Assembly Standing Committee on Revenue and Taxation

Do you want to sit over here. Mister Gipson, or over there? Okay. No, he's fine.

All right. Okay, so both down or both up. When you want to start? Yes. All right, we will go ahead and get started then. Good morning and welcome to todAy's hearing of the Assembly Committee. All right, I think I must forget to do that a lot because that was not.

Well, good morning and welcome to todAy's meeting of the Assembly Committee on Revenue and Taxation. In order to facilitate the goal. Do we have an issue with it? Is the microphone not on?

Can you hear me now?

How about now? All right. Okay. My consultant has. Yeah, how about now? All right. zero, maybe I wasn't sitting close enough. All right. In order to facilitate the goal of hearing as much from the public within the limits of our time, we will not permit conduct that disrupts, disturbs, or otherwise impedes the orderly conduct of legislative proceedings.

We will not accept disruptive behavior or behavior that incites or threatens violence, even veiled threats. This hearing is being live streamed on the Assembly's website and a recording will be posted. So hopefully this will serve as a resource that can be referred to in the future.

I know some of our Committee Members were unable to join us in person and they are watching online as well as other interested stakeholders. Before we start, I would like to thank the Members and panelists in attendance today. Today's oversight hearing is focused on tax Administration in the Golden State.

Specifically, we will be focusing on two state entities that were created in 2017 as part of the Taxpayer Transparency and Fairness act, the California Department of Tax and Fee Administration, and the Office of Tax Appeals.

As our panelists will explain over the course of the hearing, California is unique compared to other states because we have multiple state entities involved in tax Administration. This can make navigating an already complex subject even more confusing for taxpayers.

Despite robust disagreements about taxes in General, there is a broad consensus regarding the principles that should guide sound tax policy, and I've tried to prioritize them during my tenure as chair of this Committee. A few of these principles are as follows. Transparency and certainty taxpayers need to know what their obligations are so they can plan accordingly.

Convenience and security taxpayers must be able to fulfill their obligations in a way that isn't overly onerous, while ensuring that their information is protected and private, and fairness and accountability. Taxpayers must be confident that the rules are being applied evenly to similarly situated taxpayers and that others aren't receiving special treatment.

This hearing will be an opportunity for Members of this Committee and the public to develop a deeper understanding of California Department of Tax and fee Administration and the Office of Tax Appeals, and the history leading up to their creation. The hearing will consist of two panels.

The first panel will feature two experts from the Legislative Analyst Office who I've asked to explain some of the constitutional and legislative history of tax Administration in California. The second panel will feature the leadership from both CDTFA and OTA who will explain the accomplishments and challenges their organizations have faced since their creation.

Finally, we will close with an opportunity for Members of the public to make public comments. With all this in mind, if any of my colleagues have any introductory remarks, you are welcome to share them now. All right, thank you. For the first panel, we will have a q and a portion for the entire panel at the end.

Panelists, after you finish your presentation, please remain seated so that Members may ask questions. And I would like to welcome for our first panel Seth Kirsten from the Legislative Analyst's office to provide a historical overview of the Tax Administration in California.

Mister Alex Benz with the LAO is unfortunately not joining us today due to illness, and we are wishing him a speedy recovery. Mister Kirsten, please begin when you are ready.

Thank you. Yes, I'm Seth Kerstein with the Legislative Analyst's office. I'll provide some historical perspective on how the state ended up with its current configuration of tax agencies. Essentially the origin story of the two entities that you'll be over, which you'll be conducting oversight today. And I've distributed a testimony.

I believe a copy also will be appearing on a monitor nearby. So next slide, please. I'll start on the first page of that handout, which has a little flow chart. I think maybe that might be someone else's up there. So let's not look at the monitor quite yet.

I'll start on the first page of the handout, which has a little flow chart illustrating. So you should look something like this right here. Little flow chart illustrating the landscape of California taxes. That's the one, yes. Thank you, Madam Chair. The landscape before the 2017 changes.

So at that time, the state's two main tax agencies were the Franchise Tax Board, known as FTB, and the State Board of Equalization, known as boeheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheheh. FTB administered personal and corporate income taxes, and Boe administered the sales and use tax, as well as dozens of smaller tax and fee programs.

And Boe also heard appeals for all state taxes. Although BoE was established initially under the state constitution, most of the duties that it had going into 2017 were assigned by statute. So for simplicity, I'll just note that this flow chart here and a similar.

One later in the handout do not depict various other state and local entities involved in these tax programs. As the chair mentioned earlier, that would be even more complex. So next slide, please.

Turning to the next pace of the handout, I'll note that boes historical structure blended together some of the defining characteristics of legislative, Executive, and judicial branches of government under a single entity. And so those multiple roles fundamentally conflict with each other.

If you're elected to be an advocate for a particular constituency or a particular issue, that's going to fundamentally conflict with the duty to deliver impartial rules on tax disputes. If you have representatives elected from four.

Geographically distanced districts overseeing state tax Administration, that fundamentally conflicts with the duty to conduct those administrative activities in a uniform, consistent fashion throughout the state. And so these inherent organizational conflicts had been clear for quite some time.

For example, our office's analysis of the 194950 budget Bill noted, quote, because of the personal feeling of responsibility for their district, the individual board Members frequently require certain deviations from the adopted policy of the board. Next slide, please.

So, turning to the next page of the handout, I'll just briefly summarize some findings from evaluations conducted by various state entities that illustrate some of the concrete consequences of BoE's original organizational structure. So, for example, in the nineties, the Legislature approved 250 new audit positions for BoE.

And in 1999, the State Auditor reported that BoE had redirected half of those positions to other activities aside from direct auditing functions.

And so, in response to that, in subsequent budget acts, all the way till now, the line items for the tax agencies have included budget Bill Language called provision one, which expressly prohibits redirecting resources away from direct auditing or collections activities.

Then, in 2015, the state controller reported that problems with BoE's internal accounting and administrative controls had led to misallocation of some sales tax revenues.

In March 2017, the Department of Finance found that individual board Members had intervened in administrative activities, resulting in inconsistencies in operations and activities contrary to state law and to budgetarian legislative directives, including the aforementioned provision one.

And then later in 2017, the State Personnel Board published a report describing some serious problems with Boe's personnel policies and hiring practices. Next slide, please. So, turning to the next page of the handout, I'll describe the state's response to these institutional problems. In 2017, the Legislature passed and the Governor signed AB 102 and AB 131.

And so these two laws transferred BoE's statutory responsibilities to two new entities that you'll be discussing today, the Department of Tax and fee Administration known as CDTFA, and the Office of Tax Appeals, known as OTA. BoE retained its constitutional authority over taxes on property insurance and alcoholic beverages. Next slide, please.

So, turning to the final page of the handout, we have one more flowchart, and that depicts the current structure of state tax Administration and appeals. So, through interagency agreements and CDTFA carries out many administrative tasks for taxes on BoE's constitutionally authorized insurance and alcoholic beverage tax programs on behalf of Boe.

So BoE's tax Administration efforts and practice are largely focused on property tax programs. OTA is responsible for hearing most tax appeal cases, including income taxes and sales taxes. And these cases are heard by panels of, in General, three administrative law judges in Sacramento, Fresno, or Los Angeles.

That concludes my comments, and I'd be happy to take any questions that you have.

Do we have questions?

Mister Gibson, thank you very much. I appreciate. I want to also thank the chair for one convening this informational hearing and bringing us all together to look at what transpired since 2017 after the Legislature, as well as the Governor, took action to remove some authority. Right. So I'm concerned about how things have been.

You've talked about the past, and I appreciate your articulation. I think that, you know, we certainly know what we did in terms of the authority, but how are things going forward now? When you mention the three administrative law judges, do the administrative law judges hear or do they even communicate with taxpayers?

Like, taxpayers have questions because before they were able to reach out to the board Members themselves because they were natural constituents. Now it's changed since 2017 and it's been restructured.

So I'm just curious, how is that process now with three administrative law judges even taking any comments or even hearing from the taxpayers or the businesses in the state, as well as if you can talk about the rate of denial, if you will, in terms of how many times that the, since 2017 that the actual administrative law judges vote in favor or against the taxpayer.

Sure. So thank you. Thank you for the question. Mister Gibson, two questions, it sounds like. So one, I think, you know, OTA will be on the next panel, I think, able to go into a lot more detail about their process for communicating with taxpayers, but I can sort of maybe make one or two broad comments on that.

Right, but you, right, but you talked about what happened prior to. So I'm assuming that you would have some knowledge of what's going on now since you talked about the past a little bit.

A little bit. I mean, I think what I would say is the more fundamental difference. I mean, sort of before, so there were opportunities for taxpayers to communicate with Boe. Now there are opportunities for taxpayers to make their case before a panel of three, in General, three administrative law judges.

I think there are some situations in which it could be a smaller panel, potentially, but.

So, I'm sorry, did you say there's another panel?

I think there was. I don't recall exactly. I think Ota would be able to speak to the details, but I think there was a law passed subsequently that, for certain types of cases, allowed taxpayers to elect to have their appeals heard through a different process. But I would need to look into that probably.

I'm sure OTa could speak to that in more detail. But I think sort of the basic standard setup is three administrative law judges. But anyway, it's your. To your first question, Mister Gibson.

I think, really, the fundamental difference to me is that the process through which taxpayers who are appealing, the process through which they communicate with the folks who are deciding the cases is much more structured.

I would say one of the concerns with BoE was sort of the, there was, weren't a whole lot of guardrails around what, in sort of judicial contexts, or in this case, quasi judicial, are referred to as ex parte communications.

And so in the case of Ota, my understanding is there are some pretty strict rules governing the ways in which communications occur between either party and the appeal and the panel that's, that's hearing their case. And I think the intent of that is to allow, allow all sides of the case to have all of the relevant information.

So beyond that, I think Ota might be able to speak in a bit more detail.

Okay, thank you.

I believe the other, let's see, the other question was sort of the rate. I don't have numbers about the rate as far as which side tends to prevail. I guess my one maybe comment on that is, I'm not sure.

Ultimately, you know, at least the way we view the job of sort of an entity who's determining the outcome of tax appeals, whether it's ota, boe, or whoever, is to come up with a ruling that sort of best reflects the facts and best reflects the law.

And so, you know, there's processes by, through which taxpayers might decide to appeal. And it's not really clear to me, sort of in abstract terms, you know, what rate would be the correct one, except that whichever one ends up following the facts and following the law as closely as possible.

So I'm not sure, you know, if the number were 20%, 80%, or whatever the case may be, that I think it would take some additional information or additional context to really try to ascertain whether that was appropriate.

I don't think he answered my question, but. Okay. Thank you.

What we were really hoping. Is this. Right now, I don't know. Have things changed? We're hoping in this hearing, there are just a few of us left from back in 2017 when this decision was made. So we were hoping in this hearing to kind of dig in a little deeper as to what happened during that timeframe.

