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 13, 2017 11 (Prepared from audio recording) 12 13 14 15 SALES AND USE TAX APPEAL HEARING 16 APPEAL OF 17 KOCH SUPPLIES, INC. 18 NO. 554415 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 Sen. George Runner (Ret.) 6 Member 7 Yvette Stowers Appearing for Betty T. 8 Yee, State Controller (per Government Code 9 Section 7.9) 10 Joann Richmond Chief 11 Board Proceedings Division 12 For California 13 Department of Tax and Fee Administration: 14 Scott Claremon Legal Division 15 Steven Smith 16 Legal Division 17 For Appellants: Reed Schrider 18 Representative 19 Joan Armenta-Roberts Representative 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 13, 2017 4 ---oOo--- 5 MS. RICHMOND: Madam Chair, our first item 6 for this afternoon is C14, Koch Supplies, Inc., 7 please come forward. 8 MS. HARKEY: Mr. Angeja, please introduce 9 the items of this appeal. 10 MR. ANGEJA: Madam Chair and Members, the 11 appeal before you involves one unresolved issue, 12 which is whether certain sales of equipment qualify 13 for the partial exemption for farm equipment and 14 machinery. 15 MS. HARKEY: Okay. Thank you. 16 Welcome to the Board of Equalization. You 17 will have ten minutes to present your case. The 18 Department will have ten minutes. You'll get five 19 minutes on rebuttal. And I think you've seen there's 20 often questions. So please introduce yourself for 21 the record and then begin. 22 MR. SCHRIDER: Good afternoon, Chairwoman 23 and Honorable Members of the Board. Thank you for 24 the opportunity to appear before you today on this 25 matter. My name is Reed Schrider. I'm with 26 PricewaterhouseCoopers. And I'm appearing on behalf 27 of the claimant Koch Supplies. 28 Also appearing with me today is Miss Joan 3 1 Armenta-Roberts. She's also from PwC. 2 The issue in this appeal is whether 3 claimant's sales to Dole Fresh Vegetables' Soledad 4 facility qualify for the partial exemption for farm 5 equipment and machinery. 6 This issue raises the underlying question of 7 whether the activities at Dole's Soledad facility 8 qualify for the partial exemption. 9 First, I'd like to briefly review the 10 procedural history of this claim for refund, and then 11 we'll get into the facts at the heart of the appeal. 12 This matter began in late 2011 when the BOE 13 began an audit of Bud Antle, a division of Dole Fresh 14 Vegetables, which owns and operates several farms and 15 the Soledad facility. 16 During the audit we agreed with the auditor 17 to put the issue of whether or not Dole's activities 18 at the Soledad facility qualified under the partial 19 exemption to the Board's Legal Department. Although 20 our -- although Legal agreed in our initial contact 21 that the exemption applied, they subsequently issued 22 written advice in July of 2013 that the partial 23 exemption did not apply. 24 We followed up with Legal after that letter 25 was issued to discuss with them further the facts of 26 the case and the applicable law. 27 Over the next two years we had a number of 28 discussions and meetings with Legal to provide 4 1 additional information and answer questions that it 2 had regarding the activities at the Soledad facility. 3 We also provided approximately 30 product bags, the 4 bags that the product is put in and sent to market 5 in. Which we have today, if you would like to see. 6 And we offered them pictures of the facility and a 7 tour as well. They didn't take advantage of the 8 tour, but we did offer that. 9 Legal eventually -- Legal eventually advised 10 us that it had enough information to issue advice in 11 Dole's favor. It's a legal issue. It's written 12 advice in favor of Dole on March 9th, 2017. And this 13 is the letter that you have in front of you. 14 In the letter, it -- Legal's letter follows 15 the exact analysis that we have presented from the 16 beginning and are continuing to present. 17 We hear a lot about how maybe Legal 18 misinterpreted the facts, or Dole didn't provide full 19 information, or even that maybe Dole misrepresented 20 the facts to Legal. And these are all unfounded 21 assertions. 22 Dole described the Soledad operations to 23 Legal. We answered their questions, and we provided 24 information over a period of several years. The 25 facts are relatively straightforward, as that letter 26 shows. 27 So now let's take a look at the factual 28 background. First, let's talk just for a minute 5 1 about Koch Supplies. So during the period at issue, 2 Koch Supplies sold a variety of products to Dole for 3 use at the Soledad facility, including beard guards, 4 latex gloves, dust masks and knives. 5 Now I'll turn to Dole since that's really 6 the heart of the appeal of what they do. Dole -- 7 Dole grows and harvests a variety of agricultural 8 products identified in SIC Manual Major Group 1, such 9 as vegetables and a variety of lettuces. 