of the 2 Department. 3 Regulation 1669.5, somewhere around there, 4 that deals with the -- a lease of a vehicle, which is 5 a loan, in effect. 6 The lease of a vehicle, an accommodation 7 loan, where a individual is leasing a vehicle, and 8 they're provided an accommodation loan, another 9 vehicle, at no charge, whatsoever. 10 They use it. And the agency has 11 historically imputed the value to be the lease 12 receipts, and treated as a loan or continuing lease, 13 continuing use in California. But they imputed the 14 value as the lease receipts, the amount that they're 15 paying. 16 Because, I mean, part of the provisions of 17 it to be a loan, you have to establish some 18 consideration for that loan. But in this case, there 19 was no consideration. They agreed -- the 20 Department -- the agency concluded that the 21 consideration was actually the lease receipts, even 22 though there was no charge. 23 Are you familiar with that? 24 Mr. Angeja is looking that up. 25 MR. HELLER: Mr. Horton, I don't -- in this 26 case, the tax is imposed on the purchase price of the 27 instruments, not on lease receipts. So -- and then 28 in addition -- 25 1 MR. HORTON: The appellant is arguing that 2 this is a loan. 3 MR. HELLER: I totally understand that. 4 MR. HORTON: And so your efforts would be to 5 conclude that it was not a loan or something. 6 MR. HELLER: No, we -- excuse me, 7 Mr. Horton. 8 MR. HORTON: Go ahead. 9 MR. HELLER: Thank you. 10 The Department agrees that it was a loan. 11 We just believe that basically when you loan your 12 property to someone in California, under the 13 conditions here, you're exercising some rights and 14 powers over that property the entire time that it's 15 in California. Also, under the -- 16 MR. HORTON: Yeah. But in order to have a 17 loan, there has to be some measure of 18 consideration. 19 MR. HELLER: No. No. In this case, 20 the -- a loan in this is actually a gratuitous loan. 21 So it's for no money at all, the loan itself. 22 There's nothing being paid for the loan itself. And 23 I think -- I don't think there's any dispute about 24 that. 25 MR. HORTON: I'm not asking if anyone 26 disputes it. I'm just asking what the law -- 27 Mr. Angeja, what does the law say relative 28 to a loan? 26 1 MR. ANGEJA: A loan is a -- as they had 2 said, a loan is a use under 6008, 6009. It's one of 3 the incidents of ownership. The same as you loaning 4 me your car, a pen, a fountain pen. I, as an 5 owner -- well, the State owns this. But I, as an 6 owner of property, can loan it to someone. And it's 7 not a lease if there's no consideration. It's an 8 exercise of ownership. 9 I'm a consumer, I would owe use tax on the 10 purchase of that if it was used in California. 11 MR. HORTON: I think the key is that there's 12 no consideration. It's just hard for me to fathom 13 that this complicated equipment is -- that there is 14 no consideration. 15 And I'm not saying that you can't impute 16 consideration. That consideration can be a premium, 17 as the law has stated on a number of occasions. 18 Unless there's a premium that's given to the -- to 19 the seller of the other property. In this case, the 20 seller of the -- of the prosthetics. If there's a 21 premium, that's consideration. If there's a benefit, 22 that's consideration. 23 It sounds where they somehow contractually 24 obligate the purchaser to continue to buy this 25 product for them, or even a computer contractual 26 relationship. I'm just curious if that existed in 27 this case. 28 And if it did exist, I haven't heard that. 27 1 Because I haven't asked the taxpayer those questions. 2 But I will. 3 MR. HELLER: Mr. Horton, can I just add one 4 thing that I think might have been responsive to your 5 prior question? 6 Again, I don't think we have any extra 7 consideration to add. But I think with regard to the 8 accommodation loan discussion earlier, generally 9 speaking, under the Rev. and Tax Code, when an 10 accommodation loan is made, which is basically 11 somebody is buying or leasing a product from you that 12 you don't have right now -- 13 MR. HORTON: Apologies. 14 MR. HELLER: Right. 15 MR. HORTON: I understand that the argument 16 before us is that it's a loan. 17 MR. HELLER: Right. 18 MR. HORTON: And so -- well, let me just go 19 to the taxpayer relative to this argument about it 20 being a loan. 21 In your -- why give this away? Why allow a 22 California medical facility to use this equipment at 23 absolutely no cost? Is there any benefit to the 24 company? 25 MR. BROWDY: Well, there's no separate cash 26 charge for the use of the instrument. 27 I would -- as far as the historical reasons 28 why the instruments are loaned under these 28 1 arrangements -- and, again, it's common throughout 2 this industry. I don't know the reason why they're 3 loaned as opposed to leased or sold outright. But I 4 do know it has nothing to do with tax planning. 5 But the -- presumably, the cost to Zimmer of 6 the instruments that it loans, presumably those costs 7 are factored into the selling price of the implants 8 that they sell at the hospitals and surgical 9 facilities. 10 MR. HORTON: Okay. 11 MR. BROWDY: So there's noncash 12 consideration for -- 13 MR. HORTON: So is there any evidence that 14 the selling price, the product that you sell, is sold 15 at a premium, if, in fact, this equipment was not 16 provided? 17 MS. BITTICK: Well, the implants -- 18 MR. HORTON: Well, let me retract that. Let 19 me ask you a couple of questions before I ask you 20 this question. Because I think I need to sort of 21 establish a basis for the questions that I'm asking, 22 which is another part of the question. 23 The challenge of this new policy of not 24 being able to kind of drill down on what the facts 25 are is that parties come before the Board with 26 preestablished talking points, preestablished ideas, 27 and so forth. And so as we extract the facts, the 28 facts can change the measure of tax. 29 1 So under -- if this was a lease where there 2 is some consideration, and even though the lease 3 occurred in California, it would have been a sale in 4 California -- it would have been a lease in 5 California, the measure of tax would have been on the 6 lease receipts. Even if those lease receipts -- and 7 if those lease receipts were considered to be the 8 premium consideration in the case of the lease of a 9 vehicle, that the lease receipts that you received, 10 that you collect, and you pay tax on, you don't pay 11 tax on, whatever, is part of the premium. 12 And looking at the dates in these 13 transactions -- the date of these transactions, if it 14 was a lease, then the purchaser would be obligated 15 for the tax. 16 MR. BROWDY: Correct. Because -- 17 MR. HORTON: Statute would have ran on that 18 obligation. 19 MR. BROWDY: Correct. 20 Because there is a provision in the 21 California law 6006.1, I believe it was, that says 22 that when -- in the case of a lease of property 23 that's transferred to the lessee outside the state, 24 it's a continuing sale and a continuing purchase in 25 California, even though the property was delivered to 26 the lessee outside the state. 27 MR. HORTON: Yeah, I heard -- 28 MR. BROWDY: We don't have anything like 30 1 that in the case of a loan. 2 MR. HORTON: Well, I heard you use the 3 argument of continuing sale and continuing use. And 4 so I was just -- I can't put words in your mouth, but 5 I'm just curious -- okay. 6 Let's presume everyone understands that area 7 of the law. Is there a premium associated with 8 the -- I'm going to use the term loan. But I'm going 9 to use the term loan, continuing use or continuing 10 sale in California. Is there a premium to the sale 11 of the original prosthetics? Is there a value 12 associated to the sale of the original prosthetics, 13 that it could be imputed to the use of this 14 equipment? 