1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 JANUARY 24, 2017 10 11 12 13 FINAL ACTION 14 ITEM C4 15 PUBLIC MOTORS ORANGE COUNTY, LLC 16 NO. 569627 (EA) 17 18 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board of Equalization: Fiona Ma, CPA 4 Chairwoman 5 Diane L. Harkey Vice Chair 6 Jerome E. Horton 7 Member 8 Sen. George Runner (Ret.) Member 9 Yvette Stowers 10 Appearing for Betty T. Yee, State Controller 11 (per Government Code Section 7.9) 12 Joann Richmond 13 Chief Board Proceedings 14 Division 15 For Board of 16 Equalization Staff: Jeff Angeja Tax Counsel IV 17 Legal Department 18 ---oOo--- 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 JANUARY 24, 2017 4 ---oOo--- 5 MS. MA: Okay. Ms. Richmond, next item, 6 please. 7 MS. RICHMOND: Our last item for today is 8 Item C4, Public Motors Orange County, LLC. This is 9 a waived appearance. 10 MS. MA: Okay. 11 MR. ANGEJA: I don't have an intro. I 12 would just like to add this is a Section 40 13 decision. 14 MS. HARKEY: I would like to move to adopt 15 staff recommendation but remove the negligence 16 penalty. 17 It was a first audit, and he wasn't 18 negligent in recordkeeping. Um, he provided general 19 ledgers, QuickBooks, federal income tax returns, 20 sales tax returns and deal jackets. And there were 21 just some issues that he could not prove up. 22 And I think the Department is right, but I 23 would like to remove the negligence penalty. 24 MR. HORTON: Um, I would second that. 25 Comment at the appropriate time, Madam 26 Chair. 27 MS. MA: Okay. 28 Okay. There's a motion by Ms. Harkey, 3 1 seconded by Mr. Runner -- 2 MS. HARKEY: Mr. -- 3 MS. MA: -- to -- 4 Oh, seconded by -- I'm sorry. 5 MR. HORTON: Me. 6 MS. MA: Seconded by Mr. Horton? 7 MS. HARKEY: -- Horton. 8 MS. MA: Horton. Horton, to, um -- to 9 waive the negligence penalty, but otherwise to grant 10 for the -- 11 MS. HARKEY: Department. 12 MS. MA: -- Department. 13 MR. HORTON: Madam Chair, a comment though, 14 if I may. 15 MS. MA: Okay. Mr. Horton. 16 MR. HORTON: Members, my -- my concern with 17 this audit is that there is a -- a -- a potential 18 for, in my mind, a potential for additional 19 deductions for the taxpayer that were not taken in 20 consideration based on our initial inquiry of the 21 Department and should have been taken in 22 consideration. 23 However, in the absence of the taxpayer 24 taking affirmative action to either ask for or 25 provide documentation to support these deductions, 26 it becomes inherently challenging for the Board to 27 arbitrarily do this. 28 But I do want to encourage the Department, 4 1 uh, to -- to look at audits of this nature, or any 2 other nature, and take the position of trying to 3 adjust not only in a positive, but also in a 4 negative light. 5 Um, and the deductions that I am referring 6 to -- this is a used car dealership as I understand 7 it that floor their own product. They financed 8 their own product through their own, uh -- a 9 separate entity, but a separate entity that's wholly 10 owned by them. Which means that there could be bad 11 debt deductions that we have not taken in 12 consideration. 13 And in the used car business, repossessions 14 is just part of your operation. It just occurs. 15 And particularly when you finance your own vehicles. 16 The strategy that these companies use is they charge 17 a high interest rate with the intention of 18 repossessing the car, you know, if in fact they 19 don't pay for it. It's kind of like a security. 20 It's almost like a financial agreement, a loan with 21 the car being part of the equity. Extended from 22 that is the whole, uh -- what do you call it? -- 23 pink slip loan program that they have out there. 24 So, you know, it's a little concerning that 25 the Department -- didn't appear that the Department 26 put forth the effort to provide the taxpayer with a 27 deduction that seems to be obvious for this 28 particular industry. 5 1 The other deduction that I thought might, 2 that I saw no indication of an adjustment for was 3 when vehicles are sold with -- with tax-paid 4 gasoline inside of 'em, they're entitled to a 5 tax-paid resold credit of that gasoline. And that's 6 just indicative of the industry. 