1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 9 REPORTER'S TRANSCRIPT 10 DECEMBER 12, 2017 11 (Prepared from audio recording) 12 13 14 15 SALES AND USE TAX APPEAL HEARING 16 APPEAL OF 17 GOURMET 88 MANAGEMENT, INC. 18 NO. 850780, 870558, 907579, 908779 19 AGAINST PROPOSED ASSESSMENT OF 20 SALES AND USE TAX 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 Franchise Tax Board: Robert Tucker, Tax Counsel Kevin Hanks, Tax Counsel 15 For Appellants: Marc Brandeis, 16 Representative Greg Reynolds, 17 Representative 18 19 ---oOo--- 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 12, 2017 4 ---oOo--- 5 MS. RICHMOND: Our next item is Item 6 C9, Gourmet 88 Management, Inc., please come 7 forward. 8 MS. HARKEY: Okay. Thank you. 9 Will you please introduce the items of this 10 appeal? 11 MR. ANGEJA: Madam Chair and Members, the 12 appeal before you involves one unresolved issue, 13 which is whether petitioner is the retailer of food 14 sold to customers using online food ordering and food 15 delivery services. 16 MS. HARKEY: Thank you. 17 To the appellant, you have ten minutes, and 18 then the Department will have ten minutes, and then 19 you'll have five minutes on rebuttal. 20 So please introduce yourself for the record, 21 and you may begin. 22 MR. BRANDEIS: Madam Chair, my name is 23 Marc Brandeis, CPA, representative for petitioner. 24 MR. REYNOLDS: Madam Chair, my name is 25 Greg Reynolds, CPA, also representative for the 26 petitioner. 27 MS. HARKEY: Thank you. 28 MR. BRANDEIS: What we intend to show is 3 1 that in this case the Department really has not 2 performed a sales and use tax audit. Instead, the 3 Department has chosen to use what we call the 4 smokeout method or assessing liability. 5 The taxpayer received a B&R request, books 6 and records request, dated May 2nd, 2014. And we 7 provided the books and records listed in that request 8 via e-mail on November 8th, 2014, and provided 9 federal income tax returns for 2011, 2012, 2013. We 10 provided POS data for the audit period. We provided 11 POS data ratio analysis for the audit period. 12 In a subsequent pleading with the auditor, 13 after the case was transferred from the Glendale 14 office to the Irvine office, we provided bank 15 statements for the audit period, we provided credit 16 card statements, we provided purchase invoices for 17 2012, and we also provided 1099-K data. 18 In short, we complied with the law. The law 19 requires taxpayers to maintain adequate books and 20 records. And upon request by the Board under Revenue 21 and Taxation Code Section 7054, the law requires that 22 we turn over that information to the Board. 23 The Department essentially refused to look 24 at the data, to look at what we had given them, and 25 instead chose to base the audit on a -- impeach the 26 records and base the audit on an assumption that 27 50 percent of all transactions are credit card 28 transactions. They made a calculation that didn't 4 1 even account for tips in the credit card transactions 2 and assessed the liability. This is just as a 3 smokeout method. This isn't an audit. It's a 4 smokeout. 5 We did, however, perform at least two 6 observation tests with the Department. We did one on 7 May 12, 2015, and we did a second one to -- a month 8 later on June 12, 2015. One was a Tuesday, one was a 9 Friday. 10 The results of those tests materially 11 confirmed the POS data that we provided to the 12 Department. The Department, however, refused to 13 accept them. We ended up in a formal appeal. We 14 appeared before the appeal's conference -- at an 15 appeal's conference before the Appeals Division. 16 The Appeals Division auditor resoundingly 17 objected the Department's approach. And instead 18 based the audit on those two days observation test, 19 which really results in a small assessment. About 90 20 percent of the Board's assessment went away, 21 including the negligence penalty. 22 It was at that hearing that the Department 23 then raised the issue that there were undercover 24 purchases made, and that some cash transactions 25 didn't show up in the POS data. We said, "Well, how 26 many?" This was the first we've heard it. We said, 27 "How many undercover purchases did you make?" They 28 refused to tell us. 5 1 They gave us copies of the seven 2 transactions that they claimed didn't appear. And 3 based on our analysis, two did appear in the data, 4 five didn't. 5 We approached our client as to why this -- 6 any cash transactions wouldn't appear in the data. 7 They don't know why themselves. We have only a 8 theory that -- again, like any business, the owners 9 can't be there all the time. They have to give 10 management function over the POS system to certain 11 employees while they're away. And it is possible 12 that those employees did reverse some cash 13 transactions. 