State Board of Equalization:
BOE to Spend Millions More on Building Repairs

The State Board of Equalization will have to spend $3 million to $4 million to replace faulty glass panes with new materials at its headquarters building at 450 N Street in Sacramento, staff told the board during its August 21-22 meetings in Sacramento.

Liz Houser, deputy director of administration, said the Department of Finance approves of the spending, which she said is necessary to improve the safety of the building in light of past incidents where glass fell from the high-rise to the sidewalks below.

In addition to the glass replacement, the BOE will have to pay for extensive repairs to failing drainage pipes, but Ms. Houser said a cost estimate has not yet been developed for that project.

BOE Member George Runner questioned why the BOE has to pay for the repairs, considering that it is only a tenant in the building, which is owned by the Department of General Services (DGS). Ms. Houser said the BOE's contract with DGS requires the tax agency to pay for such repairs. The BOE has borne approximately $64 million in repair costs already, due to a variety of calamities at the headquarters building.

In other action from the BOE's August 21-22 meetings in Sacramento:

Taxpayer Says BOE Needs Better System for Documenting Files. During sales and use tax appeals hearings on August 21, one taxpayer criticized the BOE's handling of documents filed by taxpayers, saying sending documents to the board is like sending them "into the grand abyss."

Lisa Gygax, an attorney representing taxpayers in the Appeal of Northbay Wellness Group, said the BOE has no endorsement process to show what has been submitted and filed, nor any docket showing what is in each audit file. She said she has submitted documents, only to be asked for them again at a later date, and said that when she requested a copy of her client's audit file, it did not contain some items that she had submitted.

The appeal involved a marijuana collective that was in operation in 2005 and 2006, before the BOE issued notices stating that medical marijuana was subject to sales tax, and is not exempt as a medicine. The taxpayers said they tried to get a seller's permit when they started the collective, but the BOE would not issue one. Years later, after the BOE launched an audit, BOE staff asked one of the collective's leaders to sign a retroactive seller's permit in an attempt to assign tax liability to her personally, Ms. Gygax said.

On a 5-0 vote, the board held that the marijuana sales were not exempt as sales of medicine, and that taxes are owed.

Use of Negligence Penalty Questioned. During the August 22 hearing in the Appeal of Buy Rite Auto Wholesale, BOE Member George Runner said he was stunned to discover that BOE staff initially imposed a negligence penalty on a taxpayer whose reporting of taxable sales was alleged to be less than 1 percent off the mark. The negligence penalty initially was imposed "because petitioner did not maintain adequate books and records," but was dropped after the taxpayer protested, according to the BOE's hearing summary. Mr. Runner said the fact that the penalty was even considered reveals something about the auditor's state of mind.

On a 3-2 vote, with Mr. Runner and BOE Vice Chair Michelle Steel opposed, the board upheld its staff's determination that taxes were owed on sales that had not been reported by the auto wholesaler.

FTB Concedes on Houseboat Repairs Case. The day before the August 21 income and franchise tax appeals hearings, an interesting development occurred. In the Appeal of Lane Brennan, involving a personal income tax dispute over repair expenses vs. capital improvements that amounted to a proposed tax of $966, the case was dismissed August 20, as the Franchise Tax Board conceded. The hearing summary was 15 pages long, with a tax issue related to timing.

The $966 was not even the potential net revenue to the state, because if expensing had been denied, the amount would have been depreciated over time, with roughly the same revenue effect. (CalTax: It is unclear why government auditors and attorneys are spending so much time and money over insignificant issues and revenue. These government employees should adhere to their internal cost benefit ratios before taking a case all the way to the board.)

Higher Cost Recovery Fees Approved. On a 4-1 vote, with Vice Chair Steel opposed, the board set new cost recovery fee amounts that will take effect in 2013.

State law (SB 858 – Chapter 721 , Statutes 2010) requires the BOE to impose a "Collection Cost Recovery Fee" on past due liabilities beginning January 1, 2011. The amount of the fees imposed must be the same as the collection costs incurred by BOE.

For small liabilities (up to $2,000), the 2012 fee was $185 and the 2013 fee will be $190. For medium liabilities ($2,000 to $50,000), the 2012 fee was $550 and the 2013 fee will be $570. For large liabilities (more than $50,000), the 2012 fee was $925 and the 2013 fee will be $950.

"Customer" Service Improvements Planned. Cynthia Bridges, the BOE's new executive director, told the board that a Customer Service Improvements Initiative is being launched to, among other things: increase the range of services provided to taxpayers; improve the tax agency's website and add multilingual pages; and review all publications to make sure they are useful for taxpayers. A project committee will be formed to make recommendations to the board.

August 24, 2012
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