15 MR. BROWDY: I think in the same sense that 16 any business cost is reflected somewhere in the 17 selling price of one's goods of services, your 18 utilities, your legal fees, those costs are all 19 factored in. 20 MS. BITTICK: Every cost you've got. 21 MR. BROWDY: Every cost. If you're doing 22 things right, those costs are recovered somewhere. 23 Usually from the consumer. 24 MS. HARKEY: Don't tell California that. 25 MR. HORTON: Mr. Angeja, I'm presuming 26 you've had an opportunity to kind of look at the law 27 as it relates to combination loans. Can you 28 enlighten us as to what that -- 31 1 MR. ANGEJA: A couple of points. 2 That Section 1669.5, which is -- 3 MR. HORTON: Not whether -- I'm not 4 proposing that it applies here. 5 MR. ANGEJA: But -- 6 MR. HORTON: I've yet to extract the 7 evidence or the testimony. But I just want to make 8 sure that we kind of understand what it -- 9 MR. ANGEJA: So accommodation loans are, as 10 provided for in that regulation, are specific to that 11 industry, for one. 12 For two, we don't say they're not taxable. 13 They're taxable. Those are -- 14 MR. HORTON: They're taxable. I'm asking -- 15 MR. ANGEJA: The inventory -- the pool of 16 inventory -- 17 MR. HORTON: I'm asking -- is taxable. 18 MR. ANGEJA: Well, they buy it usually under 19 a resale certificate. 20 The tax that's due under 6244(a), because 21 it's held partly for resale and then partly for use, 22 is the fair market value. 23 And then the fair market value is deemed to 24 be already included. And usually it's in a lease 25 situation, the vehicle that's going out. 26 So we're not saying it's not taxable because 27 it's an accommodation loan. We're saying -- 28 MR. HORTON: They purchased it for resale. 32 1 MR. ANGEJA: -- it is taxable. And we tax 2 the fair market value in lieu of 100 percent of the 3 purchase price on that car being taxed for being 4 loaned out for one day, or for -- 5 MR. HORTON: And if that occurred in 6 California, an out-of-state auto dealer provided -- 7 was leasing a vehicle in California, provided an 8 accommodation loan to that California consumer, what 9 would be the measure of tax, and who would owe it? 10 MR. ANGEJA: The prime lease, they're not -- 11 I would have to see the contract. Because that's -- 12 you're leasing the car in Indiana, and the driver 13 drives into some other state. 14 So I don't know that there would be a 15 mechanism whereby that lessor would be reporting and 16 paying tax to California in the first place. So that 17 hypo doesn't really help us. 18 So you had asked me for the law on that. 19 I'm trying to explain the accommodation loan is still 20 subject to tax. And it's pursuant to Section 1669.5, 21 that we have a fraction of the tax that becomes due. 22 But that's for loaner vehicles under 1669.5, specific 23 to that industry. Doesn't apply here. 24 MR. HORTON: And what happens when there's a 25 sale, and there's a premium on sales price of the 26 item? 27 So -- so you're loaning this. But you would 28 normally may have sold the property for $5. But you 33 1 turn around and you say, "Well, hey, listen. I'm 2 going to loan you this equipment, but I'm going to 3 sell it for $5.25." 4 MR. ANGEJA: Right. So that's covered in 5 Section 1670. You have to at least recoup 50 percent 6 of your cost, or you're considered to be the consumer 7 of it. 8 MR. HORTON: Got it. 9 MR. ANGEJA: Right. 10 So you'd have to show here that -- and I 11 have another thing to add to that. 12 You'd have to show, and we have no evidence 13 of that, that it was marked up, the sale of the 14 implants was marked up enough that they at least 15 recovered their cost. Or else they're making a gift 16 of it. Because it's not a -- 17 MR. HORTON: Not -- not their full cost. 18 MR. ANGEJA: Well, 1670 is premiums. You've 19 got to sell it for at least 50 percent -- 20 MR. HORTON: Fifty percent of your -- 21 MR. ANGEJA: -- to be deemed to have sold it 22 to them. 23 But the facts are that they retain -- sorry 24 to point. 25 That Zimmer retained title, and did not 26 transfer title. So there wasn't a sale. So it's not 27 truly a premium, as would be covered by 1670. 28 The final point is -- 34 1 MR. HORTON: Well, in the case of 1670, the 2 premium, if it was a lease of the property, it would 3 be considered part of the lease receipts. 4 If that lease, in fact -- I mean, a lease, a 5 sale, a continuing sale, one of the same -- 6 MR. ANGEJA: Of the instruments, or of the 7 implants? Which ones are you -- 8 MR. HORTON: Of the implants. 9 MR. ANGEJA: But those are sold. 10 MR. HORTON: I know. I mean, if the 11 implants were sold at a premium. 12 MR. ANGEJA: Premium would have to be enough 13 to cover the cost. 14 MR. HORTON: Fifty percent of the cost. 15 MR. ANGEJA: Well, I'm trying to say that's 16 for 1670 when something is sold. They didn't sell 17 the instruments. 18 But let's, for discussion, say there was no 19 evidence that it got that high. Then the next 20 question would be the implants are expressly exempt 21 by statute. And this is a different type of TPP. 22 It's not a service as part of the sale. It's 23 independently got to qualify for an exemption or an 24 exclusion to be nontaxable. 25 The other part you had said earlier about 26 they're needing to be consideration. I realize a 27 gift is not at issue here. But there's no 28 considering for a gift. 35 1 And under Yamaha, if I make that gift in 2 this state to you, there's no consideration. And 3 yet, I owe tax on my cost. Because I've done an 4 incident to ownership, Section 6008, 6009. 5 So a loan is the same situation. If I loan 6 it to you, and you take it into this state, that's my 7 exercise of dominion and ownership over -- and 8 control over the property. 9 And if I haven't previously paid tax on it, 10 it's taxable, absent another exemption or exclusion. 11 MR. BROWDY: It would be true only if the 12 gift was -- or loan, as the case may be, was made in 13 California. I think that's the whole point of 14 Yamaha, is where was this gift made? If it was made 15 outside of California -- 16 MR. HORTON: These are hypotheticals. 17 MR. ANGEJA: And I was just responding to 18 the consideration angle of that, not the location 19 of -- 20 MR. HORTON: So what was the basis that the 21 property was loaned outside of California? That the 22 initial loan took place outside of -- that the 23 consumer took possession and control outside of 24 California? 25 MR. BROWDY: Yes. It's -- it's the civil 26 law and common law definition of a loan. Which is 27 the transfer of possession of property, with the 28 understanding that somebody would give it back 36 1 without compensation for its use. 2 So the basis for our position is that the 3 loan, or use, is made outside of California. Because 4 possession is transferred to the purchaser of the 5 implants when Zimmer delivers the instruments to the 6 common carrier outside the state. 7 MR. HORTON: To the Department, what would 8 be necessary to establish that? 9 MR. HELLER: As far as we're concerned, 10 there's no such rules. And, essentially, exercising 11 any right or power over your property while it's in 12 California is a use. 13 So there's no exception that you can 14 transfer it to a common carrier and then still 15 exercise any rights and powers over it while it's in 16 California. There's no such exception. 