Agency Won’t Enforce Challenged Amendments to Sales Tax Audit Manual Unless They Are Adopted Through APA or Exempted, CDTFA Director Says


The California Department of Tax and Fee Administration “will not issue, use, enforce, or attempt to enforce” recently published amendments to Audit Manual Sections 4 and 13 — challenged by former state lawmaker Dean Andal as an underground regulation – “unless or until the amendments are adopted pursuant to the Administrative Procedure Act (APA) or an appropriate APA exemption has been identified,” CDTFA Director Nicolas Maduros said June 19.

Maduros made the statement in a brief memorandum to Kenneth Pogue, director of the Office of Administrative Law (OAL), as a formal certification from the CDTFA in response to Andal’s challenge.

In his April 18 petition to the OAL challenging the amendments to Audit Manual Chapter 13 (“Statistical Sampling”) and Chapter 4 (“General Audit Procedures”) as an underground regulation, Andal wrote:

“The changes represent a dramatic change in the CDTFA’s policy in the conduct of statistical sampling during taxpayer audits. These audit manual changes are a rule of general application that are instructions to auditors and taxpayer alike. Auditors who do not follow the audit manual procedures are subject to discipline and thus the audit manual procedures are uniformly applied. Taxpayers are required to submit to the new standards. … The recently published changes to Sections 4 and 13 of the CDFTA’s audit manual, after 40 years of longstanding practice, is an amendment to a rule of general application. This underground regulation is not subject to the two relevant potential exemptions from the APA requirement for ‘internal management’ or ‘audit guidelines.’”

Andal wrote that the changes proposed by the CDTFA “have obvious, substantive, and harmful effects on taxpayers,” adding:

“Just one example of a negative impact on taxpayers is the change in the previous longstanding provision of the audit manual that required the taxpayer and auditor to agree on the methodology to be used in statistical sampling. The new audit manual allows individual auditors to impose whatever methodology they want on the taxpayer. … The new policies upend longstanding audit procedures that have been relied on by auditors and taxpayers alike for over 40 years. The changes were not submitted to the regulatory protections of the APA, will result in widespread confusion among taxpayers when they are selected for a cyclical audit, and are likely to result in millions of dollars of overpayment of tax as a result of the mandated unsound statistical methodology.”

Andal served on the Assembly Revenue and Taxation Committee during his tenure as a state lawmaker, and later was elected to the State Board of Equalization – where his role as chair also made him a member of the three-person Franchise Tax Board – before returning to the private sector as a managing director at PwC.

CalTax raised the same concerns during the CDTFA’s interested parties meetings on the proposed amendments, but the tax agency published its final version of the amendments without including changes recommended by CalTax, Andal, and others to protect taxpayers’ rights.

Although the Audit Manual changes had an effective date of April 1, 2023, CalTax members received notices prior to that date from auditors in the field that their existing sales tax audits already were using the new rules.