California Creates New Tax Departments; Limits Roles of Elected Tax Officials
| Publication year | 2017 |
| Author | By Chris Micheli |
By Chris Micheli1
As part of the California state budget adopted on June 152 for the fiscal year that began on July 1,3 the Legislature and Governor stripped almost all authority from the State Board of Equalization (SBE)4 and transferred the SBE's duties and responsibilities to two new state departments created on July 1, 2017. The SBE and its 5-member elected Board5 have been in existence for almost 140 years.6 There were other efforts to limit the scope of law changes to the SBE and California's tax system, but those were unsuccessful.7 This bill is the most dramatic change in the California tax system in decades. It represents a significant weakening of an elected body most of whose duties are transferred to the executive branch.
Originally created to oversee the uniform assessment of local property taxes, the SBE has acquired numerous other duties as the State of California has expanded its taxation system to include sales and use taxes, liquor, fuel, and over 30 other tax and fee programs8 administered by the SBE.9
The California Constitution establishes the SBE as an elected board and charges it with equalizing property tax assessments across the state, as well as assessing certain statewide properties of a unitary nature, and several other specific constitutional provisions relating to local property taxes,10 insurance taxation,11 and alcoholic beverages taxes12 that remain with the SBE after the enactment of AB 102.13
Prior state laws gave additional authority to the SBE relating to the administration of various taxes and fees and generally make the SBE responsible for administrative appeals relating to the collection of those taxes and fees, as well as for income taxes collected by the Franchise Tax Board (FTB).14 15
In addition to the overall budget blueprint set forth in AB 97,16 the main budget bill also adopted on June 15, the Legislature passed AB 10217 to leave the SBE only with its duties and responsibilities specifically set forth in the California Constitution. AB 102 represents the culmination of decades of complaints that have been lodged against the elected members of the SBE, which has been under withering criticism regarding allegations of interfering with audit staff to misuse of revenue-generating staff to charges of nepotism. AB 102 was signed into law by Governor Brown on June 27, 2017.
According to the official bill analysis of AB 102, "This bill establishes the Office of Tax Appeals (OTA) for purposes of adjudicating tax disputes related to state taxes and fees, shifts the administrative activities of the Board of Equalization (BOE) to the newly-established California Department of Tax and Fee Administration (CDTFA), and maintains the elected BOE as a body rededicated to its core tax administration responsibilities as set forth in the California Constitution."18
All of the statutory duties and responsibilities of the SBE were transferred, effective July 1, 2017,19 to the newly-created Department of Tax and Fee Administration20 (DTFA) and the Office of Tax Appeals21 (OTA), both of which will be housed in the California Government Operations Agency. AB 10222 is to "be known and may be cited as the Taxpayer Transparency and Fairness Act of 2017."
AB 102 designates the DTFA as the successor to, and is vested with, all the duties, powers and responsibilities of the SBE. In addition, AB 102 also establishes the OTA as the successor to, and vested with, all the duties, powers and responsibilities of the SBE that are necessary or appropriate to conduct appeal hearings.
Pursuant to AB 102, the SBE will only continue to have duties, powers and responsibilities that it possesses through the Constitution such as measurement of county assessment levels and adjustment of secured local assessment rolls, the assessment and collection of excise taxes on the manufacture, importation, and sale of alcoholic beverages, and the duty to adjust the rate of the motor vehicle fuel tax for 2018-2019. After December 31, 2017, it will no longer serve as an appeals body except for those constitutional provisions applicable to the SBE.
Initially, it was expected that this budget trailer bill23 would be narrowly focused on the recently-concluded Department of Finance24 (DOF) audit issued in March of this year that showed elected members of the SBE had inappropriately intervened in the tax agency's daily operations, created a climate of fear among some civil servants, and allowed questionable accounting that misallocated tax revenue to the tune of $52 million.
