The California Taxpayers Association filed suit August 15 to challenge a retroactive tax increase that violates the rights of companies operating in California (Senate Bill 167, Chapter 34, Statutes of 2024), CalTax President Robert Gutierrez announced.
The suit was filed in Fresno County Superior Court.
“This legislation imposes a retroactive tax hike that would reach back several decades, allowing California’s tax collectors to go after companies that already paid every cent of the taxes owed under the laws that were in place at the time,” Gutierrez said. “This egregious violation of taxpayers’ rights cannot go unchallenged.”
SB 167 retroactively modifies the rules used to apportion global income when determining the portion that is taxable in California. The change, included in the state budget as a revenue-raiser, would increase taxes on many CalTax members and others for tax periods that ended decades ago.
Among other things, the new law requires companies to exclude foreign dividends from their sales factor when making a water’s-edge election. This was inaccurately described during legislative discussions as a “clarification of existing law,” when it actually overturns a law that has been in place since the 1960s.
SB 167 ignores the decisions of two unanimous panels of judges with the independent Office of Tax Appeals (OTA). These decisions make clear that the longstanding law authorizes companies to include foreign dividends in their sales factor.
Further evidence of SB 167’s retroactivity is contained in the revenue estimates prepared by the Department of Finance. The DOF estimated that SB 167 would generate $1.3 billion immediately, and an additional $200 million annually thereafter.
“This legislation shreds well-reasoned, unanimous decisions of California’s Office of Tax Appeals and serves as a not-so-hidden tax increase,” Gutierrez said. “This is a cash grab that undermines the tax system and threatens the integrity of the tax appeals process in California, and it must be stopped.”
As part of its challenge, CalTax filed Public Records Act requests with the Department of Finance, Franchise Tax Board, and Office of Tax Appeals to gather additional information.
The law firm of Eversheds Sutherland LLP is representing CalTax in this matter.