Corporate Close-Up: California Creates Independent Office of Tax Appeals Ending SBOE’s Role in Income and Franchise Tax Appeals

As first reported by Laura Mahoney in the Daily Tax Report (subscription required), California Gov. Jerry Brown (D) signed into law A.B. 102, The Taxpayer Transparency and Fairness Act of 2017, on June 27, stripping the State Board of Equalization (SBOE) of its role in administering and hearing tax appeals for many California taxes, including income and franchise taxes.

In place of the SBOE, A.B. 102 creates two separate departments: the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA). While the CDTFA will be responsible for California’s sales and use tax and many other excise taxes, the OTA will handle appeals from decisions of the Franchise Tax Board.

Eric Coffill, Senior Counsel with Eversheds Sutherland’s Sacramento, Calif., office and co-author of the California Corporate Income Tax Navigator (subscription required) told Bloomberg BNA by email that “businesses certainly should be optimistic” about the new office, though he believes it will be a challenge for the new agency to be fully functional by the beginning of 2018.

He added that “the SBOE has had appellate jurisdiction over the FTB since 1929 in corporate tax matters and since 1935 in personal income tax matters.  Over half the states already provide taxpayers with an opportunity for a hearing before a person independent from the administrative bodies responsible for raising state revenue.  Now, California finally joins that list of states.”

A.B. 102 is not without its controversy, as Coffill noted that "a large number of business organizations, including the California Taxpayers Association, the California Chamber of Commerce, the California Business Roundtable, the California Manufacturers & Technology Association, and the Silicon Valley Leadership Group opposed A.B. 102, in part because of the way the bill was rushed through the budget trailer bill process in literally a matter of days instead of going through the usual legislative committees." 

Business taxpayers should be aware of how California implements rules to transition from appeals heard by the SBOE to appeals being heard by the OTA, warns Coffill. “There are going to be some interesting transitional issues involving timing,” Coffill said noting that “the Chair of the Assembly Budget Committee, Phil Ting, wrote a letter in the California Assembly Journal to clarify that under Assembly Bill 102, all taxpayer appeals that are set on the calendar of the [SBOE] for hearing at the [SBOE] on or before Dec. 31, 2017, will be heard and decided by Board members.”

Taxpayers already before the SBOE also are going to have challenges in getting their appeals completed before the switchover. Coffill said that it certainly will not be business as usual at the SBOE through Jan. 1, 2018.  Under A.B. 102, “ex parte communications with Board members by taxpayers who are in front of the Board in the appeal process are prohibited as of July 1, 2017.  The OTA has the authority to adopt emergency regulations that can become effective immediately rather than at the end of an often lengthy process, and I would expect them to address a number of transitional issues,” he went on to say.

On Friday, California announced the appointment of David Botelho as acting director of the CDTFA. Appointments for the OTA are expected imminently, according to Eric Coffill.

As a result, California taxpayers with current or pending appeals before the FTB or SBOE should stay apprised of the forthcoming announcements concerning the OTA and the adoption of emergency regulations by the end of the year.

Continue the discussion on LinkedIn: How will the creation of the Office of Tax Appeals change the appeals process in California?

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