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

The BOE's Business Taxes Committee recommended a delay after hearing public testimony critical of immediate action.

Carrie-Lee Coke, representing the California Manufacturers Association (CMA), stated that there is no need to rush a regulation to reallocate use tax. She said that CMA would like to be involved in the drafting of the regulation.

Albin C. "Al" Koch, representing Municipal Resource Consultants, suggested that there is no rush to publish the regulation. Mr. Koch outlined his firm's objections to the current proposed pooling formula. He stated that the author of SB 110 (Senator Ralph Dills) verbally indicated that estimates could be used to allocate the use taxes. He suggested that the BOE issue a bulletin by January 1, 1998 to set procedure and follow later with the regulation.

At the full board meeting, Chair Ernest Dronenburg said there was no target date to begin the program in SB 110. "There is a lot of uncertainty. It needs a lot of study," he said, telling staff, "Bring the forms to us in January and we will start the process."

Member Dean Andal said staff had overestimated the number of permits (7,500) that would be issued. He supported the motion, as did Rex Halvorsen, representing Kathleen Connell. Members Johan Klehs and John Chiang voted against it.

Mr. Dronenburg, also the committee chair, questioned the need to add 22 staff to administer the program and also indicated no urgency in publishing a regulation. He asked staff to work with public parties to fashion the regulation.

In other action, the committee approved publication of Regulation 1593, "Aircraft and Aircraft Parts," and reviewed the 1996-97 Business Taxpayers' Bill of Rights Annual Report.

Meanwhile, the BOE Legislative Committee, led by Mr. Klehs, last week approved legislative proposals for 1998 that include:

Property Taxes

• Revise administration of the welfare and veteran's organization exemptions. Assessors requested that the final exemption decision be at the county level.
• Allow the board until August 31 of each year to notify assessors of prescribed changes to the property statements to be used for the ensuing lien date.
• Facilitate the effective administration of the Private Railroad Car Tax.
• Allow for exemption from the timber yield tax those harvests that are not economical to administer, and amend the Public Resources Code to require that documents transmitted to the BOE contain information sufficient to identify timber owners qualifying for an exemption.
• Include the Private Railroad Car Tax Law under the state tax lien provisions.

• Require that interest be imposed on a daily, rather than monthly, basis under the sales and use tax and special taxes and fees programs administered by the board. (Probable effective date is January 1, 1999.)
• Allow a seven-day grace period on interest when a relief of penalty is granted. This would help taxpayers who miss the filing deadline by hours or a day.

• Eliminate the irregular reporting and prepayment requirements for the second quarter reporting period.
• Clarify that any penalty is limited to a maximum of 10 percent for persons required to remit taxes by electronic funds transfer and who fail to file a return, fail to remit by electronic fund transfer, or fail to remit taxes.

• Provide relief for underground storage tank operators from penalty and interest when they are unaware of responsibilities to file reports and pay fees.
• Conform provisions authorizing the board to issue determinations for recovery of amounts erroneously refunded by the board.
• Provide that the use fuel and diesel fuel tax laws will be administered in conjunction with the International Fuel Tax Administrators Articles of Agreement.
• Amend insurers law to equalize the interest rate for insurers and surplus line brokers.
• Amend cigarette and tobacco products law to impose taxes on seized inventory.
• Amend cigarette and tobacco products law to include a reseller in wholesaler definition.
• Amend "911" laws to allow the BOE to require electrical utilities and telephone service suppliers to post security, as necessary.
• Amend "911" laws to allow for reporting periods other than monthly.
• Add authority to collect generator fee surcharge liabilities.
• Amend hazardous substance tax law regarding disposition of overpayments.
• Amend codes related to the occupational lead poisoning and childhood poison prevention fees.
• Provide that underground storage tank fees be deposited in the state treasury.
• Include kerosene in the definition of diesel fuel.
• Clarify refunds of diesel fuel.

• Advanced Appraisal Handbook. The Property Tax Committee, chaired by Mr. Andal, adopted a Subject Matter Outline for the Assessors' Handbook 502 on Advanced Appraisal. BOE staff will now begin drafting the new handbook with the first draft due in March 1998. Also approved by the committee was use of the publication Marshall Valuation Service for commercial and industrial properties cost guides.