14 The question then becomes, how material is 15 it? And we would say that based on the observation 16 test performed, it isn't very material. Just looking 17 at what they did, it's about an 80/20 ratio between 18 credit card transactions, 80 percent being credit 19 card and 20 percent being cash. 20 We have lots of restaurant clients, and many 21 of our restaurant clients, if we put them on a graph 22 and did a central limit theorem, the average is about 23 80/20 between credit card and cash transactions for 24 your average sit-down restaurant where you have 25 waiters and waitresses and tips. 26 The mark up on this case is reasonable. 27 Approximately 130 percent mark up overall. The 28 FITR's reconcile, the POS data reconciles, but yet 6 1 the Department refused to accept. And then shortly 2 before, literally a month ago, we got another e-mail 3 from the Department. They got together with the 4 Appeals Division and with headquarters -- BOE 5 Headquarters Operations and chose another approach 6 unbeknownst to us. They just sort of dropped it on 7 us last month. And are now basing the audit on a 8 270-some percent mark up. It's based on some polling 9 that they did of other Chinese-type restaurants in 10 the area. Which, of course, we can't see the data 11 they're looking at, and we have no ability to know 12 whether even that's accurate. 13 We have lots of Chinese restaurants as 14 clients, and I would say that that average is pretty 15 high, and not indicative of what we -- we typically 16 see. 17 At any rate, we -- again, they contend the 18 Board really hasn't done an audit. This is one 19 smokeout after another smokeout. 20 I'm going to give the balance of my time to 21 Mr. Reynolds to deal with the other issue in this 22 case, which is the online sales of food. 23 MR. REYNOLDS: This issue is relatively 24 minor from a materiality standpoint. It's about 25 29,000 measurements resulting in $3,000 in tax. 26 The taxpayer had reported this as taxable, 27 and then realized they were actually resale sales, 28 and filed a claim for refund on these transactions. 7 1 So the petitioner maintains that the sales 2 made through the online ordering services are sales 3 for resale. And that the online ordering service 4 providers are actually the retailers. That's the 5 issue here. 6 So we claim that GrubHub and Eat24, who are 7 these retailers, are actually the retailers, and the 8 petitioner, Gourmet 88, is actually making resale 9 sales. 10 So the online ordering service providers, 11 they have a Web site, and you go into that Web site 12 and you visit it, and you select a restaurant. You 13 figure out where you're going to live. You put in 14 your various locations, and then you make an order, 15 you make a sale -- you make a purchase, I mean. 16 Okay? 17 So the company is then providing you food. 18 And we're maintaining that's a sale of tangible 19 personal property under Revenue Taxation Code 6006. 20 They're holding themselves out as retailers. 21 So this process is really exactly like any 22 other time you go on a Web site and order some 23 property, like Amazon. It's no different. You put 24 in the information, you buy what you want, and you 25 order it. 26 We want to make an analogy to say something 27 like a furniture retailer. If you went to a 28 furniture retailer onsite, you would go, and you 8 1 would pick out a furniture item that you want, like a 2 desk. You would maybe pick the manufacturer you 3 want, kind of similar to the restaurant situation, 4 and you would order it. And you would pay the tax, 5 and you would pay directly to that particular party 6 the transaction. Okay? 7 And these guys aren't going to carry any 8 inventory, and you're basically going to place the 9 order with them. So that's exactly what's going on. 10 What we're doing here with Eat24 and GrubHub 11 is no different than when you go to any other, 12 Amazon, or one of these Web sites. So it looks 13 exactly the same. 14 So the furniture company would be considered 15 a retailer to audits like this all the time. And so 16 why is it that they're not considered a retailer when 17 we have Eat24 and GrubHub now selling food? What's 18 the difference? 19 Well, what's happening here is the 20 Department's coming and saying, "Oh, you know what we 21 have here? We have an agency relationship going on." 22 All these other transactions you see with these other 23 retailers, those are retailers. But in this 24 particular situation with food, now all the sudden we 25 have an agency relationship. 