State Board of Equalization:
First Fire Tax Bills to Be Mailed in August

The State Board of Equalization plans to begin mailing the first bills for the state's new fire tax – described by supporters as a "fire prevention fee" – in August, and hopes to have all bills sent by December, BOE staff told board members at their July 25 meeting in Culver City.

Observers believe the tax will be subjected to a legal challenge as soon as the first bills go out, since property owners then will have legal standing to mount a challenge.

Echoing the sentiment of many property owners, BOE Vice Chair Michelle Steel said during the meeting, "This so-called 'fee' is an unconstitutional tax." The 2011 legislation authorizing the charge (ABX1 29, Blumenfield) did not receive the support of at least two-thirds of the Legislature, as required for a tax, and the charge itself does not qualify as a fee under Proposition 26.

The bills will be sent to approximately 827,000 people identified by the California Department of Forestry and Fire Protection as being owners of habitable property in areas where the state has responsibility for fighting fires. The bills will be mailed in the alphabetical order of the counties of the recipients, and the first bills will be mailed in batches of 4,000 per day, in anticipation that there will be numerous calls from those who receive them. The mailings eventually will increase to approximately 10,000 per day, BOE staff said.

Based on this plan, all bills for the 2011-12 year will be in the mail by December, staff said. The affected property owners may be in for a surprise a few months later, in March, when bills for 2012-13 arrive in their mailboxes. BOE staff said this should be the only time in which property owners receive two bills during the same fiscal year.

The BOE also plans to mail an advance notice to the affected property owners to warn them that the bills are coming, and to provide them with a brochure explaining the "fee."

The tax will cost property owners up to $150 per habitable structure, and must be paid or protested within 30 days of the billing date. Owners of property within the boundaries of a local fire protection agency will be eligible for a reduction of $35 per habitable structure.

BOE Member George Runner estimated that half of the property owners live in his district.

In other action from the BOE's July 24-26 meetings in Culver City:

Board Cautious in Deciding Cases on Taxation of Income Earned by American Indians. In two July 24 appeals involving whether the Franchise Tax Board should be taxing specified income of members of Indian tribes, the board opted not to make a decision.

It appeared from questioning that Mr. Runner favored the taxpayers' positions, and in one case (Appeal of Robert C. and Ruby B. Johnson), a motion to grant the taxpayers' petition was turned down by a 2-3 vote (Mr. Runner and Vice Chair Steel in support, Chairman Horton, Ms. Yee and Ms. Mandel opposed).

At issue in the Johnson case is whether the FTB can tax a tribal member living on a reservation for income received from a non-tribal employer on the reservation. The Johnsons live on the Quechon Indian Tribe reservation near the Arizona border, and Mrs. Johnson works for the Fort Yuma Indian Hospital – a facility that is on the reservation, but is run by the U.S. Department of Health and Human Services.

In a precedent-setting 1972 case (McClanahan v. Arizona Tax Commission), the U.S. Supreme Court held that the states could not tax "reservation source" income. It was pointed out during the BOE appeal that the court knew the McClanahan income was from a non-tribal source, although it did not say so in its opinion.

Natasha Paige, representing the FTB, said the term "reservation source" could mean only "tribal source" income. This was disputed in a line of questions by Mr. Runner, who said there was no reason to include the term "reservation" in the McClanahan opinion if it just meant "tribal source."

The FTB also made an outrageous suggestion that the board should vote to "abstain" on the case, which would cause the taxpayer to lose and go to court. This would force the taxpayer to spend thousands of dollars – if not hundreds of thousands – in appeals when the amount at issue in the case is only $1,012.

Instead of deciding the appeal, the board's majority asked staff to bring back a report on the issues in the case.

The other no-decision case involves residency. In the Appeal of Daniel Marcotte, the FTB asserted that the appellant, who is a member of the Morongo Band of Mission Indians, did not live on the reservation in 2006, and thus his income was taxable by California.

The FTB argued that he lived in a house in Beaumont, and upon questioning by Mr. Runner, FTB staff said their position was supported by the fact that tax documents were sent to the Beaumont house, and Mr. Marcotte paid the utility bills.

In response, Mr. Marcotte pointed out that he owned the house as a rental property, but had been unable to rent it, and had a friend live there to maintain the property (a housesitter). Naturally, he would pay the utility bills in this situation. He claimed that he lived on the reservation in a house previously owned by his mother, who had died years earlier.

Of interest was the fact that the FTB found unpersuasive two letters from the Morongo Tribe attesting to Mr. Marcotte's residency. During questioning from Mr. Runner, Ms. Paige of the FTB admitted that a letter from a neighbor would be more important to the tax agency than letters from the tribal government. The FTB also said home ownership is not necessary for residence.

The board postponed a decision in this case to allow the taxpayer more time to furnish documents under the "30-30-30" process.

Seniors Overpay Income Tax, but Can't Get Their Money Back. Manik and Devika Bose unknowingly overpaid their California income tax for seven years by paying taxes on Social Security income that is exempt from tax. However, they were unable to get refunds for 2001 and 2002, as the FTB asserted that the statute of limitations had expired.

Representing the taxpayers, Erica Brinitzer argued for equitable estoppel because of what she said were confusing tax forms and instructions. She said the FTB itself must have felt the forms and instructions were confusing, because the agency changed them in 2006 and 2011. Nancy Parker, an FTB attorney, said she failed to see how the forms were confusing. The board voted 5-0 against the taxpayer. (CalTax: In fact, the exemption for Social Security income on the California tax return is confusing, because the state tax form starts with federal adjusted gross income that includes Social Security that is subject to federal tax. Taxpayers have to know to back out the Social Security that is taxed by the federal government but is not taxed by California. What makes it more confusing is that part of Social Security income is not taxed by the federal government, and the taxpayer has to figure what this portion is, and must be careful not to back it out of income for California.)

July 27, 2012
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