This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Courts, BOE Side with Taxpayers in 3 Cases

In the span of a month, business taxpayers in California received good news on three tax appeals from the courts and State Board of Equalization. The three decisions strike a theme of fairness and consistency in the administration of this state's tax system. Cal-Tax played a part in each successful outcome as General Counsel Greg Turner represented the organization in amicus curiae briefs before state appellate courts and in an amicus letter to the BOE.

These are the cases:

• Ceridian v. Franchise Tax Board (December 22) - The First District Court of Appeal held that Revenue and Taxation Code Section 24410 is an unconstitutional violation of the federal commerce clause. According to the court, the California tax code had two problems: allowing a deduction for insurance subsidiary premiums only to corporations domiciled in California, and limiting the amount of the deduction based on the subsidiary's gross receipts, payroll and property within the state.

The Court of Appeal also sustained the trial court' s judgment invalidating the statute and awarding Ceridian the stipulated amount of tax refund (rejecting FTB's assertion that the remedy should be a reassessment of all those taxpayers who benefited by the deductions). Cal-Tax joined with a member company, Wells Fargo Bank, in the amicus submission.

• Heavenly Valley v. El Dorado County Board of Equalization (November 22) - The Third District Court of Appeal held that Revenue and Taxation Code Section 469 entitles taxpayers audited by a county assessor the right to appeal to the County Board of Equalization when the audits disclose property "subject to" escape assessment. Actual enrollment of an escape assessment by the assessor is not necessary to trigger taxpayer-appeal rights.

Cal-Tax was joined by the Silicon Valley Manufacturing Group in submittal of an amicus brief.

• Edison International v. Franchise Tax Board (December 12, a non-published opinion) -The State Board of Equalization ruled in favor of Edison International by holding that Edison's capital financing subsidiaries were unitary with Edison International's electric utility business and that the income derived from those subsidiaries was business income. The FTB argued the subsidiaries were not unitary despite the FTB's exact opposite conclusion in the immediately preceding audit period. Cal-Tax submitted an amicus letter arguing for the BOE to consider the vacillating positions taken by the FTB.

Andal: Expedite Regulations
State Board of Equalization Member Dean Andal has asked Governor Gray Davis to help expedite the long-stalled Franchise Tax Board protest regulations. Mr. Andal made the request in a six-page December 27 letter in which he says the regulations have been held up in the State and Consumer Services Agency, which oversees the FTB.

In his letter, which as of January 9 had not resulted in a reply from the governor or his administration, Mr. Andal stated that protest regulations would increase collection of legally owed taxes while providing taxpayers an orderly FTB deficiency assessment protest process. The FTB has $3.2 billion in uncollected revenue involved in cases that exceed the two-year time limit, Mr. Andal wrote.

Because the OAL has declared previous FTB protest instructions "underground regulation," taxpayers have no guidance when they protest a deficiency assessment, he said.

The Franchise Tax Board, at its December 18 meeting, noted that the draft regulation it had approved in September was held up because it was accompanied by a request to increase the board's legal staff. The Department of Finance disagreed with the need for more lawyers. The board directed staff to delete the budget change proposal and resubmit the protest regulation with a declaration that it would have no fiscal impact.

Mr. Andal stated that protest regulations would increase collection of legally owed taxes while providing taxpayers an orderly FTB deficiency assessment protest process.

Internet Sales Tax Bill is Back
It has a new number (AB 81) in the new 2001-02 session of the Legislature: The vetoed AB 2412 of last year is back. Independent booksellers and others seek to require online retailers to collect taxes on sales to California consumers.

Assembly Members Carole Migden of San Francisco and Dion Aroner of Berkeley reintroduced their bill, mainly on behalf of locally based bookstores who complain that lack of clarity in the law allows Borders Books and Barnes & Noble Booksellers to sell books online without tax collection responsibility. This year's bill requires out-of-state "dot.coms" to collect sales tax on purchases shipped into California if the out-of-state e-retailer is at least 10 percent owned by (or owns) an in-state business, and the out-of-state e-retailer has a similar name and sells similar products as its in-state affiliate.

Meanwhile, the San Jose Mercury News reports that Governor Gray Davis has not changed his mind since the veto. His spokesperson, Roger Salazar, said, "The Internet industry has contributed greatly to California's booming and explosive economy. At this stage of the game, he thinks it needs to mature a little bit more before we think about taxing the Internet."

Leonard Floats Split-Roll Plan
Assembly Member Bill Leonard, a 22-year veteran of the Legislature who was a "tax-revolt" candidate when first elected in 1978 as a "Proposition 13 baby," announced in December that he was "seriously considering" introducing a bill to boost property taxes paid by businesses.

He said his goal is to "assure that homeowners no longer pay a disproportionate share of the state's property taxes by reforming the way in which commercial and industrial property is assessed "

The San Bernardino County Republican, contacted by Cal-Tax, said he had no interest in retaliating against the business community for its support of Proposition 39, which voters passed in November to make it easier to pass local school bonds that are paid for by property taxes. However, he said he'd welcome support from any legislator who might have such a motive. He said his motive is "parity." He added he also would be interested in discussing an increase in the homeowners' exemption as well as a revenue stream for local government as a result of the shift of property taxes to schools.

Mr. Leonard, who said he was talking to legislative counsel about drafting a bill, stressed that his proposal would not result in arbitrary reassessments, such as the three-year cycle of reappraisal proposed and then dropped last spring by Assembly Member John Dutra. Also, he said he did not want to give assessors "hunting licenses to go after businesses." He wanted to explore a change-of-ownership reappraisal to current market value when more than half of a company's stock changes hands.

Sacramento Bee columnist Dan Weintraub reported that while a split roll "is not likely to happen" in 2001, the "mere fact that Proposition 13 has been put on the table by one of its original backers may well signal the beginning of a new era in California politics." He tied Mr. Leonard's announcement to voter approval of Proposition 39 and quoted Jon Coupal, president of the organization founded by Proposition 13 co-author Howard Jarvis, as saying, "Ten years ago, no conservative Republican would have credibly thought that a split roll was an option. But there are many conservatives who believe that the business community has left the reservation and has repeatedly sought higher taxes, to the detriment of working-class families."

Lenny Goldberg, head of the California Tax Reform Association and longtime booster of a split roll property tax, was consulted by Mr. Leonard. "I'm just happy as a clam it's being discussed," Mr. Goldberg was quoted in the Weintraub column. "How quickly it will build, I don't know. If it's five or 10 years, I'll be happy. If it happens this year, great."

As of this writing, Mr. Leonard had not introduced a bill. The introduction deadline is February 23.

(Editor's Note: Items in 
FOR THE RECORD were previously reported in Caltaxletter, 
a Cal-Tax newsletter published 40 times a year.)