So can you talk about what was done to ensure a smooth transition, transition from the duties of BoE to CDTFA and OTA and were staff retained and transferred over to the new entities and what. In what numbers? If so, yeah.

So I can, I don't have numbers on that, but I can give you just a brief overview. So this was something that when those laws were passed, there was some statutory guidance on this.

So the Legislature, through those laws, sort of had a particular vision for sort of what was, how to strike that balance, and in particular for all of the tax and fee programs that were transferred under those laws. The laws also transferred all of the civil service staff from BoE who were working on those programs to CDTFA.

So I think the intent there was to provide a significant amount of continuity. Of course, there's sort of trade offs involved with that, but I think that, you know, that's sort of one reasonable choice, and that's sort of what, what those laws did. You know, with OTA, there was nothing really analogous in the statute.

It was sort of a little bit of more a flavor of starting from scratch, I suppose. But having said that, quite a few of the folks who work at OTA do have some prior work experience at Boe or CDTFA. So there's some amount of institutional knowledge, I think, that still plays a role there.

So in your opinion, was it a smooth transition?

There weren't. It's hard to say. I'm not sure. I'm really in a great position to judge that. It certainly wasn't. I wouldn't call it especially chaotic. Whether it was smooth or only somewhat smooth, I'm not sure.

Is there any other state that has an elected body deciding tax appeals?

I'm not aware of one. We haven't sort of done a comprehensive review of all 50. Certainly there's not one that we're aware of.

And then how does the current leadership structure at CDTFA and OTa compare to other California agencies and departments?

Yeah. So CDTFA's structure is very similar to many other state departments. Voters elect the Governor. The Governor appoints the secretary of the government operations agency, who oversees about a dozen departments, including CDTFA. And then the Governor also appoints the Department Director and some of the other Executive staff. So that's pretty standard as far as state departments go.

Ota is different. OtA also has a Director who's appointed by the Governor. But unlike a typical Department, that Director, there's no agency secretary or sort of equivalent person that the Director reports to.

And I guess just in terms of leadership structure, the one other thing I would note about OTA is sort of the relatively narrow statutory scope of the director's powers. I think the intent there is sort of to preserve the Independence of the Panels.

So the government code expressly prohibits the Director from directing, overseeing or otherwise being involved in the decision making process of the tax appeals panels. Right.

And then have you done any audits of, has the Legislature requested any audits of CDTFA and OTA?

So, I'm not aware of any with OTA. I mean, since the transition to CDTFA, the State Auditor has, has published several findings, all of which pertain to practices that began under BoE and continued for various periods under CDTFA.

So I think the ones we're aware of are there was a problem with the way that paid leave was recorded on some employees timesheets. There was a problem with the way, or at least from the Auditor's perspective, a problem with the way CDTFA estimated cigarette prices for the purposes of calculating tobacco tax rates.

Another sort of, in the Auditor's serve tobacco tax evaluation, they also took issue with the adequacy of the documentation that CDTFA auditors required for tobacco distributors to document tobacco distributors tax liabilities and audits.

And then sort of the one, I think the one that maybe is most notable to us is there was starting under BoE and then to, I guess, recurring at 1.0 or either continuing or recurring at some point since the transition to CDTFA.

There was a Department administrator who was engaged in activities that were incompatible with their duties, including preparing tax returns for clients who had sellers permits with CDTFA.

So I think that one, I mean, on the whole, I would say the scope and nature of that collection of findings doesn't suggest to us that sort of the widespread systemic problems at BoE have persisted since the transition to CDTFA. But having said that, I mean, that last one, it was just one individual.

But I think the concern there would be that it is sort of strongly reminiscent of that organizational culture that the Legislature intended to change, I think, when it established CDTFA. And so it's, I would take it kind of as a reminder that the Department just needs to be extremely vigilant about things of that nature.

Okay. And then since Boe's responsibilities have been reduced, are you seeing that they are focusing more on the issues that are relevant to their remaining duties?

Yeah, that one. That's a very good question. I don't know if we can speak to that one very well. I think that would maybe be a question best directed to Boe.

All right. And so about the 2018 Supreme Court's decision. Wayfair decision represented a massive shift in state level tax Administration. When California passed AB 147, which sought to codify Wayfair, it was CDTFA's responsibility to implement these significant changes. So how does, how did this affect CDTFA in the first few years of its existence?

Yeah, so I think some of the key things to note here go back to around 2011, and at that time, there was a period of perennial budget challenges.

And one of the, I think that was a time when the Legislature passed a couple laws that, first of all, within the existing sort of understanding of the commerce clause, sort of went as far as they could do to expand sort of use tax collection, but then also contained a provision that was sort of a dormant requirement for out of state retailers to, to collect and remit use tax to basically whatever extent would be authorized under federal law.

So then when the Supreme Court issued that Wayfair ruling that you're referencing in June 2018, that triggered that dormant statutory requirement. And so at that point, given what the laws were, at that point in time, CDTFA had a duty to put those into practice.

And so later in 2018, they issued a notice that retailers who met certain requirements would need to register to pay use tax the following spring.

And the tricky thing there is that this combination of state statutes and the Supreme Court ruling, it didn't really provide crystal clear guidance on exactly how to impose these tax collection requirements or I, or sort of what would meet the legal standards exactly that the Supreme Court was establishing.

And so that's when the Legislature stepped in and passed AB 147 that you referenced to really provide that clarification and that additional structure in some areas that were probably a little unclear coming out of the wayfair decisions. So one notable thing here is that through that process, CDTFA did what the law directed it to do.

First, the law said one thing, and that's what CDTFA did, and then the Legislature made a policy decision to provide this additional structure, clarification, sort of set things up according to the Legislature's vision, and then CDTFA subsequently did that.

And so I guess your question sort of one aspect of it is in a counterfactual world where we had had Boe, would Boe have done the same thing? I mean, it's really hard to say. I would say their track record doesn't, wouldn't necessarily inspire confidence, but it's just really hard to say.

Okay. All right, that's all my questions. Assembly Member Ting.

Thanks for being here. Appreciate your report. I think it omitted a few things. I do want to go back to my colleague's original question around the resolution issue. Just because there was something in the staff report regarding the resolution of appeals under. And we're going to get to the future part.

We're just going to go through the past for right now, the next panel is going to talk about the current status. But just to quote from the staff report regarding a 2010 Bureau of National Affairs Report, that specifically the report found that in cases with contributions amount of 250 and less, taxpayers won 30% of the time.

Taxpayer winning rate increased to 53% when contribution amounts were between 250 and 16,000. And then finally taxpayers prevailed at a clip of 75% and 88% when the contributed amounts were between 16,050 thousand and between 50,1307000. So that's from our 2010 report regarding resolution.

I also go back to stand with Mister Kerstein's report that actually the percentage of resolution really doesn't matter. It's really whether the law was followed. Being a former county assessor, my former job was not to, like a District Attorney, have a high percent or a Low percent. It was to follow the law.

And when the law was followed, I felt completely fine. Just going back to our chairs. Questions. Do you know, you mentioned in your report the BoE historically was an administrator, an arbiter, and an advocate. In lay terms that would be. They were judge, jury and sheriff. Is that a fair?

Well, I mean, I don't think we.

Need to parse the specificities, but I'm using nomenclature.

That's a way that one could think about it.

Okay. And then in terms of what you didn't mention, also there was a huge backlog in sales and use tax distribution during this time period. Do you recollect that?

I don't have a very detailed recollection of that.

Did you attend many of the budget hearings during that time? I did, yes. Many of them. I was there at all of them. You might recollect. We had numerous cities, counties.

The associations complain the millions of dollars that were owed to them by the state that had not been processed because the agency was dead derelict in their duty. So that was a specific issue. I wish your report had mentioned that. You may want to go amend that.

The other area, I don't know if you recollect or not, was the backlog in the appeals cases.

I have somewhat more of a recollection of that one, yes.

Do you recollect roughly the length of time in backlog? Not off the top of my head now. Well, off the top of my head, it was a few years. So while people could talk to, you know, the judges and the juries, they couldn't get their cases resolved for years.

So that was one of the other very significant issues your report did not mention or highlight. Also, I think, what other, what? You also didn't mention where there were a number of ethical issues that were reported. Do you recollect that?

Well, I would have. I certainly the intent was not for this to be an exhaustive list, but I would, I would say, in our view, some of the things we know do constitute ethical.

The top 10 list would have been good if I could rattle these off top of my head without much preparation. I would have hoped that someone who was supposed to write a report could have rattled that off as well.

I certainly wanted to keep things not too lengthy for the handout. Yeah.

Well, there's your job, as my understanding, is to compile information and to provide information. And I think having fairly major omissions is concern.

So again, going back to numerous ethical issues within the Department, I think you kind of mentioned it a little bit where you had individual board, as you mentioned, from the Department of Finance audit, you had individual board Members intervene in administrative activities. You had individual board Members set up a shadow call center. Do you recall that?

Yes, that was, you know, I've never heard of an off the books call center, but there was an off the books call center from the agency. I'm still looking for my off the books call center. I can't quite find it in San Francisco, but I would, you know, that would be interesting to have set up.

Also, during one of the hearings, one of my most memorable moments, chairing Budget Committee was when the Director of the agency took the Fifth Amendment because he refused to answer the Legislature's questions regarding the agency. That will go down in one of my memories when I'm retired in a few weeks.

And then in terms of staff transition during that time period, there was a fairly significant amount of staff angst regarding how the Department was run. I'm sure you got staff approaching you. I can't.

I think I got, like an email every day from different staff people regarding the angst of how they were disagreeing with how the agency was run and how they were just not in favor of how things were being done. So I think, you know, so part of the reason this Bill got presented and the Bill.

Well, it's a budget Bill, had my name on. It was, again, the millions of dollars at stake for not just the state, but for our cities and county governments up and down the state, and also the fact that taxpayers could not get their appeals resolved.

So, again, do you know of any other tax agency in the entire country that is an administrator, an arbiter, and an advocate? These are your words at the statewide level?

No. No, I'm not.

Yeah. And so now would you feel it's fair to characterize the agency since the Administration part has been, you know, 90% of it has been removed and they are no longer the arbiter that they are. Primarily. They have some administrative duties and they have some advocacy duties?

Well, my understanding is they do have. They do occasionally hear an appeal with regard to their constitutional purpose programs, but that it's pretty minimal.

Do you recall how many appeals a year they're hearing?

Zero, God. I think I might. Not exactly, but I believe it's a very small number.

A small number being my recollection in past hearings. Like 20 under 20.

Yeah, it sounds a little high. I was thinking a smaller number.

Smaller than 20.

That's my record. I'd have to go back and look at the numbers. It sort of depends. I mean, in terms of appeals actually heard by the board, my recollection is it's. It's far fewer than that. But there's a whole sort of. There are other parts of the. Of the process.

I would need to go back and check the numbers. Right. I don't really.

And their constitutional duty, which I'm greatly familiar with, just because I'm a former assessor, is primarily around property tax Administration. And of course, they don't do the property tax Administration. They just provide advice on it. The assessment. The county assessors are in charge of property tax Administration. Is that so?

