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

COUNTY COUNSELS EXCLUDE ANDAL'S LAWYER

When Paul Steinberg arrived as a duly paid and registered attendee at the County Counsel Association's 1997 Spring Conference's Taxation Study Section last month in San Francisco, he was surprised to see himself as the first order of business.

Mr. Steinberg said the gathering of deputy county counsels and staff who specialize in tax matters voted to exclude him from the entire April 24-25 conference because he is State Board of Equalization Member Dean Andal's legal counsel. The expulsion, Mr. Steinberg said, is a result of Mr. Andal's pro-taxpayer positions on property tax issues important to counties, and counties' lawsuits filed or contemplated against BOE rulemaking on issues ranging from valuation of computer software to ATM classification.

Two BOE staff attorneys also were at the meeting, but were not asked to leave. Contacted by his staff at the conference, BOE Chief Counsel Tim Boyer discussed what had happened to Mr. Steinberg with BOE Executive Director Les Sorensen. It was decided that BOE staff lawyers would have to leave the conference.

The unprecedented action against Mr. Steinberg was "stunning" and "ill-advised," Mr. Sorensen told Caltaxletter. "I pulled my staff out at that point. It put the agency in a very awkward position" of having staff attend a conference where a board member's counsel had been excluded. He said a BOE staffer was halfway through a legislative update presentation when he communicated the decision to bring BOE staff back to Sacramento. "I let her finish, and then brought everyone back."

Deputy San Francisco Attorney Claude Kolm, chair of the conference, told Caltaxletter that it was not known until the last minute that Mr. Steinberg works for Mr. Andal. It was believed he was part of the BOE staff contingent, Mr. Kolm added. "He didn't say on his application form that he was anything other than board staff."

He said, "We were going to discuss confidential matters and we even wondered about board staff being there." Because of legal disputes between counties and the state board, he said the association will evaluate the appropriateness of state board staff attorneys' attendance at future conferences.

"We did the best we could, reacting on the spot, when we perceived a potential conflict of interest," he said.

While there were some abstentions, the only person to raise a hand in opposition to the motion to exclude Mr. Steinberg was Mr. Steinberg, according to Mr. Kolm.

In Sacramento, Dan Wall, advocate for the California State Association of Counties, said he attended the conference but was out of the room when the Steinberg issue was taken up. "I think the basic concern was they would be talking about strategic matters, such as AB 1027, and thought it would not be prudent" for such talk in front of Mr. Andal's lawyer, since Mr. Andal opposes that bill. "They did not know who he was until he showed up. This is a sensitive issue."

(AB 1027, Caldera, is a bill sponsored by county assessors that would increase assessors' advantages over taxpayers in property tax disputes.)

Mr. Sorensen said he could understand if the county officials wanted to meet in private to discuss litigation, but to take such action against Mr. Steinberg was an "ill-advised" display of feelings against a board member.

Conference officials, according to Mr. Steinberg, "told me there was no precedent for a board member's staff attending," but Mr. Steinberg added that he was told that then-BOE Member Matt Fong's counsel attended a past conference.

Mr. Steinberg said he was interested in hearing other views on issues and had anticipated that he would not attend the conference roundtable discussion of litigation. He added that he was not at the conference to "spy" on the counties, but rather to gain insight on their problems so that Mr. Andal would be better able to respond to their proposed solutions.

Counties have a number of so-called Section 538 lawsuits either on file or in the works against BOE rules. These involve Rule 152 (valuation of computer software), and, down the road, likely cases involving ATM classification and treatment of possessory interest property taxation.

Mr. Steinberg and Mr. Sorensen both expressed concern that the expulsion was from a program that was sanctioned by the State Bar for continuing education credit. They said refunds will be requested of the $185 registration fees.

Editor's Note: Attendance and participation at the County Counsels' confabs by "outsiders" -- including legislative staff -- have been allowed, even welcomed. Cal-Tax's David R. Doerr, when he was chief consultant to the Assembly Revenue and Taxation Committee, attended the conferences off and on for nearly 20 years.