17 And we're not aware of any exception that 18 says that they're -- that you're accepted if someone 19 else is functionally using the property. As long as 20 you're exercising any rights or powers over it, 21 you're using it in California, too. 22 And then storage includes just any retention 23 of the property in our state for a purpose other than 24 resale or shipping it out of the state for use solely 25 outside of the state. 26 So we think this was in the state where they 27 were exercising rights over it. And that it was 28 retained here for a purpose other than resale or 37 1 shipment straight outside the state. 2 MS. BITTICK: I -- I just want to say just 3 to -- just to keep bringing this back to the center 4 point, which is, regardless of any of those things, 5 it has to be by Zimmer. The storage and the 6 retention in the state of California has to be by 7 Zimmer. 8 Zimmer has -- stores these products in 9 Mississippi and Indiana, and surrenders them to 10 common carriers in those states, and makes the loans 11 in those states. 12 They come into California, they're taken 13 into possession by people who are not Zimmer 14 employees, and Zimmer does not control those people. 15 So there is no exercise of control at that point. 16 MR. BROWDY: And, Member Horton, I wanted to 17 address the specific question you asked the 18 Department was, is there -- what evidence is there of 19 the transfer to the common carriers outside the 20 state? 21 That was never disputed by the Department at 22 any stage of this case. And it was found by the -- 23 in the decision and recommendation as a fact. And 24 that the facts -- according to the decision and 25 recommendation, the facts were not in dispute in this 26 case. 27 So it was never in dispute. We had provided 28 the Department during the review period with ample 38 1 evidence of the delivery to the common carriers. 2 And so by the time it got to the decision 3 and recommendation, the Appeals Division said, "This 4 is not in dispute. We, in effect, stipulate that the 5 property was delivered to the carrier -- carriers 6 outside California in every case." That's what the 7 decision and recommendation finds. 8 MR. HORTON: Do you ever -- is this 9 equipment ever returned to you? 10 MR. BROWDY: It is sometimes returned. As I 11 gave the example, if a particular doctor at a 12 hospital leaves or retires, or decides, "I don't like 13 Zimmer instruments anymore; I want to use a 14 competitors," they'll send them back. 15 MR. HORTON: Is it -- is it reusable? 16 MR. BROWDY: It depends on their state, or 17 their condition. But if they're not in a condition 18 for further use, the hospital or the sales 19 representative, not Zimmer, destroys them. 20 And when they are returned, or if they are 21 returned, they're sterilized and cleaned using 22 equipment owned by the hospital. So Zimmer 23 doesn't -- 24 MR. HORTON: I'm going to go to the 25 Department on the transfer. 26 I mean, I would speculate that they're going 27 to argue transfer of title. But what say you to the 28 taxpayer's argument that the use occurred outside of 39 1 California? 2 MR. HELLER: Well, our argument is that the 3 taxpayer retained the title to their instruments, and 4 controlled who -- or basically maintained ownership, 5 held somebody liable for the risk of loss, and 6 actually did make them pay for damaged instruments, 7 so that they exercise some rights and powers over 8 their property while it was in California. Any 9 exercise of any right or power, just one, would be 10 sufficient under the statute. 11 And then, again, we did point out, there is 12 nothing in the statute that says, "You have to be 13 here retaining your property," or that it has to be 14 your agent that's retaining your property. It just 15 says that any keeping or retention in this state for 16 any purpose other than resale or transport outside 17 the state is storage. 18 And so we're using that definition. Not 19 necessarily that they personally came here and rented 20 space that they operated. You know, that's not -- 21 that's not necessary to argue that. And I'm not -- 22 we're not suggesting that was even the facts here. 23 And we, personally -- well, any way, I don't 24 think it's necessary to even argue about whether 25 there's an attribution. Because there is use and 26 there is storage by Zimmer within the meaning of the 27 statute. 28 MR. HORTON: Thank you, Madam Chair. 40 1 MS. HARKEY: Thank you. 2 Okay. I have -- I'm going to take some 3 questions here, because I've got a little bit of a 4 different tack. 5 And I'd like -- the reason the Department is 6 saying that they're loaned rather than gifted is 7 because the medical instruments were depreciated. 8 The state on your books were depreciated. 9 And there is -- I've got language in the 10 agreements here that claim that the medical equipment 11 remained your property. And that the medical 12 instruments held by the sales representatives remain 13 the property of the claimant. And that inventory 14 should be returned to the claimant upon the 15 claimant's request. 16 Is that due to patent rights, or why does 17 this have to be -- why does this have to be destroyed 18 or returned? 19 MR. BROWDY: I'm not sure I understand the 20 question. 21 MS. HARKEY: Well, you've said several times 22 the instruments are either destroyed or they're 23 returned to you. Why does that have to be? 24 MR. BROWDY: Well, they're destroyed when 25 they become obsolete, or they're warn or damaged, 26 they're returned. Well, I said they were returned in 27 rare circumstances. The ideal is that they're never 28 returned. That the hospital continues using them 41 1 until they can't be used anymore. 2 MS. HARKEY: Right. There's a certificate 3 of destruction that you require. What do you use 4 that for? 5 MR. BROWDY: That's if an instrument needs 6 to be destroyed because it's broken or damaged or 7 obsolete. The sales representative or the hospital 8 certifies to Zimmer that it was destroyed. 9 MS. HARKEY: And then what happens on your 10 end? How do you use that? Why do you have to have 11 that? 12 MR. BROWDY: It's just a record that the 13 instrument no longer exists. 14 MS. HARKEY: Well, do you take it off your 15 inventory, or what do you do? 16 MR. BROWDY: I don't know the answer to 17 that. I presume they remove it from their asset 18 list. 19 MS. HARKEY: Right. That's what I'm 20 thinking. 21 Okay. Then let me ask you, there is -- I've 22 got little charts here of what constitutes gifts and 23 what constitutes loans. And I know you're not 24 arguing gift. But there also is a gift subject to a 25 condition. 26 And section -- there's an annotation, 27 280.000, gifts, marketing aids, premiums and prizes, 28 regulation 1670, annotation 280.0670. That's the 42 1 annotation. 2 Gift versus loan. 3 A computer -- this is an example. 4 A computer manufacturing company transfers 5 personal computers to selected educational 6 institutions in the state. The recipient institution 7 is free to use the property as it sees fit. However, 8 the institution is under an obligation to return the 9 property to the manufacturer or destroy the property 10 if and when the property becomes obsolete. 11 The computers are shipped by the 12 manufacturer from a point outside the state, and 13 title of the computer passes to the educational 14 institution outside the state pursuant to the 15 agreement of terms. 16 So although this title doesn't transfer 17 because it has to be returned, it says the above 18 transaction is a gift subject to a condition and not 19 a mere loan. 20 The critical fact that although the 21 transferee may not alienate the property, the 22 transferee has no absolute duty to return it, but may 23 alternately destroy the property upon obsolescence. 