10 Dole harvests the lettuce and vegetables in 11 its fields, loads these products into boxes, and 12 delivers them by truck to the Soledad facility. Upon 13 arrival at the plant, the products are immediately 14 unloaded into cooling tubes to cool the product to 15 preserve their freshness. Once properly cooled, the 16 product is placed on conveyors. 17 Depending on the type of products, the 18 conveyors run the products through a trim line to 19 trim off unwanted portions of the vegetable or 20 lettuce, and then possibly through a cutter to cut 21 the product into smaller pieces, two wash cycles, a 22 shaker to shake out any addition -- any extra water 23 and remaining debris, weighing and bagging. 24 Once filled and sealed, the bags of the 25 various products are then shipped to market. 26 About 25 percent of the time a single type 27 of lettuce, and mostly iceberg, is bagged and shipped 28 to market. And it's bagged by itself. 6 1 About 60 percent of the time more than one 2 type of lettuce or vegetables are mixed together for 3 bagging and shipment. 4 The remaining 15 percent of the time Dole 5 mixes vegetables and/or lettuces and adds previously 6 prepared and sealed master packs containing salad 7 dressing, croutons and nuts or berries. The master 8 pack is added in the last step before the bag is 9 sealed and sent to market. 10 Revenue and Taxation Code Section 6356.5 11 provides the partial exemption for sales and use tax 12 that's at issue in this matter. Regulation 1533.1 13 lays out the rule. And on page 2 of your handout, 14 you'll see the three requirements for the 15 exemption. 16 Didn't get a hand out? 17 MS. HARKEY: I got one. 18 MR. SCHRIDER: We had submitted a letter and 19 then a package this morning as well. 20 MS. HARKEY: Okay. The package came this 21 morning, and I just got it. 22 MR. SCHRIDER: Okay. Um -- 23 MS. HARKEY: I got this from my Chief. 24 MR. RUNNER: I got the letter in my file. 25 (Inaudible discussion.) 26 MS. STOWERS: I don't have that. 27 MS. HARKEY: Maybe Shawn has that. 28 MR. RUNNER: My staff has it. Appears my 7 1 staff has it. I think we're getting somewhere. 2 MS. HARKEY: We're getting somewhere. We 3 have it. Thank you. 4 MR. SCHRIDER: So we had previously 5 submitted a letter from Legal that was, as I said, 6 issued in March, and it was analyzing this Dole 7 Soledad facility and the activities, and agreeing 8 that those activities did satisfy the partial 9 exemption. So that was submitted previously. 10 And then today we brought this package. It 11 has the colorful cover on it. 12 Okay. So page 2 of your handout has the 13 three requirements. And the three requirements are: 14 One, a qualified person; two, purchases farm 15 equipment and machinery; and three, primarily for use 16 in producing and harvesting agricultural products. 17 So let's start with the first requirement, 18 qualified person. On page 3 of your handout, you 19 will see the relevant excerpt from the regulation's 20 definition of a qualified person. 21 A qualified person means a person engaged in 22 a line of business described in Code 0111 to 0291 of 23 the SIC Manual, which is basically farming 24 activities, or performs activities described in Code 25 0711 to 0783. And those are agricultural services or 26 crop preparation-type services. In addition to being 27 engaged in a line of business described in Code 011 28 to 0291. 8 1 And also note that a qualified person is not 2 required to be engaged 50 percent or more of the time 3 in the -- in the farming activities. 4 So under this definition, Dole is a 5 qualified person, is engaged in a line of business 6 described in Code 0111 to 0291, specifically Code 7 0161, which is operating cabbage farms, lettuce farms 8 and romaine farms. And it performs activities 9 described in Code 0711 to 0783. And specifically we 10 look at Code 0723, sorting, grading and packing of 11 vegetables. 12 So we can check off the first one, qualified 13 person. 14 Let's take a look at the second requirement, 15 farm equipment and machinery. Which is also referred 16 to as qualified property in the regulation. 17 On page 4 of your handout you will see an 18 excerpt from the definition of farm equipment and 19 machinery in Regulation 1533.1(b)(1)(a). Farm 20 equipment machinery means implements of husbandry, 21 which include any new or used tool, machine, 22 equipment, appliance, device or apparatus used in the 23 conduct of agricultural operations. And such items 24 include, but are not limited to, handling and packing 25 equipment and conveyors. 26 Again, note that the regulation states that 27 farm equipment and machinery may be attached to 28 realty, which ours is. 9 1 The equipment at the Soledad facility 2 includes conveyors, washers, and packing machines, 3 and the machinery needed to operate those machines. 