BILL ANALYSIS Ó
AB 867
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 867
(Wagner) - As Introduced February 26, 2015
Majority vote. Fiscal committee.
SUBJECT: Tax administration: refunds: property tax: state
assessment: actions
SUMMARY: Extends the statute of limitations for filing a claim
for refund indefinitely in the case where a court has determined
that a tax, fee, assessment, surcharge, or other amounts have
been illegally levied or collected by the Franchise Tax Board
(FTB) or the State Board of Equalization (BOE), as specified.
Specifically, this bill:
1)Allows a person who has paid a tax, fee, assessment,
surcharge, or other amount to a tax agency (collectively
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referred to as "the amounts") to file a refund claim, even if
the statute of limitations for filing has expired, when a
court of competent jurisdiction, in its final and
nonappealable decision, has decided that those amounts have
been illegally levied or collected by the tax agency.
2)Specifies that a claim for refund must be filed within one
year after the date when the court's decision regarding the
legality of the amounts paid becomes final and nonappealable.
3)Does not require a person to file a claim for refund in order
to recover the illegally levied or collected amounts if the
tax agency has sufficient records to identify the person that
paid the amounts, as provided.
4)Requires a tax agency to refund the amounts paid, plus
interest, when:
a) A person has filed a claim for refund, either within one
year of the court's decision or prior to the effective date
of this bill, if the tax agency has not yet refunded those
amounts; or,
b) Information in the tax agency's records is sufficient to
identify the persons that have paid the amounts and the
person's current address, the date of payment, and the
amount paid.
5)Provides that, for purposes of bringing an action against the
tax agency for recovery of the amounts claimed as an
overpayment, the statute of limitations does not start running
until after the extended one-year period for filing a claim
for refund for those amounts has expired.
6)Applies to a property tax levied on state-assessed property
where the court of competent jurisdiction issues a final and
nonappealable decision that the property tax was illegally
assessed or allocated.
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7)Does not apply to transactions and use taxes imposed by local
governments in accordance with Part 1.6 (commencing with
Section 7251) of Division 2 of the Revenue and Taxation Code
(R&TC).
8)States that, upon appropriation by the Legislature, the
amounts necessary to make refunds shall be allocated to the
applicable tax agency.
9)Defines a "tax agency" as either the FTB or the BOE.
EXISTING FEDERAL LAW :
1)Requires taxpayers to file a claim for refund or credit with
the Internal Revenue Service (IRS), prior to filing a suit in
federal court for the recovery of any tax that is alleged to
have been erroneously or illegally assessed or collected, any
penalty claimed to be collected, or any sum alleged to be
excessive or wrongfully collected.
2)Prescribes that a taxpayer must file a suit for refund within
two years of the date that the IRS notice disallowing the
underlying claim, in whole or in part, was mailed.
3)Provides that, if the IRS fails to take action on a claim for
refund or credit within six months of the date of filing, a
taxpayer may file a suite for refund in federal court.
EXISTING STATE LAW :
1)Limits the time period within which a person may file a valid
claim for refund with the FTB or BOE for taxes, fees,
assessments, surcharges or other amounts, including applicable
interest or penalty.
2)Allows a taxpayer, in the case of an income or franchise tax,
to file a claim for refund within four years from the date
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when the tax return was timely filed, four years from the due
date of the tax return, or one year from the date of any
overpayment. (R&TC Section 19306.)
3)Requires a claim for refund to be in writing and state
specific grounds for refund.
4)Provides that, in the case the FTB fails to mail a notice of
action on any refund claim within six months after the
taxpayers has filed the claim, the taxpayer may consider the
claim disallowed and may either file an appeal with the BOE or
a suit in court to recover the refund amount claimed.
5)Specifies that interest on a refund claim is calculated from
the date of overpayment to 30 days preceding the date of the
refund warrant.
6)Allows a person, in the case of an overpayment of tax, fee,
assessment, surcharge or other amounts administered by the
BOE, to file a claim for refund no later than three years from
the return due date for the period for which the person made
the overpayment, six months from the overpayment date, or, for
a payment made pursuant to a determination, six months from
the date the determination became final. (R&TC Section 6902.)
7)Prescribes a different time period for persons who claim a
refund for an overpayment to the BOE if collected by means of
a levy, lien, or other enforcement procedure. For this type
of overpayment, the person may file a valid refund claim
within three years from the date the BOE collected the
overpayment. (R&TC Section 6902.3.)
8)States that a person's failure to file a refund claim within
any of these time periods invalidates the claim and prevents
the FTB or the BOE from making or allowing a refund or credit,
regardless of the merits of the claim.