24 If there was an absolute duty to return the 25 property, we would treat the transaction as a loan, 26 despite the title provision. Because an absolute 27 obligation to return the property would be incomplete 28 with a transfer of title. 43 1 And then there's a business taxes memo 2 that's actually dated from 1984 that says: 3 Memorandum, business taxes attorneys hearing 4 officers, from Gary J. Jugum. 5 Sale - return or destroy. 6 We recently received an inquiry from a 7 computer manufacturing, which is planning to transfer 8 personal property selected to educational 9 institution. 10 The question is, are these gifts or are 11 these loans? 12 If there is a gift, the manufacturer owes no 13 California use tax, because a gift occurs out of 14 state. 15 If there's a loan, then the manufacturer 16 owes the use tax because there is use in the state. 17 And I discussed this matter and concluded 18 there is a gift subject to a condition, and not a 19 mere loan. 20 The critical fact is although the transferee 21 may not alienate the property, the transferee has no 22 absolute duty to return the property, but may 23 alternately destroy the property upon obsolescence. 24 If there was an absolute duty, again, to 25 return the property, we would treat the transaction 26 as a loan, despite the title provision. Because 27 absolute obligation to return would be incompatible 28 with the transfer of a title. 44 1 So what I'm asking you, is it possible that 2 it's a gift with a condition? 3 Department, tell me why. 4 MR. HELLER: Because they expressly retained 5 title to the property. And in the annotation you're 6 referring to, they did not -- they actually expressly 7 transferred title out of state. So the annotation is 8 not applicable. 9 And even in the annotation, they were 10 suggesting that the retention of a right, an absolute 11 requirement to return the property, would even negate 12 the title clause. 13 In this case, we did have that. 14 Also in the agreement, the requirement to 15 return the property. So they both retain title and 16 required return. So it's just not applicable here. 17 And it -- 18 And, also, I did some research, and I really 19 could not find a single case that found a gift where 20 the -- quote, the person making the gift actually 21 retained express, written title to the property. And 22 I just don't believe there really is a case like 23 that. 24 MS. HARKEY: Well, I don't know. I'm 25 just -- you know, I was -- I was looking at this, and 26 we've done the analysis for a loan; we've done the 27 analysis for a gift. And I know that the -- 28 MS. STOWERS: Ms. Harkey. 45 1 MS. HARKEY: Yeah. 2 MS. STOWERS: What you're reading, it 3 implied that if it is a loan, it is subject to tax, 4 the use tax. That's what it said, right? 5 MS. HARKEY: That's -- that's what this 6 says. But I'm thinking that -- I mean, loans, 7 generally speaking, are subject to tax if the 8 claimant retained title. 9 But I'm -- because this is, you know, 10 it's -- it appears to be, to me, more of a gift with 11 a condition. Because it goes with the package. And 12 it either has to be destroyed, or it has to be 13 returned. And title does not pass. They keep it on 14 their balance sheet. They -- they depreciate it. 15 So I'm thinking it's more of a gift with a 16 condition. Because you can't just -- they don't just 17 give it away. 18 MS. MA: To anyone. 19 MS. HARKEY: To anyone. 20 MS. MA: Well, that's conditional volume 21 there. 22 MS. BITTICK: If I could address that. 23 MS. HARKEY: Sure. 24 MS. BITTICK: We -- we argued that it was a 25 gift for a long time, and encountered a great deal of 26 resistance to that from the Department. That was our 27 original basis. And we did site to the Yamaha case. 28 Which, in my opinion, clearly makes this stuff 46 1 exempt. 2 MS. HARKEY: Why don't you go into that? 3 Because I'm -- I'm -- you know, with the loan 4 situation, I think we're kind of caught in a box 5 here. 6 MS. BITTICK: Do you want to explain Yamaha? 7 MR. BROWDY: Well, we had also argued -- we 8 had argued initially, or I had argued all along that 9 it was a gift. And the Department's vigorous 10 opposition to that position was, "How can it be a 11 gift if you retained title to it?" 12 And so we responded that there is ample 13 authority in the law that you could make a gift of 14 the use of your property without trans -- without 15 giving ownership of the property away. You can make 16 a gift of the use. 17 I let somebody use my storefront for a Boy 18 Scout event. I make a gift of the use. There's 19 ample authority inside and outside of California that 20 one can make the gift of the mere use of property 21 without transferring title or ownership of that 22 property. 23 And the Department vigorously disagreed. So 24 we were -- this was consistent with our position. 25 MS. HARKEY: Well, I think the reason the 26 Department disagreed initially on the whole gift is 27 because, generally, a gift is withdrawn from 28 inventory and shipped via common carrier. And an 47 1 out-of-state gift is not taxable. 2 If it's shipped via common carrier, and you 3 still retain the inventory, then it's a gift when 4 removed and said to be taxable. 5 So that's why I'm seeing this as a little 6 bit of a mix here. 7 MR. BROWDY: I -- if -- I would just suggest 8 that whether you characterize it as a loan or a gift, 9 either one of those constitutes a use, right? 10 But either one of those, whether it's a gift 11 or a loan, which are uses, has to occur, quote, 12 within this state. 13 And our position is that whatever you call 14 it today, a gift or a loan, it did not occur within 15 this state. 16 MS. BITTICK: And that was the Yamaha case. 17 In Yamaha, as you know, Yamaha made the gift 18 of musical instruments. 19 The musical instruments left the state of 20 California, and Yamaha had no more control and right 21 over those instruments. 22 The state of California asserted that tax 23 was due on them, because the gift occurred in the 24 state. It was the gift that was the use. 25 MR. BROWDY: And -- and -- and the gift -- 26 the gift occurred in the state, because Yamaha made 27 delivery of the musical instruments when it placed 28 them with the common carrier. 48 1 So the Yamaha court said when you make 2 constructive delivery in this state to a common 3 carrier, you're using them in this state. 4 So what we have here is the reverse. We 5 have this delivery to the carrier takes place outside 6 the state. So whether it's a gift or a loan, either 7 way, the use does not occur within the state. 8 MS. HARKEY: Okay. 9 Would you opine on that? You're shaking 10 your head all over. And don't lose your marbles over 11 this. Just -- 12 MR. HELLER: Well, I don't know how -- well, 13 let me just start by responding that the taxpayer 14 conceded that it was not a gift during the appeal's 15 conference process. 16 They came in here this morning and conceded 17 that it was not a gift again. And said that they 18 conceded that Yamaha didn't apply, and that they 19 weren't going to discuss Yamaha. 20 So -- so -- so I still think they've 21 conceded, and I think that their concessions are 22 sufficient to establish that it's not a gift. 23 But in addition to that, you know, in 24 Yamaha, the taxpayer did not expressly retain title. 25 They literally were making a gift to give it to 26 someone else, and they delivered it to a shipper to 27 take to the donee. And there's nothing expressed 28 saying, "I retain title to that. The donee owes me 49 1 money if -- or are asked to return it," or "The donee 2 has to pay for it if it's damaged or broken." 