As part of Governor Jerry Brown’s 2017 budget bill, the California State Board of Equalization (SBE) was stripped of its functions that had been authorized by statute, leaving principally property tax matters deriving from the state constitution. Sales and use tax and fee functions were moved to a newly created California Department of Tax and Fee Administration (CDTFA). Jurisdiction to hear appeals from the Franchise Tax Board (FTB) as well as appeals in sales and use tax and fee matters from CDTFA was vested in a new Office of Tax Appeals (OTA), to become effective January 1, 2018. The OTA is scurrying to adopt rules before opening for business on January 1, 2018. It recently released an early draft of what will become emergency regulations. An informal public discussion meeting of the draft has been scheduled for November 6, 2017, in Sacramento.

The initial discussion draft provides for deferring an appeal in sales and use tax matters pending settlement negotiations. The draft does not have a companion provision for income tax appeals from the FTB. That may be added before January 1, 2018.

The draft also contains simplified rules for the introduction of evidence by the taxpayer, a significant percentage of whom will not be represented by professional advisors. However, no rules are provided for discovery by taxpayers. This could prove problematic, as evidenced by the following examples:

To illustrate, Sales and Use Tax Regulation 1705 provides for relief from liability where a taxpayer reasonably relies on prior written advice from the SBE (now the CDTFA). Written advice can come from a prior audit report dealing with the same issue. A taxpayer that receives a Notice of Determination of sales tax liability may be excused from liability on a showing of reliance on that prior audit report. How does the taxpayer get a copy of the prior audit report? It is not enough to assume that the taxpayer can informally ask the CDTFA for and received a copy.

For an income tax example, assume that the FTB has issued a Notice of Action where the FTB’s position was based on a proposed federal regulation, but the final regulation withdrew the proposed regulation and expressly supported the taxpayer’s position, and the Internal Revenue Service followed the final regulation for all tax years. A taxpayer should be able to request an admission from the FTB that proposed regulations do not have the authority of law, and that final federal regulations interpreting the statute apply retrospectively unless expressly otherwise provided. The taxpayer might also seek an admission that where a California tax statute is based on a federal tax statute, the FTB follows the federal interpretation of the federal statute.

As these examples illustrate, the final regulations should contain rules that unrepresented taxpayers can understand and follow dealing with requests for files, requests for admission, stipulation of facts and possibly the taking of depositions. The rules currently applicable to other California Administrative Procedures Act appeals to an administrative law judge refer to subpoenas and subpoenas duces tecum, but that is likely to be unwieldy for taxpayers, particularly those who are unrepresented.