Underpayment of License Fees (Phase I)

CPSD contends that Starving Students underpaid license fees in 1998, 1999, and 2000, because Starving Students' quarterly reports for those years are false. CPSD contends Starving Students did not include in those reports all applicable revenue accounts subject to license fees.

Parties' Contentions

CPSD reviewed Respondents' quarterly reports, work papers, annual financial statements, and California income tax returns for the years 1998, 1999, and 2000. Gross operating revenues were lower on Starving Students' quarterly reports filed with the Commission than on its annual financial reports. In reviewing various sources to obtain accurate gross operating revenues for those years, CPSD found only Starving Students' California income tax returns reliable.

Starving Students included only three revenue accounts in its quarterly reports' computation of gross operating revenue-local moving, intrastate moving, and packing materials/box sales, and occasionally miscellaneous box sales. (Exhibit 1.) CPSD contends Starving Students omitted without justification revenue accounts such as intrastate moving-long haul, pick and hold intrastate revenue, and packing labor-intrastate, and others in violation of § 5201.⁷ As a result, CPSD contends that Respondents underpaid license fees for 1998, 1999, and 2000.

Starving Students admits that the sum of the gross revenues reported in its quarterly reports for 1998, 1999, and 2000 is lower than the total reported to the Commission in its annual reports or to the Franchise Tax Board in its Schedule R-1 but notes that the various reports require the reporting of different revenues. Starving Students contends that the annual reports should not include revenues derived from moves on premises, non-regulated storage services, Commission fees, and fuel charges. Starving Students claims it reports all revenue from interstate operations as California revenue on its Schedule R-1s, regardless of where the sale or move originated, because California is the location of Starving Students' corporate headquarters. (Ex. 5 at 4-5.)

Calculation of Operating Revenues

CPSD used two methodologies to compute Starving Students' gross operating revenues, the first based on Starving Students' California income tax returns (Table 1) and the second based on Starving Students' annual reports submitted to the Commission (Table 2).⁸

TABLE 1

TABLE 2

Although CPSD found only Starving Students' income tax returns reliable, CPSD contends that annual report figures also can be used to estimate revenues to determine the underpayment. Starving Students claims that in at least one year the annual report contains both interstate and other state revenues. Where there is a dispute as to the amount of revenues reported, estimating revenues can present the problem found here-lack of reliability in the supporting documentation. Starving Students' annual report revenues for 1999, $22,255,480, are significantly higher than revenues reported on the income tax returns, $17,049,246 and considerably higher than revenue reported for 1998, $11,654,927, and for 2000, $12,070,594. It would appear that other state revenues are commingled with California revenues in 1999, as Starving Students contends. Whatever the reason, the significant discrepancy between 1999 revenues reported on the income tax returns and annual reports negates any advantage of using annual report revenues to estimate gross operating revenues. Therefore, we will use Starving Students California income tax returns to estimate gross operating revenues.⁹

Exclusions from Gross Operating Revenues are Limited

Starving Students states revenues from exempt shipments, subject to a lower regulatory fee, are included in its California income tax revenues. Starving Students also claims that revenues associated with moves on premises, bad debt, non-regulated storage services, and Commission fees and fuel charges should not be included in gross operating revenues subject to the requirement to pay license fees.¹⁰ Starving Students' analysis adjusted its income tax revenues accordingly; CPSD did not verify the accuracy of those deductions. CPSD contends there is no Commission directive that permits Starving Students to exclude Commission fees and fuel charges from operating revenues. CPSD also claims revenues from moves on premises are not included in operating revenues, because Starving Students deducted them. CPSD notes that revenues for exempt shipments were not separately stated on the quarterly and annual reports, as required. Finally, CPSD states bad debt is expensed and should not be separately excluded from revenues.

The Commission collects license fees reported on quarterly revenue statements from household goods carriers. (Pub. Util. Code §§ 5328, 5003.1.) Pub. Util. Code § 5002 provides that gross operating revenue subject to payment of a license fee includes:

All revenue derived from the transportation of property having origin and destination within this state, where the revenue is derived from transportation performed under a permit issued by the commission.

It follows that gross operating revenue is broadly defined to encompass all revenues from the transportation of property within our jurisdiction. We have not exempted assessed fees and fuel charges from operating revenues. Permitting carriers to assess those fees does not remove resulting revenues from inclusion as gross operating revenue. We find that assessed fees and fuel charges are not exempt from license fees and that Starving Students cannot deduct bad debt from revenues reported to the Franchise Tax Board for the purpose of estimating gross operating revenues.

