David R. Doerr, principal contributor
Ronald W. Roach, editor

BOE APPROVES DRAFT POSSESSORY INTEREST RULE

A draft of a new possessory interest rule (Rule 20) was adopted by the State Board of Equalization last Thursday. BOE members, during a lengthy Property Tax Committee meeting, generally followed recommendations of board staff on the language of the proposed rule, although some suggestions from taxpayers and assessors were incorporated. Before it is finally approved, the new rule must be formally adopted pursuant to the provisions of the Administrative Procedures Act. A formal board hearing on the rule will be held sometime in the next few months.

Of most significance, the board decisively rejected a constitutionally suspect proposal by county assessors to vastly expand possessory interest assessment to tax-exempt properties where no possessory interest currently exists. The assessors had proposed that taxable possessory interests apply to property that is constitutionally exempt when used for higher education purposes, religious worship, libraries, museums, and various charitable purposes. BOE staff stated that the doctrine of possessory interest "has never extended to this class of exempt property, only to government-owned property." Taxpayers told the board the proposal could subject all students living in college dorms to possessory interest assessments.

After lengthy discussion, the board agreed with taxpayers that the word "possession" would be defined as "actual physical occupation." BOE staff had argued for "actual physical use or physical occupation." Eric Miethke, an attorney with the Sacramento law firm of Nielsen, Merksamer (etc.) who was representing taxpayer interests, said the term "use" was wrong in defining possession. He cited appellate court decisions in rental car company cases saying the "use" of hallways, etc. did not create a possessory interest.

He added, "A mere use test opens the door to all kinds of problems."

The board rejected taxpayer suggestions to create a bright-line test on whether an interest is "durable" enough to be a possessory interest. Taxpayers had suggested than an interest of less than 30 days be rebuttably presumed to be lacking in durability to be a possessory interest. In defining "durable," the board-approved rule tracks statutory language.

On the question on when an interest is "independent" enough to be a possessory interest, the board rejected suggestions from taxpayers, BOE staff, and assessors. The adopted proposal restates the language of the statute. Taxpayers had sought revisions placing the second sentence of the stautute first.

On the question of what constitutes an "exclusive" use for determining whether a possessory interest exists, taxpayers had asked for an example stating that an airline's interest in an airport runway is not exclusive. Representatives of the San Mateo County Counsel's Office vehemently objected to the language. The board (with acting board member John Chiang dissenting) in response adopted an example drafted by its staff of a hypothetical example of where there would be no possessory interest in a runway.

The board also postponed action on a Cal-Tax suggestion that there is no taxable possessory interest if government property is fully taxable up to its Proposition 13 limit (California's Constitution provides that government-owned property outside its boundaries is taxable under certain conditions). BOE Member Dean Andal said the issue was one of valuation, and will be considered when the possessory interest rules are before the board. A timetable was set for development of the valuation rules. After preliminary meetings among BOE staff, taxpayers and assessors, the valuation rules are set before the board on July 30.

Other BOE developments:

• Cox-Wyden. The board agreed to a proposal by Member Johan Klehs requesting the Legislature to adopt a joint resolution asking Congress to adopt the Cox-Wyden bill placing a moratorium on state or local Internet taxes.
• Web-Site Nexus. The board unanimously approved a draft of amendments to Regulation 1684 (relating to collection of use tax by retailers) providing that web-site use in California does not create nexus. The new draft language, developed by Controller Kathleen Connell and Mr. Andal, states: "An out-of-state retailer whose only contact with this state is the use of a computer server on the Internet to create or maintain a World Wide Web page or site does not constitute 'substantial' nexus with this state. No Internet service provider, on-line provider or other similar provider of Internet access services or World Wide Web hosting services shall be deemed the agent or representative of any out-of-state retailer solely as a result of the service provider maintaining a web page or site on a computer server that is physically located in this state." In addition, the board adopted a letter stating legislative intent on the issue prepared by Mr. Klehs. The draft languge adopted by the board will be subject to a formal board hearing in a few months under the Administrative Procedures Act.

Kaye Caldwell, president of the Silicon Valley Software Industry Coalition, wrote the board in support of the regulatory amendment saying that use of California web-sites does not create nexus for users. She cited legislation carried by Mr. Klehs when he was an Assembly member. This legislation states that receipt of a sales order on a computer network located in California does not create nexus for an out-of-state retailer, and this also accurately describes a web hosting service. She disputed BOE staff arguments that nexus would be created in specified circumstances.

