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

BOE OPPOSES MAJORITY OF AB 1027 PROVISIONS

The State Board of Equalization took a strong stand for property taxpayer rights last week by voting to oppose most provisions in AB 1027 (Caldera), the county assessor-sponsored omnibus anti-taxpayer bill. As the state agency designated by law to oversee county assessment practices, the board found fault with virtually all anti-taxpayer provisions in the measure.

Key provisions of the bill opposed by the board are limits on the board in issuing assessment handbooks, provisions allowing assessors more authority in changing Proposition 13 base-year values, repeal of the burden of proof on assessors to support escape assessments, authorization for assessors to make value-in-use assessments, a change in the filing date for business property statements to March 31, authorization for assessors to demand information during appeals, expanded assessor subpoena power; county standing to participate in the state assessee valuation process, and local appeals boards rules of procedure.

BOE Member Dean Andal challenged county government lobbyist Dan Wall on a number of the bill's provisions. Mr. Andal said the board now gives more notice and allows more input than required under the Administrative Procedures Act.

He also said assessors had no standing to participate in state-assessed property valuation as the Constitution rests sole authority with the state. BOE Chair Ernest Dronenburg, Vice Chair Johan Klehs, and Rex Halverson, representing Controller Kathleen Connell, also had a number of critical observations regarding the bill.

Other BOE developments:

• Tobacco Products Tax Rate. The board last week adopted the tobacco products tax rate of 29.37 percent for 1997-98.
• Multistate Tax Commission (MTC). The board last week postponed a decision to fund the MTC's Property Tax Fairness Project. Mr. Andal was critical of the project, saying that most of the spending in the last 10 years was for one lobbyist. He added that he asked MTC Executive Director Dan Bucks for a copy of the next fiscal year's budget. He said Mr. Bucks told him there was no budget, and he did not know what the budget would be until he knows how many states are participating. Some MTC members do not participate in the project. Mr. Dronenburg said he felt the state should get out of the project as there are no 4-R (railroad assessment) Act bills pending in Congress. Member John Chiang and Mr. Klehs opposed the motion to defer action, which was favored by Mr. Andal, Mr. Dronenburg and Mr. Halverson.
• Nexus. The board approved the draft of a proposed change in Sales Tax Regulation 1648, relating to nexus. The amendment provides that an independent contractor performing warranty or repair services on behalf of an out-of-state retailer would not cause the retailer to be engaged in business in this state, provided ownership of the retailer and independent contractor is not substantially similar. It also provides use of a computer server on the Internet by an out-of-state retailer will not be a factor in determining nexus. The regulation will now go through the formal Administrative Procedures Act approval requirements.
• Payment by Credit Card. At the Customer Services Committee meeting last Tuesday, BOE members expressed concern about the slowness of implementation of a program to allow taxpayers to pay by credit card. Mr. Klehs said, "It's absurd to wait a year. No business operates this slowly." Mr. Dronenburg and Mr. Andal suggested allowing small accounts the authority to pay by credit cards to get the program started, and by charging users a flat rate surcharge for the convenience. BOE Executive Director Les Sorensen promised to bring back options to the next meeting.
• Waiver of Audit Letters. Waiver of audit letters sent to taxpayers will make it clear that the waiver of an audit is not written advice under Section 6596. The letters will advise taxpayers that if they desire written advice, they should write to the board.
• Innocent Spouse Relief. The BOE Business Tax Committee approved a draft of Sales Tax Regulation 1705.1, relating to innocent spouse relief. The regulation provides that an innocent spouse will be relieved from liability in certain circumstances. The relief will be retroactive prior to when authorizing legislation was passed, as board members stated this was legislative intent. The regulation will now go through steps provided in the Administrative Procedures Act.
• Welfare Exemption Claim. The board last Wednesday heard the welfare exemption claim of St. Jude Hospital in Yorba Linda.

Claimant Attorney Clayton J. Vreeland explained that the activities of the non-profit foundation, which operates St. Jude, St. Joseph's and Mission Hills hospitals, are different than activities of for-profit hospitals in three ways: (1) They are controlled and operated by the foundation, not by physicians; (2) They provide services regardless of the ability to pay, and (3) They conduct research and education for themselves and for the community. Mr. Vreeland stated that the foundation operates these hospitals for charitable purposes.

