A new state tax appeals era begins in California, but questions remain

By Shirley J. Wei, J.D., LL.M., Los Angeles, and Jeremy Sharp, J.D., LL.M., Washington

Editor: Jacob Puhl, J.D., LL.M.

As if federal tax reform were not enough to keep taxpayers on their toes, California recently revamped its state tax agency system and the associated tax appeals process. Last year, California enacted two tax bills that reduced the functions of the State Board of Equalization (BOE) to the core responsibilities granted to it under the California Constitution and created two tax agencies that would take over many of the responsibilities previously handled by the BOE, including the appeals function that was previously handled by the BOE's five-member board.

Some of the changes became effective shortly after the initial bill's enactment in June 2017, with the remaining changes taking effect on Jan. 1, 2018. This discussion provides an overview of these changes, which could have a significant impact on taxpayer controversies pending before the Franchise Tax Board (FTB) or the new California Department of Tax and Fee Administration (CDTFA).

The new era: Enactment of A.B. 102 and A.B. 131

On June 15, 2017, the California Legislature passed Assembly Bill (A.B.) 102 (2017—2018 Reg. Sess. (Cal. 2017)). Based on a review of the BOE's current practices and operational environment, the California Legislature had determined that it was "in the best interest of the taxpayers, their businesses, and the state to have members of the [BOE] refocus the board's efforts toward its core constitutional responsibilities" (A.B. 102, §2(l)). The legislature passed A.B. 102 to, among other purposes, ensure "a tax administration and appeals process that is fair, transparent, consistent, equitable, and impartial," as "[o]ne of the most fundamental aspects of a good tax system is a fair and efficient appeals process," and "to restore the public's trust in the system and provide a work environment that is free from undue influence" (Id., §§2(a), (b), and (j)).

On June 27, 2017, California Gov. Jerry Brown signed A.B. 102, formally titled the Taxpayer Transparency and Fairness Act of 2017. A.B. 102 strips the BOE of many of the historic functions granted to it under statutory provisions and limits its responsibilities primarily to those specifically provided in the California Constitution. Under A.B. 102, many of the responsibilities previously held by the BOE are shifted to two newly created tax agencies: the Office of Tax Appeals (OTA) and the CDTFA.

The OTA assumes the appeals responsibilities previously held by the BOE and hears appeals of taxes and fees administered by the CDTFA, as well as appeals from FTB determinations relating to the state's income and franchise tax. The CDTFA assumes the administration of certain taxes and fees that had previously been administered by the BOE, including the sales and use tax and business and excise taxes. California now has five state tax agencies — the FTB, BOE, CDTFA, OTA, and the Employment Development Department.

A.B. 131 (2017-2018 Reg. Sess. (Cal. 2017)) was subsequently enacted to, among other reasons, clarify various ambiguities and uncertainties that were triggered by the enactment of A.B. 102 with respect to the duties, responsibilities, and rules that apply to the BOE, OTA, and CDTFA.

Historical function of the BOE

The California Constitution provides for the establishment of the BOE (Cal. Const. Art. XIII, §17). The board consists of five individuals: the controller, who is elected statewide, and four members, each of whom individually represents one of four distinct geographic districts in California and is elected by district voters for four-year terms. The responsibilities of the BOE, as granted under the state constitution, include: (1) reviewing equalization and adjustment of property tax assessments (id., §18); (2) measuring county assessment levels or adjusting secured assessment rolls (id.); (3) assessing pipelines, flumes, canals, ditches, and aqueducts lying within two or more counties (id., §19); (4) assessing property owned or used by regulated railway, telegraph, and telephone companies, car companies operating on railways in the state, and companies transmitting or selling gas or electricity (id.); (5) assessing taxes on insurers (id., §28); and (6) assessing and collecting excise taxes on the manufacture, importation, or sales of alcoholic beverages (Cal. Const. Art. XX, §22).

Over the years, California statutes had expanded the BOE's duties, powers, and responsibilities to include the administration of various taxes and fees, including sales and use taxes and business and excise taxes (A.B. 102, preamble ¶1). The BOE was also responsible for administrative appeals relating to the assessment and collection of those taxes and fees and the California personal income tax and corporation franchise and income tax (id.). The BOE also administered the motor vehicle fuel tax and is required until July 1, 2019, to annually modify the motor vehicle fuel tax rate in accordance with California law (id.).

As a result of the enactment of A.B. 102 and A.B. 131, the BOE's historical duties, powers, and responsibilities have changed. The specific changes made under these two tax bills are summarized below.