9)Requires the BOE to assess market values for public utilities
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and railroads, as provided by the California Constitution, and
requires payment of taxes prior to commencing an action to
recover state-assessed property taxes arising from a disputed
assessment. Provides that this action must commence within
four years after the date the BOE mailed either its decision
or its written findings and conclusions, whichever is later.
FISCAL EFFECT : Unknown, but the FTB notes that the potential
revenue loss to the General Fund may be in the billions.
COMMENTS :
1)The Author's Statement . The author provided the following
statement in support of this bill:
"Existing law limits the time period that an individual may
file a valid refund claim with the Board of Equalization (BOE)
or the Franchise Tax Board (FTB) for a tax, fee, assessment,
surcharge, or interest, or penalty overpayment. Failure to
file a claim for refund within the specified time period
prevents an individual from being able to file for a refund at
a later date.
"Even if a tax, fee, assessment, surcharge, or other amount is
later declared unconstitutional or illegal, taxpayers are only
eligible to receive refunds if they have exhausted all their
administrative appeals remedies."
2)Arguments in Support . The proponents of this bill state that
under existing law, "[T]axpayers are precluded from recovering
taxes collected illegally unless they have exhausted their
administrative remedies and jumped through other procedural
hoops." The proponents argue that the "current process for
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obtaining a refund places taxpayers in an unfair predicament,
as many taxpayers are not even aware of the potential that an
assessed tax is illegal and that they need to challenge it in
order to obtain a refund." The proponents note that current
law places "the financial burden on the taxpayers as he/she is
forced to not only pay the tax, but also the legal costs
associated with challenging the tax through the administrative
process - and ultimately the court - in order to obtain a
refund." The proponents assert that this bill "would resolve
this unfair predicament for a taxpayer." Finally, they argue
that neither the state nor any local government "should be
able to retain the revenue from an illegally assessed tax
solely because a taxpayer did not pursue an administrative
appeal or petition to contest the tax before a court deemed
the tax unlawful."
3)Background: What is the Problem ? The California Constitution
provides "[n]o legal or equitable process shall issue in any
proceeding in any court against this State or any officer
thereof to prevent or enjoin the collection of any tax. After
payment of a tax claimed to be illegal, an action may be
maintained to recover the tax paid, with interest, in such
manner as may be provided by the Legislature." (Cal. Const.,
art. XIII, Section 32.) This language has been broadly
construed to bar not only injunctions, but also a variety of
prepayment judicial declarations or findings which would
impede the prompt collection of a tax. (See, e.g., State Bd.
of Equalization v. Superior Court (1985) 39 Cal. 3d 633, 217.)
Thus, the California Constitution forbids a court from
adjudicating the validity of a tax before the tax has been
paid in full. In order to challenge a tax, the taxpayer must
first pay it, and then follow specified statutory procedures
for recovery. A taxpayer may not go into court and obtain
adjudication of the validity of a tax which is due but not yet
paid. (State Bd. of Equalization v. Superior Court (1985) 39
Cal. 3d 633.) The constitutional power "to control tax refund
suits requires strict adherence to the administrative
procedures set forth by the Legislature before a court action
can be filed." (Shiseido Cosmetics (America) Ltd. v.
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Franchise Tax Board (1991) 235 Cal.App.3d 478, 488.)
Existing statutory law provides that a tax refund action is the
exclusive means of obtaining judicial review of state tax
proceedings and that exhaustion of administrative remedies is
required prior to commencing an action in a Superior Court.<1>
Furthermore, existing law, both state and federal, limits the
time period during which an individual or corporate taxpayer
may file a valid claim for refund to recover an overpayment of
the tax. Under state tax laws, a claim for income or
franchise tax refund must be filed with the FTB within: (a)
four years from the date the tax return was timely filed, (a)
four years from the due date of the tax return, or (c) one
year from the date of any overpayment. (R&TC Section 19306;
Section 19384.) For an overpayment of the sales or use tax,
fee, assessment, surcharge or other amounts, a person may file
a valid refund claim with the BOE no later than: (a) three
years from the return due date for the period for which the
person made the overpayment, (b) six months from the
overpayment date, or (c) for a payment made pursuant to a
determination, six months from the date the determination
became final. (R&TC 6902.) In the case of an overpayment
that the BOE collected by means of a levy, lien or other
---------------------------
<1> For example, R&TC Section 19382 states that "Except as
provided in Section 19385, after payment of the tax and denial
by the Franchise Tax Board of a claim for refund, any taxpayer
claiming that the tax computed and assessed is void in whole
or in part may bring an action, upon the grounds set forth in
that claim for refund, against the Franchise Tax Board for the
recovery of the whole or any part of the amount paid." R&TC
Section 19382 provides a constitutionally adequate
post-deprivation remedy in the form of a judicial refund
action in which taxpayers may contest the validity of the tax
penalty under R&TC 19138. (California Taxpayers Assn. v.