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While the California business community and tax practitioners actively worked against AB 102 in the three days between when the bill language became publicly available25 and when it was voted upon,26 the bill was heavily lobbied in favor by labor groups including the California Labor Federation27 and the Service Employees International Union.28 AB 102 also had strong support and advocacy from Governor Jerry Brown, Senate leader Kevin de Leon, Assembly Speaker Anthony Rendon, and Assembly Budget Committee Chairman Phil Ting.
While AB 102 initially stalled on the Senate Floor Thursday afternoon (the Senate was the first house to take up this particular trailer bill), it ultimately passed by a vote of 22-13 (21 votes was the minimum required). It took several hours of lobbying by organized labor and the Governor's staff to finally get sufficient votes for the bill to pass the State Senate. Thereafter, the bill easily passed the State Assembly and was on its way to the Governor's Desk.
The bill received extensive debates on both floors of the State Legislature, with Democrats voicing support and Republicans speaking in strong opposition both to the policy changes contained in AB 102, as well as the lack of deliberative process to adopt the budget trailer bill.
Some Capitol observers believe AB 102 could violate several provisions of the California Constitution. For example, Article IV, Section 8(d) prohibits the Legislature from creating or abolishing any office with urgency legislation. While AB 102 is not per se an urgency clause bill, as a budget trailer bill, its provisions take effect immediately upon signature by the Governor, just as an urgency bill does. While AB 102 does not abolish any office, it creates two new offices—the DTFA and the OTA.
AB 102 adds new provisions to the Government Code29 and establishes in the Government Operations Agency30 the DTFA and places it under the control of a director appointed by the Governor and subject to confirmation by the Senate. The bill also authorizes the Governor to appoint a chief deputy director and a chief counsel, but neither of these positions are subject to Senate advice and consent.
In addition, AB 10231 authorizes the DTFA to adopt regulations, including emergency regulations, necessary or appropriate to carry out these provisions, as well as authorizes the DTFA to conduct certain inspections and examinations related to the administration of the taxes and fees under its jurisdiction. The bill prohibits the director, the chief deputy director, and the chief counsel from divulging information concerning the business affairs of companies reporting to the department and makes it a crime to violate this prohibition.
AB 102 requires each member of the SBE elected by the voters of an equalization district to have one office in Sacramento and one district office. The bill requires each member of the board elected by the voters of an equalization district to have 2 staff persons who are exempt from civil service and other civil service staff persons and requires SBE member procurements to be processed through the Department of General Services. These provisions are operative on July 1, 2017.
In addition, AB 102 establishes in state government the Office of Tax Appeals and places the office under the control of a director appointed by the Governor and subject to confirmation by the Senate. The bill authorizes the Governor to appoint a chief deputy director and a chief counsel. The bill transfers to the office the various duties, powers, and responsibilities of the State Board of Equalization necessary or appropriate to conduct appeals hearings, except for those duties, powers, and responsibilities imposed or conferred upon the board by the California Constitution.
Within the office, the bill establishes tax appeals panels and requires each tax appeals panel to consist of 3 administrative law judges. The bill, on and after January 1, 2018, requires the tax appeals panels to conduct and prohibits the SBE from conducting, appeals hearings for those duties, powers, and responsibilities transferred to the office.
Finally, AB 102 appropriates $5,000,000 from the General Fund to the Office of Tax Appeals for specified administrative costs.
AB 10232 contains numerous legislative findings and declarations:
"The Legislature finds and declares all of the following: "California taxpayers are entitled to a tax administration and appeals process that is fair, transparent, consistent, equitable, and impartial. Such a system is vital for both taxpayers and their businesses as well as the state's ability to pay for public services, including, but not limited to, education, health and human services, public safety, transportation, and the environment.33
"One of the most fundamental aspects of a good tax system is a fair and efficient appeals process. Taxpayers deserve to have appeals considered by an independent, objective panel with sufficient expertise and a sole focus on tax issues. Any appeals forum must issue decisions in a transparent fashion, relying on well-established precedents in tax law, providing open public access and choice of representation, and building a record that both taxpayers and tax administration agencies can rely upon...
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