The Office of Tax Appeals (OTA) was established in 2017 as California’s new administrative appeals forum. Born from controversy, the agency was designed to function as an independent and impartial tribunal. Two years in, taxpayers have a better idea about how the OTA will shape California’s corporate tax landscape, but questions still remain. We recently published a three-part series on the OTA in Law360 discussing how the OTA has approached corporate tax issues thus far and identifying the questions yet to be answered.
To provide more background on the agency itself, this alert re-introduces the OTA and the appeals process, providing a refresher on the events leading to the establishment of the state’s new independent tax appeals forum, a description of how the process works and insight on the impact the OTA already is having on California’s tax landscape.
An Agency on the Outs
The OTA is a successor agency to the California State Board of Equalization (BOE). The BOE was created in 1870 to resolve property assessment disputes among counties.1 Throughout the twentieth century, the BOE expanded in size and scope as California added new types of taxes and fees, and assumed the administration and assessment of sales and use, bank share, utility gross receipts, insurance and other taxes.2 By early 2017, the BOE had over 4,300 employees, a $617 million budget and an administrative portfolio of more than 30 types of state taxes and fees.3 The BOE also heard appeals from determinations of the FTB, the agency that administers California’s personal and corporate income taxes.
The BOE’s century-long pattern of expansion ended abruptly in July 2017 with the enactment of “The Taxpayer Transparency and Fairness Act of 2017” (the Act), which stripped the BOE of most its powers.4 Then-Governor Jerry Brown called for the legislation following highly critical reports from both State Controller Betty Yee and the State Department of Finance that detailed serious issues within the agency, including allegations of maladministration of taxes and misuse of state resources.5
The Act created two new agencies: the Department of Tax and Fee Administration (CDTFA) and the OTA. Beginning July 1, 2017, the CDTFA assumed administration of California’s sales and use taxes, among other taxes. The OTA, for its part, assumed the BOE’s appellate functions on January 1, 2018. Afterward, the BOE only retained duties expressly granted under the California Constitution, including property tax assessment, assessment of taxes on insurers and assessment and collection of excise taxes on alcoholic beverages.
New Agency, Familiar Faces: Opening the OTA
Although not formally established as a tax court, the OTA is intended to serve as an independent and impartial administrative appeals forum for California taxpayers.8 The agency is led by a Director and a Chief Counsel, both of whom are appointed by the Governor.9 The OTA’s first Director is Mark Ibele, a longtime civil servant who previously served as the staff director of the California State Senate Committee on Budget and Fiscal Review.10 The OTA’s Chief Counsel is Kristen Kane, a former tax counsel at the FTB who most recently served as deputy director of the California Competes Tax Credit Program at the Governor’s Office of Business and Economic Development.11
Mr. Ibele and Ms. Kane oversee 27 administrative law judges that sit on three-member panels to hear cases.12 Over half of the judges previously worked at the BOE or CDTFA and nearly as many at the FTB.
The OTA has jurisdiction to hear appeals from the FTB in a variety of circumstances, including appeals of corporate income or franchise tax Notices of Action, claim for refund denials and assessment and collection actions.13 The OTA also hears appeals from decisions of the CDTFA that are adverse to taxpayers or other state agencies. The agency conducts hearings in Sacramento, Fresno and Los Angeles.15
Practicing Before the OTA
The OTA has promulgated a set of rules governing the tax appeals process.16 In general, a taxpayer has between 30 to 90 days to appeal an action of the FTB or CDTFA, depending on the nature of the underlying action.17 Filing an appeal triggers a formal briefing process, although time extensions often are granted.18 The OTA appeals process permits discovery, including the issuance of subpoenas. The OTA encourages the parties to engage in informal discovery, however, and the parties must show that they attempted informal discovery before the agency will get involved.19
Taxpayers have a right to an oral hearing before a three-judge panel, and may request an informal conference at any time.20 As a general rule, OTA proceedings are public and the OTA will post notice of a scheduled oral hearing on its website at least 15 days before the hearing.21 During a hearing, parties can call witnesses and introduce exhibits.22
The OTA issues a written decision in every case, which the parties may request redacted for publication or sealed.23 This decision becomes final in 30 days unless the parties file a petition for a rehearing.24 Decisions are posted within 100 days after becoming final.25 OTA decisions may be designated as precedential or non-precedential, and any person may propose that an opinion be given precedential effect by emailing the agency.26
There are two key aspects of appealing to the OTA, which are consistent with prior practice before the BOE. Namely: (1) a taxpayer need not pay the underlying assessment to appeal to the OTA, and (2) if a taxpayer wins its appeal, the state agency cannot appeal the decision or otherwise bring an action in Superior Court.27 If a taxpayer loses its appeal at the OTA, it must pay the underlying assessment, file a claim for refund with the respective state agency – either the FTB or the CDTFA, and bring a refund action in California Superior Court once the claim is denied.28 A Superior Court trial is de novo, meaning a new record must be created through formal discovery and the introduction of evidence subject to the Court’s governing rules.29
Conclusion
Taxpayers are still learning about the OTA as the agency enters its third year of hearing appeals. How the OTA ultimately will impact California corporate tax jurisprudence remains to be seen but there are encouraging signs so far, including some initial, favorable corporate tax decisions and evidence of a truly impartial forum. We will continue to follow decisions as they are issued and report back on any developments.
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1 California State Board of Equalization, History & Milestones of the State Board of Equalization, (Feb. 18, 2020), https://www.boe.ca.gov/info/milestones.htm#old. The significance of that original statutory body was short-lived, however, because in 1874 the California Supreme Court declared that legislation enacted in the subsequent 1871-1872 session was unconstitutional in so far as it had delegated to the BOE the right to fix the rate of taxation, which the court considered to be a delegation of legislative power in derogation of the California Constitution. Thus, the BOE lacked any meaningful power until the California Constitution of 1879 created a new BOE consisting of one member from each of the three then-existing congressional districts in the state and the Controller as an ex officio member.