3 There's nothing like that. This isn't a 4 gift. Yamaha doesn't apply to it. It doesn't -- 5 Yamaha doesn't address loans at all. It just simply 6 doesn't apply here at all. 7 MS. HARKEY: Okay. 8 Member Runner. 9 MR. RUNNER: Yeah. 10 You know, I appreciate the fact that 11 somebody may change their opinion in regards to how 12 they make their argument. And I would submit that at 13 times the Department does that, too, when indeed 14 you're going down a path and then all the sudden you 15 find resistance, and all the sudden we come up with 16 different arguments. Which is fine. I don't think 17 there's anything wrong with that. 18 And so as we're going in this discussion, I 19 don't think there's anything wrong with this 20 discovery for us to have a discussion about what is 21 the best and right path that makes sense. And that 22 makes sense in this process. 23 So I guess I'm not willing to say just 24 because they conceded at one time, as they're going 25 through the maze of their appeal, that somehow that's 26 not a relevant discussion for us to have here. 27 I guess I'd like to tease out a little bit 28 more on the gift issue. Because I'm one that has an 50 1 issue trying to define the loan aspect, too. And 2 maybe it's a unique issue. Maybe this is such a 3 unique issue that it fits -- it doesn't fit neatly 4 into either one of those -- those categories. 5 And, again, we've got a very unique 6 situation where we're dealing with instruments that 7 are used, what, for the surgical process that is -- 8 surgical process for a -- devices that are -- that 9 don't have tax attached to them, correct? 10 MS. BITTICK: Mm-hm. 11 MR. BROWDY: Correct. 12 MR. RUNNER: And so it becomes an 13 interesting discussion as we try to then work through 14 exactly how to -- how to find there. 15 Work with me, at this point, as to how it is 16 that -- when you said you -- great deal of resistance 17 to the issue of gift, which is, again, I think 18 everybody is trying to find their best path, what was 19 the resistance you felt, and why did you -- why did 20 you feel like you had to give up on that argument? 21 MR. BROWDY: The resistance was that as a 22 matter of law, one cannot make a gift of the use of 23 their property. You have to give away title and 24 ownership in order for there to be a gift. 25 And that is simply not the law. It's not 26 the law in California. It's not the law anywhere 27 else. 28 The Internal Revenue Code recognizes that 51 1 you can make a gift of property that you still own 2 and depreciate. So it is simply not the law that you 3 cannot make a gift of the use of your property. 4 We gave up on it for purposes of today 5 because the decision and recommendation was explicit 6 in that this is not a gift, it's a loan. 7 So -- but, again, to -- our stance all along 8 was that the law is clear, you can make a gift of the 9 use of your property without giving title or 10 ownership of the property. 11 MR. RUNNER: It's an aspect of control; is 12 that what you would argue? 13 MR. BROWDY: I'm sorry. I missed the first 14 part. 15 MR. RUNNER: You said, in some aspect, 16 because you are gifting your property -- 17 MR. BROWDY: It would be consistent with 18 this gift with a condition described in this -- 19 MR. RUNNER: Right. 20 MR. BROWDY: -- backup -- 21 MR. RUNNER: Right. 22 MR. BROWDY: Which was what we had tried to 23 rely on. 24 MR. RUNNER: So you still -- you still have 25 some kind of aspect of control in that process, the 26 condition. 27 MR. BROWDY: Correct. Which is why we say 28 whether you call it a gift or a loan, the operative 52 1 act here is the giving of possession. 2 MR. RUNNER: Mm-hm. 3 MR. BROWDY: And that took place outside the 4 state. 5 MR. RUNNER: Okay. Thank you. 6 MS. BITTICK: I did want to go back to one 7 question that you had, Chair Harkey. 8 Early on you were asking about the 9 certificate of destruction, and why did we need that. 10 Keep in mind, these are medical devices. 11 The knees and all are medical devices. The tools 12 that are used with them are similarly treated that 13 way. So they are numbered, they are tracked. And 14 the company does keep track of them for that purpose. 15 And so that is one reason that they want the 16 certificate back, so that they can account for what 17 happened to one of those instruments. 18 MS. HARKEY: I think -- I -- I'm still 19 toying with the title retention, and that, you know, 20 might still be a condition of the gift. There's no 21 cost for it. It's loaned, or gifted rather, I guess. 22 I don't know. It's -- this is tough. 23 MS. BITTICK: Well, when we looked at this 24 initially, I mean, we kind of honestly kind of looked 25 at it almost from basic first-year law school 26 property law. That, you know, you've got a bundle of 27 sticks. And you can give your complete legal title 28 to something, or you can break it up and give other 53 1 aspects of rights over that property. 2 And so, for us, we looked at this 3 instrument, and we said, "All right. They're giving 4 them the use of this property in the state of 5 California. They're -- they're making the gift 6 outside of the state." But is a gift of use? 7 To your question, Mr. Runner. 8 Earlier, the resistance on that was just a 9 lack of an ability to see that it was even possible 10 to break up the bundle in that manner. That you 11 could gift the use of something. 12 I'm from -- as you guys know, I'm not from 13 California. I'm from the South. And let me tell 14 you, they do use (inaudible) all the time where I'm 15 from. So the gifting of use or the providing of a 16 use of property is just -- is not that uncommon in 17 the law. 18 But that was our original problem that we 19 ran into with that was just having them be able to 20 understand and comprehend that you could do that. 21 MR. HORTON: Madam Chair, just a follow-up 22 question to that explanation. 23 MS. HARKEY: Sure. 24 MR. HORTON: Any -- any evidence of 25 relinquishing control over the property other than 26 use where the customer -- well, it's not in the 27 contract, though. Let me ask anyway. 28 Where the customer has the ability to 54 1 destroy the property without your permission? 2 MR. BROWDY: So if I understand the 3 question, can a purchaser of the implants destroy an 4 instrument without Zimmer's permission? 5 I believe so. I believe if they're broken 6 or damaged or become obsolete, and -- 7 MR. HORTON: Who makes that decision? 8 Damaged? Obsolete? 9 MR. BROWDY: It's my understanding that it's 10 made locally by the surgical team. 11 MR. HORTON: Zimmerman [sic] -- Zimmerman 12 doesn't play a role in that process? 13 MR. BROWDY: Zimmer does not. It's either 14 the surgeon by himself or herself, or in conjunction 15 with the sales representative, who is not a Zimmer 16 employee or agent. 17 But Zimmer, itself, doesn't go to the 18 thousands of hospitals nationwide and police the 19 condition of a given instrument. 20 MR. HORTON: Department, is that a condition 21 of the contract that the -- you're going like this 22 because -- 23 MR. HELLER: I'm just -- I'm sorry. I'm 24 trying to follow the question. Pardon me. I'm 25 sorry. 26 MR. HORTON: Oh. 27 Is it a condition of the contract that the 28 customer has control over the destruction of the 55 1 property; therefore -- control over the destruction 2 of the property? They can decide to destroy this 3 property, and Zimmerman has no right to -- to recoup 4 the cost if they destroy. 