BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 816                           |Hearing    |3/30/16  |
          |          |                                 |Date:      |         |
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          |Author:   |Hill                             |Tax Levy:  |No       |
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          |Version:  |1/4/16                           |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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                 State Board of Equalization:  members:  contributions



          Eliminates the current $250 threshold that triggers conflict of  
          interest requirements for BOE members under the Kopp Act.  


           Background 

           In 1850, the Legislature first directed county assessors to tax  
          property; however, assessors in different counties often applied  
          different tax rates and methods of assessment.  The California  
          Constitution of 1879 created the five-member Board of  
          Equalization (BOE), composed of four members elected by district  
          and the State Controller, to equalize rates and assessment  
          practices among counties.  In 1910, voters amended the  
          Constitution to direct BOE to value property owned by railways,  
          companies selling gas and electricity, or telephone companies.   
          The Constitution additionally allows the Legislature to  
          authorize BOE assessment of property owned or used as "public  
          utilities."  BOE also administers the Sales and Use Tax,  
          locally-imposed transactions and use taxes, several excise  
          taxes, and more than 30 other fee programs, and considers all  
          appeals under these laws and programs.  

          When the Legislature created the Bank and Corporation Franchise  
          Tax in 1929, instead of directing BOE to collect the tax, it  
          instead established the Franchise Tax Commissioner to do so. A  
          three-member Committee consisting of the State Controller,  







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          Director of Finance, and the Chair of BOE appointed the  
          Commissioner.  The Legislature granted to BOE appellate review  
          functions over the Commissioner's actions, and chose to retain  
          this same structure when it enacted the Personal Income Tax in  
          1935.  In 1948, the Legislature replaced Commissioner with the  
          Franchise Tax Board, consisting of the same three officials  
          charged with appointing the Commissioner.  

          BOE considers more than 1,000 appeals per year for all of its  
          programs, and appellants and their representatives make  
          contributions to BOE candidates.  Prior to 1991, the Political  
          Reform Act's conflict of interest provisions didn't apply to BOE  
          members.  In that year, the Legislature enacted SB 1738  
          (Roberti), an omnibus political reform bill which included the  
          Quentin L. Kopp Conflict of Interest Act of 1991, also known as  
          the Kopp Act.  The Kopp Act applied several conflict of interest  
          measures to BOE members, including:

                 Requiring members who know or who have reason to know  
               that they received a contribution or contributions totaling  
               more than $250 in the last 12 months from a party, the  
               party's agent, any participant, or the participant's agent,  
               to a proceeding before BOE, to disclose the fact on the  
               record prior to rendering a decision on the proceeding,

                 Requiring parties or participants in adjudicatory  
               proceedings before BOE to disclose on the proceeding's  
               record any contribution or contributions exceeding $250  
               made by a party, the party's agent, any participant, or the  
               participant's agent to any member of the Board within the  
               last 12 months.  However, when a "close corporation" is the  
               party or participant, disclosure only applies to the  
               majority shareholder.  

                 Prohibits members from making, participating in making,  
               or otherwise attempting to use his or her official position  
               to influence, the decision in any adjudicatory proceeding  
               where the member received a contribution or contributions  
               from a party, the party's agent, any participant, or the  
               participant's agent, to a proceeding before BOE within the  
               previous 12 months, so long as the member knows that the  
               participant has a financial interest in the decision.   
               However, a member can participate in a decision under the  
               circumstances described above so long as the member returns  








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               the contribution.  

          The Kopp Act provides that violations are punishable as a  
          misdemeanor, but requires prosecutions to be initiated within  
          four years of the date of the violation.  Any person convicted  
          is subject to a fine up to the greater of $10,000 or three times  
          the contribution, and cannot serve as an elected official or  
          lobbyist for four years following the time for filing a notice  
          of appeal has expired, or all possibility of direct attack in  
          the courts of this state has been finally exhausted, unless the  
          court at the time of sentencing specifically determines that  
          this provision shall not be applicable.  The author wants to  
          delete the current $250 amount, thereby applying the Kopp Act's  
          provisions to BOE members regardless of the amount of the  
          contribution.


           Proposed Law

           Senate Bill 816 deletes the Kopp Act's $250 threshold, thereby  
          triggering its provisions whenever a BOE receives a contribution  
          in any amount.  The measure also makes conforming changes.


           State Revenue Impact

           BOE states that SB 816 does not directly affect state or local  
          revenues.


           Comments

           1.   Purpose of the bill  .  According to the author, "California's  
          five-member Board of Equalization is the only elected tax  
          commission in the nation.  It collects sales, property and use  
          taxes, acts as the state's tax court in settling disputes, and  
          assesses public utility and railroad properties.  Four board  
          members are elected by districts; the state controller is the  
          fifth member.  SB 816 ensures that Board of Equalization (BOE)  
          members comply with disclosure and recusal procedures for all  
          contributions received in the previous 12 months instead of just  
          those over $250.  The measure prevents BOE members from voting  
          on cases if they've received a contribution from that entity  
          within the previous 12 months.  Current law contains a loophole  








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          that allows individuals with business before the BOE to  
          contribute to BOE members at levels below $250 without  
          triggering disclosure and recusal rules.  As an example, a BOE  
          member's reelection campaign committee last year received 45  
          contributions of $249 each from executives, attorneys and other  
          employees of a tax consulting firm totaling more than $11,000.   
          Another BOE member received 25 contributions of $249 each from  
          employees of the same tax consulting firm."