It's one of their roles is that oversight function. I believe they do also do some assessments for certain types of property that are outside the scope of county assessments.

That's right. Yeah. They do the utilities and the railroads because the creation of the agency was done when the railroads controlled the state. And I think people were afraid that they could not get fair tax Administration of the railroads from the Legislature. So they've created this agency as an independent agency for the railroads and the utilities.

Is that, it's my understanding, is that fair?

Okay. So you're saying--okay, I see. So you're saying--this is just from the staff report, our staff report regarding Assembly Member Reyes's bill, noting that the BOE's--this is just on page three--noting that the BOE's published formal opinions dropped from an average of 161.5 in the eighties to an average of 3.2 decisions in the first decade.

So that would be the, that gives you a sense of the change. So in terms of--I think, you know, I think your report does a job of demonstrating that this was an issue that had been going back for decades. You know, you quote on page two, the LAO's-- this is the LAO's analysis of the budget bill or this is--yeah.

This is the LAO's--from 1940. That's not a typo, right? 1949, 50. That wasn't a typo. That wasn't my poor eyesight, all right. So that, so this just highlights the fact that this issue was not something that came about in 2017. This had been going on for decades.

Yes.

I think, in fact, the Sac Bee headline was something to the effect of, like, that it took 90 years to go do this, and this has been going on for quite a while, my recollection of that headline. So I think, again, and one of the issues that you had highlighted that happened in 1999 with the 250 audit positions from the BOE and redirected that the BOE redirected half of these positions to their activities, that wasn't just in 1999.

That happened during our budget hearings in 2016 as well, where the board could not articulate how many FTEs they had, how many open FTEs they had, what they were doing with all the open FTEs. So this was not something that just happened in 1999.

So I appreciate you highlighting it, but I think if you had, you know--and again, you can't be highlighting every single issue. It would probably state that this was a continuing organizational practice. Does that sound?

Well, yes. So this, I mean, I think there were different parts when we spoke more generally versus providing concrete examples, and I think the 2017 Department of Finance OSAE evaluation spoke to that to a significant extent.

I mean, there sort of was the, I think one thing that was ongoing in that wasn't really a secret was sort of this notion of rotating or borrowing staff sort of among the board members who originally were intended to be sort of part of the agency and not part of the board members' office. So there were a variety of issues of that nature.

Well, I think the way that you, the way you quoted, which is a very polite way of saying they weren't following the law, activities, contrary to state law, and budgetary and legislative directives.

That's a polite way of saying they weren't following the law?

I suppose so.

Yeah. Trying to think anything--I'm looking to see if anything I've left out just going down. This has been a fun walk down memory lane for me. But again, I think just to restate this action wasn't taken lightly. It wasn't done because of something that happened over a one-year period. It was a decades--and again, it's not to point to any individuals at that--it had nothing to do with any of the individuals who were board members at that time.

Frankly, it's an organizational structure which you highlight from the beginning in terms of it's very difficult for an agency--I don't know any other agency in the state that is set up this way, that you are both the administrator, the arbiter, and the advocate of the agency.

And it has automatically, the way it was set up, internal conflicts of interest within itself. And none of those duties were fired, firewalled off from one another. And so it's very difficult for you to administer and then for you to arbitrate because if you administer something, it's very difficult for you to say that you're wrong or that you did something incorrectly. And it's even more difficult to be the advocate of that.

And so again, I think when this action was taken, it was to make sure that those duties were clear, clearly separated. It's also a reason why we didn't have CDTFA also hear appeals. That's where it's a completely separate office of taxpayer appeals.

I will be interested to hear about the number of cases OTA hears, as well as how quickly they sort of adjudicate and also to the fairness, whether they're following the law or nothing. I don't know if there's anything in my comments that you would find contrary to your recollection or anything you feel like I left out that was fairly significant.

No, nothing to add.

Great. Thank you.

Assembly Member Gipson.

Thank you very much. I appreciate my colleague, Mr. Ting, walking us down the past, and certainly the past is there making sure that we don't repeat it, right? And again, from my lens, is making sure in 2017, with change that the Legislature made, did, and how are we doing now?

How are the small businesses in the State of California faring under this new rule? And I think this provides--this informational hearing provides checks and balances because since 2017, we haven't had such a conversation in this particular space. But I want to also talk about, in terms of the past, for the purpose of the BOE, it's my understanding the BOE was created to making sure that taxpayers have someone they can elect, they can unelect, that they could be accountable to, in fact, the taxpayers of the State of California.

And so, yes, the Board of Equalization has a very unique disposition than other boards, but it also has a very strong purpose for it where taxpayers, taxpayers, taxpayers have the ability to one: meet and vote for their elected representative on this particular board. And so we don't have that now. But I want to ask you a question.

Is it not true that CDTFA attempted to make a major change in their audit manual that is now being--that's contrary--now is being challenged by a pending court decision? I didn't see it in your analysis.

So my understanding is there is some--I'm aware of something along those lines.

So you are aware of it, but it was not brought out in your analysis? Can you elaborate to your understanding what that court pending decision is?

I'm not--I'm aware that there's some type of litigation. I haven't been tracking sort of--

But is anyone in your office? I mean, you are the Legislative Analyst Office, and so you charge responsibility, and that was omitted from your report, and certainly this was germane to this hearing to talk about a court decision that is pending regarding whether or not we made a mistake or did make a mistake regarding 2017.

I'm not sure I understand the question.

The question is, do you know about a pending litigation that's before the courts?

I'm aware of it, yes.

Can you elaborate on that, please?

I'm not sure I have much to add at this point.

The Legislative Analyst doesn't have information regarding this? I mean, wouldn't this be part of your report to this body?

It was not my understanding that that was part of the scope of my testimony today.

Hmm--I'm not--well--was it--well, I'm not sure who provided the framework. It seemed like to me this would be falling under the scope, and we're talking about a new dynamic that we made in 2017. Certainly we want to know the good, the bad, and the ugly, the good, the bad, and the ugly in our legislative analysis's report to this body. And so it seemed like you would be prepared to have that kind of discussion, if in fact, a member brings a question before you today. Is there anyone you can report to on your staff that can elaborate on that before I ask the next panel to come up and speak to it?

Seems like an appropriate question for the next panel. I mean, whether we--

But I think it's appropriate for you, sir.

People sue people over things all the time. It seems a little early to judge whether it's good, bad, ugly or--

Yeah, but you can talk to--but if you had information, you could talk to what gave rise to it. That's all I'm trying to understand.

So, yeah, that's not something we've looked at in detail at this time.

Thank you very much. I have no further questions.

All right. That was very good. Thank you. Thank you, and appreciate your time. I don't know if we'll be calling you back up for additional questions or not, but appreciate the background. And now we are going to move on to our next panel with the leadership from CDTFA and OTA. And this time after CDTFA speaks, we'll ask questions and then after OTA. So we won't wait for, we won't wait for both of them to finish. Good morning.

Good morning.

So from--we have Nicolas Maduros from CDTFA and Myriam Bouaziz from OTA.

Thank you, and good morning. I'm Nick Maduros. I'm the Director of the California Department of Tax and Fee Administration. We've got a presentation. I don't know if it's going to show up on screen or if you all have the printed version, but--okay.

So anyway, I--thank you, Chair Irwin, Vice Chair, Members of the Committee, Assembly Member Ting for joining today. I'm happy to be here to answer any questions you may have about CDTFA. As you know by now, CDTFA was created in 2017, in July of 2017. I've been the Director since July of 2017.

And I'd like to go through some of what we've been up to over the course of the last seven plus years, some of the accomplishments, as well as some of the challenges we face as a department. If we go to the next slide?

CDTFA now administers 42 different tax and fee programs on behalf of the State of California, it's various cities and counties, and special taxing jurisdictions. Among the new programs that we have stood up over the past seven years are the cannabis taxes, e-cigarettes, lithium extraction, embedded batteries, single-use plastics is coming up.

We just started--we'll get our first returns this month on the firearms and ammunition excise tax that we administer. I'd like to just point out at the top, we simply administer these programs on behalf of the state. You all are the policymakers and we do our best to implement the law as the Legislature and as approved by the Governor as you all decide.

That is our role. Neither I nor any of my colleagues at the Department is making the law on behalf of the State of California. We are trying our best to follow the laws written. If we could go to the next slide here to give you a sense of the scope of what we are doing now, we currently have about 1.34 million active taxpayer accounts. About a million of those are in the sales and use tax and 340,000 across the various special tax and fee programs.

The team currently processes almost 3 million returns annually. We--the accounting--and there was some mention of some of the audit findings earlier--the accounting at the Department is incredible. It is very complex with funds going to 46 different state accounts.

We also, each month, fund every city, every county, as well as over 400 special taxing jurisdictions across the state. The team just does a fantastic job. I will point out that this year when the Department was created, we had, as Assembly Member Ting pointed out, we had quite a few audit findings across various parts of the Department.

This year, I believe we were the only financial department with a clean audit from the state. I'm really proud of what the team's done to clear audit findings over the years and I'd be happy to answer any questions related to that. We've got now about 3,800 team members working at CDTFA.

If you look at the--we try and judge our effectiveness by the how much it costs us to collect 100 dollars worth of revenue. It now costs the state about 66 cents to collect $100 of revenue at CDTFA. That's down by over 28% since the department was created.

We are trying our best to operate as efficiently as possible on behalf of the state. Nobody wants to pay taxes in order to have the money just spent collecting taxes. So we recognize that and the team works very hard to be as efficient and effective as possible.

If you look at the next slide and the CDTFA overview, you'll see our network of offices around the state. We also have three out-of-state offices in Houston, Chicago, and New York that focus on auditing out-of-state taxpayers. These are some of the largest tax audits that we do out of those offices.

We have been focused as well on consolidating and reducing office space, particularly as the team is now working hybrid, by and large. We've shed almost 75,000 square feet of office space to save about 7.5 million dollars each year in rent. We are continuing to look at ways to save on office space around the state. We've got two considerations there.

One is our team members and having them be close enough to get to an office to work, and then taxpayers obviously, making sure that they have a place to get service. I will say our foot traffic in our offices is down about 60%, our taxpayer foot traffic since pre-Covid.

Like as technology advances like in everything else, people are looking for other ways to get services, and I'll talk a bit about the challenges of that later, but we're focused on providing services in ways that taxpayers want to receive services, and less and less we're seeing that that's in-person, but we still are committed to providing that to the extent we can.

If you go to the next slide, it's got a little bit of background on the sales and use tax to give you a sense of the scope and where the money's going. Last fiscal year, we collected almost $80 billion in sales and use tax.

Now that includes all three sales and use tax programs, the state portion, as well as the Bradley-Burns uniform state and local sales tax, as well as our district tax or transactions and use tax programs. You can see there that Bradley-Burns was about 11.8 billion. That's the one and a quarter percent that goes to the locals.

