DOING BUSINESS IN THE GOLDEN STATE WEBINAR SERIES

Transcription

1 CHANGES IN STORE FOR CALIFORNIA TAX DISPUTES: WHAT TO EXPECT AFTER THE BOARD OF EQUALIZATION SHAKE-UP DOING BUSINESS IN THE GOLDEN STATE WEBINAR SERIES Wendy Abkin Drew Allen Carolyn Lee October 4, Morgan, Lewis & Bockius LLP

2 Our Panelists Wendy Abkin Partner San Francisco T wendy.abkin@morganlewis.com Drew Allen Associate Silicon Valley T andrew.allen@morganlewis.com Carolyn M. Lee Associate San Francisco T carolyn.lee@morganlewis.com 2

3 AGENDA DISPUTES WITH CALIFORNIA TAX AUTHORITIES BEFORE 2. WHY THERE WAS A SHAKE-UP 3. DISPUTES WITH CALIFORNIA TAX AUTHORITIES TODAY 4. FUNCTIONAL CHANGES: TRANSFER OF AUTHORITY FROM ELECTED BOE TO NEW DEPARTMENT OF TAX & FEE ADMINISTRATION (DTFA) 5. NEW OFFICE OF TAX APPEALS (OTA) 6. KNOWN UNKNOWNS, RUMORS AND SPECULATION

4 1. Disputes with California Tax Authorities Before

5 Disputes with California tax authorities Before Franchise Tax Board (FTB) Income and franchise tax examination and determination Appeals Settlement Bureau Assessment and collection Appeals to the BOE (elected board) State Board of Equalization (BOE) Oversight for uniform assessment of local property taxes Administration of: Sales and Use Taxes Appeals from FTB Actions Regarding Income and Franchise Taxes Property Tax Appeals Cigarette & Tobacco Products Tax Motor Vehicle Fuel Tax Covered Electronic Waste Recycling Fee Diesel Fuel Tax Energy Resources (Electrical) Surcharge Fire Prevention Fee Hazardous Waste Disposal Fee Jet Fuel Tax Lead-Acid Battery Fees Lumber Products Assessment Marine Invasive Species (Ballast Water) Fee Oil Spill Prevention, Response, and Administration Fees Prepaid Mobile Telephony Services (MTS) Surcharge More 5

6 Disputes with California tax authorities Before State Board of Equalization The nation s only elected administrative tax appellate body Currently, the representative for each of the four California districts is a former state legislator State controller (an elected statewide office) sits as fifth voting member 4,800 employees, administering all programs 6

7 BOE s placement in California s government Elected BOE. Organizational peer to the Governor, Lieutenant Governor, Attorney General, and other elected offices. 7

8 2. Why there was a shake-up

9 Reasons for a shake-up Frustration with BOE, as reflected in legislative findings stated in Assembly Bill 102: A number of reviews of BOE have been undertaken by: Legislatively mandated review of the State Board of Equalization (Department of Finance - March 30, 2017 report), the Controller s audit of the board, the Legislative Analyst Office s analysis of the board, and ongoing examinations of the board by the Attorney General, the California State Auditor s Office, and the State Personnel Board. The board s operational culture severely impacts its ability to report accurate and reliable information to the public, the administration, and the Legislature. current practices support inappropriate interventions by board members in administrative and appeal-related activities inconsistencies in operations, breakdowns in centralized processes, and activities contrary to state law and budgetary and legislative directives. civil service employees are handicapped in their efforts to fairly apply the law through the undue influence of elected board members and the staff of board members numerous complaints concerning members of the State Board of Equalization and their staff s attempt to influence the audits, investigations, and collections activities of the board s civil service employees. 9

10 3. DISPUTES WITH CALIFORNIA TAX AUTHORITIES TODAY

11 Disputes with California tax authorities Today, legislative action Taxpayer Transparency and Fairness Act of 2017 Assembly Bill 102, approved by Governor Brown on June 27, Limited elected BOE s authority to constitutionally mandated taxes; 2. Transferred responsibility for most taxes & fees previously administered by elected BOE to newly created Department of Tax and Fee Administration (DTFA); and 3. Created new Office of Tax Appeals (OTA). This newly established department will lead to fair and equal tax administration in our state and will uphold the Taxpayer s Bill of Rights. --Government Operations Agency Secretary Marybel Batjer Assembly Bill 131, passed the Assembly and Senate on September 15, 2017 Trailer bill to clarify aspects of the Taxpayer Transparency and Fairness Act of 2017, with immediate effect as of September 20,

