Editor

David Kline

Principal Contributors

David R. Doerr, Robert Gutierrez

Editor

1215 K Street, Suite 1250

Sacramento, CA 95814

(916) 441-0490

www.caltax.org

Vol. XXVII, No. 16 April 25, 2014

IN THIS ISSUE

State Budget: Governor Calls Special Session to Consider His Rainy Day Fund Swap 1

State Board of Equalization: Manufacturing and R&D Equipment Sales Tax Exemption Regulation Placed in Formal Rulemaking Process; CalTax

Amendment Approved 3

CalTax Commentary: California Needs a Bright-Line Test for Determining Residency for Tax Purposes 9

Courts: Court Awards Attorney Fees in Lucent Case on Taxation of Technology Transfer Agreements 12

Legislative Update: Senator Steinberg Dumps Carbon Tax Idea, Proposes Using Cap-and-Trade Revenue for Housing and Transit 13

Senate Governance and Finance Committee:

Panel Approves Measure to Hike Tax Rate on Corporations That Pay CEOs More Than State Deems Proper 16

Assembly Revenue and Taxation Committee:

Panel Sends Health Savings Account Conformity Measure to ‘Suspense File’ 18

Assessors: Humboldt County Assessment Ratio Is 101.39 Percent, BOE Reports 21

Local Taxes: Berkeley’s “Robin Hood Committee” Proposes Taxing Landlords to Pay for Low-Income Housing 23

New Wine in Old Bottles: Recently Amended Bills of Interest 24

Waste, Fraud & Mismanagement: Your Tax Dollars at Work: Los Angeles County Sanitation

Districts Spend $430 Million on “Trash Train” That Doesn’t Leave the Station 33

Potpourri: Symposia, Sightings, Salutes & Snafus: CalTax Delivers Legislative Update to Southern California Business Groups 34

Who’s New or Leaving State Government: Governor Appoints Chair of Political Watchdog

Commission 36

Tax Trivia: Which California Politician Played Inadvertent Matchmaker for Two Celebrities? 36

Blast From the Past: Los Angeles County Property Appraised Via Telephone 36

Coming Up: Legislative Committee Hearings 36

STATE BUDGET:

Governor Calls Special Session to Consider His Rainy Day Fund Swap

Governor Jerry Brown called a special session of the Legislature that convened April 24 to deal with his proposal to change current and proposed constitutional proposals for “rainy

day” funds.

Specifically, the governor wants to repeal the current rainy day fund adopted by voters in

2004 (Proposition 58), and to remove from the November ballot a tighter rainy day fund proposal that Governor Arnold Schwarzenegger and the Legislature agreed to place before voters (ACA 4). In their place, the governor proposes an alternative that would replace

the requirement that 3 percent of annual revenue be put in a rainy day fund with a requirement that revenue from capital gains that exceeds 6.5 percent of general fund

revenue be placed in the fund. In many years, this would be $0. The governor’s plan also allows money in the rainy day fund be used for paying down debt, and creates a reserve for Proposition 98 school funding.

April 25, 2014 2

The governor believes his proposal enhances the current rainy day fund. “We simply must prevent the massive deficits of the last decade, and we can only do that by paying down

our debts and creating a solid rainy day fund,” he said.

However, critics believe the proposal emasculates the concept of a rainy day fund. A

possible key is the reaction of public employee unions, which have expressed displeasure with the current proposal on the ballot but have not yet objected to the governor’s alternative. Critics believe that one of the features touted by the governor – the ability to

use the rainy day fund to pay down the state’s debt – substantially weakens the entire concept. This feature of the governor’s plan would allow general obligation bonds, now

required to be repaid with general fund revenue, to be shifted to being repaid with rainy day fund revenue, freeing up added general fund revenue to be spent elsewhere. As a result, it is possible that there never would be any money in the rainy day fund to use

during an economic downturn.

Senate Republican Leader Bob Huff said the governor’s proposal would allow withdrawal of

funds more easily, and he described it as “more of a slush fund” than a reserve.

The governor’s proposal also has been criticized by Legislative Analyst Mac Taylor and by Brad Williams, an economist for Capitol Matrix Consulting, for using capital gains revenue

as the trigger for sending money into the rainy day fund. Mr. Williams said it can take years to get an accurate accounting of capital gains for a given budget year. As a result,

he said, everyone would be guessing as to the amount to be deposited in the reserve.

It is unclear why the governor called a special session to consider this issue. Observers

said the matter could be handled just as well in the regular session, and at less cost to taxpayers, as the Legislature must print a number of additional documents for a special session. (Sources: Governor Brown’s proclamation and press release, April 16; The

Sacramento Bee, April 17.)

In other state budget news:

Assembly Budget Subcommittee Discusses Corporate Tax Revenue. The Assembly Budget Subcommittee on Education Finance met April 22 to review the governor’s proposed expenditure plan for energy-efficiency programs funded by a 2012 corporate tax

change.

In 2012, California voters approved Proposition 39, which mandated that most taxpayers

subject to the corporate tax calculate their liability using a single sales factor apportionment formula. The initiative, promoted by billionaire activist Tom Steyer, was said to generate approximately $1 billion annually (although that estimate was not

verified). The initiative also established the California Clean Energy Jobs Act, which in 2013-14 earmarked $467 million to K-14 schools for energy-efficiency projects.

The governor’s proposed 2014-15 budget estimates that Proposition 39 will generate $726 million, of which $363 million will be eligible for school energy projects. The governor proposes appropriating $316 million to K-12 schools energy projects, $39 million to

community college energy projects, $5 million to the Conservation Corps for technical assistance in schools, and $3 million to job-training programs.

April 25, 2014 3

The subcommittee heard from officials in the California Department of Education and the California Energy Commission who said that for 2013-14, only four K-12 school energy-

efficiency projects were approved, while other projects are pending review.

Community colleges, which received 11 percent of funding from 2013-14, have

appropriated all of the $36 million they received. More than half (54.7 percent) of the funding directed to community colleges was spent on lighting upgrades.

The committee held the item open for possible action in the future, with members

indicating they are waiting to see if the governor’s May budget revision will include newer corporate tax revenue estimates.

State Income Tax Revenue for April So Far Exceeds $10 Billion. Controller John Chiang’s daily revenue tracker reports that as of today, April income tax collections exceed $10 billion. Also, the total fiscal-year-to-date (April 25) revenue from the three

major state taxes (personal income tax, sales tax and corporate tax) amounts to $75.5 billion, which exceeds by $600 million the amount that the budget projected would be

received by April 30.

STATE BOARD OF EQUALIZATION:

Manufacturing and R&D Equipment Sales Tax Exemption Regulation Placed in Formal Rulemaking Process; CalTax Amendment Approved

A regulation to implement the manufacturing and research-and-development equipment partial sales and use tax exemption (proposed Sales and Use Tax Regulation 1525.4)

was approved for publication and public review April 22 by the State Board of Equalization’s Business Taxes Committee.

The proposed regulation clarifies terminology in the authorizing statute (Revenue and Taxation Code Section 6377.1) relating to qualifying taxpayers, eligible equipment, and the process for refunds and exemption certificates.

CalTax has been working on the regulations with the board’s staff since September, and has led the industry effort to draft a regulation that promotes economic activity and

establishes an administratively feasible and fair exemption process. After numerous discussions and written comments, and three interested parties meetings, the regulation presented to the board this week included most of CalTax’s suggested language and

recommendations.

An unresolved issue – included in the proposed regulation as an alternative to the board

staff’s proposal – related to CalTax’s recommendation that taxpayers be allowed to demonstrate their eligibility for the partial sales and use tax exemption at the establishment level, based on the number of full-time employees dedicated to the

qualifying manufacturing or R&D activity. CalTax Fiscal Policy Director Therese Twomey told the board that without such an amendment, a number of businesses that otherwise

would qualify under the statute would not qualify under the regulation.

April 25, 2014 4

There was substantial debate during the BOE meeting. At the conclusion, BOE Member Betty Yee moved approval of the staff language without the CalTax amendment. She said

the number of full-time employees was the least compelling measurement of a taxpayer’s level of engagement in a qualifying activity. BOE Member George Runner offered a

substitute motion that incorporated the CalTax language, which was seconded by Deputy State Controller Marcy Jo Mandel, representing Controller John Chiang. The motion carried with Mr. Runner, Ms. Mandel and BOE Vice Chair Michelle Steel voting “yes,” and Ms. Yee

and Board Chair Jerome Horton voting “no.”

Other testimony on the regulation included a request from the California Poultry

Federation to authorize establishments within legal entities that are subject to the three-factor apportionment requirement – including those engaged in agriculture, financial services and extractive activities – to be eligible for the partial sales and use tax

exemption. Board staff responded that the clear language of the statute prohibits such an interpretation, and Mr. Runner encouraged the federation and other industries required to

apportion under the three-factor formula to seek legislation to authorize eligibility.

With the board’s 3-2 vote, the proposed regulation was approved for publication and is posted on the BOE’s website, at www.boe.ca.gov/meetings/pdf/Proposed1525-4.pdf.

The tentative date for the board’s public hearing on the regulation is July 17, and barring any substantive changes, the regulation would be transmitted on August 7 to the Office of

Administrative Law (OAL) for review. The deadline for OAL approval is anticipated to be September 19.

In other action from the BOE’s April 22 meeting in Sacramento:

Board Approves Letter to Assessors to Clarify Proper Assessment of Possessory Interests. The board unanimously approved a letter to assessors (LTA) stating that

assessors and assessment appeals boards must follow BOE Rule 21 in assessing possessory interests. BOE staff, which drafted the letter and presented it to the board for

adoption, noted that the board’s county assessment practices surveys have “revealed a substantial number of inconsistencies among the counties as to the application of the standards set forth on Property Tax Rule 21 and Assessor Handbook Section 510.”

In summary, the LTA and Rule 21 require assessors, when valuing possessory interests, to use the stated term of possession unless an assessor or taxpayer can, by clear and

convincing evidence, show that a taxpayer and public owner have reached a mutual understanding that the reasonably anticipated term of possession is shorter or longer than the stated term. The LTA also instructs assessors to follow Proposition 8 of 1978 and

reassess a possessory interest each year when the value of the interest is less than the base-year value.

The BOE interprets Rule 21(d)(1) to require assessors to follow three principles when making a determination that the term is shorter or longer than the stated term:

As a matter of law, the public owner and private possessor must have modified the

right to possess the land in a manner that is legally cognizable under contract law principles (e.g., promissory estoppel, quasi-contract, breach of contract, a writing

consistent with the statute of frauds, implied contract, detrimental reliance, etc.).

April 25, 2014 5

No party can prove by clear and convincing evidence that a modification has taken place under Rule 21(d)(1) when either party’s agreement to the asserted

modification constitutes an ultra vires act that renders the modification void ab initio (i.e., an unenforceable act that is invalid from the outset because it is beyond

the scope of powers of the parties under applicable local, state or federal laws).

Unless allowed by the statutory scheme, the reasonably anticipated term of possession may never exceed a limit placed on the occupancy of public land by the

Legislature. (For example, cities are restricted by the Government Code from entering into leases of real property for more than 55 years, or 99 years in certain

conditions.)

Support for the LTA was voiced by a number of speakers representing taxpayers. Ms. Twomey said CalTax agrees with BOE staff that Rule 21 needs to be clarified, and that the

letter is consistent with state law, court rulings, and BOE regulations. Mike Jacob, representing the Pacific Merchant Shipping Association, said ocean carriers support the

LTA. Dean Leavenworth, representing Time-Warner, which employs 8,000 California workers, said the LTA provides certainty. Carolyn McIntyre, president of the California Cable and Telecommunications Association, said the LTA is an important step toward

equalizing the assessments of possessory interests. John Gamper, representing the California Farm Bureau Federation, said a number of members of the organization have

grazing permits on federal land that vary, and renewals are up to the federal government. Support was also voiced by a Jim Lites, executive director of the California Airports

Council.