Franchise Tax Bd. (2010, 3d Dist) 190 Cal App 4th 1139, reh'g
denied.)
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enforcement procedure, the person may file a valid refund
claim within three years from the collection date. Finally,
for an overpayment of property tax levied on public utilities
and railroads, a refund action must commence four years after
the BOE mailed its decision or its written findings and
conclusions, whichever is later, as provided. A person's
failure to file a refund claim within these time periods
prevents the tax agency from allowing a refund or credit,
regardless of the merits of the claim.
Thus, if a tax is declared unconstitutional or illegal by the
court, taxpayers are eligible to recover the tax paid only if
they have filed valid claims for refund and have exhausted all
of their administrative remedies. In other words, if a person
failed to file a timely claim for refund, no refund may be
allowed, despite a court's determination regarding the
legality of the tax. The author asserts that this bill is
needed to "fix this problem by allowing [taxpayers] to recoup
their money as quickly and painlessly as possible."
4)The Proposed Solution . First, this bill would modify
procedures for filing a claim for refund if a tax, fee,
assessment, surcharge or other amount has been determined by a
court to have been illegally levied or collected. As noted
above, existing law generally requires taxpayers or feepayers
to claim a refund within three or four years from the return
due date or one year or less from the date of overpayment. In
contrast, this bill would authorize a taxpayer or a feepayer
to recover the illegally collected amounts, plus interest,
within one year from the date when the court's decision
becomes final and nonappealable. Furthermore, this bill would
relieve taxpayers from the obligation to file this claim for
refund altogether in some circumstances, such as when the tax
agency is able to identify, from its records, the person that
paid the tax, his/her address, the date of the payment and the
amount paid. In other words, this bill would repeal the
existing filing requirement imposed on taxpayers and, instead,
would require a tax agency to initiate the payment of refunds
if information in its records is sufficient to identify the
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persons that have paid the amounts. In addition, a person who
has filed a claim for refund prior to the effective date of
this bill would not be required to file another refund claim
to recover the amount claimed as an overpayment if the tax
agency has not yet refunded the overpayment. Finally, this
bill appears to toll the statute of limitations for purposes
of bringing an action against the tax agency for recovery of
the amounts claimed as an overpayment by stating that the
statute of limitations does not start running until after the
extended one-year period for filing a claim for refund for
those amounts has expired.
5)Indefinite Extension of the Statute of Limitations (SOL) for
Filing Refund Claims: A Balancing Act . This bill highlights
the innate tension between the societal desire to remedy the
wrong and the practical, yet maybe harsh, realities of a tax
system administration. A regular statute of limitations
resolves this tension, but in a very imperfect way. As
pointed out by the supporters of this bill, many taxpayers are
not even aware of the potential that an assessed tax that they
paid may be illegal and, thus, the existing process for
obtaining a refund seems unfair if the tax is invalidated by
the court, after the expiration of the SOL for filing a refund
claim. However, an indefinite SOL, or rather a lack thereof
as proposed by this bill, presents a challenge as well. This
bill would require both taxpayers and tax agencies to maintain
taxpayers' records in perpetuity, imposing a huge burden on
both, and would eliminate any possibility for final
resolutions of disputes between those parties. As explained
by the United States Supreme Court, with regard to the federal
SOL, "[i]t probably would be all but intolerable, at least
Congress has regarded it as ill-advised, to have an income tax
system under which there never would come a day of final
settlement and which required both the taxpayer and the
Government to stand ready forever and a day to produce
vouchers, prove events, establish values and recall details of
all that goes into an income tax contest. Hence, a statute of
limitation is an almost indispensable element of fairness as
well as of practical administration of an income tax policy."
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(Rothensies, Collector of Internal Revenue v. Electric Storage
Battery Co. (1946) 329 U.S. 296, 301 (emphasis added).)
Federal courts have stated that fixed deadlines - statute of
limitations - may appear harsh because they can be missed, but
the resulting occasional harshness is redeemed by the clarity
imparted. (Prussner v. United States (7th Cir. 1990) 896 F.2d
218, 222-223 [quoting United States v. Locke (1985) 471 U.S.
84; United States v. Boyle (1985) 469 U.S. 241, 249].)