Notable changes made under A.B. 102 and A.B. 131

As mentioned above, A.B. 102 created two new tax agencies — the OTA and the CDTFA — both of which are based in Sacramento (A.B. 102, preamble ¶1; Cal. Gov't Code §§15570(a) and 15670(a)). Each agency is required to appoint a director (subject to state Senate confirmation) as well as a chief deputy director and a chief counsel (A.B. 102, preamble ¶1; Cal. Gov't Code §§15570(b) and 15670(b)). As of this writing, Gov. Brown had appointed Mark Ibele as director and Kristen Kane as chief counsel of the OTA, and Nicolas Maduros as director and Tad Egawa as chief counsel of the CDTFA.

The OTA and the CDTFA are also empowered to adopt regulations as necessary or appropriate to carry out their duties, powers, and responsibilities and to adopt and readopt emergency regulations until Jan. 1, 2019. A.B. 102 required the OTA to adopt regulations by Jan. 1, 2018 (A.B. 102 §13; Cal. Gov't Code §15679(a)(1)). A.B. 102 further provides that, for purposes of the emergency regulations, the CDTFA and the OTA were "exempted from the requirement that it describe facts showing the need for immediate action and from review of the emergency regulations by the Office of Administrative Law" (A.B. 102 §§5 and 13; Cal. Gov't Code §§15570(c) and 15679(a)(2)). Effective Jan. 5, 2018, the OTA adopted emergency regulations that govern appeals from actions taken by the FTB and CDTFA.

As of July 1, 2017, the BOE is only allowed to carry out those duties and responsibilities granted to it under the California Constitution and continue to adjust the motor vehicle fuel tax rate for the 2018-2019 fiscal year (Cal. Gov't Code §15600(c)). A.B. 131 provided that the BOE would continue to hear tax appeals until Dec. 31, 2017, provided that any such appeal was both calendared for a BOE hearing prior to Jan. 1, 2018, and was actually heard, decided, and finalized before Jan. 1, 2018 (A.B. 131 §6; Cal. Gov't Code §15600(d)). Any appeals that were not finalized before Jan. 1, 2018, were transferred to the OTA, and the BOE has no legal authority over them (id.).

Overview of the OTA's duties, powers, and responsibilities

Within the OTA, tax appeals panels (each consisting of three administrative law judges (ALJs) designated by the agency's director) will hear appeals and related hearings, as described further below (A.B. 102, preamble ¶2; Cal. Gov't Code §§15670 and 15674). Each ALJ must be an active member of the State Bar of California for at least the five years preceding appointment, possess knowledge and experience with regard to the administration and operation of the tax and fee laws of the United States and California, and subscribe to the Code of Judicial Ethics adopted by the California Supreme Court (Cal. Gov't Code §15670(c)). A.B. 131 clarifies that this requirement includes, but is not limited to, the canons governing conflicts of interest (A.B. 131 §8; Cal. Gov't Code §15670(c)(2)). As of this writing, the OTA was still in the process of identifying and appointing the ALJs.

Beginning Jan. 1, 2018, the BOE is prohibited from conducting any appeals, and that function is transferred solely to the OTA. As of that date, the OTA has the duties, powers, and responsibilities of the BOE necessary or appropriate to conduct appeals hearings, and the tax appeals panels will conduct all appeals, including hearings related to the following:

  • Petitions, including, but not limited to, petitions for redetermination, reassessment, reconsideration of successor liability, or rehearing;
  • Administrative protests;
  • Claims, including claims for refund;
  • Appeals from an action of the FTB;
  • Applications, including, but not limited to, applications for an administrative hearing; and
  • Any other item that may be scheduled for a hearing, including, but not limited to, requests for relief of taxes, fees, interest, or penalties (Cal. Gov't Code §15671(a)).

In an appeal before the OTA, a taxpayer may be represented by any individual who is at least 18 years old, including, but not limited to, an attorney, appraiser, accountant, bookkeeper, employee, business associate, or other person (Cal. Gov't Code §15676). A.B. 131 further clarifies that, in addition to the other enumerated individuals, both CPAs and public accountants may represent a taxpayer on such an appeal (A.B. 131 §12; Cal. Gov't Code §15676). The OTA is required to publish a written opinion within 100 days after the date a tax appeals panel's decision becomes final (Cal. Gov't Code §15675). The taxpayer may appeal the decision of the panel to a state superior court in accordance with the law that imposes the tax or fee (Cal. Gov't Code §15677). Generally, California state tax agencies do not have similar rights to appeal administrative decisions to a California superior court.

A.B. 131 further provides that the director of the OTA will administer and direct the day-to-day operations of the office, which include, but are not limited to, ensuring that each hearing office is sufficiently staffed and that appeals hearings are heard and resolved in a timely and efficient manner (A.B. 131 §8; Cal. Gov't Code §15670(b)(2)). However, the director may not oversee, direct, supervise, or otherwise be involved in the tax appeals panels' decision-making process (id.).