And then the special district taxes were about 14.4 billion. We're seeing those special district taxes increase over the years as more and more jurisdictions pass ballot measures to raise their--raise or impose in case they don't have them, district taxes at the local level, as that's one of the few ways that locals can raise revenue in the State of California.

As I mentioned earlier, each month we fund 423 special taxing jurisdictions, all the counties, as well as 483 local jurisdictions. This next slide briefly gives you a sense of the special tax and fee programs. Last fiscal year, that was about $17 billion in revenue.

The largest of those by far are fuel tax programs. Alcohol and tobacco are about 1.8, and then cannabis, about 700 million last year with about 5.3 billion, the balance being, across the other programs. This next slide briefly goes through some of the new programs that I'd mentioned earlier.

I will mention that in addition to these actual new tax and fee programs, we do--we've had a lot of work post-Wayfair on making sure that economic nexus and the Marketplace Facilitator Act are administered in accordance with the Legislature's wishes.

We also will now be administering AB 2854 to keep an eye on revenue sharing agreements and keep a state log of those agreements, which I think will prove useful to us as well as to the public to have more visibility into those, and I'm happy to answer any of--any questions about any of these new programs.

Cannabis taxes is a whole--we could have a whole discussion just about the difficulties we've encountered over the past six years on cannabis taxes, but the team has really done, I think, a spectacular job, and I really want to recognize their efforts, particularly in Southern California where there has been and remains significant noncompliance in the cannabis industry.

Turning to the next slide, we have been very focused on providing the best taxpayer service that we can. I'd like to go through a few of the statistics. Our call center, last year, our call center answered about 619,000 calls. The average wait time was two and a half minutes.

When the Department started, the average wait time was five minutes. Even five minutes is pretty darn good for a tax department. Two and a half minutes is really spectacular. The team there does a great job.

On refund processing, it became clear to me when the Department was started, that first Christmas that I was the director, I got a call from a taxpayer who was frantic about their refund because that was their money they were going to be using to buy gifts for their family.

I looked into it, and let's just say that the refund processing times were suboptimal. When the Department was started, about 57% of refunds were processed within 60 days. The remainder took longer, often much longer. Now we process two-thirds the refunds within ten days. We process more than 90% within 60 days.

Pretty much the only ones that take more than 60 days are ones that we send out to audit to make sure that the refunds are actually due. In terms of audits, we have reduced the aged audit assignments by 24%. Those are audits that I think are over 13 months, is what's considered an aged audit, I believe.

I also would say that in terms of disagreed audits, that's one of the things we look at in terms of taxpayer service. We're proud of the fact that most taxpayers actually agree with the audits, despite the fact that they're found to have some tax liability.

In the old days, I think the pre-CDTFA, the number of agreed audits, the percentage was about 80%. I think since CDTFA has been created, we're at about 78%. I think the delta there is largely driven by two factors, one: cannabis audits.

We're seeing substantial disagreements on some cannabis audits where the liabilities can be very large and the noncompliance, as I mentioned earlier, can be very large. The other thing that's I believe is precipitating that slight drop is an unremitted tax collected penalty that the Legislature imposed of 40%, which is actually larger than our 25% fraud penalty in a strange situation for state law.

Something we would love to fix at some point, but that is driving that as well. In terms of payment plans, we've made it much easier for taxpayers who cannot manage their tax liability to enter into payment arrangements where they can take time, two or three years, sometimes longer, although we now auto-approve, and this is all driven by data.

It used to be in the old days--the old days, sound like Wilford Brimley or something here--used to be that the aperture for getting a payment plan was very narrow, and you needed to show things like that you'd gone out to a bank and been denied a loan. The Department wanted you to get a loan in order to pay the state back.

It turns out when you look at the data that that's not really needed, that people who want to enter payment plans are, by and large, pretty good for keeping current on those, and that we have a system that can keep them current. So we've, we've broadened the aperture. There's currently not a--there are time limits.

There's no dollar limit on the payment plans as long as people enter into them and stay current, they pay interest, and so the state is made whole and taxpayers have an easier time to comply and can manage their cash flow.

You know, our, our goal is not to try to put anybody out of business, if we can, other than some very noncompliant taxpayers, which is a whole other story. If we could turn to the next slide here: Appeals. Assembly Member Ting mentioned this.

We've reduced the time to resolve appeals by more than a third since the Department was created. The backlog, I believe, used to--or the number of appeals in our system used to be about 4,000. We've cut that in half to about 2,000 by trying to clean out any backlogs.

Offers in Compromise: this is a project or program under state law by which taxpayers who are basically cannot meet their tax obligations can make some payment, whatever they can pay, and resolve their tax liabilities. Those used to take about nine to 12 months. They currently take about 30 days.

Petitions for Redistribution: now this is sort of an appeal of local tax issues. When the Department was founded, we had cases dating back into, as my kids call it, the 1900s. We had cases dating back to 1998. We currently--our oldest cases, we've got three cases that date back to 2022.

The team there has really done a spectacular, spectacular job. And one more taxpayer service item I'd like to focus on, and this was done with the Legislature's action, is to allow us to provide much easier taxpayer relief for disaster victims.

It used to be that even if you were in a natural disaster, that you needed to request some extension from us. Sometimes I believe with a wet signature, you needed to attest under penalty of perjury that you'd been a victim of the disaster. You know, if you're--we recognize, and I'm glad you all recognize that if your town has been subject to a giant natural disaster, wildfire, that probably filing for an extension of your sales and use tax return is not your top priority, and so now we can do that automatically.

Lastly, on taxpayer service, we do have a taxpayer rights advocate office created by statute. The office reports directly to me. They handle issues that are raised to them by taxpayers, as well as any issues raised by the members of the Legislature.

Last fiscal year, there were 52 legislative inquiries to the TRA and about 438 direct taxpayer inquiries. I would say that, again, we have 1.34 million taxpayers, I think. While I think that's a pretty small percentage, and we do our best to resolve any of those, the TRA gets back.

We keep a log of when the inquiries come in and when they're responded to. The response is less than one day. Public Input and Feedback: we have lots of public input and feedback. We have interested parties meetings through our regulatory process.

We've recently started having regulatory workshops to try to have a bit more of a free discussion because the interested parties' meetings became very sort of bogged down. And so those have been working well. We have an annual Taxpayer Bill of Rights Hearing which our TRA, our taxpayer rights advocate, just hosted. We have a Cannabis Tax Advisory Committee.

We have a Tax Advisory Committee and practitioner group that meets. Both of those meet twice a year. We put out taxpayer surveys to see how we're doing. We invite taxpayers to join us for user testing on our systems so that we can try to make systems that people can actually use.

We also have tax and fee education events around the state. Last fiscal year, we had about 450 of them. We've also really focused on trying to create more video content for people because--that's in Spanish and English and other languages--because it's much easier for people to access that.

Just briefly, and I don't want to take too much of your time, we've been leveraging technology in order to try to provide services better and more effectively and efficiently. We did implement a new computer system. The final state acceptance was in 2021. It's called CROS.

We've automated a lot of our delinquency processes to clear out some of the underbrush. We used to have people basically doing a lot of work to try to get people to files returns where they owed no tax dollars. It really didn't make sense to spend hundreds of dollars to get zero dollars as the State of California.

So now we've automated a lot of that so that we can have our collectors focus on larger dollar collection accounts. This next thing, the Return Analytics Pilot Project, we're trying to use data to better run our systems. It has a dual benefit: it gets to the taxpayers sooner so that they don't run up huge liabilities, and it also makes the state quite a bit of--it increases compliance and makes the state money.

Our dollar return per hour on our audit program is about $924 an hour, which is good because the state does not pay auditors anywhere near $924 an hour. The return on our data analytics project is about $29,000 an hour. As you can imagine, we're looking to expand the program to gain even more efficiencies.

We also have set up an interactive data visualization tool, which I would encourage you, if you haven't looked at it on our website, it's on our homepage. It's really a great tool. It can give locals, it can give you a sense by city, by county, by quarter what the tax revenue is, what kind of industries it's coming from in your area. That was, the team did a fantastic job putting that together and won a prize from the Federation of Tax Administrators.

Looking ahead--and here's where we get some of the challenges, and I'd like to add a couple to these lists that I'll actually start with. One is local tax allocations. As I mentioned earlier, we administer two sales and use tax programs for the state.

The Bradley-Burns allocation issues--it's been a challenge for years, and it remains a challenge to make sure that taxpayers allocate the tax properly. We do have a very small handful of taxpayers that we believe are allocating improperly, and we've--are continuing to make efforts to try to make sure that the tax goes to the right place.

I'm happy to answer any questions about that. It's a really complicated topic, and I know you're interested in it, and you had a field hearing on that. Also, technology transfer agreements I would mention, which isn't on this slide, but is again, a complicated tax issue under California law dating back to 1993 that has never really been fully implemented.

It's very difficult to try to navigate. It basically tries to tax the intellectual property and the taxable tangible property separately--will not tax the intellectual property, but only tax the tangible personal property. We've had a couple of very good workshops recently. We've got another one, I believe, coming up in December.

We're trying to find some solution and get a regulation so that we can work through. We've got a lot of pending refund claims on that. As I mentioned, we've implemented new tax programs. We're trying to--the team is building a Guided Path return, which would basically be sort of like a Turbo Tax return for sales and use tax for small businesses so that they can more easily file and comply. As I mentioned, we're always looking to harness data to be more effective. We're trying to engage taxpayers where they are.

I mean, how many of us, we probably all used to go to the bank quite a bit. I can't tell you the last time I was in a bank. It's similar to our taxpayers. We're trying to allow them to get their service at home or on their phones as easily as possible. We do have some hiring challenges.

I will say it's a real challenge, particularly in audit, where we have to hire account--we're looking for accounting grads. There are fewer accounting grads. They're being hired by private industry at higher pay than we can pay.

The IRS is hiring thousands of auditors from--all the states are feeling the squeeze, and they're offering quite a bit more money than we pay. The cities pay more, the counties pay more. So that is a real challenge to try to figure out how we continue to find the professionals needed to do some of these very complicated audits. And with that, I think I will answer any questions that you may have. Sorry to take so long, but a lot's happened over seven years.

Well, appreciate that. And again, this is very valuable to go through this information. Just a couple of real quick clarifications before we go to my colleagues, who I'm sure have plenty of questions, and then we'll talk about Cupertino after. I have more questions on that. So it looks like you have really increased your efficiencies and timelines. Is this all because of technology or have you been able to hire additional people?

We have fewer people, actually, and it's not just technology. Technology is a tool, but it's also just process improvements. I mean, we had a lot of--there are lots of things small and large, and we're looking to take, you know, take the field one yard at a time. We--just to give you some examples.

And when we started, we had a lot of information officers. You know, the Department was not necessarily staffed in order to do the tax administration work that CDTFA is tasked with, at least. And so we've put the positions where they're needed rather than on. I mean, if I never show up in the newspaper, that's fantastic as far as I'm concerned. But it's also process improvements.

