California Tax Court: It's Time To End 'Pay-to-Play' In California

In 1992, distinguished UCLA Law School Professor Michael Asimow, an expert on California administrative law, observed in a law review article, "to put it charitably, California's present arrangement for adjudicating tax cases is a patchwork that can only be understood as a series of historical accidents; to put it less charitably, the system is a mess."1. Things have not improved in the last 12 years, and California still finds itself in a minority of states that place responsibility for collecting taxes and adjudicating tax disputes in the hands of the same agency.

Indeed, California was ranked among the bottom five states in every category of CFO Magazine's annual state tax survey, causing "no state to come near California's dismal ranking."2 More specifically, California was rated as being among the "least desirable" when it came to determining the impact of a state's revenue department policies and systems on a company's decision to locate or expand in the state, and "least independent" when rating the independence of the state's administrative appeal process from the audit department.

Taxpayers have two basic concerns when it comes to the adjudication of their tax disputes: they want (1) due process in the form of a fair, impartial tax hearing that is separate from the tax collection function; and (2) the ability to contest alleged deficiencies without the heavy burden of prepaying the tax, a requirement commonly referred to as "pay-to-play." Creating an independent tax adjudication system that does not require taxpayers to "pay-to-play" would go a long way toward improving the perception of California as a fair and decent place to live and do business.

Where We Are Today

Currently, California taxes are administered and collected by various administrative agencies, including the Franchise Tax Board ("FTB"), the State Board of Equalization ("SBE"), and the Employment Development Department ("EDD"). In general, the FTB administers corporate franchise taxes and income taxes, while the SBE administers sales and use taxes, state-assessed property taxes, and a myriad of other "special" taxes (e.g., cigarette taxes, environmental taxes, fuel taxes, and insurance taxes). The SBE also hears taxpayer appeals of the taxes administered by the FTB. The EDD primarily administers employment taxes. Typically, an aggrieved taxpayer who seeks to appeal a final decision of one of these revenue collection agencies must first pay the tax, and then file a suit for refund in Superior Court. Thus, unlike federal taxpayers and taxpayers in most other states, California taxpayers must pay their tax before having their "day in court" before a tribunal other than the tax collection agency. This is true regardless of the size or propriety of the proposed liability.3

How We Got To Where We Are Today

To understand where we are today, and why an independent tax court is needed in California, a brief history lesson is helpful. The SBE was created in 1872 to equalize property taxes across the state. At the time it was formed, there were no personal or corporate income taxes, no sales and use taxes, and few specialized taxes. When the Bank and Corporation Franchise Tax Act was originally enacted in 1929, the SBE and the State Controller both sought to administer the new tax. A compromise was reached whereby a new Franchise Tax Commissioner was to be appointed by the Chairman of the SBE, the State Controller, and the Director of Finance. A similar struggle ensued in 1935, with similar results, when the personal income tax law was enacted. In 1949, the FTB replaced the office of the Franchise Tax Commissioner. The FTB consisted of the same three officers who formerly had the power to...