26 And they're going to go back and site some 27 agency claims that they have in the contracts, and 28 I'm going to address those real quick. Okay? 9 1 So we maintain that the argument in position 2 presented by the Department concerning an agency 3 relationship is really irrelevant here in this case. 4 There's no clear indication on either Eat24 or 5 GrubHub's food-ordering Web site, that there's any 6 relationship between -- as an agent between the 7 restaurant and these Web sites. Okay? 8 So it appears when you go to these Web sites 9 that you're buying the food from Eat24 or GrubHub. 10 You can go and pick the restaurants you want, just 11 like you would in this furniture store thing. But 12 you pay for it, you order it, and you do everything 13 on the Web site with Eat24 and GrubHub just like any 14 other web. 15 But the Department's going to claim that 16 there's a contract between Gourmet 88 or the 17 restaurant and Eat24 that establishes an agency 18 relationship. When you look through the 836 as well 19 as the original D&R, that's what they're claiming. 20 Okay? 21 So what's the agreement between Eat24 and 22 the petitioners state? It states that Eat24 may 23 charge and collect tax from the customer as an agent 24 on behalf of the restaurant. And the only place in 25 the contract at all where it even mentions the word 26 agency is when it talks about sales tax. And you 27 really can't reassign sales tax liability. 28 There's a case, Meyer v. SBOE that basically 10 1 says who a retailer is. Okay? And what it says 2 there, in essence, is the person who receives a PO 3 from a customer, and who then places his own PO with 4 the supplier and requires the supplier to ship 5 directly to the customer, is the retailer. And 6 that's kind of what we have here. We have a Meyer 7 situation where something's being ordered, that order 8 is being sent to the restaurant, the restaurant then 9 makes -- kind of builds the property and delivers it 10 to the customer pursuant to the sales transaction 11 that was entered into by the onsite delivery system 12 and retailer. 13 So the agreement states the petitioner 14 restaurant is responsible to prepare meals to the 15 orders, and they did that. It's our position the 16 requirement to prepare the meals for the orders for 17 Eat24 and GrubHub does not establish an agency 18 relationship. We maintain the petitioner prepared 19 the meals ordered through the Eat24 and GrubHub 20 systems and sold the meals to them for resale, then 21 Eat24 and GrubHub made retail sales to the customer. 22 MS. RICHMOND: Time's expired. 23 MS. HARKEY: Thank you. 24 To the Department, you have ten minutes. 25 Please introduce yourself for the record. 26 MR. TUCKER: Thank you. I'm Robert Tucker 27 with Mr. Kevin Hanks, and we're here on behalf of the 28 California Department of Tax and Fee Administration. 11 1 Before I begin, I wish to note the following 2 objections. 3 This matter still lacks crucial facts that 4 are necessary for the Board Members to decide this 5 case. Without the additional information, there is a 6 significant risk that the parties due process will be 7 violated, because there is an insufficient record 8 upon which the Members could arrive at a legal 9 conclusion for this matter. 10 Therefore, this -- by hearing this matter, 11 it could result in unnecessary expenses for the 12 petitioner. 13 This matter is not right to be scheduled for 14 Board consideration. Specifically, this matter was 15 deferred to the district office for further 16 adjustments and examination. However, those 17 adjustments are not yet fully reviewed, and 18 accordingly, not yet complete. Since they're not 19 complete, this matter is not yet ready for hearing. 20 Finally, the notice of Board Hearing was not 21 mailed at least 75 days in advance of the scheduled 22 hearing date of December 12, 2017, and, therefore, 23 was not timely provided pursuant to Section 5522.6 of 24 the Rules for Tax Appeals. 25 Subdivision D of Section 5522.6, the Rules 26 for Tax Appeals provides a waiver of the 75-day 27 notice period when it's agreed upon by all parties 28 and Chief Counsel. 12 1 However, on October 13th, the Department -- 2 the California Department of Tax and Fee 3 Administration, a party to this hearing, expressly 4 refused to waive the 75-day notice period, and 5 continues to expressly -- continues to refuse to 6 waive the 75-day notice period for the reasons noted 7 above. 8 Accordingly, this matter was not handled in 9 accordance with your own regulations. 10 As to the merits of this matter, petitioners 11 operated a restaurant specializing in Chinese-style 12 cuisine with sales of beer and wine since October of 13 2006. 14 For the audit, petitioner provided federal 15 income tax returns for 2011, 2012, and 2013, sales 16 data from its point of sale system, and purchase 17 orders -- or purchase invoices for 2012. 