BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1113|
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THIRD READING
Bill No: SB 1113
Author: Wolk (D)
Amended: 4/28/10
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-2, 4/14/10
AYES: Wolk, Alquist, Padilla
NOES: Walters, Ashburn
SENATE JUDICIARY COMMITTEE : 3-1, 4/20/10
AYES: Corbett, Hancock, Leno
NOES: Harman
NO VOTE RECORDED: Walters
SENATE APPROPRIATIONS COMMITTEE : 7-3, 5/27/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee
NOES: Denham, Walters, Wyland
NO VOTE RECORDED: Cox
SUBJECT : Franchise Tax Board: tax administration:
determinations
SOURCE : Author
DIGEST : This bill, for determinations issued by the
State Board of Equalization on or after January 1, 2011,
authorizes the Franchise Tax Board (FTB) to bring an action
for a trial de novo in superior court to determine the
deficiency amount, the amount of refund or credit, or
disallowance of interest that was the subject of the
CONTINUED
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determination of the State Board of Equalization, where the
amount of the deficiency, overpayment, or disallowance of
interest exceeds $100,000 for taxpayers subject to tax
imposed under the Personal Income Tax Law, or $1,000,000
for taxpayers subject to tax imposed under the Corporation
Tax Law. Any action filed by the FTB under this bill shall
be commenced and tried in the city or city and county in
which the Attorney General maintains an office that is
located nearest to where the taxpayer resides or maintains
a principal place of business. In the event the taxpayer
no longer resides or has a principal place of business in
the state, the FTB may bring the action in any city or city
and county where the Attorney General maintains an office.
A taxpayer may file a motion to change the venue of any
suit filed under this subdivision to a venue closer to the
taxpayer's principal residence or principal place of
business and the motion shall not be opposed by the
Attorney General or the counsel for the FTB.
ANALYSIS : California's tax regulation scheme is
antiquated. Dan Simmons, Professor of Law at UC Davis,
opined in his article "California Tax System: Time for
Reform," published in the University of Santa Clara Law
Review, Vol. 48, 2008, as follows:
California's tax collection system has been
characterized in at least one legislative study as
duplicative, a financial waste, a diffusion of
activities and responsibilities, and as a hodgepodge of
boards, and elective and appointed officials not truly
responsive to the Governor. The current structure
evolved from mechanisms created in the State
Constitution of 1879 in order to equalize property
taxes among competing mining and grazing counties in
the state. While both the California economy and the
sophistication of its revenue laws has grown, the state
remains saddled with an antiquated tax collection
system supervised in large part by an elected board
with no particular experience with tax matters.
California has two tax review bodies: the Board of
Equalization (BOE) and the FTB. FTB is responsible for
reviewing income tax returns of California's taxpayers.
When FTB finds an error, they have the authority to revise
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the taxpayer's overpayment, refund, or deficiency
assessment amounts. If a taxpayer disagrees with an FTB
tax determination, the taxpayer can appeal FTB's finding.
BOE is charged with reviewing the taxpayer's appeal. When
BOE affirms FTB's findings to the detriment of the
taxpayer, the taxpayer can appeal the BOE decision to the
Superior Court. Conversely, FTB has no redress for an
adverse BOE decision.
Prior Legislation
SB 548 (Burton), of 2003, among other things, would have
authorized the Attorney General, independently, or with the
approval of the Executive Director of the FTB or the
Director of Finance, to bring an action for a trial de novo
in superior court to determine the deficiency or carryover
amount, the amount of refund or credit, or allowance of
interest that was the subject of the determination of the
BOE. This bill died in the Assembly Revenue and Tax
Committee.
SB 3 (Greene), Chapter 31, Statutes of 2003), among other
things, authorized the BOE to hear appeals by taxpayers
regarding FTB decisions.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee analysis,
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 will meet the
deficiency amount threshold and qualify for a trial under
this bill. FTB estimates that fewer than 10 suits will be
filed each year under the authority provided by this bill.
The Attorney General (AG) represents FTB in these suits as
the attorney of record for the state. The AG estimates
that a caseload of 12 lawsuits in a year requires the time
of six Deputy Attorney General (DAG) staff with
administrative support at a full-year cost of approximately
$1.57 million. Actual costs depends on the number of cases
in a year, the complexity of each case, and the
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aggressiveness of taxpayer representation. FTB staff costs
to support the AG will be relatively minor. The bill
results in no revenue impact until 2012-13, and future
potential revenue depends 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.
The Senate Appropriations Committee staff notes that to the
extent that more cases are heard in the courts rather than
BOE, this bill will 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.
SUPPORT : (Verified 5/28/10)
Board of Equalization Chair Betty Yee
California Labor Federation
OPPOSITION : (Verified 5/28/10)
Asian Business Association
Board of Equalization Member Jerome Horton
California Chamber of Commerce
California Manufacturer Technology Association
California Society of CPAs
Cal-Tax
TechAmerica
ARGUMENTS IN SUPPORT : The author's office writes, "BOE
often makes decisions based on political considerations,
and not the appropriate application of law to the facts as
a Court would do. Decisions are rarely published, leaving
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little meaningful precedent to guide both taxpayers or tax
administration agencies, and can often be inconsistent from
case to case, resulting in further confusion. SB 1113 aims
to bring more consistency to BOE decision making in two
ways. First, with both sides of a tax dispute able to
appeal, courts will have additional opportunities to weigh
in on disputes and create meaningful precedent, instead of
the current system where a Superior Court may only hear
cases brought by taxpayers. Second, the BOE will know as
part of its decision making process that an increased
likelihood exists that its decisions will be subject to the
scrutiny of judicial review, making reliance on precedence
and building a record more important should it have an
interest in having its decisions upheld."
The chairwoman of BOE, Betty T. Yee (Ms. Yee), a supporter
of the bill, states that "BOE hears complex tax matters
related to large taxpayers whose resources match those of
the FTB . . . . Given the expense of litigating tax
appeals, it is highly unlikely the FTB would seek to appeal
any but the largest, most complex tax matters."
ARGUMENTS IN OPPOSITION : The opponents state the
following in opposition (1) Wrongfully Imposes Burden of
Proof on Taxpayer in FTB Appeals . This bill imposes the
burden of proof on the taxpayer, despite that the taxpayer
would essentially be the respondent in an FTB appeal to
superior court. Currently, if FTB chose to challenge the
decision of the BOE, the mechanism would be a petition for
writ of mandate and the burden of proof would lie with FTB
to prove that the BOE abused its discretion in deciding in
favor of the taxpayer. Under this bill, even though the
taxpayer proved his or her case at the BOE level and won a
favorable decision, the taxpayer would have to prove that
the decision was correct at the trial court level. This
approach is contrary to the approach taken in most other
civil cases where the petitioner has the burden of proof in
an appeal. Imposing the burden of proof on the taxpayer
both before the BOE and on appeal stacks the deck in favor
of FTB and against the taxpayer; (2) Forces Many Taxpayers
to Settle Meritorious Claims . Even taxpayers with
sufficient resources to fight the FTB's position beyond the
BOE likely will settle meritorious claims where the amount
in dispute does not justify moving forward with litigation;
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and (3) Eviscerates Important Check on FTB Action . This
bill creates an incentive for FTB to pursue nonmeritorious
appeals because the agency can use the appeal as leverage
for taxpayers to settle and because the agency knows the
costs of challenging FTB operate as a deterrent to the
taxpayer's fighting an appeal.
DLW:do 5/28/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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