• Rules of Practice. The BOE hearing on proposed changes in the board's rules of practice was canceled. Instead, Chief Counsel Timothy Boyer plans to hold a symposium in July where interested parties will be invited to discuss proposed changes.
• BOE Joint Meeting with Assessors. The board voted to hold the legally required meeting with assessors in Sacramento next fall. Traditionally this meeting has been held at the same time and place as the Assessors' annual convention. Mr. Andal said it would be more cost-effective to hold the meeting in Sacramento. He said Sacramento is the capital, the background resources are here and it would cut down on the costs of staff travel. He added that the assessors could hold their convention anywhere they wanted.
• Property Taxpayers' Bill-of-Rights Hearing. At the board's annual Property Taxpayers' bill-of- rights hearing, Cal-Tax's David R. Doerr said he had been getting a number of complaints regarding unreasonable demands by certain assessors for information, including requests for information that has no bearing on the value of property. He suggested the issue merits review by the board.
• Collection of "911" Telephone User Tax. The board heard testimony and took under submission an appeal by GTE California, Inc., protesting a "911" telephone user tax assessment. At issue in the case is whether underpayments of the tax can be offset against overpayments. The BOE staff took the position that they cannot offset, and assessed a deficiency solely on the underpayments.

San Francisco attorney Robert Dunn, representing GTE, said the board last summer adopted a policy allowing netting of overpayments and underpayments (see Caltaxletter of July 29, 1996) but staff was not following the policy. He argued this was sound statutory interpretation and pointed out netting was permitted for sales tax returns.

Janet Vining, representing BOE staff, argued that the law required overpayments not refunded to taxpayers must be paid to the state.

At the commencement of the hearing, the state's administrator in charge of the "911" program asked to testify. She requested the board not to take action that would decrease the amount of revenue the program would receive.

Mr. Andal called the appearance "inappropriate and unethical." He questioned whether the witness was trying to prejudice the case by saying even if the law is on the side of the taxpayers, the case should be decided against the taxpayer because the "911" program needs the money.

• "Moby Dick" Appeal Denied. The board rejected an appeal of a staff sales tax assessment against "Moby Dick," described by appelants as a gay bar on Castro Street in San Francisco.

The taxpayer remitted sales tax based on cash register receipts. The board, by checking the amount of liquor purchased and using a mark-up method, assessed a deficiency.

At issue was the amount of alcohol in each drink. The taxpayer's representative said the bar pours a generous drink due to competition, and assessed the board staff should allow 1.875 ounces of liquor per drink in computing tax based on the mark-up method. BOE staff said they would only allow 1.75 ounces per drink (thus creating more drinks sold per bottle and more sales tax owed). BOE staff said they sent an auditor to the bar and found that she was poured less than 1.5 ounces of liquor per drink. The taxpayer's representative said that the auditor sent was "a beautiful blonde," and her appearance so disrupted the bar that short drinks were poured to discourage her patronage.

ASSEMBLY TAX PANEL LEAVES MOST ISSUES IN SUSPENSE

The newly created "suspense file" dominated last Monday's meeting of the Assembly Revenue and Taxation Committee. All important bills were relegated to the suspense file without a committee vote pursuant to committee rules adopted on March 31.

The author of one such bill, Assemblyman Dick Floyd, used unprintable language to denounce the suspense file process, and noted no suspense file was used a decade ago when he was a member of the committee (when former Assemblyman Tom Hannigan was chair).

Two minor bills were approved by the committee. AB 80 (Ducheny) extends current law denying tax deductions for substandard housing to "substandard vacant" residential property. AB 1155 (Shelley) conforms to federal law allowing a deduction of the value of a leasehold improvement when the taxpayer dispenses of the improvement upon termination of a lease.

Bills placed on the suspense file were:

• R & D Credit. AB 1499 (Caldera) conforms to federal changes in the research and development credit. Assemblyman Louis Caldera stated that research and development is the key to the state's economic future. The bill was supported by Fred Main, representing the California Chamber of Commerce; Carrie Lee Coke, representing the California Manufacturers Association; Chris Micheli, representing the semiconductor industry, Cal-Tax's David R. Doerr, and Gina Rodriquez, representing Spidell Publishing.