4 So the equipment at Soledad does qualify as farm 5 equipment and machinery as defined in the regulation, 6 and it is also attached to the realty as allowed. 7 Finally, let's look at the -- we can check 8 off the second requirement. So we've got two checked 9 off. We're looking at the third one now, which is 10 producing and harvesting agricultural products. 11 On page 5 of your handout, you'll see the 12 excerpts from the definition of producing and 13 harvesting agricultural products from Regulation 14 1533.1(b)(5). So one excerpt says producing and 15 harvesting agricultural products means those 16 activities described in Major Groups 1, 2 and 7 of 17 the SIC Manual. And -- and Dole is engaged in 18 activities in Major Group 1 and 7. 19 Another excerpt says producing and 20 harvesting agricultural products involves the 21 cultivation or the growing, raising or gathering of 22 the commodities described in Code 0111 to 0291 of the 23 SIC Manual, and integral activities thereto described 24 in Code 0711 to 0783 of the SIC Manual. 25 Again, we're engaged in those activities. 26 And, finally, the final excerpt says, 27 producing and harvesting agricultural products also 28 includes the washing of agricultural products, the 10 1 inspection and grading of agricultural products, and 2 the packaging of agricultural products for shipment. 3 Again, those are all the activities that 4 take place at the facility in Soledad. 5 So that we -- we meet that definition as 6 well, so we can check off the third requirement of 7 producing and harvesting agricultural products. 8 So in conclusion, Dole satisfies the three 9 requirements set forth in Regulation 1533.1 for 10 qualifying for the partial exemption. Thus, 11 claimant's sales of qualified property to Dole -- 12 excuse me -- property to Dole for use and producing 13 and harvesting agricultural products qualify for the 14 partial exemption. We thus ask the Board to grant 15 Koch Supplies claim for refund. 16 And we'll gladly answer your questions, and 17 we thank you for your time. 18 MS. HARKEY: Thank you. 19 To the Department, please introduce 20 yourself. You have ten minutes. 21 MR. CLAREMON: Thank you. 22 Good afternoon, Chairwoman Harkey and 23 Members of the Board. I'm Scott Claremon with the 24 Department of Tax and Fee Administration. With me 25 are Steven Smith and Kevin Hanks. 26 We concur with the recommendation of the 27 Appeals Bureau, the claim for refund should be 28 denied. 11 1 Claimant is a retailer of a wide variety of 2 merchandise to the meat packing, dairy and food 3 processing industries. At issue are its sales of 4 beard guards, latex gloves, dust masks and knives to 5 its customer Soledad facility where the customer 6 received harvested vegetables, almost all of which 7 were purchased from other growers, 90 percent. Which 8 were then cooled, trimmed, chopped, washed, and then 9 bagged for market. 10 A majority of the products produced at the 11 Soledad facility were bags of chopped or cut 12 vegetables, like lettuces, cabbage -- cabbage, 13 carrots and radishes. 14 If you were to look at the customer's Web 15 site, these products are referred to as salad blends, 16 and they are found under the heading "Salad." And 17 the packaging of these products includes a salad 18 guide with suggested recipes or, quote, "pairings." 19 Claimant argues that these sales of beard 20 guards, gloves, masks and knives are partially exempt 21 sales of farm equipment and machinery under Revenue 22 and Taxation Code Section 6356.5 and Regulation 23 1533.1. 24 As relevant here, Regulation 1533.1 requires 25 that farm equipment and machinery be primarily used 26 in producing and harvesting agricultural products. 27 Subdivision (b)(4), therof, defines such activities 28 to include those described in Major Group 7, the 12 1 standard industrial classification, SIC Manual titled 2 Agricultural Services, but excludes those activities 3 described in Major Group 20 of the SIC Manual titled 4 Food and Kindred Products. 5 As a preliminary matter, we have reviewed 6 the opinion letter of March 9th, 2017 that was 7 discussed by the claimant. We have determined that 8 the analysis contained therein is erroneous. It does 9 not reflect the position of the CDTFA Legal Division 10 or of the CDTFA generally. Rather, our position is 11 that which is stated in our prior opinion letter 12 issued to the customer on July 19th, 2013 which is 13 consistent with the Appeals' recommendation. 14 To wit, these items are not being used to 15 harvest agricultural products. They're being used to 16 manufacture process foods, an activity that falls 17 under SIC Major Group 20. Specifically, they're 18 being used to prepare salads, which are specifically 19 listed as an example under SIC Group 2099, food 20 preparations, not elsewhere classified. 