What Are the California Department of Tax and Fee Administration and the Office of Tax Appeals

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[To contact a former senior BOE Auditor, Sales Tax Consultant Marc Brandeis, click here.]

On June 15th, Senate Bill (SB) 86 was passed. The bill was called the “Taxpayer Transparency and Fairness Act,” and the full text can be found here. The bill makes several changes which appear to be a direct result of audits performed by the State of California as to the finances and actions of various other state boards and officials, not just the BOE. (Though the news about a possible investigation by the Attorney General’s office should not go unmentioned – see a SacBee article here.) Nonetheless, perhaps the most impactful of the changes arising from this bill are a gutting of the State Board of Equalization. There are two new bodies, the Department of Taxes and Fee Administration and the Office of Tax Appeals. Per the Legislative Counsel’s Digest for the Bill:

This bill would transfer to the California Department of Tax and Fee Administration the various duties, powers, and responsibilities of the State Board of Equalization relating to the administration of various taxes and fees except for those duties, powers, and responsibilities imposed or conferred upon the board by the California Constitution, as specified, and the duty to adjust the motor vehicle fuel tax rate for the 2018–19 fiscal year. The bill would, for these purposes, also provide for the transfer to the department of the board’s employees serving in civil service, the rights and property of the board, and the board’s funding, as provided.

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The bill also would restrict ex parte communications in relation to a board adjudicatory proceeding.

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(2) This bill would establish in state government the Office of Tax Appeals and would place the office under the control of a director appointed by the Governor and subject to confirmation by the Senate. The bill would also authorize the Governor to appoint a chief deputy director and a chief counsel. The bill would transfer to the office the various duties, powers, and responsibilities of the State Board of Equalization necessary or appropriate to conduct appeals hearings, except for those duties, powers, and responsibilities imposed or conferred upon the board by the California Constitution, as specified. Within the office, the bill would establish tax appeals panels and would require each tax appeals panel to consist of 3 administrative law judges, as specified. The bill, on and after January 1, 2018, would require the tax appeals panels to conduct, and would prohibit the board from conducting, appeals hearings for those duties, powers, and responsibilities transferred to the office.

This bill would make these provisions operative on July 1, 2017.

The biggest change noted by fellow tax practitioners has been the fact that the long-standing 5-person panel, including 4 elected officials, which heard Franchise Tax Board and Sales Tax Appeals, will no longer have duties including adjudication of FTB and sales tax issues. Instead, for those purposes, the BOE will be replaced with a panel of 3 administrative law judges, appointed rather than elected. There is a lot of discomfort in the tax community regarding the change, but a lot of it appears to be attributable to settling for “the devil you know” rather than the “devil you don’t know.” A 3-person appointed panel can be great if they are selected based on reputations in both private practice and civil service – much like judges are appointed in state court and the federal level. However, if the judges are simply promoted from within the government or are appointed based on politics rather than merit, there may be less faith in the impartiality of the panel.

One item that lends to some optimism in the bill, though, is that there does appear to be an emphasis on transparency and integrity. As a practitioner who spent many years practicing exclusively in Tax Court and Federal District Court, I have to admit there was always a discomfort with the openness to ex parte communications in State Board of Equalization proceedings. In addition, though many judges are elected in the state, I preferred the federal method of appointing judges, keeping them from having to campaign – and accept donations – at the same time as sitting in a quasi-judicial capacity. As the United States Tax Court has a great reputation, I personally welcome any moves in that direction.

The State BOE does continue in a more limited role, however. It still has constitutional authority to work on cases involving property taxes, insurance taxes, alcohol excise taxes, and assessor’s practices.

Updated on 03/29/2021 by Daniel W. Layton.

Daniel W. Layton, the author of this post, is a former IRS trial attorney and former Federal prosecutor who was tasked with handling criminal tax prosecutions and civil litigation including tax refund suits, lien enforcement and foreclosures. As a tax attorney in private practice in Newport Beach, he uses his knowledge of IRS procedures and rules to keep the IRS in check and protect his clients’ rights. He may be contacted at (949) 301-9829.

To contact a former senior BOE Auditor, Sales Tax Consultant Marc Brandeis, click here.