Lenny Goldberg, representing the California Tax Reform Association, opposed the bill. He said the high-tech industry has received the largest share of tax benefits lately.

• Small Business Expensing. AB 41 (Murray) conforms to the federal provisions increasing the amount of property that may be expensed by a small unincorporated business.

Moira Traver, representing the Wilson administration in support of the measure, said budget revenue estimates have been revised to fund the revenue loss that would occur if the bill passes.

• Health Insurance. AB 230 (Runner) allows self-employed individuals to deduct initially 40 percent of the cost of their health insurance. The deduction would rise to 80 percent by 2006. Assemblyman George Runner said the bill would save government the costs of providing health care to a number of self-employed individuals who would otherwise be unable to afford such care.
• Child-Care. AB 258 (Floyd) reestablishes a child-care tax credit.
• Gifts of Appreciated Property. AB 265 (Battin) exempts from the alternative minimum tax any capital gain on the gift of appreciated property to charities.
• General Conformity. AB 1044 (Assembly Revenue and Taxation Committee ) generally conforms to recent federal law changes. Mr. Caldera said the intent was to amend the bill during its stay on the suspense file and work out an acceptable bill.
• School Construction Tax Credit. AB 56 (Mazzoni) establishes a 30 percent tax credit for the cost of establishing or expanding a public school facility. A satellite school, provided by Hewlett-Packard in conjunction with the Santa Rosa School District, was favorably cited as an example of what the credit seeks to encourage.
• Teacher Tax Credit. AB 336 (Miller), gives teachers a tax credit for amounts they spend on classroom purchases. Assemblyman Gary Miller said teachers should be reimbursed for out-of-pocket expenses. The California Federation of Teachers supported the bill.

Of interest was opposition testimony by Rick Simpson, representing the California Teachers Association, the state's largest teachers union. He said the bill was not the proper way to fund school spending. Cal-Tax opposed the measure on the grounds that a 100 percent deduction was not cost-effective as there is no incentive to purchase the most cost-efficient products.

• Computers for Schools. AB 372 (Battin) establishes a schedule for tax credits for contributions of computers for use in schools. According to Assemblyman Jim Battin, under AB 372, "Everyone wins -- the kids, the schools, business." Assemblywoman Helen Thomson testified in support of the measure, saying it also provided "vocational opportunities".

Cal-Tax President Larry McCarthy said the bill is an opportunity to provide more technology for classrooms. Diana Detweiler, representing the Detweiler Foundation, said they have about 1,500 donated computers a month to refurbish and place in schools.

Speaking in opposition, Mr. Goldberg raised a number of questions. He asked whether donations to private schools should be eligible and pointed to a San Francisco Chronicle article stating the largest number of computers are going to Silicon Valley schools.

JUDGE REJECTS SUIT VS. SANTA CLARA COUNTY TAX HIKE

A Superior Court judge rejected a lawsuit seeking to halt collection of a 0.5 percent sales tax increase in Santa Clara County, but critics of the county's two-proposition strategy were expected to take their case to the Sixth District Court of Appeal.

In issuing his summary judgment on April 3, Judge Jeremy Fogel wrote that he anticipates his analysis of the law will be reviewed by the appellate courts. He ruled that drafters of Measure B, the sales tax hike that was approved by 51.8 percent of the vote last November, had "cured the legal defects" which caused state Supreme Court invalidation of local sales taxes considered in earlier cases. These include a Santa Clara County transit tax (Guardino v. Santa Clara County Local Transportation Authority in 1995); a sales tax hike in San Diego for justice facilities (Rider v. San Diego County in 1991), and an appellate district ruling against a Monterey County tax in 1992.

Those earlier cases involved local taxes that lacked two-thirds voter approval as required of special, or earmarked taxes by the California Constitution since 1978's passage of Proposition 13. General taxes require majority-voter support.

Judge Fogel said Measure B is not a special tax because its proceeds, beginning last April 1, are deposited into the county general fund. Another November ballot question, Measure A, was advisory in nature. It advised the Board of Supervisors to spend the revenue on transportation projects. More than 70 percent of voters supported Measure A.

