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California Makes Major Changes to Key Tax Administrative Body

3 min readBy: Lindsey Lassiter

On June 15, the California Legislature passed the Taxpayer Transparency and Fairness Act (SB 86 and AB 102), which restructures the Board of Equalization and creates two new agencies. This legislation will remake an agency responsible for one-third of California’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue and strengthen its oversight, with most changes taking effect by July 1.

The bill makes the following changes:

  • Creates the California Department of Tax and Fee Administration (CDTFA)
  • Establishes the Office of Tax Appeals (OTA)
  • Limits BOE authority to overseeing property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. assessments, utility tax assessments, and tax assessments on insurers

So, what happened?

The cloud over BOE had been darkening for some time. The agency was already struggling to explain a 2015 audit that revealed the misallocation of $47.8 million in sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. revenue. California’s state constitution established the Board of Equalization in 1879, originally to ensure that county property tax assessments were equal and uniform but their authority now includes sales and use taxes, special taxes, and tax appellate programs. (The separate Franchise Tax Board collects the state’s income and business taxes.)

The growing volume and frequency of the BOE’s critics was probably the best indication that change was imminent. State Controller Betty Yee called for stripping the BOE’s authority even before the March auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. report was released. San Francisco board member Fiona Ma requested direct intervention from Governor Brown (D) to appoint a public trustee to manage the BOE.

On the other side of the debate, taxpayer advocacy groups expressed concern that such a drastic change to one of the primary tax administrative bodies would have a negative impact on the public’s rights, especially the tax appeals process. The status quo under BOE allowed citizens and business owners to address tax disputes without hiring attorneys or navigating a complex court system. Individuals could contact the BOE members directly to ask questions and understand tax laws. Under this bill, taxpayers would have to go through the new CDFTA or the new OTA to make their case to administrative law judges.

The BOE employs more than 4,000 people and manages $60 billion in tax revenue. With less than two weeks before the first changes take effect, the complicated logistics of an overhaul could mean that taxpayers lose out. Some have pointed out that shifting authority to unelected political appointees would stifle responsiveness and accountability to the public. Opponents also argue that this dramatic change should have at least been afforded a period of public comment.

There was another framework for reform proposed. Assemblyman and chair of the Assembly Revenue and Taxation Committee Sebastian Ridley-Thomas proposed AB 1210. This legislation would have provided a more measured approach to reform that would protect the rights of taxpayers in the process. Its key provisions would have required disclosure of private communication with anyone subject to tax appeal proceedings, allowed board members to select and terminate the BOE’s executive director and general counsel, and state the intent to create the Office of Inspector General. AB 1210 was supported by the California Chamber of Commerce, the California Taxpayer Association, and numerous other groups. However, Assemblyman Ridley-Thomas was ultimately unsuccessful in slowing the push for the more dramatic overhaul.

The Brown administration, which has already taken steps to temporarily curtail the BOE’s duties, does support the overhaul legislation. It is expected to earn Governor Brown’s signature as part of the overall budget bill.