(1)The Franchise Tax Board administers the Personal Income Tax Law and the Corporation Tax Law and the State Board of Equalization administers the Sales and Use Tax Law and various other tax and fee laws. Counties, cities, and districts, as specified, are authorized to impose local sales or transactions and use taxes in conformity with the Sales and Use Tax Law. Amendments to the Sales and Use Tax Law are automatically incorporated into the local laws. Those laws generally require a claim for refund to be filed within specified timeframes based on the date of overpayment or specified board action if any amount has been overpaid, as specified. Under those laws, the rule of res judicata, which provides that a matter that has been adjudicated by a court of competent jurisdiction may not be pursued further by the same parties is applicable only if the liability involved is for the same reporting period as was involved in the case previously determined.

This bill would, notwithstanding existing law regarding the rule of res judicata, where a tax, fee, assessment, surcharge, or other amount levied or collected by the tax agency, which this bill would define to include the board and the Franchise Tax Board, has been determined to have been illegally levied or collected in a final and nonappealable decision of a court of competent jurisdiction, authorize any person who paid that tax, fee, assessment, surcharge, or other amount to file with the tax agency a claim for refund, within one year after the date of the final and nonappealable decision and would require the tax agency to refund the amount so paid. This bill would also require the tax agency to refund these amounts without the person filing a claim for refund when information in the tax agencies records is sufficient to identify the person. This bill would, upon appropriation by the Legislature, allocate the amounts necessary to make these refunds to the applicable tax agency.

(2)Existing law requires an action to recover property taxes levied on state-assessed property arising out of a dispute as to an assessment to be commenced only after payment of the taxes in issue and within 4 years after the latest of the dates that the State Board of Equalization mailed its decision or its written findings and conclusions, as provided.

This bill would instead require, where the tax assessed or allocated has been determined to have been illegally assessed or allocated in a final and nonappealable decision of a court of competent jurisdiction, the action to commence no later than one year from the date the court rendered that decision.

(3)This bill would make a legislative finding and declaration regarding the public purpose served by the bill.

Date of Hearing: April 27, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 867

Author:(Wagner) – As Introduced Ver:February 26, 2015

Majority vote. Fiscal committee.

SUBJECT: Tax administration: refunds: property tax: state assessment: actions

SUMMARY: Extends the statute of limitations for filing a claim for refund indefinitely in the case where a court has determined that a tax, fee, assessment, surcharge, or other amounts have been illegally levied or collected by the Franchise Tax Board (FTB) or the State Board of Equalization (BOE), as specified. Specifically, this bill:

1. Allows a person who has paid a tax, fee, assessment, surcharge, or other amount to a tax agency (collectively referred to as "the amounts") to file a refund claim, even if the statute of limitations for filing has expired, when a court of competent jurisdiction, in its final and nonappealable decision, has decided that those amounts have been illegally levied or collected by the tax agency.
   
   

2. Specifies that a claim for refund must be filed within one year after the date when the court's decision regarding the legality of the amounts paid becomes final and nonappealable.
   
   

3. Does not require a person to file a claim for refund in order to recover the illegally levied or collected amounts if the tax agency has sufficient records to identify the person that paid the amounts, as provided.
   
   

4. Requires a tax agency to refund the amounts paid, plus interest, when:

1. A person has filed a claim for refund, either within one year of the court's decision or prior to the effective date of this bill, if the tax agency has not yet refunded those amounts; or,

2. Information in the tax agency’s records is sufficient to identify the persons that have paid the amounts and the person’s current address, the date of payment, and the amount paid.

5. Provides that, for purposes of bringing an action against the tax agency for recovery of the amounts claimed as an overpayment, the statute of limitations does not start running until after the extended one-year period for filing a claim for refund for those amounts has expired.
   
   

6. Applies to a property tax levied on state-assessed property where the court of competent jurisdiction issues a final and nonappealable decision that the property tax was illegally assessed or allocated.
   
