The Office of Tax Appeals released 50 opinions November 3, including a decision denying a refund sought by a company that received incorrect information from the Franchise Tax Board about the deadline for filing a refund claim.
In the Appeal of HD Research Corp., it was undisputed that an FTB employee informed the taxpayer that the deadline for filing a claim for a $493,164 refund was July 15, 2024, and that the claim was filed almost two weeks before that date, on July 2.
The problem for the taxpayer was that the actual deadline was April 15, 2024.
The taxpayer argued that its reliance on the erroneous information established reasonable cause for missing the true deadline, but the OTA disagreed.
The erroneous advice was provided eight days after the April 15 deadline expired, the OTA noted, so the FTB “was not ultimately responsible for appellant’s untimely filing.”
Even if the FTB had misled the taxpayer prior to April 15, it wouldn’t have mattered, the OTA added.
“[E]ven if FTB had been responsible for a delay in appellant’s claim for refund and caused the claim to be filed after the expiration of the statute of limitations, unfortunately, there is no reasonable cause or equitable basis for suspending the statutory period,” the OTA opined. “A taxpayer’s failure to file a claim for refund or credit within the statutory period bars a refund or credit even if the tax is alleged to have been erroneously, illegally, or wrongfully collected. Further, R&TC section 18572 does not provide FTB with the authority to alter the statutorily prescribed filing deadline ….”
Other notable opinions released by the OTA:
Tax Agency Prevails in Two Precedents Involving Sales Tax Disputes. In the Appeal of HM Carpet Inc., the OTA unanimously upheld the California Department of Tax and Fee Administration’s determination that the company – a construction contractor that furnished and installed flooring materials – failed to report more than $8.7 million in purchases that were subject to use tax and more than $4.2 million in sales that were subject to local transactions and use taxes.
During an audit, the CDTFA determined that the company had issued resale certificates with respect to nearly 91 percent of its flooring material purchases during the liability period, but nothing in the record indicated that the appellant’s vendors paid tax on the materials, and the company did not claim that it resold the materials at retail.
The appellant argued that its vendors did not verify the validity of the resale certificates and did not take the certificates in good faith. Therefore, the company argued, the vendors are liable for the sales tax on the transactions at issue.
The OTA wrote that it found the arguments “unpersuasive,” and added that this was the company’s second audit, so it should have known how to correctly collect and remit the taxes at issue.
The taxpayer argued that the first audit took so long to be finalized that it did not help the company rectify problems before the second audit commenced. The OTA rejected this argument, ruling that the record indicates that the company had at least two and a half years in which to improve its reporting of taxable purchases, and that the company did not meet its burden of proving that the first audit took too long.
The second precedential opinion, in the Appeal of USA Hoist Company Inc., centers on the question of whether hoists, when leased with an operator provided, constitute a taxable lease of equipment or a non-taxable service agreement.
The opinion begins with a tutorial: “Hoists are temporary external elevators that are attached to the sides of buildings/structures, which are being constructed, demolished, or renovated. They transport people and materials up and down such buildings/structures. The hoists at issue are controlled by an operator whose role requires skilled labor and specialized training. The pool of available hoist operators is limited.”
The appellant, an Illinois corporation, served as a subcontractor providing hoists to general contractors for construction projects in several states, including California. For some construction projects, the appellant provided the operators, who were the appellant’s employees.
“Due to union requirements, many of appellant’s general contractor customers used appellant’s union-member operators because they did not have access to another operator who was a member of the union,” the OTA stated.
Using the appellant’s sales journal and invoices, the CDTFA identified charges totaling $8,576,183 for “leases” of hoist systems provided during the liability period. The CDTFA found that while appellant generally provided an operator, most of the “rental” agreements either specifically excluded the operator from the appellant’s scope of work or stated that the appellant’s customers would be responsible for providing their own operators. Thus, the CDTFA concluded that the appellant’s operators were optional, and that the agreements constituted taxable leases rather than nontaxable service contracts.