Riverside County Assessor Larry Ward urged the board to allow assessors more time to review the LTA. This request was echoed by Marin County Assessor Richard Benson,

Plumas County Assessor Charles Leonhardt, and Brian Donnelly, chief appraiser in Los Angeles County. Albert Ramseyer, Los Angeles County’s principal deputy county counsel,

was more vocal in criticizing the LTA.

Mr. Runner asked staff about the relevance of this LTA to the recent CalSTRS decision, which found that taxation of the reversionary part of a possessory interest was

unconstitutional. BOE staff attorney Richard Moon, who presented the LTA to the board, said the LTA is consistent with the case, as a long term of possession used by an assessor

inconsistent with the rule might tax the reversionary interest.

Massive Robocall Effort Launched. More than 100,000 taxpayers will be getting recorded phone messages from the board under a new program with the euphemism

“Proactive Outreach Manager.”

Thor Dunn, manager of the BOE’s Customer Services and Publishing Division in the

External Affairs Department, described the new program to the Customer Service and Administrative Efficiency Committee. During the presentation, Ms. Yee said, “These are robocalls, aren’t they?”

Staff said the calls will be made with different messages, and will be sent to phone numbers that are in BOE records, including business and home phones. Calls to

approximately 100,000 taxpayers will be made in a four-day span to remind taxpayers

April 25, 2014 6

that returns are due. Mr. Dunn said staff is working on an upgrade to send out 800,000 calls in 15 days. The calls are being made to maximize revenue production, he said.

Vice Chair Steel expressed concern about people hanging up when they get a robocall. Ms. Yee asked that the topic be brought back for further discussion next month.

Another issue will be how taxpayers will distinguish official BOE robocalls from calls made by phone scammers identifying themselves as BOE employees and asking for information that could be used for identity theft.

In Horse Race Case, FTB Finishes Out of the Money. An effort by the Franchise Tax Board to deny owners of thoroughbred horses deductions for losses because their horses

did not win enough races in most years (Appeal of Robert J. and Carol E. Molinaro) came up short, as the board unanimously held for the taxpayer in the case.

Richard Craigo, attorney for the taxpayers, said horse racing is a high-risk business, and

that horse owners continue racing even if there are losses in most years, with the hope they will have a horse someday that will win big stakes. This thought was echoed by

board members during a discussion of the case.

Seattle Slew, which won the Triple Crown in 1977 – one of only 11 horses to win the Kentucky Derby, Preakness and Belmont Stakes in a single year – was cited as an

example. The horse was purchased for $17,000, and made $1.2 million.

At issue were losses of $81,000 in 2005 and $72,000 in 2006 that the FTB denied, based

on an argument that the taxpayer did not operate the business to make a profit. FTB Attorney Cheryl Akin said the losses shielded other income from taxation, and said there

were a string of losses prior to these two years.

Mr. Craigo said the taxpayers changed their business model 12 years ago by purchasing more expensive horses (averaging $70,000 per horse), and made $50,000 in the first

year and broke even in the second. However, in 2004, 2005 and 2006, seven horses were lost to catastrophic injuries.

Ms. Akin said injuries cannot be considered to be unforeseen or unexpected. Ms. Mandel disagreed. Attorney Joe Vinatieri, also representing the taxpayer, said that it is difficult for taxpayers when government agencies come in and attempt to “Monday-morning

quarterback” on how taxpayers should run their businesses.

Written Opinion on Sales Tax on Transportation Charges. At issue in the Appeal of

SMF Energy Corporation, requiring a written opinion under AB 2323, was whether a portion of the selling price charged for fuel represents a fee charged by petitioner for nontaxable transportation services. In its opinion, adopted unanimously, the board stated:

“Initially, we note that petitioner’s sales tax worksheets and reports provided to the Department at the time of the audit showed that petitioner added a markup for

transportation charges and that the amount of the markup matched the understatement found in the audit. In addition, petitioner’s contention that these charges are a ‘monthly fee’ (consisting of the sale of tangible personal property and nontaxable services) and not

transportation charges lacks support. Petitioner has not provided any evidence to support

April 25, 2014 7

its assertion that the charges are a monthly fee consisting in part of service charges. Accordingly, we find that the charges at issue are transportation charges.”

Medical Group Convinces Board That FTB Assessment Was Not Justified. In a case requiring a written opinion under AB 2323, the board resolved a tax dispute between the

Franchise Tax Board and the Camino Medical Group in favor of the taxpayer. During the period in question, the taxpayer was one of Northern California’s largest physician-owned medical groups, with more than 160 medical providers caring for 140,000 patients in

northwestern Santa Clara County (and presumably named after the road of the Spanish explorers and priests that runs through the area, the El Camino Real). At issue was

whether the taxpayer had constructive receipt of more than $10 million in deferred compensation in 2005 from the non-profit Palo Alto Medical Foundation.

The Camino Medical Group argued that it never received the funds, and never had

constructive receipt of the funds, because they were subject to substantial restrictions. The FTB argued that the taxpayer had control of the funds. This was rebutted by the

taxpayer by citing a 2000 oral agreement, confirmed by Dr. Richard Slavin, head of the medical group at that time, in a statement made under penalty of perjury, that the oral agreement placed similar restrictions on the $10 million as was placed on other similar

funds advanced to the Palo Alto Medical Foundation that the Internal Revenue Service agreed were not constructively received.

Mr. Runner, Ms. Steel and Ms. Yee voted “yes,” Chairman Horton voted “no,” and Ms. Mandel did not participate in the vote.

Board Approves Contract for Security Guards, With Instructions to Staff to See if They Can Be Replaced With Unionized Civil Service Guards. At the request of Liz Hauser, head of the Administration Division, the board approved a $1,475,000 contract

with Intercon Security Systems Inc. to provide round-the-clock guard services at the board’s headquarters building. Randy Cheek, representing Service Employees

International Union Local 1000, said SEIU represents civil service security guards, and the board should consider using these guards instead. Ms. Yee asked staff to work with SEIU and bring back a plan to the board. Ms. Houser said any plan will have to have a lead time

of at least 15 months.

Responding to Inquiries. BOE Executive Director Cynthia Bridges announced changes

regarding how the board will respond to inquiries from the media and the public. The intent is to have the board speak with “one voice,” she said. The chair will determine what top BOE executive will respond to inquiries. If a BOE member declines an interview

request, the chair will handle it, or will designate someone else. For news conferences, the chair will determine who will lead the conference.

Ms. Yee said she was disappointed that written materials regarding these changes were not posted on the website for the public to see. (CalTax: Since a written explanation was not posted with this agenda item, it is not entirely clear what these changes are. It also is

not clear why they were needed, or what they are intended to accomplish. Do the changes apply to board members and board staff?)

Relief From Liability Based on Reliance on Written Advice. The board unanimously approved changes in Sales and Use Tax Regulation 4902 that clarify that the presentation

April 25, 2014 8

of a person’s books and records for examination by an auditor shall be deemed to be a written request for the audit report “by the audited person and any person with shared

accounting and common ownership with the audited person.” The proposed amendments also add language to the end of Regulation 4902, subdivision (c), to clearly prescribe the

circumstances under which a person has shared accounting and common ownership with an audited person, and to require that a person have shared accounting and common ownership with an audited person during the periods that the person is entitled to rely on

the audited person’s audit report for relief.

Use Tax Reimbursements Under “Lemon Law.” The board unanimously adopted

amendments to Sales and Use Tax Regulation 1655 to require the BOE to reimburse a manufacturer of a new motor vehicle for an amount equal to the use tax that the manufacturer is required to pay to, or for, a buyer or lessee when replacing a vehicle or

making restitution pursuant to California’s “Lemon Law.” BOE attorney Monica Silva said the staff received no public comments on the regulatory change.

Tobacco Products Tax Rate Set at 28.95 Percent for 2014-15. Each year, the board has the statutory duty to set the tobacco products tax rate, which must be based on the wholesale premium brand cigarette price as of March 1. This year, the staff’s calculation

determined that the tobacco products tax rate should be set at 28.95 percent. This is slightly less than the current rate of 29.82 percent.

Lumber Products Tax Update. The 1 percent tax on lumber products, pushed by Governor Jerry Brown and passed by the Legislature, generated $31.9 million in the 2013

calendar year, Susanne Buehler, chief of the Tax Policy Division in the Sales and Use Tax Department, told the board. Instead of the potential of 25,000 retailers that the board originally thought might be subject to the tax, there were only 5,695.

The law requires retailers to be reimbursed for their costs, with a board-established limit of $735, but only $500,000 has been claimed, and $3.7 million is still to be claimed. Ms.

Buehler said she is uncertain why the actual claims are substantially less than the projected amount.

Because the number of returns is lower than expected, Mr. Runner concluded that the

board might be able to increase the reimbursement amount so it is closer to the actual amount spent by retailers to comply with the law. Ken Dunham, executive director of the

West Coast Lumber and Building Materials Association, concurred.

The board wants to see the amount of reimbursements claimed on the first 2014 returns.

New “Open Data Portal” Demonstration. The board is launching a new open data

portal to allow taxpayers more access to board data, and staff gave the board a demonstration of the new website. The site, titled “Open BOE,” will go live May 1, and

more information is scheduled to be posted on the BOE website.

Six Employees Congratulated as They Near Retirement. The board extended its congratulations to six employees who will retire soon:

Michael L. Hale, a business taxes specialist in the Information Security Office of the Administration Department who will retire June 30.

April 25, 2014 9

Patricia Gouveia, an information systems technician specialist in the Technology

Services Department who will retire May 31.

Carolee D. Johnstone, a tax counsel in the Legal Department’s Tax and Fee Programs Division who will retire May 1.

Elwyn C. Jones, a tax technician in the Sales and Use Tax Department’s Sacramento Out-of-State Office who will retire April 30.

Roberta Ramirez, an administrative assistant in the Technology Services

Department who will retire August 1.

Yvette Wilson, a staff information systems analyst in the Sales and Use Tax

Department’s Compliance and Technology Section who will retire April 30.

CALTAX COMMENTARY:

California Needs a Bright-Line Test for Determining Residency for Tax Purposes

By David Kline, Vice President of Communications and Research

(This column was featured on the Fox & Hounds Daily blog on April 23.) “Where do you live?” This seemingly straightforward question has been the

source of major contention between taxpayers and the Franchise Tax Board for many years, resulting in time-consuming appeals, exhausting searches

for documents and witnesses, significant audit resources, and, in some cases, expensive litigation. It is time for the state to end the confusion by establishing a bright-line test for determining whether a person is or isn’t a California resident for

income tax purposes.

Inventor Gilbert Hyatt’s recent federal civil rights suit against members of the FTB and the

State Board of Equalization brought the residency issue back to the front burner, but the issue started causing headaches long before the dispute between Mr. Hyatt and the FTB began more than 20 years ago.

One of the most famous episodes occurred in 1974, when the FTB staff made headlines for determining that President Richard Nixon was not a California resident from 1969 to

1973 for purposes of income tax, although he was domiciled in San Clemente, was away for a temporary period, and claimed San Clemente as his residence for federal income tax purposes. The Assembly Revenue and Taxation Committee investigated and held a

hearing on the matter.

In 1988, another residency case made headlines when the Senate Revenue and Taxation

Committee held a hearing on the FTB’s actions in a dispute involving Beldon and Mildred Katleman. Although the Katlemans voted in Nevada, had greater business interests in

Nevada (Mr. Katleman was president of the El Rancho Vegas Hotel and Casino) and belonged to many social clubs in Nevada, they maintained residences in both states, and the FTB found them to be California residents because they had a homeowners’ exemption

April 25, 2014 10

on their California home. The BOE upheld the FTB on appeal, but the FTB then agreed to settle the case for three-eighths of the amount in dispute.