As I mentioned, we had a lot of people working on things that produce zero tax revenue or we would do things that, you know, we spend $300 in order to get an incremental $15, which is actually losing the state $285. And so I think using data is a big part of it and just using some sort of efficiency tools, but technology plays a role in that.

Okay, and then the, you have that TRA responded to 52 legislative inquiries and 438 taxpayer inquiries. So could you explain that a little bit more? What, like, how does somebody--what is a legislative inquiry?

So those are from an Assembly or Senate office. If an office gets a taxpayer concern, then your staff may reach out to us and say, 'hey, we've got a constituent who is having an issue with x, y or z issue,' and then the Taxpayer Rights Advocate Office will take that on as a case and try to work to resolve it.

Okay, and then what's the follow-up for the tax--yeah, the 400?

Those are ones who directly reach out to us, to the Taxpayer Rights Advocate Office, which is prominently positioned on our website, and ask for help.

And what is the response that these taxpayers get from you?

Well, so the timing response is, you know, again, we get back to people in less than a day. The actual response will vary. I mean, some of the cases are, you know, very complex and may take a little time. Some, you know, to Assembly Member Ting's point earlier, some people have very valid claims and we resolve those. Some people just don't like paying taxes. And it's, you know, we--the law is what it is. And if people owe, then, then they owe.

But it does make sure that the TRA will take a second and a third look to make sure that any liabilities, any collection activity that we're actually following, that the team is actually following the law.

But the taxpayers get a written follow-up?

Oh, they get written follow-up. They get calls. I mean, they work together. It's like a case management system internally. So they get an advocate inside who will walk them through the process because, you know, these tax programs are confusing. I mean, they're confusing.

I mean, you all are even on the Revenue and Taxation Committee. You know, David's been doing this for a lot of years. There are a lot of tax programs and a lot of provisions and it's confusing and we recognize it's confusing for taxpayers, too. So we want to make sure we help them.

All right. I just wanted to clarify those two things. Thank you. Questions? Assembly Member Ting.

You mentioned that you have fewer people. You mentioned on slide two about 3,800. How many people did you start with?

We started with about, there were about 4,800 PYs, I believe, and we had probably 4,000 or so actually on staff, as my recollection when we started.

Is that one of the major reasons that your, your cost per $100 collected is 28% lower?

Yes.

Great. So you mentioned on slide four the money for sales and use taxes. You collected about 80 million--80 billion, sorry, with the b. How much would that is goes to local government?

So, um--

Oh, I'm sorry. You break it out here. So this is the local government.

Break it out. So the Bradley-Burns and the special district are the two that go directly to local governments, and then parts of the state portion as well because of realignment and other factors also go to local government.

Okay, but just going to that slide, the state portion is about 34. And the rest, most of the rest seems like it's going to local government.

That's right. But the top four, the state General Fund, the Local Revenue 2011, Local Public Safety, and Local Revenue Fund, those are all state administered. Those are all out of the 6%.

Got it. But the second, third, Local Revenue, Local Public Safety, Local Revenue Fund, that all goes--that's money you collect that goes back to local government?

That's right.

So again, the issue that we had, I had brought up earlier, when the agency or the Department was not collecting that money, you know, more than half of that was owed to local government?

That's right.

Okay. So just going to slide eight, you had mentioned.

Yeah, you had mentioned that you had that petitions for redistribution. That case is going all the way till 1998. So how long did that take for you to sort of clear that backlog? Because obviously that backlog wasn't created overnight.

It took us. Gosh, I should know. I had weekly meetings for probably three or four years to clear the backlog.

Yeah, but now you're saying at this point you had only a few aged cases.

That's right. We have, the oldest cases now are 2022 and we've got three of those. And they're complicated. I mean, they're being worked. It's just tax issues are difficult.

Got it. And you mentioned on the same slide that you reduce the time to resolve appeals by more than one third. How much was it before and how much is it now?

Let me see. I probably got that. Let me, I might have to see what we've got here if I could get that to you. I'll check with the team.

And then on the following side, you talk about sort of taxpayer rights advocates and, you know, whether or not taxpayers. So, if I'm a taxpayer, I have a question. What are the common ways that I would reach out to you? You mentioned the call center. What are some of the other ways?

So, they can call the call center. They can call or visit one of our local offices. They can call, contact the Taxpayer Rights Advocate Office either directly or through their elected representatives.

Is that usually their?

I get emails myself. I respond immediately. That's one of the joys of my job, to surprise people when they email me, and they hear back in a minute from the Director of the Department that we're on it and let us take a look.

And do most people go directly to the agency, or do they go straight to the taxpayer rights advocate?

Well, the Taxpayer Rights Office is part of the Department, but I think most people overwhelmingly, you know, go to, I would guess most people go to their, either call the call center and we get a lot of calls there or they call their local office or stop in.

You know, I will be say, I'm one of the pleasant surprises of this job, which I never would have thought directing a tax agency. I get more compliments from taxpayers on team member service than I get complaints.

Maybe we have to revisit how you're adjudicating some of these issues then. So that was a joke. So, in terms of involvement on sort of taxpayer issues, how, you know, how would you say the taxpayer rights advocate can, you know, obviously they're part of the Department, but they also, there to be a taxpayer advocate.

So how do you manage and ensure that they're independent?

Well, I mean, again, they report directly to my office. We have a fantastic taxpayer right advocate currently, Claudette Yang. She and her team do a great job. Their sole function is to try to resolve these issues. I mean, we, we would like to resolve as many tax issues without going to appeals and going to court as possible.

We're operating on a numbers game to try to drive the revenue for the State of California and getting caught up over, I mean, we had recently, when you've got 3,800 people, you're going to have some people who are maybe a little overzealous sometimes or might get caught up in very small dollar.

I mean, we recently had somebody reach out and say, well, I agree with the whole liability, but I don't agree with this $18 in interest because I tried to log in to the system and it didn't send me the text message that I was expecting in order to be able to log in.

And so, I shouldn't have to pay the interest. Now, unfortunately, in an ideal world, the team members immediately upon hearing that would have said, I agree, no problem. You get some people who are a little overzealous. The TRA team took a look. It was resolved very quickly.

We had another case come up recently where somebody had had a vendor compensation issue as a cannabis dealer. Under California law, they're allowed, some equity dealers or retailers are allowed vendors comp. They had an issue. It was resolved. Overwhelmingly, these issues get resolved favorably for the taxpayer.

Got it. So just going back to sales and use tax for one quick second, because I brought it up in my earlier comment, is there any backlog that we owe money to the local government, county, special districts?

No, and in fact, we've really, I didn't, there's so many details that you can't get into. And even though I took more time than I should have, you know, we're now much more accurate in terms of the month. We send out every month to every locality, an amount of money.

It used to be we would hold some of that back, and now we don't do that. We're much more accurate than we used to be in making sure everybody gets the right amount of money.

Got it. Because of the staff issues that were highlighted. You know, the Lao brought up in the State Personnel Board's report, and that was not the only report. CalHR does the hiring. Is that still the case?

They don't. No, we have our hiring delegation back. We got it back after a year. There haven't been issues. We have our State Personnel Board audit as every three years I believe. We haven't had any big issues. You know, Mister Kerstein mentioned one audit finding and we had one. I don't even know.

It was part of a much bigger state audit. We had one team member who was representing some people who had permits from us. There was disciplinary action taken immediately. I mean in my mind that is not a, if you're going to try and run an organization this size, you're going to have some bad actors. And that was one. And we dealt with it very quickly.

Great. Okay. Thank you.

All right. Assembly Member Gipson.

Thank you very much. It's great seeing you. Thank you very much for being here. Can you describe for me, can you just describe for me what the appeal? Let me go through my notes. You provided a lot of information I just want to piggyback on.

Just to get further clarification, how do you compare, you talked about on page two, the return process. More than $2.9 million in return annually. What was it prior to?

2.9 million returns.

Returns. Compared to before the change took place.

I'm guessing it's relative. I don't know exactly. I'm guessing it's relatively stable. I bet we have probably about the same number of taxpayers. The reason why the taxpayer number and the return number.

I mean, you know, sales and use tax, you typically file quarterly but the smaller taxpayers which are overwhelming, you know, we have a lot of smaller taxpayers who file once a year so I'm guessing it's, it's pretty similar.

Just to piggyback on Mister Ting's question regarding on your still on page two, team members, approximately 38 so it's 200. And you said you had prior to 4000?

We probably had about; I think we had about 4000 when we started. We had about 4800 PYs but about 4000 actual on staff. I mean you always have some vacancy and churn.

Right. But also, on one of the slides you talked about hiring challenges.

Yes.

Can you go into detail?

Well, so that's been a real challenge, you know, particularly on audit but also on the collection front. You know on audit we're hiring accounting graduates for audit auditor positions and the state pay on for auditors has just not kept up candidly.

And so, we're basically those graduates can get higher paying jobs with cities, counties, private industry or the IRS. And so, we're just not the employer of choice. But I will say our HR team has really done a great job.

I mean we now have one-day hiring events where you can show up and, you know, by the time you leave that day, you can have a conditional job.

Who's the employee is represented by?

SEIU.

Which? 1000?

Local 1000.

Okay, so these would be 1000 SEIU Local 1000 employees. And so again, from the 4000 to 3800, you have. So, there's about 200 people or vacancies. Would you say that?

Yes, we have even more vacancies than that. Although we're now, you know, in a budget drill with. Given the budget situation where we're.

Did those 200 people like? I mean, what are the causes?

Those are. Those are through attrition. What? Yeah.

Through nutrition?

Attrition. Yeah. We haven't. We certainly haven't laid anybody off. We've, you know, we're desperately trying to keep and upskill and train the people we have.

Through the transition of 2017, was there people who left the agency as a result, or you maintained everyone through the transition?

No, we maintained everyone. There was one CEA that was let go and that was it. I don't think. Maybe two over time, but that was it. We kept everybody. We've repurposed people as needed and kept everybody on board.

Great. On page four in the talked about the tax, sales, collection, and use tax revenue totaling $79.6 million. What was it prior to? Was that? Is this the highest?

Yes, that's the highest. I mean, the prior year may have been slightly higher in 2016. So, 2016. 2017. So, this is pre-CDTFA. The total revenue was. So, this includes all tax and fee programs, not just sales and use was 64.3 billion. So, the revenues increased by about 50%.

Good. Can you please describe for me the appeal process? Right. So, when a taxpayer has a dispute, can you illustrate step by step what the process is?

Sure. So, if a taxpayer has a dispute on, on audit, for instance, let's take an audit. That's where typically these arise. If a taxpayer has an audit issue, the first step is to try to resolve that with the auditor. And then you can try to resolve with the audit supervisor or the.

Is the auditor the same person that's actually has audit a business?

Yeah. Yes. So, we try and resolve it at the lowest level possible. By and large, as I mentioned before, almost 80% of audits are agreed audits. So, the taxpayer agrees with the ultimate finding of the auditor. But.

I'm sorry, what was the percent you said that taxpayers agree with?