12 Disputes with California tax authorities Today, you are here Government Operations Agency (GOA) FTB DTFA 4,400 BOE employees transferred to DTFA Temporary home of the OTA OTA Organizational home to be determined. 12

13 Disputes with California tax authorities Today, you are here Elected BOE remains in place with reduced responsibilities. 13

14 4. FUNCTIONAL CHANGES: TRANSFER OF AUTHORITY FROM ELECTED BOE TO NEW DEPARTMENT OF TAX & FEE ADMINISTRATION (DTFA)

15 Functional changes to the role of the elected BOE Drastic reduction in responsibility and staffing No administrative appeals to elected board if tax or fee is not administered by the elected Board No ex parte communications regarding matters before the elected board 15

16 Elected BOE after July 1, 2017 Section 15600, Government Code Section of the Government Code is amended to read: (a) There is in state government the State Board of Equalization (b) The board shall continue to only have the following duties, powers and responsibilities each pursuant to the California Constitution and any duty, power or responsibility conferred by statute related to the responsibility: (1) Review, equalization or adjustment of property tax assessment; (2) Measurement of county assessment levels and adjustment of secured local assessment rolls; (3) Assessment of pipelines, flumes, canals, ditches and aqueducts lying within two or more counties and property, except franchises, owned or used by regulated railway, telegraph or telephone companies, car companies operating on railways in the state, and companies transmitting or selling gas or electricity pursuant to Section 19 of Article XIII of the California Constitution; 16

17 Elected BOE after July 1, 2017 Section 15600, Government Code Section of the Government Code is amended to read: (4) Assessment of taxes on insurers; and (5) Assessment and collection of excise taxes on the manufacturer importation and sale of alcoholic beverages in California. (c) Retain the duty to adjust the rate of the motor vehicle fuel tax pursuant to Revenue & Taxation Code Section 7360(b) for the fiscal year. 17

18 DTFA California tax & fee administration is the same as it ever was Birth of a new department From Assembly Bill 102: SEC. 5. Part 8.7 (commencing with Section 15570) is added to Division 3 of Title 2 of the Government Code, to read: PART 8.7. California Department of Tax and Fee Administration CHAPTER 1. Administration (a) There shall be established within state government, in the Government Operations Agency, the California Department of Tax and Fee Administration. The department s headquarters shall be in Sacramento. 18

19 DTFA California tax & fee administration is the same as it ever was Role and responsibilities of DTFA: Organizational placement within the GOA Director appointed by Governor, subject to confirmation by Senate David Botelho, CPA, Acting Director Former program budget manager at the California Department of Finance, Chief of the Office of State Audits and Evaluations, Deputy Director, Audits & Investigations, California Department of Health Care Services,

20 DTFA California tax & fee administration is the same as it ever was Same telephone numbers; new website ( with a striking resemblance, and links, to BOE website; new stationery and business cards Responsible for the various duties, powers, and responsibilities formerly under the authority of the elected board relating to the administration of various taxes and fees except those duties, powers, and responsibilities imposed or conferred upon the elected Board by the California Constitution 4,400 former BOE s employees transferred to DTFA Civil service staff whose duties relate to taxes and fees transferred to DTFA BOE funding, rights, and property transferred to DTFA Authorized to adopt regulations, including emergency regulations, necessary or appropriate to carry out the provisions of AB 102 DTFA retains authority to settle matters without requiring appeal to OTA 20

21 DTFA California tax & fee administration is the same as it ever was Tax and fee programs administered by the California DTFA: Sales and Use Tax Cigarette & Tobacco Products Tax Motor Vehicle Fuel Tax Covered Electronic Waste Recycling Fee Diesel Fuel Tax Energy Resources (Electrical) Surcharge California Tire Fee Natural Gas Surcharge Timber Yield Tax Program Use Fuel Tax Fire Prevention Fee Hazardous Waste Disposal Fee Jet Fuel Tax Lead-Acid Battery Fees Lumber Products Assessment Marine Invasive Species (Ballast Water) Fee Oil Spill Prevention, Response, and Administration Fees Prepaid Mobile Telephony Services (MTS) Surcharge Water Rights Fee More 21