The coalition of opponents to the tax, represented by attorney Robert Rychlik, includes the Libertarian Party and a local taxpayers group. The judge "is dead wrong," said Mr. Rychlik, adding the decision could cause cities and counties throughout the state to copy the dual measure tactic to avoid the need for two-thirds voter approval of special taxes.

Jonathan Coupal, counsel for the Howard Jarvis Taxpayers Association, said his organization was preoccupied with implementation of Proposition 218 and did not participate in this case. He said the plaintiffs might still win on appeal -- "it's a close question" -- but he believes Proposition 218 will guard against future dual ballot measures like those used in Santa Clara County. The Jarvis-sponsored initiative was approved by statewide voters last November to strengthen requirements for voter approval of local tax increases, specifically banning majority-vote taxes where the earmarked money is deposited into a general fund, Mr. Coupal said.

However, he said he has heard that Monterey County supervisors have already talked about a dual measure strategy for a sales tax hike to fund transportation projects, and there may be others.

Judge Fogel, in his ruling, said he accepted the challengers' argument that county supervisors who voted to place Measure B on the ballot "fully intended and expected that the sales tax revenues produced by Measure B would be used to fund the projects identified in Measure A." However, he said, "The fact that the two measures appeared together does not alter the undisputed fact that Measure A is explicitly advisory (and non-binding per the Election Code) and that Measure B explicitly contains no restrictions or limitations on the use of tax revenues."

The judge concluded, "... it is for the appellate courts to determine if this court's analysis of the applicable law is correct, and it is for the voters to decide whether those who spend Measure B's future revenues are doing so appropriately and for the benefit of the community."

Meanwhile, County Counsel Steven Woodside said the county should not spend revenues from the tax until the appellate courts have ruled.

L.A. VOTERS PASS SCHOOL BONDS

Los Angeles voters have approved a $2.4-billion school construction bond measure, by far the largest local school bond measure to win voter support in California history. With nearly all precincts accounted for, 71 percent of the voters supported Measure BB on last Tuesday's ballot.

The measure will increase property taxes by about $66 a year for the average homeowner. A similar measure barely missed the required two-thirds approval on last November's ballot. The previous record for a local school bond was $250 million, which was approved by voters on March 4 in San Ysidro (San Diego County).

In another local school bond election last Tuesday, voters in Burbank overwhelmingly approved a $112.5-million measure. The bond will add $44 per $100,000 of assessed value to property taxes.

These two elections reflect a continued trend toward voter approval, by at least a two-thirds margin, of local school bonds.

Meanwhile, Los Angeles voters rejected Proposition 7, a continuation of a 3.75 percent business surtax. With nearly all votes counted, 54 percent were opposed to the tax which produces $10 million a year for city services. The vote was required under Proposition 218, a statewide initiative passed last November that forces cities to win majority-vote approval for new or continued general taxes. The surtax had been imposed without a vote of the people.

Elsewhere, however, voters approved at least three measures prompted by Proposition 218 to authorize continued collections of previously non-voted levies. Burbank voters decided to retain a 10 percent transient parking tax at short-term facilities such as Burbank Airport.

In Northern California, two fire protection district assessment elections were successful. Measure C in the Placer County community of Penryn allows a $75 parcel tax for the fire district. It was supported by 78.6 percent of voters. In the North Tahoe Fire Protection District, Measure B was heavily favored in early returns -- 83.6 percent approval -- to continue a $66.64 assessment per single-family residence.

COURT: PROPERTY TAX IS FOR PRIOR YEAR SERVICES

In a decision on whether a taxpayer's property tax liability should be apportioned, the Third District Court of Appeal declared that the property tax is for government services for "the year preceding the assessment." (Richard Seegmiller v. County of Nevada.)

The issue was whether the property tax should be apportioned based on the time Mr. Seegmiller's property was in California. Mr. Seegmiller relocated his entire business, Truckee Precision, to Nevada on August 8, 1994, and he argued that he should only pay 38/365 of the property tax. He conceded, however, that the property was located in California on March 1, 1994 (the lien date).