   

7. Does not apply to transactions and use taxes imposed by local governments in accordance with Part 1.6 (commencing with Section 7251) of Division 2 of the Revenue and Taxation Code (R&TC).
   
   

8. States that, upon appropriation by the Legislature, the amounts necessary to make refunds shall be allocated to the applicable tax agency.
   
   

9. Defines a "tax agency" as either the FTB or the BOE.

EXISTING FEDERAL LAW:

1. Requires taxpayers to file a claim for refund or credit with the Internal Revenue Service (IRS), prior to filing a suit in federal court for the recovery of any tax that is alleged to have been erroneously or illegally assessed or collected, any penalty claimed to be collected, or any sum alleged to be excessive or wrongfully collected.
   
   

2. Prescribes that a taxpayer must file a suit for refund within two years of the date that the IRS notice disallowing the underlying claim, in whole or in part, was mailed.
   
   

3. Provides that, if the IRS fails to take action on a claim for refund or credit within six months of the date of filing, a taxpayer may file a suite for refund in federal court.
   
   

EXISTING STATE LAW:

1. Limits the time period within which a person may file a valid claim for refund with the FTB or BOE for taxes, fees, assessments, surcharges or other amounts, including applicable interest or penalty.
   
   

2. Allows a taxpayer, in the case of an income or franchise tax, to file a claim for refund within four years from the date when the tax return was timely filed, four years from the due date of the tax return, or one year from the date of any overpayment. (R&TC Section 19306.)
   
   

3. Requires a claim for refund to be in writing and state specific grounds for refund.
   
   

4. Provides that, in the case the FTB fails to mail a notice of action on any refund claim within six months after the taxpayers has filed the claim, the taxpayer may consider the claim disallowed and may either file an appeal with the BOE or a suit in court to recover the refund amount claimed.
   
   

5. Specifies that interest on a refund claim is calculated from the date of overpayment to 30 days preceding the date of the refund warrant.
   
   

6. Allows a person, in the case of an overpayment of tax, fee, assessment, surcharge or other amounts administered by the BOE, to file a claim for refund no later than three years from the return due date for the period for which the person made the overpayment, six months from the overpayment date, or, for a payment made pursuant to a determination, six months from the date the determination became final. (R&TC Section 6902.)
   
   

7. Prescribes a different time period for persons who claim a refund for an overpayment to the BOE if collected by means of a levy, lien, or other enforcement procedure. For this type of overpayment, the person may file a valid refund claim within three years from the date the BOE collected the overpayment. (R&TC Section 6902.3.)
   
   

8. States that a person’s failure to file a refund claim within any of these time periods invalidates the claim and prevents the FTB or the BOE from making or allowing a refund or credit, regardless of the merits of the claim.
   
   

9. Requires the BOE to assess market values for public utilities and railroads, as provided by the California Constitution, and requires payment of taxes prior to commencing an action to recover state-assessed property taxes arising from a disputed assessment. Provides that this action must commence within four years after the date the BOE mailed either its decision or its written findings and conclusions, whichever is later.
   
   

FISCAL EFFECT: Unknown, but the FTB notes that the potential revenue loss to the General Fund may be in the billions.

COMMENTS:

1. The Author's Statement. The author provided the following statement in support of this bill:
   
   

"Existing law limits the time period that an individual may file a valid refund claim with the Board of Equalization (BOE) or the Franchise Tax Board (FTB) for a tax, fee, assessment, surcharge, or interest, or penalty overpayment. Failure to file a claim for refund within the specified time period prevents an individual from being able to file for a refund at a later date.

"Even if a tax, fee, assessment, surcharge, or other amount is later declared unconstitutional or illegal, taxpayers are only eligible to receive refunds if they have exhausted all their administrative appeals remedies."

