BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1113 (Wolk)
Hearing Date: 05/17/2010 Amended: 04/28/2010
Consultant: Mark McKenzie Policy Vote: Rev&Tax 3-2, Jud
3-1
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BILL SUMMARY: SB 1113 would authorize the Franchise Tax Board
(FTB), after a final determination of the Board of Equalization
(BOE) on a taxpayer appeal, to file a suit against a specified
taxpayer as a "trial de novo" in superior court to determine a
tax deficiency, a claim for refund, or a disallowance of
interest.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
DOJ costs (per 10 cases) $850 $1,307
$1,307General
Potential revenue gains
($0-$25,000)General
trial de novo judgments
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
The FTB administers the personal income tax and the corporation
tax laws according to the federal and state Constitution and
statutes. The BOE is a constitutional board consisting of four
elected members and the State Controller that is charged with
administering the sales and use tax, excise taxes, special
taxes, and the state's fee programs. BOE also adjudicates
income tax appeals after FTB's administrative dispute process is
exhausted. If the taxpayer disputes the BOE ruling, the
taxpayer must pay the disputed taxes and may file suit in
superior court for a refund of the tax paid. The suit is heard
as a "trial de novo," a new trial as to law and facts, rather
than as a direct appeal of BOE's determination. If FTB disputes
a BOE ruling, existing law does not allow FTB to file a suit in
superior court as a trial de novo to determine a deficiency.
The BOE is the only tax dispute resolution body in the United
States comprised of elected officials.
This bill would allow FTB to file suit in superior court as a
trial de novo to determine a deficiency within 90 days of a
final determination by BOE. This authority would only apply to
corporate taxpayers with a deficiency amount of over $1 million
or personal income taxpayers with a deficiency amount of over
$100,000. This bill would also provide a rebuttable presumption
that the notice of action issued by FTB related to the
taxpayer's obligation is correct, and the taxpayer would have
the burden of proving that FTB's determination is incorrect.
The BOE receives as many as 1,500 appeals in a year, but many
are resolved without an oral hearing before the board. BOE
heard 49 income and corporation tax cases last year, about 80 in
the previous year, and 120 in the year before that. It is
unknown how many of these would meet the deficiency amount
threshold and qualify for a trial under this bill.
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SB 1113 (Wolk)
FTB estimates that fewer than 10 suits would be filed each year
under the authority provided by SB 1113. The Attorney General
(AG) would represent FTB in these suits as the attorney of
record for the state. The AG estimates that a caseload of 12
lawsuits in a year would require the time of six Deputy Attorney
General (DAG) staff with administrative support at a full-year
cost of approximately $1.57 million. Actual costs would depend
on the number of cases in a year, the complexity of each case,
and the aggressiveness of taxpayer representation. FTB staff
costs to support the AG would be relatively minor.
The bill would result in no revenue impact until 2012-13, and
future potential revenue would depend upon the outcomes of the
suits. FTB indicates revenue gains could range from $0 to $25
million initially per year, with the potential for growth in
future years.
From the taxpayer's perspective, the current BOE tax appeal
process presents a relatively inexpensive, accessible, and
timely resolution of tax disputes. Faced with the potential
that a tax dispute may end up in court, regardless of BOE's
determination, some taxpayers may opt to pay their tax liability
and attempt to recover a refund through the courts, or simply
pay their disputed liability and walk away rather than taking
the time and expense related to adjudication at the courts.
Staff notes that to the extent that more cases are heard in the
courts rather than BOE, SB 1113 would result in higher costs to
the AG for representing FTB than the figures represented above.
This could also result in increased tax revenues in a given
fiscal year to the extent that taxpayers pay the disputed taxes
up front and file suit in superior court for a refund, or simply
pay the taxes and walk away.