Emergency Regulations regarding the Office of Tax Appeals (OTA) and the California Department of Tax and Fee Administration (CDTFA) have recently been issued by the state of California. Effective July 1, 2017, the OTA and CDTFA absorbed many, but not all, of the functions of the California State Board of Equalization (SBOE). The SBOE, established by the California Constitution, will continue to administer the state’s property tax. However, the OTA and CDTFA will absorb the majority of the SBOE’s other powers, including the administration of the Sales and Use Tax and the ability to serve as the appeals function for the state’s corporate and individual income taxes.
Although many of the changes in the Dec. 26, 2017 Emergency Regulations are administrative in nature, such as the new address for filing appeals, several of the rules will have a significant impact on taxpayers. While these rules are temporary—final regulations must be issued by Jan. 1, 2019—taxpayers should be aware of the key differences between the OTA and the SBOE.
For example, taxpayers waive their right to confidentiality when they file an appeal with the OTA. Although taxpayers don’t have a right to confidentiality, they may request in writing that the hearing be closed and that the record be sealed. The regulations state that it is preferable for this request to be made in the opening brief, but it may be made at any time during the briefing phase. Taxpayers requesting a closed hearing or a sealed record must establish that they meet the applicable criteria, including but not limited to establishing that the appeal “involves trade secrets or other confidential research, development, or other information the disclosure of which would cause unwarranted annoyance, embarrassment, or oppression to any person.” In addition, the taxpayer must also establish under this criteria that the information is not publicly available, that the information would be disclosed during the oral hearing, and to what extent the parties can mitigate this risk by limiting their oral hearing presentations.
Another big change for California taxpayers and practitioners involves the OTA website. Unlike the SBOE, the OTA will begin posting all final opinions online. Previously, the SBOE posted a limited number of their decisions, sometimes making it difficult for taxpayers and practitioners to find results of similar cases prior to filing an appeal. Final opinions will be published 100 days after they are issued.
That being said, even though opinions may be more accessible to taxpayers and practitioners, they may not carry substantial weight. Opinions issued by the OTA may be designated by the agency as precedential, but that designation contains a major caveat. The regulations provide that the OTA may withdraw a precedential designation from an earlier opinion when issuing a subsequent opinion on a similar issue. One possible explanation for this arrangement is that it affords the OTA the ability to address an issue being raised by multiple taxpayers. Practically speaking however, taxpayers should be careful when relying on opinions designated by the OTA as precedential given the OTA’s lack of a function resembling stare decisis.
The OTA does however provide taxpayers with some administrative relief. The OTA has the authority to hear appeals arising out of almost any “notice of action” from the Franchise Tax Board (FTB). Thus, taxpayers may now bypass other administrative agencies, such as the Audit Services, Administration, and Protest Bureau and the Settlement and Litigation Bureau. Taxpayers may appeal a Notice of Proposed Assessment, Notice Affirming Carryover of Adjustment, and a Notice of Cancellation of Credit or Refund. Taxpayers may even file an appeal if the FTB fails to act on a claim for refund of tax, penalties, fees, or interest within 6 months.
All told, California taxpayers will have to adjust to this new system of appeals. After over 100 years of existence, the move from the SBOE to the OTA will no doubt lead to an adjustment period for taxpayers and tax professionals in the Golden State. Taxpayers contemplating appealing an FTB tax deficiency with the OTA should discuss the new rules and procedures with their tax advisors before proceeding. Should you have any questions regarding tax issues in California, or any other complex tax issue please contact John Dies, Managing Director of Tax Controversy, at [email protected].