2. Arguments in Support. The proponents of this bill state that under existing law, "[T]axpayers are precluded from recovering taxes collected illegally unless they have exhausted their administrative remedies and jumped through other procedural hoops." The proponents argue that the "current process for obtaining a refund places taxpayers in an unfair predicament, as many taxpayers are not even aware of the potential that an assessed tax is illegal and that they need to challenge it in order to obtain a refund." The proponents note that current law places "the financial burden on the taxpayers as he/she is forced to not only pay the tax, but also the legal costs associated with challenging the tax through the administrative process – and ultimately the court – in order to obtain a refund." The proponents assert that this bill "would resolve this unfair predicament for a taxpayer." Finally, they argue that neither the state nor any local government "should be able to retain the revenue from an illegally assessed tax solely because a taxpayer did not pursue an administrative appeal or petition to contest the tax before a court deemed the tax unlawful."
   

3. Background: What is the Problem? The California Constitution provides "[n]o legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature." (Cal. Const., art. XIII, Section 32.) This language has been broadly construed to bar not only injunctions, but also a variety of prepayment judicial declarations or findings which would impede the prompt collection of a tax. (See, e.g., State Bd. of Equalization v. Superior Court (1985) 39 Cal. 3d 633, 217.) Thus, the California Constitution forbids a court from adjudicating the validity of a tax before the tax has been paid in full. In order to challenge a tax, the taxpayer must first pay it, and then follow specified statutory procedures for recovery. A taxpayer may not go into court and obtain adjudication of the validity of a tax which is due but not yet paid. (State Bd. of Equalization v. Superior Court (1985) 39 Cal. 3d 633.) The constitutional power "to control tax refund suits requires strict adherence to the administrative procedures set forth by the Legislature before a court action can be filed." (Shiseido Cosmetics (America) Ltd. v. Franchise Tax Board (1991) 235 Cal.App.3d 478, 488.)
   
   Existing statutory law provides that a tax refund action is the exclusive means of obtaining judicial review of state tax proceedings and that exhaustion of administrative remedies is required prior to commencing an action in a Superior Court.¹ Furthermore, existing law, both state and federal, limits the time period during which an individual or corporate taxpayer may file a valid claim for refund to recover an overpayment of the tax. Under state tax laws, a claim for income or franchise tax refund must be filed with the FTB within: (a) four years from the date the tax return was timely filed, (a) four years from the due date of the tax return, or (c) one year from the date of any overpayment. (R&TC Section 19306; Section 19384.) For an overpayment of the sales or use tax, fee, assessment, surcharge or other amounts, a person may file a valid refund claim with the BOE no later than: (a) three years from the return due date for the period for which the person made the overpayment, (b) six months from the overpayment date, or (c) for a payment made pursuant to a determination, six months from the date the determination became final. (R&TC 6902.) In the case of an overpayment that the BOE collected by means of a levy, lien or other enforcement procedure, the person may file a valid refund claim within three years from the collection date. Finally, for an overpayment of property tax levied on public utilities and railroads, a refund action must commence four years after the BOE mailed its decision or its written findings and conclusions, whichever is later, as provided. A person's failure to file a refund claim within these time periods prevents the tax agency from allowing a refund or credit, regardless of the merits of the claim.
   
   Thus, if a tax is declared unconstitutional or illegal by the court, taxpayers are eligible to recover the tax paid only if they have filed valid claims for refund and have exhausted all of their administrative remedies. In other words, if a person failed to file a timely claim for refund, no refund may be allowed, despite a court's determination regarding the legality of the tax. The author asserts that this bill is needed to "fix this problem by allowing [taxpayers] to recoup their money as quickly and painlessly as possible."
   