Member Klehs inquired as to the revenue and operating budget of St. Jude Hospital. The bottom line was $113,500 of charitable services in 1996, or less than one percent for charity. Member Andal asked if there is a standard for charity and staff responded, "No, but exemptions have previously been granted to properties with two percent or three percent charity." In effect, there is no published guideline and, therefore, no standard.

The claim was taken under submission by unanimous consent.

• Records. The board adopted, with staff changes, Regulation 1698 Records, rewritting Revenue and Taxation Code Section 7053 to provide clarity and to incorporate requirements regarding the maintenance of taxpayer records on electronic media.

The staff amendments respond to Cal-Tax's concern that taxpayers would have to provide records rather than have them "available" for examination as previously provided.

• Emus. The board approved changes in Sales Tax Regulation 1587 providing emus are animals that constitute food for human consumption. This action will treat sales of emus as exempt from sales tax.

ANTI-PROPOSITION 62 BILL HEADS TO ASSEMBLY FLOOR

The Assembly Appropriations Committee last Wednesday passed AB 1362 (Mazzoni), which would allow local governments to continue collecting taxes imposed without voter approval that were found illegal by the state Supreme Court in 1995.

Advocates for the bill, especially the California State Association of Counties, repeatedly claimed that the bill is only about preventing refunds on taxes already collected and spent. Proponents were allowed a lengthy time to argue their case. Cal-Tax's Stephen Kroes tried to point out that the bill's proponents had given erroneous statements but was told by committee Chair Carole Migden to limit his testimony to one more sentence. Mr. Kroes emphasized that proponents were wrong to claim that this bill was only about refunds when its greatest effect is to allow continued collection of illegal taxes without ever bringing them into compliance with Proposition 62's vote requirement.

A spokeswoman for the Department of Finance made very positive remarks about how the bill would avoid hundreds of millions of dollars in revenue losses for local governments, but then said, since she did not have a file on the bill, the department had no position. The vote was 12-7.

MASSIVE CONFORMITY BILL CLEARS FIRST LEGISLATIVE HURDLE

Legislation conforming many provisions of California personal income and bank and corporation tax law to federal law changes made since 1992 cleared its first legislative hurdle last week. SB 455 (Alpert), conforming to more than 50 federal law provisions, was approved unamiously by the Senate Revenue and Taxation Committee.

Committee Chair Dede Alpert said the most significant provisions of the bill are increasing the amount that small unincorporated businesses may expense (up to $25,000) and the pension simplification provisions. Testifying in support of the bill were Gina Rodriquez of Spidell Publishing and Cal - Tax's David R. Doerr.

Water interests urged conformity to federal "contributions in aid of construction" provisions. The Department of Finance said passage of the bill would increase revenues over the estimated revenues in the proposed budget by $12 million and voiced neutrality on the measure.

(A complete outline of provisions in the bill is available on Cal - Tax Online -- http://www.caltax.org -- in the Members-Legislative Section, which is open to online subscribers. Subscription information is on the website.)

Other committee developments:

• Cigarette Tax Hike. The anti-tobacco lobby persuaded the committee to pass legislation increasing cigarette taxes by 50 cents-per-pack (SB 552, Watson). Proponents said the bill would drive down the consumption of cigarettes by 23 percent.

Opponents said the bill would lead to "buttlegging," work a hardship on low-income people and reduces funding for other programs funded by cigarette taxes.

• Check-the-box. The committee unamiously approved SB 1234 (Alpert), providing partial conformity with federal "check-the-box" regulations permitting entities to classify themselves as corporate or non-corporate entities for tax purposes. The Department of Finance said the bill is not expected to impact revenues.
• Biomass Tax Credit. Legislation providing a tax credit of 1.5 cents for each kilowatt hour of electricity generated by a biomass energy production facility (SB 1216, Costa) was defeated. Proponents argued that biomass conversion aids the environment, gets rid of waste and helps meet power needs. They said the credit was necessary for the facilities to compete with electricity deregulation.

Speaking in opposition, Lenny Goldberg said the industry was the most massively subsidized industry in a long time and it would not be able to compete even with the credit.

