The California Court of Appeals made it just a little bit easier for taxpayers who are appealing sales and use tax determinations. In a recent case, the court ruled (Agnew V. SBE CA CT APP 2nd div 7) that revenue and taxation code sections 6901 to 6908 do not require the payment of interest in order for the taxpayer to file a valid claim for refund.

As a review, the normal appeals procedure following a sales and use tax audit involves the following steps:

BEFORE THE BILLING (NOTICE OF DETERMINATION)

1. Discussion with the auditor.

2. Discussion with the supervisor.

3. Discussion with the Principle Tax Auditor (as a response to the 10 day letter.)

AFTER THE BILLING (NOTICE OF DETERMINATION)

1. A petition for redetermination must be filed within 30 days from the date of the Notice of Determination.

2. An appeals conference is held and a Decision & Recommendation (D & R) is issued.

3. The taxpayer and/or the staff can request reconsideration.

4. A Board Hearing is held with the members of the Board of Equalization.

If the Board Members re-determine the liability, (make no adjustments) or if the petitioner is not satisfied with any adjustments made, he must pay the liability in full and file a claim for refund within 6 months from the later of the date of payment or the date the liability is re-determined. As a side note, in the event of partial payments, a claim for refund must be filed every six months.

Once the claim (or final claim in the event of payments) is filed, the board has six months to mail a notice of action.

In the event the board denies the claim or fails to respond, the taxpayer may bring suit in superior court within 90 days.

The board has held that taxpayers are not eligible to bring suit until the sales and use tax liability is paid in full including the interest thereon.

The Agnew case, however, reverses the board on this point. Now, if a taxpayer looses his final Board Hearing, he can file his final claim for refund, (and ultimately have his day in court), by paying all the tax and none of the interest. Since the audits cover a three year period and because the appeals process takes several years, the accrued interest is often a large part of the original tax liability.

For example, the board is now hearing cases covering a typical audit period from 1990 to 1993 - the accumulated interest on a 1st quarter 1990 tax liability is 90% of the tax (1% per month simple interest) thru 10-31-97. If a petitioner was assessed $50,000 in that quarter which is in dispute, the related interest would be approximately $45,000 for a total deficiency of $95,000. Prior to this case, the State Board of Equalization's position was that the taxpayer had to pay all $95,000 before filing the final claim for refund. Thus until it was all paid, he would have no right to file suit in superior court. Now, the taxpayer only has to pay $45,000 before filing his claim and ultimately (assuming the claim is denied) filing suitThe State Board of Equalization has long taken the position that a gift of an item (with few exceptions) is a use and the donor would owe use tax measured by the purchase on the cost of the item given away. Moreover, then Annotations state this use tax is due even if the item is shipped out of California.

It is this interpretation which led Yamaha Corporation to sue the State Board of Equalization for over $700,000 in taxes assessed and paid in an audit involving the promotional gifts of musical instruments that were shipped out of state.

This case, recently heard by the Supreme Court of California,

has important ramifications for all future sales and use tax disputes.

The decision by the Supreme Court didn't answer the question of whether an out of state shipment constitutes a taxable gift but rather focused on what legal effects courts must give to the Board's Annotations.

An Annotation is an opinion by the Board of Equalization's legal staff on certain transactions. They consist of a brief summary of facts followed by an opinion and are often used by the audit staff and the appeals staff to support their position. In fact in one case, I wrote a letter asking if a certain publication qualified as an exempt newspaper. The opinion which stated it was not a newspaper (and therefore subject to tax) become an Annotation and was later used by the appeal staff in deciding that same case. This circular reasoning highlights the issue in the Yamaha case (it's taxable because the State Board of Equalization says it's taxable).

Background

The California Court of Appeals (CT of App52CalApp4th1268(1997) reversed a lower courts decision that promotional gifts of inventory items made to out of state donees were not subject to use tax. In doing so the court of appeals cited Annotation 280.1140. This Annotation holds the view that items purchased in California under a resale card which are subsequently given away are taxable notwithstanding the fact that they may be shipped out of state. Similarly, Annotation 280.0040 states items purchased out of state that are given away in this state are taxable. If the item first comes into California and is subsequently shipped out of state it is still taxable since the use occurs when the merchandise is delivered to a common carrier.

The Supreme Court did not address the correct interpretation of the law, the Regulations, or the Annotations governing this issue but did express an opinion as to whether or not the Annotations are entitled to the same weight or deference as the statue, the Regulations, and case law. On this point, they concluded that the court of Appeals gave greater weight to the Board's Annotation than it warranted. An excerpt from the discussion of the case follows:

Courts must, in short, independently judge the text of the statute, taking into account and respecting the agency's interpretation of its meaning, of course, whether embodied in a formal rule or less formal representation. Where the meaning and legal effect of a statute is the issue, an agency's interpretation is one among several tools available to the court. Depending on the context, it may be helpful, enlightening, even convincing. It may sometimes be of little worth.

In summary, the State Board of Equalization's, "Because I said so," reasoning will no longer work when challenged in the courts.