California Tax Board Practices Violate State Law, Audit Says

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By Laura Mahoney

Elected members of the California State Board of Equalization intervene in daily operations of the tax agency, use tax staff to promote personal events and threaten senior managers with dismissal if they don’t go along, according to an audit obtained by Bloomberg BNA.

Some of the board members’ actions and inconsistent policies violate state law and make it difficult to know how the agency is spending its funds or how effective its programs are, the Department of Finance Office of State Audits and Evaluations (OSAE) said in an audit prepared for the Legislature.

Auditors found issues within each of the four member’s operations, but identified the most widespread problems in the office of member Jerome Horton (D). Horton has shifted headquarters staff to his personal staff but left them on the headquarters payroll and has used tax compliance staff to promote his personal events. The SBOE also maintains a “non-public” SBOE office with 10 civil service staff next to Horton’s public district office in the Los Angeles area that senior managers couldn’t explain, and Horton opened a call center with 10 employees without seeking approval from the board.

No Comment

Horton didn’t respond to a request for comment March 27.

Bloomberg BNA obtained a March 20 copy of the audit report, which the OSAE has completed and sent to the tax board for comment. The audit won’t be final and released publicly until OSAE incorporates SBOE’s March 24 written response to the draft, which Bloomberg BNA also obtained.

The report is expected to be released publicly by March 31 and is likely to frame debate about the SBOE’s budget during hearings in the Legislature next month.

Earlier Reports

Bloomberg BNA has previously examined some of the activities that are the subject of the audit, including Horton’s use of tax agency resources to promote and run outreach events with loose ties to the board’s tax mission. His largest is his annual Connecting Women to Power Conference, which is free to attendees and features panels on using social media to market a business, wealth management, leadership skills and managing stress.

According to information provided to Bloomberg BNA in 2015, the tax agency spends an average of four times as much on promoting events such as the Connecting Women to Power conference than it does on outreach events specifically tied to tax administration, such as sales and use tax compliance seminars for restaurants, nonprofit organizations or other types of businesses.

In its response sent to the OSAE March 24, the SBOE pointed to changes it has already made to address some of the issues raised, including new policies that limit member spending on outreach activities and more transparent governance.

Significant Concerns

“BOE strongly agrees with the report’s observation that it ‘has a fiduciary responsibility to promote an operational environment that provides fair, effective, and efficient tax administration over the billions of dollars for which it is responsible,’” the SBOE said in its response. “The report raises significant concerns, and BOE will use it to continue to effect cultural change and improve its practices.”

Auditors interviewed 70 employees at the SBOE’s Sacramento headquarters, eight field offices and the non-public office in El Segundo, which is in Horton’s district south of Los Angeles International Airport. They found managers at various levels weren’t aware of certain activities in the districts they managed.

“Several individuals state that board members, acting individually, intervene in the daily operations within their respective districts,” the audit said. “These individuals also reported a fear of retaliation if staff did not respond or follow the directions of the individual board members. Examples include being informed of potential office relocations or told ‘one more vote and you’re gone’ meaning their job appointment could be dismissed by a vote of three board members.”

Board Member Intervention

The audit pointed to specific examples of board member intervention that at least created inconsistencies in agency operations and at worst violated state law. Several of the examples involved a blurring of lines between the field operations employees—who work for the overall tax agency, report ultimately to Executive Director David Gau and work on tax compliance issues such as audits—and employees who report to the elected members on their personal staffs. Examples include:

  •  Horton’s involvement in creating a call center in the SBOE’s offices in Culver City, in his district, including requesting expedited hiring for 10 people into temporary positions without informing the rest of the board or getting board approval;
  •  Two side-by-side offices in Horton’s El Segundo district office, with one housing Horton’s personal office and the other housing 10 staff members from the field operations and external affairs offices that isn’t open to the public. Executive management at SBOE told auditors the non-public office was opened in 2014 to house an assistant chief of field operations because of a shortage of office space in the Culver City field office, but couldn’t explain why it houses 10 staff members.
  •  Employees on the personal staff of Chair Diane Harkey (R) sitting among audit and compliance staff in the San Diego field office in her district without a clear explanation from management about why board member employees were located in the field office.
  •  Increasing costs for member-driven outreach events with limited nexus to the SBOE’s tax programs without clear information provided to agency about the events, their budgeting or accounting. Because of a lack of clear management, the external affairs office, which is tasked with running outreach programs, has under-counted spending for outreach by almost $3 million a year, for a total of $4.86 million a year.
  •  Some outreach staff have been hired without following hiring and budget rules. One employee hired in 2012 using rules for temporary employees to work in short-term positions came to the agency’s external affairs department, reporting to a boss in the Sacramento headquarters. The employee, Francis Taylor, was immediately redirected to work on Horton’s personal staff and still works there as a public information officer.

Auditors Directing Traffic

Auditors attending a Harkey-hosted Connecting Women to Power conference on Nov. 3, 2016 found 113 field office staff, 98 of whom were sales and use tax audit and compliance personnel, working at the event. The employees, including auditors, tax technicians and compliance specialists with salaries ranging from $28,608 a year to $101,400, were registering attendees, directing traffic in the parking lot and staffing the break room, among other duties.

The magnitude of costs and lost revenue from redirecting revenue-generating staff to events such as this one is unknown, the audit said.

According to the audit, Gau and the agency’s deputy director told auditors in January they had recently learned of the staff working at the event and were unaware it was a common practice among the four districts.

Report Not Final

Harkey told Bloomberg BNA she didn’t direct 113 people from the agency’s staff to work at the event.

“It is not within my purview to direct 113 people,” she said. “They were not there by my request or direction.”

Harkey said some of the items in the audit are inaccurate, and she expects corrections in the final version.

“I hope that everybody doesn’t get hung before the facts are final and public,” she said.

SBOE Member George Runner (R) told Bloomberg BNA the agency is already addressing some of the issues related to outreach and limitations on the sales tax agency’s involvement in the Voluntary Income Tax Assistance program, which helps low-income people file their income tax returns. He is concerned about the agency’s use of its outreach resources and is focused on doing better, he said.

He said he isn’t aware of threats of retaliation to employees who don’t go along with board member directions.

“Clearly that is wrong,” he said. “It needs to end.”

SBOE Member Fiona Ma (D) was unavailable for comment March 27.

Unique Elected Board

The five-member elected SBOE is the only state tax body of its kind in the country. Four of its members are elected by geographic district and the fifth member is the state controller, who is elected statewide.

The elected members have the dual roles of administering the sales and use tax and more than 30 other tax and fee programs, and adjudicating disputes between taxpayers and the state regarding those same programs. The SBOE chair and the state controller also serve on the three-member Franchise Tax Board, which administers income and franchise tax. The SBOE then serves as the adjudicatory body for taxpayer appeals that arise from taxes administered by the SBOE and the FTB.

The agency also issues regulations, takes positions on legislation and sets property tax values for utilities, railroads and telecommunications companies.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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