CITIES HONE STRATEGY TO BOOST TAXES

The League of California Cities' Board of Directors has sharpened the focus of a fiscal policy agenda in Sacramento that would make it easier to raise taxes, allow cities to keep taxes that have been ruled unlawfully collected, and increase funding from the state.

The board's actions, as related in the cities' April 25 Legislative Bulletin, "seek changes to the local government finance structure in California that protect, reform and restore city revenue bases." The board adopted recommendations of its Task Force on Fiscal Stabilization/Reform that include (Editor's Note: These are the cities' comments and descriptions):

• Constitutional Protection. Constitutionally prohibit any other level of government from tampering with city revenues.
• Guardino Protection. Enact legislation to protect local governments from financial loss that resulted from changing judicial interpretations of Proposition 62 (which the state Supreme Court has revived to require voter approval of many local taxes and assessments).
• Majority Vote on Special Taxes. "Under current constitutional provisions, one voter can cancel out the votes of two other voters when casting a ballot on special taxes. This is contrary to the one-person, one-vote principle. The majority-vote standard established in Proposition 218 should be applied to special taxes."
• General Obligation Bonds. The majority-vote principle in Proposition 218 should also be established for local general obligation bonds. "It will assist in building infrastructure to make California competitive. It makes local government G.O. bonds consistent with the majority vote for state G.O. bonds."
• Jointly Authorized Countywide 0.5 percent Sales Tax. Utilize existing authority for 0.5 percent countywide sales tax with approval of a majority of cities representing a majority of population and a majority of county board of supervisors. Majority-voter approval also would be required.
• Sales Tax Equity. Extend sales tax to catalogue sales, "leveling the economic playing field" for California businesses. Federal authorization is required.
• Sales Taxes and Emerging Economy. Apply sales tax to transactions in service-based businesses while reducing the overall sales tax rate.
• Fines to Enforce State Motor Vehicle Laws. Return the revenues from moving violations taken from local government in the early 1990s to help fund trial courts.
• Return Local Government Property Tax. Shift the $3.6 billion in property taxes taken by the state in 1992-93 and 1993-94 back to cities, counties and special districts.
• Shift State Sales Tax to Local Government. "In recognition of the state's improved financial condition and the revenue shifts away from local government to the state to assist the state's financial condition during the early 1990s, shift up to one percent of the state sales tax to cities and counties."

FTB TO STUDY OPTIONS TO PERFECT ERRONEOUS WATER'S-EDGE ELECTIONS

The Franchise Tax Board last Monday instructed its staff to develop a "white paper" on options for legislation to allow taxpayers to perfect erroneous water's-edge elections. Controller Kathleen Connell said the paper should explore potential solutions to the problem on both a retroactive and prospective basis.

Board member Ernie Dronenburg pushed for a timely deadline for the report and a goal was set for the staff to report at the board's next meeting (in July). FTB Executive Officer Gerald Goldberg said he was unsure if the project could be completed by July, but would try. He added that he wants to get business input as part of the study.

FTB staffer Kathy Sommers said the water's-edge election statute mandates a complicated election process, but contains no authority for the FTB to allow taxpayers to perfect erroneous elections. She added the board sometimes finds the mistakes on audit, and it is a continuing, not just a one-time problem. To date, FTB staff has identified approximately 200 invalid elections.

Much of the discussion centered on how proposed legislative recommendations should be scored. Dr. Connell said the staff should not count allowing corrections of mistakes as a revenue loss. Department of Finance representative Terri Parker agreed, saying the added revenue from mistakes was not anticipated and therefore not a part of the "base-line" revenue estimates.

These comments were in response to staff estimates that allowing errors made in 1988 returns to be corrected would be scored as a $45 million to $50 million revenue loss, and to allow all past mistakes to be corrected would be scored as a $120 million loss.