Residency and the sourcing of income also were major issues in the 1990s, when Congress stepped in to stop the FTB from taxing non-residents’ income from pensions

earned from past jobs in California.

More recently, members of Indian tribes in California have been grumbling, claiming that the FTB is aggressively going after revenue by alleging that some tribal members do not

live on their tribe’s reservation, and thus must pay state income tax. Some of these disputes have gone before the State Board of Equalization, and have raised issues such as

whether registering a vehicle to an address on a reservation is acceptable evidence that the owner lives there.

In fact, vehicle registration often is mentioned during residency disputes, but not in a

consistent manner. In many cases, the FTB asserts that registration of a vehicle in California is a strong indication that the taxpayer is a resident, and should pay California

income tax. But in one of the tribal appeals in 2012 (Appeal of James J. Martin), the FTB staff testified to the BOE that registration of a vehicle to an address on a reservation was not considered evidence that the owner lived where the car was registered.

Voter registration and driver’s licenses also are used as indicators of residency, but again, without consistency. In some cases, the FTB argues that a California driver’s license and

voter registration at a California address are proof of California residency, but in other cases, the agency rejects taxpayers’ arguments that licenses and registration in other

states prove they don’t reside in the Golden State.

In two residency appeals heard by the BOE on the same day in August 2010 (Appeal of Brent and Viki Lee Welling and Appeal of Christopher and Catherine Hadsell), time spent

in California was an issue. In the Welling case, the FTB placed significant weight on the fact that the couple spent more time in California than Nevada, where they said they

lived, but in the Hadsell case, the FTB acknowledged that the couple spent more time in Nevada, but downplayed the significance of that fact.

In the Hyatt case, the initial issue was whether the inventor lived in California or Nevada

for a period in 1991 and 1992, and thus whether his income from patent royalties during that period is taxable by California. While more than two decades have gone by since the

tax years in question, the residency dispute still has not been resolved. It seems incontrovertible that it should not take 22 years to determine the residency of any taxpayer. In fact, Mr. Hyatt’s federal suit, filed in early April, alleges that the delay has

“irreparably prejudiced” Mr. Hyatt, as “material witnesses have passed away, memories of witnesses have faded, and documents relevant and important to Hyatt are no longer

available.”

While the facts of each case are unique, years of following residency appeals before the BOE and in the courts have convinced CalTax that residency issues should be addressed

by a bright-line test, moving away from subjectivity and focusing on four key principles:

Fairness. Californians expect their tax agencies to be vigilant against fraud, and

indeed we benefit from ensuring that nobody dodges their tax obligations. But we

April 25, 2014 11

also expect tax agencies to weigh evidence fairly, and to give documents such as state-issued licenses equal weight whether they support or refute a tax

determination. The bright-line test should be fair and impartial, and should accurately determine whether a person is legitimately subject to California income

tax.

Simplicity. When he was a member of the BOE, Bill Leonard suggested that the

state should consider creating a checklist of 20 or so possible residency indicators (ownership of property, voter registration, vehicle registration, etc.), and that a

taxpayer who checks a specified number of items would be considered a resident for tax purposes. The FTB already has a checklist for indicators of residency, but it isn’t used as a bright-line test – rather, it is completely subjective, and the agency

can assert that a person is a California resident even if most of the items on the list would indicate non-residency.

Certainty. The test should leave no gray areas or room for “gotchas” – it should

create certainty for the taxpayer that residency has been decided, and future audits

and back taxes will not be an issue. A residency checklist should carry weight, and should include descriptions of what documentation will be honored to substantiate

each item on the list, so taxpayers have the ability to obtain and retain documents that will be accepted by the FTB.

Avoid Negative Side-Effects. One of the positive consequences of a bright-line

test would be to improve California’s competitiveness by eliminating the perception

that tax agencies target any wealthy individual who sets foot in California. Other consequences could be negative, and must be avoided. For example, investing in

California-based businesses, hiring California-based lawyers, visiting a California surgeon, putting money in California banks, etc., should not be considered indicators of California residency (as they sometimes are now – in the Hadsell case,

for example, the FTB argued that the continued use of brokerage and insurance services in California was evidence of residency). Residents of other states should

not be discouraged from contributing to California’s economy. The state should not risk losing sales tax revenue, income tax revenue or jobs by discouraging people from investing, buying, or traveling in California.

A bright-line test also would address the very important principle of timeliness. When years go by between the beginning of a residency dispute and its conclusion, taxpayers

are disadvantaged. The threat of growing interest can create financial upheaval, and valid arguments might be foreclosed simply because of the loss of witnesses and documentation needed to disprove claims made by the FTB, which has the benefit of a

presumption of correctness.

It is possible that the federal government should be involved, as with the proposed Mobile

Workforce State Income Tax Simplification Act, which is intended to standardize state income tax collection for travelling employees, and to create certainty about where wages should be reported.

The issue of residency has consumed more than its share of time and resources – for taxpayers, the tax agencies and courts alike – and it behooves us all to get together and

April 25, 2014 12

find a simple, fair method of ensuring that the state taxes only those who legitimately owe California income tax.

COURTS:

Court Awards Attorney Fees in Lucent Case on Taxation of Technology Transfer Agreements

A Los Angeles County Superior Court judge on April 18 awarded attorney fees to the taxpayers’ counsel in Lucent Technologies Inc., et al. v. State Board of Equalization, a

case involving whether written agreements that called for taxpayers to provide software to telephone customers were subject to sales tax.

Judge Steven Kleifield awarded $2,625,470 to Paul Hastings LLP, which represented plaintiffs Lucent and AT&T during the case. Paul Hastings attorneys Julian Decyk and Jeff Varga litigated the case. The fees were owed to the plaintiffs after Judge Kleifield granted

summary judgment in the taxpayers’ favor September 27, finding that there were no triable issues of fact and granted summary judgment. The judge relied on Nortel Networks

Inc. v. Board of Equalization (2011) 191 Cal.App.4th 1259 as precedent.

Under Revenue and Taxation Code Section 7156, Lucent was entitled to recover attorney fees if the BOE’s position in defending the case was “not substantially justified.” The

plaintiffs argued that the position was not substantially justified based on the fact that the trial court and Court of Appeal in Nortel made findings that bound the trial in the current

case.

Marty Dakessian, a lawyer with Reed Smith LLP who wrote a declaration in support of Lucent’s attorney fee motion, said: “Although the BOE may believe it had to seek clarity

on the issue of taxing pre-written software, with this big fee award, the court sent a powerful message – that Nortel was clear, binding precedent. This is a huge win for

taxpayers, but not just about taxing software. The court also addressed a much broader issue: our taxing agencies have the vast resources of the state at their disposal, and so they are rightly held to a higher standard than private litigants. And when they don’t live

up to those standards, they must be held accountable.”

The BOE argued that it was justified in defending the case because it did not have

sufficient opportunity to defend itself in Nortel due to state budgetary problems and an inability to present expert testimony. Judge Kleifield did not find this persuasive, noting: “The BOE is not like a typical private litigant. Litigation is oftentimes a war of attrition,

where the side of the greater resources prevails, not on the merits, but on the lack of ability to finance litigation to the end. While there is no reason to believe that the BOE

engaged in such a war in this case, there may often be cases where the taxpayer does not have the financial resources to pursue the BOE for taxes that may wrongfully have been imposed. In situations where there is a clear binding precedent, however, it would be poor

public policy to cause the taxpayer to pay these taxes on the basis that the BOE wants to further ‘test the waters.’ It should be no different in a case, such as this, where the

taxpayer has the financial resources to pursue a tax refund.”

The judge did agree with the BOE on when the “fee clock” should start to run, saying it

began once the Nortel Court of Appeal decision was final. The judge ruled that Lucent’s

April 25, 2014 13

attorneys were uniquely qualified to handle the case, based on extensive experience with the TTA statutes, and their service as attorneys in the Nortel case, but lowered the

amount sought by the plaintiffs by $613,919.30.

The ruling on attorney fees will be included in the final court judgment for the case, which

should be released in the next few weeks. After the final ruling, the BOE will have an opportunity to appeal within 60 days. If the BOE appeals and loses, it could be subject to reimbursing the taxpayer for additional attorney fees incurred during the appeal.

LEGISLATIVE UPDATE:

Senator Steinberg Dumps Carbon Tax Idea, Proposes Using Cap-and-Trade Revenue for Housing and Transit

Senate President Pro Tem Darrell Steinberg announced April 14 that he has dropped his proposal for a “carbon tax” on gasoline, and now will pursue legislation to authorize the

use of cap-and-trade revenue for government housing projects and transit programs, including high-speed rail.

“I am pivoting from a carbon tax,” the senator said at a Capitol press conference surrounded by supporters of his new proposal.

The original plan was to swap the requirement that the petroleum industry participate in the cap-and-trade

program with a carbon tax on fuels. The proposal, unveiled during a speech to the Sacramento Press Club, also would enact a refundable earned income tax credit

for families with annual household income of $75,000 or less, funded by a portion of the revenue from the fuel tax (see CalTaxletter of February 21).

“I gave that speech to be a bit of a provocateur, and it served that purpose,” Senator Steinberg said. He said the carbon tax proposal sparked “civic discourse at its best,” during which it became clear that the plan was very unpopular.

Under existing law, starting in 2015, California’s cap-and-trade program will be expanded to include refineries and others in the petroleum industry. The program, adopted by the

California Air Resources Board as one of its several programs to implement the Global Warming Solutions Act of 2006, requires businesses to purchase “allowance” permits in a market-based auction. To date, the program has raised more than $1 billion, and the

governor has proposed making the program an integral funding source for the state’s high-speed rail project.

Senator Steinberg predicts that the expanded cap-and-trade program will produce approximately $5 billion in new state revenue (i.e., will cost taxpayers approximately $5 billion a year), and he proposes to spend the money on mass transit and programs to

build “affordable housing.”

“Social equity, economic development and climate change go together,” he said,

explaining why he believes it would be proper to use cap-and-trade revenue for the

April 25, 2014 14

identified spending. Some observers believe the senator’s plan would be susceptible to legal challenges over whether the programs actually would have any impact on air quality

in California.

“Permanent sources of funding for mass transit and affordable housing are key if we are

committed to long-term change,” Senator Steinberg added. The transit spending would include spending on highway repairs and on high-speed rail, which would receive approximately 20 percent of the funds, he said.

The construction funded by his proposal would be a “guaranteed catalyst for job creation,” the Senate leader added. “My motivation is high-wage job creation,” he said, “as well as

modernizing our transportation system.”

Asked about the legislative analyst’s opinion that high-speed rail would not produce air-quality benefits in the short term, and therefore would not comply with the state law that

spawned the cap-and-trade program, the senator opined that the rail system would create environmental improvements. He also said that he will push for an extension of the law

(AB 32) through 2050 as part of his plan.

The new plan is supported by a large coalition of transit associations and housing groups that would receive major funding, and by the California Alliance for Jobs, the State

Building and Construction Trades Council of California, the League of California Cities, the California State Association of Counties, the Environmental Defense Fund, and others.

In other legislative action:

Oil Severance Tax Measure Approved by Committee. An oil and gas severance tax

measure (SB 1017, Evans) was approved April 24 by the Senate Education Committee on a 5-3 vote.

The bill was heard in the education policy committee because it includes language

earmarking revenue from the tax to the newly created California Higher Education Fund. The bill now goes to the Senate Governance and Finance Committee.

CalTax Policy Analyst Peter Blocker testified against the bill, along with representatives of the California Manufacturers and Technology Association, CalChamber, the National Federation of Independent Business, the Western States Petroleum Association and

others.

