BILL ANALYSIS �
AB 2510
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Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2510 (Wagner) - As Introduced: February 21, 2014
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 tax, fee,
assessment, surcharge, or other amounts have been determined by
a court to 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
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,
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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.
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.
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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
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,
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regardless of the merits of the claim.
9)Requires the BOE to assess market values for public utilities
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:
"When California taxpayers have been illegally forced to pay a
tax, the state needs to return their money. AB 2510 would fix
this common sense problem by allowing taxpayers to recoup
their money as quickly and painlessly as possible."
2)Arguments in Support . The proponents of this bill state that,
under existing law, failure to "strictly adhere to the filing
deadlines and requirements set forth in the administrative
appeals process could ultimately bar a taxpayer from obtaining
a refund." Thus, if a court determines that a tax is
unconstitutional or illegal, a taxpayer that has diligently
paid the tax, as required, may be barred "from pursuing a
refund [of the illegal tax] if he/she did not prospectively
seek to challenge the tax in the administrative appeals
process." The proponents argue that the "current process for
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 assert that AB 2510
"would resolve this unfair predicament for a taxpayer" and
state that the state or local government should not 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
lawful."
Finally, the proponents note that taxpayer "should have access
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to a quick refund," which is "especially true with the recent
fire tax lawsuit, likely to be heard in Superior Court this
year." They point out that a judge "has already ruled that
individuals must fill out a petition for redetermination form
in order to receive a refund if the lawsuit is successful,"
which means that the state "may receive tens of millions of
dollars in new revenue even if taxpayers are victorious in the
court." AB 2510 "would eliminate this injustice and allow all
taxpayers to apply for an appropriate refund."
3)Arguments in Opposition . The opponents state that the
"current statutory construct provides a fair and time-limited
process to receive reimbursement." They argue that while
"there are occasional circumstances that seem to demand a
change in the statute [of limitations] in the name of
fairness, the statute of limitations plays an important role
and provides a level of stability and assurance for local
agencies."
4)Background: What is the Problem ? The California Constitution
provides that "No 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.
Franchise Tax Board (1991) 235 Cal.App.3d 478, 488.)
Existing statutory law provides that a tax refund action is the
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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.) 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 put in place common sense protections for taxpayers
---------------------------
<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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by requiring the state to provide a full refund to all
individuals who paid a tax that is later declared
unconstitutional or illegal."
5)The Proposed Solution . First of all, 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, AB 2510 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, AB 2510 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
persons that have paid the amounts. In addition, a person who
has filed a claim for refund prior to the effective date of
this measure, and the tax agency has not yet refunded those
amounts, would not be required to file another refund claim to
recover the amount claimed as an 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.
6)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 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
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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. It 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." (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.
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7)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
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 limitation 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.
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8)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."
Since that phrase is undefined, that phrase is open to various
interpretations. Does it mean the legality of the actual tax
imposed, such as for example, the Smog Impact Fee that was
determined to be unconstitutional? Or does it 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.
9)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.
10)Current Litigation . As pointed out by the BOE staff, on
October 3, 2012, the Howard Jarvis Taxpayer Association filed
a class action lawsuit 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 illegal,
taxpayers, in general, are allowed to recover the fire fee for
the four years preceding the court's final decision. This is
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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.
11)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. This could potentially allow a taxpayer that
was not a party to the original case to bring a claim for
refund by citing the court's original decision.
12)Actions Against a Tax Agency . Under the provisions of this
bill, taxpayers 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
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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.
13)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 staff of both tax
agencies points out 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
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California Taxpayers Association
California Chamber of Commerce
California Manufacturers and Technology Association
Howard Jarvis Taxpayers Association
Opposition
The California Association of County Treasurers and Tax
Collectors
Analysis Prepared by : Carlos Anguiano / Oksana Jaffe / REV. &
TAX. / (916) 319-2098