Many Questions Unanswered After California’s Tax Shakeup

(This article originally was published by Law360 on October 7, 2017.)

On Sept. 16, 2017, California Governor Jerry Brown signed Assembly Bill (A.B.) 131 into law,[1] which takes effect immediately and makes various changes to the Taxpayer Transparency and Fairness Act of 2017 enacted on June 27, 2017.[2] The Act overhauled the California State Board of Equalization (BOE) and created two new tax agencies.

Specifically, the Act divested the BOE of its duties to administer various statutory taxes and fees and its appellate function, and assigned those functions to the newly created California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA).

The CDTFA began administering sales and use taxes and certain special taxes and fees on July 1, 2017. The OTA will perform administrative appellate duties—including hearing income tax appeals—starting Jan. 1, 2018. Income tax appeals under the OTA will be heard by tax appeals panels consisting of three administrative law judges (ALJs). These ALJs, who have yet to be assigned, must possess an active California Bar membership for five years prior to assignment to a tax appeals panel and have knowledge and experience of United States and California tax and fees law.

The BOE, for its part, retains duties granted under the California Constitution, including property tax assessment, assessment of taxes on insurers and assessment and collection of excise taxes on alcoholic beverages. No legislative changes have been made to the duties of the California Franchise Tax Board (FTB), which continues to administer California’s personal and corporate income taxes.

Regarding the CDTFA, A.B. 131 provides guidance on appeals conferences conducted by that agency. Specifically, appeals conferences before the CDTFA will be conducted in the same manner as before at the BOE prior to July 1, 2017.[3] The BOE’s rules regarding appeals conferences now expressly apply to appeals conferences before the CDTFA, although the CDTFA may revise, repeal or add rules as necessary to carry out its functions.[4]

A.B. 131 also provides that a taxpayer may request a hearing before the OTA if the CDTFA denies that taxpayer’s request for relief in an appeals conference.[5] These legislative changes are limited to administrative challenges involving sales and use taxes and the special taxes and fees administered by the CDTFA—not income tax. Administrative challenges involving the personal income tax or the corporate income tax cannot be appealed to the CDTFA.

Regarding the OTA, A.B. 131 clarifies a number of procedural issues. For example, A.B. 131 addresses the transition of active appeals from the BOE to the OTA and provides that the BOE is prohibited from acting on an appeal heard at a BOE meeting prior to Jan. 1, 2018, if the BOE’s determination or decision is not final before Jan. 1, 2018.[6] A.B. 131 also imposes an obligation on the OTA to establish both a process whereby a party may request a closed hearing and objective criteria for determining whether to grant such a request.[7]

In addition, A.B. 131 clarifies the rules applicable to appeals before the OTA. All appeals proceedings will be conducted under California’s Administrative Procedure Act (APA).[8] The BOE’s existing Rules for Tax Appeals will continue to apply to OTA appeals, subject to amendment by the OTA and to the extent those rules do not conflict with the APA.[9] New regulations adopted by the OTA must be consistent with the American Bar Association’s 2006 Model State Administrative Tax Tribunal Act (ABA Model Act), unless in conflict with the APA and carryover BOE rules.[10]

A.B. 131 also clarifies the standard of review for taxpayer actions initiated in a California Superior Court following an unfavorable OTA decision.[11] Such actions constitute a trial de novo—thus the California Superior Courts will not defer to the OTA’s findings of facts or law.[12]

A.B. 131 includes an expanded definition of the OTA director’s duties. Specifically, the director is in charge of “administer[ing] and direct[ing] the day-to- day operations” of the OTA, and must ensure “that each hearing office is sufficiently staffed and that appeals hearings are heard and resolved in a timely and efficient manner.”[13] The director, however, is prohibited from involvement in the decision-making process of the OTA’s tax appeals panels.[14]

Lastly, A.B. 131 states that the OTA’s tax appeals panels and the appeals hearings conducted by these panels are not construed to be, or to be conducted by, a tax court.[15] Thus, non-lawyers will be allowed to appear before the OTA.

Despite the legislative clarification, California taxpayers with administrative challenges are left with many unknowns. Taxpayers with appeals currently pending before the BOE face a great deal of uncertainty about the OTA and its procedures. Even those taxpayers whose appeals make it onto the BOE’s December calendar for oral argument likely will be transferred to the OTA, because it takes at least 30 days for a BOE decision to become “final.”[16]

Moreover, the law is muddled regarding what the rules of practice will be before the OTA. Currently there are references to three distinct sets of procedural rules (BOE, APA and ABA Model Act). The number of panels and the identity (and experience) of the ALJs remain unknown.

According to recent OTA ALJ job announcement postings, it appears that only individuals who are already in state service or who are currently reachable on an active, existing, open state hiring list may apply.[17] As a practical matter, there is a chance that taxpayers appearing before the OTA may find themselves in front of a panel comprised of former FTB and/or BOE attorneys.

Taxpayers may have to wait until the OTA issues regulations or other guidance and the initial panel assignments are finalized to assess whether the OTA is the best forum for moving forward with a California administrative challenge.

[1] Cal. Stats. 2017, Ch. 252.

[2] Cal. Stats. 2017, Ch. 16.

[3] Cal. Gov’t Code § 15570.50.

[4] Cal. Gov’t Code § 15570.52.

[5] Cal. Gov’t Code § 15570.54.

[6] Cal. Gov’t Code § 15600(d).

[7] Cal. Gov’t Code § 15676.5.

[8] Cal. Gov’t Code §§ 15674(a)(3), 15679.5(a).

[9] Cal. Gov’t Code § 15679.5(a).

[10] Cal. Gov’t Code § 15679.5(b)(3).

[11] Cal. Gov’t Code § 15677.

[12] Ibid.

[13] Cal. Gov’t Code § 15670(b)(2).

[14] Ibid.

[15] Cal. Gov’t Code § 15672(b).

[16] Cal. Rev. & Tax. Code § 19346.

[17] See, e.g.,