Supporters include the California Teachers Association, the California Labor Federation

and several other labor unions.

Democratic Senator Cathleen Galgiani joined Republicans in opposition to the tax, and Democratic Senator Lou Correa did not vote.

Vehicle “Registration Fee” Measure Drives Through Assembly Transportation Committee. AB 2393 (Levine), authorizing counties to impose a $2 vehicle “registration

fee,” was approved by the Assembly Transportation Committee on a 9-6 vote April 21. The majority-vote bill also authorizes an increase in the additional fee for commercial vehicles, from an extra $2 per commercial vehicle to $4 extra.

April 25, 2014 15

Assemblyman Marc Levine, the bill’s author, emphasized the “permissive” nature of the bill, as it authorizes the counties to increase the fee, but does not require them to do so.

David Wolfe of the Howard Jarvis Taxpayers Association testified in opposition to the bill, and pointed out that the bill should require a two-thirds vote at the local level to increase

the “fee.” The charge proposed in the bill would not cover the administrative cost of registration, but funds automated fingerprint identification programs. Mr. Wolfe noted that this violates the nexus provision of Proposition 26.

John Caldwell, representing the Association of California Car Clubs, objected to the imposition of another fee for law enforcement programs, since California drivers already

pay $1.50 per car for law enforcement – a charge that generates more than $40 million a year.

In a letter to the committee opposing the bill, CalTax stated: “The fees authorized by AB

2393 distort the purpose of California’s vehicle registration program. By burying the funding of specified automated fingerprint identification programs into the cost of

registering a vehicle, the Legislature would be ignoring the importance of a transparent revenue structure. For years, hidden taxes have frustrated voters. In 2010, voters passed Proposition 26 to stop the Legislature from disguising fees as taxes. AB 2393 ignores the

voters and undermines the spirit of Proposition 26. Proposition 26 also stated that an appropriate fee is either regulatory in nature, or needs to provide a direct benefit to the

fee-payer. As that nexus is not established, it is a local tax increase requiring a two-thirds vote.”

The bill now heads to the Assembly Local Government Committee.

Food Labeling Bill Advances. SB 1381 (Evans), requiring that food that is entirely or partially genetically engineered be labeled as such, if offered for retail sale in California,

and authorizes suits for injunctive relief against a violation of these provisions, was approved by the Senate Judiciary Committee on April 22 with a 4-2 vote. The bill now

goes to the Senate Agriculture Committee. CalTax opposes the bill.

Committee Approves of Eliminating Elections to Fill Legislative Vacancies. SCA 16 (Steinberg), allowing the governor to make appointments to fill legislative vacancies,

rather than having the vacancies filled in special elections, was approved by the Senate Elections and Constitutional Amendments Committee on April 22, with a 3-1 vote. The

proposed constitutional amendment now goes to the Senate Appropriations Committee.

Assembly Approves Proposed Changes to Unemployment Insurance Program. AB 1556 (Perea), codifying a number of reforms to the policies and practices in the

unemployment insurance (UI) program, passed the Assembly on April 21 with a vote of 54-21.

Among other things, the bill: requires the Employment Development Department (EDD) to translate key documents and publications for both the UI program and state disability insurance (SDI) program into seven additional languages; requires the EDD to translate

online information regarding applying for and receiving UI benefits into seven additional languages; requires the EDD director to periodically review the UI program to identify

policies and practices that delay benefit payments, increase EDD workload, and provide

April 25, 2014 16

little or no value in identifying or preventing fraud in the UI program; prohibits EDD from automatically halting payment of UI benefits and requiring a redetermination of eligibility

when a claimant begins a training or education program; and prohibits EDD from automatically halting payment of UI benefits and requiring a redetermination of eligibility

until a claim certification form is more than 21 days late.

During the floor discussion, Assemblywoman Diane Harkey said the unemployment insurance program should be addressed “holistically” to also treat the UI fund’s

insolvency, and said AB 1556 fails to do so.

Assembly Passes Property Tax Exemption for Space Flight Personal Property. A

personal property tax exemption for space flight property (AB 777, Muratsuchi) was approved by the Assembly on April 24 by a 70-2 vote. The bill now goes to the governor’s desk.

Under the bill, practically all personal property connected to a space flight would be eligible for the exemption – including a space vehicle, launch vehicle, satellite, space

station and fuel for a space flight – provided the taxpayer has a primary purpose in space flight activities. The exemption applies to lien dates for 2014 and ending January 1, 2024.

The bill is supported by a wide coalition, including CalTax, the State Board of Equalization,

CalChamber, the California Manufacturers and Technology Association, and the Commercial Space Flight Association. The only official opposition has come from Santa

Clara County Assessor Larry Stone.

SENATE GOVERNANCE AND FINANCE COMMITTEE:

Panel Approves Measure to Hike Tax Rate on Corporations That Pay CEOs More Than State Deems Proper

The Senate Governance and Finance Committee voted April 24 to approve legislation (SB

1372, DeSaulnier) that would impose massive tax increases on publicly held corporations whose chief executive officers are paid significantly more than the corporations’ median salary for all workers.

The bill would change California’s flat corporate tax rate of 8.84 percent (10.84 for financial corporations) on publicly held corporations to a tax rate based on the salaries of

each corporation’s highest paid employee as compared to other employees. For taxable years beginning on and after January 1, 2015, SB 1372 would impose a corporate tax rate ranging from 7 percent to 13 percent (9 percent to 15 percent for financial

institutions), based the “compensation ratio,” and also would increase the tax rate by 50 percent for taxpayers that have a specified decrease in full-time employees in the United

States, while increasing the number of contracted and foreign full-time employees.

The measure passed on a 5-2 party-line vote, with Democrats in support and Republicans opposed, and now goes to the Senate Appropriations Committee. If it reaches the Senate

floor, it will require a two-thirds vote for passage.

The bill also would require the governor’s signature, and Governor Jerry Brown has

indicated that he does not favor the proposal. The governor told KQED radio on April 24

April 25, 2014 17

that he is sympathetic to complaints about a growing gap between rich and poor in California, but said: “To try to close the gap, which is a global phenomenon, based on

technology, return on assets, on global flows of capital, one little state can’t do that. … We can’t equalize everything, or you’d need state control like the old Soviet Union. And we’re

not going there.”

Liberal author and professor Robert Reich, who served as the Clinton administration’s secretary of labor, testified in support of the bill, stating that the difference in pay

between CEOs and rank-and-file employees has grown too large. “This is not only unjust, but it’s bad for the economy,” he said.

“We’re very honored to have you here,” Senator Lois Wolk, who chairs the committee, told Mr. Reich.

Art Pulaski, head of the California Labor Federation, testified that SB 1372 would

motivate workers, and thus would increase productivity.

Representatives of those who run businesses disagreed with that theory, and noted that

business owners will be even less likely to open or remain in California if the state government begins dictating what pay levels are acceptable, and punishes those deemed unacceptable with massive tax hikes.

CalTax Vice President of State Tax Policy Gina Rodriquez said: “This bill would launch our corporate tax rate into the stratosphere. California is already the third worst state for

business climate in the nation and this would add to our reputation as an anti-business state.”

The CalChamber testified that the bill would be a “job-killer.”

Republican Assemblyman Steve Knight said he believes CEO pay “probably is out of whack,” but said it is not the proper role of government to force politicians’ ideas about

salaries on to private companies.

In other committee action:

Health Savings Account Conformity Measure Fails. SB 1035 (Huff), conforming California law to federal law with respect to health savings accounts (HSAs), failed passage on a party-line 2-5 vote, with Democrats opposed. CalTax Fiscal Policy Director

Therese Twomey testified in support of the bill, stating that it would make health care more affordable, and would encourage businesses to contribute to employees’ savings.

Contrary to claims made by opponents of the legislation, the bill’s benefits would not be confined to those with high incomes, Ms. Twomey noted.

Earned Income Tax Credit Advances. SB 1189 (Liu), allowing a nonrefundable Earned

Income Tax Credit (EITC), equal to 15 percent of the federal EITC, was approved on a 5-0 vote. In response to questions from Senator Mimi Walters, the author of the legislation

said she is still considering amending the bill to make the tax credit refundable. Senator Walters voted for the bill, but said that if the legislation is amended to make the credit refundable, she will oppose it.

April 25, 2014 18

New Rules for Taxation of Low-Income Housing Advance. SB 1203 (Jackson), canceling assessments on low-income housing excluded from the welfare exemption, and

adopting new rules for cities imposing fees on low-income housing, was approved on a 5-0 vote.

Next Generation 911 Gets Committee’s Approval. SB 1211 (Padilla), requiring the Office of Emergency Services to develop a plan to implement Next Generation 911 in California, was approved on a 6-0 vote.

Assessors’ Bill on Property Tax Exemptions Moves Forward. SB 1323 (Lieu), implementing several recommendations from the California Assessors’ Association

regarding property tax exemptions, was approved on a 6-0 vote.

Committee Rejects Measure to Require Refund of Illegal Taxes. SB 1327 (Knight), requiring the state to refund any tax that a court deems unconstitutional or illegally

assessed, was defeated on a 2-4, party-line vote, with Democrats opposed.

Extension of Fire Tax Deadline Approved. SB 1413 (Wyland), extending from 30

days to 60 days the period of time owners of structures have to pay or request redetermination of the state fire tax (officially dubbed a “fire prevention fee”), was approved on a 6-0 vote.

ASSEMBLY REVENUE AND TAXATION COMMITTEE:

Panel Sends Health Savings Account Conformity Measure to ‘Suspense File’

The Assembly Revenue and Taxation Committee took testimony April 21 on legislation to conform California tax law to federal tax law with respect to health savings accounts

(HSAs), but did not approve the bill (AB 2576, Harkey). After testimony was heard, the bill was sent to the committee’s “suspense file” for a possible future vote.

CalTax Fiscal Policy Director Therese Twomey testified in support of the bill, saying the federal Affordable Care Act has prompted more Californians to use high-deductible insurance plans and health savings accounts, making conformity more important than

ever.

The CalChamber also supported the bill.

The California Labor Federation and the union-affiliated California Tax Reform Association were among the opponents. A lobbyist for the Labor Federation said consumers don’t have enough information to make effective choices about health care coverage, and that people

with chronic conditions will avoid visiting the doctor if they have high-deductible plans, and instead will end up in more expensive emergency rooms.

Assemblyman Brian Nestande voiced support for conformity, and noted that California is one of only two states that don’t conform to federal treatment of HSAs. This is evidence that it shouldn’t be a partisan issue, he said.

Other bills sent to the suspense file without a vote:

April 25, 2014 19

Tax Deduction for Property Devaluation Due to Government Policies. AB 1651 (Donnelly), allowing taxpayers to claim a state income tax deduction for the

decline in fair market value of tangible personal property resulting from a state law, rule or regulation. Assemblyman Tim Donnelly cited new state regulations that

make older big rigs “almost worthless,” and said it is unfair that the owners of these vehicles don’t even get a tax break to help mitigate their financial loss. “When the government becomes the biggest threat to your livelihood, … there

ought to be recourse,” he added.

The bill is opposed by the California School Employees Association, the Service

Employees International Union, the California Tax Reform Association (CTRA), and the American Federation of State, County and Municipal Employees. A CTRA lobbyist said that when the state adopts new regulations, “There’s nothing wrong

with there being winners and losers.”

Sales Tax Exemption for Desalination Equipment. AB 1891 (Donnelly),

establishing a sales and use tax exemption for any equipment purchased to be used primarily for water desalination. “We are in an epic drought” that is causing water shortages for Californians even though “we’re sitting next to an ocean,”

Assemblyman Donnelly said. He said that while his bill would not address the current water problems, it would “prime the pump” for desalination systems that

would address the state’s long-term water needs. The bill is opposed by CTRA, which argued that the legislation could result in some equipment qualifying for

more than one tax break.