21 This is consistent with FDA guidance and 22 regulations, which classify fresh-cut vegetables as 23 processed foods and explicitly not as raw 24 agricultural commodities. 25 It is also consistent with the customer's 26 marketing of the products as salads, including on the 27 packaging itself. 28 As such, the sale of beard guards, gloves, 13 1 masks -- masks and knives do not constitute sales of 2 farm equipment and machinery, and the claim for 3 refund should be denied. 4 Thank you. 5 MS. HARKEY: Thank you. 6 Five minutes on rebuttal. 7 MR. SCHRIDER: Thank you. 8 Today is the first we've heard that Legal no 9 longer is supporting their letter. So the fact that 10 they were appearing gave us a hint, but we have not 11 received any notice until right now that Legal has 12 changed their mind. 13 Secondly, they talked about the 89 percent 14 of products that were purchased from other growers. 15 In the letter, the facts -- factual portion of the 16 letter describes the arrangements that Dole had with 17 growers. 18 Eleven percent of the product that it 19 brought to Soledad, it grew in its own farms. The 20 other 89 percent, they had arrangements with other 21 growers in which there were several types of 22 arrangements, but essentially they had some sort of 23 stake in the crop. Whether it was they harvested it 24 so they assumed the risk, or that they were providing 25 contributions along the way, and kind of essentially 26 an equity in the crop so that they were not merely 27 buying a product from another grower, they were 28 involved in the growing. It's just they didn't do it 14 1 all by themselves. 2 And, finally, as I mentioned in the 3 regulation, there's nothing that requires them to do 4 more than 50 percent of the time in growing 5 activities anyway. 6 Secondly -- or third -- excuse me -- we're 7 hearing about this being bags of let -- the bags of 8 lettuce or salads. And one comment that's made is it 9 says "salad mix" on the bag, or there's a salad 10 guide. The salad guide goes to, you can use this 11 product if you would like to make a salad, and here 12 are some recommendations on what to add, what to eat 13 it with, that sort of thing. 14 Secondly, salad -- using the term salad on 15 the bags is merely marketing or labeling, branding, 16 you know, whatever term you want to use that way. It 17 was never intended to determine a sales and use tax 18 issue. And if the Board is going to go in the 19 direction of labeling determining the sales and use 20 tax consequences of a product, that opens the door 21 for, I think, a lot of problems for them. 22 We went through a process in the second 23 letter that we submitted as part of this process to 24 Legal of trying to define salad. Generally, we were 25 finding that it was saying, you know, it could be a 26 mix of lettuce and vegetables and that sort of thing. 27 But that it usually included salad dressing and 28 croutons and other things. 15 1 That may be a bit of a rabbit hole to go 2 down. But I think salad generally is intended to 3 refer to a manufactured product rather than a bag of 4 lettuce or a head of lettuce, either one. 5 Would you like to talk a little bit -- 6 MS. ARMENTA-ROBERTS: Yes, I think -- Reed 7 and I talked about this. I think the main crux of 8 the issue is which SIC code does it fall under, 9 right? Do they fall under 723 or 299? 10 And if you look at -- and we gave you copies 11 of both SIC codes. But under 2099, that's where 12 staff is trying to say that Dole falls under that. 13 If you look at that -- that SIC code, it talks about 14 food preparations that -- with other ingredients. 15 And if you look down the list, it's stuff 16 like almond paste, baking powder, bullion cubes, 17 pizzas, potatoes that have other ingredients. 18 They're clearly very processed products. And it does 19 list on the back salad dressings, mixes and dry. And 20 then it also -- the next line is salads, fresh or 21 refrigerated. 22 We believe this was intended to mean the 23 little box salads you get, or even the 15 percent 24 that Dole produces when you -- like, I want a quick 25 lunch, I'll go to the grocery store and get a little 26 boxed salad, and it has everything I need. Take it 27 back to the office, put it together. That's a salad. 28 And it's all packaged and ready to go. 16 1 Dole has 15 percent of what they do is they 2 add a little package with croutons and salad dressing 3 and whatnot. But that's a very small percentage of 4 their business. The rest of it is -- I would clearly 5 not call a bag of spinach and arugula a salad. 6 That's not -- it's not a salad in my mind. I'm not 7 going to open up and eat that as a salad. 8 And there's several others that sometimes 9 the lettuces -- like the iceberg is one ingredient. 