United States: California Legislature Passes Bill Transferring Many Of State Board Of Equalization's Responsibilities To New Tax Agencies

On June 15, 2017, just 72 hours after its publication, the California legislature passed the Taxpayer Transparency and Fairness Act of 2017, in a move that will transfer significant responsibilities for taxation and administration from the State Board of Equalization (SBE) to two newly established agencies that will be overseen by governor-appointed directors.1 Effective July 1, 2017, the California Department of Tax and Fee Administration will assume many of the SBE's duties, including administration of sales and use taxes. Beginning January 1, 2018, the Office of Tax Appeals will conduct appeals of most tax types.2 The SBE's responsibilities will be limited to property tax, insurance premiums tax and alcoholic beverage taxes. California Governor Edmund G. Brown Jr. is expected to sign this legislation.3


The SBE was established in 1879 by the California Constitution.4 As one of the only elected tax agencies in the U.S., the SBE is required to have five voting members consisting of the state Controller and four elected officials. The SBE has historically had broad responsibilities involving many different taxes and fees, including the administration of sales and use taxes, the oversight of property tax assessments, and the clarification of existing tax laws by acting as an appellate body for various direct and indirect tax assessments.

Recent reviews of the SBE's activities by the California Department of Finance resulted in findings of significant inefficiencies, including the misuse and misallocation of revenues.5 The recent legislative modifications to the SBE's authority and responsibilities are the result of a call to action by Governor Brown for substantial reform as a result of the Department of Finance's findings.6 The Act clearly states what the legislature sees as systematic failures within the current SBE. The legislature acknowledges that "[t]axpayers deserve to have appeals considered by an independent, objective panel with sufficient expertise and a sole focus on tax issues."7 As explained by the legislature, "[d]ue to the State Board of Equalization's failure to focus on its core responsibilities, significant errors in the board's allocation of sales and use tax revenue among the state, cities, and counties continue to materialize and result in the inability to effectively plan for the provision of public services."8 The legislature further explains that "[i]n order to restore the public's trust in the system and provide a work environment that is free from undue influence, it is necessary to enact changes to the State Board of Equalization that put fairness, consistency, and transparency of the tax administration and appeals processes in the forefront."9

Although the Act effectively strips the SBE of much of its authority and some of its funding, the SBE will continue to maintain its constitutional functions including the oversight and administration of property tax assessments and certain excise taxes such as insurance premiums taxes, among others.10 Nonetheless, this change will greatly impact many taxpayers as the SBE will no longer collect and administer sales and use and business taxes, nor will it hear appeals for these taxes or income and franchise taxes.

Department of Tax and Fee Administration

Effective July 1, 2017, the Act establishes the California Department of Tax and Fee Administration (TFA) to assume the SBE's responsibilities for administering and collecting various taxes including sales and use, tobacco and cannabis taxes.11 The governor will appoint a director, chief deputy director and chief counsel to head the agency.12 The Act transfers duties, powers and responsibilities from the SBE to the TFA.13 Specifically, the Act provides that "[a]ll laws prescribing the duties, powers, and responsibilities of the [SBE] to which the [TFA] succeeds, together with all lawful rules and regulations established under those laws, are expressly continued in force . . .."14 The TFA is authorized to promulgate regulations that are necessary to perform its duties.15 The current SBE employees working in the affected tax departments will be transferred to the TFA.16

Office of Tax Appeals

The Act also establishes the Office of Tax Appeals (OTA), which will assume responsibility for hearing any petition for redetermination, reassessment, reconsideration or rehearing, as well as any taxpayer appeals from the California Franchise Tax Board (FTB) related to personal and corporate franchise tax.17 Administrative protests, applications for hearings, and claims for refund will also be heard by this new agency.18 Other than appeals of property tax and miscellaneous taxes retained by the SBE, "the [OTA] is the successor to, and is vested with, all of the duties, powers, and responsibilities of the [SBE] necessary or appropriate to conduct appeals hearings."19 The Act provides that the OTA will begin to conduct appeals on or after January 1, 2018, providing the SBE with continued authority to hear previously scheduled cases up until that date.20 The OTA is directed to adopt any regulations that are necessary to perform its duties.21

The OTA's new tax appeal panels will consist of three administrative law judges, appointed by the director of the TFA, to hear all tax appeals.22 The Act provides that the OTA will be required to publish a written opinion for every appeal decided by each panel, and that the person filing the appeal may appeal an OTA decision to the superior court.23


This legislation was passed with minimal notice and taxpayer input, and dramatically shifts the landscape for sales, use, personal and corporate-level taxes. Opponents of the change criticize the replacement of elected officials with state appointed directors and judges to serve as taxpayer advocates during the appeals process. Alternatively, proponents cite greater transparency and fairness evidenced by the removal of ex parte communications and written decisions. The changes to the appeals process for personal and corporate franchise tax may impact the way that taxpayers approach administrative remedies, and do create some immediate uncertainty as to process and procedure given the abrupt manner and speed with which the legislation was drafted and enacted. Due to the July 1, 2017 effective date of the legislation, the changes will commence very soon. Taxpayers can expect to see a number of regulatory clarifications and statutory amendments in the future as policymakers work through various ambiguities within the new law.


1 A.B. 102, as passed by California Assembly and Senate on June 15, 2017.

2 The legislation is operative on July 1, 2017, but the new Office of Tax Appeals will not conduct appeals until January 1, 2018.

3 On June 21, 2017, the legislation was presented to Governor Brown for approval.

4 CAL. CONST. art. XIII, § 17.

5 Final Report—California State Board of Equalization Evaluation, California Department of Finance, March 30, 2017.

6 Patrick McGreevy, Gov. Jerry Brown Says California's Tax Board Is "a Mess" and Reform Is Needed, LOS ANGELES TIMES, May 11, 2017. 

7 A.B. 102, § 2(b).

8 A.B. 102, § 2(i).

9 A.B. 102, § 2(j).

10 CAL. GOV'T CODE § 15600. Please note that the SBE will retain the duty to adjust the motor fuel tax rate for the 2018-19 fiscal year. The statutory citations in this SALT Alert presume that Governor Brown will sign this legislation.

11 CAL. GOV'T CODE §§ 15570 to 15570.100.

12 CAL. GOV'T CODE § 15570(b).

13 CAL. GOV'T CODE §§ 15570.22 to 15570.30.

14 CAL. GOV'T CODE § 15570.22.

15 CAL. GOV'T CODE § 15570.40.

16 CAL. GOV'T CODE § 15570.26(a).

17 CAL. GOV'T CODE §§ 15670 to 15680. 

18 CAL. GOV'T CODE § 15671(a).

19 CAL. GOV'T CODE § 15670(c).

20 CAL. GOV'T CODE § 15674.

21 CAL. GOV'T CODE § 15679.

22 CAL. GOV'T CODE § 15672.

23 CAL. GOV'T CODE §§ 15674; 15675; 15677. The OTA's written opinion must be published within 100 days of the decision becoming final. The superior court will apply a de novo standard of judicial review. 

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