BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2323 HEARING: 6/20/12
AUTHOR: Perea FISCAL: Yes
VERSION: 5/25/2012 TAX LEVY: No
CONSULTANT: Grinnell
PUBLISHING BOE DECISIONS
Requires BOE to publish decisions in cases worth more than
$500,000
Background and Existing Law
The California Constitution establishes the Board of
Equalization (BOE) as a five-member board composed of four
members elected by district, plus the State Controller.
BOE values property of statewide assessees and sets rules
for County Assessors; its initial function was to
"equalize" assessment practices between counties when it
was created in 1870. Currently, BOE administers sales and
use taxes, excise taxes, special taxes, and the state's fee
programs. Taxpayers may also appeal administrative
determinations of the Franchise Tax Board (FTB) on personal
income and corporation tax cases to the BOE. Taxpayers may
appeal BOE determinations in favor of FTB to Superior
Court, but FTB cannot likewise appeal BOE decisions in
favor of the taxpayer. Only BOE's property tax duties are
enshrined in the Constitution; all of its other powers are
statutory.
Proposed Law
Assembly Bill 2323 requires BOE to publish written formal,
memorandum, and summary opinions on its website within 120
days of its decision if the amount in controversy exceeds
$500,000. The measure does not apply to items decided on
its consent calendar.
Each opinion must include findings of fact, the legal
issue(s) presented, applicable law, analysis, disposition,
and the names of adopting board members. Board members may
submit dissenting opinions setting forth his or her
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rationale for disagreeing with the opinion, or submit a
concurring opinion setting forth his or her rationale for
agreeing with the result if different from the rationale
set forth in the opinion. A formal or memorandum opinions
may be cited as precedent in any matter or proceeding
before the board unless it has been de-published,
overruled, or superseded, but a summary decisions cannot.
State Revenue Impact
No estimate exists for revenue impacts; however, according
to the Assembly Appropriations Committee, BOE will incur
administrative costs in the hundreds of thousands of
dollars, but provide possible savings from avoiding
litigation with fuller explanation of decisions. The BOE
notes that in all of 2011, there were only 20 cases that
could be affected by the bill.
Comments
1. Purpose of the bill . According to the Author, "BOE
members hear appeals arising from the various tax and fee
programs the BOE administers. In addition, the BOE serves
as the administrative appellate body for final actions of
the FTB. Given the BOE's quasi-judicial role in hearing
and deciding taxpayer disputes, taxpayers must have full
confidence in the process by which the BOE renders its
decisions. AB 2323 would promote taxpayer confidence by
requiring the BOE to publish written opinions for each case
in which the amount in controversy is $500,000 or more.
These opinions would provide a formal record, for both the
taxpayers involved and other interested parties, of the
legal analysis applied to resolve significant cases. The
BOE does publish certain decisions. Indeed, the BOE's
website provides access to formal opinions dating all the
way back to 1930. It would appear, however, that the
number of published decisions has decreased dramatically in
recent years. For example, during the 1980s, the BOE
published a total of 1,615 formal opinions, for an average
of 161.5 decisions a year. During the period from 2000 to
2010, however, the BOE only published 32 formal opinions -
an average of 3.2 decisions each year. Thus, AB 2323 is
needed to restore a very useful BOE practice that will, in
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turn, promote the twin goals of transparency and sound
governance."
2. Sowing confusion . Opponents argue that the bill will
be costly, cause unnecessary confusion, and lead to
unintended consequences. Opponents add that requiring the
BOE to issue more decisions would make them more difficult
to find on their website, and that the measure's $500,000
threshold is arbitrary. Opponents further note that this
bill will delay the BOE appeals process because it will
take longer for appeals to become final and that the bill
will not improve guidance to taxpayers because of the built
in administrative procedures to ensure transparency such as
minutes of minutes that BOE already uses. Finally, the
opposition notes that the BOE has already published over
4,000 precedential written decisions since it began
publishing decisions in 1930 and they are available on the
website. The Committee may wish to consider whether the
current administrative procedures at the BOE are
sufficient.
3. Decisions, decisions . According to the Assembly
Revenue and Taxation Committee analysis of this bill, after
testimony ends, BOE may vote to decide a case, take the
matter under submission and decide it later, or continue
the hearing to a later date. In many cases, BOE's Appeals
Division will also prepare a "Letter Decision," which
contains a short explanation of the reasons for the BOE's
decision, and provide one copy to each party to the case.