10 It's sent -- it's sold to restaurants where they put 11 it in tacos or hamburgers. So it's not a salad. 12 So that's our position. I think you have to 13 look at those two SIC codes and which one do they fit 14 most closely in. 15 The Legal Department issued us an opinion 16 that said they -- exactly that, that they believed it 17 fell under 723 not 2099. And they really -- you 18 know, Reed and I were discussing this morning, I 19 said, "This is exactly our position, and they took 20 the same position." 21 And the other thing that has been 22 troublesome. I've been working with this client for 23 all these years. And it's been, "Yes, they agree 24 with you." "No, they don't." "Yes, they agree with 25 you." "No, they don't." For like six years. And we 26 finally got the Legal letter that said, "Yes, they 27 agree with you." And then -- 28 MS. HARKEY: No, we don't. 17 1 MS. ARMENTA-ROBERTS: -- and then when -- 2 and now today they don't. So -- 3 MR. SCHRIDER: One other point to make, too, 4 is that 723 -- SIC Code Section 723, is there 5 activities that are subsequent to harvest? So there 6 are some post-harvesting activities that are allowed. 7 And that's -- you know, we're saying we fall under 8 there. They're not -- they don't go so far as to be 9 things that end up in 2099. They're activities in 10 723, which are allowed as part of the harvesting 11 activities. 12 MS. HARKEY: Okay. 13 Members, do we have any questions? 14 MR. RUNNER: Yeah, I'll start. 15 MS. HARKEY: Member Runner. 16 Thank you. 17 MR. RUNNER: Let's go right to the letter. 18 Tell me the history of getting -- of where -- the 19 history of asking for the advice of the process. 20 MR. SCHRIDER: Sure. Well, we started 21 out -- we reached out to Legal and gave a brief 22 description of what was going on. Verbally, they 23 said, "Yeah, that sounds okay." Then came back and 24 said, "Well, we're not so sure. So go ahead and 25 submit the letter." Because they -- the initial 26 thought was maybe it would be dealt with without a 27 letter. 28 MR. RUNNER: Mm-hm. 18 1 MR. SCHRIDER: And so we went ahead and put 2 together the initial letter that we sent in, and that 3 led to questions about what's a salad and what's not 4 a salad. So we followed up with a lengthy letter 5 about definitions of salad and various dictionaries, 6 and "does it need to have salad dressing or not?" 7 And I can tell you more about that if you're 8 interested, but probably -- 9 MR. RUNNER: Was this all prior to the -- 10 the letter references a letter of July 9th. 11 MR. SCHRIDER: Right. And that goes -- 12 MR. RUNNER: This is all -- this is all 13 before that? 14 MR. SCHRIDER: That all happened before the 15 July letter -- 16 MR. RUNNER: Okay. 17 MR. SCHRIDER: -- and then that letter was 18 issued. 19 MR. RUNNER: Is where you -- I mean, you're 20 basically going pre-discussion honing down on what 21 the facts were gonna be -- 22 MR. SCHRIDER: Right. 23 MR. RUNNER: -- submitted for the letter. 24 MR. SCHRIDER: Right. 25 MR. RUNNER: Okay. 26 MR. SCHRIDER: So they came back with the 27 July 9th, 2013 letter. At that point, we came back 28 and said, "Well, wait a minute." You know, we 19 1 thought we were doing better than that. So we, 2 again, engaged in discussions for a couple of years. 3 As I said, we came over, we talked on the phone, we 4 met in person. We brought bags of the product to say 5 that this is what it looks like. Here are some 6 pictures of the facility. Cause we had been on a 7 tour of the facility, just so they can get an idea of 8 what it looked like. And talked about the facts and 9 the analysis that we thought was appropriate. 10 And at that point, then, Legal came to a 11 point where they said, "Yes, we're going to give you 12 a letter that is supportive of you." Then it took a 13 long time, and there was change over several -- chief 14 counsel retired -- 15 MR. RUNNER: Mm-hm. 16 MR. SCHRIDER: -- and a new acting Chief 17 Counsel, and then that Chief Counsel stepped down. 18 And then a new one came in, and then that one stepped 19 down. And then another one came. So throughout that 20 process -- 21 MR. RUNNER: Mm-hm. 22 MR. SCHRIDER: -- we were getting yes, no, 23 yes, no, yes, no, verbally. And that's why at one 24 point we withdrew the request, because we were 25 hearing, "No, it's not gonna go in your favor." And 26 then we were told, "Yes, it will go in your favor." 27 So then that's when the March 9th, 2017 28 letter was issued. So it's been -- it's been an up 20 1 and down situation. 2 MR. RUNNER: So based upon that letter -- 3 MR. SCHRIDER: And based on -- yes. So that 4 was the last word we had was that they agreed. They 5 issued this letter. And until now, we were of the 6 opinion that, um -- 7 MR. RUNNER: So if you got this letter -- 8 why would you assume you would be before us if you 9 got this letter? 