If you live in California, you’re likely already familiar with the California Board of Equalization, or the BOE. Instead of having a Department of Revenue like other states, in California the BOE was the government agency responsible for collecting sales and use taxes among others, auditing taxpayers and hearing tax appeals. These appeals involved individuals and businesses and included income, franchise, sales/use, fuel, cigarette and even property taxes of state-assessed utilities.
The key word here is “was.” In 2017, former California Governor Jerry Brown signed The Taxpayer Transparency and Fairness Act of 2017 into law. This new law essentially stripped the old BOE of almost all of its responsibilities and then parceled out the duties to three separate state agencies:
- The Board of Equalization is now only responsible for duties assigned to it under the California constitution, including administering property taxes, alcohol excise taxes, and taxes on insurers;
- The California Department of Tax and Fee Administration, or CDTFA, is now responsible for administering many of the taxes formerly handled by the BOE, including sales and use, fuel and cigarette taxes. The CDTFA will also handle the auditing of taxpayers with regard to these taxes; and,
- The Office of Tax Appeals, or OTA, will hear all state franchise, income and sales/use tax appeals.
So, what factors made this power grab or shake-up of the BOE necessary and how do these changes affect California taxpayers?
Why Did the BOE Change?
The old BOE was headed by four elected Board Members plus the State Controller who served as an ex-officio Member. The idea behind this unique approach was to create a taxing authority that was both transparent and accountable. However, over time, serious administrative problems developed within the BOE that hampered its effectiveness according to Governor Brown and some legislators.
According to The Taxpayer Transparency and Fairness Act some of these so-called problems, included:
- Issues with Reporting – The BOE was supposed to be transparent. Unfortunately, the Board had problems giving both the public and the California legislature accurate information regarding taxes. This led to a lack of trust in both the numbers the BOE was reporting and its ability to effectively administer California’s taxes in the future;
- Improper Influence – A growing number of complaints had been made about BOE members and their staffs attempting to influence BOE employees with regard to the outcome of audits, investigations, and tax collection. This inappropriate behavior undermined the effectiveness of the BOE in carrying out its responsibilities;
- Serious Errors – There were serious errors made by the BOE when it came to the allocation of the over $60 billion in taxes collected annually in California. These errors meant that state, county, and city agencies in California were increasingly unable to plan for the public services dependent on those tax dollars.
How Do These Changes Impact California Taxpayers?
The CDTFA claims that this reorganization “will lead to fair and equal tax administration in our state and will uphold the Taxpayers’ Bill of Rights” and promises that it is “committed to a seamless transition and ensuring that taxpayers will see no difference in service.”
However, that has not proven to be the case at all. Shortly after the reorganization, the CDTFA rolled out a new computer system referred to as “CROSS” and it promptly made a mess of tax return processing and payments. Furthermore, the appeals process at the OTA became much more formal and slowed to a snail’s pace. Instead of having the 3-member ALJ panels hear tax cases every day throughout the state, they meet only one or two times a month.
In addition, the Governor’s Office oversaw the selection of 17 brand new Administrative Law Judges (ALJs) to hear appeals; but, 15 of them were former Franchise Tax Board or Board of Equalization attorneys. The result after a year of hearing income tax appeals by the OTA ALJ panels – Out of a total of 162 appeals in 2018, the taxpayers wholly or partially prevailed in just 5 cases, i.e., 3% of the time. In my humble opinion, that is hardly a sign of “fair and equal tax administration”. As for sales tax appeals, not a single one was even heard in 2018.
These changes to the BOE were no more than a power grab by Governor Brown. A power grab that taxpayers will have to live with. If the OTA continues to rule in favor of the taxing agencies 97% of the time, taxpayers must consider taking their cases to Settlement instead. It will be far less expensive and fairer based on the ALJ decisions rendered so far. That is a decision that we can help you make at Rex Halverson & Associates. Contact us today for a free initial consultation.