An effort by county
assessors to narrow a State Board of Equalization rule on aircraft assessment
was rejected by a 5-0 board vote December 14. Critics said the assessors'
proposal would drive aircraft from California and result in the loss of
hundreds of jobs.
In September of 2003, the
California Assessors' Association petitioned the board requesting a change in Property Tax Rule 138,
which provides that certificated aircraft owned by air carriers and temporarily
out of service and in California for maintenance, repair and storage are
eligible for a property tax exemption pursuant to Revenue and Taxation Code
Section 220. This rule was adopted in the aftermath of the September 11, 2001
terrorist attacks.
The assessor's association
proposed to delete the following sentence from the rule: "Aircraft in
California solely for the purposes described in subsection (b)(1) include any
incidental and attendant storage." Instead the assessors wanted to add to
the rule: "Aircraft in California primarily for the purpose of storage may
require incidental maintenance or servicing related to storage." Such
aircraft do not qualify for the exemption.
Board staff defended the
existing rule, saying it was consistent with statute and urged the board to
deny the assessors' petition. Board staff also noted the Office of Administrative
Law approved the current rule.
A phalanx of assessors
turned out to support their proposed changes. Shasta County Assessor Chris
Andrews said the current rule exempts property not exempt by statute. Yolo
County Assessor Dick Fisher echoed Mr. Andrews' testimony, as did Assessor
James Finch of Kern County. Rick Auerbach, Los Angeles County assessor,
supported the rule change but said he would not oppose legislation to exempt
the aircraft.
Board Member Bill Leonard's
father, William, led the opposition. He represented the Inland Valley
Development Agency and said the assessors' proposal would result in the loss of
150 jobs in San Bernardino County. He said there would not be any increase in
revenue from the aircraft because they would move to a more friendly state. Due
to the loss of jobs and business for firms maintaining the aircraft, there
would actually be a revenue loss, he added.
Assessor Don Williamson of
San Bernardino County broke ranks with the association and opposed the
assessor's proposal. He said there was no problem with the current rule.
Also voicing opposition were
Jim Hultquist, managing director of taxes for the Air Transport Association;
Richard Dewberry of Bewley, Lassleben & Miller (Whittier law firm),
representing Boeing and Lockheed Martin, and John White of Southern California
Aviation in Victorville. Mr. Hultquist said that the assessors had caused some
air carriers not to bring planes in California due to the uncertainty
surrounding their proposal. This has resulted in job losses.
Other BOE developments at
the December 14-15 meetings:
BOE Chief Counsel Retiring. Tim Boyer, BOE chief counsel for a number of years, is retiring, effective at the end of the year.
Chiang Elected Chair. With former chair Carole Migden now serving in the state Senate, Board members elected John Chiang as the new board chair. In this capacity, he will serve on the Franchise Tax Board. Mr. Leonard was nominated for the vice chair position, but he declined, saying Mr. Parrish had done a good job in the position, so Mr. Parrish was reelected as vice chair.
Assessors Win Change in Business
Assessment Appeal Rule. Over the
objections of taxpayers, the board, on a 5-0 vote, approved an
assessor-suggested modification to restrict business taxpayer appeals under Property Tax Rule 305.3.
Under current law, if the result of a personal property audit shows property
subject to an escape assessment, a taxpayer may file an appeal on all property
except property previously equalized. If the assessor says an audit finds no
escape assessments, taxpayers may request an appeals board to make such a
determination.
The assessors' proposal that was approved by the board would restrict the
appeal right of taxpayers, when no escape is found, to situations where the
escape is no less than one percent of the audited value of the taxpayers'
fixtures and personal property for the year under audit. For all practical
purposes, with this language, a taxpayer appeal where no escape is found will
be exceedingly rare.
James Rees, deputy county counsel in Santa Clara County, appearing on behalf of
Assessor Larry Stone, said the change is a "common sense rule" that
will add certainty. He said that currently the rule is subject to manipulation.
On questioning from Marcy Jo Mandel, representing Controller Steve Westly,
Shasta County Assessor Chris Andrews promised assessors will be "fair and
even-handed" and won't abuse the rule. "We're elected and sensitive
to taxpayers," he said.