22 DTFA New website and contact information DTFA website is live at A few webpages worth bookmarking: File a Return ( Important online filing instructions, among other helpful information Forms & Pubs ( The DTFA has been busy over the summer creating and updating new forms and publications Legal Division Tax and Fee Programs Bureau ( Members of the public may request a legal opinion on tax and fee matters by submitting a request in writing. The specific facts and circumstances of the activity or transaction at issue should be fully described in the request for advice, as well as the question on those facts. Contact: Robert Tucker, Assistant Chief Counsel at (916)

23 DTFA California tax & fee administration is the same as it ever was 23

24 What the new DTFA means for entities doing business in the Golden State Front lines: Major changes not expected Diminished impact (for better and worse) of political input on tax administration 24

25 5. New Office of Tax Appeals (OTA)

26 Office of Tax Appeals Established by authority of Assembly Bill 102, which amended the California Government Code to include Section 15670(a): There shall be established in state government the Office of Tax Appeals. The OTA has been established in state government to serve as a fair and impartial adjudicatory appellate body and, beginning January 1, 2018, will begin conducting appeals on taxes and fees that are not related to the constitutional authority of the Board, such as franchise and personal income tax appeals, sales and use tax, and other special taxes and fees. Each appeal will be heard by a panel of three Administrative Law Judges, who will issue written decisions for each appeal decided. The OTA is an independent body and will not report to the GOA. Still a prepayment opportunity to be heard. 26

27 OTA Organization OTA management team Each appointed by the Governor: Director Also subject to Senate confirmation Chief Deputy Director Chief Counsel Placement within California government under discussion: Independent body, per AB 102 Organizational efforts currently being managed by the Office of Government Operations OTA adjudication conducted by three-member panels of Administrative Law Judges (ALJs) Based in Sacramento, hearing cases in Sacramento, Fresno, and Los Angeles Some staff of the elected BOE may transfer to the OTA Sources: Assembly Bill 102; Assembly Bill 131; conversations with state officials 27

28 OTA Authority The OTA is the successor to the duties, powers, and responsibilities of the elected BOE, including the authority to hear: Petitions, including but not limited to petitions for redetermination, reassessment, reconsideration of successor liability, or a rehearing; Administrative protest; Claims, including claims for refund; Appeal of an action by the FTB; Applications, including applications for an administrative hearing; and Other appeals, including but not limited to requests for relief of taxes, fees, interest, or penalties. Sources: Assembly Bill 102; Assembly Bill 131; conversations with state officials 28

29 OTA Independent decision-making ALJs appointed, not elected Appointed by the OTA Chief Counsel Posted application process currently administered by Office of Government Operations Statutory requirements: Active membership in the California State Bar for at least the preceding five years Knowledge and experience with regard to tax and fee laws of California and the United States Regulations forming a code of conduct to be drafted and adopted by January 1, 2018; the law includes permission to adopt and use emergency regulations until January 1, 2019 OTA Executive Director shall not direct, oversee, supervise or be otherwise involved in the decision making process of the tax appeals panels No ex parte communications by the parties with the tax appeals panels ALJs may hear the facts from the parties for the first time at the hearing 29

30 OTA The taxpayer s experience Expressly not a Tax Court, per AB 131 Initially recruiting five three-member panels (15 ALJs) No small case procedures; hearings not limited in time Anyone age 18 or older may be authorized to represent a taxpayer before a tax appeals panel Including but not limited to an attorney, appraiser, auditor, bookkeeper, employee, business associate, consultant, or any other person CPAs and Enrolled Agents also may be authorized representatives OTA charged with developing and adopting regulations regarding evidentiary standards and hearing and proceeding rules that do not require application of specialized knowledge. Generally, all adjudicative hearings and proceedings conducted according to the Administrative Procedure Act 30

31 OTA The taxpayer s experience Tax appeals panels will issue a written opinion for each appeal decided within 100 days of a hearing Closed hearings allowed The OTA is required to establish procedures for requesting closed hearings, including objective criteria for determining whether to grant the request The process for filing appeals with the newly created OTA are in development Until further notice, taxpayers and feepayers who wish to file an appeal should continue to follow the current BOE process Taxpayers and feepayers must comply with all filing deadlines and retain the related records 31