• Other Bills Approved. Five other bills were approved by the committee: SB 219 (Rosenthal), allowing non-profit organizations to buy multi-family tax defaulted property; SB 100 (Lewis), allowing loss on sale of home to be deducted from income; SB 560 (Hayden), imposing a 24 percent excise tax on certain chemicals used to produce methamphetamine; SB 635 (Knight), establishing an enterprise zone in the city of Barstow (on Route 66); and SB 1106 (Senate Revenue and Taxation Committee), sponsored by the FTB making minor and technical changes.
• Other Bills Defeated. Two other bills were defeated: SB 569 (Lewis), indexing the basis of specified residential property for capital gain computations; and SB 842 (Hayden), limiting the corporate minimum tax to the actual costs to the state agency for processing incorporation documents.

MAJORITY-VOTE SCHOOL BOND PROPOSAL MOVES FORWARD

The Senate Constitutional Amendments Committee last Wednesday passed by a 3-1 vote SCA 12 (O'Connell), which would allow local school bonds to be approved by majority vote instead of the long-standing two-thirds vote requirement. Cal-Tax's Stephen Kroes argued against the measure, saying that property owners need the two-thirds vote to protect against renters imposing tax increases on owners while the owners often have no vote.

ENTERPRISE ZONE BILLS PASSED AT BIZARRE ASSEMBLY TAX COMMITTEE HEARING

Some observers compared last week's Assembly Revenue and Taxation Committee hearing to films directed by legendary Italian director Federico Fellini. At a minimum, it was the most bizarre hearing in a bizarre legislative session.

For openers, the hearing started nearly two and one-half hours late, due to a Republican caucus. At the hearing, a coterie of rather disheveled witnesses, purporting to represent organizations unfamiliar to most observers, harangued the committee on pending enterprise zone legislation. They said, among other things, that zones increase disease and limit worker pay.

The Department of Finance opposed legislation proposing a five percent personal income tax cut in each of the next two years on the basis that the bill was a big revenue loss and also was inconsistent with Governor Pete Wilson's proposal last year for a 15 percent cut.

Lenny Goldberg, representing the California Tax Reform Association, and usually a foe of legislation reducing revenue, suggested amendments to legislation allowing a $500 tax credit for children up to the age of 13 that would have substantially increased the revenue loss.

Assemblywoman Dion Aroner, who had castigated enterprise zone proposals all afternoon, meekly voted "aye" on Assembly Speaker Cruz Bustamante's proposal to create new enterprise zones.

To the surprise of many, the committee approved four enterprise zone proposals, despite the fact that most carried price tags substantially higher than other bills being sent to the suspense file. The last Democratic chair of the committee, ex-Assemblywoman Juanita McDonald, refused to allow enterprise zone bills out of the committee.

A key difference this year is that three of the four enterprise zone bills are carried by Democratic authors -- including Speaker Bustamante and Majority Leader Antonio Villaraigosa -- and the key witness for the fourth was a Democrat, Supervisor Roger Dickinson of Sacramento County.

Enterprise zone bills approved by the committee:

• McClellan Air Force Base Conversion. The committee approved AB 638 (Alby), providing a number of tax incentives to private firms bidding for work at the soon-to-be-closed McClellan Air Force Base near Sacramento. The Pentagon has set up the bidding procedure forcing private companies to bid against Hill Air Force Base in Utah which pays no taxes.

The private bidders, including Boeing, say they cannot compete with the Utah bid unless they, too, have tax incentives.

Supervisor Dickinson said the issue is whether a $240 million payroll stays in California or is lost to Utah. In response to the Department of Finance opposition due to revenue loss, Mr. Dickinson said there will be no revenue at all if Utah wins the bid, which it will unless California acts to give the private bidders similar tax exposure as enjoyed by the public bidder in Utah.

• LARZ Extension. AB 82 (Villaraigosa), extending the Los Angeles Revitalization Zone for five years, was approved. The zone was created, with a large package of tax incentives, in response to the rioting in South-Central Los Angeles in 1992.

Mr. Villaraigosa said five years was not enough time to help the community rebuild, and a five-year extension was warranted.

In critical comments, Ms. Aroner said the zone was too big and observed that Slauson Avenue does not look any different. Mr. Goldberg also spoke against the measure.