18 The BTFD found that reported gross receipts 19 from petitioner's federal income tax returns were 20 materially consistent with petitioner's reported 21 sales. BTFD reduced the cost of goods reported on 22 petitioner's FITR by 2 percent for self-consumption 23 and 2 percent for spoilage, and then compared the 24 adjusted cost of goods sold to the corresponding 25 gross receipt book markups of 148.5 percent, 142.54 26 percent, and 140.74 percent for the years 2011, 2012, 27 and 2013 respectively. 28 Since BTFD expected book markups of 180 13 1 percent or more, based on its experience audit in 2 similar restaurants in the area, it decided that 3 further investigation was warranted. 4 However, as explained previously, this is 5 not yet complete, and the final results are not yet 6 known. 7 On July 30th, 2015, after notices of 8 determination were issued, petitioner filed a claim 9 for refund alleging it had unclaimed sales for 10 resale. In the claim for refund, petitioner asserts 11 incorrectly reported sales of food ordered online 12 through Eat24 and GrubHub Web sites was taxable sales 13 for the period July 1st, 2011 through June 30th, 14 2014. 15 Petitioner argues that measures of tax 16 should be further reduced to account for sales that 17 were allegedly not made by the petitioner. However, 18 petitioner has not specified the amount of the 19 adjustment it seeks. 20 The BTFD found that the online ordering 21 services acted as petitioner's agents by coordinating 22 online food orders for petitioner and providing a 23 delivery service. Thus, the BTFD concluded that 24 petitioner, not the online ordering services, was the 25 retailer for the food it sold and liable for the tax 26 on those sales. 27 Written agreements between the petitioner 28 and Eat24 state petitioner is responsible for food 14 1 quality in preparation and accordance with 2 regulations, and also is responsible for notifying 3 Eat24 of any changes to its menu. 4 Also, the agreement states any disputes 5 between petitioner and its customers are to be 6 handled by the petitioner. 7 It is clear that Eat24 did not have any 8 control over petitioner's business operations, and 9 that Eat24's duties were limited to delivering food 10 and collecting payments on behalf of petitioner and 11 in accordance with the express terms of the 12 agreement. 13 Regarding sales tax, the agreement clearly 14 states that Eat24 may collect taxes as a convenience 15 for petitioner and as an agent for petitioner, but it 16 is petitioner's responsibility to verify the amounts 17 collected, file the appropriate tax returns, and 18 remit the proper amount to the appropriate taxing 19 authorities. 20 Based on the agreement, it's clear that, 21 although Eat24 may collect sales tax reimbursement 22 from the customer, it does so as an agent for 23 petitioner, and remits the collected amount to the 24 petitioner. It is then petitioner's responsibility 25 to report taxable sales and remit the sales tax to 26 the Board, or in this case the CDTFA. 27 Agreement between petitioner GrubHub states 28 that petitioner is responsible for fulfilling orders 15 1 and charging a fair price. Additionally, petitioner 2 is to use its best efforts in processing, preparing, 3 and delivering food ordered through the online 4 system. 5 Since the agreement specifies that 6 petitioner sets its own prices, decides which food 7 items to place on the menu, and handles the logistics 8 of online orders, it is clear GrubHub has no control 9 over petitioner's business operations, and is merely 10 a conduit for petitioner's customers to place their 11 orders online. Accordingly, we find GrubHub was also 12 acting as an agent for petitioner. 13 On Eat24's Web site there's a statement the 14 Web site allows consumers to order their food from 15 their favorite restaurants. On GrubHub's Web site 16 there's a statement that ordering from your favorite 17 restaurants is easier than eating. 18 We find these statements make it clear that 19 the online ordering services are not retailers for 20 the food, but are merely a platform for the customers 21 to order food from the restaurants. 22 The fact that online ordering services take 23 orders and collect payments supports the notion that 24 these online ordering services are agents for 25 petitioner. Moreover, we note that these 26 circumstances are very familiar to the circumstance 27 addressed in the Board's memorandum opinion of 28 Mark Pulvers adopted in 1994. 