Voicing opposition to the rule change were Bill Harris, property tax manager of
Intel, and John Despotakis, property tax manager for Apple. Mr. Harris said the
one percent threshold is "way too high" for Intel, for it computes to
$10 million before an appeal could be accepted. Mr. Despotakis said the current
rule was the result of assessor abuse and the change was not good tax policy.
Mr. Parrish said he voted for the rule change because there was
"gaming" of the system.
Yount to Head Administrative Support
Division. BOE Executive Director Ray
Hirsig announced that Charlene Yount was selected by the board to be the new
chief of the Administrative Services Division.
Timber Tax Rate. The board set the tax rate for the timber yield tax at 2.9 percent of timber harvest value. This is the same rate as last year.
Timber Harvest Values. The board adopted timber harvest values for various regions of the state. The values were recommended by the Timber Advisory Board and there was no opposition voiced.
Race Horse Audit Threshold. The board adopted amendments to Property Tax Rule 1045, increasing the mandatory audit threshold for the race horse tax from $2,000 in tax to $4,000 in tax. This threshold of $4,000 corresponds to the mandatory audit threshold for business personal property.
Amnesty Update. In an update of its forthcoming amnesty program,
board staff said several meetings with taxpayers have been held to get input.
Concerns expressed by taxpayers relate to how penalties will apply where there
are current audits and appeals in process. Mr. Dewberry, of Bewley, Lassleben
& Miller, said the penalties are unfair and punish good-faith and
fair-reporting taxpayers. He also asked that if a statute of limitations, which
would otherwise be closed but extended by a taxpayer, would be extended to 10
years under amnesty.
Mr. Leonard noted the informal settlement agreements are not exempt from
amnesty penalties.
He said the program needs to treat taxpayers fairly.
Differing from FTB staff-proposed amnesty implementation, board staff said they
will allow netting of over and under payments. They will also apply any
payments to tax liability first and penalties last. Mr. Parrish asked that the
minutes be transcribed so these statements would be on the record.
Manufacturing Equipment Exemption Regulations Repealed. The board repealed Sales Tax Regulation 1525.2 and 1525.3, relating to the manufacturing equipment sales tax exemption on the theory that the exemption expired at the end of 2003. Staff presented the action as a Section 100 change, with no regulatory effect. This procedure exempts the process from notice and public hearing requirements of the Administrative Procedures Act.
FTB Staff Delays Resolution of Tax
Protest and Hits the Taxpayer for Interest for the Delay. In the Appeal of Richard and Lori Randall, it
was disclosed that FTB staff, after the taxpayers' oral protest hearing,
delayed a decision for 18 months and is proposing charging interest for the
delay. Jeanne Sibert, FTB staff attorney, said interest cannot be waived
because the delay was caused by an FTB managerial decision, rather than an FTB
ministerial decision. She said FTB management pulled staff from this case and
assigned the auditor to another case, causing delay. Mr. Leonard, who was not
impressed, said this had the same result as if management told staff to lose
the file.
He lost an effort (on a 2-3 vote) to waive interest for this 18-month period
(Leonard and Parrish: yes, Mandel, Chiang, Yee: no).
At issue in this case is whether the state could source all of a non-residents
disqualified option gains to California. The case was put over so the taxpayer
could provide more information on the time the taxpayer worked in California.
FTB Staff Denies a Bad Debt Deduction Allowed by the IRS. In the Appeal of Paul and Peng Van Etten, it was disclosed that FTB staff disallowed a bad debt deduction allowed by the IRS. FTB counsel argued the taxpayer continued to collect the debt after taking the deduction. Ms. Mandel noted that IRS has ruled that efforts to continue to collect a bad debt are not fatal to bad debt deductions. The BOE voted to deny Mr. Van Etten's appeal.
Message to FTB Staff: Don't Ask for Rehearings on Small Amounts of Money. In making a motion to deny a Franchise Tax Board staff petition for rehearing of the board's decision in the Appeal of Shirley I. Niles, Mr. Leonard said he wanted to send a message to the FTB staff. He said FTB staff should not ask for rehearings in cases involving small amounts of money. In the Niles case $137 was involved in the request for rehearing. Mr. Leonard said the costs to all parties to process the request is more than the amount at issue and it wastes BOE members' time. His motion was approved 5-0.
BOE Provides Relief from FTB Demand
Penalty. After hearing from Stanley A.
