Courts:
Court Says BOE Must 'Comply With the Laws Governing Tax Appeals'

The Second District Court of Appeal blasted the State Board of Equalization with both barrels in a strongly worded May 23 opinion relating to the BOE's allocation of sales tax revenue to several cities in Los Angeles County.

Refusing to pave the way for a pending settlement by vacating a trial court's judgment that also took the BOE to task, the appellate court stated that "the judgment should remain intact as a reminder to the agency that it must comply with the laws that restrict its decisionmaking authority." The court added: "Unless and until the judgment is reversed on appeal, it should remain on the books to encourage the Board to comply with the laws governing the tax appeals within its jurisdiction, including local sales tax reallocations as well as the payment of corporate and personal income taxes."

The consolidated cases that spawned the opinion involve sales tax revenue generated by a retailer of telecommunications hardware that sold products through a toll-free telephone number based in Georgia, and delivered merchandise to customers from a warehouse in Pomona. Under the BOE's longstanding "warehouse rule," the local tax revenue from these sales had been allocated to all cities and agencies in the county, via a "countywide pool." A string of BOE actions (detailed in the court's opinion) changed this situation, culminating with a 2010 board decision to allocate the revenue to Pomona, a change that was retroactive to 1993, and called for Pomona to receive more than $7.1 million that previously had been distributed to – and presumably spent by – other cities and agencies.

Twenty cities sued, and in March 2011, Los Angeles Superior Court Judge David Yaffe ordered the BOE to set aside its 2010 decision, take no further action to enforce the decision, and conduct further proceedings consistent with directions from the court.

Instead, the BOE, the plaintiff cities and Pomona decided to settle the case. The parties agreed to leave the BOE's 2010 decision intact, and Pomona agreed to reimburse the cities more than half of the allocation ordered by the board. As part of the settlement, the parties jointly filed a motion asking the Court of Appeal to vacate the trial court's judgment that essentially threw out the BOE's decision.

No dice, said the Court of Appeal. "Based on our analysis, we conclude the interests of the public would be adversely affected if the judgment were vacated," the court wrote. The court continued:

"(I)n the trial court's view, the Board demonstrated a lack of knowledge of basic statutory and constitutional rights that inure to the benefit of the public …

"As recited in the judgment, the Board: (1) failed to understand that it must explain the basis of its decisions; (2) paid little attention to its statutory authority, or lack thereof, to apply regulations retroactively; (3) appeared unconcerned with the principles of due process; (4) was oblivious to the inequities of considering an appeal filed eight years after the Board Management decision; and (5) ignored the requirements of the Administrative Procedure Act.

"The trial court's judgment is tantamount to a public reproval and is an embarrassment to an agency charged with functions vital to the financial stability of California and its subdivisions and the finances of state taxpayers."

The decision in City of Palmdale v. State Board of Equalization (City of Pomona real party in interest) and consolidated cases was written by Presiding Justice Robert Mallano. Justices Victoria Gerrard Chaney and Jeffrey Johnson concurred.

May 25, 2012
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