   

4. The Proposed Solution. First, this bill would modify procedures for filing a claim for refund if a tax, fee, assessment, surcharge or other amount has been determined by a court to have been illegally levied or collected. As noted above, existing law generally requires taxpayers or feepayers to claim a refund within three or four years from the return due date or one year or less from the date of overpayment. In contrast, this bill would authorize a taxpayer or a feepayer to recover the illegally collected amounts, plus interest, within one year from the date when the court's decision becomes final and nonappealable. Furthermore, this bill would relieve taxpayers from the obligation to file this claim for refund altogether in some circumstances, such as when the tax agency is able to identify, from its records, the person that paid the tax, his/her address, the date of the payment and the amount paid. In other words, this bill would repeal the existing filing requirement imposed on taxpayers and, instead, would require a tax agency to initiate the payment of refunds if information in its records is sufficient to identify the persons that have paid the amounts. In addition, a person who has filed a claim for refund prior to the effective date of this bill would not be required to file another refund claim to recover the amount claimed as an overpayment if the tax agency has not yet refunded the overpayment. Finally, this bill appears to toll the statute of limitations for purposes of bringing an action against the tax agency for recovery of the amounts claimed as an overpayment by stating that the statute of limitations does not start running until after the extended one-year period for filing a claim for refund for those amounts has expired.
   
   

5. Indefinite Extension of the Statute of Limitations (SOL) for Filing Refund Claims: A Balancing Act. This bill highlights the innate tension between the societal desire to remedy the wrong and the practical, yet maybe harsh, realities of a tax system administration. A regular statute of limitations resolves this tension, but in a very imperfect way. As pointed out by the supporters of this bill, many taxpayers are not even aware of the potential that an assessed tax that they paid may be illegal and, thus, the existing process for obtaining a refund seems unfair if the tax is invalidated by the court, after the expiration of the SOL for filing a refund claim. However, an indefinite SOL, or rather a lack thereof as proposed by this bill, presents a challenge as well. This bill would require both taxpayers and tax agencies to maintain taxpayers' records in perpetuity, imposing a huge burden on both, and would eliminate any possibility for final resolutions of disputes between those parties. As explained by the United States Supreme Court, with regard to the federal SOL, "[i]t probably would be all but intolerable, at least Congress has regarded it as ill-advised, to have an income tax system under which there never would come a day of final settlement and which required both the taxpayer and the Government to stand ready forever and a day to produce vouchers, prove events, establish values and recall details of all that goes into an income tax contest. Hence, a statute of limitation is an almost indispensable element of fairness as well as of practical administration of an income tax policy." (Rothensies, Collector of Internal Revenue v. Electric Storage Battery Co. (1946) 329 U.S. 296, 301 (emphasis added).) Federal courts have stated that fixed deadlines – statute of limitations - may appear harsh because they can be missed, but the resulting occasional harshness is redeemed by the clarity imparted. (Prussner v. United States (7th Cir. 1990) 896 F.2d 218, 222-223 [quoting United States v. Locke (1985) 471 U.S. 84; United States v. Boyle (1985) 469 U.S. 241, 249].)

In addition, an open-ended SOL would pose a problem for the State's revenue system. Article XIII, Section 32 of the California Constitution permits tax refunds only "in such manner as may be provided by the Legislature." The Supreme Court of California explained that the policy “behind Section 32 is to allow revenue collection to continue during litigation so that essential public services dependent on the funds are not unnecessarily interrupted." (Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277, 283-284.) To implement this policy, "[A] specific statutory refund procedure has been provided for taxpayers…." (Ibid.) An open-ended SOL would undermine this policy by potentially requiring the state to make payments on refund claims, including interest, in connection with the tax or other amounts that were originally collected years ago. The Committee may wish to consider whether the approach suggested by this bill – to allow an unlimited SOL for certain refund claims – is a balanced and fair solution to the problem.