Conformity to Federal NOL Carryback and Refund Claim Procedures. AB 1984 (Harkey), bringing California in closer conformity to federal tax laws by

allowing taxpayers that have net operating loss carrybacks and refund claims to use procedures in California similar to procedures used by the IRS, including procedures

for speedy refunds, payment extensions, and refund claim overpayment application. The bill is sponsored by CalTax, and is supported by the CalChamber, the California Manufacturers and Technology Association, and the National

Federation of Independent Businesses.

CalTax Vice President of State Tax Policy Gina Rodriquez testified in support, stating

that the bill “is all about the timing of refunds,” and not about whether taxpayers would or would not receive the refunds in the first place. Allowing taxpayers to apply their refund claim overpayments to estimated tax payments is something that

taxpayers have been asking the Franchise Tax Board to do since 2008, Ms. Rodriquez said. Supporters said the bill would simplify the tax structure for

taxpayers, while also simplifying administration for the FTB.

Lenny Goldberg, a lobbyist for CTRA, testified against the bill. He said NOL carrybacks are the most destabilizing part of the tax system, and that making it

easier to get them is a bad tax policy.

Tax Credit for Contributions to Preschool Fund. AB 2107 (Gorell), allowing an

income tax credit equal to 40 percent of the amount contributed by a taxpayer to the newly established California Preschool Investment Fund, and requiring the California Department of Education to disburse the money annually for purposes of

April 25, 2014 20

subsidizing preschool services for eligible families in five counties chosen to participate in the California Preschool Investment Pilot program.

Tax on Heavy Equipment Rentals. AB 2114 (Pan), replacing the existing personal property tax on heavy equipment used for rentals with a 0.75 percent tax

on short-term leases or rental receipts of a person whose principal business is derived from the short-term rental of heavy equipment. The bill is supported by the American Rental Association and several rental companies, and is opposed by the

California Assessors’ Association, the State Association of County Auditors and others. Supporters say the bill would reduce uncertainty, make taxation of heavy

rental equipment more consistent from county to county, and would spread the tax burden over time rather than requiring payment of one very large tax bill after the January 1 lien date. Opponents in a letter to the committee that their main concern

relates to “the potential for the bill to increase the contractor’s cost of renting heavy equipment if rental companies fail to completely pass along the savings they

would realize from the elimination of the personal property tax on owned equipment.”

New Method of Taxing Private Railroad Cars. AB 2262 (Frazier), changing the

method of calculating the property tax on private railroad cars by switching from calendar days to miles traveled, and modifying the depreciation schedule. The bill is

sponsored by the BOE and is supported by the Railway Supply Institute. Michele Pielsticker, chief of the BOE’s Legislative and Research Division, said the change

would reduce the burden on taxpayers, and also would increase the BOE’s efficiency. She said the change would conform California to the process used in every other state to tax private rail cars. A railroad industry representative said the

change will make the tax more equitable, noting that under the current system, rail cars that were left idle due to labor strikes at ports ended up incurring taxes for

every day they sat in California waiting for the strike to end.

Tax Break for Adopting Pets. AB 2326 (Dickinson), allowing a personal income tax deduction for qualified costs paid or incurred adopting a pet from a qualified

animal rescue organization, and authorizing the addition of the Pet Adoption Cost Deduction Fund check-off to the personal income tax return upon the removal of

another check-off. The bill is sponsored by the American Society for the Prevention of Cruelty of Animals, and is supported by the Humane Society of the United States. No opposition was voiced at the hearing.

Refunds of Illegally Collecting Taxes. AB 2510 (Wagner), extending the statute of limitations for filing a claim for refund indefinitely in the case where a

tax, fee, assessment, surcharge, or other amount has been determined by a court to have been illegally levied or collected by the Franchise Tax Board or the BOE. BOE Member George Runner testified in support of the bill, saying it is wrong for

the state to keep money that it collected improperly. “We need to remember … whose money it is,” he said. Mr. Runner added that if a retailer kept money that it

collected improperly, the Legislature would be likely to act decisively to force the retailer to return the funds to consumers.

Supporters of the bill include CalTax, the Howard Jarvis Taxpayers Association, the

California Manufacturers and Technology Association, CalChamber, and the National

April 25, 2014 21

Federation of Independent Business. No opposition was presented to the committee.

Taxation of Counterfeit Goods. AB 2681 (Dababneh), providing that a “retail sale” includes any sale by a convicted seller of tangible personal property with a

counterfeit mark regardless of whether the sale is for resale in the regular course of business. Ms. Pielsticker testified in support of the bill, along with a representative of BOE Chairman Jerome Horton. No opposition was raised.

The committee also approved one bill at this week’s hearing:

Modification of Property Assessed Clean Energy Program Advances. On an 8-0

vote, the committee approved legislation (AB 2597, Ting) modifying the California Alternative Energy and Advanced Transportation Financing Authority’s underwriting standard for the Property Assessed Clean Energy (PACE) program by providing that an

assessment cannot exceed 15 percent of the value of the property, and by substituting the term “loan” with “assessment” within various parts of the PACE program. The bill has

no formal opposition.

ASSESSORS:

Humboldt County Assessment Ratio Is 101.39 Percent, BOE Reports

Humboldt County Assessor Mari Wilson is doing a good job, but has some areas that should be improved, the State Board of Equalization reported April 18 in an assessment

practices survey that included a sample of the 2011-12 assessment roll. The county’s average assessment ratio is 101.39 percent, the BOE reported (the ideal is 100 percent).

“In the area of administration, we noted that the assessor effectively manages staffing,

workload, and assessment appeals,” the report said. “However, we found improvement is needed in the staff property and activities program. In the area of real property assessment, we found that the assessor has an effective program for mineral property.

However, we found improvement is needed in the following programs: change in ownership, new construction, declines in value, Timberland Production Zone property, and

taxable possessory interests. In the area of personal property and fixtures assessment, the assessor has effective programs for business equipment valuation and vessels. However, we noted a need for improvement in the assessor's audit and business property

statement programs. Despite the recommendations noted in this report, we found that most properties and property types are assessed correctly.”

The BOE made 10 recommendations (all references to code sections are in the Revenue

and Taxation Code):

Improve the staff property and activities program by expanding the written procedures for the assessment of staff-owned property, and ensuring compliance

with procedures as stated in the assessor’s Conflict of Interest Code.

April 25, 2014 22

Improve the change-in-ownership program by correctly implementing the penalty abatement process.

Improve the Legal Entity Ownership Program by timely reassessing all properties owned by a legal entity undergoing a change in control or ownership, and properly

implementing the penalty process in accordance with section 482(b).

Properly implement the provisions of section 63.1(j) when a certified claim for exclusion is subject to a processing fee.

Enroll all assessable new construction as of the completion date, and issue appropriate supplemental assessments.

Annually review all decline-in-value properties pursuant to section 51(e). The board said the assessor does not have a formal program in place to discover declines in value, but primarily relies on taxpayer requests. (CalTax: Many taxpayers might

not realize the extent their property has declined in value in relation to the base-year value, and may not make a request.) The board also said the assessor does

not consistently perform annual reviews. The assessor responded that properties in decline-in-value status will be reviewed annually, but did not mention any change in discovering declines.

Periodically send questionnaires to all owners of timberland production zone properties to discover nonexclusive compatible uses.

Improve the assessment of taxable possessory interests by: using proper methods to develop the income stream to be capitalized when using the direct income

approach to value taxable possessory interests; periodically reviewing all taxable possessory interests with stated terms of possession for declines in value; reappraising taxable possessory interests with month-to-month tenancies in

accordance with section 61(b)(2); obtaining copies of all current lease agreements or permits for taxable possessory interests; issuing supplemental assessments for

taxable possessory interests upon a change in ownership or completion of new construction; exempting from property taxation only qualified taxable possessory interests that are in compliance with section 254; and valuing each individual

franchise of a multiple-franchise company when valuing cable or video service taxable possessory interests.

Enroll all escape assessments discovered during an audit.

Accept only properly signed business property statements.

Assessor Wilson said she concurs with the BOE’s recommendations, and will implement

them. On the possessory interest issues, she said that with the assistance of board staff, the county’s possessory interest assessment program was reworked for 2013.

In other assessor news:

Los Angeles Assessor Files Suit Over Property Tax on New Long Beach Courthouse. The Los Angeles County Assessor’s Office has filed suit seeking payment of

April 25, 2014 23

$4 million to $5 million a year in property taxes on a new courthouse building in Long Beach.

The suit, John R. Noguez v. California State Board of Equalization, names Long Beach Judicial Partners LLC as the real party in interest, noting that the limited liability company holds a 35-year leasehold interest in the real property (the company financed $490 million

to build the courthouse, and is leasing part of it back to the courts).

The courthouse opened in September. In addition to 31 courtrooms, the property is slated to house a sandwich shop and other private-sector retail establishments.

The assessor targets legislation signed four years ago (Chapter 442, statutes of 2010) that includes legislative findings that the law was intended to expedite the replacement of a dilapidated courthouse “by resolving a disputed property tax issue that could potentially delay the replacement project and add an element of unpredictable financial risk to the

project’s public sponsor.”

The suit states: “The intent of the statute in question … is to abate the fair market value assessment principle and the principles of uniform and equal assessment as they apply to

the Subject Real Estate. The Legislature does not have the authority to exempt real property from property tax. … A statute which purports to exclude by definition an

assessable possessory interest in government-owned real property is invalid and unconstitutional.”

The suit seeks a declaration that the state law is unconstitutional and invalid, and that the assessor may enter a possessory interest tax assessment against Judicial Partners for the

2013-14 assessment year in consideration of the full value of its leasehold interest in the property. (Sources: Courthouse News Service, April 22; Text of suit filed April 4 in Los

Angeles County Superior Court.)

LOCAL TAXES:

Berkeley’s ‘Robin Hood Committee’ Proposes Taxing Landlords to Pay for Low-Income Housing

In Berkeley, the “Robin Hood Committee for a Windfall Profits Tax” is promoting ballot measures that would impose new taxes on landlords to raise money for housing project

for low-income tenants.

The committee is trying to collect 2,600 valid signatures by early May to place the measures on the November ballot.

The tax measure would nearly triple business license taxes for landlords, from the current $11 per $1,000 of receipts to $30 per $1,000 of receipts, with exemptions for single-family rentals, duplexes, owner-occupied properties with fewer than 10 rental units, and rent-controlled properties where initial rents were set before 1999. The tax doesn’t kick in

until rentals have been certified for occupancy for 20 years.

April 25, 2014 24

A companion initiative would direct a large chunk of the expected new revenue into a city fund for affordable housing. If the companion measure fails and the tax measure is

approved, the tax revenue would go into the city’s general fund.

The president of the Berkeley Property Owners Association said the proposed tax is “anti-business,” and said it unfairly targets small, local landlords, and does not tax “corporate”

out-of-town landlords whose properties have not yet been on the rental market for 20 years.

The head of the Robin Hood Committee referred to landlords’ income as “unearned income” that should be “reinvested” in affordable housing and other government programs. (Source: Contra Costa Times, April 21.)

In other local tax news:

Turlock Moves Toward Putting Sales Tax Measure on Ballot. The Turlock City

Council voted April 22 to have the city attorney prepare a ballot measure calling for a 0.5 percent sales and use tax increase to raise revenue for road repairs. The measure will come back to the council before going on the ballot.

The tax, slated for the November ballot, would cost taxpayers approximately $5 million per year, according to a city analysis. If the measure is placed on the ballot, it will require a two-thirds vote of the public to take effect. (Source: Modesto Bee, April 22.)