Dr. Connell, who serves as FTB chair, told an audience of largely tax practitioners and business representatives that she had helped eliminate a number of small, unfair nuisance taxes that increase blood pressure of taxpayers more than they increase revenue.

For next year, Dr. Connell said she was going to push for zero-based budgeting, consolidation of the FTB and BOE, a two-year budget cycle, and a four-year capital improvement plan. She urged the budget process be an open one, and was critical of the process of developing a major tax bill behind closed doors on the last night of session.

She also said that she will be announcing an audit of the California education system next month.

Other conference developments:

(Editor's note: Our November 10 issue covered developments of the conference up to Caltaxletter deadline. This story covers developments subsequent to that time.)

• Telecommunications Apportionment Regulation. FTB attorney James Peters said the FTB's proposed telecommunications apportionment regulation (Section 25137-13) has "real merit" for sourcing of telecommunications income. The principal change made by the regulation is the recognition of the contribution of a market state in the sales factor, he added. Debbie Gastler, representing the Times-Mirror Corporation, asked what evidence the FTB has of distortion in order to justify a separate apportionment regulation.

 
According to Mr. Peters, a second symposium on the proposed regulation will be held next year.
 
• Cox-Wyden Internet Tax Freedom. Walter Hellerstein, University of Georgia law professor, discussed proposals to tax Internet transactions, including one to expand the sales tax to downloading electronic messages. Kendall Houghton, COST general counsel, said there is no one position of business on the issue. She added that there is no way digital products can be treated the same way as intangible property.
  
  
• Alternative Minimum Tax. Due to a drafting error, California's alternative minimum personal income tax exemption for 1997 will be increased to $45,000 for a joint return ($22,500 for a single return and $33,750 for head of household). The Senate Floor Analysis of SB 1233 said the bill increased the AMT exemption beginning in 1998 (to $57,260 for a joint return).
  
  
• Elective Combination. Assembly Revenue and Taxation Committee consultant Steve Kamp said that until parties can work out a definition of a unitary business, the elective combination bill may "stall" in the Legislature.
  
  
• "Quickie Refunds." Virginia Gates, tax partner of Price Waterhouse in San Jose, urged the adoption of a "quickie refund" procedure whereby a taxpayer can get a refund before the end of the tax year of an erroneous estimated payment.
  
  
• Joyce v. Finnegan. FTB attorney Michael Brownell said the FTB staff believes that its regulatory authority allows them to overturn the Finnegan decision, if that is appropriate. According to Sacramento attorney Eric Coffil, the BOE's Finnegan decision held that for apportionment purposes, when sales are made into California by a corporation not taxable in California, the sales are not "thrown back" if any member of that corporation's unitary group is taxable in California.

The FTB's rulemaking authority (in Section 25106.5) was passed by the Legislature in 1987, prior to the BOE's 1990 Finnegan decision. 


• Combined Reports Mechanics Regulation. The draft of the Combined Report Mechanics Regulation (25106.5) contains significant issues for taxpayers. According to Mr. Brownell, there is a need for a regulatory framework on the entirety of combined reporting.

In addition to the Finnegan v. Joyce controversy, issues in the draft regulation include basic methodology, capital gains and losses, accounting methods and elections, the interest offset, charitable contributions, and application of Section 24425 in a group setting.

In the draft of the regulation, tax credits are applied to specific member liability rather than to the unitary group as a whole. Special rules for capital gain and loss netting are set forth. First, the business or non-business determination is made, then an apportionment percentage is applied, prior to netting of gain and loss.

Mr. Brownell said the interest offset portions of the rule is still to be addressed, as well as assignment of all charitable contributions to the parent of the unitary group (for purposes of determining if the 10 percent limit has been exceeded). The practice of the FTB has been to apply the interest offset on a combined basis but not tax credits.

• IRS Data. Syracuse University Professor David Burnham told conferees about the massive amount of IRS data he has accumulated as a result of 13 Freedom of Information suits. This information may be accessed by taxpayers free of charge at the following website: http://trac.syr.edu/tracirs/.

 
He said the data show different criminal enforcement by regions, noting that a taxpayer in Sacramento is more likely to be prosecuted than one in Los Angeles. He added that there are regional variations in audit, with the audit rate in Jackson, Mississippi higher than in New York City.