Appeals conducted pursuant to the Administrative Procedure Act

A.B. 131 also provides that all OTA appeals hearings and proceedings must be conducted pursuant to California's Administrative Procedure Act (A.B. 131 §11; Cal. Gov't Code §15674(a)(3)). A.B. 102 provides that any regulations adopted by the OTA to carry out this purpose must also be consistent with the Model State Administrative Tax Tribunal Act, to the extent possible (A.B. 102 §13; Cal. Gov't Code §15679(a)(3)(C)). It should be noted that California's Administrative Procedure Act requires a hearing to be open to the public (Cal. Gov't Code §11425.20(a)). However, A.B. 131 authorizes taxpayers to request a closed hearing, subject to the approval of the OTA (A.B. 131 §13; Cal. Gov't Code §15676.5). The OTA is required to establish a process under which a person filing an appeal may request a closed hearing and objective criteria for determining whether to grant such a request (id.).

As noted above, the OTA recently adopted emergency regulations. These regulations provide useful guidance regarding the procedures relating to the filing and administration of appeals before the OTA, the requirement that the OTA publish written opinions for each appeal decided, and the precedential effect of existing BOE opinions as well as new OTA opinions. Notably, the OTA's emergency regulations provide that the precedential opinions of the BOE that were adopted prior to Jan. 1, 2018, in accordance with applicable law and regulations may be cited as precedential authority to OTA "unless a panel removes, in whole or in part, the precedential status of the opinion as part of a written opinion that the panel issues" under these regulatory provisions (Cal. Code Regs., tit. 18, §§30501(d)(3) and 30818(d)).

The emergency regulations also state that where the OTA removes the precedential status of an opinion of the BOE, it must publish on its website a specific notation that the previously precedential BOE opinion is no longer precedential, along with the date of the OTA opinion removing the precedential status (id.). Moreover, the emergency regulations provide that the "OTA may withdraw, in whole or in part, the precedential status of an opinion previously designated as precedential in a later appeal before [the] OTA by explaining in the decision issued in that later appeal why the precedential status has been removed" (Cal. Code Regs., tit. 18, §§30501(d)(2) and 30818(c)).

Also in the OTA's emergency regulations, the OTA outlines procedures for taxpayers to request that a closed hearing or the appeal record be sealed in whole or in part (Cal. Code Regs., tit. 18, §§30704 and 30816). The OTA also lists grounds that it would consider in determining whether to grant or deny the request. Such grounds include:


  1. Whether the appeal involves trade secrets or other confidential research, development, or other information the disclosure of which would cause unwarranted annoyance, embarrassment, or oppression to any person, and all of the following criteria are met:
    1. Whether such information is not otherwise publicly available and would ordinarily be considered to be private and sensitive;
    2. Where a request for a closed hearing is made, whether such information is likely to be disclosed during an oral hearing;
    3. Where a request for a closed hearing is made, whether any risk of disclosure of such information can be mitigated by instructing the parties to limit the content of their presentations at the oral hearing.
  2. To ensure the ability of the party to be represented by the person of their choice, in the circumstances of that particular case.
  3. Upon other grounds as necessary to ensure a fair hearing and provision of due process, in the circumstances of that particular case. [Cal Code Regs., tit. 18, §30704(c).]
De novo appeal from an OTA decision

A.B. 102 states that "[t]he person filing the appeal may appeal the decision of the tax appeals panel to the superior court in accordance with the law imposing the tax or fee" and that the standard of judicial review to be applied by the court is "review de novo" (A.B. 102 §13). A.B. 131 clarifies this language by providing that "[i]f a person that sought relief from a tax appeals panel disagrees with its decision, the person may bring an action in superior court in accordance with the law imposing the tax or fee for a trial de novo" (A.B. 131 §14; Cal. Gov't Code §15677).

Overview of duties, powers, and responsibilities of the CDTFA

A.B. 102 provides that the duties, powers, and responsibilities of the CDTFA include all those that prior to July 1, 2017, had been vested in the BOE, except for those specifically granted to the BOE in the California Constitution (A.B. 102 §5; Cal. Gov't Code §15570.22). A.B. 131 further provides that the CDTFA conducts appeals conferences in the same manner as before the restructuring of the BOE, and the rules and regulations governing these appeals conferences will continue to apply (A.B. 131 §3; Cal. Gov't Code §§15570.50 and 15570.52). However, the CDTFA may amend, repeal, or add any regulations that may be necessary for carrying out its duties, powers, and responsibilities in this respect. A taxpayer may appeal a decision of the CDTFA to the OTA if the taxpayer's request for relief in an appeals conference is denied (A.B. 131 §3; Cal. Gov't Code §15570.54).