NEW WINE IN OLD BOTTLES:

Recently Amended Bills of Interest

Cap-and-Trade Funds for Traffic Lights. AB 1447 (Waldron), authorizing the spending of cap-and-trade funds on traffic signal synchronization, was amended April

22 to narrow the authorization for spending on synchronization to sustainable infrastructure projects “when the project is designed and implemented to achieve

cost-effective reductions in greenhouse gas emissions and includes specific reduction targets and metrics to evaluate the project’s effect.” This is a majority-vote bill.

Extension of Self-Generation Incentive. AB 1499 (Skinner), extending the California Public Utilities Commission’s self-generation incentive program, was amended April 21 to

extend the program from December 31, 2017, through January 1, 2019. This is a majority-vote bill.

Tax Credit for Research and Development. AB 1564 (Manuel Pérez), increasing

the percentage of specified research expenses that qualify for a tax credit by 3 percent each year for a five-year period, and allowing taxpayers to buy and sell the

credits, was amended April 22 to change the administrator of the Research and Development Tax Credit Trade Program from the Governor’s Office of Business and

Economic Development (GO-Biz) to the State Treasurer’s Office, and to limit the amount of credits sold to $100 million per taxable year. This is a two-thirds-vote bill.

April 25, 2014 25

Restrictions on Fees for Services Also Provided by DMV. AB 1627 (Gomez), prohibiting private parties from charging a fee for any service that the state will

perform for the public without a cost or fee, was amended April 21 to require private parties contracting with the Department of Motor Vehicles, and charging fees to the public

for services provided at no cost by DMV, to inform consumers that they may obtain the same service from the DMV without being charged. The bill was amended again April 23 to remove the provisions prohibiting private individuals from charging fees for services the

state performs, leaving only the April 21 DMV provisions. This is a majority-vote bill. (CalTax: There is no such thing as a free government service. All government activities

carry a cost that is paid either directly or indirectly by taxpayers.)

Prohibition Against Cap-and-Trade Money for High-Speed Rail. AB 1639

(Grove), formerly a spot bill on reducing greenhouse gas emissions, was amended April 22 to prohibit the use of cap-and-trade revenue for funding the construction and operation of California’s high-speed rail project, because the project will not contribute

significant greenhouse gas reductions before the 2020 statutory target for reaching emissions levels that existed in 1990. This is a majority-vote bill.

Urban Farming Tax Credits. AB 1661 (Bonta), enacting a tax credit for people engaged in the production of agricultural products in an “Urban Agricultural Incentive Zone,” was

amended April 21 to establish a personal income tax credit up to 20 percent of the gross sales of a qualified business, as defined, for businesses increasing the availability of fresh fruits and vegetables. This is a majority-vote bill.

Cap on Pest Operator Fees. AB 1685 (Williams), increasing specified fees associated with pest control licensing, was amended April 21 to prohibit the Structural Pest Control

Board from charging licensing fees of more than $60. This is a majority-vote bill.

Ban on Microplastics in Personal Care Products. AB 1699 (Bloom), banning the

sale of personal care products containing more than 1 percent of microplastics, was amended April 22 to eliminate provisions previously establishing a “Plastic Pollution

Fund” that would have been funded through civil penalties. This is a majority-vote bill.

Personal Privacy. AB 1710 (Dickinson), requiring a person or business conducting business in California that owns or licenses computerized or non-computerized data

that contains personal information to disclose, as specified, a breach of the security of the system or data following discovery of the security breach to any California resident

whose personal information was acquired by an unauthorized person, was amended April 24 to establish minimum encryption requirements, to delete the provision

authorizing a public prosecutor to “bring an action to recover a civil penalty not exceeding $500, or for a willful, intentional, or reckless violation not exceeding

$3,000, per violation,” and to make changes to the notice requirements. This is a majority-vote bill.

Public Contract Participation for Disabled Veteran Small Businesses. AB 1734

(Jones-Sawyer), requiring all state agencies, departments, boards, and commissions to reach a goal of 25 percent for small business participation in awarding state

procurement and contracts, and increasing the requirement for disabled veteran

April 25, 2014 26

business enterprise participation to 5 percent, was amended April 23 to, among other things, specify that the 5 percent participation goal be met by the 2017-18 fiscal year

and that it be applicable to contracts with bids over $100 million unless otherwise specified. This is a majority-vote bill.

Restrictions on School Bond Fund Purchases. AB 1754 (Hagman), prohibiting the use of school bond money to purchase instructional materials, was amended April

24 to also specifically prohibit the use of school bond money for purchasing portable electronic devices, including laptop and tablet computers, that are not closely

connected to classroom instruction, are assigned to individual pupils, or are permitted to leave the school site for more than one school day.This is a majority-vote bill.

Elimination of Long-Term Plan Deadline for Former Redevelopment Agencies. AB

1963 (Atkins), allowing former redevelopment agencies to maintain their assets under specified conditions, was amended April 21 to clarify that agencies would be allowed to keep their assets only if they form a long-range property management plan before

January 1, 2016. Amendments to the bill also add an urgency clause, making the bill a two-thirds-vote bill.

Low Carbon Fuel Standard. AB 1992 (Quirk), authorizing the California Air Resources Board (CARB) to establish a very-low-carbon fuel market commitment program requiring all entities that provide liquid transportation fuel to a retailer, or who sell it directly to

consumers, to sell very-low-carbon liquid transportation fuel, was amended April 21 to delete a provision that would have required fuel suppliers and retailers to sell very-low-

carbon liquid transportation fuel, as defined, up to a specified percentage not to exceed 2 percent of their fuel sales in the state. The amendments instead state that fuel suppliers and retailers must include very-low-carbon transportation fuel as part of their sales in the

state, at percentages to be determined by CARB. The bill further authorizes CARB to declare this authorization inoperative five years after achieving an objective of having

very-low-carbon fuel account for at least 2 percent of transportation fuel sales in California. This is a majority-vote bill.

Rebates for Residential Solar Water Heaters. AB 2017 (Muratsuchi), authorizing

the California Public Utilities Commission to require certain electrical or gas corporations to develop and implement an on-bill repayment program providing

financial assistance for energy-efficiency improvements for rental properties, was amended April 22 to add a provision making residential solar water heaters eligible for

any energy efficiency rebate program or financing program offered by gas corporations for purposes of reducing natural gas demand for water heating. This is a

majority-vote bill.

Lumber Tax Exemption. AB 2031 (Dahle), exempting a taxpayer from payment of the

“engineered wood products assessment,” was amended April 21 to specify that a taxpayer is exempt from the provisions of the assessment if their total sales of qualified lumber products were less than $5,000 during the previous calendar year. This is a majority-vote

bill.

AB 32 Extension Through 2050. AB 2050 (Quirk), requiring the California Air

Resources Board to extend AB 32 through 2050, was amended April 21 to require CARB’s

April 25, 2014 27

Economic and Technology Advancement Advisory Committee to report on the economic impact and provide a cost analysis of greenhouse gas reduction through 2050. This is a

majority-vote bill.

Business Entity Taxes and Fees. AB 2086 (Calderon), previously authorizing that

business entity filing fees be paid to the secretary of state up to one year after the forms that prompted the fees are filed, was amended April 21 to provide that annual taxes, fees, and minimum franchise taxes payable to the Franchise Tax Board may be paid in equal

installments, on or before specified dates. This is a majority-vote bill.

Tax on Rental of Heavy Equipment. AB 2114 (Pan), imposing a tax of 0.75

percent of the gross receipts of the rental price on those who rent qualified heavy equipment, as an in-lieu tax, was amended April 22 to clarify that adjustments to the

allocation of local revenue would be done in such a way to ensure that local school district funding is not adversely affected. This is a two-thirds vote bill.

Small Business Energy Incentives. AB 2137 (Quirk), previously establishing the Small Business Energy Efficiency Incentive Program to provide rebates to small businesses, was amended April 21 to delete these provisions and instead require the California Public

Utilities Commission to inform small businesses about electrical and gas corporation energy-efficiency programs. This is a majority-vote bill.

Minimum Franchise Tax Reduction. AB 2244 (Chau), lowering the minimum franchise tax for dormant and inactive businesses, was amended April 24 to specify

that a business entity cannot be dormant, inactive, or both for more than five total taxable years. This is a majority-vote bill.

Battery Recycling Plan. AB 2284 (Williams), among other things requiring producers of batteries or battery-containing products to submit a stewardship plan for

collection and recycling of the batteries, was amended April 22 to remove provisions detailing separate battery collection point requirements for rural counties and non-

rural counties. This is a majority-vote bill.

Diversion of Cap-and-Trade Funds for Conservation Projects. AB 2348 (Stone),

diverting cap-and-trade money for environmental and wildlife conservation programs, was amended April 22 to specify that the Natural Resources Agency’s “climate

improvement program” would be administered in coordination with the California Air Resources Board and the Wildlife Conservation Board to identify various programs that

would maximize greenhouse gas reductions. This is a majority-vote bill.

Tax Credit for School Scholarship Donations. AB 2421 (Nestande), authorizing a tax

credit for 50 percent of monetary contributions to nonprofit education scholarship organizations that fund private school scholarships or cover transportation costs for attending private, public, or charter schools, was amended April 22 to extend the credit to

scholarships for homeless youth, to add co-authors, and to make clarifying changes. The tax credit is capped at $200,000 per taxpayer, and will be awarded on a first-come, first-

served basis, up to $50 million aggregate for each calendar year. This is a majority-vote bill.

April 25, 2014 28

Tax Credit for Education Expenses. AB 2519 (Patterson), establishing a personal income tax credit in an amount equal to 50 percent of the tuition paid or incurred, for

taxable years beginning on or after January 1, 2014, and before January 1, 2018, was amended April 24 to specify that the tax credit applies only to private postsecondary

institutions that grant certificates or associate degrees only. This is a majority-vote bill. Annual Registration Fee for County Sealers. AB 2589 (Bloom), authorizing county

boards of supervisors to impose registration fees for weighing and measuring packages and containers to determine whether they contain the amount represented, was amended April 21 to specify that the fee shall not exceed $640. Previously, the bill limited the fee to

an amount equal to the total cost to the county for weighing and measuring the packages. This is a majority-vote bill.

Health Savings Accounts Conformity. AB 2576 (Harkey), conforming California

law to federal rules allowing for a deduction and other tax benefits for contributions to a health savings account, for tax years beginning January 1, 2014, was amended April 22 to add co-authors. This is a majority-vote bill.

PACE Program Loans. AB 2597 (Ting), authorizing the Property Assessed Clean Energy Reserve Program to provide a property assessment that is less than 15

percent of the value of the property when determining whether to provide a loan, was amended April 24 to change “property assessment” to “property financing,” and to

authorize financial assistance “that is less than 15 percent of the value of the property, for up to the first $700,000, and less than 10 percent of the remaining value

of the property above $700,000.” This is a majority-vote bill.

Pharmaceutical Wholesaler License Fee Increase. AB 2605 (Bonilla), formerly

requiring the State Board of Pharmacy to report pass rates for pharmacy licensing exams to the Legislature and Department of Consumer Affairs, was amended April 23,

in a gut-and-amend maneuver, to provide a number of pharmacy-related regulations including: increasing the fees for the issuance and renewal of licenses for

pharmaceutical wholesalers and designated representatives; and requiring out-of-state individuals or companies that ship drugs into the state or operate distribution

warehouses in the state to be a licensed pharmaceutical wholesaler. This is a majority-vote bill.

Business Improvement District Assessments. AB 2618 (John Pérez), establishing a

variety of requirements for business improvement district assessments, was amended April 22 to specify that for purposes of business improvement districts, a “general benefit”

excludes all types and components of a “special benefit.” (CalTax: Business improvement districts are funded by property-based assessments intended to provide a proportional and specific benefit to property owners under Proposition 218. Several court cases have

taken issue with particular services that are eligible for assessment funding, noting that some activities – including tourism, marketing, promotion and other events – provide an

ancillary benefit to the general public, even though businesses receive a specific benefit. This bill would provide that an incidental benefit is not a general benefit.) This is a

majority-vote bill.