10 MR. SCHRIDER: Yeah. During -- because of 11 all the time it took. 12 MR. RUNNER: Mm-hm. 13 MR. SCHRIDER: There were a number of 14 audits. And so the audits -- we had said we're 15 getting a letter from Legal. When the first letter 16 came out saying you don't qualify, they wrapped the 17 audits up. So in order to keep the matters alive, we 18 needed to appeal them. 19 And so that's -- this is one of three. 20 MR. RUNNER: Okay. 21 MR. SCHRIDER: And that's why we're sitting 22 here today. It ended up going through Appeals, 23 Appeals said no, and so now we're here. 24 So, again, those -- those audits wrapped up 25 based on the first letter. 26 MS. ARMENTA-ROBERTS: And one -- one -- one 27 thing I wanted to -- 28 I'm sorry, Reed. 21 1 One thing I wanted to add is the Appeals -- 2 we've been working with the Appeals office for the 3 other two claims. And he started -- he wanted to 4 make sure the facts in the letter were what Dole was 5 actually doing. So he went through everything and 6 called -- had an e-mail to the auditor and said, "Do 7 you agree with these facts?" And the auditor said, 8 yes, they agreed with the facts that Dole was 9 presenting. And they turned around and went to 10 refunds and higher up and said, "Do you agree?" And 11 gave somebody else a chance to say no, you know, we 12 don't agree. 13 So that's where it's just been this 14 ping-pong. The auditor says, "Yes, these are the 15 facts of the case." 16 MR. SCHRIDER: And the auditor is the only 17 other person who's actually been to the facility of 18 everybody else at BOE or CDTFA now. 19 MR. RUNNER: Okay. Okay. 20 So let me go to the Department. 21 Tell me about how it is that we issue a 22 letter and then decide later on, "Oops, we don't 23 think this applies. We want to withdraw the letter," 24 or whatever. I guess I'm unclear. Are we actually 25 withdrawing this letter? 26 MR. CLAREMON: I -- I think that we will -- 27 I don't think it's happened yet, but there will be an 28 official withdraw of the letter sent to that 22 1 taxpayer, who is not the claimant here. 2 MR. RUNNER: And what's the basis of -- I 3 mean, if a taxpayer writes in, gets advice, I mean, 4 normally we would say, "Hey, that's written advice. 5 They're good to go." 6 MR. CLAREMON: That's correct. 7 MR. RUNNER: So what -- how -- what makes 8 this different to where all the sudden we say, "Time 9 out. We're going to now withdraw that letter"? 10 MR. CLAREMON: A couple things to point out. 11 One, this all took place after the audit period. So 12 this is not a situation where 6596 would apply. It's 13 not -- I mean, to the extent maybe going forward. 14 MR. RUNNER: Mm-hm. 15 MR. CLAREMON: But not with regard to the 16 audit periods we're talking about. 17 It's also a claim for refund. 18 MR. RUNNER: Mm-hm. 19 MR. CLAREMON: So tax wasn't paid based on 20 that information. 21 We did provide contrary advice in 2013. And 22 as he pointed out, as late as October of 2016 the 23 subsequent request for an opinion was withdrawn. So 24 I -- you know, anything -- any oral advice given or 25 any oral communication is certainly not -- 26 MR. RUNNER: Are you saying because we 27 change our minds a lot, you shouldn't depend on our 28 letter? 23 1 MR. CLAREMON: Well, again, anything that 2 was said in oral conversation is certainly not -- 3 MR. RUNNER: Mm-hm. 4 MR. CLAREMON: -- the opinion of the Legal 5 Department. 6 MR. RUNNER: Right. 7 MR. CLAREMON: So as of October 2016 our 8 opinion had not changed at all. 9 MR. RUNNER: Right. 10 MR. CLAREMON: I cannot speak to the 11 delivery of process of how that letter was issued. 12 But in reviewing -- 13 MR. RUNNER: Well, let me ask you this. 14 Because what's the process? I mean, I can remember 15 that time, too. We had a series of change of Chief 16 Counsel -- of -- of -- of acting Chief Counsel. So I 17 would assume there was maybe extraordinary review 18 during that period of time, because you had a number 19 of different eyes on it. 20 MR. CLAREMON: Mm-hm. 21 MR. RUNNER: But yet the letter comes out at 22 the end. 23 MR. CLAREMON: The -- the letter was issued. 24 But, again, I -- I can't really speak to the delivery 25 of the process of that specific letter. I can just 26 say that in our review of this matter before us, we 27 determined that the analysis was incorrect. 28 MR. RUNNER: And who, I guess -- when you 24 1 say "we," does that mean the new Chief Counsel 2 over -- where -- who -- who determined that this 3 letter is no longer -- who -- 4 MR. SMITH: The Legal Division. 5 MR. RUNNER: Of? 6 MR. SMITH: CDTFA. 7 MR. RUNNER: So would that be the new Chief 8 Counsel? 9 MR. SMITH: I don't think we -- the -- the 10 assistant Chief Counsel and every lawyer below him. 11 MR. CLAREMON: Of the Tax and Fee 12 Programs. 