A.B. 102 prohibits disclosure by the CDTFA director, chief deputy director, or any other person who has obtained knowledge about a business during an inspection of the taxpayer's records, of certain confidential taxpayer information (with certain exceptions) unless otherwise directed by the governor (A.B. 102 §5; Cal. Gov't Code §15570.84); it also makes a violation of these taxpayer privacy provisions a misdemeanor punishable by a fine not to exceed $1,000 or by imprisonment not to exceed six months, or both, at the court's discretion (id.).

A.B. 131, however, allows the CDTFA to disclose certain listed information to specific individuals, for use in any actions or proceedings affecting the personnel rights of a current or former employee, or in preparation for such action or proceeding, to the extent the CDTFA determines that the information is or may be relevant and material to the action or proceeding (A.B. 131 §4, Cal. Gov't Code §15570.84(f), listing situations when disclosure is permissible). Civil and criminal penalties may apply for unauthorized disclosures (Cal. Gov't Code §15570.84(h)).

A.B. 131 also allows the CDTFA to obtain copies of full-face engraved pictures or photographs of licensees directly from the California Department of Motor Vehicles to enforce its duties, powers, and responsibilities (A.B. 131 §4; Cal. Gov't Code §15570.66). The BOE has the same authority, but A.B. 131 clarifies that it may exercise that authority only to enforce the duties, powers, and responsibilities retained by the BOE under A.B. 102 (A.B. 131 §7; Cal. Gov't Code §15618.5).

Finally, A.B. 102 provides that the director of the CDTFA is solely responsible for selecting individuals for career executive positions and other non-civil service managers for the agency (A.B. 102 §5; Cal. Gov't Code §15570(c)).

Implications for the BOE

As of July 1, 2017, the BOE continues to carry out only the duties and responsibilities granted to it under the California Constitution (as discussed above) and adjust the motor vehicle fuel tax rate for the 2018-2019 fiscal year. The BOE no longer retains its former statutory functions, including the collection and administration of the sales and use tax and the business and special taxes, as well as hearing tax appeals for those taxes and the income and franchise taxes. Also, as of July 1, 2017, A.B. 102 restricts the activities of BOE members as follows:

  • Ex parte communications with BOE members on issues being appealed are generally prohibited (A.B. 102 §10; Cal. Gov't Code §15609.5, providing a few very limited exceptions from Cal. Gov't Code §§11430.10-11430.80).
  • BOE members have no authority to appoint, remove, discipline, assign, reassign, promote, demote, or issue orders to any employee of the BOE, including, but not limited to, the career executive assignment positions and other non-civil service managers (Cal. Gov't Code §15600(h)(1); note, however, that A.B. 102 appears to allow BOE members to appoint an executive director for the BOE, who in turn may select "persons for career executive assignment positions and other noncivil services managers for the [BOE].")
  • BOE members shall not interfere with or influence the process of the BOE or the CDTFA's legislative analyses, revenue analyses, or any other form of technical assistance requested by the governor or the legislature (Cal. Gov't Code §15600(j)).
  • BOE members shall not represent a person in appeals before one year after the expiration of the member's BOE term or one year after separation from the BOE (Cal. Gov't Code §15600(l)(1)). This restriction also applies to a BOE member's staff (id. at (l)(2)).
  • BOE members are prohibited from investigating the administration, enforcement, and operation of tax administration within the district from which the BOE member was elected (Cal. Gov't Code §15623).

California's enactment of A.B. 102 and A.B. 131 dramatically alters the state's tax appeals landscape, perhaps most notably in that tax appeals formerly heard by the five-member BOE will now be heard by ALJs who are a part of the OTA's three-member tax appeal panels. Given that the OTA is still in the process of identifying and appointing these ALJs, there is considerable uncertainty about the exact impact that this new structure will have on taxpayers' appeals before the FTB and CDTFA. Although the OTA's emergency regulations provide some guidance as to the procedures that will govern appeals before the OTA, until the OTA decides taxpayer cases, this uncertainty will remain.

What can be fairly stated is that California has made some of the most significant changes to its tax appeals process in decades, and these changes can be expected to have an impact on taxpayer appeals. It may be several years, however, before taxpayers have a body of OTA decisions that will reveal the nature and extent of these changes.

The authors thank Brian Toman and Tom Cornett for their contributions to and review of this article.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.


Jacob Puhl is a manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax group.

For additional information about these items, contact Mr. Puhl at 202-220-2767 or jpuhl@deloitte.com.

Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.

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