April 25, 2014 29

E-Waste Recycling Charge. AB 2666 (Daly), specifying that the U.S. government and its agencies and instrumentalities are not “persons,” and therefore are not subject

to the state’s electronic-waste recycling charge, was amended April 22 to make technical changes referencing the Department of Resources Recycling and Recovery.

This CalTax-sponsored legislation seeks to remedy situations in which retailers are held liable for recycling charges on specified video display devices (computer

monitors, tablets, etc.) when the federal government refuses payment. A letter issued by the U.S. Government Accountability Office determined that the federal government

doesn’t have to pay the E-Waste charge because it constitutes a tax in violation of the Commerce Clause. This is a majority-vote bill.

Railroad Oil Spill Contingency Plan. AB 2677 (Rodriguez), formerly prohibiting the use of money from the state’s oil spill response trust fund from being used for any

purpose other than oil spill response clean-up activities, was amended April 21, in a gut-and-amend maneuver, to require the California Environmental Protection Agency to work with the state fire marshal and other local agencies to develop and submit to the governor

and the Legislature a report with recommendations for a comprehensive contingency plan for railroad oil spills. This is a majority-vote bill.

Small Business Development Center Program. AB 2717 (Bonta), appropriating $6 million from the general fund to the California economic development fund to provide a match for federal funds to administrative lead centers that have contracts

with the U.S. Small Business Administration, in order to administer the federal Small Business Development Center Program in California, was amended April 23 to add an

urgency clause. The bill is contingent on AB 2670 becoming operative, and requires a two-thirds vote.

Certification of Assessors. AB 2756 (Assembly Revenue and Taxation Committee), prohibiting individuals from making decisions with regard to change-in-ownership or

property tax exemptions as state or county employees, unless they have a State Board of Equalization-issued certification, was amended April 22 to exempt decisions

on homeowners’ exemption claims from requiring certification. This is a majority-vote bill.

Reallocation of Property Tax Revenue Among School Districts. SB 69 (Roth) revising property tax allocations relating to the “vehicle license fee adjustment amount,” provided that the amount be calculated on the basis of changes in assessed valuation,

was amended April 21 to change the fiscal year for which the modified allocations would commence.

Mortgage Debt Forgiveness Conformity. SB 439 (Evans), formerly regulating medical marijuana, was amended April 21, in a gut-and-amend maneuver, to conform California tax law with the federal extension of the personal income tax exclusion of qualified

principal residence indebtedness discharged before January 1, 2014. The bill also makes an appropriation from the general fund to the Franchise Tax Board to cover refunds to

taxpayers who paid tax on principal residence indebtedness between January 1, 2013, and January 1, 2014.

April 25, 2014 30

Brain Research Funding Program. SB 836 (Corbett), formerly a spot bill, was amended April 22 to establish the California Blueprint for Research to Advance

Innovations in Neuroscience (Cal-BRAIN) Act of 2014. The goal of Cal-BRAIN is to map the activity of every neuron in the human brain. This is a majority-vote bill.

Restrictions on Oil Deleted. SB 916 (Correa), formerly prohibiting the sale of lubricating oil in California after January 1, 2017, unless specified standards are met, was amended April 21, in a gut-and-amend maneuver, to instead regulate firearms. This is a

majority-vote bill.

Aerospace Tax Credit. SB 998 (Knight), formerly establishing aerospace innovation hubs, was amended April 22 to create a tax credit equal to an unspecified percentage

of generated tax revenue from a new aerospace project. This is a majority-vote bill.

Stewardship Plans for Home-Generated Pharmaceutical Waste. SB 1014

(Jackson), requiring producers of pharmaceuticals to submit to the Department of Resources Recycling and Recovery a product stewardship plan containing details on the collection and disposal of home-generated pharmaceutical waste, was amended April 21

to change the recycling program to a voluntary framework, requiring entities electing to participate in the recycling program to adhere to the framework. This is a majority-vote

bill.

Solar Panel Recycling Programs and Fees. SB 1020 (Monning), requiring solar energy panel manufacturers to establish a recycling program that would be administered

by the Department of Toxic Substances Control, for a “reasonable” annual “administrative fee,” was amended April 21 to require solar panels to be managed as universal waste, and

to change the parameters for the solar panel recycling program, including allowing contractual arrangements between producers and consumers for alternative recycling

plans. The bill requires the Department of Resources, Recycling, and Recovery to set the fee amount that consumers will have to pay in order to recycle the panels, requires recycling program operators to also pay an annual administrative fee, and requires those

who remove panels from a building, who are not part of a recycling program, to submit the panels to a recycling program and pay a fee. This is a majority-vote bill.

Vehicle Mileage-Based “Fee” Pilot Program. SB 1077 (DeSaulnier), establishing a pilot program to examine and report on issues related to implementing a vehicle-miles-traveled “fee,” was amended April 21 to specify that the “fee” would replace the state’s

fuel excise tax. This is a majority-vote bill.

Vehicle Fine Increase in School Zones. SB 1151 (Cannella), formerly doubling fines

for vehicle infractions within school zones, was amended April 21 to change the increase to $35, in addition to the existing fine amounts for those violations were they to occur outside of a school zone. Funds received from the fines will be used for school zone safety

projects. This is a majority-vote bill.

Expenditure of School Bonds. SB 1157 (Hancock), formerly a spot bill on the

Kindergarten-University Public Education Facilities Bond Act of 2006, was amended April 21 to prohibit funds identified under the act for the repair or replacement of seismically vulnerable school facilities from being transferred for use for any purpose other than

April 25, 2014 31

seismic repair, reconstruction, or replacement. The bill also requires, if the 2014-15 state budget includes a transfer of the unencumbered funds remaining in the High Performance

Schools Account to other accounts, that the transferred funds be used only for new construction or modernization projections promoting the use of designs and materials that

include the attributes of high-performance schools. This is a majority-vote bill.

Vehicle Registration “Fee” for Bicycle Infrastructure. SB 1183 (DeSaulnier), previously authorizing local governments to impose a special point-of-sale tax on bicycles

to raise revenue for creation, rehabilitation, and maintenance of paved and natural surface bike trails, was amended April 21 to eliminate the bicycle tax and replace it with

authorization for local governments to impose a vehicle registration surcharge up to $5, to be administered by the Department of Motor Vehicles, with net revenue to be allocated to cities, counties, or park districts for bicycle infrastructure development and maintenance.

This is a majority-vote bill.

Modifies PILOT Agreements. SB 1203 (Jackson), voiding any payment in lieu of taxes

(PILOT) agreement for properties eligible for the welfare property tax exemption, if the local government requires a property owner to pay a charge or fee, was amended April 21, in a gut-and-amend maneuver, to instead delete the requirement that property

owners certify that the funds that would have been necessary to pay property taxes are instead used to maintain the affordability of, or reduce rents of, low-income tenants.

Additionally, the bill prohibits assessors from levying any escape or supplemental assessment as a result of the certification requirement “because of a property owner’s

certification concerning the use of funds that would have been necessary to pay property taxes and a PILOT agreement with a local government for which the assessor did not, prior to January 1, 2015, levy any assessment.” The bill also requires outstanding ad

valorem taxes, interest, or penalties that were levied between 2012 and 2015 because of the certification requirement for PILOT agreements to be canceled, and to prohibit a

refund of tax, interest, or penalties that were paid prior to January 1, 2015. Finally, the bill prohibits local agencies from entering into an agreement to impose a new fee on a housing development project that is eligible for the exemption, unless the fee is imposed

pursuant to the Mitigation Fee Act and is consistent with fees paid by all other developments. This is a majority-vote bill.

Property Tax Postponement Reestablished. SB 1214 (Anderson), reestablishing the Senior Citizens and Disabled Citizens Property Tax Postponement Program, was

amended April 23 to delay the start of the program from 2015 to 2016; to require that the program’s fund be an interest-bearing fund; and to authorize the state controller to increase the fee for providing a statement of lien status from $10 to $30. This is a

two-thirds-vote bill.

Water Bond Reduction. SB 1250 (Hueso), previously a spot bill on reducing the $11.14

billion water bond on the November ballot, was amended April 21 to reduce the amount of the bond to $9.45 billion and to add an urgency clause. This is a two-thirds-vote bill.

Cap-and-Trade Money for Low-Income Motorists. SB 1275 (de León), among other things establishing the Charge Ahead California Initiative requiring the California Air Resources Board to adopt quotas for the number of “near zero-emission vehicles” used in

California, was amended April 21 to direct the Legislature to encourage the use of cap-

April 25, 2014 32

and-trade money to subsidize purchases of such vehicles by low-income motorists. This is a majority-vote bill.

Revised and Expanded Fees for Oil Refinery Inspection and Consultation. SB 1300 (Hancock), authorizing the Department of Industrial Relations, instead of the

Division of Occupational Safety and Health, to establish specified fees related to the consultation and inspection of oil refineries, was amended April 21 to eliminate a provision ensuring that trade secrets will be protected and not become public. The bill also

authorizes the department to collect from the owner of a refinery the full cost of extraordinary expenses related to the division’s response to a hazardous material release.

This is a majority-vote bill.

Oil Spill Prevention Fee Increase. SB 1319 (Pavley), formerly a spot bill, was amended April 21 to, among other things, increase the Oil Spill Prevention, Response and

Administration Fee by eliminating the fee’s January 1, 2015, decrease from $0.065 to $0.05; increase the fee limit from $0.05 to $0.065 for people “owning crude oil at the

time crude oil is received at a refinery”; delete the fee exemption for independent crude oil producers; and require every person who operates an oil refinery, marine terminal, or a pipeline to register with the State Board of Equalization. This is a majority-vote bill.

Charge on Point-of-Sale Systems. SB 1328 (Hill), among other things authorizing the Department of Food and Agriculture to impose a $2 assessment for the license of a

business that uses a point-of-sale system, was amended April 21 to prohibit a grocery store from being fined or assessed any other penalty for the first item not in compliance

during an initial standard inspection of the point-of-sale system, if the store meets specified requirements. This is a majority-vote bill.

Electronic Public Records. SB 1337 (DeSaulnier) requiring state and local agencies to

provide an electronic copy of public records when responding to a public records request, was amended April 21 to remove provisions making the bill effective after January 1,

2016, and to remove provisions making the bill applicable only to records created after that date. The amendments also specify that records must be provided by state agencies within 30 days, instead of “as soon as possible and no later than 30 days.” This is a

majority-vote bill.

Higher Corporate Tax Rates for Corporations With Highly Paid CEOs. SB 1372

(DeSaulnier), proposing higher corporate tax rates on certain publicly held corporations based on their chief operating officers’ salary levels, was amended April 21 to change the definition of “full-time employee” from someone receiving compensation for services

provided for at least 35 hours per week, to someone providing services for at least 30 hours per week. This is a two-thirds-vote bill.

Labeling for Genetically Engineered Food. SB 1381 (Evans), proposing to enact the California Right to Know Genetically Engineered Food Act requiring that food that

is entirely or partially genetically engineered be labeled as such, was amended April 25 to exempt food sold at a farmer’s market and field and farm stands, and to exempt farmers, producers and suppliers who are not retailers or manufacturers from liability

for violations under the provisions of this bill. The bill imposes its requirements on all food offered for retail sale in California; and prescribes labeling requirements for a raw

April 25, 2014 33

agricultural commodity that is genetically engineered and packaged foods, as defined, containing some products of genetic engineering; and authorizes the attorney general

or an injured resident of the state to bring an action for injunctive relief against a violation of these provisions, as specified. This is a majority-vote bill.