Other FTB meeting highlights:

• Double-weighted sales factor. Brian Toman, Director of the FTB's Multistate Tax Program, told the board that a regulation defining kinds of taxpayers not subject to double-weighted sales factor provisions, such as agriculture and extractive industries, is just about ready for review. He said he expects it to be ready for public review in May. Symposia will be scheduled in June and July for preliminary discussions, before the regulation is placed in the formal rule-making process.
• MTC Issues. Mr. Toman informed the board that the Multistate Tax Commission (MTC) has begun a process to develop non-binding regulations defining a unitary business and non-business income.

The first step will be to create public participation working groups to discuss issues. Academic input will be sought at this stage. When the working groups finish their work, the proposed regulations will be run though the MTC regulatory process and then forwarded to states as suggestions.

• Check the Box. FTB attorney Doug Bramhall said legislation is needed to conform state law with federal "check the box" regulations. The staff is starting a regulatory project on the issue to get as close to conformity as possible.

Under the "check the box" provisions, entities can check a box to ensure they are treated either as corporate or non-corporate limited liability entities.

In a related development, "check the box" provisions in SB 1106 are being removed from the bill. New language is being added to SB 1234 to conform to federal provisions.

• FTB Web Site. Mr. Goldberg announced that the FTB will be placing information about regulatory activities on its Internet web site. The board suggested that information on MTC activities also be placed on the FTB's web site.
• Positions on Legislation. The board took positions on several bills. After a lengthy discussion, the board voted to support AB 1192 (Takasugi), reforming "hot interest" calculations. ARCO attorney Barry Weissman said it was unfair to apply the higher "hot interest" rate to a second deficiency if taxpayers pay off the deficiency within 30 days. He said this is a case where non-conformity was appropriate because state circumstances are different from federal.

On AB 701 (Caldera), allowing charter cities to have limited access to confidential FTB information, board members expressed reservations about the measure. Staff recommended an oppose position. Mr. Goldberg said historically the staff has always opposed disclosure of taxpayer information. The board instructed the staff to look at options for helping charter cities, other than what is proposed in AB 701, and report back at the next meeting.

BOE SCHEDULES MEETINGS WITH TAXPAYERS ON PROPOSED RULES OF PRACTICE

Changes in the "Rules of Practice" before the State Board of Equalization are under review. The board is inviting taxpayers to meet and discuss proposed changes to the current rules.

The rules incorporate established procedures and requirements and make rules which are unique to specific programs easier to locate and follow. The rules define, interpret and clarify a number of terms applicable to all tax programs administered by the Board.

Covered by the rules are: (1) appeals from actions of the Franchise Tax Board; (2) business taxes and timber yield tax law; (3) hearings on jeopardy determinations; (4) state assessees and private railroad car companies; (5) taxable property of a county, city or municipal corporation; (6) property tax welfare exemption claim review procedure; (7) general board hearing procedures; and (8) Taxpayer Bill of Rights reimbursement claims.

Two meetings for taxpayer input have been scheduled. The first will be on May 20 in Room 122, 450 N Street in Sacramento (beginning at 1:00 p.m.). For taxpayers in Southern California, there will be a meeting on June 5 in Room 207, 5901 Green Valley Circle, Culver City (beginning at 1:00 p.m.).

FTB REGULATION APPROVED

The Office of Administrative Law has approved the Franchise Tax Board's removal from the code an old regulation which specifies the tax liability of the transferal of a corporation's assets after a corporate reorganization (Regulation 23251). The effective date of the change is May 16.

The Office of Administrative Law has also approved a State Board of Equalization regulation defining "significant assessment problems" for the purpose of determining whether a sampling of assessments within the county is warranted (Rule 371). This change is also effective May 16.