Deciding against Mr. Seegmiller, the court wrote in the decision filed March 31, " ... Seegmiller's business property was actually located in California for a portion of the assessment year, giving this state an even stronger justification for taxation. In any event, Seegmiller cannot escape the fact that, unlike the apportionment cases upon which he relies, his property was permanently situated in and had its sole tax situs in California as of the lien date. The fact that the county permitted him to pay the taxes in a subsequent fiscal year does not mitigate the fact he was subject to the 'opportunities, benefits, and protection' afforded by the county and the state during the year in which it was assessed.' Since the tax levy corresponded to the benefits of governmental services enjoyed as of the tax lien date, the timing of Seegmiller's exit from the state was, for due process purposes, irrelevant. A fortiori, no 'proration' was required for the following year."

NEW WINE IN OLD BOTTLES

City of Woodland Sales Tax. AB 1472 (Thomson) has been amended to authorize the City of Woodland (Yolo County) to impose an additional 0.5 percent sales tax, with majority voter approval.

Ridesharing Tax Credit. SB 634 (Knight) has been amended to reestablish a tax credit for employers for specified ride-sharing programs and provide subsidized transit passes.

NEW LEGISLATION OF INTEREST

Tax Amnesty. AB 8x (Martinez) creates a tax amnesty program for the sales tax, personal income tax, and bank and corporation tax. The amnesty period for the sales tax would be from December 10, 1997 to March 15, 1998. The FTB amnesty program would run from December 1, 1997 to June 30, 1998. Funds generated by the amnesty programs would be used for natural disaster assistance.

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Teachers back off. According to the "Education Beat" newsletter, the California Teachers Association has dropped plans to promote a 0.5 percent sales tax or some other education revenue measure on a 1998 statewide ballot. Instead, the CTA is focusing on school facilities in the next election cycle to make room for an expanded class-size reduction program, the newsletter reported. The decision followed reports of a million-dollar media blitz by the CTA designed to polish the image of the public education system, which was seen as a harbinger for a tax-for-schools crusade. A CTA spokesman told Cal-Tax there are too many irorns in the fire -- mainly a planned $4 billion K-12 construction bond measure -- to push for a tax hike in 1998.

S.D. convention center funding. The state Supreme Court has agreed to review the method of financing for the planned expansion of San Diego's harbor side convention center. Word from the court on April 2 jolted city officials, reported The San Diego Union-Tribune. The city had prevailed in lower courts against the suit by Libertarian Party activist Richard Rider. He contends that the city's $186 million commitment in lease-revenue bonds for the project is illegal because voters were not consulted, and the bonds need two-thirds voter approval. Mr. Rider last year was unable to convince the state's high court to consider his challenge to the $78 million stadium expansion. "Landmark decisions are always an uphill battle," said Mr. Rider. "We just took a huge step up that hill." San Diego Mayor Susan Golding said continued litigation is a "big economic blow" to the city. City Manager Jack McGrory said the Supreme Court's 6-0 vote to hear the appeal "means another year delay on a project that should have started a year ago." He said it is bad news for local governments throughout the state where some $60 billion in funds for major projects have been raised through lease-revenue bonds in the past decade.

FTB settlement program. Taxpayers seeking information or seeking settlement of a dispute with the Franchise Tax Board should contact: Calar Calayan (pronounced Cha-lar Cha-la-yan), supervising Tax Counsel, FTB Settlement Bureau, P.O. Box 3070, Rancho Cordova, CA 95741-3070 (phone 916-845-4334). Mr. Calayan is the new manager of the Settlement Bureau. Former bureau manager Timothy Boyer is now chief counsel at the State Board of Equalization.

COMING UP

April 14: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 126, State Capitol, at 1:30 p.m.
Subject Included on the agenda are AB 701 (Caldera) allowing cities and their representatives access to confidential income tax information, and AB 713 (Caldera), partially conforming to 1996 federal changes in the Taxpayers' Bill of Rights.

April 14 FRANCHISE TAX BOARD MEETING
Location: Room 121, 450 N Street, Sacramento, California, at 2:00 p.m.
Subjects: (1) Position on legislative bills, and (2) Cox-Wyden Internet Tax Freedom Act.

April 16: SENATE REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 3151, State Capitol, at 1:30 p.m.
Subjects: Among bills on the committee's agenda are SB 32 (Maddy), relating to possessory interest taxation, SB 455 (Alpert), the comprehensive conformity bill; and SB 706 (Rainey), replacing the alternative minimum tax with a preference tax.