OTA Denies CDTFA’s Petition for Rehearing on Use Tax Case

On Monday, November 5, 2018, the Office of Tax Appeals (OTA) denied the California Department of Tax & Fee Administration (CDTFA) request for rehearing in the case of Claimant First American Title Insurance Company, a client of the State & Local Tax (SALT) group of Bewley, Lassleben & Miller, LLP (BLM).  This is an important win for taxpayers.

The case concerns First American’s Claim for Refund, which was heard by the elected State Board of Equalization (SBE) on December 11, 2017.  The hearing was conducted just prior to the date that the SBE lost jurisdiction (1/1/18) to adjudicate business tax appeals, as required by the California Taxpayer Transparency & Fairness Act of 2017, effective July 1, 2017, a law which completely revamped the California business tax scheme and its appeals system. This is only the third business tax case decided by OTA.

The result of the hearing was that the SBE granted in part and denied in part First American’s Claim for Refund of use taxes paid on leases of computer equipment.  The SBE on a 4-1 vote, agreed with our argument that when the equipment was leased to First American by out-of-state lessors, the leased equipment was subject to use tax payable by the lessee but insurance companies which pay the insurance gross premiums tax, are exempted by the California Constitution from the payment of state and local taxes including use tax. Furthermore the out of state lessors within the SBE/CDTFA system were permitized as use tax vendors.

Despite the favorable SBE decision, CDTFA refused to issue the refund to First American.  CDTFA asserted, instead, that the SBE ruling was not yet final at the time SBE jurisdiction was transferred to OTA.  CDTFA accordingly asked OTA to “rehear” First American’s claim for refund.

We opposed the petition for rehearing in OTA on grounds of lack of jurisdiction.  We also cited the absence of any basis in the record to rehear or reconsider the SBE decision (error, new facts, etc.).  Pending an OTA decision, we commenced a writ proceeding in the Orange County Superior Court to compel CDTFA to comply with the SBE decision and provide the refund.

After several months and while the Orange County litigation was in process, OTA has now agreed with BLM’s argument that CDTFA had not presented grounds to justify rehearing of the SBE’s decision in favor of First American.  This represents a narrower view of the power of OTA, if any, to reconsider SBE decisions than CDTFA was seeking.  Indeed, the OTA decision cogently observed that CDTFA had been engaged in tactics intended to postpone the SBE hearing without obtaining any of the new information it suggested was needed for a fair consideration of the case.  The decision is important for taxpayers because it establishes that CDTFA may not rely on the legal fiction that use taxes collected from lessees on TPP leases are “sales taxes,” payable by the lessor, when an exempt party such as an insurance company is the lessee.  The decision likewise recognizes limits on OTA rehearing of SBE decisions, assuring taxpayers of greater continuity of administrative decisional law in the transition of jurisdiction.

It has been a long and arduous path for First American to just procure refund monies that were lawfully granted. It is hoped that with the new tax system, arduous journeys do not become the norm for taxpayers to receive their rightful refunds.