• Rural Enterprise Zones. AB 1217 (Bustamante), creating two new rural enterprise zones, was approved. Jim Lites, presenting the bill for Mr. Bustamante, said that areas eligible are ones that have previously applied but have not been awarded zone designation.
• LAMBRA Expansion. AB 3 (Baca) expands the Local Agency Military Base Recovery Areas (LAMBRA) from five to 10 and extends the operating dates by seven additional years to December 1, 2003. Assemblyman Joe Baca expressed concern that proposals for new base closures could have additional drastic effects on California communities. He also cited a loss of 180,000 jobs due to base closures in California. Mr. Baca explained the extension of time is needed because the first LAMBRA was not approved until February 1996.

Testifying against the bill was a contingent from what appeared to be makeshift organizations, including witnesses from the "Save Our Cities Campaign Foundation." One witness said that making more of these zones would "increase the amount of disease." An organizer of the Western Service Workers contended that the purpose of the incentive zone is to keep wages low, not exceeding 150 percent of the minimum wage. AB 3 was approved on a vote of 7-2.

• FTB Omnibus Bill. The committee approved AB 1040 (Caldera), an omnibus bill sponsored by the Franchise Tax Board. Mr. Caldera said the package contains non-controversial proposals, and the one section that had received opposition (from Cal-Tax) had been removed.
• Acupuncturists. AB 410 (Gallegos), providing a partial sales tax exemption for acupuncturists' items, was approved in the consent calendar.
• Cellulose Casings for Animal Feed. AB 803 (Machado), exempting cellulose casings used for animal feed from sales tax, was approved on the consent calendar.

• Earned Income Credit (EIC). AB 470 (Ducheny) establishes an EIC of 15 percent of the Federal EIC and was amended to apply only if the credit was used for health insurance coverage.
• Child Care Facilities Credit. AB 642 (Baldwin) extends the expiration date of the Employer Child Care Contributions tax credit from December 1, 1998 to December 1, 2003.
• PIT Rate Reduction. AB 643 (Baldwin) reduces personal income tax (PIT) rates by 10 percent over two years. The bill holds schools harmless from the tax loss. Speaking in support, Fred Main of the California Chamber of Commerce cited that over 4 million business taxpayers pay taxes through the PIT and that this would be beneficial to those small businesses.

Mr. Goldberg objected to the bill, saying it would mostly benefit those with higher incomes. The Department of Finance opposed the large revenue loss. The revenue loss estimates range from $460 million in 1997-98 to $700 million in 2000-01.

• Elective Combined Reporting. AB 417 (Davis) allows businesses that file on a unitary basis to make a 10-year election to include all affiliates in a combined return. Assemblywoman Susan Davis said the bill grows out of years of frustration with complex rules.

Major support was voiced by Fred Main of the California Chamber of Commerce; Carrie-Lee Coke of the California Manufacturers Association; Cal-Tax's David R. Doerr; Barry Weissman of the California Unitary Tax Council; Sande George of George R. Steffes, Inc., and Jeanette Bunch of San Diego Gas and Electric Company. Opposition was expressed by Mr. Goldberg and the Department of Finance, based on a projected $21 million tax loss.

• Private Railroad Cars. AB 478 (Takasugi) changes the method of taxation of private railroad cars from "car days" to "car miles". Committee Vice Chair Nao Takasugi cited the high administrative cost of $620,000, or 10 percent of the current tax of $6.2 million, as one reason for change.
• Youth Employment. AB 741 (Washington) creates a new employment tax credit of 33 percent of wages paid to qualified at-risk youth (26 or older with prior Youth Authority detention).
• Deduction for Health Insurance. AB 305 (Wayne) allows a personal income tax deduction of 25 percent of the cost of health insurance premiums. Assemblyman Howard Wayne said "This is not a conformity bill, but is an equity bill."
• Bunker Fuel Sales Tax Extension. AB 120 (Kuykendall) and AB 366 (Havice) both make permanent the sales tax exemption for bunker fuel. Assemblyman Steve Kuykendall stated that California is the only state which taxes fuel used from port-to-port within the state. He said that California had a reduction in sales of 60 percent in Los Angeles ports between 1990-92 when the sales tax was fully implemented. Eighty organizations and companies sent letters of support.
• Child Care Tax Credit. AB 215 (Baldwin) creates a new $500 per child tax credit for taxpayers with incomes up to $200,000. Speaking in support, a witness representing Concerned Women for America testified that there is a bigger tax credit for raising race horses than children. Mr. Goldberg questioned omitting a tax credit for teenagers. Department of Finance voiced opposition on the basis of an $800 million to $900 million tax loss.
• Blood. AB 993 (Perata) exempts from sales tax containers used to store human blood.
• Veterans' Exemption. AB 551 and ACA 9 (Morrissey) increase the veterans' property tax exemption from $4,000 to $7,700 and remove the wealth limitation of $5,000. Art Krause, representing the County Veterans Service Officers, stated that California does little or nothing to attract active military or veterans to move to California. Opposition was expressed by the Los Angeles County Assessor's Office, citing high administrative costs, and Mr. Goldberg who claimed that the $7 per veteran is not a big deal.