32 OTA Right to judicial appeal of OTA decision If a taxpayer disagrees with the decision of the tax appeals panel, the taxpayer may bring an action in California Superior Court in accordance with the law imposing the tax or fee for a trial de novo 32

33 OTA What the OTA means for entities doing business in the Golden State On the one hand: Probably no change 90% of state tax matters settle administratively on the merits without recourse to an appellate hearing, either with the FTB or [new] DTFA The FTB s Settlement Bureau remains available for income tax disputes 33

34 OTA What the OTA means for entities doing business in the Golden State On the other hand: For the matters that do not settle What will the procedural rules be for the tax appeals panels? What will be the ALJs experience and expertise profile? Compensation ranges will shape ALJ profile Training regarding substantive tax is limited, presuming preexisting foundational ALJ tax knowledge Nature of the matter may determine the strategy Significant amount in dispute or complex issues? Wait for the panels to find their feet? Refund action? Petition for a hearing, to secure refund without further delay? 34

35 6. THE KNOWN & THE UNKNOWN: REGULATIONS, ADMINISTRATIVE LAW JUDGES, AND OTHER ESSENTIALS

36 Known & unknown: Regulations, ALJs, and other essentials January 1, 2018 elected BOE has no authority to issue decisions All other pending matters die for lack of authority to issue a decision. Effective January 1, 2018, the elected board will not have authority to issue decisions on appeals presented to the board before that date if the subject matter is outside the elected board s constitutionally mandated jurisdiction. Three remaining elected Board 2017 meeting dates: October 24-26; November 14-16; December OTA regulations unknown Planned to be drafted for comment by mid-october, with stakeholder meetings in early November in order to finalize by early December CPAs and private tax bar being consulted Precedential value of previous BOE decisions to be confirmed Precedential value of new tax appeals panel decisions to be determined 36

37 Known & unknown: Regulations, ALJs, and other essentials Tax appeals panels hearing procedural rules to be determined Protective orders available? No history with the elected BOE, although hearings could be closed to protect trade secrets Affidavits liberally accepted, limiting examination? Hearsay tolerance? Pre- and/or posthearing briefing allowed at the request of a party? Availability of hearing transcripts? ALJ code of conduct to be determined by the OTA, consistent with The Code of Judicial Ethics adopted by the California Supreme Court, including the canons governing conflict of interest The gift, honoraria, and travel restrictions on legislators contained in the California Political Reform Act of 1974 The Model State Administrative Tax Tribunal Act dated August 2006, adopted by the American Bar Association 37

38 In Closing: Stay calm and carry on Time of transition may be time of opportunities Watch decisions of fledgling OTA Expect some growing pains and more change in the future 38

39 Biography Wendy Abkin Partner San Francisco T wendy.abkin@morganlewis.com Wendy Abkin advises clients on tax controversies and litigation with the Internal Revenue Service (IRS), Franchise Tax Board (FTB), and state and local taxing agencies. Wendy represents clients in civil and criminal tax matters, including voluntary disclosures, offshore matters, audits, appeals, litigation, and collection. She also assists clients with state and local tax matters, representing them before the California Franchise Tax Board, the State Board of Equalization, the Employment Development Department, and San Francisco City and County tax authorities. 39

40 Biography Drew Allen Silicon Valley T andrew.allen@morganlewis.com Drew Allen focuses his practice on complex tax controversy and tax litigation. Drew has represented clients in the US Tax Court, US District Courts, US Court of Federal Claims, in addition to US Courts of Appeals. He has also counseled clients at various levels of administrative proceedings before the Internal Revenue Service (IRS), Franchise Tax Board (FTB), and the California Employment Development Department (EDD). 40

41 Biography Carolyn M. Lee San Francisco T carolyn.lee@morganlewis.com Carolyn Lee advises clients on tax controversies and litigation with the Internal Revenue Service (IRS), Franchise Tax Board (FTB), and other state taxing agencies. Carolyn represents clients in civil and criminal tax matters, including voluntary disclosures, offshore matters, audits, protests and appeals, litigation and collection. Carolyn is active in the San Francisco and California tax communities, and routinely provides pro bono assistance to the underserved. 41

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