16 1 In Pulvers, the taxpayer advertised 2 themselves as providing a pick-up and delivery 3 service on behalf of restaurants. The Board found 4 the taxpayer was the agent of the restaurants 5 because, as is the case here, there were preexisting 6 agreements between the taxpayer and the restaurants 7 that set forth the duties and obligations of the 8 parties involved. Thus, the Board concluded that the 9 advertisements and preexisting agreements between the 10 taxpayer and the principals, in that case, the 11 restaurants, made it sufficiently apparent that the 12 third parties, those ordering the food, that the 13 taxpayer was merely delivering food rather than 14 reselling it. 15 Accordingly, we conclude that Eat24 and 16 GrubHub acted as agents for the petitioner, with the 17 petitioner being the retailer of the food and 18 responsible for the tax associated with the sale at 19 issue. 20 Accordingly, we request the Board adopt the 21 recommendation of the Appeals Bureau. 22 MS. HARKEY: Thank you. 23 You have five minutes on rebuttal. 24 MR. REYNOLDS: I'm gonna respond to these 25 things. Everything that was basically said there is 26 outlined in the original D&R that was done by Angela 27 Moffyback (phonetic). And so pretty much everything 28 there is all done. 17 1 As stated, the Department is arguing saying 2 that there's this agency relationship, and they site 3 this Mark Pulvers memorandum from 1994. And that 4 opinion was concluded in the agency relationship 5 existed between the parties responsible delivering 6 food. And although the agreements did not specify 7 there was an agency relationship, the conclusion was 8 that advertising made it sufficiently apparent that 9 there was an agency relationship. 10 We don't have copies of that advertising, 11 but the current procedures in ordering food online is 12 completely different than what happened in the 13 Mark Pulver's case. That was back in '94. 14 MR. BRANDEIS: I would add that Mark 15 Pulvers, back in '94, is really a pre-Internet 16 decision. The Internet, modern Internet as we know 17 it, really didn't begin to emerge until 1995. So 18 this is a decision -- and I want to stress, it's a 19 memorandum opinion. It's just that. It's an 20 opinion. It's not law. 21 And I don't even -- because we don't have 22 full information on what these adverts look like, and 23 exactly who the customer believed they were 24 contracting with, it isn't clear that that opinion is 25 correct. But it is just that, it is an opinion. It 26 is not law. 27 MR. REYNOLDS: It's also clearly stated in 28 the tax guide in Dining and Beverage Industry on page 18 1 20, which is pulmugated documentation created by the 2 agency. And it says, if written agreements between 3 the restaurant and the online ordering services 4 provider does not establish an agency relationship 5 -- and that's not necessarily saying that you're an 6 agent to collect money by sales tax. You can't shift 7 that burden -- then those parties -- those providers 8 would be considered retailers who are required to 9 hold sellers permits and is liable for the sales and 10 meals to the online ordering services. 11 This is not read long, but is pulmugated in 12 the documentation and the things issued by the Board, 13 and now of course the Department. 14 Additionally, restaurants are instructed 15 that when they contract with online ordering service 16 providers to take a customer's order, receive payment 17 and deliver the meal, which is exactly what they do, 18 it is important to prepare a written agreement 19 between you and the online ordering service provider, 20 which adequately describes the responsibilities of 21 the partner involved, and it should make clear 22 whether an agency relationship exists. That 23 language, agency relationship, is in the dining 24 guide. 25 Ordering and delivering a meal, online 26 services, purchasing the meals for resale, if the 27 agency relationship is not clearly established, the 28 default in the ordering service provider is they're 19 1 the retailer. Just like any other online ordering 2 kind of thing where you buy something from an online 3 retailer. They're always retailers. 4 We maintain that the contracts with Eat24 5 and GrubHub have not clearly established an 6 unequivocal agency relationship. They talk about 7 there's a price establish by the restaurant. Well, 8 that's like an MSRP, a manufacturer's selling price. 9 What the agreement really says is that there shall 10 not be a price set by the restaurant that's less than 11 or different than what's on the ordering site. It 12 doesn't say they're required to prepare the price and 13 send it to the agency as an exclusive sort of agency 14 relationship situation. 