          2.   PACs  .  SB 816 will ensure that a party, agent, or  
          participant who contributes significant amounts, but breaks them  
          up into several smaller contributions to avoid the $250  
          threshold, triggers the Kopp Act's conflict of interest  
          provisions.  The measure responds to recent news reports where  
          45 employees of tax consulting firm Ryan, LLC, donated $249 each  
          to one BOE member, and 25 employees donated the same amount to  
          another BOE member.  As a result, the measure will likely add  
          transparency to BOE proceedings in the form of increased  
          disclosures from BOE members and contributors.  However, the  
          bill's change only applies to direct contributions, because of  
          current law's ambiguous application to donations from Political  
          Action Committees.  Soon after the Kopp Act was enacted, BOE's  
          chief counsel opined that a contribution exceeding the $249  
          limit to the State Controller by a political action committee  
          controlled by a corporation with a valuation issue before the  
          board did not disqualify the recipient board member from voting  
          on the question, stating that "a political action committee does  
          not come within any of these definitions ["party,"  
          "participant," or "agent"].  Laura Mahoney with Bureau of  
          National Affairs, now held by Bloomberg News, found evidence of  
          the political influence of PACs in BOE cases in her August, 2010  
          work, "Campaign Contributions and the BOE: A Special Report."   
          The report selected a sample of BOE cases and found in those  
          disputes with $250 or less in contributions tied to them, the  
          taxpayers won 30 percent of the time.  In cases with between  
          $250 and $16,000, the winning percentage rose to 53 percent.  At  
          the level of $16,000 to $50,000, the success rate was 75  
          percent.  For cases where contributions were between $50,000 and  
          $137,000-the top level-the success rate was 88 percent.   

          3.   Strategic disqualification  .  The Kopp Act requires BOE  
          members to disclose contributions, and prohibits them from  
          making, participating in making, or otherwise attempting to use  
          his or her official position to influence, the decision in any  








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          adjudicatory proceeding where the member received a contribution  
          or contributions from a party, the party's agent, any  
          participant, or the participant's agent, to a proceeding before  
          BOE within the previous 12 months.  However, taxpayers can use  
          this restriction to their advantage when combined with BOE  
          Regulation 5550, which provides that a majority of a  
          three-member quorum can act on a case if other members or the  
          Controller's representative are absent or disqualified by the  
          Kopp Act.  Robert Wood described this strategy in his January,  
          2010, column in Tax Notes, which may have been deployed in BOE's  
          2-1 decision in the matter of Argonaut Group, Inc. 287738, a  
          corporation tax case heard in January, 2009.  In that case, a  
          contribution from an appellant disqualified the Controller's  
          representative under the Kopp Act, and the BOE Chair was unable  
          to attend the hearing.  After hearing the case, one BOE member  
          made a motion to put the case over for one day to allow the  
          Chair, but it failed for lack of a second.  The two remaining  
          members then approved the taxpayer's appeal on a 2 to 1 vote.   
          While SB 816 expands the Kopp Act's application, in so doing,  
          the measure may also make strategic disqualification easier. 

          4.   One of a kind  .  Generally, states follow one of two models  
          to resolve tax disputes.  Some states allow taxpayers to appeal  
          disputes between taxpayers and revenue collection agencies to  
          courts, similar to the United States Tax Court's review of IRS  
          decisions, while others place the appellate authority with the  
          agency that collects the tax.  BOE is the nation's only elected  
          tax dispute resolution board, which allows taxpayers to directly  
          interact with elected board members regarding the merits of  
          their cases, but can result in decisions which don't adhere to  
          legal precedent, according to legal experts.  SB 816 would  
          expand the Kopp Act to apply to a potentially larger set of  
          actors before the board; however, whether it will reduce the  
          actual or perceived political influence over the adjudication of  
          tax disputes in California is unclear.  More than ten years have  
          passed since the last legislative effort to reform this model,  
          such as the Tax Court proposed in AB 2472 (Wolk, 2003).  The  
          Committee may wish to consider whether alternative models to  
          adjudicate state tax disagreements may be superior to BOE.  

          5.    Related legislation  .  AB 1828 (Dodd), makes similar changes  
          to the Kopp Act as this bill, but also applies its provisions to  
          so-called behested payments, where elected officials ask groups  
          and individuals to contribute to the member's preferred charity.  








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           That measure is currently awaiting hearing in the Assembly  
          Elections Committee. 

          6.   Double-Referred  .  The Senate Rules Committee referred SB 816  
          to the Governance and Finance Committee and the Elections and  
          Constitutional Amendments Committee.

           

          Support and  
          Opposition   (3/24/16)


           Support  :  BOE Member George Runner, California Common Cause,  
          California Public Interest Research Group.


           Opposition  :  BOE Member Jerome Horton.



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