5 MR. HELLER: Well, my understanding was it 6 wasn't really -- the contract didn't really speak to, 7 like, affirmatively destroying things, is my 8 understanding. But it did say that basically the 9 customers accept the risk of loss for missing or 10 damaged equipment. And that they would -- if it's 11 somehow damaged, then they would have to pay for the 12 equipment. 13 MR. HORTON: They pay for the equipment. 14 MR. HELLER: But I don't think it was, like, 15 expressly set up so that the customer was -- you 16 know, it wasn't expressly set up for a customer to 17 decide, "I want to destroy something." It didn't 18 really address that, I don't think, as far as just an 19 item in the contract. 20 MR. HORTON: All right. Thank you. 21 MS. MA: So if someone buys one of your 22 knees or hip implants, can they use another equipment 23 that's out on the market? 24 MR. BROWDY: General -- no. They cannot be 25 safely or accurately installed using a competitor's 26 instrument. 27 MS. MA: So it's like an integral part of -- 28 MR. BROWDY: Correct. 56 1 MS. MA: And I see an exhibit where you 2 charge for the knee, you charge for the hips. And 3 then instrumentation it says, "no charge for standard 4 instrumenation." 5 MS. HARKEY: Because they want you to use 6 their instrument. 7 MS. MA: Well, of course they want you to 8 use their instrument. 9 MS. MA: To ensure that you're safe. 10 MR. BROWDY: It's not just that they want 11 you to use the instrument, you cannot install -- 12 there may be some rare exceptions where a 13 competitor's tool could be used for some. 14 MS. MA: Right. 15 MR. BROWDY: But for the, you know, 99.9 16 percent of the cases, a Zimmer hip, knee or shoulder, 17 elbow can be installed using only a Zimmer 18 instrument. 19 MS. MA: Right. 20 MR. BROWDY: That's the way implants are 21 engineered. 22 MS. MA: Right. 23 MR. BROWDY: And vice versa with a 24 competitor. It's the same. A competitor could not 25 use a Zimmer instrument to install their hip or 26 knee. 27 MS. MA: So it's a special instrument. It's 28 not just any instrument you can pull off the shelf. 57 1 MR. BROWDY: Correct. 2 MS. HARKEY: I would also offer that one of 3 the reasons probably for providing the instruments is 4 to ensure that the purchaser of the other items, 5 whatever replacement they are, uses Zimmer 6 instruments. Because if they don't, there could 7 probably be some failures, some lack of -- it 8 wouldn't work properly. It would not reflect well on 9 the company. 10 So it's probably a -- you know, almost a -- 11 almost a -- you'd be almost fearful if you didn't 12 supply the instruments with the appropriate device. 13 MR. BROWDY: Correct. 14 MS. HARKEY: Kind of an insurance. 15 Okay. Does anybody got anything else to 16 say? 17 MS. MA: So why wouldn't you just sell it to 18 them? Like, if it, you know, just -- a knee is this 19 price, hips are this price, the instrumentation is 20 this price? 21 I mean, is it because you don't want them to 22 split it up, or -- 23 MR. BROWDY: No. I don't -- I can't answer 24 that directly, because I don't know the answer. 25 I do know that it's -- that it's a -- it's 26 the practice within the industry. And that it 27 dates -- the reason -- I believe that historically, 28 going way back 30, 40 years ago, they used to sell 58 1 them. And I understand -- and I don't understand the 2 reason why at some point the industry practice 3 changed. 4 MS. MA: I guess people didn't want to buy 5 them. And then you're like, oh -- 6 MR. BROWDY: I would only be speculating. 7 MS. BITTICK: You know, it really goes back 8 to, like, I want to say the '80s when all of this 9 shifted. And so something occurred during that time. 10 We just don't know really what it was. 11 But it was enough that it caused the entire 12 industry to change how they were doing it, and not 13 just, you know, isolated companies. 14 MS. HARKEY: Usually what brings that change 15 about, I'm just opining, is liability. Something 16 happened somewhere. 17 MS. MA: Right. Health and safety or -- 18 MS. HARKEY: And they probably, somebody was 19 not using adequate or proper equipment with the -- 20 with the proper device. And they were maybe using 21 other equipment, something failed, something didn't 22 work. And there was litigation. 23 MR. BROWDY: Right. I said I didn't want to 24 speculate. But what -- what -- what I -- so I think 25 you're on the right path. I think that it had 26 something to do with some sort of federal law issue. 27 But it wasn't the tax. 28 MS. HARKEY: Wasn't the tax part. Okay. 59 1 MS. STOWERS: Can I ask a question? 2 MS. HARKEY: Sure. 3 MS. STOWERS: So I -- you're saying that 4 your instruments only -- Zimmer instruments only were 5 going to Zimmerman's [sic] implants. And there was 6 some kind of federal issue that required them to be 7 sold together, or provided together, you think. 8 Let me ask the Department. 9 If the implants cannot be used with -- 10 cannot work without the instruments, isn't that kind 11 of a connected type of a sale or -- no? Okay. 12 Department's shaking his head. 13 MR. TUCKER: In order for there to be a 14 sale, there would have to be a transfer of title. 15 MS. STOWERS: Okay. Back to the title. 16 MR. TUCKER: And that's the critical 17 element. 18 MS. STOWERS: There's no transfer of title. 19 Okay. 20 MS. HARKEY: But we would -- I'm going to 21 make a motion to conclude that the transactions 22 constitute a gift with a condition. 23 But we would need a 30/30/30 to establish 24 the amount subject to refunds for gifts made out of 25 state. 26 So it would not be -- to find that the 27 proper dollar amount. Because right now they're 28 asking for a total refund on loan. And this is a 60 1 gift with a condition. And we'd need to establish 2 the necessary amount subject to refunds for gifts 3 made out of state. 4 MS. MA: Why wouldn't it be the same amount? 5 MR. RUNNER: Why, when there's an amount 6 there? 7 MS. HARKEY: I'm not sure. 8 Ted? 9 MR. RUNNER: I was ready to make a motion 10 simply that it was a gift out of -- that it was a 11 gift out of state, wasn't a gift with condition. A 12 gift out of state. 13 MS. HARKEY: Maybe we can do that. But I 14 don't think it's the same amount of the refund. So 15 that's why I just, you know -- I don't know that's 16 100 percent refund here. 17 MR. BROWDY: If I may, Madam Chairwoman. 18 I believe it is the same amount. We're 19 talking about the same instruments. The only 20 difference is what we're -- how we're describing this 21 as a loan or a gift with conditions. 22 MR. TUCKER: I believe they have stated they 23 sent some of these to their representatives, or 24 agents in California. And that would be a big 25 distinction. 26 MS. HARKEY: Yeah. I mean, I think -- I 27 think there's -- 28 MR. RUNNER: Well, do we need to take that 61 1 back? Or can that be worked out? 2 MS. HARKEY: I think they can probably work 3 that out. But -- and it could be done prior to us 4 terminating our -- our appeal process. 5 Would you like it to come back? 6 MS. MA: No. 7 MS. STOWERS: If we -- 8 MS. HARKEY: No. 9 MS. STOWERS: If we have a second -- you 10 need a second so we can have a discussion. 11 MS. HARKEY: Sure. 12 MS. STOWERS: I'm not seconding it, 13 though. 14 MS. HARKEY: We have a second, right? We 15 have a second on this? 16 MS. RICHMOND: No, not yet. 17 MS. HARKEY: Okay. Let me just say, you 18 know, it's a gift -- I make the motion it's a gift 19 with a condition. 20 MR. RUNNER: Right. 21 MS. HARKEY: And to establish a amount 22 subject to refunds for gifts made out of state. 