78% is our agreement from over CDTFA's lifespan. I don't know.

I'm sorry, I misunderstood. Can you repeat that, please?

78% is. So, since CDTFA was started, about 78% of audits the auditee, the business being audited agrees with the audit finding.

Really? Okay, interesting.

So anyway, so then you can meet with the audit supervisor, or then you talk with the audit principal at the office. So, each office, we have teams of auditors. There's generally a supervising tax auditor who oversees a team of eight to 10 auditors. Then there's an audit principal who runs the audit program at an office.

And then there's office administrator. If the issue can't get resolved there at the local area, then you can file a petition. And those petitions come to Sacramento to headquarters, where the petitions team takes another look at that.

And then they will, depending on what the petition alleges, they will sometimes refer that back to the principal auditor and say, take a look at this again at the local level. If it's again not resolved, then it comes into our system. We do have an internal appeals process which is completely independent. It's part of our legal team.

This was the same structure that the BOE had. And they have appeals hearings internally where they, you know, both sides present, and those can happen in person or virtually now in the new world, and then they make a determination on the appeal.

If it finds, if, if the taxpayer is not, is still not satisfied at that point, the case would, they can appeal to the Office of Tax Appeals.

So, the process you described, how long does that take? That seems like a long time.

It doesn't. I don't know. I mean, to Assembly Member Ting's, I can get you the exact timeframe. It depends, I mean, there's pretty, there's some very variability, depending on how complicated the case is, depending on how some taxpayers candidly would like for the appeal process to be longer because it keeps their liability from becoming final.

And some taxpayers would like it done as quickly as possible.

Are you doing that by design?

No, we would like, I would like to get them done all immediately if it were up to me. But it's.

Taxpayer would like to.

Some taxpayers would like to because they don't want their liability to become final and have to pay until it's final.

But that's presuming that they think that they're at fault and that's why they're going through this appeal process, to try to indicate that they're not at fault. There was an error that was made. So, I'm not understanding.

There are. There's a wide variety of taxpayers and circumstances and audits. There are.

Is there interest being accumulated while going through this elongated process?

Yes. Interest accrues.

That the taxpayer will have to pay going through this process. You don't know how long it takes.

It is. It is. Again, we've cut the time that it does take.

Well, what is the time, sir?

Well, that's. I can get that for you, and I'd be more than happy to provide it to the Committee, but I don't have it with me in my. In my. And maybe while Miriam's talking, I can find it.

Let me go to the next question, if I may. So once the taxpayer appeals it, you stopped there. Describe at that particular point in time when you guys cannot resolve it through the process that you just described.

Please articulate for me and this body when they are at an appeal and who governs over that appeal that's been brought to the attention of this department.

So, the appeal is heard by an attorney. The internal appeal.

Could you describe two appeals, one internal and then the other that has the adjudicated authority?

Well, they're the ones. So, the OTA is the external adjudicator and independent. We do have an appeals section that is part of our legal division where lawyers do hear appeals. They are totally independent. I don't have anything to do with those. And they make a determination.

Again, our goal is to try to resolve all of these matters before they.

So, let's talk about that piece that you try to resolve it before it gets to the other process of the administrative law judges. So, within your authority, and when you have that second appeal process that is, in fact, in your authority. Describe that.

So, what if in fact, because what I'm hearing is that an appeal process is made, a taxpayer's appealing a process, and you have a separate one internally and within that internal process, I'm trying to understand, if you find in favor of that taxpayer, what then?

Do you pull something back? Do you reissue, do you modify? What is the decision process, and do you have that authority?

If it's the same, this process has not been changed other than to be made faster since the BOE days. It is. And I know you worked at the BOE, so it's the same procedure that you may be familiar with.

If the decision is made in the taxpayer's favor, then the liability is adjusted or eliminated in order to be in accordance with that decision.

Can you talk about how many cases that you found, that one you found in favor of the taxpayer in that process you just described?

I can get you that number. I'd be more than happy to.

You don't have. You can't point to anybody in the audience that can give that information?

No, I can't, but I can get you the information.

Okay. So, describe the process that's now set before us today. You talked about your internal process. Or maybe I'll wait for the Office of Tax Appeals to talk about that, but maybe I will. But let me ask this other question with respect to what is the growth in positions of CDTFA since you've taken over.

We're smaller than we used to be, so there's no, there hasn't been growth in positions. We've, you know, and we've tried wherever possible, and we continue to try to absorb costs, including for new legislative mandates. I mean, whether it's 2854 where the idea was we'll take it.

Whether it's the fuel pricing matter that we've now issued an annual report on, we've done that without any additional funding. Some e-cigarette. You know, we do occasionally have BCPs, but even there it's largely around destruction. I mean, we need to pay for toxic waste, destruction of some vaping. It doesn't have to do with personnel.

We're trying to live within our means and be efficient so we're smaller.

Can you talk about the appeal that the case that's pending the court decision? I spoke to the Legislative Analyst a few moments ago about that particular case regarding the audit manual.

So, the audit manual, there's no case there on the audit. There isn't a legal case on the audit manual. We.

So there was no regulation that was being changed?

Well, so we made a change to the audit manual, which we believed was appropriate. It's actually statistically sound. So, it's based on our statistical sampling method. So, if you're auditing a very large retailer, for instance, it's basically impossible to go through every sale that just for the sake that a large online retailer may have made.

So, what we do is we have what are called computer audit specialists, and we take millions of transactions, and they take a statistical sampling of those and try to determine errors and then the percentage of errors applied across the audit. Working with statisticians, our team revised the audit manual.

Under whose authority?

Under the department's authority. Under the audit manual. You know, to have its audit manual.

The office.

And so, there wasn't, so there was, there was, there was a challenge to the office administrator. So, there was a challenge to the Office of Administrative Law that said it was an underground regulation.

Okay.

We then withdrew the change and we're evaluating the situation, whether or not we should go forward with a full regulatory issue. I don't think there's any question from a statistical point of view that the proposed change is more statistically valid than what exists. But we're fine. We're fine either way.

That's not my argument. My argument and my concern is that they found that you didn't have the authority and that is it true that it's being appealed in court? Is there a court case with respect to this?

No.

There is not. Okay, thank you very much for that. I appreciate that. You made mention that the oldest case, the oldest case, unresolved tax audit appeals in the CTFA was 2022.

That's for petition for redistribution. Those are the local tax where one jurisdiction challenges the allocation of local tax to another jurisdiction.

So, what is the oldest case that you have?

The oldest case at all? I don't know. I know we've got. I mean, we have two cases that are at OTA or that I'm aware of that are date back to. We have two local tax cases in that process. One, the petition dates to 2008. One, the petition dates to 2010. Which is part of why I'm happy to, you know, if you have questions about the Cupertino issue.

It's part of what informs our decision on that. To try to not have a 16-year process, to try to resolve it. But anyway, so I don't know what our oldest case is in general, we've got cases all throughout the system and some in court. And.

Mister Maduros, do you have a. You had an answer for one of Assembly Member Gipson's questions?

I don't know that that's the. I'd rather make sure we get the right information.

My last final question, sir. The Department. Tell me, who do you report to?

I report to the secretary of government operations and ultimately to the Governor. I'm appointed by the Governor, and.

So there's no. So no elected body?

Well, the Governor is elected

board. No elected board? Got it. Okay. That's all for now. Thank you very much.

All right, thank you. And before you go, let's talk a little bit about Cupertino. So it was highlighted that you had reached an agreement with the allocations of the Bradley Burns sales and use.

And, you know, last year, obviously, we've referred to it a few times, we had very in depth discussions about these tax rebate agreements and appreciate all the work you did making sure that there was not a big cost to this transparency, which we think, of course, is a really great thing.

So what can you tell us about this agreement?

So I'm a little constrained, but not, as, you know, my real constraint is that I can't discuss specific dollar figures that could be traced back to a single taxpayer. So because of tax confidentiality rules under California law.

But what I can tell you is this, that, you know, starting almost four years ago now, as we've discussed, the Department made a real effort to try to see if local tax was being misallocated.

And so we sent out, we looked at, you know, slightly over 200 large retailers, largely online retailers, who have, in some cases, we're aware of some cases of where people may misallocate their local taxes. As part of that, we did find four retailers that we believed were misallocating who did not then correct.

We found more, but others corrected their returns because it doesn't involve, for the retailer outside of a rebate agreement, it doesn't involve any more or less tax for them. And so one of those was located in the City of Cupertino, and we've been working with the city to try to resolve the matter.

It is a substantial amount of money. It's not an ideal circumstance. It's not an ideal resolution from my perspective, but given the alternatives, it is a decent outcome.

I believe, for the state and for all the cities and counties, the revenue will start flowing properly immediately, and the revenue that will flow properly is orders of magnitude larger than the revenue that was misallocated and that we believe was misallocated. Cupertino still believes that it was allocated properly. And so that's where we are.

We would like to clear the underbrush of these few cases. There are six of these, two of which date back to the BOE days, one from 2008, one from 2010, which is why I'm familiar with those dates because we do have two petition cases dating back that far.

And, you know, if we did not resolve this in this way, it could have been an extra 10 years just to get the dollars flowing where they should go. And so, so.

But there have been some questions as to why you settled with the agency as opposed to the taxpayer.

Well, so this is, the taxpayer is not. This is just about the allocation of local tax, and this is, the taxpayer doesn't have standing. They're not. Again, it doesn't impact their tax liability. It doesn't impact anyone's tax liability. It's just where the tax is allocated under Bradley Burns.

And so under state law, that is a system by which typically one jurisdiction challenges another jurisdiction.

What we have done in recent years as part of this effort is to try to identify those misallocations ourselves, both so that we can identify them sooner, but also because if they're identified by the consultants, a large share of that tax flows to the consultants rather than to the cities.

And so our interest is, and I think the state's interest is in us trying to identify those. So that's, that's how the system works under state law.

So just to clarify, it was you that identified it? No. Other. None of the other jurisdictions, agencies? Jurisdictions. That's right. And so because some of the. Because the details are being kept confidential, does this impact any other Bradley Burns disputes right now? The outcome of any of these other disputes?

No. I mean, the same outside council that represents Cupertino represents another one of the jurisdictions that has a matter at issue. There is an issue in court with the City of San Bruno, but it doesn't, unfortunately, I'd like to resolve all of them and get us on a clearer path.

All right, well, really appreciate you being here. And. Oh, Mister Gipson, I'm done with my Cupertino question.

Great. I just have one more question, because I think the member talked about the Bradley Burns tax. The law permits the Raleigh Burns tax sharing agreement that has longstanding history in the state and supported by, of course, our Governor. Have you changed any of the standards by which these agreements are reviewed by your Department?

Because I'm specifically interested in the genuine physical human interaction that I believe that you want to change. So can you elaborate on that for me? Sure.

Well, so those are maybe two different things, so let me take them separately. One is on the revenue sharing agreements, which we have, we are completely agnostic on revenue sharing. It is currently allowed under state law. If we distribute the money to the localities, if they choose to share it with the taxpayer, currently allowed.