2 California State Board of Equalization, History & Milestones of the State Board of Equalization, (Feb. 18, 2020), https://www.boe.ca.gov/info/milestones.htm#old.
3 California State Board of Equalization, 2016-2017 Annual Report. P. 9; “Taxes and Fees Administered by the California State Board of Equalization, FY 2016-2017;” Sacramento Bee, “For 90 years, Californians have tried to kill this tax board. This is why they failed,” Adam Ashton, (April 23, 2017).
4 Cal. A.B. 102 (2017); 2017 Cal. Legis. Serv. Ch. 16 (A.B. 102) (WEST). Governor Brown signed a cleanup bill, A.B. 131, on Sept. 16, 2017.
5 Yee’s report accused the BOE of misallocating $47.8 million in retail sales taxes to the state’s general fund, improper use and documentation for office revolving funds, and inadequate controls over travel expenses and reimbursement claims. The Finance Department audit report detailed the misallocation of tens of millions of dollars, misuse of tax auditors for “parking lot duty” at a promotional event, and accused the BOE of providing misleading information to lawmakers. See “California State Board of Equalization Review Report, Internal Accounting and Administrative Controls Review, July 1, 2013 through April 30, 2015.” (Nov. 2015), pp. 6-23; Jon Ortiz, “California controller’s report criticizes her own board,” Sacramento Bee (Nov. 18, 2015); “Final Report, Evaluation, California State Board of Equalization Sales and Use Tax Reporting Retail Sales Tax Fund Adjustment,” Office of State Audits and Evaluations, California Department of Finance (Mar. 2017).
6 Cal. A.B. 102 (2017); California CDTFA Special Notice L-507.
7 California CDTFA Special Notice L-507.
8 Cal. Gov. Code § 15672.
9 Cal. Gov. Code § 15670(b)(1). The appointment of the Director is subject to confirmation by the state Senate. Id.
10 California Office of Tax Appeals, Mark lbele, (Feb. 18, 2020), https://ota.ca.gov/mark-ibele/. Mr. Ibele also has experience at the BOE. Id.
11 California Office of Tax Appeals, Kristen Kane, (Feb. 18, 2020), https://ota.ca.gov/kristen-kane-2/.
12 California Office of Tax Appeals, Judges, (Feb. 18, 2020), https://ota.ca.gov/judges/; see also 18 Cal. Code Regs. § 30505(a).
13 18 Cal. Code Regs. § 30102. Meanwhile, the OTA does not have jurisdiction over the FTB’s Notices of Proposed Assessment. Additionally, the OTA cannot decide on the constitutionality of a California statute or the state constitution unless a federal or appellate court already made such a determination.
14 CDTFA Publication 17, p. 9 (noting that the Business Tax and Fee Division cannot appeal to the OTA).
15 Cal. Gov. Code § 15673.
16 18 Cal. Code Regs. §§ 30000-30707. The OTA recently issued a Notice of Interested Parties Meeting to discuss proposed amendments to the Rules for Tax Appeals. OTA Notice (Mar. 20, 2020).
17 18 Cal. Code Regs. § 30203. The OTA will accept an appeal as valid if it contains substantially all of the information required by Regulation 30201, and the OTA can identify the appeal and the contact information for the party or the party’s representative along with the signature of each appellant or authorized representative. If an appeal is deficient, the OTA will notify all parties in writing that the information received by OTA is insufficient to be accepted as a valid appeal, and what additional information is necessary to perfect the appeal, and will provide 30 days for the appellant to complete its filing of the appeal. 18 Cal. Code Regs. § 30208.
18 18 Cal. Code Regs. §§ 30303, 30304.
19 18 Cal. Code Regs. § 30214(a).
20 18 Cal. Code Regs. §§ 30210(b), 30410, 30412. Conferences can be held via phone, videoconference, or at an OTA office in Sacramento, Los Angeles County, or Fresno. 18 Cal. Code Regs. § 30210(d). Taxpayers may also opt to appear before one ALJ for personal income tax cases where the amount in dispute (including penalties and fees) is under $5,000 or for CDTFA cases where the entity filing taxes has gross receipts less than $20 million and the total amount in dispute is less than $50,000. Cal. Gov. Code § 15676.2.
21 18 Cal. Code Regs. §§ 30405, 30430(a). Taxpayers may request to close an oral hearing from public observation or seal the record in certain circumstances. 18 Cal. Code Regs. § 30431.
22 18 Cal. Code Regs. § 30410.
23 18 Cal. Code Regs. §§ 30501, 30432. Opinions are available online at: https://ota.ca.gov/opinions.
24 18 Cal. Code Regs. § 30505(a).
25 18 Cal. Code Regs. § 30501(d).
26 18 Cal. Code Regs. § 30502(a).
27 Cal. Gov’t Code § 15677. Rehearing petitions can be filed within 30 days of the date that the panel issues its written petition. 18 Cal. Code Regs. §§ 30505, 30602. A rehearing may be granted if the substantial rights of a party are affected on one of the following grounds: an irregularity in the appeal proceedings, an accident or surprise that occurred during the proceedings, newly discovered evidence, insufficient evidence to justify the written opinion, or an error in law. 18 Cal. Code Regs. § 30604.
28 Cal. Const. art. XIII, § 32; Cal. Rev. & Tax. Code §§ 6932, 19382. Refund claims are deemed denied if the FTB or CDTFA fails to mail a notice of action on any refund claim within six months after the claim is filed. Cal. Rev. & Tax. Code §§ 6934, 19331, 19385.
29 Cal. Gov. Code § 15677.
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