7 More indicative of a new car industry, but 8 certainly a used car. Presuming that you purchase a 9 car, there's going to be gas in it, you're not going 10 to have to rush to the gas station and fill it up. 11 And most used car dealers don't have their own gas 12 station where they can purchase the gas ex-tax. 13 So just two examples of deductions that 14 should have been taken. Members, I'm almost of a 15 mind to -- 16 Maybe we should put this over and have the 17 Department sort of respond to that. Unless there's 18 some kind of -- 19 Mr. Angeja? 20 MR. ANGEJA: We actually ordered a re-audit 21 with the first D&R to expressly look at bad debts. 22 The taxpayer had claimed in excess of $95,000 worth 23 of bad debts. The Department in the re-audit 24 expressly looked for that. There's specific 25 documentation that we need in accordance with 26 Regulation 1642. 27 MR. HORTON: Familiar with it. 28 MR. ANGEJA: Related entities aren't the 6 1 same person as this taxpayer. But a retailer can 2 claim a bad debt deduction by its lender under 3 1642. 4 MR. HORTON: Right. 5 MR. ANGEJA: They need to make a timely 6 election that has to be on file with the Board. 7 I've got to believe that since we ordered a 8 re-audit for them to go do it, that they would have 9 looked. And the taxpayer was given every 10 opportunity to provide that documentation. And if 11 there was documentation to support it, that bad debt 12 deduction would have been allowed. So we have 13 expressly looked at that. 14 I believe tax-paid purchases resold for 15 fuel wasn't addressed. I don't how material that 16 might be. Could be a lot, or I don't -- that part 17 hasn't been examined. I do know that we didn't ask 18 that question. But I know expressly for bad debts, 19 we did. 20 MR. HORTON: Yeah, I mean, total -- total 21 unreported sales, according to the audit is 22 $6 million. $95,000 in bad debt on a $6 million 23 audit seems to be relatively low given the nature of 24 this industry. 25 And I believe -- I can't recall exactly 26 where I got these numbers from, but there 27 is statistical data out there that says you can 28 almost expect to have a certain percentage of bad 7 1 debts in this industry, high interest, um -- um, not 2 necessarily your most credit-worthy constituencies. 3 You sort of have this challenge. 4 But here again, opportunity given to 5 provide the evidence, no response. No response here 6 and now. You know, we can't defend something that's 7 not defending itself. I get that. And in these 8 types of cases where the liability's high and the 9 original audit had a fraud liability on it, there's 10 probably a lot more going on which is the other 11 concern I have. 12 We -- the Board of Equalization sort of 13 experienced back in the ear- -- late 90s that these 14 types of industries were laundering money through 15 their -- through their car dealership. And so when 16 the Board came in, they just simply threw up their 17 hands because they didn't want to deal with the 18 criminal component of their activities and paid the 19 tax. 20 But even in that environment, I just feel 21 that we have a fiduciary responsibility to be 22 reasonable in our adjustments. And had they came 23 before us, I certainly would have argued that the 24 industry average for bad debt deduction should have 25 been applied far greater than $95,000. But that's 26 not the case. 27 MS. MA: Okay. So do we have to make a 28 decision on the Section 40? 8 1 MR. ANGEJA: No. If you make a decision on 2 this case, we will bring back a draft Section 40 3 decision for you once it's gone final. 4 MS. MA: Okay. So I think the motion was 5 to, um, just to waive the negligence penalty but to 6 otherwise go with the Department. 7 MS. RICHMOND: Yes. 8 MS. MA: And it seems like it's without 9 objection, so that will be the order. 10 ---oOo--- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on January 24, 2017 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 9 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: January 26, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 10