FTB Chair Kathleen Connell and Member Ernest Dronenburg made the commitment last Monday at a Taxpayers' Bill of Rights hearing, where the public was invited to make suggestions about franchise and income tax law. Abstaining was Finance Director Craig Brown.

Representing ARCO and the Counsel on Unitary Tax (CUT), Barry Weissman asked the board to support collective combined reporting as provided in AB 417, giving taxpayers the option of filing a report with all affiliate companies, whether unitary or not. However, he asked the board to oppose inclusion of a unitary definition. The bill will still be pending when the Legislature reconvenes in January.

Mr. Weissman said the bill should not have been amended in September to include a new definition in unitary standards for non-electors. He said the change should be avoided because it is unnecessary, counterproductive, premature and unworkable. The amendment uses unclear terms, and there is no agreement on standards, he added.

Mr. Weissman said the unamended bill would improve certainty to taxpayers. He continued that the fiscal impact to the state would not occur until the fourth year or beyond. He cited one remaining obstacle: taxpayers who do not elect combined reporting could be thrown into uncertainty if the bill is allowed to include a unitary definition.

Others commenting before the board included Richard Harris, representing Orrick, Herrington & Sutcliffe LLP. He proposed that the board and department should emphasize collection of "the proper tax" only and not be driven by the pursuit of revenue. He continued that the public needs a perception of "fairness and equity," and he requested the board to commit itself to the Taxpayers' Bill of Rights proposals he submitted at last year's hearing. He called for a commitment to fair hearings and requested support of standards that would prohibit what he termed coercive practices by audit and collector staff.

Mr. Harris suggested that consideration of a shift of the burden of proof would be desirable. Gerald Goldberg, FTB executive officer, responded that many of Mr. Harris' recommendations are largely contained in current and administrative procedures. Mr. Goldberg said the agency would look at the appeals process to make it more staff-accessible and non-punitive.

Other FTB action last Monday included:

• Legislative Proposals. Approved Offer-in-Compromise-of-Tax-Liability Authority (authorizing staff to settle issues up to $9,999. The board would review items in excess of $7,500 informally); seek a hiring credit for seasonal employees in economic development areas, and revise the estate tax clearance requirement.
  
  
• Homeowners and Renters Assistance Program. The board authorized the staff to prepare regulations to implement the Personal Responsibility and Work Opportunity Act of 1996 regarding denial of Homeowner and Renters Assistance to illegal aliens, but directed the staff to revisit the issue at the January meeting.

Dr. Connell raised questions concerning the board's authority to determine resident and citizenship qualifications. Staff was directed to coordinate with the Joint Legislative Audit Committee. 



• Federation of Tax Administrators (FTA) Member Fees. The board questioned the fee for state membership in the FTA. It was reported that New York and California pay annual fees of $71,000 and other states and jurisdictions pay fees of a minimum of $9,000 up, based on proportionate state tax revenues. Dr. Connell called these fees "egregious" and suggested equal fees. She expressed the same view regarding fees to the Multistate Tax Commission, and suggested lower fees or increased voting influence on the basis of fees paid. Mr. Dronenburg is on the FTA subcommittee that is examining fees and said he will pursue California's interest.
  
  
• Telephone Services. Staff presented a comparison of the average wait for the public to gain telephone access to the FTB. The current wait averages five minutes, 56 seconds at FTB and four minutes, six seconds at the BOE, officials said, noting that the BOE wait is being reduced. Dr. Connell announced a desire to get the FTB wait down to two minutes or less. Staff was directed to prepare a 1998-99 budget proposal to add sufficient resources to accomplish the goal.
  
  
• Chief Counsel. In executive session, the FTB appointed Assistant Chief Counsel Brian W. Toman as chief counsel, replacing Glenn Rigby who retired in July. Mr. Toman, director of the Multistate Tax Bureau of the Legal Branch, has been at the FTB since 1975.

The First District Court of Appeal on November 12 overturned in part the trial court's judgment that the San Francisco AAB could deny a number of applications for reduction in Glenridge apartment assessments filed by taxpayers for tax years 1985-86 and 1986-87. However, the trial court was affirmed in part for disallowing refunds for tax years 1982-83 through 1984-85 and 1987-88.