The CDTFA identified taxable hoist rental charges of $4 million, compared to reported taxable sales of $1.7 million, leading to a deficiency measure of $2.3 million.
The OTA focused on the question of whether the operators provided by the appellant retained full control of the hoists (which would make the cost nontaxable) or if the general contractor had control (creating a taxable lease) by virtue of provisions allowing the general contractor to select and discharge hoist operators, even if the appellant provided them. The OTA sided with the CDTFA, opining that the operators were not mandatory, so the contractor had control regardless of whether the operators were used.
The appellant prevailed on one issue in the appeal, however. In a dispute over whether certain communications systems were taxable, the CDTFA argued that they were because they were altered – specifically, that wires were cut. The OTA rejected that position, finding that the appellant’s witness was credible and that, “more likely than not, appellant did not cut or alter the wires but merely adjusted their length by tying up excess wire with zip-ties.” Thus, the OTA found that the appellant leased the communication systems in substantially the same form as acquired, so their rental streams are not subject to tax, to the extent that the appellant paid sales tax reimbursement or use tax when it purchased the communication systems.
OTA Opines That it Lacks Jurisdiction to Decide Dispute Over SDI Withholding. In the Appeal of T. Greene, the OTA ruled that it does not have jurisdiction over a dispute involving state disability insurance (SDI) withholding.
Employees in California are required to contribute to the SDI fund. People who receive wages from more than one employer and, as a result, pay more than their required amount toward the annual SDI contribution, are entitled to a refund of the excess amount paid. The refund claim must be filed on the personal income tax return for the year in which the excess amount was deducted from wages. If the FTB denies the claim, the claimant may file a protest and submit the claim to the director of the Employment Development Department (EDD).
In this dispute, the OTA determined that the appellant did not file a 2017 return within the limitations period, and the record did not show that the appellant filed a timely protest with the EDD.
“Consequently, respondent’s denial of the refund of overpaid SDI contributions is final, and OTA has no jurisdiction to consider the matter,” the OTA concluded.
Another issue in the dispute was whether the FTB correctly denied two refund claims totaling more than $10,000.
“Appellant argues that refunds for both years are warranted because she worked hard to earn her income, and it is not fair for respondent to keep over $10,000 that the parties agree was overpaid,” the OTA wrote. “It is undisputed that appellant overpaid taxes for both years. … It is also undisputed that appellant’s 2017 and 2018 Forms 540 were filed many months after expiration of the limitations periods. … Every taxpayer whose claim is barred by a statute of limitations suffers a loss. The equitable exception proposed by appellant would swallow the rule.”
Extension of Due Date Doesn’t Translate to Extension of Time to File Claim for Refund, OTA Rules. Several opinions involved disputes in which taxpayers who received filing extensions were surprised to discover that the statute of limitations for filing a refund claim was based on the original filing date – a discovery that came with a large price tag for several appellants.
In the Appeal of N. Snyder, the taxpayer’s filing deadline was extended by the FTB from April 15, 2020, to July 15, 2020, due to the COVID-19 pandemic. The appellant filed a claim for refund on June 3, 2024, and asserted that it was timely, as it was within four years of the filing deadline.
Not so, ruled the OTA.
“Treasury Regulation section 301.7508A-1(b)(4) provides that FTB’s postponement of the original due date to July 15, 2020, does not change the original statutory due date of April 15, 2020, on which the statute of limitations in R&TC section 19306(a) is based,” the OTA concluded. “Thus, four years from the original ‘due date’ of the return remains April 15, 2024.”
This issue was present in several other disputes, including one (the Appeal of G. Gatel) in which the taxpayer lost more than $95,000 to the state and another (the Appeal of H. Bezdjian and S. Bezdjian) in which the taxpayers lost more than $46,000 – in both cases, the money had been seized by the FTB based on incorrect assumptions that the taxpayers had a filing requirement, but the taxpayers didn’t respond to FTB notices in time to meet the deadline for filing refund claims.