COUNTIES ARE ALLOCATING PROPERTY TAXES INCORRECTLY

An audit by State Controller Kathleen Connell found 11 counties (out of 12 audited) were allocating property incorrectly. Some of the problems found, by county, were:

• Alpine County. The county incorrectly included only the secured roll in computing growth in assessed value in each tax rate area. The county also incorrectly computed the property tax shift to schools.
• Humboldt County. The county incorrectly revised the allocation percentages in each tax rate area.
• Kings County. The county has incorrectly computed allocation factors by tax rate area for each jurisdiction. The county also incorrectly computed the unitary and operating nonunitary base year allocation factors, and incorrectly computed the property tax shift to schools.
• Lake County. County officials could not justify property tax adjustments resulting from jurisdictional changes.
• Marin County. Errors were made in the computation of unitary revenue amounts for redevelopment agencies.
• Modoc County. Allocations in tax rate areas could not be justified. Reallocations for jurisdictional change did not agree with documents authorizing the exchange. The property tax shift to schools was incorrectly computed, resulting in a $52,000 shortfall to schools.
• Plumas County. Documentation was unavailable to support allocations and the property tax shift to schools was incorrect, shorting schools by $196,000.
• Riverside County. The county compared base-year unitary and operating nonunitary amounts incorrectly.
• San Francisco County. There were no reportable findings.
• Tehama County. The county apportioned supplemental property tax revenues for 1986-87, 1987-88, and 1988-89 fiscal years to schools using secured apportionment factors rather than attendance.
• Trinity Counties. The county did not establish base unitary and operating non-unitary apportionment factors according to published guidelines.
• Yuba County. The county did not distribute allowable growth in redevelopment projects to schools. The county computed base-year unitary amounts incorrectly. The county over-shifted a tiny amount of property taxes to schools by using the wrong factor.

NEW WINE IN OLD BOTTLES

MIC: Qualified Property. AB 94 (Cardoza) has been amended to expand the manufacturers' investment tax credit to include property used in oil and gas extraction and specified property used in the construction of an agricultural processing or recycling facility.

Property Tax Appeals. AB 1178 (Davis) has been amended to make it unlawful for homeowners' exemption filing services and assessment appeal application filing services to make untrue or misleading statements. It also would be unlawful for such a service to use mailings that imply a government connection unless it has the consent of a government entity. The bill also would require specified disclosures by those services and limit their fees to $25.

Cigarette Tax. SB 552 (Watson) has been amended to increase the cigarette tax by 50 cents per pack. If the bill passes, the state cigarette tax rate would be 87 cents per pack.

NEW LEGISLATION OF INTEREST

Cox-Wyden. AJR 20 (Lempert) asks the Congress to enact legislation establishing a moratorium on the imposition of any taxes by state or local government on the Internet.

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Pringle for controller? Former Assembly Speaker Curt Pringle, currently Assembly Republican leader, might run for state controller in 1998, according to a published report. Mr. Pringle, once considered to be a potential candidate for Congress (in the seat currently held by Democrat Loretta Sanchez of Garden Grove), told The Orange County Register in a recent interview that he would not seek re-election to the Assembly if term limits are repealed and he does not want to move his family to Washington, D.C. He is expected to decide on a run for controller in August.

Duarte voters OK tax. In what Duarte city officials call one of the first mail-in elections complying with Proposition 218, voters have approved the continuation of a property assessment to maintain 11 neighborhood parks, a bicycle trail and a greenbelt. The vote last month was 1,124 in favor and 427 opposed, with a simple majority required for approval, according to city officials.

The assessment of $59.42 a year for homeowners generates about $300,000 a year and for the past 15 years has been continued by a vote of the City Council. Last November, voters approved Proposition 218, which requires cities to put such assessments or taxes to a vote of the people.

Moby Dick follow up. Moby Dick, the gay bar in San Francisco that lost a sales tax appeal before the State Board of Equalization, has garnered mainstream media attention since the case was first reported in Caltaxletter on April 14. In an April 30 article by Mitchel Benson, the Wall Street Journal identified the state auditor who was poured "short drinks" as Susan Wagner, a seven-year veteran with the BOE. Frank Holby, the taxpayer's consultant who presented the case before the BOE, described her as a young blonde with "knockout" good looks. Her presence was disruptive, he added, so the bar poured less booze per drink to discourage her presence. (The bar had claimed it usually pours stiffer drinks -- fewer per bottle -- so should owe less in taxes.) Ms. Wagner said she was "rather flattered" by Mr. Holby's description of her.