15 So, again, we're maintaining that if you 16 look at the Meyer case, where in essence they were 17 just delivering the property, and they're acting sort 18 of as the retailer, the Eat24 and GrubHub acts as the 19 retailer, and the Gourmet 88 is reselling to them. 20 MR. BRANDEIS: In short, what the Department 21 is allowing is they're allowing somebody to shift 22 their liability as a retailer to somebody else. And 23 that's not permitted under the law. 24 Basically what auditors look at in general 25 is how somebody holds themselves out to the public. 26 If you're holding yourself out to the public as a 27 retailer, then you're retailer. I mean, if you've 28 got a Web site that says, "I sell furniture," or a 20 1 Web site that says, "I sell food," and the public has 2 no reasonable basis to believe that they're dealing 3 with some other party, that they're dealing with you, 4 then you're a retailer. You're holding yourself out 5 to the public as somebody who's making a sale of 6 tangible personal property. 7 In this case, the online sellers, you go to 8 their Web site, you place the order with them, they 9 collect the money, they collect the tax, they arrange 10 for the delivery. And if there's a problem with the 11 order -- all the restaurant orders will tell you. We 12 have many clients that have relationships with these 13 online food ordering companies. If there's a problem 14 with the order and you want your money back, you have 15 to go back to the online ordering service and get 16 your money back from them. Why? Because they took 17 the money. 18 Not to mention, they're taking a cut of the 19 sale. call it a markup, call it a commission, 20 whatever you want to call it, but they're taking a 21 portion of the sale. 22 And so in order for the restaurant owner to 23 not be charged for sale that then was unwound, the 24 refund of that order has to go through the online 25 ordering service. This is not merely an agent, this 26 is somebody that's holding themselves out as a 27 retailer. This is somebody who's acting in every 28 single capacity as a retailer. And if this were 21 1 furniture instead of food, I seriously doubt we would 2 be having this conversation. The only difference 3 here is that this is food. 4 If you look at Revenue and Taxation Code 5 Section 6015, which defines the retailer, there's a 6 court case Meyer vs. The State Board of Equalization. 7 And what that says, and I'm reading right off the 8 Board's Web site, persons who receive purchase orders 9 from consumers, and then places his own purchase 10 order with the supplier, and requires supplier to 11 ship directly to consumer, is a retailer and not a 12 broker, where there's no contract between supplier 13 and consumer. 14 There is no contract -- there is no contract 15 between the consumer and the restaurant. The 16 contract is between the consumer and GrubHub or 17 Eat24, the online retailer. If they're unhappy with 18 the order, they have to contact the online retailer. 19 There is absolutely no contract between the consumer 20 and the physical restaurant themselves. 21 MS. RICHMOND: Time's expired. 22 MS. HARKEY: Thank you. 23 I -- just before we begin, I just have a 24 copy of a Eat24 contract here. It's Exhibit 2, 25 page 3 of 9. And I think this might be it. It says, 26 taxes, restaurant is and will be responsible for all 27 taxes, payments, fees, and any other liabilities 28 associated with computation, payment, and collection 22 1 of cash in connection with customer orders and the 2 restaurant's use of the Web site Eat24 services. 3 Eat24 may charge and collect sales tax from customers 4 as an agent on behalf of the restaurant in accordance 5 with instruction provided by the restaurant or 6 applicable law, in which case Eat24 will collect such 7 sales tax solely as an agent on behalf of the 8 restaurant, and shall pay such amount collected to 9 the restaurant -- the restaurant shall be solely 10 responsible verifying amounts collected, filing the 11 appropriate tax returns, and remitting proper amount 12 to the appropriate taxing authorities. 13 Sales tax shall include any sales, use, 14 privilege, gross receipts, restaurant excise or any 15 other tax due in relation to the food and beverage, 16 including pick up and delivery services if applicable 17 by the restaurant. 18 So, Members, are there any questions? 19 Yes. 20 MS. STOWERS: Just for the record, the 21 Department referenced the 75-day notice issue. 22 Chief Counsel, come on down. 23 MS. HARKEY: I did not track this case, so 24 I'm -- I was -- I was -- I was involved, I think, on 25 the First American, because that was an ongoing 26 dispute. Not this one. 27 Thank you. 28 MS. STOWERS: Chief Counsel, can you speak 23 1 to this rule again? And were you made aware of the 2 Department's concerns with the 75-day notice if this 3 was not met? 4 MR. NANJO: Yes, I was -- this, timing-wise, 5 is pretty much identical to the other case we have, 6 First American, including the date the notice went 7 out and including the date of the Department or 8 CDTFA's objection to us. So it's in a similar 9 situation. 