Letter Decisions may not be cited as precedent in any
appeal or proceeding before BOE. BOE does, however, have
the discretion to adopt:
"Formal Opinions," that contain the findings of
fact and conclusions of law that form the basis of
BOE's decision on an appeal in writing, is intended to
set precedent. When issuing a formal decision, the
BOE considers whether it would:
o Establish a new rule of law, apply an
existing rule to a set of facts significantly
different from those stated in published
opinions, or modify or repeal an existing rule.
o Resolve or create an apparent conflict in
the law.
o Involve a legal issue of continuing
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public interest
o Make a significant contribution to the
law by reviewing either the development of a
common law rule or the legislative or judicial
history of a provision of a constitution,
statute, or other written law.
Generally, Formal Opinions are adopted only for
franchise and personal income tax appeals.
"Memorandum Opinions," which may be cited as
precedent in any matter or other proceeding before the
BOE, unless the opinion has been depublished,
overruled, or superseded, or
"Summary Decisions," similar to both Formal and
Memorandum Opinions, but may not be cited as
precedent.
4. This just in . In the recent California Appellate Court
case, City of Palmdale v. State Board of Equalization , 2012
Cal.App. LEXIS 610, the Court provides a condemning
indictment of BOE's performance in the case, faulting them
"for rendering a decision without due regard for the
statutory and constitutional laws that govern its
decision-making." The Court held that, "To vacate the
judgment and reinstate �BOE's] decision would not only
imply the agency acted properly, it would also undermine
the effectiveness of the judgment in exposing �BOE's]
deficiencies in handling the administrative appeal."
The trial court's judgment found that BOE's decision
granting the City of Pomona's petition for a reallocation
of local sales tax required "express findings and a
discussion of the evidence supporting them." However, BOE
did "not even hint at the reasons for �its] decision" and,
as a result, the trial court was "forced into unguided and
resource-consuming explorations . . . ."
In refusing to vacate the trial court's judgment, the Court
of Appeal noted that, under BOE's decision, the City of Los
Angeles stands to lose $2.32 million in tax revenues and
that cities and their residents "have a right to know why a
city is losing or gaining millions in local sales tax
revenues, that is, a right to know the �BOE's] grounds for
reallocating those taxes." The Court also noted:
As recited in the judgment, the �BOE]: (1) failed to
understand that it must explain the basis of its
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decisions; (2) paid little attention to its statutory
authority, or lack thereof, to apply regulations
retroactively; (3) appeared unconcerned with the
principles of due process; (4) was oblivious to the
inequities of considering an appeal filed eight years
after the Board Management decision; and (5) ignored
the requirements of the Administrative Procedure Act.
5. One of a kind . BOE is the nation's only elected tax
appeals board. As such, they have been criticized for its
tax appeal decisions being politicized and favorable to
affluent taxpayers. UC Professor Dan Simmons describes
this conflict in his article for the Santa Clara Law
Review, "California Tax Collection: Time for Reform:"
"In the context of resolving disputes between
taxpayers and the tax collector, the elective nature
of the Board of Equalization causes an inherent
structural conflict. One can easily imagine that a
campaign slogan for an elected tax collector would be,
"Elect me and I will not collect taxes from you (even
if those taxes are due under the law)." One member
lists as an accomplishment of his tenure on the Board
the fact that he "is responsible for increasing the
percentage of relief received by California taxpayers
before the Board of Equalization." While that may be
an appropriate position for an elected policy maker,
it illustrates the inherent conflict between the
executive function of the Board of Equalization, which
is to supervise the collection of numerous taxes (and
its concurrent role in developing tax policy and
making recommendations to the Legislature), and a
judicial function that involves the application of
existing law to the facts of a particular case.
On the one hand, the job of the tax collection agency
is to protect the State's revenue by collecting taxes
that are due under the laws enacted by the legislature
and signed by the Governor. An individual could
campaign for the Board of Equalization on a position
that big corporations and other big business, along
with wealthy individuals, don't pay enough taxes.
Another individual may campaign for the Board on the
premise that taxes are bad for the California economy
because they stifle investment. As elected officials,
the members of the Board of Equalization have a
legitimate policy role in the structure of the tax
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system that may be influenced by these varying
positions. The overall position of the Board of
Equalization could vary with each election cycle as
the philosophy of the majority changes with new
membership. "
Laura Mahoney with Bureau of National Affairs, now held by
Bloomberg News, found evidence of political influence on
tax appeals when she showed a link between contributions to
elected board members and tax appeal decisions, in her
award-winning August, 2010 work, "Campaign Contributions
and the BOE: A Special Report" stated among other findings:
"In the cases with $250 or less 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. One firm,
PricewaterhouseCoopers (PwC), was the most active
contributor. The accounting firm represented taxpayers
in 25 cases-36 percent-of the 70 examined by BNA.