Assembly Rev & Tax chair. This rumor is growing stronger in the Capitol: Louis Caldera, chair of the Assembly Revenue and Taxation Committee, may be offered a post in the Clinton Administration. Possibly in line to succeed Mr. Caldera: Ted Lempert.

COMING UP

May 5: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 126, State Capitol, at 1:30 p.m.
Subjects: Among approximately 30 bills scheduled to be heard are AB 83 (Villaraigosa), reestablishing the 10 percent and 11 percent income tax brackets, AB 417 (Davis), establishing elective combined returns, and AB 366 (Havice), extending the bunker fuel sales tax exemption indefinitely.

May 5: SENATE APPROPRIATIONS COMMITTEE HEARING
Location: Room 4203, State Capitol, upon adjournment of session.
Subjects: Several tax bills are on a 160 bill-plus calendar, including SB 1104 (Alpert), relating to the BOE's managed audit program.

May 6: BOE CUSTOMER SERVICES COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento, at 11:00 a.m.
Subjects: (1) Taxpayer notification of audit waiver, and (2) Status of customer services joint partnership programs.

May 6: BOE LEGISLATIVE COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento, at 1:30 p.m.
Subject: Pending legislation.

May 6: BOE BUSINESS TAXES COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento, at 2:30 p.m.
Subjects: (1) Innocent Spouse Regulation 1705.1, (2) Repair services by independent contractors, (3) Collection of use tax by retailers, and (4) International Fuel Tax Agreement.

May 7: SENATE CONSTITUTIONAL AMENDMENTS COMMITTEE HEARING
Location: Room 4203, State Capitol, at 9:30 a.m.
Subject: SCA 12 (O'Connell), providing majority-vote approval for school bonds.

May 7: ASSEMBLY LOCAL GOVERNMENT COMMITTEE HEARING
Location: Room 447, State Capitol, at 9:00 a.m.
Subject: AB 1506 (Ortiz), relating to Proposition 218.

May 7: SENATE LOCAL GOVERNMENT COMMITTEE MEETING
Location: Room 112, State Capitol, at 9:30 a.m.
Subject: SB 867 (Lee), allowing local government to increase ad valorem property tax levies, by a two-thirds vote, for specified public pension costs.

May 7: SENATE REVENUE AND TAXATION COMMITTEE MEETING
Location: Room 3191, State Capitol, at 1:30 p.m.
Subjects: Bills scheduled to be heard include SB 445 (Alpert), the major federal conformity bill, SB 552 (Watson), increasing cigarette taxes and SB 569 (Lewis), indexing capital gains tax.

May 7: STATE BOARD OF EQUALIZATION MEETING
Location: Room 121, 450 N Street, Sacramento, at 9:30 a.m.
Subjects: (1) Welfare exemption claim hearing, (2) Business tax appeals hearings, (3) State assessee presentations in value, (4) Regulation 1587 on treating emus as animals used as food, and (5) Regulation 1698, revising record-keeping requirements.

May 7: ASSEMBLY APPROPRIATIONS COMMITTEE MEETING
Location: Room 4202, State Capitol, time to be arranged.
Subjects: Among bills scheduled to be heard is AB 1361 (Mazzoni), allowing cities to continue to levy local taxes that were illegally imposed under the Guardino decision.

May 8: STATE BOARD OF EQUALIZATION MEETING
Location: Room 121, 450 N Street, Sacramento, at 9:30 a.m.
Subjects: (1) Discussion of management contract for janitorial services, (2) Issue paper format, (3) Executive director's report, (4) Out-of-state travel, (5) District office space and security issues, (6) Proposed 1997-98 contracts over $1 million, (7) Tobacco products tax rate; (8) MTC Property Tax Fairness Project; (9) Business, franchise, income and property tax non-appearance matters, (10) Chief counsel recommendation on authorization to publish products, and (11) Franchise and personal income tax appeals.