10 The difference here is this does not have 11 quite as long of a history as First American did. My 12 understanding was Sales and Use Tax Division 13 requested a first deferral in April, I think it was 14 April 26th of 2017. So this does not have as long of 15 a history. But timing-wise, it's the same issue. 16 And, again, in this case it's my 17 understanding that the taxpayer's representatives 18 also were aware of it and also requested that this 19 matter be put in the December calendar. 20 MR. RUNNER: Question -- actually a followup 21 question on that, too. 22 MS. STOWERS: Go ahead. 23 MR. RUNNER: Just real quick. At least in 24 terms of -- in terms of the waiver, as I would 25 understand it, it includes the waiver approval by the 26 taxpayer, the Department, and the Chief Counsel? 27 MR. NANJO: Correct. 28 MR. RUNNER: So am I to assume, then, that 24 1 the only one who is objecting here is the Department? 2 MR. NANJO: That is correct. 3 MR. RUNNER: Okay. 4 MS. HARKEY: Thank you. 5 MR. RUNNER: I do have a question on that. 6 MS. HARKEY: Yes. Go ahead, Member 7 Runner. 8 MS. STOWERS: I'm done. I mean, for the 9 record, I am concerned that the Department is saying 10 that they didn't get the 75-day notice, and they did 11 not waive the 75 days, but yet the case is still on 12 the calendar. 13 So I do not think, for this case, that we 14 should be making a decision. And for the other case, 15 I voted no for many reasons. But for one, because I 16 didn't think we should be making a decision on that 17 one either. So that's where I stand on this 18 matter. 19 MS. HARKEY: I thought First American was 20 very worthy of this. It's on a request. I think we 21 have allowed a request. 22 MR. REYNOLDS: Can I just address that 23 issue? 24 MS. HARKEY: No. No, that's okay. This is 25 just -- this is just -- 26 MS. STOWERS: I realize that, Madam, that 27 First America was a little different. But this is my 28 thought process on this particular case. 25 1 MS. HARKEY: I appreciate it. Thank you. 2 Do you have any questions on this? 3 MR. RUNNER: I do. 4 MS. HARKEY: Member Runner. 5 MR. RUNNER: Just a question. 6 Again, this is on the idea of whether or not 7 a delivery is an agent or not. So I just want to 8 align to GrubHub, if I push one more button I'm going 9 to order a sandwich. But hopefully I won't need it 10 tonight. But, you know, as I'm at the checkout, 11 again, there's the cost of the item I've ordered, 12 there's a delivery fee, and then there's a tax. The 13 tax that shows here is not only the tax on the food, 14 but also on the delivery fee. 15 I'm just trying to think, that indicates to 16 me that they're the retailer. I mean, they're 17 charging the tax on the delivery fee. And so I don't 18 even know -- so I don't know what the contract is. 19 But, in theory, if this is all they're collecting, 20 and they then turn all this money over to the 21 restaurant, they don't make any money. Right? 22 Because their tax is on the total sale which includes 23 the delivery fee. 24 MS. HARKEY: They've got the processing 25 fee. 26 MR. RUNNER: How? Where? Where do they 27 make the money? 28 MS. HARKEY: The contract is in -- is here. 26 1 It's a contract. But they have -- 2 MR. RUNNER: You mean as a write back to 3 the -- you mean the price may not be the real price. 4 But let me go back to this idea -- 5 MS. HARKEY: The commission percentage shall 6 be 12.5 percent of restaurant net sales. Net sales 7 means la da da da da. 8 So they get 12.5. They collect tax on the 9 service of delivery, and they collect tax on the 10 food. And then they remit all of that, and they take 11 a 12.5 commission. 12 MR. RUNNER: So it doesn't make any 13 difference, I guess, if they are the collector on the 14 delivery fee. Because they are basically saying the 15 delivery fee is indeed still the responsibility and 16 cost of the restaurant. 17 MS. HARKEY: That's how I would 18 understand. 19 MR. HANKS: Delivery fees would be -- may 20 I -- are addressed in regulation 1628. And it talks 21 about type of transportation company. If it were a 22 common carrier, the delivery fees would not be. But 23 in this case, I'm assuming they're not a common 24 carrier. So under those circumstances, it would be 25 subject to tax. 26 MR. RUNNER: Okay. Let me go back to the 27 taxpayer in this discussion then. 28 If that be the case -- and, again, it's 27 1 clear in terms of this contract, there is an amount 2 of money that then goes back to the service at that 3 point, why indeed would that be -- would they be the 4 retailer? I mean, this is different than delivering 5 furniture like you're referring to. 6 MR. BRANDEIS: It has to do with how they 7 hold themselves out to the public. Who does the 8 person think that they're contracting. 