Public records show the firm, its clients, and client
employees made 46 percent of the total contributions
directly tied to specific firms and taxpayers. PwC's
clients accounted for 64 percent of the $146,761 in
contributions made by taxpayers themselves directly to
board members. PwC clients accounted for 67 percent of
the $178,811 in contributions from taxpayers to board
members, either directly or through PACs. PwC
contributed more per case than others-an average of
$12,714 compared to the average by other firms of
$8,213. PwC, therefore, contributed 55 percent more
per case than other firms. PwC won its cases 88
percent of the time, compared to an average of 43
percent for the 21 other firms representing taxpayers
in BNA's analysis."
BOE doesn't usually publish decisions, leaving little to no
guidance for either taxpayers or tax enforcement agencies
on the correctness of tax positions. Additionally, BOE
allows taxpayers and their representatives to directly
lobby its members, which is generally barred in judicial or
quasi-judicial settings, creating the impression that
effective lobbying and political strategy is more
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influential than applying the facts to the law in tax
cases. The firm that is both the most active contributor
and successful representative in cases before BOE,
PricewatershouseCoopers, is an opponent of this bill. Tax
practitioner Chris Wood's January 11, 2010 column for Tax
Notes provides further support:
California's five-member BOE has a very tough job.
They are elected, and they have a constituency. They
try to resolve and administer California's tax laws,
and most of them are not tax professionals. They are
not judges, so it is OK to talk to them ex parte. In
fact, it is common for California tax professionals to
seek out the individual members of the BOE in advance
of a hearing. You can give them a private advance
screening of what your client's case is about and why
you think you should prevail. Much like lobbyists
trying to count on legislator votes on a bill facing
an upcoming vote, you can, well, lobby. You may or may
not be able to obtain a commitment that your client's
position is meritorious. But information, as they say,
is power. And if you find that the tax case in
question is going to go along party lines (say,
Republicans voting for the taxpayer and Democrats
voting for the state), you may get clear signals (or
outright statements) that an individual BOE member
cannot or will not vote for your client. Sometimes a
no vote in this circumstance can have its own kind of
empowerment. Indeed, when this happens, one of the
most unique features of California's tax system kicks
in: money. This is odd and you will think I am
kidding. However, you may donate to that BOE member,
and both you and the member will then need to disclose
that. Any contribution of $250 or more must be
disclosed. Your contribution will disqualify that
member from considering your case. However, the BOE
member will not be disqualified if he returns the
contribution within
30 days from the time he knows, or has reason to know,
of the contribution and the proceeding pending before
the BOE. With a five-member board, if you identify two
members who will vote against your client and make
contributions to them, they will likely be
disqualified. Your board is now three members. If you
get two positive votes out of the three remaining, you
have won. You do the math. Non-Californians may find
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this untoward. It is certainly different, and not for
the untutored. But until they change the rules, that
is our system."
6. A tale of two companies . Clear rules dividing
business and nonbusiness income are of vital importance for
taxpayers and tax enforcement agencies alike, so a BOE
decision setting forth clear rules for both taxpayers and
tax enforcement agencies alike would be helpful. However,
the BOE recently decided two significant cases regarding
the distinction of business and nonbusiness income in
seemingly contradictory ways. Business income is derived
in the regular course of a taxpayer's trade or business,
and must be apportioned to states where the taxpayer has
nexus, while nonbusiness income is generally sourced solely
to the taxpayer's home state. California-based firms could
pay much higher tax if an item of income was decided to be
nonbusiness income instead of business income because the
entire item of income, not just California's share, is
subject to tax. Case law applies several tests to
determine whether an item of income is business or
nonbusiness. In In re Appeal of Pacific Bell Telephone
Company & Affiliates , Cal. Bd. Equal., No. 521312, BOE
overturned FTB's contention that income derived from
investments in foreign telecommunications companies was
business income, determining that the relationship was not
integral under case law, as value did not flow between both
Pacific Bell and the foreign telecom firms. However, the
BOE decided that a termination fee for a $1.5 billion
merger paid by QVC to Comcast Cable was business income,
possibly conflicting with its decision in Pacific Bell.
The Committee may wish to consider whether the decisions
compelled by AB 2323 will help avoid similar disputes in
the future.
Assembly Actions
Assembly Revenue and Taxation Committee: 8-0
Assembly Appropriations Committee:11-6
Assembly Floor: 47-19
Support and Opposition (6/14/12)
Support : BOE Member Michelle Steele, the California
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Taxpayer Protection Committee, California Tax Reform
Association.
Opposition : BOE Member George Runner; California
Association of Certified Public Accountants; California
Business Properties Association; California Chamber of
Commerce ; California Taxpayers Association , Ernst & Young
LLP; Deloitte LLP; Grant Thornton LLP;
PricewaterhouseCoopers.