California Taxing Agency Set for Major Overhaul - The State Board of Equalization will cease to administer most existing taxes, including sales and use taxes, and all fee programs, and will no longer serve as an appellate body for most tax appeals

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

The Taxpayer Transparency and Fairness Act of 2017 (AB 102[1]) was signed by California Governor Jerry Brown on June 27, 2017, as part of the state budget process. The legislation makes sweeping changes to California tax administration by stripping the State Board of Equalization (BOE) of all tax administration duties other than those required of it under the California Constitution, and its authority to adjudicate tax appeals.

The administration of these taxes and fees will be transferred to a newly-created California Department of Tax and Fee Administration (Department) on July 1, 2017.  The BOE will continue to administer only property, insurance and alcoholic beverage taxes as it is required to do under the California Constitution.  The adjudication of most tax appeals will be transferred from the BOE to a newly-created Office of Tax Appeals (OTA). While the OTA will come into existence on July 1, 2017, the BOE will continue to hear tax appeals until December 31, 2017.   


The BOE consists of five board members: four directly elected members, each representing a district for four-year terms, and the State Controller, who is elected on a statewide basis. The BOE is currently responsible for administering most California taxes other than income taxes, and also serves as the nation’s only tax appeals tribunal comprised of elected officials.

In a scathing March 30, 2017 report,[2] the California Department of Finance found that the BOE had misallocated millions of dollars of tax revenue, misused staff for the political purposes of BOE members, and that BOE members inappropriately intervened in BOE audits. Governor Brown asked legislative leaders to come up with new laws to address the “serious problems” with the BOE identified in the report.  

Criticism and Support of Legislation

Despite the Department of Finance audit report, many have voiced opposition to AB 102 because it was voted on by the Legislature only three days after the language was first made available and was not given proper attention as part of a larger state budget process. Critics have argued that more time was needed to consider the legislation since it results in major changes to state tax administration that go into effect in a matter of weeks from when it was first presented. While critics have acknowledged problems at the BOE, they argue that the legislation goes too far, and that the power to administer taxes should not be transferred from elected officials that are responsive to the public to administrative bodies that are not directly accountable to the voters. Those supporting the legislation have stated that clear separation of the administration of taxes from the adjudication of disputes with taxpayers, and eliminating improper interference by BOE members with tax administration and personnel decisions is necessary to alleviate the problems identified in the Department of Finance report.[3]  

California Department of Tax and Fee Administration

Under AB 102, all laws prescribing the duties, powers and responsibilities of the BOE to which the Department succeeds, and the rules and regulations established under those laws will continue to be in force, including existing processes and taxpayer remedies such as settlement options and appeals processes.[4]

Whenever any reference to the BOE appears in any statute, regulation, or contract, or in any other code with respect to any of the functions transferred from the BOE to the Department are deemed to refer to the Department.[5] An action to which the BOE is a party will continue in the name of the Department, and the Department will be substituted for the BOE by the court wherein the action is pending.[6] Any permit, registration or other authorization issued by the BOE and in effect on June 30, 2017, will be deemed on and after July 1, 2017, to be a permit, registration or other authorization of the Department.[7]

The Department will be under the control of a director. The Governor will appoint the director, a chief deputy director, and a chief counsel, each of whom will hold office at the pleasure of the Governor. The appointment of the director is subject to confirmation by the Senate.[8]

All BOE employees engaged in the performance of functions transferred to the Department will be transferred to the Department.[9] The BOE will retain employees who are engaged in the performance of administering the property, insurance and alcoholic beverage taxes, which the BOE will continue to administer under the legislation.[10] The BOE currently employs roughly 4,800 employees. As a result of the legislation, about 4,400 of these employees will be transferred to the Department.

The Department is authorized to adopt regulations, including emergency regulations. Until January 1, 2019, the Department’s emergency regulations are exempt from the requirement that it describe facts showing the need for immediate action and exempt from review by the Office of Administrative Law.[11]

Office of Tax Appeals

Beginning January 1, 2018, the BOE will no longer serve as the appellate body for tax appeals for corporate income and franchise tax, personal income tax, sales and use tax, and other excise taxes and fees. The BOE will continue to hear these appeals from July 1, 2017 to January 1, 2018. Appeals from decisions of the Franchise Tax Board (FTB) on protests and claims for refund related to corporation franchise and personal income taxes, and from decisions of the Department on petitions for redetermination and claims for refund related to sales and use taxes and other excises taxes and fees will be heard by one of several tax appeals panels under the OTA beginning January 1, 2018. Cases pending administratively at the BOE as of January 1, 2018, will then be heard by a tax appeals panel.[12] 

