Scandals make case for tax board overhaul, Phil Ting says
California’s new tax department, formed a year ago after state lawmakers stripped the elected Board of Equalization of many of its powers, has yet to hear a sales tax appeal in 2018.
The new department’s first sales and use tax case is not scheduled until Oct. 30. By this time last year, the board had heard 38. More than 300 cases dealing with sales and use taxes are awaiting resolution.
To critics of the new agency, the backlog is another flaw of a system they believe is overly formal, burdensome and potentially biased against taxpayers.
Taxpayers dealing with the new office now present their cases in front of a panel of three administrative law judges. The system of appeals now requires taxpayers to file opening briefs, receive reply briefs, and fill out multiple forms. During the hearing, a court reporter attends and subpoenas may be issued.
“They told taxpayers now you don’t need an attorney, but in effect they’ve created a de facto tax court,” said accountant Marc Brandeis, a former Board of Equalization auditor. “Big business can afford to hire attorneys day and night to defend themselves. Small business taxpayers are aggrieved by this. For most taxpayers to try to navigate through this process without a professional is going to be very difficult for them.”
Under the Board of Equalization, the majority of disagreements with tax assessments were resolved informally through calls to and visits with the elected board’s staff. If taxpayers were unsatisfied, they could present an appeal to the board’s five members. The BOE, which previously handled tax collection and tax disputes, was the only publicly elected tax collection agency in the United States.
George Runner, chairman of the Board of Equalization, said because the tax office employees are state workers, they could prioritize collecting money for the state over taxpayer interests.
“Taxpayers were giving their case before their peers,” he said. “We would listen and hear and apply the law in ways that were appropriate. But we also understood that these are real people. We weren’t conflicted. Right now, cases are heard by state employees who are not necessarily disinterested in the outcomes because there’s a outcome for the state.”
The Legislative Analyst’s Office found that 13 of the 14 original judges hired to hear appeals at the new agency previously had worked for other tax agencies, such as the Franchise Tax Board, giving them more familiarity with tax issues and leading to a possible conflict of interest against the taxpayers.
The office has also issued 91 opinions about other tax matters, mainly regarding franchise tax that corporations pay, and has sided with its auditors and against taxpayers in all but two cases.
Mark Ibele, the director of the new agency, emphasized its strict interpretation of the law, explaining that most of the posted franchise tax appeal decisions “involve straightforward tax issues that allow little room for agency interpretation.”
“The Office of Tax Appeals wants to ensure that all taxpayers will be treated with respect throughout the appeal process,” Ibele said in a written statement. “No matter how large or small, simple or complex, every appeal will be carefully considered, addressed in a timely manner, and receive a written opinion.”
The BOE, however, was plagued with reports of improper management. Recent audits from the Department of Finance revealed accounting failures, unethical spending and nepotism that helped lead to its fall. The BOE still exists in a diminished state, with only the few powers granted to it under the California Constitution.
Assembly Budget Chairman Phil Ting, D-San Francisco, who supported the bill, said that though the new tax office needs more time to begin hearing cases, the agency is on schedule.
“When you’re reforming a 4,500-person organization, it doesn’t happen overnight,” he said. “Part of that is building new organization culture, hiring new people. The hope is that the tax appeals panels start to hear cases as fast as they can and the resolutions happen at a much faster pace than they did at the BOE.”
“I know that the timeline was fairly quick, but we know that the public had been waiting 90 years for change, so we wanted to make change happen as quickly as possible,” he added. “Just because change starts doesn’t mean you’re able to fully ramp up and be fully operational. There’s no question that there’s still work to be done.”