Plaintiffs said the AAB failed to hear and make a final determination on their applications within two years as required by Section 1604 (c) of the Revenue and Taxation Code. The city argued that the taxpayers had waived the two-year requirement. The court ruled, however, that the city failed to plead waiver and estoppel issues as affirmative defenses in its answer, and could not rely on those defenses.

The decision said the AAB failed to inform the taxpayers of their lack of a full and complete filing of information on their applications, a requirement of state law.

The conclusion that taxpayers' value must be used applies only for tax years 1985-86 and 1986-87; otherwise the court found that taxpayers' claims were not timely filed.

The state's Unemployment Insurance Fund is projected to end the year with a $3.64 billion balance, $460 million higher than forecast in May. Exceptional economic growth during 1997 has slowed disbursements from the fund (benefit payments) as well as increased contributions to the fund (larger workforce). Employer contributions for 1997 are forecast to be $3.04 billion, with 1998 contributions forecast to decline to $2.87 billion. On the "E" contribution rate schedule, employer tax rates range from 1.1 percent to 5.4 percent of the first $7,000 in wages for each employee. The "D" schedule ranges from 0.9 percent to 5.4 percent.

California's UI Fund has been steadily rebuilding following a dramatic draw-down on reserves during the last recession. Saving the fund from potential red ink was its healthy reserve when the recession began. The year-end fund balance in 1990 had reserves of $5.4 billion, but dipped to a low of $2 billion by the end of 1994.

On the "D" schedule, employers will again be able to participate in California's "voluntary contribution" plan. This allows employers to voluntarily pay an additional amount into their UI reserve account in order to reduce their tax rate for the year. This option is available only when the "D" or lower schedule is in effect.

Jonathan Coupal, legal affairs director for the Howard Jarvis Taxpayers Association (HJTA) and the main drafter of the "vote-on-taxes" Proposition 218 initiative, said he believes Pinole's Measure F was the first use of the new Section C powers. A lawsuit against the non-voted utility user tax was blocked by a statute-of-limitation problem, Mr. Coupal said, so the plaintiffs mounted an initiative campaign to repeal the levy. Measure F passed, 1,837 to 1,752.

Also, the Pinole City Council, as part of a settlement of the HJTA lawsuit, agreed to put a real estate transfer tax on the November ballot as Measure G. Voters rejected the proposal.

Successful elections amounted to more than $675 million, led by Pasadena Unified's $240 million. Losers totaled about $579 million.

One election in Santa Barbara County had been too close to call, trailing by one vote in initial ballot counting. But a later count turned up the needed vote, election officials reported last Wednesday. The final vote was 202 to 101 -- the two-thirds margin needed -- for the $2 million bond to modernize and expand the Los Alamos Elementary School District school for class-size reduction.

A new strategy was noted in the SSC report. As a result of legislation effective last January (SB 1544, Peace, of 1996) districts can gerrymander themselves to enhance chances of bond passage.

Splitting the district for taxation purposes was used by the Kings River Canyon Joint Unified School District, where eight previous bond elections had failed, the last two by about 30 votes out of some 10,000 cast. Attempting to isolate the anti-tax voters, the Fresno County district was split into two parts. One had a $26 million bond, the other a $3 million proposal.

The results: The pro-tax section of the district was "indistinguishable" from the anti-tax section, wrote SSC's Bob Blattner, and "the new strategy proved un- or even counter-productive." About 56 percent of voters in each section supported the respective bonds, which was down some 10 percent from March and November 1995 elections when the district voted as a whole.
 

KNOX CHAIRS ASSEMBLY REV & TAX COMMITTEE. The new chair of the Assembly Revenue and Taxation Committee says his main thrust is to look out for concerns of working families. Upon his appointment by Speaker Cruz Bustamante, Los Angeles Democrat Wally Knox said on November 6: "I will focus on how state tax policy affects California's middle-class families and pursue an agenda that addresses economic insecurity among average working people."
 

Dec. 15: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: State Capitol, Room 447, at 9:30 a.m.
Subject: Mixed tax status of health systems.

Correction: In the last issue, the research and development credit for 1998 and thereafter was printed as 12 percent. This was a typo. The correct rate is 11 percent.