The OTA will be under the control of a director. The Governor will appoint the director, chief deputy director, and chief counsel, each of whom will hold office at the pleasure of the Governor. The appointment of the director is subject to confirmation by the Senate.[13] The OTA’s headquarters will be in Sacramento, and its hearing offices will be in Sacramento, Fresno and Los Angeles.[14]

The OTA will be the successor to, and vested with, all of the duties, powers, and responsibilities of the BOE necessary or appropriate to conduct appeals hearings.[15] The legislation establishes tax appeals panels within the OTA, and requires each tax appeals panel to consist of three administrative law judges (ALJs) designated by the director of the OTA.[16]   

Unlike current tax appeals before the BOE, ex parte communications with ALJs appointed to a tax appeals panel are prohibited. Beginning July 1, 2017, the legislation also prohibits ex parte communications with BOE members in relation to any BOE adjudicatory proceeding, including proceedings involving property taxes, insurance taxes, and alcoholic beverage taxes heard by the BOE even after January 1, 2018.[17] Since ALJs will be appointed by the OTA director, issues related to campaign contributions to, and recusals of BOE members will no longer exist in cases involving income tax, sales and use tax, and other excise taxes and fees.

The tax appeals panels will be required to conduct appeals hearings for tax and fee programs transferred from the BOE to the OTA, and the BOE will be prohibited from conducting such appeal hearings beginning January 1, 2018.[18] For these purposes, an “appeal” means any of the following:[19]

  1. A petition, including, but not limited to, a petition for redetermination, petition for reassessment, petition for reconsideration of successor liability, or petition for rehearing.
  2. Administrative protest.
  3. Claim, including a claim for refund.
  4. Appeal from an action of the Franchise Tax Board.
  5. Application, including, but not limited to, an application for administrative hearing.
  6. Any other item that may be scheduled for a hearing, including, but not limited to, requests for relief of taxes, fees, interest or penalties.

The tax appeals panels will be required to issue written opinions for each appeal within 100 days after rendering a final decision, and will generally be required to conduct adjudicative hearings and proceedings under the Administrative Procedure Act (APA).[20] 

Under the APA, an administrative decision must be in writing, be based on the record, include a statement of the factual and legal basis of the decision, and may not be relied on as precedent unless the agency designates and indexes the decision as precedential.[21] The statement of the factual basis for the decision shall be based exclusively on the evidence of record in the proceeding and on matters officially noticed in the proceeding.[22] The APA provides detailed procedural rules, including rules for subpoenas, discovery, motions, stipulations, protective orders, admissible evidence, judicial notice, and settlement conferences.[23] This is in stark contrast to the informal nature of current appeals before the BOE.

A person may be represented on an appeal before a tax appeals panel by any authorized person or persons, at least 18 years of age, of the person’s choosing, including, but not limited to, an attorney, appraiser, accountant, bookkeeper, employee, business associate, or other person.[24] While this is consistent with current BOE appeals rules, a representative would need to be familiar with the APA’s procedural rules adopted by the legislation to effectively represent a taxpayer before a tax appeals panel.

A decision of a tax appeals panel may be appealed by the party filing the appeal to the superior court in accordance with the law imposing the tax or fee. The standard of judicial review to be applied by the superior court is de novo.[25] Thus, taxpayers will continue to have a right to de novo review of an adverse administrative appeal decision to the California superior court by a suit for refund, and will continue to be required to pay the disputed tax before seeking judicial review of an adverse administrative ruling. The legislation does not provide a right to judicial review of an adverse decision of the OTA for either the FTB or the Department, which would be consistent with current practice.