COURT HEARS SINCLAIR APPEAL

The California Supreme Court last Tuesday heard arguments in the State Board of Equalization's appeal of rulings that fees imposed on paint manufacturers for lead-poisoning abatement are unconstitutional taxes. A decision in Sinclair Paint Company v. State Board of Equalization is due within 90 days.

Lawyers for Sinclair won at the trial and appellate district levels with arguments that fees imposed by 1991 legislation are actually taxes that failed to receive two-thirds approval of the Assembly and Senate, as required by Proposition 13. The courts agreed that the fee is a tax because there is no direct benefit, regulatory or otherwise, to the payer of the "fee." The Wilson Administration's Department of Health Services has intervened in support of the BOE's appeal.

Deputy Attorney General William Carter contended that fees are legal as part of a broader reading of the law that there is a connection between the provider of the product and the problem it causes. He said the lead "fee" even achieves a pro-taxpayer "Proposition 13 goal" by shifting the burden from the general taxpaying public to the industry that caused the problem.

Gene Livingston, attorney for Sinclair, said there must be some benefit to the payer of a "fee." Otherwise, he said, it is a tax. "What do you have left of Proposition 13 if the Legislature can pass a tax with a majority vote?" asked Mr. Livingston, referring to the 1978 constitutional amendment. "There probably is sufficient nexus for a tax, but not a fee," he said. "We are no more regulated before or after payment of that 'fee.' ... not one penny goes toward that law that regulates the paint industry."

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Property Tax Overrides. The Senate Loval Government Committee last week approved SB 867 (Lee), authorizing certain local agencies to increase ad valorem property tax to fund employee pensions, if two-thirds of voters approve.

Madera Sales Tax. The Senate last week approved (28-1) SB 355 (Monteith), allowing the City of Madera to impose a 0.5 percent sales tax with two-thirds voter approval.

May Revise. State Department of Finance staffers are "lashed to the mast," putting in long hours to produce the May Revise to the governor's January budget proposal about a week earlier than in recent years. The due date is this Wednesday, says a department official. Legislative leaders have asked that the revisions, featuring a fresh revenue forecast, be issued earlier so there would be more time to react and pass a budget bill by the June 15 constitutional deadline.

Treasure Chest Advertising Company. The California Supreme Court has denied requests for publication of a key appellate court decision (Treasure Chest Advertising Company v. County of Los Angeles) requiring assessors to take economic obsolescence into account in valuing property (See Caltaxletter of February 24).

COMING UP

May 12: SENATE APPROPRIATIONS COMMITTEE HEARING
Location: Room 4203, State Capitol, at 9:30 a.m.
Subjects: Among bills on calendar are SB 110 (Dills), relating to local sales tax allocations, and SB 890 (O'Connell), reducing the minimum corporate franchise tax.

May 12: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 126, state Capitol, at 1:30 p.m.
Subjects: Among bills on calendar are AB 83 (Villaraigosa), adding 10 percent and 11 percent personal income tax rates; AB 479 (Pringle), Governor Wilson's 5 percent corporate tax rate cut; AB 724 (Lempert), allowing 100 percent net operating loss carry forwards, and AB 1364 (Wayne), disallowing certain advertising deductions.

May 14: ASSEMBLY APPROPRIATIONS COMMITTEE HEARING
Location: Room 4202, State Capitol, at 8:30 a.m.
Subjects: Among bills on calendar are AB 41 (Murray), conforming to federal small business expensing provisions; AB 372 (Batttin), establishing a tax credit for computer donations, and AB 1499 (Caldera), conforming to federal changes in the R & D credit.