Major reform is coming to the way California administers its tax laws. On June 27, 2017, the Taxpayer Transparency and Fairness Act of 2017 (A.B. 102 or the “Act”), was signed into law by Governor Jerry Brown after passing both the California Senate and Assembly with little resistance. The Act fundamentally alters the administration of California’s tax laws by divesting the California State Board of Equalization (“Board”) of several of its key functions and assigning them to two new government agencies established by the Act: (1) the California Department of Tax and Fee Administration (“Tax Department”); and (2) the Office of Tax Appeals.
Under the new law, the Board will continue to retain the duties and powers granted to it under the California Constitution relating to certain property tax oversight and assessment functions, insurance company taxes, and alcoholic beverage taxes, as well as its statutory duty to adjust motor vehicle fuel tax rates for the 2018-2019 fiscal year. The Board’s duties and powers will otherwise be limited. The Office of Tax Appeals will now take over the tax appeals function currently performed by the Board, and the Tax Department will take over all remaining duties and powers currently held by the Board (i.e., the administration of sales/use taxes and special taxes and fees).
The Act sets forth an aggressive timeline for implementation. Specifically, the powers and functions of the Board being transferred to the Tax Department will be transferred on July 1, 2017, and the Office of Tax Appeals will begin hearing appeals on January 1, 2018.
Reasons for the Act
Unlike virtually every other taxing agency in the U.S., the Board is comprised of elected board members. The apparent intent of utilizing elected board members was to provide direct accountability to governance – i.e., if taxpayers were dissatisfied with how the agency was functioning, they could elect new board members. The legislature, citing various audits and examinations of the Board by other state agencies, found that this feature had other, less-desirable consequences and detailed them in the Act itself. Some of the more critical findings listed in Section 2 of the Act include:
- “…[T]he board’s operational culture severely impacts its ability to report accurate and reliable information to the public, the administration, and the Legislature.”
- The Board’s “current practices support inappropriate interventions by board members in administrative and appeal-related activities, all of which have led to inconsistencies in operations, breakdowns in centralized processes, and activities contrary to state law and budgetary and legislative directives.” The “current system of routine interference by members of the State Board of Equalization or their staff effectively eliminates the. . . ability to. . . effectively and efficiently operate the organization.”
- Acknowledgment of “numerous complaints concerning members of the State Board of Equalization and their staff’s attempt to influence the audits, investigations, and collections activities of the board’s civil service employees.”
- Acknowledgement that the Board’s civil service employees are “handicapped in their efforts to fairly apply the law through the undue influence of elected board members and the staff of board members.”
- Acknowledgement that the Board’s “failure to focus on its core responsibilities [led to] significant errors in the board’s allocation of sales and use tax revenue among the state, cities, and counties. . . result[ing] in the inability to effectively plan for the provision of public services.”
In light of these concerns, the Act seeks to “refocus the board’s efforts toward its core constitutional responsibilities” and proposes to achieve this goal by assigning the Board’s other duties to the newly-formed Tax Department and Office of Tax Appeals. The new law also establishes limitations on powers of Board members to address these concerns, providing, among other items, that Board members do not have authority to promote or demote board employees and that Board members shall not interfere or influence the Board’s or Tax Department’s legislative analyses, revenue analyses, or any other form of technical assistance requested by the Governor or the legislature.
The Department of Tax and Fee Administration
The Tax Department will be headquartered in Sacramento and will take over the Board’s collection and administrative responsibilities for California’s sales and use taxes and other special taxes and fees as of July 1, 2017. Under Section 5 of the Act, the Tax Department is the “successor to, and is vested with, all of the duties, powers, and responsibilities of the board.” Moreover, the Tax Department will “succeed to all of the rights and property of the board.” Specifically, the Act transfers the property, employees, and caseload of the Board to the Tax Department to the extent that they are unrelated to the duties to be retained by the Board. The Tax Department will have the power to adopt regulations as needed to carry out its duties and, until January 1, 2019, to adopt emergency regulations to carry out its duties, powers, and responsibilities.
Unlike the Board, which currently has elected board members, the Act requires the Governor to appoint three civil servants to lead the Tax Department: a director (subject to Senate confirmation), a chief deputy director, and a chief counsel. The Act provides for the confidentiality of taxpayer information reviewed by those individuals and the Tax Department and imposes criminal penalties for violating those rules.
The Office of Tax Appeals
As noted above, the Office of Tax Appeals will take over the Board’s administrative tax appeal function. The Office of Tax Appeals will have a management team consisting of a director, a chief deputy director, and a chief counsel – all of whom will be appointed by the Governor, subject to Senate confirmation. The Office of Tax Appeals will be headquartered in Sacramento, with hearing offices in Sacramento, Fresno, and Los Angeles. Each tax appeals panel will consist of three administrative law judges (“ALJ”) who will be appointed by the director.
Taxpayers bringing an appeal to the Office of Tax Appeals may be represented by any authorized person at least 18 years of age, including, but not limited to, attorneys and certified public accountants. A written opinion must be issued in connection with each appeal decided, and the opinion must be issued within 100 days of the panel’s final decision. In addition, appeals from a final decision by the Office of Tax Appeals may be made to one of California’s superior courts in accordance with the law imposing the contested tax or fee. Such appeals will be subject to a de novo standard of review at the superior court.
The changes described above are scheduled to be implemented at an astonishing pace. The Board is currently one of California’s most important agencies, as it collects roughly $60 billion of the state’s annual tax revenue and adjudicates all taxpayer administrative appeals. Divesting most of the Board’s tax administration and collection duties and all of its administrative hearing functions to two newly-formed agencies acting independently from the Board in the proposed timeframe is an ambitious task. Taxpayers should expect some degree of turbulence in the weeks and months ahead.
The bigger question is whether these agencies will fix the Board’s problems identified by the Act. The Act correctly states that “California taxpayers are entitled to a tax administration and appeals process that is fair, transparent, consistent, equitable, and impartial.” It clearly finds that the taxpayer-elected leadership of the Board facilitated widespread dysfunction and inequity. Under the new regime, the Governor now has the sole authority to appoint the leadership for both agencies. Will this help create more efficient, transparent, and fair tax administration? The answer, which will benefit from the clarifying lens of hindsight, probably depends on who you are asking, but the officials ultimately appointed to run these agencies, particularly the ALJs selected by the director of the Office of Tax Appeals, should give taxpayers some indication of the shape of things to come.