6. Is a Refund Claim Necessary? In California, the only traditional way for a taxpayer to challenge the imposition of taxes in court is by filing a claim for refund for taxes paid. The general rule in California requires that a taxpayer seeking "judicial relieve from an erroneous assessment must…exhaust [ ] his remedies before the administrative body empowered initially to correct the error." (Security-First Nat. Bk. v. County of L.A. (1950) 35 Cal.2d 319, 320.) The claim-of-refund statutes have been viewed by courts as having a rational basis since a refund claim, filed in advanced of litigation, "provides the state with official notice that a taxpayer will make a claim for moneys paid to the treasury." (Shiseido Cosmetics Ltd. v. Franchise Tax Board (1991) 235 Cal. App. 3d 478, 489.) Furthermore, because "the refund claim must state the specific grounds upon which it is founded [R&TC Section 26074], the claim of refund allows the state to evaluate the merits of the taxpayer’s claim and to plan fiscal policy accordingly." (Ibid.) Finally, the court in Shiseido concluded that the "[a]pplicable statutes requiring filing of a claim for refund are clear and straightforward" and that the "filing of a claim for refund is a simple and unburdensome act." (Ibid.) This constitutional requirement that actions for refund of allegedly illegal taxes be brought only in the manner prescribed by the Legislature rests on the premise that strict legislative control over the manner in which tax refunds may be sought is necessary so that governmental entities may engage in fiscal planning based on expected tax revenues. (Cod Gas & Oil Co. v. State Bd. of Equalization (1997) 59 Cal App 4th 756; McCabe v. Snyder (1999) 75 Cal App 4th 337.)
   
   This bill proposes a novel approach whereby taxpayers will be relieved from the obligation to file a claim for refund when the tax agency is able to identify, from its records, the person that paid the tax, his/her address, the date of the payment and the amount paid. Accordingly, this bill places the burden of maintaining the records and computing the amounts to be refunded on the tax agencies. As such, this bill would require tax agencies to search the taxpayer's entire tax history in trying to identify the eligible persons and then calculate the refund amounts. The Committee may wish to consider whether it is advisable to relieve taxpayers from the requirement to file a claim for refund, especially in light of the fact that it would place an enormous administrative burden on tax agencies.
   
   

7. The Scope of the Bill. This bill refers to a tax, fee, assessment, surcharge, or other amount that have been determined to "have been illegally levied or collected." Since that phrase is undefined, that phrase is open to various interpretations. Does that phrase mean the legality of the actual tax imposed, such as for example, the Smog Impact Fee that was determined to be unconstitutional? Or does that phrase include a method of computing the tax or fee? For example, would the Court of Appeal decision regarding the constitutionality of a method of income apportionment qualify as eligible under the bill, thus triggering the extension of SOL? The author may wish to define this phrase to minimize disputes between taxpayers and the tax agencies.
   
   

8. An Individual vs. "Broad Brush" Approach. The Legislature has no lack of experience in fashioning a remedy in cases where a tax, fee or method of computing the tax or the fee was held by courts to be illegal or unconstitutional. The Legislature dealt with those issues on a case-by-case basis and enacted appropriate legislation to remedy the problems. For example, when the Smog Impact Fee was determined to be unconstitutional, the Legislature enacted R&TC Section 6909 to allow persons who paid the fee to receive a refund even when the claim for refund would have been outside the statute of limitations. Just recently, after the court's decision in Cutler v. FTB, (2012) 208 Cal.App.4th 1247, the Legislature enacted a statute in 2013 to address the issues relating to gain deferrals and exclusions of qualified small business stock. Each case presents its own challenges and opportunities and allows the Legislature to determine the appropriate remedy, taken into account the fiscal conditions of the state's General Fund. The Committee may wish to consider whether an individual approach is a more appropriate way of dealing with the problem of refunding illegal taxes, fees, and assessments to taxpayers.
   
   

9. Current Litigation. As pointed out by the BOE staff, the Howard Jarvis Taxpayer Association filed a class action lawsuit on October 3, 2012, seeking to overturn the California Fire Prevention Fee, claiming that the fee was illegally assessed. Litigation can take years before the matter is finally resolved. If the court decides that the fire fee is illegal, taxpayers, in general, are allowed to recover the fire fee for the four years preceding the court's final decision; this is based on the four-year statute of limitation. Taxpayers who were parties to the original suit filed by the Howard Jarvis Association, however, can recover fees going back to the original date of enactment.