23 MR. RUNNER: I'll second that. 24 MS. HARKEY: Okay. 25 MS. STOWERS: So when you're saying it's a 26 condition, you're saying the condition is -- 27 MS. HARKEY: The condition is that they 28 either have -- they either have to return them, 62 1 destroy them. Most of them don't get returned or 2 destroyed, so they're probably never seen again. But 3 they -- 4 MS. STOWERS: So are you -- do you -- so 5 you're not concerned that title doesn't pass? 6 MS. HARKEY: No, I'm not. Because I think 7 it can be a condition of the gift, is that, you know, 8 they keep the depreciation part, and the title stays. 9 Because it's a gift of their personal property. 10 But it's not -- they're not giving it away 11 for good. They're making a gift, and it has a 12 condition. It can be -- it can be given away for 13 good. I mean, that is obvious if the property is 14 destroyed. But it doesn't have to be. 15 MS. STOWERS: Okay. Then I'm going to 16 object to that motion. Because under California 17 Civil Code 1146, 1148, you have to have a transfer of 18 title to have a gift. 19 MS. MA: Well, how about that -- that 20 issue. 21 MS. HARKEY: What do you think? 22 MS. MA: What is that issue that -- 23 MS. HARKEY: Well, the computer -- the 24 computer, they did -- they did pass -- they did pass 25 title on this computer. The gift of the use was a 26 condition that we retained title. I mean, I think 27 that could be a condition. And -- 28 MS. MA: They still retained title, right? 63 1 MS. HARKEY: They still retained title. 2 MS. MA: So that's similar to what you're 3 saying. 4 MS. HARKEY: Yeah. They retained title on 5 that. That's just part of the condition. 6 They're making a gift of these. I don't 7 think they ever expect to get them back. I think 8 they are required, almost -- or it's to their 9 advantage for litigation reasons, I believe, to 10 provide them, so that their property is -- is 11 implanted properly and cared for properly. 12 And you can't just throw any other machine, 13 or any other piece in there and know that it would 14 function, know that the joint would function 15 properly, or even be installed properly. 16 Because this meets everything. It meets 17 absolutely everything else. It's just -- it's almost 18 a perfect annotation. I think that one of the 19 conditions could be that they retain the title. 20 So is 1146 and 1148 ever violated, 21 Mr. Angeja? 22 MR. ANGEJA: What do you mean "is it 23 violated"? 24 MS. HARKEY: Well, Yvette's quoting 1146 and 25 1148 must have transfer of title -- 26 MR. HORTON: Delete the word violate. 27 MS. HARKEY: So is it ever violated? 28 MR. ANGEJA: It's a question of law, do you 64 1 have a gift or not? 2 MS. HARKEY: Right. 3 MR. ANGEJA: And if the law says you need to 4 transfer title in order to have a gift, and you keep 5 the title, then you haven't made a gift. 6 MS. HARKEY: I think you can make a gift 7 with a condition, though. And that's what I'm -- 8 that's what I'm asserting. 9 And I've -- we've -- I've seen this. I 10 mean, I'm reading it. I understand that in this 11 particular instance, a title -- so maybe it's not 12 perfect. But I think the annotation is pretty close. 13 But I don't think it is the same amount of a 14 tax refund. I think that's going to be a 15 calculation. 16 MR. HORTON: Since we are entertaining 17 these, the -- the sale of the exempt prosthetics, 18 what's the selling price without the equipment? Do 19 you ever -- strike that. 20 Do you ever sell the property without the 21 equipment? 22 MR. BROWDY: I think they can. I don't 23 think it occurs. 24 MR. HORTON: Never? 25 MR. BROWDY: It's not -- no, it doesn't 26 never occur. I don't think it occurs with any -- 27 it's not the regular practice. 28 MS. HARKEY: If it's gifted -- 65 1 MR. HORTON: Well, I mean, the fact that -- 2 is there -- is there -- is there a situation where -- 3 well, I don't want to ask hypotheticals. I apologize 4 for doing that. 5 When you do sell the property without the 6 equipment, is using $100 sales price before the 7 prosthetics -- without the equipment, what would the 8 prosthetics normally sell for? 9 MR. BROWDY: I -- I don't know the answer to 10 that. 11 MR. HORTON: All right. 12 MS. HARKEY: Well, there's a motion and a 13 second and an objection. 14 Do you want to call the roll? 15 MS. RICHMOND: Chairwoman Harkey. 16 MS. HARKEY: Aye. 17 MS. RICHMOND: Mr. Runner. 18 MR. RUNNER: Aye. 19 MS. RICHMOND: Mr. Horton. 20 MR. HORTON: I can't find -- no. 21 MS. RICHMOND: Ms. Ma. 22 MS. MA: Aye. 23 MS. RICHMOND: Ms. Stowers. 24 MS. STOWERS: No. 25 MS. RICHMOND: Motion carries. 26 MR. ANGEJA: So for clarification, when 27 you're talking about the ones that are inside and 28 outside, my understanding of the motion is that for 66 1 the ones that were shipped from outside the state, 2 those would be nontaxable and subject to refund. But 3 the ones that were delivered in state to the 4 representatives, those are taxable. 5 That's what I understood for the record. 6 MS. HARKEY: Correct. Because I think 7 there's two categories. 8 MR. RUNNER: I'm sorry. What was the -- 9 describe those categories again. 10 MS. HARKEY: It's if they're shipped outside 11 of California, which they're claiming, then -- 12 MR. RUNNER: Well, they're shipped 13 outside -- yeah, they're -- 14 MS. HARKEY: If they're shipped -- if 15 they're gifted outside of California -- 16 MR. RUNNER: Right. 17 MS. HARKEY: -- then they're not taxable. 18 If they're gifted in California, they are. Or not 19 gifted, but -- 20 MR. ANGEJA: All of them came from outside 21 the state. 22 MR. RUNNER: Right. 23 MS. HARKEY: All of them -- but if 24 they're -- if they're shipped to sales reps in 25 California. 26 MR. RUNNER: What about -- what's that mean? 27 MS. HARKEY: Well, they can be shipped all 28 around. But if they're shipped to sales reps in 67 1 California. 2 MR. HORTON: Members, not to interrupt you, 3 but -- 4 MR. RUNNER: Well, I'm trying to clarify the 5 motion here just to -- 6 MR. HORTON: Possibly what the motion is 7 concluding is that the activity in California was 8 a -- was a gift. And that the customer exercised a 9 level of ownership during the time that they 10 exercised control over it, irrespective of the title 11 clause by virtue that they had certain rights. I'm 12 not -- rights they exercise ownership. 13 Otherwise, the argument before us is a gift 14 occurred outside of California, not in California. 15 So I would sort of speculate, given the 16 intent of the Members, that that was the intent of 17 the motion. Which would mean that there is no 18 separation out of state/in state. All of these are 19 in California. And, therefore, all of them -- 20 MS. HARKEY: No. Just a second. I'm going 21 to need clarity on that. 22 MR. RUNNER: Well -- but that's why we had 23 the discussion about being the same amount. 24 MS. HARKEY: Right. Because I believe there 25 is a difference, and there's a breakdown. And if 26 you'll hold on a minute, I'll get exactly what that 27 is. 28 I need some help. My staff is sitting back 68 1 there, not responding. They're working. But -- 2 okay. 3 Okay. The instrument is shipped to the 4 reps, and then gifted inside California are taxable. 5 So that's what I have from Mr. Mathies. 6 MR. RUNNER: And what is that again? 7 MS. HARKEY: The instrument's shipped to the 8 reps and then gifted inside California are taxable. 9 And what is the difference, Mr. Mathies, 10 from the other ones? 11 MS. MA: That means the reps have to pay -- 12 MR. RUNNER: That means the rep -- that 13 doesn't -- I'm sorry, I misunderstood. I thought the 14 motion was -- I misunderstood. Maybe we could have 15 the motion read back to us. 16 Who had the motion? 