9 MR. RUNNER: It may have to do with who's 10 keeping the tax dollars' money. 11 MR. BRANDEIS: Well, no. Because the law 12 determines who's the retailer. And then if you are 13 determined to be the retailer under the law, you are 14 reliable for the tax, and you cannot contractually 15 sign the liability -- 16 MR. RUNNER: So you would believe that this 17 contract then is in conflict then with that law? 18 MR. BRANDEIS: Absolutely. Absolutely. 19 They are, in effect, assigning liability 20 illegally -- California does not allow -- 21 MR. RUNNER: Did your restaurant agree to 22 that contract? 23 MR. BRANDEIS: The restaurant -- your 24 typical restaurant owner, if you look at the majority 25 of the companies that are signing up for these 26 contracts, they are not lawyers, they are not 27 accountants. They understand operating a restaurant, 28 and they don't know what the law is. And they don't 28 1 know contract law or any of this stuff. 2 MR. RUNNER: But under this contract, 3 your -- again, if everything was fulfilled in this 4 contract, your restaurant received money for the 5 sales tax. 6 MR. BRANDEIS: That's correct. And they 7 should not have. They should not have. That money 8 belongs -- that money -- the online ordering company 9 should have a permit and should be reporting and 10 paying the sales tax and -- 11 MR. RUNNER: What'd your company do with the 12 sales tax they collected? 13 MR. BRANDEIS: They reported it to the 14 state, erroneously. That's why we filed a claim for 15 refund. They're not the retailer in these 16 transactions. 17 Only -- there can not be an assignment of 18 liability. If that were allowed, every sophisticated 19 taxpayer would try to assign the liability for the 20 tax to somebody else. And the law determines who -- 21 the law -- retailers are liable, but it's a sales tax 22 transaction. 23 MR. RUNNER: Mm-hm. 24 MR. BRANDEIS: Retailers are always liable 25 for the sales tax, always. So we need to determine 26 who is the retailer. Once we make the determination 27 of who the retailer is, that's the person that's 28 liable for the tax -- for the sales tax. 29 1 MR. REYNOLDS: In the Eat24 contract, too, 2 it doesn't mention agency. The only place it 3 mentions agency is the part Ms. Harkey read about the 4 sales tax. There they've said, "Oh, we're going to 5 create an agency relationship where we're going to 6 make you -- 7 MR. RUNNER: Well, maybe that's the only 8 place it needs to be -- is sufficient. 9 MR. REYNOLDS: Well, I would disagree. I 10 would think that you have to, in essence, create a 11 principle relationship on the sales side -- on the 12 sales side of the transaction is where the sales tax 13 liability vests, not upon the collection of the tax. 14 MR. BRANDEIS: One more thing to point 15 out. 16 MR. RUNNER: Real quick. 17 MR. BRANDEIS: There's another company 18 called Restaurants on the Run, and they do exactly 19 the same thing as Eat24 and GrubHub, and they had a 20 seller's permit. They came to the conclusion that 21 they are acting in the capacity of a retailer. 22 And the Board in the Kabir case, which 23 occurred in front of this body back in, I want to 24 say, September of 2016, basically allowed the 25 Restaurant on the Run sales to be considered sales 26 for resale, but disallowed others, because -- and 27 they got into this issue of agency and whatnot. 28 MR. RUNNER: But their contracts would 30 1 reflect that relationship. 2 MR. BRANDEIS: Well, again, it's how you 3 hold yourself out to the public. If you're holding 4 yourself out as a retailer, then -- here they're 5 holding themselves out in every single way as a 6 retailer. 7 MR. RUNNER: Okay. Thank you. 8 MS. HARKEY: Are there any other questions, 9 Members? 10 I hear none. Do I have a motion? 11 No motion? 12 MS. MA: Move for the Department -- move for 13 the Department. 14 MS. HARKEY: To deny the appeal. 15 Do we have a second? 16 MS. STOWERS: Yes, second. 17 MS. HARKEY: We have a second. 18 Are there any objections? No? 19 Such will be the order. 20 Thank you. 21 MR. HORTON: Just out of curiosity, question 22 to the Department, you plan on pulling this one back, 23 too? 24 MS. HARKEY: The taxpayer could, I guess. 25 We do our job. We work hard up here. 26 27 28 31 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 from December 11, 2017 audio, I recorded 10 verbatim, in shorthand, to the best of my ability, 11 the proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 31 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: March 8, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 . 25 26 27 28 32