In addition, an open-ended SOL would pose a problem for the
State's revenue system. Article XIII, Section 32 of the
California Constitution permits tax refunds only "in such
manner as may be provided by the Legislature." The Supreme
Court of California explained that the policy "behind Section
32 is to allow revenue collection to continue during
litigation so that essential public services dependent on the
funds are not unnecessarily interrupted." (Pacific Gas &
Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d
277, 283-284.) To implement this policy, "[A] specific
statutory refund procedure has been provided for taxpayers?."
(Ibid.) An open-ended SOL would undermine this policy by
potentially requiring the state to make payments on refund
claims, including interest, in connection with the tax or
other amounts that were originally collected years ago. The
Committee may wish to consider whether the approach suggested
by this bill - to allow an unlimited SOL for certain refund
claims - is a balanced and fair solution to the problem.
6)Is a Refund Claim Necessary ? In California, the only
traditional way for a taxpayer to challenge the imposition of
taxes in court is by filing a claim for refund for taxes paid.
The general rule in California requires that a taxpayer
seeking "judicial relieve from an erroneous assessment
must?exhaust [ ] his remedies before the administrative body
empowered initially to correct the error." (Security-First
Nat. Bk. v. County of L.A. (1950) 35 Cal.2d 319, 320.) The
claim-of-refund statutes have been viewed by courts as having
a rational basis since a refund claim, filed in advanced of
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litigation, "provides the state with official notice that a
taxpayer will make a claim for moneys paid to the treasury."
(Shiseido Cosmetics Ltd. v. Franchise Tax Board (1991) 235
Cal. App. 3d 478, 489.) Furthermore, because "the refund
claim must state the specific grounds upon which it is founded
[R&TC Section 26074], the claim of refund allows the state to
evaluate the merits of the taxpayer's claim and to plan fiscal
policy accordingly." (Ibid.) Finally, the court in Shiseido
concluded that the "[a]pplicable statutes requiring filing of
a claim for refund are clear and straightforward" and that the
"filing of a claim for refund is a simple and unburdensome
act." (Ibid.) This constitutional requirement that actions
for refund of allegedly illegal taxes be brought only in the
manner prescribed by the Legislature rests on the premise that
strict legislative control over the manner in which tax
refunds may be sought is necessary so that governmental
entities may engage in fiscal planning based on expected tax
revenues. (Cod Gas & Oil Co. v. State Bd. of Equalization
(1997) 59 Cal App 4th 756; McCabe v. Snyder (1999) 75 Cal App
4th 337.)
This bill proposes a novel approach whereby taxpayers will be
relieved from the obligation to file a claim for refund when
the tax agency is able to identify, from its records, the
person that paid the tax, his/her address, the date of the
payment and the amount paid. Accordingly, this bill places
the burden of maintaining the records and computing the
amounts to be refunded on the tax agencies. As such, this
bill would require tax agencies to search the taxpayer's
entire tax history in trying to identify the eligible persons
and then calculate the refund amounts. The Committee may wish
to consider whether it is advisable to relieve taxpayers from
the requirement to file a claim for refund, especially in
light of the fact that it would place an enormous
administrative burden on tax agencies.
7)The Scope of the Bill . This bill refers to a tax, fee,
assessment, surcharge, or other amount that have been
determined to "have been illegally levied or collected."
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Since that phrase is undefined, that phrase is open to various
interpretations. Does that phrase mean the legality of the
actual tax imposed, such as for example, the Smog Impact Fee
that was determined to be unconstitutional? Or does that
phrase include a method of computing the tax or fee? For
example, would the Court of Appeal decision regarding the
constitutionality of a method of income apportionment qualify
as eligible under the bill, thus triggering the extension of
SOL? The author may wish to define this phrase to minimize
disputes between taxpayers and the tax agencies.
8)An Individual vs. "Broad Brush" Approach . The Legislature has
no lack of experience in fashioning a remedy in cases where a
tax, fee or method of computing the tax or the fee was held by
courts to be illegal or unconstitutional. The Legislature
dealt with those issues on a case-by-case basis and enacted
appropriate legislation to remedy the problems. For example,
when the Smog Impact Fee was determined to be
unconstitutional, the Legislature enacted R&TC Section 6909 to
allow persons who paid the fee to receive a refund even when
the claim for refund would have been outside the statute of
limitations. Just recently, after the court's decision in
Cutler v. FTB, (2012) 208 Cal.App.4th 1247, the Legislature
enacted a statute in 2013 to address the issues relating to
gain deferrals and exclusions of qualified small business
stock. Each case presents its own challenges and
opportunities and allows the Legislature to determine the
appropriate remedy, taken into account the fiscal conditions
of the state's General Fund. The Committee may wish to
consider whether an individual approach is a more appropriate
way of dealing with the problem of refunding illegal taxes,
fees, and assessments to taxpayers.