17 MS. RICHMOND: Kathy, are you able to read 18 the motion back? 19 MS. SKIDGEL: It will take me a minute to 20 find it. Yeah. 21 MS. HARKEY: I'm sorry. I was -- I was 22 advised that if we did a gift with condition, we had 23 to split these up. And I'm trying to find exactly 24 what it is I'm splitting up. Because it's confusing 25 to me, too. 26 So give me -- 27 MR. HORTON: You can rescind it. 28 MS. HARKEY: We can rescind it. If I made 69 1 an error here, I'm happy to rescind it. I just 2 need -- just give me a minute here. Because I can 3 see Ted back there. He's trying to type something to 4 me to explain this to me. Because I understood at 5 the beginning that if I -- I wasn't planning on going 6 this way at all. But when I picked it up, I had 7 to -- I was advised that I had to make -- 8 MR. RUNNER: I -- I -- I did not mean to 9 support the idea that there would be a bifurcation. 10 MS. HARKEY: Well, that's why I made the 11 30/30/30 to begin with, because I don't think they're 12 all the same. But if -- I'll just -- 13 MR. HORTON: Members, either way, your legal 14 conclusion is the same. Mr. Runner's legal 15 conclusion is the same that title did transfer 16 temporarily. And either way -- and if that's the 17 conclusion, then a full amount would be refundable, 18 irrespective of -- 19 MS. HARKEY: Well, I'm sorry. I don't like 20 to be caught in a bind like this, but I want to be 21 sure I'm doing this properly. 22 MS. BITTICK: Could -- I don't want to speak 23 out of turn, but I -- I just -- and I know at what 24 point you're at in the process, it may not be 25 appropriate for me to say anything. I just wanted to 26 clarify one thing. 27 MR. HORTON: Members, why don't we rescind 28 the motion and open it back up? 70 1 MS. HARKEY: Okay. Let me rescind the 2 motion, and let's start this again when I have full 3 information. 4 MR. HORTON: There's a second to the 5 rescinding of the motion, Mr. Runner? 6 MR. RUNNER: Yeah. And I'd like to hear 7 from -- 8 MR. HORTON: I'm presuming, without 9 objection, the motion is hereby rescinded. The item 10 is back up for discussion. 11 MS. BITTICK: Thank you. 12 I just want to make a point about the sales 13 representatives. Because the gift is occurring 14 outside of the state, either in Indiana or 15 Mississippi. 16 When the goods arrived, when these 17 instruments arrived to the sales representatives, 18 these sales representatives have no power to make a 19 gift. They have no power to give these instruments. 20 They're sales reps. They're just going to deliver 21 them. 22 And they don't work for Zimmer. They may 23 represent a half dozen different medical supply 24 companies. They have no loyalty to Zimmer. They're 25 not a Zimmer employee. They're not an associate of 26 Zimmer. They just draw commissions by selling Zimmer 27 products. So they don't have any power to make a 28 gift within the state. 71 1 So I just wanted to clarify that if it's 2 going to turn on, "Well, gee, it was delivered to a 3 sales rep." Because nothing is happening there at 4 that point from the standpoint of making a gift. 5 MS. HARKEY: Okay. Are there instruments 6 shipped via common carrier direct to hospitals? 7 MR. BROWDY: Yes. 8 MS. HARKEY: Okay. And are those gifted out 9 of state at the time of shipment? 10 MR. BROWDY: Yes. 11 MS. BITTICK: Yes. 12 MS. HARKEY: So those would be exempt. 13 MS. MA: Well, under our motion -- 14 MS. HARKEY: Those would -- those are the 15 ones that are exempt under the motion that I had 16 originally made. 17 It's the instruments shipped via common 18 carrier direct to hospitals. They're different. Out 19 of state, at the time of shipment, would be exempt. 20 The ones that go to the reps are not. 21 MR. RUNNER: What's the distinction in your 22 opinion? 23 MS. HARKEY: The distinction is that it's 24 shipped to the sales reps are still in inventory. If 25 so, they're gifted in the state. 26 MR. ANGEJA: If I might clarify. 27 MS. HARKEY: That's what I'm being told. 28 That's the law that I'm being cited here. 72 1 MR. ANGEJA: The reps are enough to give a 2 use tax collection obligation under Section 6203, 3 because they are an authorized -- they're an 4 authorized agent, representative, or independent 5 contractor. 6 MR. HORTON: Excuse me. The taxpayer has 7 clearly argued that these are not their 8 representatives. They have no authority. They can't 9 transact the business. They are independent 10 contractors representing themselves, negotiating with 11 a hospital. 12 I mean, I'm not stating a fact. I'm just 13 restating the testimony, which I think should be part 14 of the record. Even though I didn't necessarily -- 15 MR. BROWDY: And I would add, whether the 16 independent sales representatives activities are 17 sufficient to create nexus for the out of state, 18 Zimmer is totally unrelated to the question whether 19 Zimmer itself uses the instruments in the state. 20 MS. HARKEY: Okay. Well, the sales rep 21 agreement requires the reps to hold -- 22 MR. HORTON: Yes, it is. But -- 23 MS. HARKEY: -- them in inventory. Requires 24 to hold inventory. And that's in the agreement. 25 And so that's why I'm saying there are two 26 here. There's two -- there's two different types. 27 Some of them get shipped directly to the hospitals. 28 And those could be gifted in the state. 73 1 The ones that go to the reps are required to 2 be held in inventory. You hold them in inventory. 3 And those are -- those, to me, are where the line is 4 drawn. 5 So that was the motion I was making. That's 6 the law that I'm reciting. 7 MR. RUNNER: But this is a case about 8 Zimmer. 9 MR. BROWDY: It's the sales representative 10 who holds it in inventory, not Zimmer. 11 MR. RUNNER: Right. This is a case about 12 Zimmer. So it's not -- 13 MS. HARKEY: Right. But Zimmer retains 14 title to the property. So it's, you know -- it's a 15 circular thing. 16 MR. HORTON: Madam Chair, may I ask a 17 question? 18 MS. HARKEY: Sure. 19 MR. HORTON: Under the argument that the 20 property is -- title and possession is transferred 21 outside of the state of California, and that the 22 property never returns to California, because more 23 often than not the consumer destroys the property -- 24 I mean, never returns to, in the end, because the 25 consumer destroys the property. And presumably in 26 destroying the property, they've rebutted this title 27 issue. Because they're exercising significant 28 control over the property. 74 1 Not only are they -- by having the ability 2 to destroy your property without your option and 3 without your recouping the cost. 4 I'm presuming that's the basis of the -- of 5 the motion. Which, I mean, if the -- that was 6 testimony, I might change my -- 7 MS. HARKEY: Well, I will support another 8 motion. 9 MR. RUNNER: Well, you know, I'll make a 10 motion. That is that we see these as gifts with 11 condition that were made outside -- outside of 12 California. 13 MS. HARKEY: Is there a second? 14 MS. MA: Second. 15 MS. STOWERS: Objection. 16 MS. HARKEY: Objection. 17 Please call the roll. 18 MS. RICHMOND: Chairwoman Harkey. 19 MS. HARKEY: Aye. 20 MS. RICHMOND: Mr. Runner. 21 MR. RUNNER: Aye. 22 MS. RICHMOND: Mr. Horton. 23 MR. HORTON: Members, I'm going to abstain. 24 Because the facts just aren't clear in this case. 25 And I don't want to add more breeze to this. 26 MS. RICHMOND: Ms. Ma. 27 MS. MA: Aye. 28 MS. RICHMOND: Ms. Stowers. 75 1 MS. STOWERS: No. 2 MS. RICHMOND: Motion carries. 3 MS. HARKEY: Thank you. 4 MS. BITTICK: Thank you. 5 MR. BROWDY: Thank you. 6 MS. HARKEY: Let's take five minutes. 7 ---oOo--- 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 76 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 March 27, 2019 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 76 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: May 21, 2019 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 77