In order to protect a taxpayer's claim without being subject to the four-year statute of limitation, a taxpayer can also file a protective claim for refund. A taxpayer can file a claim with the FTB to withhold any action on the claim while litigation is still pending. To file a claim for refund, a taxpayer must submit a letter to the FTB containing the amount of amnesty penalty and the statement requesting the correspondence to be held pending the outcome of pending litigation. Without filing a claim for refund, a taxpayer who is not a party to the original claim would be limited to the general four year statute of limitation.

10. What is Res Judicata? Res judicata is a common law doctrine barring re-litigation of causes of action or issues. Res judicata promotes judicial economy, ensures repose for the parties, and strengthens the court system in general. The term "res judicata" is used to include both claim preclusion and issue preclusion. Claim preclusion prevents re-litigation of the same cause of action in a second suit between the same parties or parties in privity. Issue preclusion precludes re-litigation of issues argued and decided in prior proceedings. Several provisions of the R&TC limit the applicability of res judicata to specific reporting quarters or tax years, which requires a party to re-litigate the same issue for a different reporting period. (See generally R&TC Sections 7176, 38805, 19802.) This bill applies the normal common law rules of res judicata to refund claims as specified by this bill, which could potentially allow a taxpayer who was not a party to the original case to bring a claim for refund by citing the court's original decision.
    
    

11. Actions against a Tax Agency. Under the provisions of this bill, a taxpayer can file a claim for refund for illegally levied taxes within a year of the final court decision. However, subdivision (f) of this bill further allows a party to bring an "action" against the taxing agency for recovery of the amount claimed as an overpayment of the illegal tax after the one-year refund claim period. The purpose of this provision is unclear to the Committee staff. Is this provision intended to simply toll the SOL for filing an action in court? Does this provision allow a taxpayer to file a claim for refund in superior court without exhausting all administrative remedies? The doctrine of “exhaustion of administrative remedies was evolved by the courts "to promote comity between coequal branches of government and to relieve overburdened courts from the need to deal with cases where effective administrative remedies are available." (Bozaich v. State of California (1973) 32 Cal.App. 3d 688, 698.) The requirement of exhausting administrative remedies applies even when the taxpayer challenges the legality of a tax under statutory or constitutional grounds. (Steinhart v. County of Los Angeles (2010) 47 Cal.4^th 1298.) Without a compelling reason from the author as to why this provision is needed, the Committee may wish to consider deleting it from this bill.
    
    

12. Implementation Concerns of Tax Agencies: Both the FTB and the BOE staff in their analyses of this bill highlighted several implementation concerns. For example, the FTB staff states that the enactment of this bill would require both taxpayers and the FTB “to maintain tax records in perpetuity in order to demonstrate entitlement to a refund should a court deem an amount paid was illegally levied or collected at some future date, thereby eliminating the finality of the tax system and creating a burdensome record retention requirement.” The BOE staff discloses that the administrative impact of this bill is unknown, but will include an increased number of refunds, BOE policy and guideline modifications, and outreach activities. However, no refunds will be paid out until the Legislature appropriates sufficient funds to the BOE and FTB for this purpose. Finally, the FTB staff points out that this bill refers to a "final and non-appealable decision of a court of competent jurisdiction." Under the California Constitution, Article III, Section 3.5, a state agency is required to enforce a statute, unless and until a court of appeal declares the statute unconstitutional (invalid or unenforceable). The BOE staff suggests an amendment to this bill to substitute the phrase "an appellate court of competent jurisdiction" for the phrase "a court of competent jurisdiction" in order to conform the provisions of this bill to the California Constitution.

REGISTERED SUPPORT / OPPOSITION:

Support

California Bankers Association

California Chamber of Commerce

California Manufacturers and Technology Association

California Taxpayers' Association

Howard Jarvis Taxpayers Association

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098