13 MR. RUNNER: Assistant Chief Counsel -- 14 would that have been an Assistant Chief Counsel at 15 BOE at the time, or prior to that? 16 MR. CLAREMON: Correct. It would be someone 17 who was the Assistant Chief Counsel at BOE who is 18 now -- 19 MR. RUNNER: Okay. That's what I'm trying 20 to get to. So the person who said the letter was 21 okay before, now said the letter is not okay? 22 MR. SCHRIDER: There was a change. 23 MR. RUNNER: Huh? 24 MR. SCHRIDER: There was a change. 25 MR. RUNNER: I'm sorry. There was a change 26 of what? 27 MR. SCHRIDER: The acting Chief Counsel at 28 the time this letter was issued is not involved as 25 1 the Assistant Chief Counsel to make that decision. 2 MR. RUNNER: Okay. Okay. Could have 3 been because we had people coming and going, and 4 retired, and all kinds of things at that time. 5 MR. SCHRIDER: Yeah. 6 MR. RUNNER: Okay. I'm -- I -- I guess -- 7 I'll listen to the rest of the questions, but the 8 letter itself is quite a quandary to me in terms of 9 trying to give advice to taxpayers, and what they can 10 go forward with, and the ability to move in and out. 11 And I guess I -- I mean, we may or may not 12 have decided that this is -- which is the correct 13 advice. But the point is, this is what we did. 14 So -- 15 MS. MA: I have a question. 16 MS. HARKEY: Okay. Member Ma. 17 Thank you. 18 MS. MA: Yeah. So I'm having a problem with 19 the letter, too. Because this is what we were told, 20 is that if taxpayers wanted advice, they should write 21 us on it, and get a legal opinion, and that they can 22 take to the bank. 23 So now, I mean, you're saying, "Well, you 24 know, they can't take it to the bank, because Legal 25 may disagree," and so, therefore -- I mean, I don't 26 think that's really fair, you know. If we issued it, 27 and presumably it went through many reviews, not just 28 one person. I don't think Larry Mandell was the only 26 1 person that wrote it, reviewed it, signed off and 2 sent it. 3 You know, taxpayers should be able to rely 4 on it, because that's what we tell taxpayers. 5 MR. SMITH: They absolutely can rely it -- 6 on it from the time it was issued in March 2017 7 until, you know, if it were to be, you know, 8 officially revoked in writing. 9 MS. HARKEY: Immediately. 10 MR. SMITH: It hasn't. But, I mean, it's 11 absolutely reliable for audit periods beginning March 12 2017. But we're talking about a claim of earlier 13 periods. 14 MS. HARKEY: I think that's the dispute. 15 Yes, Member -- 16 MS. STOWERS: Okay. The letter. 17 So, Department, we're looking for a claim 18 for refund covering '07 to 2010. So you're saying 19 that the letter March 2017 doesn't apply to those 20 earlier years? 21 MR. CLAREMON: It certainly cannot be relied 22 upon for the basis of 6596. 23 MS. STOWERS: Okay. Now, I know it's been a 24 long three days. But is this taxpayer Bud before us? 25 Is this opinion to your claimant? 26 MR. SMITH: No, the -- the claimant today is 27 Koch Supplies, which is a vendor to Bud Antle, which 28 is Dole Fresh Vegetables, essentially. 27 1 The underlying issue is whether their 2 activities qualify for the partial exemption. 3 MS. STOWERS: Bud slash -- 4 MR. SMITH: Bud and Dole -- yeah -- Dole 5 Fresh Vegetables. 6 MS. STOWERS: So -- okay. So that's why we 7 have the letter -- 8 MR. SMITH: Right. 9 MS. STOWERS: -- addressed to the claimant. 10 MR. SMITH: Right. 11 MS. STOWERS: Did the earlier letter, July 12 2015, July 2013 -- 13 MR. CLAREMON: July 2013, correct. 14 MS. STOWERS: What's the difference? I 15 don't have that letter in my file. So explain why 16 the analysis -- or why you guys are going back to 17 that letter. What's the difference in the analysis, 18 the difference in the facts? 19 MR. CLAREMON: The analysis in that letter 20 is similar to what we stated in our opening position, 21 that these are salads. That they're -- that 22 they're manufact -- that is -- what this facility is 23 doing is manufacturing processed foods, not 24 harvesting agricultural products. Different 25 conclusions were reached in the second letter that we 26 think are erroneous. 27 MS. STOWERS: Lettuce, chopped, sliced, 28 diced, put in a bag. I might be short-handing it. 28 1 MR. CLAREMON: More -- more than 50 percent 2 of the products from this were more than one 3 vegetable chopped, sliced, thrown together, put in 4 the bag. 5 MS. STOWERS: More than one vegetable in the 6 same bag? 7 MR. CLAREMON: Correct. 8 MS. ARMENTA-ROBERTS: We can give you the -- 9 the percentages are 25 percent is one single item. 10 And then you have about 25 percent that could be two, 11 like, arugula and spinach. And then they might throw 12 in a third one, another type of lettuce. And then 13 the fourth one is more than three. And then the 14 fifth type of product they have is an actual bag that 15 is a salad kit, and that's about 15 percent. 