And we're fine with that. What we're not fine with is taxpayers allocating revenue to jurisdictions where it doesn't belong. That's part of our job, that we work on behalf of the cities and counties to make sure that they get their proper amount of revenue.

Now, the second piece of your question is separate from that revenue sharing agreement, which is this genuine humanity interaction, which is a standard that dates back to the BOE days. This has nothing to do with CDTFA. It dates back, I believe, about 2006 through BOE decisions.

If anything, we've, there is currently some litigation on this should be somewhat circumspect in my remarks, but it dates back, predates CDTFA. We have tried to be, you know, use plain English in a taxpayer guide so that people can understand what our, what the tax rules are, but the standards have not changed one bit.

You made, you said plain English. You know that not everybody speaks English. So let me just go to my next question. You talked about responding to 52 legislative inquiries, and those are generated by legislative offices.

But it's my understanding that BOE members have received calls from taxpayers, and they have also tried to call the office to get the kind of response so they can respond to tax.

And I think I've got those numbers. I think it's maybe, maybe they're an additional 18 or something that came from the BOE. But we deal with the BOE all of the time. I have a great relationship with the Executive Director, the previous Executive Director, because we do, you know, we try to help them.

We do all the administrative back-office work for BOE, as well as administering the alcoholic beverage tax and the insurance tax for them. And where they do hear from taxpayers, just as, I mean, we get some.

It is not unusual for me to get a text from the state treasurer, who's a former BOE Member, saying, hey, I've talked to somebody who has a tax issue, and we'll follow up on those immediately as well.

But would it surprise you, I mean, based on what you just said, and I'm glad they have your personal cell number where they can text you, but would it surprise you that BOE members who you talked about the relationship can't even get a response back from your department with respect to an inquiry that a taxpayer made?

I would be very surprised. And, in fact, I know this issue came up earlier, and even Bloomberg reported to try to find somebody that didn't respond. And a very dogged Bloomberg reporter couldn't find anybody who.

Maybe you should talk to the BOE member who told me about that.

I'd be more than happy to. I have talked to the one BOE Member I called specifically, I think, whose district overlaps with yours and asked who I want to know so I can fix the problem. And there wasn't a response. So anyway.

But I'm determined, I'm dedicated, and the department is dedicated to try to respond to everybody's concerns as well as we can and try to administer the taxes as fairly and efficiently as we can. That is my commitment to you. And are we perfect? Absolutely not. But we're given a.

Thank you very much. I appreciate your response.

All right. Thank you. And then you are excused. But if you don't mind waiting around until just in case, there's additional questions for the entire panel. Now we are hearing from our final panelists from OTA, Myriam Bouaziz. Yes.

Wonderful. I've just made the good morning cutoff, so good morning, chair. Committee Members and assemblymember Ting, thank you for joining. My name is Myriam Bouaziz and I'm the Director of the California Office of Tax Appeals as of October 1 of this year. But I've been with the Department since 2018. [And congratulations.] Thank you.

Thank you for the opportunity to appear before you and highlight how OT has developed since the passage of the Taxpayer Transparency and Fairness act of 2017. Currently, OTA has 119 PYs, including nine vacant positions.

When we opened our doors, we were transferred 33 employees from the Board of Equalization and were allocated 89 positions. In the hearings division, there are 26 panel members, three of which are hearing officers who have an audit or CPA background, and 23 administrative law judges.

We have three offices in the State of California, one in Fresno, one in Cerritos, which is in Los Angeles County, and our headquarters is in Sacramento. Fresno is only utilized on hearing days.

The Office of Tax Appeals has a single statutory purpose to provide an impartial and accessible forum for the resolution of state tax disputes between California taxpayers and the state's tax agencies. Historically, the Board of Equalization received an average of 120 appeals a month, with an inventory at any given time of 1200 appeals.

OTA has received an average of 217 appeals a month in this last fiscal year alone. This is up from our initial full fiscal year, where we averaged 126 appeals a month and our current inventory is 1,686. Each case is decided by a panel of tax experts.

The default is three-panel members, but we do have a small case program with one-panel member that can make that decision that taxpayers may opt into. The panels are assigned at random, but expertise, scheduling, and individual caseload are taken into consideration when assigning cases. The Office of Tax Appeals has a taxpayer-driven process.

Taxpayer has a choice of representation. They have a choice of whether or not it's on the written record or if they want to engage in an oral hearing. They can also choose their oral hearing location. Taxpayers may also reasonably extend deadlines for submissions as needed.

We have in-person hearings at all three of our offices and we also provide a virtual hearing option, and we have hearings every single month as needed. The majority of appeals are decided on the written record. Prior to the pandemic, we did not have a virtual option.

In 2022, though we pivoted quickly to ensure taxpayers who opted to have an oral hearing were able to receive one. And now virtual hearings are our most popular option, followed by Los Angeles and Sacramento. Taxpayers have access to interpreters throughout the process at oral hearing, and the final opinion is translated upon request.

We are required by statute to issue a written opinion in every single appeal, so the average time it takes to close a case is 211 days. The average timeline from submission of an appeal to posting of an appeal is 15 months, and the plurality of cases are posted within nine months.

So not every case goes through our full process. That's why there are different timelines. To date, OTA has issued approximately 2800 opinions. OTA publishes approximately 414 opinions a year on average. Issuing and posting written opinions provides clarity to taxpayers and guidance to policymakers. All opinions are posted on our website monthly.

We also post all of the hearing videos and a transcript for every oral hearing that we have. This allows taxpayers, especially those who are self represented, to easily search opinions on the same issue, watch a hearing to familiarize themselves with the process, or go through the transcript if needed.

Having written guidance is not only beneficial to taxpayers, but it also has helped inform policymakers. I have two notable examples.

First is the passage of the California first time abatement program, and the second is the Franchise Tax Board changing policy on the implementation of the California Earned Income Tax Credit to provide eligibility for individuals who earn IHSS income.

If taxpayers have a question about the process, we do have an ombudsperson to help guide them through or refer them to resources at other state agencies. All of our calls are answered by a live person or calls are returned within two days.

55% of the inquiries that we receive are related to appeals at OTA, and the remaining are referred to the appropriate Department. As Nick alluded to, there are several departments that engage in the Administration of tax in the State of California, so it can be very confusing for taxpayers.

So we like to do warm handoffs when we can to the other departments if they've called us by mistake. Our ombudsperson personally responds to about 150 contacts a month, including phone calls and email.

Beyond the ombudsperson, OTA has developed a one-page appeal form that is easy to fill out and provides us with all the necessary information to file an appeal. Both the Franchise Tax Board and the California Department of Tax and Fee Administration include the appeal form with every jurisdictional notice they send out to taxpayers.

So we're very grateful to both departments that have partnered with us to help provide access to the appeals process. It also makes it less confusing because it's only sent out with jurisdictional documents that are appropriate for appeal at the Office of Tax Appeals the Office of Tax Appeals has a Salesforce cloud based case management system.

It tracks various data points and is semi-customizable. We collect over 50 data points and are able to create customized dashboards and graphs. We make the data available for presentations, our Advisory Committee meetings, and the press. We have demoed the system for other state agencies and tax appeals departments in other states.

We also engaged in user testing when we make upgrades to our system, and when we launched our portal. In 2022, we launched IOTA, our online appeals portal. We provide a guided path for taxpayers that they can fill out and get all the information needed for them to file an appeal.

It allows taxpayers, representatives, and tax agencies to file an appeal, see the status, the details of their appeal with instantaneous updates. They can ask questions. They can download case files and manage multiple appeals. Representatives can manage multiple appeals from one screen as kin taxpayers.

The portal was built with feedback from both private and public sectors, and OTA has updated the portal with new features or resources when stakeholders have requested us to do so. We love that it allows for instantaneous communication.

The mail delay sometimes can be hard for taxpayers when they receive something late, and it also expedites the hearing process because there is an instant exchange of information so everyone can respond then much more quickly. As a new agency OTA, one of our challenges was we had to get out there and let people know we existed.

So we engage with stakeholders, leverage relationship and leverage relationships to improve the taxpayer experience. OTA has an engaged Advisory Committee with a broad range of members, including members from the Assembly, Senate, CDTFA, FTB private practitioners from law firms as well as accounting firms.

The group meets regularly to discuss OTA policies and procedures, has influenced our programs, and has helped to develop all of our procedures. We have also gone through substantive large regulatory changes three times in less than seven years.

We've had numerous informal and formal ipms and made changes in response to the valuable feedback we have received from the taxpayer community. We have also implemented statutory changes. First is the small case program I alluded to earlier, allowing one ALJ or non-attorney tax expert to serve as the panel and make the decision.

One caveat is that those cases are not eligible to be presidential. They cannot have presidential status if they are decided by one individual, and the second is allowing non-attorney tax experts to serve on panels. The small case program also allows taxpayers to opt into an expedited process where their appeal is then decided on a shorter timeline.

As of 2022, non-attorney tax experts have served on panels and the hearings division currently has three non-attorney tax experts. When we receive that initial transfer, also from the Board of Equalization, auditors were also transferred along with attorney staff as well as support staff.

So we have had non-attorney experts since the start of the Office of Tax Appeals, just not serving on actual panels. OTA has also partnered with the California Lawyers Association to create an award-winning pro-Bono program. CLA provides free, limited-scope legal advice for appeals before the OTA.

This initiative helps taxpayers navigate the substantive and procedural aspects of tax law essential for their appeals. It is designed to assist those who cannot afford an attorney. OTA informs eligible taxpayers of this opportunity and directs them to contact the California Lawyers Association directly to schedule an appointment with volunteer attorneys.

Over half of the taxpayers that have taken advantage of the program have had their appeal resolved before the hearing due to withdrawal by the Tax Department or tax agency. Early resolution is always the goal, so we're happy the program has provided representation at no cost that save resources and time for both the taxpayer and the state.

Just as Director Maduro stated, one of our largest challenges has been hiring, especially since we had such a truncated timeline to hire a large amount of individuals. And because we have such a large amount of our department is staffed by highly skilled tax attorneys.

Competing with private when the salaries are not in the same realm, even has been challenging. We've had many people interview and we've made offers and then they've declined when they've seen what the salary is going to be.

So that is our largest challenge is to keep ourselves staffed and as we also compete with the other tax agencies for that talent. So I welcome any questions for the Committee. Thank you for allowing me to be here.

Thank you very much. So, to serve on a regular OTA panel, what's the type of expertise then?

So statutorily, you have to have five years of tax experience already prior, so you couldn't come in as a new attorney or a new Auditor.

But generally, due to the level of classifications that we utilize, most people have decades of experience prior to coming on each of our administrative law judges and our auditors because we generally hire, due to the complexity of our cases, senior administrative law judges as well as business tax specialist threes and program specialist threes.

So our average person, but the minimum is five years of experience to join.

Okay. And then does OTA have the authority to invalidate regulations promulgated by another state agency or department?