Max Tariff 4, item 160, distinguishes storage-in-transit, subject to regulation, from storage that exceeds 90 days and is not regulated. However, CPSD concluded that Starving Students appears to have improperly deducted the accounts for storage-in-transit-local and storage-in-transit intrastate. Since Starving Students refers to the storage revenues found in Exhibit 1, CPSD's investigation report, and CPSD included intrastate storage revenue accounts that did not distinguish between storage duration, we cannot determine if unregulated revenues are included in Starving Students' deduction. Thus, we will not adopt a deduction for storage-in-transit. Furthermore, under accrual accounting, estimates for bad debt are incorporated in revenues reported to taxing authorities. If those estimates for bad debt exceed recorded debt, the remedy is to adjust the estimate, not to deduct the difference.

Interstate and Unregulated Revenues Properly are Excluded from Gross Operating Revenues

Interstate and exempt revenues are not subject to Commission license fees. Starving Students demonstrated that its California income tax returns include some interstate revenues, due to income tax reporting requirements. We approve Starving Students' deductions for interstate revenues ($3,408,678 for 1998, $4,701,724 for 1999, and $3,742,074 for 2000), which are excluded from our fee assessments. We also approve deductions for moves on premises ($341,864 for 1998, $435,928 for 1999, and $438,559 for 2000), which are unregulated, and separate exempt shipments ($772,324 for 1998, $472,015 for 1999, and $455,186 for 2000), which are assessed at a different fee level. Although CPSD did not verify Starving Students' calculations of these amounts, Starving Students' accountant testified she reviewed the underlying revenues and based her calculations of interstate revenues on amounts reported in attachments to CPSD's testimony. She obtained moves on premises and exempt shipment revenues from Starving Students' accounting files. CPSD did not review the data from those accounting files to assess its reliability. Because § 5331 requires an estimate of revenues, we can assume that those accounting files are sufficiently accurate to make that estimate. We calculate used household goods revenues in Table 3.

TABLE 3

Year	California Income Tax Return	Revenue Not Subject to Fees	Gross Operating Revenues	Exempt Shipment Revenues	Used Household Goods Revenues
1998	$14,897,273	$3,750,542	$11,146,731	$772,324	$10,374,407
1999	$17,049,246	$5,137,652	$11,911,594	$472,015	$11,439,579
2000	$15,352,263	$4,180,633	$11,171,630	$455,186	$10,716,444
Total	$47,298,782	$13,068,827	$34,229,955	$1,699,525	$32,530,430

We calculate underreported revenues in Table 4.

TABLE 4

Year	Gross Operating Revenues	Quarterly Report	Underreported Gross Operating Revenues	Underreported Exempt Shipments	Underreported Household Goods Revenues
1998	$11,146,731	$10,945,072	$201,659	$772,324	($570,665)
1999	$11,911,594	$10,329,670	$1,581,924	$472,015	$1,109,909
2000	$11,171,630	$9,149,307	$2,022,323	$455,186	$1,567,137
Total	$34,229,955	$30,424,049	$3,805,906	$1,699,525	$2,106,381

Using California income tax returns, Starving Students underreported gross operating revenues in 1998, 1999 and 2000, by a total of $3,805,906. Starving Students underreported used household goods revenues in 1999 and 2000 and overreported used household goods revenues in 1998, totaling $2,106,381 in underreported household goods revenues for 1998, 1999, and 2000. Because Starving Students did not report exempt shipment revenues on its quarterly reports, Starving Students underreported exempt shipment revenues for 1998, 1999, and 2000 by $1,699,525, using California income tax returns.

CPSD Did Not Prove Starving Students Intentionally Underreported Gross Operating Revenues

CPSD contends Starving Students' actions were intentional, because all quarterly reports include the same revenue accounts, Respondent Margalith did not oversee preparation of the quarterly reports, the reports were prepared by different individuals, and Starving Students refiled an annual report with the Washington Utilities and Transportation Committee and agreed to pay less than $4,000 in additional fees pursuant to a settlement agreement. Starving Students asserts that CPSD has not shown that any of its actions were intentional and that the Washington settlement does not prove Starving Students misrepresented revenues in either Washington or California. Starving Students claims different individuals were responsible for preparing the Quarterly and Annual Reports and these individuals did not coordinate the preparation of these reports. (Exhibit 3 at 5.)

We may suspend the permit of a household goods carrier if the carrier knowingly and willfully files a false report that understates gross operating revenues or, in the alternative, impose a fine of not more than $20,000. (Pub. Util. Code § 5285.) In addition, Rule 1 of our Rules of Practice and Procedure requires that any person who transacts business with the Commission agree to comply with the laws of the State of California, maintain the respect due the Commission, and never to mislead the Commission or its staff by an artifice or false statement of law.

CPSD fails to establish that Starving Students knowingly and willfully filed false quarterly reports that understated revenue. The employees who prepared those reports are no longer with Starving Students and did not testify in this proceeding. It is impossible to infer from the evidence before us that Starving Students omitted certain revenue accounts with the intent to falsify those reports. Consistency in preparing the quarterly reports is insufficient to show intent to falsify. In addition, Starving Students' annual reports contained higher revenues, an unlikely outcome if there were intent to underreport revenues. The facts in evidence are insufficient to establish intentional conduct.