Posey about the extraordinary circumstances causing his failure to respond to
an FTB demand, the board voted 4-1 (Yee: no) to relieve Mr. Posey from the
demand penalty imposed by FTB staff.
According to Mr. Posey, there was "reasonable cause" for the failure.
He said he married a Singapore resident and, just before the tax return was
due, his wife was denied entrance to the United States because she tested
positive for HIV. Mr. Posey said he immediately left for Singapore and didn't
see any demand letter. After awhile, the situation was resolved when it was
proved that the tests were wrong. He said he paid his taxes when he got back.
FTB Counsel Suzanne Small argued this set of facts was not "reasonable
cause" because Mr. Posey was often out of the country and he had attached
a copy of the demand letter with his appeal, showing he got it. Mr. Posey said
he attached a copy that he got later from the FTB for the appeal.
Sales Tax Refunds of Unusable MIC
Credits Granted. Three sales tax appeals
involving refunds of amounts of manufacturers' investment credit not able to be
claimed on corporate tax returns were approved by the board. (Appeal of
Lightwave Electronics Corporation, Appeal of Grundfos Holding
Corporation and Appeal of Conextant Systems).
In the Lighthouse case, which was the lead case, the taxpayer, a
Mountain View corporation and leader in laser technology, had used its FTB
liability by claiming R&D credits. It filed for a sales tax refund for the
amount it could have claimed on its corporate tax return if it had not used its
R&D credits. Board staff denied the claim. Representing the taxpayer, Jon
Sperring of PricewaterhouseCoopers, said it was legislative intent that
taxpayers who filed prior to August 7, 2003 could claim sales tax refunds of
unused tax credits. He then played a tape of the legislative debate on SB
1064 (Burton) on the Assembly floor to demonstrate the legislative
intent that taxpayers with claims for sales tax refunds be grandfathered in.
BOE staff attorney Brad Heller argued that the MIC statute prohibited taxpayers
from claiming a sales tax credit if they could not claim the credit on their
corporate return.
After the Lighthouse case was decided for the taxpayer on a 4-0 vote
(Yee-abstaining), the other two cases involving the same issue were decided on
the same stipulated arguments. On the Conextant case, Mr. Chiang was not
participating and out of the room, so the vote was 3-0.
Conflicts of Interest Regulatory Change Passed. The board unanimously approved, and placed in the 15-day file, changes to its conflict-of-interest regulation (Regulation 6001). The change was requested by the Fair Political Practices Commission.
Rules of Practice Regulatory Changes Approved. The board unanimously approved changes in Rules of Practice rules that staff said would make it clear to taxpayers what is required in appeals. Three of the changed rules were approved: 5041, 5073 and 5076. One, 5082.2 was placed in the 15-day file.
Pac Bell Gets Half a Loaf on Appeal. In the appeal of its property tax assessment, Pac Bell came out with half a loaf. At issue was the company's contention that the board underestimated the present value of the future costs of removing telephone poles. Sacramento attorney Eric Miethke, representing Pac Bell, said these future risks created a diminution of current value. The board had assessed the company at $8.505 billion. The taxpayer argued the correct figure would be $8.346 billion. As a compromise, the board set the value at $8.452 billion.
Extension for Use of Existing Cigarette Tax Stamps. The board approved emergency Regulation 4056.1, authorizing the use of current cigarette tax stamps for four months. BOE chief counsel Tim Boyer said there are some minor problems in putting in the new stamps. Much of the testimony on the resolution came from representatives of a company not awarded the contract for the new stamp (Standard Register). They complained about the fairness of the state's bidding process.
Legislative Analyst Fails to Submit
Study on Administrative Tax Agency Consolidation on Time. BOE Executive Director Ray Hirsig told the board
that the Legislative Analyst has failed to meet the deadline to submit a study
required by law (AB
986 of 2003) on consolidation of certain administrative functions of
the tax agencies. The study was due November 1.
For some unexplained reason, the Analyst changed direction from what the
Legislature asked, according to Mr. Hirsig, the bill's author, Assembly Member
Jerome Horton, and BOE Member Bill Leonard shared their concerns about the
change with the analyst.
Legislative Proposals. The board approved a package of non-controversial proposals for introduction in the Legislature in 2005. Margaret Shedd, the BOE legislative director, said they would be introduced as "consent" bills by the tax committees.
Caltaxletter December 17, 2004
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