San Francisco Redevelopment Successor Agency Revenue. SB 1404 (Leno),

authorizing the successor agency of the City and County of San Francisco to continue to receive property tax revenue from specified redevelopment project areas, and to

incur indebtedness pursuant to specified amended redevelopment plans, in order to replace affordable housing units, was amended April 23 to state that due to “the

unique circumstances relating to the replacement of affordable housing demolished by the former Redevelopment Agency of the City and County of San Francisco, a special

law is necessary and a general law cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution.” This is a majority-vote bill.

WASTE, FRAUD & MISMANAGEMENT:

Your Tax Dollars at Work

Los Angeles County Sanitation Districts Spend $430 Million on “Trash Train” That Doesn’t Leave the Station. The sanitation districts of Los Angeles County have spent 10

years and $430 million building a railway system to haul trash to a desert landfill, but the Orange County Register reports that “the system is sitting idle because it is too expensive

to use.”

“Instead, Los Angeles County is dumping its trash in Orange County, where space in the Brea and Irvine landfills is plentiful and half the $80-per-ton cost of using the trash train,”

the Register writes.

Funding for the unnecessary train came from increases in trash-hauling fees that were

passed down to residents and businesses.

County officials say the expensive 200-mile rail line will cost $300,000 per year even when not in use, and they estimate that it could be five to 15 years before the train is

used. A private consultant who is not affiliated with the county or the train said the train might sit idle much longer than that, as Southern California’s remaining disposal capacity

could last another 100 years. (Source: Orange County Register, April 21.)

Highly Advertised Highway Project Website Not Available When Needed. In the Sacramento area, a project to repair portions of Highway 50 has been a major news story,

with government officials and the media frequently warning commuters to plan ahead to avoid gridlock caused by lane closures. The California Department of Transportation has

touted a website, www.fix50.com, as a go-to source of information on the repair schedule, alternate routes, and alternate transportation options. The website includes a link to “help spread the word” by encouraging others to visit the site.

However, on April 22, the first day of the repair project, a CalTax employee who tried to visit the website found that Caltrans is having trouble maintaining the information

superhighway, too. The attempt to access the website resulted in this message: “Service

April 25, 2014 34

Unavailable. The server is temporarily unable to service your request due to maintenance downtime or capacity problems. Please try again later.”

School Board Member Continues Voting Despite Losing Her Seat. The San Gabriel Valley Tribune reports: “Bassett Unified board member and Mt. San Antonio Community

College trustee Laura Santos continues to vote in both districts despite receiving two legal opinions that she is violating state law.”

The law stipulates that upon being elected to incompatible offices, a person automatically

loses the first position. Attorneys for Bassett Unified School District and for the Mt. San Antonio Community College District both determined that there is a conflict between the

two offices to which Ms. Santos was elected. Bassett’s attorney said there are “significant conflicting interests between the two institutions.”

Ms. Santos, who receives pay for each post, said she will not resign the Bassett position

until the end of June. Because the process of ousting her from the post would take months and could be expensive, the school board president has not acted beyond asking

her to resign. Ms. Santos has abstained on some votes where she acknowledged a possible conflict.

On her campaign website for the November 2013 election to the community college post,

Ms. Santos touts her service with labor unions, and her participation in a variety of education groups. The site notes that she graduated from the University of California at

Davis Law School, and states that “after practicing law for 9 years Laura stayed home to care for her neice (sic)” and enrolled in education programs. The site does not mention

another reason that she quit practicing law: she was disbarred in 2001, after being suspended since 1997 for a variety of transgressions, including misappropriating money from clients’ trust accounts, failing to communicate with clients, failing to perform legal

services competently, and failing to cooperate with the State Bar’s investigations. (Sources: San Gabriel Valley Tribune, April 20; State Bar of California Attorney Search

website, accessed April 24.)

POTPOURRI:

Symposia, Sightings, Salutes & Snafus

CalTax Delivers Legislative Update to Southern California Business Groups.

CalTax President Teresa Casazza was the keynote speaker at the April 15 meeting of the Los Angeles Business Federation (BizFed),

delivering a presentation focused

on split-roll property tax activity in the

state.

Casazza explained split roll and how it

works, and why treating business

April 25, 2014 35

property different than homeowner property is bad for not only the California business community, but for all taxpayers in the state. She emphasized the need for the business

community to be united and take action against split-roll legislation, especially since this type of legislation is currently moving through the Legislature.

Casazza also discussed legislation attempting to weaken Proposition 13 by lowering the vote threshold for local taxes. CalTax’s president also touched upon some of the other threats to taxpayers currently

moving through the Legislature, such as cap-and-trade spending proposals, a carbon tax (SB 1156), a corporate tax increase (SB

1372), an oil severance tax (SB 1017) and a minimum wage increase (SB 935).

CalTax Policy Analyst Peter Blocker added to the legislative update,

noting that the Legislature is amending hundreds of bills a day, so new tax threats are always a possibility as California moves through

its legislative session.

California’s Return on Tax “Investments” Among Worst in Nation, Report Says. California taxpayers do not get a very good return on their significant “investment” in

taxes, according to a new report that says California is tied for 44th place among the 50 states in terms of ROI. The report by WalletHub considered the state and local tax burden

in each state, measured against 27 metrics, including the quality of schools, roads, bridges, water and hospitals, as well as violent crime rates, and home price volatility.

Wyoming, Alaska and South Dakota were the states with the top ROI, while Louisiana, Mississippi and Arkansas were in the cellar.

Governor Announces New Hiring Credit Pilot Areas in Fresno, Merced and

Riverside. Governor Jerry Brown announced April 24 that new tax incentives will be available for employers hiring workers in Fresno, Merced and Riverside.

“These tax credits will spur new jobs and help communities hardest hit by the recession,” the governor said.

The New Employment Credit (NEC) is a hiring credit for businesses in California

communities with the highest rates of unemployment and poverty. The credit is part of the Governor’s Economic Development Initiative that passed in 2013. The Governor’s

Office of Business and Economic Development (GO-Biz) will oversee the credit and may designate up to five pilot areas.

In selecting the first round of pilot areas, GO-Biz evaluated employment, poverty and

wage data to identify areas of the state that would benefit the most from the expanded hiring credit, the governor said. The designation as a pilot area is effective immediately,

applicable for four years and may be extended by GO-Biz for an additional three years.

April 25, 2014 36

WHO’S NEW OR LEAVING STATE GOVERNMENT:

Governor Appoints Chair of Political Watchdog Commission

Chair, California Fair Political Practices Commission: Jodi Remke, a Democrat from

Oakland, has been appointed chair of the California Fair Political Practices Commission, which investigates alleged violations of the state’s Political Reform Act, imposes penalties,

and assists state and local agencies in the development and enforcement of conflict-of-interest codes. Ms. Remke has been the presiding judge at the State Bar Court of California since 2006, where she was hearing judge from 2000 to 2006. She was an

attorney with the California State Senate Judiciary Committee from 1997 to 2000, at the Montana Legal Services Association from 1994 to 1996, and at Miller Starr and Regalia

from 1991 to 1994. Ms. Remke is board president of the National Council of Lawyer Disciplinary Boards. She holds a law degree from the University of the Pacific, McGeorge School of Law. The position does not require Senate confirmation, and the compensation

is $136,144 per year, plus benefits.

TAX TRIVIA:

Which California Politician Played Inadvertent Matchmaker for Two Celebrities?

In 1978, Gene Simmons from the rock group KISS and singer/actress Cher became a

high-profile celebrity couple, after meeting early in the year at a fundraiser for a California politician who had a substantial impact on the state’s tax structure. Who was the

politician? (Answer on the last page.)

BLAST FROM THE PAST:

Los Angeles County Property Appraised Via Telephone

“[Los Angeles] County Assessor Hopkins, in his questioning, sought to show that the work

of appraisal had not been done properly and was successful in eliciting the information that most of the appraising was done by means of telephone instead of a personal inspection. Mr. Harpham [Elmer Harpham, a civil engineer who was one of three men

appointed by the State Board of Equalization to obtain data regarding Los Angeles real estate] admitted that he placed values on property that he had not seen and Assessor

Hopkins made the remark that he believed most of the work was done by hearsay, in spite of the large salary that was supposed to have been paid for conscientious work.”

— Los Angeles Herald, September 1, 1909

COMING UP:

Legislative Committee Hearings

Monday, April 28

ASSEMBLY APPROPRIATIONS COMMITTEE HEARING State Capitol, Room 4203, 10 a.m.

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Among bills on calendar:

SB 1131 (Walters), provides conformity to federal legislation for limited liability

company members by excluding the definition of employee on any member that is treated as a partnership for federal tax purposes.

ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING State Capitol, Room 126, 1:30 p.m. Among bills on calendar:

AB 1984 (Harkey), conforms California income and franchise tax laws to specific federal net operating loss rules.

AB 2109 (Daly), requires the State Board of Equalization to annually report on parcel tax trends among California local governments.

ASSEMBLY TRANSPORTATION COMMITTEE HEARING

State Capitol, Room 4202, 1:30 p.m. Among bills on calendar:

AB 1447 (Waldron), diverts cap-and-trade money to finance traffic light synchronization.

Tuesday, April 29

ASSEMBLY AGRICULTURE COMMITTEE HEARING State Capitol, Room 113, 9:30 a.m.

Among bills on calendar:

SB 1381 (Evans), requires certain food and beverages that contain genetically

modified products to be labeled.

ASSEMBLY BUDGET SUBCOMMITTEE NO. 4 ON STATE ADMINISTRATION State Capitol, Room 447, 1:30 p.m.

The committee will address all open issues remaining for all departments.

ASSEMBLY JUDICIARY COMMITTEE HEARING

State Capitol, Room 4202, 8 a.m. Among bills on calendar:

AB 2688 (Brown), allows taxpayers to rely on written opinions relating to labor laws in defense proceedings for alleged violations of labor laws.

SENATE TRANSPORTATION AND HOUSING COMMITTEE HEARING

State Capitol, Room 4203, 1:30 p.m. Among bills on calendar:

SB 1122 (Pavley), authorizes the Strategic Growth Council to use cap-and-trade funds for affordable urban housing and transportation projects.

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SB 1183 (DeSaulnier), authorizes any city, county, or regional park district to impose a vehicle registration surcharge to finance bicycle infrastructure.

Wednesday, April 30

ASSEMBLY APPROPRIATIONS COMMITTEE HEARING

State Capitol, Room 4202, 9 a.m. Among bills on calendar:

AB 2348 (Stone), establishes the Natural Resources Climate Improvement

Program to be funded by cap-and-trade funds to develop “regionally integrated natural resource projects.”

AB 2666 (Daly), redefines “persons” to exclude the federal government and its agencies for purposes of the electric-waste recycling charge.

ASSEMBLY BUDGET SUBCOMMITTEE NO. 3 ON RESOURCES AND

TRANSPORTATION HEARING State Capitol, Room 447, 9 a.m.

Among budget items on calendar:

Budget Item 3900 – California Air Resources Board.

SENATE ENVIRONMENTAL QUALITY COMMITTEE HEARING

State Capitol, Room 3191, 9:30 a.m. Among bills on calendar:

SB 1268 (Beall), diverts cap-and-trade funds to fund programs that protect against sea-level rising and extreme weather events.

AB 2666 (Daly), redefines “persons” to exclude the federal government and its

agencies for purposes of the electric-waste recycling charge.

The next issue of the CalTaxletter will be published May 2, 2014.

Tax Trivia Answer: Jerry Brown. The fundraiser was hosted by Neil Bogart, founder of

Casablanca Records. According to several published reports, Mr. Bogart hosted the event despite being a strong supporter of Gerald Ford. When Mr. Bogart died of cancer in 1982, at the age of 39, Governor Brown attended his funeral.