16 MS. STOWERS: The kit -- is it -- I guess I 17 won't go back to that. 18 So there is some items besides lettuce going 19 in the bag? 20 MS. ARMENTA-ROBERTS: Mostly all lettuce -- 21 MS. STOWERS: Besides -- what type of 22 lettuce? 23 MS. ARMENTA-ROBERTS: There could be 24 cabbage, and arugula, spinach, iceberg, and some have 25 carrot slices. 26 MS. STOWERS: All in one bag? 27 MS. ARMENTA-ROBERTS: Yes. But that's 28 like -- you know, if you broke it down in 29 1 percentages, it's 25 percent single item, and then 2 probably about 20 percent two items. And so now 3 you're up to 45 percent. And then maybe another 20 4 percent with three items. And then the remaining, 5 you have 15 percent that has, like, croutons and a 6 little package you can buy at the store, you can make 7 your own salad at home. 8 MS. STOWERS: Yeah. 9 MS. ARMENTA-ROBERTS: About 15 percent of 10 their business is that type of bags. And then 11 there's probably another 20 percent that might have 12 more than three -- more than three or four items. 13 But you still get to over 50 percent is just raw 14 vegetables in a bag that -- 15 MS. HARKEY: They're not processed. 16 MS. STOWERS: By your understanding that the 17 other -- only ones that includes the croutons and 18 salad dressing represents a salad -- 19 MS. ARMENTA-ROBERTS: Correct. 20 MS. STOWERS: -- is your argument? 21 MS. ARMENTA-ROBERTS: Correct. And Legal's 22 as well. If you look at the letter -- 23 MS. STOWERS: Well, I don't know about this. 24 MS. ARMENTA-ROBERTS: The Chief Counsel at 25 the time. 26 MS. STOWERS: I -- I -- I understand what 27 you're saying. I guess it's really up to us in how 28 you define a salad. 30 1 MS. ARMENTA-ROBERTS: Right. And I think if 2 you go back to the SIC codes and really study those, 3 the salad is -- you know, I go to the store, I buy a 4 package, I take it back to my desk and eat it. That 5 is a salad. I'm not going to open a bag of lettuce 6 and call it a salad. 7 MS. STOWERS: That's why I said it's really 8 to the trier of fact on how you define a salad. I 9 personally define a salad as a bag of lettuce. I get 10 the mix of salads and lettuce, and for me, that's a 11 salad. 12 If we're not standing by this letter, I 13 guess it's up to us on -- 14 MR. RUNNER: Mm-hm. 15 MS. STOWERS: -- what is a salad. 16 A bag of let -- I mean, I joke about it at 17 home. But I say, "Okay. I'm making you guys a 18 salad. Here's a bag of lettuce." That is our family 19 salad for dinner. 20 MS. HARKEY: Well, I'm sure you don't eat it 21 with nothing on top of it? 22 MS. STOWERS: Um, my sister does. 23 MS. HARKEY: She can still go buy a head of 24 lettuce, I suppose, and that would not be a processed 25 item. 26 I'm -- I'm agreeing with the taxpayer 27 accepting for the bag salad kits. So I could find 85 28 percent for the -- for the taxpayer on this, because 31 1 I do think the bag salad kits are bag salad kits. 2 That's -- 3 MR. RUNNER: But the kits -- are the kits 4 included in your -- 5 MR. SCHRIDER: Right. So of the output of 6 the Soledad facility, about 15 percent are what we 7 would concede are a salad. 8 MR. RUNNER: You're conceding. Okay. 9 MR. SCHRIDER: And so we only have to cross 10 over the 50 percent threshold. So that's why we're 11 saying if 85 percent is not salad, we get the partial 12 exemption. 13 MS. HARKEY: Is that -- explain that to me, 14 Appeals. If -- if -- if 50 percent qualifies, then 15 they get the whole exemption? 16 MR. ANGEJA: So the exemption applies to 17 equipment that is principally used in a qualifying 18 activity. So the principle use test is generally 50 19 percent or more. 20 MS. HARKEY: Oh, okay. 21 MR. RUNNER: I see. 22 MR. ANGEJA: 50.01 percent or more. 23 MS. HARKEY: Yeah, this is very similar, I 24 think, to Grimmway here. I don't find it a whole lot 25 different. Actually, probably even less so in that 26 Grimmway -- 27 MR. RUNNER: Yes. 28 MS. STOWERS: Baby carrots. 32 1 MS. HARKEY: Yeah, they did the baby 2 carrots. They didn't process it, though. 3 MR. RUNNER: Right. 4 MS. HARKEY: There was no process involved. 5 Just cutting. 6 So I'm -- I guess if it's principally used, 7 then I would be compelled to grant the petition. And 8 I'll make a motion -- 9 MS. MA: Second. 10 MS. HARKEY: -- that way. 11 There's a second by Member Ma. 12 MS. STOWERS: Objection. 13 MS. HARKEY: Please call the roll. 14 MS. RICHMOND: Chairwoman Harkey. 15 MS. HARKEY: Aye. 16 MS. RICHMOND: Mr. Runner. 17 MR. RUNNER: Aye. 18 MS. RICHMOND: Ms. Ma. 19 MS. MA: Aye. 20 MS. RICHMOND: Ms. Stowers. 21 MS. STOWERS: No. 22 MS. RICHMOND: Motion carries. 23 MS. HARKEY: Okay. Thank you. 24 ---oOo--- 25 26 27 28 33 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 13, 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 33 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: May 2, 2018 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 34