9)Current Litigation . As pointed out by the BOE staff, the
Howard Jarvis Taxpayer Association filed a class action
lawsuit on October 3, 2012, seeking to overturn the California
Fire Prevention Fee, claiming that the fee was illegally
assessed. Litigation can take years before the matter is
finally resolved. If the court decides that the fire fee is
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illegal, taxpayers, in general, are allowed to recover the
fire fee for the four years preceding the court's final
decision; this is based on the four-year statute of
limitation. Taxpayers who were parties to the original suit
filed by the Howard Jarvis Association, however, can recover
fees going back to the original date of enactment.
In order to protect a taxpayer's claim without being subject
to the four-year statute of limitation, a taxpayer can also
file a protective claim for refund. A taxpayer can file a
claim with the FTB to withhold any action on the claim while
litigation is still pending. To file a claim for refund, a
taxpayer must submit a letter to the FTB containing the amount
of amnesty penalty and the statement requesting the
correspondence to be held pending the outcome of pending
litigation. Without filing a claim for refund, a taxpayer who
is not a party to the original claim would be limited to the
general four year statute of limitation.
10)What is Res Judicata ? Res judicata is a common law doctrine
barring re-litigation of causes of action or issues. Res
judicata promotes judicial economy, ensures repose for the
parties, and strengthens the court system in general. The
term "res judicata" is used to include both claim preclusion
and issue preclusion. Claim preclusion prevents re-litigation
of the same cause of action in a second suit between the same
parties or parties in privity. Issue preclusion precludes
re-litigation of issues argued and decided in prior
proceedings. Several provisions of the R&TC limit the
applicability of res judicata to specific reporting quarters
or tax years, which requires a party to re-litigate the same
issue for a different reporting period. (See generally R&TC
Sections 7176, 38805, 19802.) This bill applies the normal
common law rules of res judicata to refund claims as specified
by this bill, which could potentially allow a taxpayer who was
not a party to the original case to bring a claim for refund
by citing the court's original decision.
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11)Actions against a Tax Agency . Under the provisions of this
bill, a taxpayer can file a claim for refund for illegally
levied taxes within a year of the final court decision.
However, subdivision (f) of this bill further allows a party
to bring an "action" against the taxing agency for recovery of
the amount claimed as an overpayment of the illegal tax after
the one-year refund claim period. The purpose of this
provision is unclear to the Committee staff. Is this
provision intended to simply toll the SOL for filing an action
in court? Does this provision allow a taxpayer to file a
claim for refund in superior court without exhausting all
administrative remedies? The doctrine of "exhaustion of
administrative remedies was evolved by the courts "to promote
comity between coequal branches of government and to relieve
overburdened courts from the need to deal with cases where
effective administrative remedies are available." (Bozaich v.
State of California (1973) 32 Cal.App. 3d 688, 698.) The
requirement of exhausting administrative remedies applies even
when the taxpayer challenges the legality of a tax under
statutory or constitutional grounds. (Steinhart v. County of
Los Angeles (2010) 47 Cal.4th 1298.) Without a compelling
reason from the author as to why this provision is needed, the
Committee may wish to consider deleting it from this bill.
12)Implementation Concerns of Tax Agencies : Both the FTB and
the BOE staff in their analyses of this bill highlighted
several implementation concerns. For example, the FTB staff
states that the enactment of this bill would require both
taxpayers and the FTB "to maintain tax records in perpetuity
in order to demonstrate entitlement to a refund should a court
deem an amount paid was illegally levied or collected at some
future date, thereby eliminating the finality of the tax
system and creating a burdensome record retention
requirement." The BOE staff discloses that the administrative
impact of this bill is unknown, but will include an increased
number of refunds, BOE policy and guideline modifications, and
outreach activities. However, no refunds will be paid out
until the Legislature appropriates sufficient funds to the BOE
and FTB for this purpose. Finally, the FTB staff points out
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that this bill refers to a "final and non-appealable decision
of a court of competent jurisdiction." Under the California
Constitution, Article III, Section 3.5, a state agency is
required to enforce a statute, unless and until a court of
appeal declares the statute unconstitutional (invalid or
unenforceable). The BOE staff suggests an amendment to this
bill to substitute the phrase "an appellate court of competent
jurisdiction" for the phrase "a court of competent
jurisdiction" in order to conform the provisions of this bill
to the California Constitution.
REGISTERED SUPPORT / OPPOSITION:
Support
California Bankers Association
California Chamber of Commerce
California Manufacturers and Technology Association
California Taxpayers' Association
Howard Jarvis Taxpayers Association
Opposition
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None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098