We do not believe we do. We actually went through interested parties meeting where we were going to place that in our regulations stating we didn't believe we had that authority. Stakeholders did reach out to us and tell us that they did not agree with that assertion.

So then we went to the AG's office and we are awaiting an opinion from them of whether or not we have that authority. We are one of the oldest requests right now on the website, so we're hoping we get that soon so that we can share it with everyone.

All right, Mister Gipson.

It's great seeing you again. Thank you. Thank you very much for your presentation. I just have maybe one or two questions for clarification. Your administrative law judges, what is the denial rate?

We do not track the denial. A win-loss ratio, if people have asked. We did distribute an article that was written by Bloomberg where there was a count done early on in OTA's existence.

I believe from looking it over, I read that it was pretty similar to the Board of Equalization's win-loss ratio, with us slightly having, a slightly higher win ratio, but we don't track that. Our goal is to be legally correct.

Okay, my last question, because again, I appreciate your presentation. So once a taxpayer is denied, what is the recourse from the taxpayers? What happens after that denial from the administrative law judges on their particular case? Can you illuminate for me what that process looked like?

So we have a petition for rehearing process. So following them, receiving their opinion where they did not prevail, they can file a petition for rehearing and have their appeal looked at once more.

Once they've exhausted that they would have to, the tax would be due, but they could engage with the programs that Director Maduros alluded to, which both FTB and CDTFA have of payment plans, offer, and compromise.

Also, during the petition for rehearing process, sometimes when taxpayer or tax agency file, they can go back into settlement and then the case settles without our decision will be posted. But whatever the settlement agreement, if they make one goes forward. So.

So what you just described is final. Basically. It's final.

It's final. Yes.

So they have. They have no. So they have no recourse in terms of taking it to court?

They may always go to court. They can skip us and go to court. Court looks at these cases De novo.

At their own expense.

Yes. We are a prepayment forum that exists, but court, obviously, you'd have to pay. And, and of course, that's expensive. And you'd have to pay the tax.

They have to pay the tax. But a court can overturn that, your decision?

Yes, they may.

How many cases have actually, how many businesses have actually done that? I'm just curious.

I'm aware of. I don't know of any businesses. There was one case that went to court, a trust case, and they affirmed, even though they didn't have to, and used analysis from our opinion to afford.

So they upheld your decision?

But it wasn't a business. It was a trust case.

Okay. But still.

Yes.

Okay. Right.

So we have the opportunity to bring up the panel members, if you have additional questions. No additional questions. Okay. Well, thank you very much. Thank you so much. And we will now transition to the public comment portion of our agenda.

To ensure that everybody who wishes has a chance to speak, we will be limiting public comment to two minutes per person. Additionally, committee is accepting written public comments, so please consider that option if you would like to provide greater detail. And members of the public are welcome up.

Madam Chair, as the public is coming, can we make sure that, I know there was a lot of information that I guess myself and you and Mister Ting could not get out of the panel, and the panel indicated that they will be more than happy to supply that information to us.

So can you reaffirm they will supply that information to us in a very timely manner forthwith?

All right, we have, and I think the LAO also, in writing to the committee. That would be. That would be.

Thank you very much.

They're all shaking their heads. Yes. Okay.

Good afternoon. My name is Joan Armenta-Roberts, and I'm with CalTax. And I want to give you a really quick background so you kind of know where I came from.

I started my career as a sales and use tax auditor with the Board of Equalization, and I also worked for one of the elected board members and then went on to work at two of the large, big four accounting firms. And now, along with CalTax, working part-time, I represent very small businesses as a consultant.

I have my own consulting business. So just kind of, I have the institutional knowledge of everything that's been discussed today. The most significant change that taxpayers have experienced with the emergence of the CDTAFA is the lack of oversight and lack of advocacy for taxpayers. Let me explain this.

There's just a few, a few cases that I've seen and I'm aware of. And the biggest example is the regulatory process right now does not include an unbiased third party review.

So currently, when the CDTFA make the regulatory changes, their proposed amendments, and they allow taxpayers to weigh in and encourage them to send in their comments, but their comments are regular, are not very often accepted.

And so their option then is to, you know, they have interested parties meetings, and after that their option is to ask for a public hearing. But the same staff hold the public hearing. So it is kind of like they make the law and there's no one that oversees it.

So I think there should be an independent third party assigned to review both sides and make the final decision. A second example is changing longstanding policies, which you've discussed already. One was the attempt to change the audit manual and was challenged as an underground rag, and the change was stopped. In addition, right now there's a second.

There's a second change in policy currently being challenged as an underground regulation which was alluded to and a taxpayer has taken it to court and without oversight. This will likely continue as there appears to be a desire to flip decisions made in the past by creating new policies without statutory or regulatory authority.

A third issue that has emerged is the attitude of auditors and other personnel that taxpayers no longer have anyone to run to to get help if they disagree with an audit or decision made by staff. And the staff kind of feel like they don't have, they don't have anybody to answer either.

And I'm talking about, I deal with tax or auditors throughout the state. A common response, taxpayers are told, is if you disagree, you can appeal. To appeal an audit is a long and arduous process that many taxpayers cannot afford. [I'm going to have to ask you to wrap it up, please.] Okay. I'm sorry.

[Ask you to wrap it up.] Okay. I'm sorry, the recent. The most recent taxpayer bill of rights hearing, there was a lot of taxpayers that complained about not being treated fairly. And so I happen to know who to go to, and I know Trista Gonzalez is great. She's very responsive.

There's people at the higher level, but I don't like to have to take it to that level. So I think this needs to be resolved at a lower level. Thank you. Thank you very much.

Hi, Gina Rodriguez. I'm a principal at Ryan, LLC. I'm in their advocacy services area. We are not subject to Sarbanes Oxley Act, so we are allowed to try to help government improve processes and ensure taxpayer rights are protected. Just two very quick issues.

I hope no one today discussed the high number of appeals that are withdrawn from the OTA. And I think OTA is doing either a really good job trying to ensure the taxpayers understand what the issue is. Pulled some numbers, and in 2018 to 2022.

So for a five year period, FTB, and I don't have CDTFAs, but FTB had pulled, withdrew from the OTA. 2900 cases, so 2900 appeals. And again, we had all talked about making sure we resolve cases at the lowest possible level because it's much more effective and efficient for the state as well as much cheaper for taxpayers.

So that was something of concern. High number of appeals being withdrawn from the OTA. Second issue is we have a deemed denial process for the FTB Franchise Tax Board. We also have one for the CDTFA, but they don't match.

So if I am in appeals, or, excuse me, if I have a refund claim at FTB and six months go by, I can appeal that to the OTA or I can go to court. If I have a refund claim at CDTFA and six months go by, it is also deemed denied, just like it is at the FTB.

But I have no option to go to the OTA. I have to go to court, and this is simply wrong for taxpayers. We should be given the option to go to the OTA in these situations. Thank you very much. Thank you very much.

Madam Chair, Mister Gipson, members of the committee staff, Marc Aprea. I'm here on behalf of the California Alliance of Taxpayer Advocates. It is a trade association representing property tax practitioners. Thank you for the opportunity to speak. I note that the title of the hearing is evaluating California's newest tax agencies.

Yet much of the hearing was dedicated to relitigating ACA 11 and past tax agencies. I want to remind the committee that ACA 11 came before this committee on two occasions, it never passed, and there was considerable opposition, not only from CATA, my client, but from other taxpayer organizations as well as the California Assessors Association.

And while there were many reasons for the opposition to that measure, the primary reason for the opposition was that the existing BOE is a body that has elected members.

The state comptroller and four BOE Members and taxpayers as well as assessors appreciate the fact that we have elected officials to which we can petition and the fact that we have parties that are oftentimes at odds both opposing that measure and supporting the BOE. I hope the committee will take note of that. Thank you for your time.

Thank you very much. And I would just like to ask if anybody would like to respond to the, from the panel. Would you like to respond to any of the public comments? No need to, but if you would like to, if you have something to respond, Mister Maduros.

I would just thank the speakers for their comments and say that we, you know, both with Miss Armenta Roberts and Mister Rodriguez, we deal with both of you and, you know, we continue to try to resolve any issues that you may have.

I don't necessarily agree with the characterization of the, you know, some of the comments, but I do think, you know, again, it's a large department and you're going to have some outliers, and we try and resolve those wherever they're raised.

So please continue to work with us and - who's the Chief Deputy at the department to try to resolve this.

And with regard to Gina Rodriguez's comment about the difference between the Franchise Tax Board deemed denial and the California Department of Tax and Fee Administration, there are several areas of law that actually have differences between the two.

And I think I, that stems from part of the appeals process prior being vertical for the appeals that were emanating business tax appeals versus franchise and income tax appeals. So that's something if policymakers would like to look at and make the rules more in line.

There are actually several differences in law that I'd be happy to discuss outside.

And I would say that we're trying to resolve. That really is a comment, I think, largely around the technology transfer agreements where we recognize we have refund claims that have been sitting for quite a while.

I'm not sure it's in the state's interest, I think it's in the state's best interest to try to resolve that through the regulatory process and get a process in place rather than just shift the difficulties to OTA.

All right, thank you. Okay. Any, all right. You want to say something there, Mister Gipson?

No, I was going to use it for my close, for the final comments.

Well, how about you close with your final comments.

Thank you very much. I appreciate that. And this has certainly been enlightening for me and certainly appreciate the robust conversation we've had. And thank you. The agencies, you have certainly shed a great deal of light.

I've taken a lot of notes and certainly for me it's important that we do some follow up and get your feedback and also answers the question, questions you were not able to address. But it also points to the public comments. Again, oversight and accountability.

That word continued to ring loud and clear in my mind that we need to make sure we have that because we as elected, whether it's BOE members or just assembly members or Senators, we are accountable to the, to our constituents. And our constituents are the people we represent.

They have the right and the responsibility to be able to reach out to us and call our offices and get the response, at least the dialogue started with respect to any issues they may have. And I don't see that. And we're talking about the largest tax-paying, you know, California is large.

We're talking about the State Board of Equalization was created for time to hold these elected officials accountable and they should be held accountable.

And I don't believe that it was in the best interest of our, well, I don't believe that our forefathers envisioned to have a tax agency with no accountability, should be, certainly have elected representation from people who elect them and have an expectation. And this doesn't.

And I look forward to the follow-up and the dialogue and thank the chair, for one, calling this informational hearing again, I think it was most enlightening.

Okay. And I would like to thank all the committee members that showed up today and certainly, the staff worked very hard. Thank you to the panelists also.

But Mister Gipson, I really want to thank you because again, this big change took place in 2017 and to our knowledge, we have not had a meeting like this where we're really talking about how has, how have things progressed with CDTFA and OTA since 2017.

So this meeting, this oversight hearing was really, this hearing was really long overdue and I want to thank you for requesting it and we will continue the conversation.

Well, I also want to thank the speaker's office for approving it and appreciate you for your leadership as well.

All right. Okay. And with that, this meeting is adjourned.