By January 1, 2018, the OTA will be required to adopt regulations as necessary or appropriate to carry out its duties. Any rule or regulation may be adopted as an emergency regulation in accordance with the Administrative Procedures Act.[26] Until January 1, 2019, the adoption of emergency regulations by the OTA are exempt 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.[27]

Open Issues

There are numerous issues and questions that are raised by the legislation, including the following:

  1. For cases in the briefing stage before the BOE as of January 1, 2018, will the current SBE briefing procedures continue to apply throughout the case, or will a new set of procedural rules govern as of that date? The legislation does not address the procedural rules applicable to appeals pending as of January 1, 2018, where some, but not all briefs have been filed with the BOE.
  2. Will the same appeals conference procedures continue to apply to sales and use tax and other excise tax and fee cases currently pending in the BOE administrative process?
  3. For purposes of proceedings before the OTA, the term “appeal” in Government Code section 15671 is defined to include petitions for redetermination. It is our understanding that petitions for redetermination will be reviewed by the Department consistent with current practice, and the OTA will hear taxpayer appeals from Department decisions on petitions for redetermination.
  4. What will happen to appeals heard by the BOE before January 1, 2018, where no decision is issued, or a petition for rehearing is filed after that date?
  5. What effect will the new law have on the precedential value of prior BOE decisions? While formal opinions (income taxes) and memorandum opinions (sales and use taxes) will likely continue to be precedential, what about summary and letter decisions?
  6. Currently, the BOE abstains from deciding constitutional issues because Article III, Section 3.5 of the California Constitution provides that “an administrative agency, including an administrative agency created by the Constitution or an initiative statute, has no power (a) To declare a statute unenforceable, or refuse to enforce a statute on the basis of it being unconstitutional unless an appellate court has made a determination that such statute is unconstitutional; (b) To declare a statute unconstitutional…” Since the OTA was not created by the Constitution or by an initiative statute, will this prohibition apply to the OTA?
  7. The legislation does not specify how many tax appeals panels will be established. Given the volume of currently pending appeals before the BOE and the requirement to issue written decisions, it would appear that a significant number of tax appeals panels will be necessary.
  8. Since the APA requires an administrative decision be based on the record, will a record be required to be made before the tax appeals panel? Will this, in turn, affect who may act as a representative of taxpayers? How formal will the record be? Is a record necessary given that a decision of the OTA may be “appealed” to superior court by a taxpayer under existing refund procedures that will be subject to de novo review?
  9. Will the BOE continue to maintain a settlement bureau, and will a separate one be established within the Department?
  10. Under Government Code section 11420.10, an agency may refer the parties to alternative dispute resolution (e.g., mediation, arbitration). Will alternative dispute resolution become a common way to settle cases pending before the OTA? How would this coincide with the FTB’s settlement program?
  11. There will need to be separate directors, chief counsels, and other similar positions at the Department and the BOE. Where will BOE personnel be assigned who currently perform duties related to taxes which the BOE will continue to administer, but also taxes which the Department will now administer?
  12. Can all of the changes in the legislation be fully implemented by the July 1, 2017 and January 1, 2018 effective dates?




[3] BOE members George Runner, Jerome Horton, and Diane Harkey opposed AB 102. BOE members Fiona Ma and Betty Yee, and State Treasurer John Chiang supported it. Runner and State Senator John Moorlach have stated that AB 102 violates the state Constitution and policies restricting how the Legislature can make major structural changes to state departments, and have mentioned a ballot measure to restore the BOE’s powers on those grounds. See         

[4] Government Code section 15570.22.          

[5] Government Code section 15570.24(a).     

[6] Government Code section 15570.24(b).     

[7] Government Code section 15570.24(c).     

[8] Government Code section 15570(b).          

[9] Government Code section 15570.26(a).     

[10] Government Code section 15600(d)(1).   

[11] Government Code section 15570.40.         

[12] Government Code section 15674.               

[13] Government Code section 15670(b).         

[14] Government Code section 15673.               

[15] Government Code section 15672.               

[16] The ALJs must subscribe to the Code of Judicial Ethics adopted by the California Supreme Court for the conduct of judges, be active members of the State Bar for at least five years prior to designation to a tax appeals panel, and possess knowledge and experience with regard to the administration and operation of the tax and fee laws of the United States and California. Government Code section 15670(c).             

[17] Government Code section 15609.5(b).      

[18] Government Code section 15674(a) and (b).           

[19] Government Code section 15671(a).         

[20] Government Code sections 15674(a)(3) and 15675.             

[21] Government Code section 11425.10(a)(6) and (7).

[22] Government Code section 11425.50(c).    

[23] See, e.g., Government Code sections 11450.10, 11507.6, 11511, 11513, and 11515.     

[24] Government Code section 15676.               

[25] Government Code section 15677.               

[26] Government Code section 15679(a)(1).    

[27] Government Code section 15679(a)(2).   


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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