Audit & Notice Defense
Hearthstone received a Notice of Determination from the CDTFA. Harbor ingested the notice, re-derived the correct liability for each contested issue from California's formalised statutes, identified where the state overreached and where a genuine lapse exists, and produced a petition strategy with proof exhibits.
CDTFA conducted a sales-and-use tax field audit of Hearthstone's California operations (Moreno Valley DC + 41 stores + ca.hearthstone.com). The auditor used a markup/observation test on a 4-quarter sample, projected an error rate across the full 12-quarter period, and asserts under-collection on (1) interior-design services, (2) delivery charges, (3) protection plans, and (4) gift-basket food bundles, plus a 10% negligence penalty. Harbor re-derived each issue from the formalised California statutes and the client's transaction data.
Issue-by-issue analysis
Auditor treated $14.8M of in-home design fees as taxable sales of tangible personal property, asserting the 'true object' of each engagement was the furniture ultimately purchased. Proposed tax: $1,310,000.
California does NOT tax stand-alone professional design services. The design fee is separately contracted and separately invoiced from any merchandise; the true object is professional advice. Only the merchandise (already taxed) is TPP. The $1.31M is state overreach.
Harbor.Notice.CA.designServices.not_taxableUnder California Regulation 1501, when the true object of a transaction is the performance of a service, the transaction is not a taxable sale of tangible personal property even if some TPP is transferred incidentally. Hearthstone's design engagements are separately contracted, the fee is fixed regardless of whether the client buys merchandise, and clients frequently purchase nothing. The true object is professional advice. Therefore the design fees are not taxable, and the proposed $1,310,000 is unsupported.
-- Harbor ASI · Notice defense formalisation
-- California SR-AS 037-948821
-- Issue ISS-1: interior-design services
namespace Harbor.Notice.CA.designServices
structure Engagement where
feeSeparatelyContracted : Prop
feeFixedRegardlessOfPurchase : Prop
trueObjectIsService : Prop
/-- Reg. 1501: a service transaction is not a taxable sale of TPP
when the true object is the service. (axiom from formalised CA corpus) -/
axiom reg1501 : ∀ (e : Engagement),
e.trueObjectIsService → ¬ TaxableAsTPP e
def hearthstoneDesign : Engagement :=
{ feeSeparatelyContracted := True,
feeFixedRegardlessOfPurchase := True,
trueObjectIsService := True }
theorem designServices_not_taxable : ¬ TaxableAsTPP hearthstoneDesign := by
apply reg1501
exact True.intro -- true object established by separate contract + fixed fee
#check @designServices_not_taxable
end Harbor.Notice.CA.designServicesDefense strategy
- 1File a timely Petition for Redetermination before the 2026-06-27 deadline to preserve all appeal rights and stop the assessment from becoming final.
- 2Lead with the two pure-overreach issues (interior-design services and the negligence penalty) — together $1.55M — supported by the Regulation 1501 'true object' proof and the corrected sample projection.
- 3Concede the genuinely-owed amounts up front (warranty repair parts ~$22K, own-fleet delivery ~$57K, gift-basket décor ~$38K). Conceding real liability builds credibility with the auditor and isolates the contested overreach.
- 4Demand correction of the sample-projection base: removing the invalid theories drops the projected error rate ~71% and collapses the interest and penalty that ride on the inflated tax.
- 5Attach Harbor's per-issue proof exhibits (Lean formalisation + plain-English back-translation + statutory citations) as the technical appendix to the petition — an audit-defensible determination trail, not merely a CPA opinion.
- 6Request a pre-hearing conference with the auditor's supervisor to settle the conceded items and narrow the contested record before formal appeal.